Understanding the department

The credit and marketing department is the heart of all banks. They are the main source of revenue for
the banks in the form of interest and commissions. Usually a credit and marketing department is broken
down into dash sections:
MARKETING DIVISION
o Venturing and acquiring customer base according to individual banks risk criterion.
o Maintaining customer relationship and assistance with existing and potential clients
o Provide other necessary duties as per banks requirement
CREDIT DIVISION
o Analysis of potential customers financial statements to assess customer viability
o Continuous assessment of customer status and viability
o Documentation of necessary documents to insure smooth loan handling.
o Gain approval for credit policy package from Head Office (if centralized)
In case of HBL, the RM of the bank usually has to work with all departments particularly the sanctioning
committee (CAD & CCAD). Marketing as well as credit division responsibility all falls under the RM. In
such cases, the RM must have extensive knowledge about credit policies of the bank as well as business
understanding and its viability. Although the main person responsible for bringing in customer for the
bank falls mostly on the Branch Manager, every bank individual has a performance quota limit which
they must fulfill in order to be evaluated properly.
The following various topics are not written in chronological order but according to how they are faced
during the training.
Types of Facilities
The most common types of credit that is acceptable in the bank are cash margins/ deposits and
registered land. Usually the amount of loan that is offered to the client is based upon 90% of the cash
deposits/ margins. The land/building registered to HBL for the purpose of providing loan against it is
valued using a valuator specializing in valuing tangible collaterals. They usually mark, authenticate and
value the proposed size of the land/ building physically and also evaluate the forced sale value in case
the bank has to liquidate the land/ building on an urgent basis. Forced sale value is usually 75% of the
total market value of the properties. This form of liquidation, however, is not favorable since this shows
the banks inability to accumulate its loan facilities and should only be considered as a last resort. Land/
building liquidation is also a very complicated deal and in most cases very difficult to collect. Thus HBL
prefers cash margins/ deposits for secured facility maintenance which, in the case, is also an obstruction
for most SME related financing as liquid cash margin in one of the many reasons the small time
entrepreneurs are seeking loan in the first place! But we have to keep in mind that finding a proper loan
seeker is indeed a very hard job since generally a person does not want to default in the loans he/she
has taken but circumstances as well as economic uncertainty in Bangladesh may force an entrepreneur
to default on the loan.
Seeking a good borrower
Before a loan can be proposed to a borrower, the following assessment is made while justifying the
credibility of an intending loan:
a. Selection of borrowers:
1. Character: commitment, credit record, dependability, business experience, technical
knowledge, age etc.
2. Capacity: profitability, cash flow, debt service coverage etc.
3. Capital: state in business, quality of assets, solvency, retention of earning, ability to
infuse more money, etc.
4. Condition: economic trends, industry growth, competitive & regulatory Environment,
working conditions, etc.
5. Collateral: asset quality, type, location, title, forced sale value etc.
b. Credit Investigations: Credit Investigation refers to the assessment of a loan proposal from
different points of view, especially credit status of any, for justifying the credibility of intending
borrowers.
c. Besides, a banker must know:
1. Whether he indulges in speculative business
2. When he started his business
3. Assumed popularity & marketability of products
4. Availability of raw materials
5. Transport and Communication
6. Liabilities & involvement in other businesses, if any.
Keeping the above in mind, a banker will form a balanced opinion on the following issues:
a. Moral Risk: borrowers reliability/ character.
b. Business Risk: borrowers capacity/ capability.
c. Property Risk: borrowers capital means.
Necessary documents for Opening new/ renewal of existing Credit
Package
For any new/renewal of credit package for a client/ company, the following documents are absolutely
necessary:
1. Letter requesting renewal of the facility supported by Board Resolution
A formal letter must be provided to the credit & marketing department addressing the
BM to renew/ open a credit line for the client.
Board Resolutions are necessary mainly because of the following reasons:
The client must provide confirmation that he/she/it is in compliance with the
rules and procedures mentioned in the sanction advice (will be thoroughly
discussed later) provided by the banks CAD department.
The Board Resolution will also confirm the signatories or the proxies that will
have the authoritive power to conduct any sort of transactions other than the
Managing Director.
2. Memorandum & Article of Association
3. Certificate of Incorporation
4. Trade License
5. TIN Certificate
6. Vat Registration Certificate
7. Future Business Plan.
Future plan explains any preparations taken by the company/group as well as give us a
viable source for extension in business with the customer. This also provides for
customers commitment towards improvement and insures continuing business
development and liability management.
8. CIB Undertakings of each directors/owners
The directors of the bank must provide permission to the bank to look up for any and all
sensitive financial information regarding loan status of the clients with other banks from
the Bangladesh Bank. This is known as a CIB undertaking
9. Management/In-house financial performance of June 30, 2013.
In-house management reports are usually prepared before the audited financials for the
year. This is also a productive way to deduce the managements future projections &
planning for the company as well as current situation within the company.
10. Latest Audited financial statements and/or Annual Report
If audited financials are not available, management financials are used to develop a
Financial Spreadsheet Analysis (FSS Analysis) in order to understand the clients viability
of the facility requested from the financial POV. FSS analysis carries almost 60% weight
in determining the risk involved in providing facility to potential/existing clients.
Please note that FSS analysis is done every time new or renewed facilities are being
processed for the clients.
11. Consolidated group financial performance
If the client is part of a group of industries, group FSS analysis is also required. This is
because financial health of the group will eventually affect any subsidiary company of
the group. Besides, group financial performance ensures that the group is not squeezing
money from the smaller subsidiary in order to survive or moving money to other
ventures without fulfilling the commitment to the bank. Other various factors are
important such as controlling power, recessional hit, etc that can affect the subsidiary
enjoying the credit facility.
12. Up to date liability position of the group
As before all information regarding the group is vital for fruitful continuous relationship
with the client.
13. Latest stock and receivable statements
In HBL, pledge and hypothecation of stocks and receivables are common practices in
case of creating liability against collateral. Receivables also provide for a basis of
understanding about how the company plans to finance its liability through its turnover
of inventory.
Any discrepancies suspected by the experienced RM in the areas must be
communicated instantly since fraudulent activities such as higher days receivables to
gain unnecessary flexibility in loan repayment, higher valuation of receivables to
increase collateral values etc are common among many loan defaulters.
14. Latest business and industry updates
Any additions, amendments, and liquidation etc of both the business and the industry in
which it is operating is crucial in sound and progressive decision making. Trends analysis
in similar businesses as well as industry as a whole must be understood for future
predictions on how the client/business will react in the future. By doing so, detailed plan
can be constructed and implemented by the experienced RM beforehand in order to
minimize risk of downfall in the overall credit facility offered.
15. Details of tangible securities to be provided against the facility.
This is usually done by the CAD department of HBL but the list of collaterals of which the
facility is given must be identified and marked at the branch level. CAD then provides
necessary charge document which are security against tangible items to create liability
for the customer. CAD will also ensure that the legal documents against which the
collaterals are registered properly maintained in the system as well as stamped and
stored in the vault of the bank. Upon non-performance, the bank may take necessary
actions to liquidate the assets in order to make full or partial payments of the total loan
facility amount.
16. Environmental Clearance Certificate
A mandatory from the Department of Environment for all types of concern and a
requirement for the Bangladesh Bank Green Banking Policy.
Sanction Advice
Sanction Advice are legal and binding papers presented for the clients to document the complete
procedure regarding the type, form, tenor, etc of the whole facilities provided to the customer. The
sanction advice is basically a document that explains the client of his/her compliance to the rules and
regulations implemented for the facilities that are offered. This document, along with all charge
documents {documents that charges (holds accountable) to take responsibility of any non-performance
as well as grants the bank to take full ownership of the collateral in case of non-performance of the
sanction advice} dully signed and stamped are then kept in the bank vault for safe keeping.
Sanction advice are basically legal documents that binds the client with the promise to payback the
liabilities that he/she/it holds with the bank. It also explains detail structure of all collaterals held against
the facilities and the procedures to liquidate them should the client fails to repay when the time comes.
As mentioned before a copy of the sanction advice (in banks letter heads) is send to the client for his
agreement to the documents drawn as well as another copy kept in the bank for safe keeping.
Documents prepared during Credit new/renewal of credit facilities by
the RM
Subsequently, a RMs job is to prepare a proposal that provides for clear understanding about the
clients present position as well as the description of the facilities offered. This is done to recognize the
viability of the client from three levels of authority; the RM, The branch Manager and the Risk Manager.
If the proposal points to higher level of credit authority (high credit approval which is above Risk
Manager Level) the proposal may be sent to HOK for approval. The CPM (Credit Policy Manual)
developed for HBL (originally developed for HOK) are designed to support comprehensive rules and
regulations that need to be followed in order to maintain the hierarchy and authority of the officials of
HBL Bangladesh. From time to time, the policy may be changed based on collaboration and authority of
Bangladesh Bank through the circulars given by them in their websites. Strict adherence is maintained
when following these rules and regulations and any deviation is absolutely prohibited.
Financial Spreadsheet Analysis
Financial spreadsheet analysis is the key most important aspect in identifying the viability of a client.
60% of the total weight falls under FSS to identify any weaknesses of the client. Usually, FSS is made
before the client is positioned to be sanctioned any facility both in new and renewal cases. But in case of
HBL and is true in most other banks, financial stability of businesses in Bangladesh does not properly
reflect the actual health of the business of the client and is often found to be misleading. As a result,
clients are mostly confirmed by personal experience and clients reputation in the banking as well as the
business industry. But this is still a comprehensive way of eliminating poor investment proposals and is
always prepared in any renewal or new facility offerings.
Financial Spreadsheet Analysis involves the following 4 areas using Microsoft Excel. Keep it in mind that
the format for such Spreadsheets are usually pre-approved in the Head Office of Karachi, Pakistan and is
often difficult to incorporate with international accounting practices:
Balance sheet
Income Statement
Fixed Asset Reconciliation Statement
Cash Generation Statement
After successful analysis of the above statements and no anomaly are found within the calculation, an
automated Financial Summary Statement is generated that shows the various ratio calculation as well as
key figures related to investment and viability of the proposal.
One other thing to remember is that the clients liability positions and any other KC information are
taken before the preparation of the proposal.
Once the FSS is prepared, a CM is prepared on behalf of the client proposing to the BM, Risk Manager
etc. for the approval of the proposal.
Credit Memorandum
A CM or Credit Memorandum is a comprehensive essay that summarizes and focuses on various issues
and notes which involves the client and his company. A CM simply states in lamer terms the condition of
the borrower and his/her ability to repay. Usually, a Credit Memorandum incorporates the following
notes:
1. Overview of the company and group it is part of
a. Overview covers the group history, its directors background, sister concerns (if any),
associations to any other group directly or through directors partial ownership etc.
2. Purpose of the facilities offered
3. Structure of the facilities offered
a. Type, limit, expiry/ tenor, specific short summary of purposes, security details, detailed
transaction rationale, recovery and facility repayment methods, etc
4. Industry Analysis
5. Management assessment & succession plan
6. Financials
a. Summary of overall health of the company, financial statement analysis (income
statement, balance sheet, cash flow etc), ratio analysis, projected financials
(management or unaudited)
7. Credit Risk Grading (CRG)
a. CRG is a comprehensive preset mathematical sheet that takes in information from ratio
analysis as well as qualitative information derived by RM experience to grade/ score the
health of the proposed facility taker. This is done in all organizations (financial or
otherwise) to assess a credit rating score against all potential or existing borrowers.