Mohiuddin Farhad

Risk Management Division

Bank Asia Limited
Credit Operations and Management (COM)

Module-A Introduction of Loans and Advances

1.1 Introduction
1.2 Types of Borrowers and Loans & Advances
1.3 Banker-Customer Relationship
1.4 Credit Planning
1.5 Credit Policy
1.6 Centralized and Decentralized Credit Operations
1.7 Qualities of a Good Borrower
1.8 Features of Different Credit Products
1.9 Indicative Questions

1. What are the types of borrowers of a bank?

2. Mention the types of credit according to CL reporting.
3. What are different types of funded credit?
4. Explain the categories of relationship between banker and customer.
5. Mention different steps to follow for an informed credit decision.
6. What are advantages of centralized credit management over decentralized credit (Branch /RM)
7. Mention qualities of a good borrower

What are the types of borrowers of a bank?

Banks typically have various types of borrowers in their lending portfolio. Here are some common
categories of borrowers:

1. Individuals: Banks lend to individual borrowers for personal financing needs such as home
mortgages, auto loans, personal loans, and credit cards. These borrowers may include salaried
employees, self-employed individuals, professionals, and retirees.

2. Small and Medium-sized Enterprises (SMEs): Banks provide loans and credit facilities to small
and medium-sized businesses for working capital, expansion, equipment purchase, and other
business needs. SME borrowers can include startups, family-owned businesses, and established
enterprises.

3. Large Corporations: Banks extend credit to large corporations for corporate financing purposes
such as capital investments, acquisitions, and debt refinancing. These borrowers are typically
well-established companies with substantial revenue and assets.

4. Real Estate Developers: Banks lend to real estate developers and construction companies for
property development projects. These borrowers may include residential, commercial, or
industrial property developers.

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Risk Management Division
Bank Asia Limited
5. Government and Public Sector Entities: Banks may provide loans and financial services to
government entities, municipalities, and public sector organizations for infrastructure projects,
public services, and other government-related financing needs.

6. Non-profit Organizations: Banks may offer financial services and credit facilities to non-profit
organizations, including charities, foundations, and educational institutions.

7. Financial Institutions: Banks engage in interbank lending, providing credit lines, and other
financial services to other banks and financial institutions.

It's important to note that the specific types of borrowers can vary based on the bank's target market,
size, geographic location, and specialization. Banks assess the creditworthiness and risk profile of each
borrower before extending credit to them, considering factors such as income, financial statements,
credit history, collateral, and the purpose of the loan.

1. Individuals: (Under retail Segments): Retail traders, Micro, Small and Medium Enterprises, Farmers,
Agricultural, Consumers, Home loan, Credit Card etc.
2. Proprietorship Firms.
3. Partnership Firms.
4. Private Limited Companies.
5. Public Limited Companies.
6. Large Corporates.
7. Government Entities. (SOEs)

Types of Credit Facility:

Commercial banks make loans and advances in different forms. All types of credit facilities can be broadly
classified into two groups:
1. Funded credit
2. Non-funded credit

Funded loan: PAD, LTR, SOD(EM), PC, LDBP, FDBP, Loan against EDF, lease finance, HBL, DL, OD, CC(H),
CC(pledge) etc
Non-funded loan: LC (sight, usence, differed, B2B, acceptance, bills for payment, BG

On the basis of facilities loan can be classified as follows:

 Term loan
 Demand loan
 Continuous loan

All loans and advances will be grouped into four categories for the purpose of CL ( As per master circular
of loan classification BRPD circular 14, date September 23, 2012)

1. Continuous loan
2. Demand loan
3. Fixed term loan
4. Short term agricultural and micro credit
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Risk Management Division
Bank Asia Limited
Qualities of a good borrower

Answer: Qualities of a good borrower include the following:

1. Good Credit History: A good borrower typically has a positive credit history, including a track
record of making timely payments, managing debts responsibly, and maintaining a good credit
score. Lenders consider a borrower's credit history as an indicator of their ability to manage credit
responsibly.
2. Stable Income and Employment: Lenders prefer borrowers with a stable and sufficient income
source. A steady employment history demonstrates reliability and the ability to meet financial
obligations. It provides assurance to lenders that the borrower has the means to repay the
borrowed funds.
3. Responsible Financial Management: A good borrower demonstrates responsible financial
management. This includes budgeting, living within their means, and avoiding excessive debt.
They prioritize financial obligations and maintain a reasonable debt-to-income ratio.
4. Strong Financial Stability: Lenders prefer borrowers who have financial stability. This means
having a consistent income, minimal outstanding debts, and a healthy savings or emergency fund.
Financial stability indicates that the borrower is less likely to default on their loan.
5. Clear Purpose and Responsible Borrowing: A good borrower has a clear purpose for borrowing
and understands the responsibility that comes with it. They borrow for valid reasons, such as
education, home purchase, or business expansion, and use credit as a tool to improve their
financial situation.
6. Good Communication and Documentation: A good borrower maintains open and transparent
communication with lenders. They provide accurate and complete information during the
application process, respond promptly to inquiries, and submit required documents on time. This
helps establish trust and credibility with lenders.
7. Low Debt-to-Income Ratio: A good borrower typically has a low debt-to-income ratio, meaning
their debt obligations are manageable in relation to their income. Lenders assess this ratio to
determine the borrower's ability to handle additional debt and meet repayment obligations.
8. Positive Employment Stability: Lenders prefer borrowers with a stable employment history. A
consistent job or career path demonstrates reliability and the likelihood of continued income.
Lenders may consider factors such as job tenure, industry stability, and prospects for future
employment.
9. Financial Discipline: A good borrower demonstrates financial discipline by making payments on
time, avoiding unnecessary debt, and managing credit responsibly. They understand the
importance of meeting their financial obligations and strive to maintain a positive financial
reputation.
10. Willingness to Negotiate and Collaborate: A good borrower is willing to negotiate and collaborate
with lenders when facing financial difficulties. They proactively seek solutions, such as loan
modifications or refinancing, and communicate their challenges to find mutually beneficial
resolutions.
It's important to note that while these qualities are generally desirable in a borrower, lenders may have
specific criteria and requirements based on their lending policies and the type of credit being sought.

 Credit-worthiness
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Risk Management Division
Bank Asia Limited
 Building a solid foundation
 Money Management Skills
 Integrity
 Prudence
 Purposeful Spending
 Borrow Only When There is Need
 Make Payments on Time

What is Credit Planning?

Credit planning determines how credit should be granted in the future in order to achieve the
predetermined credit objectives according to the mandate of the bank and macro-economic priorities of
the Government and regulator considering financial condition of the institution, financial market scenario
and competitiveness with peer group.

Factors Influencing Credit Planning:

 Mandate of the bank.
 Government and regulatory priorities.
 Conditions of both Money Market and Capital Market.
 Performance scenario of the homogeneous products in the market.
 Cost of Credit (Loan pricing).
 Risk assessment from historical data based on types of credit.
 Collaterals accepted by the bank.
 Tenure of the loan and repayment procedure.
 Geographical concentration.

For a bank, credit planning refers to the process of assessing and managing the credit needs and risks
associated with its lending activities. Banks engage in credit planning to ensure the prudent allocation of
their financial resources, minimize credit losses, and maintain a healthy loan portfolio. Here are the key
aspects of credit planning for a bank:
1. Credit Portfolio Analysis: Banks analyze their existing loan portfolio to understand the
composition of credit exposures across various sectors, industries, and borrower segments. This
analysis helps identify concentrations of credit risk and potential vulnerabilities.
2. Credit Risk Assessment: Banks assess the creditworthiness of borrowers by evaluating their
financial health, repayment capacity, collateral, and other relevant factors. This helps banks
determine the level of risk associated with lending to different borrowers.
3. Loan Origination Process: Banks establish policies and procedures for originating loans, including
underwriting standards and documentation requirements. Credit planning involves defining and
implementing these processes to ensure consistency and adherence to risk management
guidelines.
4. Credit Limits and Exposure Management: Banks set limits on the maximum amount of credit
exposure they are willing to extend to individual borrowers, industries, or geographic regions.
Credit planning involves establishing these limits and monitoring exposure levels to maintain a
balanced and diversified loan portfolio.
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Risk Management Division
Bank Asia Limited
5. Interest Rate and Pricing Strategy: Banks develop strategies for setting interest rates and loan
pricing based on factors such as market conditions, credit risk, and profitability objectives. Credit
planning includes defining these strategies to ensure that loan pricing adequately reflects the risk
associated with each credit transaction.
6. Credit Monitoring and Review: Banks regularly monitor the performance of their loan portfolio,
tracking repayments, reviewing financial statements, and assessing changes in borrowers'
creditworthiness. Credit planning involves establishing processes for ongoing monitoring and
conducting periodic credit reviews to identify potential problem loans and take appropriate
actions.
7. Provisioning and Risk Mitigation: Banks set aside provisions for potential loan losses based on
their assessment of credit risk. Credit planning involves determining the amount of provisions
required to maintain adequate reserves and mitigate the impact of potential credit losses.
8. Regulatory Compliance: Banks must adhere to regulatory guidelines and reporting requirements
related to credit risk management. Credit planning includes ensuring compliance with applicable
regulations and reporting standards.
Overall, credit planning for a bank involves the careful assessment of credit risks, the establishment of
robust lending processes, and the ongoing monitoring and management of the loan portfolio to maintain
a sound and profitable credit business.

Credit planning at bank level implies estimating total loanable fund that are likely to be available within
the given period and then allocating the same amongst various alternatives uses in conformity with the
guidelines issued by the central bank and priorities. Credit planning activities of a bank is important for
achieving the following objectives: one, maximization of profit; two, diversification of credit portfolio;
three, ensuring the best alternative use of fund; four, providing credit to right person at right time at right
quantity; and five, compliance with regulatory limits and priority. Bank level credit plan should be made
by giving due consideration of the following points.
 Government priority set in the 5-year plan
 Government priority set in the national budget
 National level credit growth target set in monetary policy
 Industrial policy
 Export and Import policy
 Bank‘s profit target
 Bank‘s deposit growth plan
 Bank‘s current portfolio structure
 Prudential regulations
 Regional and sectorial imbalances

Credit Policy:
Credit policy defines the course of action or a guiding principle that influences decision of lending. A set
of rules and regulations formed in line with the regulatory guidelines to minimize credit risk for the safety
of the depositor‘s money and to ensure sustainable earnings.
Features of a GoodCredit Policy:
 Credit volume
 Earnings
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Risk Management Division
Bank Asia Limited
 Asset quality
 Regulatory compliances: Priority sector lending like CMSME, Agricultural credit, Large loan
concentration, Single borrower exposures, ICRR, CIB etc.
 Application procedure
 Formation of committees and set assignments
 Assessment and evaluation stages and procedures
 Loan pricing method
 Delegation of power
 Approval / Sanction of Credit.
 Maintenance of Liquidity and statutory reserves (CRR, SLR)
 Maintenance of Capital
 Documentation guidelines
 Monitoring and supervision of the Loans
 Management of Non-Performing Loans
 Legal action

A credit policy for a bank refers to a set of guidelines, principles, and procedures that govern the bank's
lending activities and determine how it extends credit to borrowers. It serves as a framework to manage
credit risk and ensure the bank's lending practices are consistent, prudent, and aligned with its strategic
objectives. The specific details of a credit policy can vary between banks, but here are some common
elements typically included:
1. Loan Portfolio Objectives: The policy outlines the bank's objectives for its loan portfolio, such as
desired asset quality, diversification, profitability, and target market segments.
2. Risk Appetite and Credit Risk Management: It defines the bank's risk appetite, establishing the
level of risk the bank is willing to accept in its lending activities. It also outlines the bank's credit
risk management practices, including risk assessment, monitoring, mitigation, and reporting
procedures.
3. Credit Approval Process: The policy outlines the process for evaluating and approving credit
applications. It includes criteria for borrower evaluation, such as creditworthiness, financial
stability, collateral requirements, and industry-specific considerations.
4. Loan Types and Limits: The policy specifies the types of loans the bank offers, such as personal
loans, mortgages, commercial loans, or lines of credit. It also defines the maximum loan amounts,
loan-to-value ratios, and other limits applicable to each loan category.
5. Interest Rates and Fees: The policy establishes guidelines for setting interest rates and fees
charged to borrowers. It may consider market conditions, the borrower's creditworthiness, loan
duration, and other relevant factors.
6. Collateral Requirements: The policy outlines the bank's approach to collateral, specifying the
acceptable types of collateral, valuation methods, and loan-to-value ratios for various collateral
categories.
7. Loan Monitoring and Review: It defines the bank's procedures for ongoing loan monitoring and
review, including periodic assessment of borrower financials, loan performance, and compliance
with loan covenants.
8. Loan Loss Provisioning: The policy establishes guidelines for setting aside provisions for potential
loan losses, in compliance with regulatory requirements and accounting standards.
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Risk Management Division
Bank Asia Limited
9. Compliance and Legal Considerations: The policy ensures adherence to applicable laws,
regulations, and internal policies. It may include provisions related to anti-money laundering
(AML), know-your-customer (KYC), consumer protection, and other regulatory requirements.
10. Reporting and Internal Controls: The policy outlines the reporting requirements and internal
controls necessary to track and manage credit risk effectively. It may include procedures for
reporting delinquencies, defaults, and overall loan portfolio performance.
Overall, a credit policy serves as a framework to guide the bank's lending decisions, minimize risk
exposure, and promote responsible lending practices. It helps the bank strike a balance between providing
access to credit for borrowers and safeguarding its own financial stability.
Regenerate response

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Risk Management Division
Bank Asia Limited
Module – B Principles of Sound Lending and Credit Process & Investigation

2.1 Principles of Sound Lending

2.2 Borrower Selection Process in Banks
2.3 Credit Investigation
2.4 Preparation of Credit Proposal
2.5 Analysis of Financial Statements and Financial Ratios
2.6 Internal Credit Risk Rating Systems (ICRRS)

Indicative Questions:

1. State the activities associated with credit operations of a bank.

2. Draw a diagram showing the different stages of credit operations.
3. What are the functions of the relationship manager (RM) of a bank?
4. What are the functions of the credit administration department (CAD) of a bank?
5. What are the functions of the recovery unit (RU) of a bank?
6. Discuss the principles of sound lending. How do you select a good borrower?
7. Show the borrower selection process with the help of a flow chart.
8. What are the financial statements that should be obtained from the business borrowers?
9. What are the different categories of assets and liabilities that are reported in the balance sheet
of an organization?
10. What are the different techniques or tools of financial statement analysis?
11. What are the different categories of ratios that are commonly used in case of borrower analysis?
12. Why is ICRR important for selecting the right borrower?
13. What are the parameters of measuring quantitative risk?
14. What are the exceptions to ICRR?
15. Which types of loans/exposures are not applicable for ICRR?

Discuss the principles of sound lending. How do you select a good borrower?
1. Safety
2. Purpose
3. Liquidity
4. Profitability
5. Security
6. Diversification
7. National interest
8. Managerial feasibility
9. Organizational feasibility
10. Technical side
11. Marketing side
12. Financial aspect
13. Economic aspect

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Risk Management Division
Bank Asia Limited
CAMPARI for borrower analysis:
 Character
 Ability
 Margin
 Purpose
 Amount
 Repayment
 Insurance

Five C’s: character, capacity, capital, condition, collateral

Five P’s: Person, purpose, product, place, profit
Five M’s: Men, money, material, market, management

Selecting a good borrower involves assessing their creditworthiness and evaluating their ability to repay
the loan responsibly. Here are some factors to consider when selecting a good borrower:
1. Credit History: Review the borrower's credit history, including their credit score and credit report.
A good borrower typically has a positive credit history with a track record of making timely
payments, low levels of debt, and responsible credit management.
2. Income and Employment Stability: Evaluate the borrower's income and employment stability. A
good borrower should have a stable income source that is sufficient to cover their financial
obligations. Consider factors such as the length of employment, consistency of income, and the
likelihood of continued employment.
3. Debt-to-Income Ratio: Assess the borrower's debt-to-income ratio, which compares their monthly
debt obligations to their income. A lower debt-to-income ratio indicates that the borrower has a
manageable level of debt relative to their income, suggesting they are more likely to meet their
loan repayment obligations.
4. Financial Stability: Consider the borrower's overall financial stability. Evaluate their savings,
assets, and any other sources of income. A borrower with a solid financial foundation is more
likely to handle financial challenges and repay the loan responsibly.
5. Purpose of the Loan: Understand the borrower's purpose for seeking the loan. A good borrower
will have a clear and legitimate reason for borrowing, such as education, home purchase, or
business expansion. Ensure that the loan aligns with their needs and is being used responsibly.
6. Communication and Responsiveness: Evaluate the borrower's communication skills and
responsiveness during the application process. A good borrower should provide accurate
information, be responsive to inquiries, and demonstrate a willingness to provide necessary
documentation.
7. Relationship with Previous Lenders: If the borrower has a history of borrowing from other lenders,
consider their relationship and repayment history with those lenders. A good borrower will have
a positive track record of repaying previous loans in a timely manner.
8. Risk Assessment: Assess the potential risks associated with the borrower, such as industry-specific
risks, market conditions, or any other factors that may impact their ability to repay the loan.
Consider the borrower's contingency plans and their ability to manage potential risks.

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Risk Management Division
Bank Asia Limited
9. Professional and Personal References: Consider any references provided by the borrower, such
as employers, colleagues, or personal contacts. These references can provide insights into the
borrower's character, reliability, and financial responsibility.
10. Legal and Regulatory Compliance: Ensure that the borrower meets all legal and regulatory
requirements for obtaining the loan. Verify their identity, assess their eligibility, and comply with
anti-money laundering and Know Your Customer (KYC) regulations.
It's important to note that selecting a good borrower involves a comprehensive evaluation process and
consideration of multiple factors. It's also essential to adhere to fair lending practices, avoiding any
discriminatory practices and treating all borrowers fairly and equitably.

Borrower Selection Process in Banks

The borrower selection process in banks typically involves several steps and criteria to assess the
creditworthiness and risk profile of potential borrowers. While the specific process may vary between
banks and jurisdictions, the following steps are commonly involved:
1. Loan Application: The first step is for the borrower to submit a loan application to the bank. This
application typically includes information about the borrower's personal and financial
background, purpose of the loan, and details of the collateral or security, if any.
2. Documentation and Verification: The bank reviews the loan application and requests supporting
documentation to verify the borrower's identity, income, employment, and financial statements.
This may involve collecting documents such as bank statements, tax returns, pay stubs, business
financials, and legal documents.
3. Credit Assessment: The bank assesses the borrower's creditworthiness by analyzing various
factors, such as credit history, credit score, existing debts, repayment behavior, and any past
defaults or bankruptcies. This helps the bank evaluate the borrower's ability and willingness to
repay the loan.
4. Income and Debt-to-Income Ratio: The bank evaluates the borrower's income level and calculates
their debt-to-income ratio, which compares their monthly debt obligations to their monthly
income. A lower debt-to-income ratio indicates a lower financial burden and a higher likelihood
of loan repayment.
5. Collateral Evaluation: In cases where the loan is secured by collateral, such as a property or
vehicle, the bank assesses the value of the collateral to determine its adequacy as security for the
loan. The value of the collateral helps mitigate the bank's risk by providing an additional source
of repayment in case of default.
6. Risk Analysis: Banks analyze the overall risk associated with lending to the borrower. This involves
assessing industry trends, market conditions, and the borrower's specific circumstances to gauge
the likelihood of loan default. Risk analysis helps banks determine the interest rate, loan amount,
and other terms and conditions applicable to the loan.
7. Decision and Approval: Based on the information gathered and analyzed during the previous
steps, the bank makes a decision on whether to approve or decline the loan application. The
decision considers factors such as the borrower's creditworthiness, risk profile, repayment
capacity, and compliance with the bank's lending policies.
8. Loan Structuring: If the loan application is approved, the bank works with the borrower to
structure the loan terms, including the interest rate, repayment schedule, loan duration, and any

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Risk Management Division
Bank Asia Limited
other specific requirements or conditions. The loan agreement is prepared, and both parties sign
the document.
It's important to note that the borrower selection process may also involve compliance with legal and
regulatory requirements, anti-money laundering checks, and adherence to internal risk management
policies established by the bank.

State the activities associated with credit operations of a bank.

The credit operations of a bank involve various activities related to the lending and management of credit.
These activities may vary based on the size, scope, and focus of the bank, but generally include the
following:
1. Loan Origination: This involves the process of evaluating loan applications, assessing the
creditworthiness of borrowers, and making decisions on loan approvals. It includes gathering and
analyzing financial information, conducting credit checks, and determining the terms and
conditions of the loan.
2. Credit Underwriting: Credit underwriting involves assessing the risks associated with lending and
determining the appropriate loan amount, interest rate, and repayment terms. It includes
evaluating the borrower's credit history, financial stability, income sources, collateral (if
applicable), and other relevant factors to determine the creditworthiness and the appropriate
loan structure.
3. Loan Documentation: Once a loan is approved, the credit operations team prepares the necessary
loan documentation. This includes drafting loan agreements, promissory notes, security
documents (such as mortgage or collateral agreements), and any other legal documents required
to formalize the loan.
4. Loan Disbursement: The credit operations team handles the disbursement of approved loans. This
involves verifying the completion of loan conditions, coordinating with the borrower and other
parties involved, and releasing the funds to the borrower or designated accounts.
5. Loan Servicing: Loan servicing encompasses the ongoing management of loans after
disbursement. It includes maintaining accurate loan records, monitoring repayments, sending
loan statements to borrowers, and handling any changes or requests related to the loan terms or
repayment schedules.
6. Credit Monitoring: The credit operations team monitors the performance of loans and ensures
compliance with loan covenants and repayment schedules. They track the borrower's repayment
behavior, analyze financial statements, and identify any signs of default or deterioration in credit
quality.
7. Loan Restructuring and Workout: In case of borrower financial difficulties or loan delinquencies,
the credit operations team may engage in loan restructuring or workout activities. This involves
assessing the borrower's financial situation, negotiating revised repayment terms, and
implementing strategies to help the borrower overcome financial challenges and repay the loan.
8. Collateral Management: If loans are secured by collateral, the credit operations team manages
the collateral. They maintain accurate records of collateral, assess its value and marketability, and
handle any actions required for securing or disposing of collateral in case of default.
9. Loan Repayment and Recovery: The credit operations team monitors loan repayments, follows
up on late payments, and takes appropriate actions for loan recovery in case of default. This may

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Risk Management Division
Bank Asia Limited
include engaging in debt collection activities, initiating legal actions, coordinating with external
agencies, and managing the recovery process.
10. Portfolio Analysis and Reporting: The credit operations team provides periodic reports on the
bank's loan portfolio, including loan performance, delinquencies, provisioning requirements, and
credit quality. They conduct portfolio analysis to identify trends, assess risks, and make
recommendations for portfolio management and improvement.
These activities collectively ensure the smooth functioning of credit operations within a bank, from loan
origination to loan servicing, monitoring, and recovery. Effective credit operations help manage credit
risk, maintain loan quality, and support the bank's overall financial health.

What are the functions of the recovery unit (RU) of a bank?

The Recovery Unit (RU) of a bank is responsible for managing and facilitating the recovery of non-
performing assets (NPAs) or bad loans. Its primary functions include:
1. NPA Identification: The RU identifies non-performing assets within the bank's loan portfolio. NPAs
are loans where the borrower has failed to make timely repayments, and the loan account has
become overdue or in default.
2. Asset Classification and Provisioning: The RU assesses the classification of NPAs as per regulatory
guidelines and internal policies. It determines the provisioning requirements to set aside funds to
cover potential losses arising from NPAs, ensuring compliance with prudential norms and
accounting standards.
3. Recovery Strategies: The RU formulates and implements strategies to recover the bank's bad
loans. It analyzes the borrower's financial situation, explores potential repayment arrangements,
negotiates settlements, and considers legal actions, if necessary, to recover the outstanding
amounts.
4. Restructuring and Rehabilitation: In cases where borrowers are facing temporary financial
difficulties, the RU may evaluate and recommend loan restructuring or rehabilitation measures.
It assesses the feasibility of restructuring proposals and coordinates with the borrower to
implement revised repayment terms.
5. Debt Recovery Actions: The RU initiates and manages debt recovery actions to recover
outstanding dues from defaulting borrowers. This includes coordinating with legal departments,
engaging external collection agencies, initiating recovery suits, and pursuing enforcement actions
like attachment or sale of collateral.
6. Negotiations and Settlements: The RU negotiates with borrowers to arrive at feasible repayment
arrangements or settlements. It may consider restructuring loan terms, reducing interest rates,
extending repayment periods, or settling for a reduced amount to expedite recovery and minimize
losses.
7. Collateral Management: When loans are secured by collateral, the RU manages the collateral. It
evaluates the value and marketability of collateral, initiates necessary actions to secure or
liquidate the collateral, and recovers the outstanding dues from the sale proceeds, if required.
8. Relationship Management: The RU maintains relationships with borrowers, attempting to resolve
disputes, address concerns, and promote mutually beneficial solutions. It seeks to maintain open
lines of communication and fosters cooperation to facilitate successful loan recovery.

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Risk Management Division
Bank Asia Limited
9. Reporting and Compliance: The RU prepares reports on recovery efforts, NPA status, and progress
made in debt recovery activities. It ensures compliance with regulatory reporting requirements,
internal guidelines, and audit standards.
10. Portfolio Analysis and Improvement: The RU conducts regular analysis of the bank's loan portfolio
to identify trends, assess risks, and recommend improvements to prevent future NPAs. It provides
feedback to other departments within the bank regarding credit assessment, risk management,
and loan recovery processes.
Overall, the Recovery Unit plays a critical role in managing the bank's non-performing assets, recovering
outstanding loans, and minimizing financial losses. It employs various strategies and actions to maximize
recovery while ensuring compliance with regulatory requirements and maintaining customer
relationships to the extent possible.

Show the borrower selection process with the help of a flow chart.
1. Start: Begin the borrower selection process.
2. Receive Loan Applications: Gather loan applications from prospective borrowers.
3. Assess Credit History: Evaluate the credit history of each borrower by reviewing their credit
reports and credit scores. Consider factors such as payment history, outstanding debts, and
previous loan performance.
4. Analyze Income and Employment Stability: Review the income and employment stability of the
borrowers to determine their ability to repay the loan. Assess factors like employment history,
income consistency, and prospects for continued employment.
5. Evaluate Debt-to-Income Ratio: Calculate the debt-to-income ratio for each borrower by
comparing their monthly debt obligations to their income. Consider a lower debt-to-income ratio
as an indicator of better repayment capacity.
6. Review Financial Stability: Examine the overall financial stability of the borrowers by considering
factors like savings, assets, and other sources of income. A financially stable borrower is more
likely to repay the loan responsibly.
7. Assess Purpose of the Loan: Evaluate the purpose of the loan for each borrower. Determine if the
loan is being used for legitimate and responsible reasons, such as education, home purchase, or
business expansion.
8. Communication and Documentation: Assess the borrowers' communication skills and their ability
to provide accurate and complete documentation during the application process. Consider their
responsiveness and willingness to provide necessary information.
9. Risk Assessment: Conduct a risk assessment by evaluating industry-specific risks, market
conditions, and any other factors that may impact the borrower's ability to repay the loan.
Consider potential risks and determine the level of risk associated with each borrower.
10. Make Borrower Selection: Based on the evaluation and analysis conducted, make a decision to
select or reject each borrower. Consider the creditworthiness, repayment capacity, financial
stability, and other relevant factors.
11. End: Complete the borrower selection process.
Remember that the borrower selection process can vary among different lenders and institutions. The
above steps provide a general outline of the process, but specific criteria and considerations may differ
based on the lender's policies, loan types, and risk appetite.
Regenerate response
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What are the different techniques or tools of financial statement analysis?

Financial statement analysis involves examining and interpreting financial statements to gain insights into
a company's financial performance, position, and prospects. Various techniques and tools are used to
conduct financial statement analysis. Here are some commonly used techniques:
1. Ratio Analysis: Ratio analysis involves calculating and analyzing various financial ratios derived
from the financial statements. Ratios provide valuable information about a company's liquidity,
profitability, efficiency, solvency, and market performance. Examples of ratios include current
ratio, debt-to-equity ratio, return on investment (ROI), and earnings per share (EPS).
2. Trend Analysis: Trend analysis compares financial data over multiple periods to identify patterns,
trends, and changes in performance. It helps assess the direction and magnitude of changes in
key financial metrics, such as revenues, expenses, and profitability, and highlights areas of
improvement or concern.
3. Vertical Analysis: Vertical analysis, also known as common-size analysis, expresses each line item
on the financial statements as a percentage of a base figure. It allows for a comparison of the
relative importance of different components of the financial statements, such as the proportion
of revenue contributed by each expense category.
4. Horizontal Analysis: Horizontal analysis compares financial data across consecutive periods to
identify changes in performance and detect any significant variations. It helps identify growth
rates, fluctuations, and anomalies in financial statement items, such as revenues, expenses, and
net income.
5. Cash Flow Analysis: Cash flow analysis focuses on the cash flows generated by a company's
operating, investing, and financing activities. It involves examining the statement of cash flows to
assess the company's ability to generate cash, its cash flow patterns, and its ability to meet its
short-term and long-term obligations.
6. DuPont Analysis: DuPont analysis breaks down a company's return on equity (ROE) into its
component parts to assess the sources of profitability and identify factors driving changes in ROE.
It examines the company's profit margin, asset turnover, and financial leverage to understand the
drivers of overall profitability.
7. Comparative Analysis: Comparative analysis involves comparing the financial performance of a
company with that of its competitors or industry peers. It helps evaluate a company's relative
position within the industry and identify areas of strength or weakness.
8. Common-Size Statements: Common-size financial statements present financial data as
percentages of a common base, typically using total assets or total revenue as the base. This
allows for easier comparison of different companies or different periods within the same
company.
9. Break-Even Analysis: Break-even analysis determines the level of sales or production volume at
which a company neither incurs a profit nor a loss. It helps assess the company's cost structure,
breakeven point, and sensitivity to changes in sales or costs.
10. Qualitative Analysis: Qualitative analysis involves considering non-financial factors such as
industry trends, competitive landscape, management quality, corporate governance, and
regulatory environment. These factors provide context and supplement the quantitative analysis
of financial statements.

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These techniques and tools of financial statement analysis help analysts, investors, and stakeholders
understand a company's financial health, performance, and potential risks. It's important to use multiple
techniques in combination to gain a comprehensive and well-rounded view of a company's financial
position.

What are the different categories of ratios that are commonly used in case of borrower analysis?
In the case of borrower analysis, various categories of ratios are commonly used to assess the borrower's
financial health, repayment capacity, and creditworthiness. These ratios provide insights into different
aspects of the borrower's financial performance and help lenders evaluate the borrower's ability to repay
loans. Here are some key categories of ratios used in borrower analysis:
1. Liquidity Ratios:
 Current Ratio
 Quick Ratio
 Cash Ratio
2. Solvency Ratios:
 Debt-to-Equity Ratio
 Debt Ratio
 Equity Ratio
3. Profitability Ratios:
 Gross Profit Margin
 Operating Profit Margin
 Net Profit Margin
 Return on Assets (ROA)
 Return on Equity (ROE)
4. Efficiency Ratios:
 Asset Turnover Ratio
 Inventory Turnover Ratio
 Accounts Receivable Turnover Ratio
 Days Sales Outstanding (DSO)
5. Coverage Ratios:
 Interest Coverage Ratio
 Debt Service Coverage Ratio
6. Growth Ratios:
 Revenue Growth Rate
 Earnings Growth Rate
7. Cash Flow Ratios:
 Operating Cash Flow Ratio
 Cash Flow Coverage Ratio
8. Stability Ratios:
 Earnings Stability Ratio
 Dividend Stability Ratio
These ratios are calculated by analyzing various financial statement figures, such as income statements,
balance sheets, and cash flow statements. Each ratio provides a different perspective on the borrower's

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financial position and performance. By examining these ratios collectively, lenders can assess the
borrower's ability to generate profits, manage debt, meet financial obligations, and maintain liquidity.
It's important to note that the specific ratios used for borrower analysis may vary depending on the
industry, loan type, and the lender's specific requirements. Additionally, lenders may have their own
proprietary models or customized ratios based on their risk assessment methodologies.

What are ICRRS, CRG, and LRA?

Credit risk is the risk of losses arising from borrowers' failure to repay the loans or meet contractual
obligations. In order to establish a sound credit risk management, adopting a modern rating mechanism
is important.
The Internal Credit Risk Rating System (ICRRS) is a system-based credit risk assessment and decision-
making model or tool. This model is for analyzing a borrower's repayment ability based on information
about a customer's financial condition, including their liquidity, cash flow, profitability, debt profile,
market indicators, industry and operational background, management capabilities, and other indicators.

ICRRS, CRG, and LRA are all credit risk assessment models which were introduced at different times as
per industry requirement.

ICRRS has been introduced due to industry demand. In the last couple of years, industry characteristics
have changed a lot. Besides, the necessity to review different weights applied in the CRG framework has
evolved. Bangladesh Bank feels the necessity to update the credit risk grading mechanism in order to deal
with growing complexities in a more dynamic banking industry. This ICRRS will replace the existing Credit
Risk Grading System (CRGS) that was introduced in 2005.

 The main objectives of new rating system is to eliminate the limitations of existing CRGS and facilitate
bank's overall portfolio management activities, assess the quality of individual borrower to help the
banks to determine the quality of the credit portfolio, line of business, the branch or the Bank as a
whole.
 A total of 18 industries under 4 sectors- Manufacturing, Trade & Commerce, Service and Agro based
& Agro processing- are required to go through ICRR system for processing a loan application. The ICRR
consists of 4-notched rating system covering the Quantitative and Qualitative parameters.
 In the previous version of Credit Risk Grading Manual, 50 percent weights were assigned for
quantitative indicators while 50 percent weights were for subjective judgment [though it varied from
bank to bank]. In the new ICRRS, these weights have been revised and 60 percent weights are assigned
for quantitative indicators while 40 percent are assigned for qualitative indicators.
 Quantitative indicators and associated weights in ICRR fall into six broad categories; leverage,
liquidity, profitability, coverage, operational efficiency, and earning quality. Whereas Qualitative
indicators [which must be done by the Relationship Manager] covers six broad aspects of the
firms/institutions to be rated, namely business/industry risk, credit quality enhancement,
performance behavior, management risk, relationship risk, and compliance risk.
 The existing CRG system has not that much been effective due to so many drawbacks and as it was
confined into a single model; not fit for diversified sectors or industries. But the new ICRRS has largely
addressed those constraints and expects to be more effective and purposeful.

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 Internal Credit Risk Rating System will be an integral part of credit risk management for the banks. It
will provide a granular, objective, transparent, consistent framework for the measurement and
assessment of borrowers’ credit risk.
 ICRRS will facilitate the portfolio management activities
 ICRRS will assess the quality of individual borrower to help the banks to determine the quality of the
credit portfolio, line of business of the branch or the Bank as a whole.
 ICRRS will be used for individual credit selection, credit pricing, and setting credit limit and terms &
conditions.

Who is the user of ICRRS?

The commercial bank will use the model to analyze a borrower's repayment ability based on information
such as financial condition, including their liquidity, cash flow, profitability, debt profile, market indicators,
industry and operational background, management capabilities, and other indicators. ICRRS shall be an
integral part of the credit approval process. All credit proposals whether new, renewal or enhancement
shall be gone through the ICRR process and the ICRRS report shall be retained in the loan file.

Applicability of ICRRS
ICRRS shall be conducted for all credit proposals including new, renewal and enhancement of the
existing proposal.

As per latest BRPD circular letter No. 05 of January 06, 2021, "The ICRRS shall be applicable for all
exposures (irrespective of amount) except consumer loans, small enterprises having total loans
exposures less than BDT 50 (fifty) lac and small enterprises in manufacturing having total loans
exposures less than BDT 1 (one) crore, short-term agri loans, micro-credit, and lending to bank, financial
institution, insurance company, micro finance institution, merchant bank, stock brokerage house and
non-government organization. For these types of entities, banks shall use their own credit risk
management tools and risk mitigation strategies."

Frequency of Credit Risk Scoring

For existing credit relationship, the ICRRS shall be reviewed at least annually at the time of annual/regular
credit review.
Components of Credit Risk Rating
ICRRS has 02 components:-
 Quantitative indicators
 Qualitative indicators
In the previous version of Credit Risk Grading Manual, 50 percent weights were assigned for quantitative
indicators (financial risk) while 50 percent weights were for subjective judgment. In the ICRR, these
weights have been revised; 60 percent weights are assigned for quantitative indicators while 40 percent
are assigned for qualitative indicators.

 Quantitative indicators and associated weights: Quantitative indicators in ICRR fall into six broad
categories leverage, liquidity, profitability, coverage, operational efficiency, and earning quality

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Quantitative Indicators Individual Total
Weight Weight
Debt to Tangible Net Worth (DTN) 7
Leverage 10%
Debt to Total Assets (DTA) 3
Current Ratio (CR) 7
Liquidity 10%
Cash Ratio (Cash) 3
Net Profit Margin (NPM) 5
Profitability Return on Assets (ROA) 3 10%
Operating Profit to Operating Assets (OPOA) 2
Interest Coverage (IC) 3
Debt Service Coverage Ratio (DSCR) 5
Coverage Operating Cash Flow to Financial Debt Ratio 15%
4
(OCDR)
Cash Flow Coverage Ratio (CCR) 3
Stock Turnover Days (STD) 4
Operational
Trade Debtor Collection Days (TDCD) 3 10%
Efficiency
Asset Turnover (AT) 3
Operating Cash Flow to Sales (OCFS) 3
Earning Quality 5%
Cash Flow based Accrual Ratio (CFAR) 2

 Qualitative indicators and associated weights: Qualitative indicators cover the following six
broad aspects of the firms/institutions:
Individual Total
Qualitative indicators
Weight Weight
Performance Behavior with Lending Banks 9
Performance
Performance Behavior with 10%
Behavior 1
Suppliers/Creditors
Sales Growth 2
Age of Business 2
Business and Industry
Industry Prospects 1 7%
Risk
Long-Term External Credit Rating of the
2
Borrower
Experience of the Management 2
Existence of Succession Plan 2
Management Risk 7%
Auditing Firms 2
Change of External Auditors in Last 3 Years 1
Primary Security 2
Collateral 2
Security Risk 11%
Eligible Collateral Coverage 5
Type of Guarantee 2
Relationship Risk Account Conduct 3 3%
Compliance with environmental rules,
Compliance Risk 1 2%
regulations and covenants
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Independence of Management 1

Internal Credit Risk Rating Scores:

The ICRR consists of 4-notched rating system covering the Quantitative and Qualitative parameters.

The latest circular has been issued on February 23, 2022 through BRPD circular letter No. 07 and the
revised aggregate score is as below and will be effective till December 31, 2023.
Rating Scores Aggregate
Excellent ≥75%
Good ≥65% to <75%
Marginal ≥50% to <65%
Unacceptable <50%
Latest Management Action Trigger (i.e. 1.10): In deriving ICRR, whatever score a borrower gets in the
qualitative part, if the score in the quantitative part is less than 40%, the borrower’s ICRR shall be
"Unacceptable".

Which rating tells you what?

Excellent: Strong repayment capacity of the borrower evident by the high liquidity, low leverage, strong
earnings, and adequate cash flow. Borrower has well established strong market share. Very good
management skill & expertise.
Good: These borrowers are not as strong as "Excellent" borrowers, but still demonstrate consistent
earnings, adequate cash flow and have a good track record. Borrower is well established and has strong
market share. Very good management skill & expertise.
Marginal: This grade has potential weaknesses that deserve management’s close attention. If left
uncorrected, these weaknesses may result in a deterioration of the repayment prospects of the borrower.
Unacceptable: Financial condition is weak and no capacity or inclination to repay. Severe management
problems exist. Facilities should be downgraded to this grade if sustained deterioration in financial
condition is noted (consecutive losses, negative net worth, excessive leverage).

Sectors of ICRRS
A total of 18 industries under 4 sectors- Manufacturing, Trade & Commerce, Service and Agro based &
Agro processing- are required to go through ICRR system for processing a loan application.
A. Industry:-
1. Ready Made Garments (RMG)
2. Textile (including spinning, knitting, weaving)
3. Food and Allied Industries
4. Pharmaceutical
5. Chemical
6. Fertilizer
7. Cement
8. Ceramic
9. Ship Building
10. Ship Breaking
11. Jute Mills
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12. Steel Engineering
13. Power and Gas
14. Other Industry
B. Trade and Commerce
C. Agro Base and Agro Processing
D. Service:-
1. Housing and Construction
2. Hospitals and Clinics
3. Telecommunication
4. Other Service

What is loan pricing? Discuss the components those are required to be taken into account in pricing of
loan.
Loan pricing refers to the process of determining the interest rate and other fees or charges associated
with a loan. It is a critical aspect of lending as it directly affects the cost of borrowing for the borrower and
the profitability for the lender. Several components need to be taken into account when pricing a loan,
and here are some of the key considerations:
1. Risk Assessment: The risk associated with the borrower is a crucial factor in loan pricing. Lenders
evaluate the borrower's creditworthiness, including factors such as credit history, financial
stability, income levels, and collateral. Higher-risk borrowers are generally charged higher interest
rates to compensate for the increased likelihood of default.
2. Cost of Funds: Lenders need to consider their own cost of funds when determining loan pricing.
This includes the interest rates they pay on deposits, borrowings from other financial institutions,
or capital market sources. The cost of funds is an important consideration as it determines the
baseline for the interest rate charged to borrowers.
3. Profit Margin: Lenders aim to generate a profit on their lending activities. They factor in their
desired profit margin when setting loan pricing. This margin represents the compensation for the
lender's services, administrative costs, and the risks they undertake in providing credit.
4. Market Conditions: Market conditions play a significant role in loan pricing. Factors such as
prevailing interest rates, inflation, liquidity, and competition in the lending market influence the
pricing decisions of lenders. If interest rates are low or competition is high, lenders may adjust
their pricing to remain competitive and attract borrowers.
5. Loan Tenure and Repayment Schedule: The duration of the loan and the repayment schedule
impact the pricing. Longer loan tenures may carry a higher interest rate compared to shorter-term
loans due to the increased risk and uncertainty associated with longer repayment periods.
Additionally, the frequency of loan repayments, such as monthly or quarterly, can also affect the
pricing.
6. Loan Size: The amount of the loan is another factor to consider in loan pricing. Larger loan
amounts may have a different pricing structure compared to smaller loans. This is because larger
loans may require more extensive credit assessment, involve higher administrative costs, and
potentially carry higher risks.
7. Collateral and Security: The presence of collateral or security offered by the borrower can
influence loan pricing. Collateral provides a form of protection for the lender in the event of

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default. Loans secured by valuable collateral may have lower interest rates compared to
unsecured loans or loans with weaker collateral.
8. Relationship with the Borrower: The existing relationship between the lender and borrower can
impact loan pricing. Lenders often provide preferential pricing or discounts to long-standing
customers with a good track record. This is done to encourage customer loyalty and reward
reliable borrowers.
It's important to note that loan pricing is a complex process that involves the consideration of multiple
factors. Lenders employ various pricing models and risk assessment tools to determine the appropriate
interest rate and fees for each loan. The ultimate goal is to strike a balance between the borrower's ability
to repay and the lender's need for profitability and risk mitigation.
Regenerate response

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Module-C Term Loan and Working Capital Financing

3.1 Appraisal of Term Lending

3.2 Importance of Credit Appraisal
3.3 Different Aspects of Credit Appraisal
3.4 Cost of the Project and Means of Financing
3.5 Capital Budgeting Techniques
3.6 Sensitivity Analysis
3.7 Cost-Volume-Profit Analysis
3.8 Assessment of Working Capital Requirement

Indicative Question:
1. What are the different aspects of credit appraisal?
2. Discuss different techniques of analyzing financial viability?
3. Why is environmental aspect very important for assessing feasibility of the project?
4. Why is credit appraisal so important?
5. Which of the aspects of credit appraisal is most important? Why?
6. Discuss the different techniques of capital budgeting.
7. Why NPV is considered better than pay back period?
8. What do you understand by sensitivity analysis?
9. What do you mean by working capital financing?
10. How will you assess the working capital requirement of a prospective borrower?

Credit appraisal:
Credit appraisal, in simple terms, means pre-investment analysis of an investment proposal with a view
to determining, its commercial and socio-economic feasibilities i.e. to examine as to whether a proposed
project which is going to take up for implementation and finance is
 commercially profitable,
 economically viable and at the same tune.
 socially desirable.

Credit appraisal, also known as credit evaluation or credit assessment, is the process by which a financial
institution, such as a bank, assesses the creditworthiness of a borrower to determine their ability to repay
a loan or meet their financial obligations. The credit appraisal process helps the institution evaluate the
risks associated with extending credit to a borrower and make informed decisions regarding loan
approval, terms, and conditions.
The credit appraisal process typically involves the following steps:
1. Collection of Information: The lender collects relevant information about the borrower, including
personal and financial details, income sources, employment history, and credit history. This
information is usually obtained through loan applications, financial statements, credit reports,
and other supporting documents.
2. Financial Analysis: The lender analyzes the borrower's financial statements, including income
statements, balance sheets, and cash flow statements, to assess their financial stability and ability
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to generate sufficient cash flows to repay the loan. This involves evaluating factors such as income
levels, profitability, liquidity, debt levels, and financial ratios.
3. Creditworthiness Evaluation: The lender evaluates the borrower's creditworthiness by
considering their credit history and credit score. This involves reviewing their past repayment
behavior, loan defaults (if any), outstanding debts, and the overall credit utilization. A good credit
history and a high credit score indicate a lower credit risk for the lender.
4. Risk Assessment: The lender assesses the risks associated with lending to the borrower. This
involves evaluating factors such as industry conditions, market trends, economic factors, and the
borrower's specific circumstances. The lender considers the potential risks that may impact the
borrower's ability to repay the loan, such as changes in interest rates, competition, regulatory
changes, and market volatility.
5. Collateral Evaluation (if applicable): In cases where the loan is secured by collateral, the lender
assesses the value and quality of the collateral to determine its adequacy as security for the loan.
This evaluation helps mitigate the lender's risk by providing an additional source of repayment in
case of default.
6. Decision and Loan Structuring: Based on the information gathered and analyzed during the credit
appraisal process, the lender makes a decision on whether to approve the loan application. If
approved, the lender structures the loan by determining the loan amount, interest rate,
repayment schedule, and other terms and conditions.
7. Monitoring and Review: After loan approval, the lender continues to monitor the borrower's
financial performance and adherence to the loan agreement. Regular reviews are conducted to
assess any changes in the borrower's circumstances or financial health that may impact their
ability to repay the loan.
The credit appraisal process is crucial for banks and financial institutions to assess credit risk, make
informed lending decisions, and safeguard their assets. It helps ensure responsible lending practices and
contributes to maintaining a healthy loan portfolio.

Importance of Credit Appraisal

Credit appraisal is a crucial process undertaken by financial institutions, such as banks and lending
organizations, to assess the creditworthiness and viability of potential borrowers. It involves evaluating
various aspects of a borrower's financial profile, business model, and repayment capacity to determine
the risk associated with granting credit. The importance of credit appraisal cannot be overstated, and here
are several reasons why it plays a significant role in lending decisions:
1. Risk Management: Credit appraisal helps financial institutions in managing credit risk effectively.
By thoroughly analyzing the borrower's financial position, including their income, assets,
liabilities, and credit history, lenders can assess the likelihood of default or delayed payments.
This enables them to make informed decisions about granting credit and determine appropriate
terms and conditions to mitigate potential risks.
2. Sound Investment Decisions: Through credit appraisal, lenders evaluate the feasibility and
profitability of a borrower's project or business proposal. It allows them to assess the borrower's
ability to generate sufficient cash flows to repay the borrowed funds. By scrutinizing the
borrower's financial statements, market conditions, and growth prospects, lenders can make
informed investment decisions, ensuring that their funds are allocated to viable and sustainable
ventures.
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3. Maintaining Asset Quality: Effective credit appraisal contributes to maintaining the asset quality
of financial institutions. By conducting a thorough assessment of borrowers, lenders can identify
potential red flags, such as overleveraging, poor cash flow management, or inadequate collateral.
This helps prevent the inclusion of risky assets in the lender's portfolio, reducing the chances of
non-performing assets and improving the overall health of their loan book.
4. Pricing of Credit: Credit appraisal facilitates the determination of appropriate interest rates and
fees for loans. Lenders assess the risk associated with a borrower and adjust the cost of credit
accordingly. A thorough appraisal process helps in differentiating between low-risk and high-risk
borrowers, ensuring that the pricing of credit reflects the potential risks involved. This ensures
fairness in interest rates and helps in maximizing the lender's profitability while maintaining
competitiveness in the market.
5. Compliance with Regulatory Requirements: Financial institutions are subject to various regulatory
frameworks and guidelines regarding lending practices. Credit appraisal ensures compliance with
these regulations by thoroughly assessing the borrower's eligibility and adherence to regulatory
requirements. This helps institutions avoid penalties, legal issues, and reputational risks
associated with non-compliance.
6. Building Long-Term Relationships: Credit appraisal is not just a one-time evaluation; it also helps
in building long-term relationships between lenders and borrowers. By conducting a
comprehensive appraisal, lenders gain insights into the borrower's financial situation, future
plans, and repayment capabilities. This understanding fosters trust and transparency, leading to
stronger relationships, repeat business, and potential cross-selling opportunities.
In conclusion, credit appraisal is a fundamental process in the lending industry that allows financial
institutions to make informed decisions while managing risks, maintaining asset quality, and complying
with regulatory requirements. By conducting a thorough assessment of borrowers' creditworthiness,
lenders can ensure sound investment decisions, fair pricing of credit, and the establishment of long-term
relationships.

Different Aspects of Credit Appraisal:

1. Managerial Aspect
2. Organization Aspect
3. Technical Aspect
4. Marketing Aspect
5. Financial Aspect
6. Socio-Economic Aspect
7. Environmental Aspect

Why is credit appraisal so important?

Credit appraisal is important for several reasons:

1. Risk Management: Credit appraisal plays a crucial role in assessing and managing credit risk. By
thoroughly evaluating a borrower's creditworthiness, financial position, and repayment capacity,
lenders can identify potential risks associated with extending credit. This helps them make
informed decisions about loan approvals, loan terms, and interest rates, thereby minimizing the
risk of defaults and loan losses.
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2. Loan Quality: Effective credit appraisal ensures that loans are extended to borrowers who have
the ability and intention to repay them. By evaluating the borrower's financial health, business
operations, and credit history, lenders can assess the quality of the loan application. This helps
maintain a portfolio of high-quality loans, reducing the likelihood of non-performing loans and
improving overall loan portfolio performance.
3. Profitability: Credit appraisal directly impacts the profitability of lenders. By carefully evaluating
the creditworthiness of borrowers, lenders can price loans appropriately based on the assessed
risk. This helps ensure that the interest rates charged on loans are commensurate with the risk
involved, thereby optimizing profitability and avoiding underpricing or overpricing of credit.
4. Regulatory Compliance: Credit appraisal helps lenders comply with regulatory requirements and
prudential norms. Financial institutions are often required by regulatory authorities to conduct
thorough credit assessments before extending credit. Adhering to these requirements helps
lenders maintain regulatory compliance, avoid penalties, and demonstrate sound lending
practices.
5. Customer Relationship Management: Credit appraisal is crucial for establishing and maintaining
strong relationships with borrowers. By conducting a comprehensive assessment of the
borrower's financial position, lenders can understand their unique needs, offer suitable loan
structures, and provide customized financial solutions. This helps build trust and loyalty with
borrowers, fostering long-term relationships and repeat business.
6. Decision Making: Credit appraisal provides lenders with the necessary information and analysis
to make informed credit decisions. It enables lenders to differentiate between creditworthy
borrowers and those with higher credit risks. With accurate and thorough credit appraisal, lenders
can make sound decisions about loan approvals, loan amounts, interest rates, and collateral
requirements.
7. Portfolio Management: Credit appraisal supports effective portfolio management. By assessing
the creditworthiness of borrowers, lenders can diversify their loan portfolios, manage exposure
to different industries and sectors, and balance risk across the portfolio. Regular monitoring and
review of borrowers also help identify early warning signals and take timely actions to mitigate
risks and protect the overall portfolio.
Overall, credit appraisal is vital for lenders to mitigate credit risks, maintain loan quality, ensure
profitability, comply with regulations, build customer relationships, make informed decisions, and
manage loan portfolios effectively. It forms the foundation of prudent lending practices and contributes
to the financial stability and sustainability of lenders.

Cost-Volume-Profit Analysis? Why it is important?

Cost-Volume-Profit (CVP) analysis is a managerial accounting technique used to assess the relationship
between costs, volume of production or sales, and profits. It provides insights into how changes in these
factors impact the financial performance of a business. CVP analysis is crucial for several reasons:
1. Profit Planning and Decision Making: CVP analysis helps businesses in profit planning by providing
information on the level of sales or production needed to achieve a desired profit target. It assists
managers in setting sales targets, determining pricing strategies, and making decisions regarding
cost control, product mix, and resource allocation. By understanding the impact of various
scenarios on profits, businesses can make informed decisions to maximize profitability.
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2. Break-Even Analysis: CVP analysis enables the determination of the break-even point, which is the
level of sales or production at which total revenues equal total costs, resulting in zero profit.
Knowing the break-even point is crucial for businesses as it indicates the minimum level of activity
required to cover all costs. It helps in assessing the feasibility of a new project, pricing decisions,
and evaluating the potential impact of cost changes or volume fluctuations on profitability.
3. Sensitivity Analysis: CVP analysis allows businesses to conduct sensitivity analysis by assessing
how changes in key variables, such as sales price, variable costs, or fixed costs, affect profits. This
analysis helps in understanding the risk associated with various factors and identifying critical
areas that require attention. It enables businesses to evaluate different scenarios, quantify the
potential impact of changes, and develop contingency plans to mitigate risks.
4. Pricing Decisions: CVP analysis plays a vital role in pricing decisions. By understanding the
relationship between costs, volume, and profits, businesses can determine the appropriate
pricing strategy. It helps in setting optimal prices by considering cost structures, competitive
factors, customer demand elasticity, and desired profit margins. CVP analysis ensures that prices
are set to cover costs while maximizing profitability and maintaining competitiveness.
5. Performance Evaluation: CVP analysis provides a framework for evaluating the financial
performance of different products, services, or business segments. It helps in identifying the most
profitable products or services and assessing the contribution of each to overall profitability. By
comparing actual performance against expected results, businesses can identify areas of
improvement, monitor the efficiency of cost management, and make informed decisions to
enhance profitability.
6. Capital Budgeting: CVP analysis assists in capital budgeting decisions by considering the impact of
new investments or projects on profitability. It helps in evaluating the potential returns, assessing
the level of sales or production required to recover costs and generate profits, and determining
the payback period or return on investment. CVP analysis aids businesses in selecting the most
financially viable projects and allocating resources effectively.
In summary, CVP analysis is essential for businesses as it provides valuable insights into the relationships
between costs, volume, and profits. It aids in profit planning, decision making, pricing strategies,
performance evaluation, and capital budgeting. By utilizing CVP analysis, businesses can optimize their
operations, maximize profitability, and make informed strategic choices to achieve long-term financial
success.

What is Break-Even Point? Why it is important?

The break-even point is a fundamental concept in cost-volume-profit analysis that represents the level of
sales or production at which total revenues equal total costs, resulting in zero profit or loss. At the break-
even point, a business covers all its expenses but does not make any additional profit. The break-even
point is important for several reasons:
1. Assessing Profitability: The break-even point helps businesses determine the minimum level of
activity required to cover costs and achieve profitability. By understanding the sales volume
needed to break even, businesses can set realistic sales targets and develop strategies to exceed
the break-even point, thereby generating profits. It serves as a reference point for evaluating the
financial feasibility of a business or project.
2. Pricing Decisions: Knowing the break-even point is crucial for setting prices that ensure
profitability. By considering the cost structure and the desired profit margin, businesses can
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calculate the sales price needed to cover costs and achieve the desired level of profit. The break-
even analysis helps in evaluating different pricing strategies and determining the optimal price to
maximize profitability.
3. Cost Control: The break-even point analysis provides insights into cost management. By
identifying the fixed costs, variable costs per unit, and the break-even sales volume, businesses
can analyze their cost structures and find opportunities for cost reduction or optimization. It
enables businesses to focus on cost control measures to operate more efficiently and improve
profitability.
4. Financial Planning: The break-even point is an essential component of financial planning and
budgeting. It helps in forecasting sales targets and estimating the financial performance of a
business. By understanding the relationship between costs, sales volume, and profitability,
businesses can develop realistic budgets, allocate resources effectively, and make informed
decisions about investments and expenditures.
5. Performance Evaluation: The break-even point serves as a benchmark for evaluating the financial
performance of a business. By comparing actual sales or production levels with the break-even
point, businesses can assess whether they are operating above or below the minimum required
to cover costs. It helps in monitoring the efficiency of operations, identifying areas of
improvement, and measuring the success of cost management strategies.
6. Decision Making: The break-even point analysis assists in various decision-making processes. It
helps businesses evaluate the financial impact of potential changes, such as introducing a new
product, expanding operations, or changing the cost structure. By conducting sensitivity analysis
around the break-even point, businesses can assess the risks associated with different scenarios
and make informed decisions to mitigate those risks.
In summary, the break-even point is a crucial metric that helps businesses determine the minimum level
of activity required to cover costs and achieve profitability. It aids in pricing decisions, cost control,
financial planning, performance evaluation, and decision making. By understanding the break-even point,
businesses can set realistic goals, optimize their operations, and make informed strategic choices to
improve their financial performance.

What is Working Capital?

Working capital refers to the financial resources available to a company for its day-to-day operations. It
represents the difference between a company's current assets and its current liabilities. Working capital
is a measure of a company's short-term liquidity and its ability to meet its immediate obligations. It plays
a vital role in the smooth functioning of business operations. Here are a few key points to understand
about working capital:
1. Calculation: Working capital is calculated by subtracting current liabilities from current assets.
Current assets include cash, accounts receivable, inventory, and other assets that are expected to
be converted into cash within one year. Current liabilities include accounts payable, short-term
debt, and other obligations due within one year.
Working Capital = Current Assets - Current Liabilities
2. Importance: Working capital is essential for sustaining day-to-day operations and ensuring the
smooth flow of business activities. It is needed to meet short-term obligations, such as paying
suppliers, employees' salaries, utility bills, and other operating expenses. Adequate working

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capital is crucial for maintaining liquidity, managing cash flow, and avoiding disruptions in
business operations.
3. Operating Cycle: Working capital is closely related to the operating cycle of a company. The
operating cycle starts with the acquisition of raw materials, followed by the conversion of these
materials into finished goods, sale of the goods to customers, and ultimately the collection of
accounts receivable. The time it takes for these processes determines the amount of working
capital required to support the cycle and keep operations running smoothly.
4. Positive and Negative Working Capital: Positive working capital indicates that a company has
sufficient current assets to cover its current liabilities. This is generally seen as a healthy sign, as
it suggests that the company is able to meet its short-term obligations. Conversely, negative
working capital occurs when current liabilities exceed current assets. Negative working capital
may indicate liquidity issues and may require immediate attention to ensure the company's
financial stability.
5. Managing Working Capital: Efficient management of working capital is crucial for optimizing a
company's liquidity and profitability. This involves maintaining a balance between maintaining
adequate levels of current assets to meet operational needs and minimizing excess working
capital that may be tied up in unproductive assets. Effective management of accounts receivable,
inventory, and accounts payable is important for controlling working capital levels.
6. Working Capital Ratios: There are several ratios used to assess a company's working capital
position, such as the current ratio and the quick ratio (also known as the acid-test ratio). These
ratios provide insights into the company's liquidity and its ability to meet short-term obligations.
They are commonly used by investors, creditors, and analysts to evaluate a company's financial
health.
In summary, working capital represents the financial resources available to a company for its day-to-day
operations. It is crucial for meeting short-term obligations, maintaining liquidity, and supporting the
smooth functioning of business activities. Effective management of working capital is important for
optimizing cash flow, profitability, and overall financial stability.

Working capital is important for several reasons:

1. Liquidity: Adequate working capital ensures that a company has sufficient funds to meet its short-
term obligations and cover day-to-day operating expenses. It provides the liquidity necessary to
pay suppliers, employees, and other creditors on time. Without proper working capital, a
company may face cash flow difficulties and struggle to fulfill its financial obligations, potentially
leading to disruptions in operations or strained relationships with stakeholders.
2. Operational Efficiency: Having a healthy level of working capital allows a company to operate
smoothly and efficiently. It ensures that there are enough resources to maintain inventory levels,
fulfill customer orders, and manage the production process. With adequate working capital, a
company can avoid delays in purchasing raw materials, pay for necessary services, and invest in
equipment or technology upgrades to enhance productivity.
3. Business Growth: Sufficient working capital is often required to support business growth and
expansion. It provides the financial cushion needed to invest in new opportunities, launch new
products or services, enter new markets, or expand operations. Working capital allows a company
to seize growth opportunities without being constrained by a lack of immediate funds, enabling
it to capitalize on favorable market conditions and drive long-term success.
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4. Supplier and Creditor Relationships: Maintaining a strong working capital position is crucial for
building and maintaining positive relationships with suppliers and creditors. When a company has
the ability to pay suppliers promptly and fulfill its financial commitments, it enhances its
reputation and credibility in the marketplace. This can lead to improved credit terms, discounts,
or preferential treatment from suppliers, as well as access to better financing options from
creditors.
5. Risk Management: Adequate working capital serves as a buffer against unexpected events and
economic downturns. It provides a financial cushion to absorb unexpected expenses, manage
fluctuations in demand or supply, and navigate periods of reduced sales or profitability. Having
sufficient working capital reduces the risk of liquidity crises, financial distress, or the need for
emergency borrowing.
6. Investor Confidence: Investors, both shareholders and potential investors, closely analyze a
company's working capital position as an indicator of financial health and stability. A strong
working capital position reflects a company's ability to effectively manage its short-term
obligations and signals a lower risk of financial difficulties. This can instill confidence in investors
and positively impact a company's valuation, access to capital, and overall attractiveness to
potential stakeholders.
In summary, working capital is important for maintaining liquidity, supporting day-to-day operations,
facilitating growth, managing risks, and building strong relationships with suppliers and creditors. By
effectively managing working capital, companies can enhance their financial stability, operational
efficiency, and long-term success.
Regenerate response

Factors that influence Working Capital Requirement:

 Nature of industry
 The operating cycle
 The manufacturing cycle
 Production policies
 Shift in demand for products
 Competitive conditions
 Growth and expansion programs
 Operating efficiency
 Taxation
 Dividend policy
 Depreciation policy
 Price level changes
 Variation in supply of raw materials

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Module-D Credit Risk Management

Concepts and Types

General Steps in Credit Risk Management
Credit Derivatives and Credit Risk Mitigation

Indicative Question:

1. State the different types of credit default.

2. Discuss the various categories of credit risk.
3. List the main causes of stand-alone credit risk.
4. What are the principles a bank should follow for sound management of credit risk?
5. Briefly explain the general steps of credit risk management process.
6. Define expected loan loss. What are the components of expected loan loss?
7. What is credit concentration? What are the different types of Credit concentration?
8. Write down the techniques for managing concentration risk.

Credit Risk:
Credit risk refers to the potential for financial loss that arises from a borrower's failure to repay a loan or
meet their contractual obligations. It is the risk that a borrower or counterparty may default on their debt
obligations, leading to a loss for the lender or investor. Credit risk is a significant concern for financial
institutions, lenders, and investors who extend credit or invest in debt securities.

Banks are exposed to various types of credit risk in their lending activities. These risks can arise from
different sources and have distinct characteristics. Here are some common types of credit risk that banks
face:
1. Default Risk: Default risk refers to the risk that a borrower fails to fulfill its contractual obligations
and does not repay the principal or interest on a loan as agreed. This is the most fundamental and
significant type of credit risk for banks. Default risk can be influenced by factors such as the
borrower's financial health, repayment capacity, and the overall economic conditions.
2. Counterparty Risk: Counterparty risk arises when banks engage in financial transactions with
other financial institutions or counterparties. It includes the risk of default by these counterparties
in settling financial obligations or fulfilling contractual commitments. Counterparty risk is
particularly relevant in activities such as interbank lending, derivatives transactions, and trade
finance.
3. Concentration Risk: Concentration risk refers to the risk of excessive exposure to a specific
borrower, industry, or geographic region. If a bank's loan portfolio is heavily concentrated in a
particular sector or geographic area, adverse developments in that sector or region can have a
significant impact on the bank's credit risk exposure. Diversification of the loan portfolio is an
essential risk management strategy to mitigate concentration risk.
4. Country Risk: Country risk, also known as sovereign risk, arises from lending to borrowers in
foreign countries. It encompasses the risk associated with political instability, economic

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conditions, regulatory changes, foreign exchange rate fluctuations, and legal uncertainties in the
borrower's country. Country risk can affect a bank's ability to recover its funds in the event of
default.
5. Credit Migration Risk: Credit migration risk, also known as credit quality migration risk or credit
rating risk, refers to the risk of a borrower's creditworthiness deteriorating over time. A
borrower's credit rating or creditworthiness may change due to factors such as changes in
financial performance, industry conditions, or overall economic conditions. The risk lies in the
potential for a borrower's creditworthiness to decline and result in increased default probability.
6. Industry-Specific Risk: Industry-specific risk refers to the credit risk associated with lending to
borrowers in certain industries or sectors that may face unique challenges or vulnerabilities.
Industries such as energy, real estate, and technology can have specific risks and fluctuations that
impact the creditworthiness of borrowers operating in those sectors. Banks need to assess and
manage industry-specific risks when lending to such borrowers.
7. Mitigation Risk: Mitigation risk arises from relying on risk mitigation techniques or instruments
that may not effectively reduce credit risk as anticipated. For example, using credit derivatives,
securitization, or credit insurance to transfer credit risk introduces the risk that these risk
mitigation tools may not perform as expected during times of stress or crisis.
It's important to note that these types of credit risk are interconnected and can interact with each other.
Banks employ various risk management practices, including credit assessment processes, portfolio
diversification, risk modeling, collateral requirements, and provisioning for credit losses, to identify,
measure, monitor, and mitigate these types of credit risk.
Regenerate response

Indicators of High Credit Risk in a Bank:

 The level of loans is high relative to total assets and equity capital.
 Loan growth rates significantly exceed national trends and the trends of similar banks.
 Growth was not planned or exceeds planned levels, and stretches management and staff expertise.
 The bank is highly dependent on interest and fees from loans and advances.
 Loan yields are high and reflect an imbalance between risk and return.
 The bank has one or more large concentrations. Concentrations have exceeded internal limits.
 Existing and/or new extensions of credit reflect liberal judgment and risk-selection standards.
 Practices have resulted in a large number of exceptions to the credit policy.
 The bank has a large volume and/or number of classified loans.
 Even among standard and special mention account loans, the portfolios are skewed toward lower
internal ratings.
 Classified loans are skewed toward the less favorable categories (doubtful and bad/loss).
 Collateral requirements are liberal, or if conservative, there are substantial deviations from
requirements.
 Collateral valuations are not always obtained, frequently unsupported, and/or reflect inadequate
protection.
 Loan documentation exceptions are frequent, and exceptions are outstanding for long periods of
time.

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 The bank liberally reschedules and/or restructures loans in a manner that raises substantial concern
about the accuracy or transparency of reported problem loan numbers.
 Quarterly loan losses, as a percentage of the total loan portfolio, are high and/or routinely exceed
established provisions.

State the different types of credit default

Credit default refers to the failure of a borrower to fulfill their contractual obligations to repay a loan or
meet other credit-related commitments. There are several types of credit default that can occur:
1. Payment Default: Payment default occurs when a borrower fails to make timely payments on a
loan or credit obligation. This could involve missing a single payment or consistently failing to
meet the scheduled repayment terms.
2. Default on Interest Payments: This type of credit default specifically refers to the failure to pay
interest on a loan or debt instrument. The borrower may make principal payments but fails to
meet the interest obligations, resulting in default.
3. Covenant Default: Many loans and credit agreements include covenants or conditions that
borrowers must adhere to. Covenant default occurs when a borrower breaches one or more of
these covenants, such as failing to maintain a certain financial ratio or violating other agreed-upon
terms.
4. Technical Default: A technical default occurs when a borrower violates a non-monetary term of
the loan agreement, such as failing to provide required financial statements or breaching other
administrative requirements. Although it may not directly involve payment obligations, it still
constitutes a default under the loan terms.
5. Cross-Default: Cross-default occurs when a borrower defaults on one obligation, triggering a
default on other related loans or credit agreements. This can happen when loan agreements
include cross-default provisions that consider default on any one loan as a default event for other
loans.
6. Bankruptcy or Insolvency: Bankruptcy or insolvency is a severe form of credit default where a
borrower becomes unable to meet its financial obligations and seeks legal protection from
creditors. It typically involves the filing of a bankruptcy petition or similar legal process.
7. Loan Repudiation: Loan repudiation refers to a borrower's explicit refusal or denial to honor their
loan obligations. It can occur when a borrower disputes the validity of the loan agreement, raises
claims of fraud, or refuses to repay the loan based on legal or contractual grounds.
It's important to note that the specific types of credit default may vary based on the terms and conditions
of the loan or credit agreement. Lenders typically outline the events and conditions that constitute default
in the loan documentation, providing clarity on the consequences and remedies available to the lender in
case of default.

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Module-E Credit Documentation and Administration

Concept of Security
Characteristics of Good Security
Acceptable Security and Valuation
Valuation
Creating Charges on Security
Modes of Creating Charge on Securities

Indicative Questions:
1. What are the essential characteristics of good security?
2. How will you determine the value of different types of securities?
3. Why is insurance coverage of the security important?
4. What do you mean by margin and drawing power?
5. What do you mean by creation of charge on security?
6. Describe the different modes of creating charge on securities?
7. What are the essentials of pledge?
8. Pledge is preferable to lenders but hypothecation is preferable to borrowers‘-Explain.
9. What are the rights of the pledger?
10. What are the obligations of the pledger?
11. What are the rights of the pledgee?
12. What are the obligations of the pledgee?
13. What is hypothecation?
14. What are the circumstances under which hypothecation appropriate?
15. Distinguish between hypothecation and pledge.
16. What are the different features of hypothecation?
17. Discuss the different types of lien.
18. Discuss assignment process with example.
19. What are the essential features of set off?
20. What are the different types of mortgages?
21. State the rights of the mortgagee.
22. State the rights of the mortgagor.
23. State the rights of the mortgagee in possession.
24. List the required documents for creating mortgage over property.
25. What is documentation? What are the steps in documentation?

Security:
In banking, security refers to collateral or assets provided by a borrower to a lender as a form of protection
against potential credit risk or default. When a borrower takes a loan or seeks credit from a bank, the
bank may require the borrower to provide security as a means of mitigating the risk associated with
lending.
Here are a few key points to understand about security in banking:
1. Collateral: Security often takes the form of collateral, which is an asset or property pledged by the
borrower to secure the loan. Collateral can include real estate, inventory, equipment, vehicles,
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securities, or other valuable assets. By providing collateral, the borrower provides an additional
layer of protection to the lender. If the borrower defaults on the loan, the lender has the right to
seize and sell the collateral to recover the outstanding debt.
2. Risk Mitigation: Security acts as a risk mitigation measure for banks by reducing the potential loss
in the event of default. It provides lenders with a means of recovering at least a portion of the
loan amount through the liquidation or sale of the collateral. Having security in place helps banks
manage credit risk and make lending decisions based on the borrower's ability to provide
adequate collateral.
3. Loan-to-Value Ratio: The loan-to-value (LTV) ratio is often used to determine the amount of
security required by the bank. It is the ratio of the loan amount to the appraised value of the
collateral. Banks set maximum LTV ratios to limit their exposure to potential losses in case of
default. Higher-risk loans may require a lower LTV ratio, meaning a higher percentage of collateral
relative to the loan amount.
4. Valuation and Monitoring: Banks assess the value of the collateral to determine its worth and
establish the amount of credit that can be extended against it. Valuation methods vary depending
on the type of collateral, and professional appraisers may be involved in the process. Banks also
monitor the value of the collateral over the loan term to ensure that it remains sufficient to cover
the outstanding debt.
5. Security Documentation: To formalize the security arrangement, banks require borrowers to sign
legal agreements and documentation. These documents outline the terms and conditions of the
security, including the rights and obligations of both the lender and the borrower. The security
documents specify how the collateral can be used, transferred, or sold in the event of default.
6. Additional Security Measures: In addition to collateral, banks may implement other security
measures to further protect their interests. These may include personal guarantees from the
borrower's directors or shareholders, assignment of receivables, bank guarantees, letters of
credit, or insurance policies. These measures provide additional layers of protection and increase
the likelihood of recovering the loan amount in case of default.
It's important to note that the availability and acceptance of security can vary depending on the lending
institution, the type of loan, and the borrower's creditworthiness. The specific security requirements are
typically negotiated between the lender and the borrower based on the risk profile of the loan and the
borrower's ability to provide suitable collateral.

Characteristics of Good Security:

 Marketability
 Easy Ascertainment of Value
 Stability of Value
 Storability
 Low Cost of labor and Supervision
 Transportability
 Durability
 Ascertainment of Title
 Easy transfer of title
 Absence of contingent liability
 Yield
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Good security, in the context of banking and lending, possesses several key characteristics. These
characteristics contribute to the effectiveness of security in mitigating credit risk and protecting the
lender's interests. Here are some important characteristics of good security:
1. Value: Good security should have sufficient value to cover the loan amount and potential interest
or losses in case of default. The value of the security should be accurately assessed and should be
at a level where it provides adequate protection to the lender. If the value of the security is
significantly lower than the loan amount, it may not effectively mitigate credit risk.
2. Liquidity: Ideally, good security should be easily convertible into cash without significant delays
or complications. Liquid assets such as cash, marketable securities, or readily marketable
properties can be quickly sold or converted into cash to recover the loan amount. Assets that are
illiquid or difficult to sell may pose challenges in the event of default and may reduce the
effectiveness of the security.
3. Marketability: Security that has a broad market and can be easily sold or transferred is
advantageous. If the security needs to be liquidated, a wider market ensures that there are
potential buyers or investors who can purchase the security at a fair price. Marketable assets,
such as stocks, bonds, or widely recognized real estate, provide more flexibility and options for
recovering the loan amount.
4. Durability: The durability of the security is an important consideration. It should be capable of
maintaining its value and usefulness over time. For example, a property with a stable structure or
equipment with a long lifespan can retain its value and remain a viable security option throughout
the loan term.
5. Legal Protection: Good security should have clear legal protection that safeguards the lender's
rights. This involves ensuring that the security is properly documented, with legally enforceable
agreements and provisions. The security documentation should outline the lender's rights in case
of default, including the ability to take possession and sell the security to recover the outstanding
debt.
6. Priority and Enforceability: Security should have a high priority and enforceability in the event of
default. This means that the security interest should be properly registered or recorded with
relevant authorities or institutions, ensuring that the lender has a clear and recognized claim to
the security. The enforceability of the security should be supported by applicable laws and
regulations to ensure that the lender can take necessary actions to recover the debt.
7. Independent of Borrower's Business: Ideally, good security should be independent of the
borrower's business or financial performance. This reduces the risk of the security's value being
influenced by the borrower's operational challenges or economic conditions. For example, relying
on collateral that is tied directly to the borrower's business, such as inventory or accounts
receivable, may expose the lender to higher risk if the business encounters difficulties.
It's important to note that the suitability of security can vary depending on the type of loan, the borrower's
creditworthiness, and the specific requirements of the lender. The assessment of security and its
characteristics should be done on a case-by-case basis, taking into consideration the unique circumstances
and risk factors associated with each lending situation.

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Acceptable Security:
1. Bank deposit
2. Gold / gold ornaments
3. Government Bond
4. Guarantee given by Government or Bangladesh Bank
5. Bank Guarantee
6. Land and Building
7. Share
8. Stock
9. Machinery and Equipment
10. Charge on the fixed and floating asset
11. Pari-passu Charge on fixed and floating assets
12. Corporate Guarantee of another company backed by Board Resolution.
13. Personal Guarantee
14. Bill or Receivables
15. Ownership of vehicles / assets
16. Life Insurance Policy
17. Post Dated Cheque
18. Trust Receipt

Hypothecation, Pledge, Mortgage, Lien, Assignment, Set-off

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Module-F Supervision and Follow-up of Loans and NPL Management

Introduction
Supervision, Monitoring and Follow-up
Problem Loan
Loan Classification and Provisioning
Rescheduling of Loans
Loan Write Off

Indicative Questions:

1. Describe the significance of timely loan recovery.

2. Define Non-Performing Loan (NPL). What are the consequences of NPL?
3. Discuss the non-legal measures of recovering NPL.
4. What do you mean by Alternative Dispute Resolution (ADR)?
5. Write down a summary on the loan recovery process through the operation of Money Loan Court
Act.2003.
6. Describe the legal process for filing suits under Money Loan Court Act.

Problem loan:
A loan to a borrower whose financial profile may deteriorate or where a payment schedule has been
breached or where the bank‘s secured position is likely to deteriorate.Any occurrence which may lead the
bank to believe the loan has developed a higher risk thensuch loans will be considered problem loans and
treated accordingly

A problem loan, also known as a non-performing loan (NPL) or a troubled loan, refers to a loan that is
experiencing difficulties in repayment or is at risk of default. It is a loan where the borrower has failed to
make scheduled payments of principal and interest for an extended period or is likely to be unable to
meet its financial obligations in the future. Problem loans pose challenges for lenders and financial
institutions, as they can result in financial losses and have implications for the overall health of the loan
portfolio. Here are some key points to understand about problem loans:
1. Non-payment or Delinquency: Problem loans typically involve borrowers who are significantly
behind on their loan payments or have stopped making payments altogether. The loan may be
considered delinquent if the borrower is past the due date for payment, and it becomes a problem
loan if the delinquency persists for an extended period.
2. Impaired Repayment Capacity: Problem loans often arise when borrowers face financial
difficulties or encounter adverse circumstances that affect their ability to repay the loan. These
difficulties can include declining business performance, unemployment, economic downturns, or
unexpected events such as natural disasters or personal emergencies.

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3. Risk of Default: Problem loans have an increased risk of default, meaning the borrower is at risk
of being unable to fulfill their contractual obligations, including repaying the principal and interest
according to the agreed terms. Default can result in financial losses for the lender and potentially
require them to take legal actions to recover the outstanding debt.
4. Impact on Lender: Problem loans can have several negative consequences for the lender. They
can lead to a decrease in interest income, deterioration of loan portfolio quality, reduced
profitability, and increased provisioning for potential credit losses. Additionally, problem loans tie
up capital that could be deployed in more productive lending activities, limiting the lender's ability
to support new borrowers.
5. Workout and Resolution: Financial institutions typically work with borrowers to address problem
loans through workout or resolution processes. This may involve renegotiating the loan terms,
restructuring the repayment schedule, or modifying the loan agreement to better align with the
borrower's current financial capacity. The goal is to find a mutually beneficial solution that
maximizes loan recovery while minimizing losses for the lender.
6. Provisioning and Write-offs: Banks and financial institutions set aside provisions or reserves to
cover potential losses on problem loans. These provisions serve as a buffer against the expected
credit losses and help maintain the financial stability of the institution. In severe cases, if recovery
efforts are unsuccessful, the lender may write off the loan as a loss, removing it from the balance
sheet and recognizing the loss in their financial statements.
7. Regulatory Considerations: Problem loans are closely monitored by regulatory authorities,
particularly in the banking sector. Regulators impose guidelines and requirements on financial
institutions to manage and report problem loans appropriately. These regulations aim to ensure
adequate risk management, capital adequacy, and transparency in the assessment and disclosure
of problem loans.
Overall, problem loans represent a challenge for lenders as they can result in financial losses and impact
the overall performance and stability of the loan portfolio. Effective risk management practices, proactive
loan monitoring, and timely resolution efforts are crucial in mitigating the impact of problem loans on the
financial institution.

Question. What is loan rescheduling? Discuss the procedure of loan rescheduling.

Answer: Loan rescheduling refers to the process of modifying the terms and conditions of a loan
agreement with a borrower who is facing temporary financial difficulties. It is a proactive measure taken
by the bank to assist the borrower in managing their loan repayment obligations and avoiding default.

Banks may choose to reschedule a loan for several reasons, primarily to assist borrowers who are facing
temporary financial difficulties. Here are some common reasons why a bank may opt to reschedule a loan:

1. Financial Hardship: When a borrower experiences a sudden loss of income, unexpected expenses, or
other financial challenges, they may struggle to meet their loan repayment obligations. Rescheduling
the loan allows the bank to provide temporary relief and assist the borrower in managing their
financial difficulties.

2. Risk Mitigation: Banks aim to minimize the risk of loan defaults and non-performing assets. By
rescheduling a loan, the bank can maintain a performing loan status for borrowers who are facing
temporary setbacks, rather than pushing them into default. This proactive approach helps protect the
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bank's asset quality and reduces the need for more severe measures, such as foreclosure or legal
actions.

3. Customer Retention: Rescheduling a loan demonstrates the bank's commitment to its customers and
their financial well-being. By offering assistance during challenging times, banks can strengthen their
relationships with borrowers and enhance customer loyalty. This can lead to long-term customer
retention and potential future business opportunities.

4. Reputation and Public Image: Loan rescheduling can be seen as a compassionate and socially
responsible approach by banks. It helps improve the bank's public image and reputation, portraying
it as an institution that cares about the well-being of its customers and is willing to work with them
during challenging times.

5. To help the borrower by extend the loan tenure and not to default

6. To reduce NPL

Loan rescheduling is typically considered as a temporary solution, and the borrower is expected to
eventually resume the original repayment terms when their financial situation improves.

Process of Loan rescheduling:

1. Board approved Policy

2. Examine the causes of NPL
3. Required cash down payment and process should be complete within 03 months
4. Previous payment will not be considerable for reschedule
5. Consider repayment capability with consideration of other bank liability
6. Review financial statement
7. Bank inspection
8. If satisfy then, or legal procedure to recover payment with provision
9. Written justification by credit committee
10. NPL loan can be reschedule maximum 3 time but in special consideration it may 4 times
11. Assessment of the Borrower's Financial Situation: The bank evaluates the borrower's financial
position, including their income, expenses, assets, liabilities, and credit history. This assessment
helps the bank understand the borrower's ability to repay the loan and determine if rescheduling
is a viable option. (capacity, New Business Plan)
12. Communication with the Borrower: The bank initiates communication with the borrower to
discuss their financial challenges and explore the possibility of loan rescheduling. This may involve
face-to-face meetings, phone calls, or written correspondence.
13. Documentation: The borrower is usually required to provide updated financial documents and
information to support their request for loan rescheduling. This may include bank statements,
income proof, expense details, and any other relevant documentation requested by the bank.
14. Evaluation of Rescheduling Options: Based on the borrower's financial situation, the bank
assesses the available rescheduling options. This can involve extending the loan term, reducing
the interest rate, temporarily reducing or suspending repayments, or a combination of these
measures. The bank determines the most suitable rescheduling plan that aligns with the
borrower's circumstances and the bank's policies.
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Risk Management Division
Bank Asia Limited
15. Proposal and Agreement: The bank presents the rescheduling proposal to the borrower, including
the revised terms and conditions. This proposal outlines the new repayment schedule, interest
rate, any changes in fees or charges, and any other relevant adjustments. Both the bank and the
borrower need to agree on the proposed terms.
16. Documentation and Signatures: Once the borrower agrees to the rescheduling proposal, a formal
agreement is prepared. This agreement includes the revised terms and conditions and is signed
by both parties. It serves as a legally binding document that outlines the rights and responsibilities
of both the bank and the borrower regarding the rescheduled loan.
17. Implementation and Monitoring: The bank implements the rescheduled loan terms, and the
borrower begins making payments according to the revised repayment schedule. The bank closely
monitors the borrower's compliance with the new terms and offers support and guidance as
needed.
Reschedule Tenure: (1st and 2nd time)

Types of loan Outstanding (crore) Maximum tenure with grace period (Year)
Term Below 100 6
100 to below 500 7
Above 500 8

Continuous and Demand Below 50 5

50 to below 300 6
Above 300 7
In case of 3rd and 4th time reschedule maximum tenure will be less than 1 years of the mentioned table
bucket

Reschedule down payment: (1st and 2nd time)

Types of loan Outstanding (crore) Down payment (expired EMI + total due)
Term Below 100 7% + 4.5%
100 to below 500 6% + 3.5%
500 and above 500 5% + 2.5%

Continuous and Demand Below 50 4%

50 to below 300 3% but not below 2 crore
300 and above 300 3% but not below 9 crore
In case of 3rd and 4th time reschedule maximum tenure will be more than 1% of the mentioned table
bucket

Difference between Loan Rescheduling and Loan Restructuring:

Rescheduling of loans means to extend or add extra time to your existing loan tenure, resulting in a
revision of your monthly instalment amount so that you may be able to pay a lesser amount each month.
This can help the borrower buy some time to adjust the repayment plan and also not default on their
loans. But this could result in the borrower paying more in interest as they will have to service the loan
for a longer time.
On the other hand, restructuring of loans means changing the type or structure of the existing loan to
help the borrower improve their current cash flow. An example of this can be converting an overdraft into

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Risk Management Division
Bank Asia Limited
term loans. Restructuring is more of a prominent change in the terms and conditions of the existing loan
when compared to rescheduling. However you may also incur additional administrative and legal cost on
top of the usual interest charges.

Loan rescheduling and loan restructuring are both financial strategies employed by lenders to assist
borrowers who are facing difficulties in repaying their loans. While they are similar in nature, there are
some key differences between the two:

Loan Rescheduling:

1. Definition: Loan rescheduling involves modifying the repayment schedule of the loan, typically
by extending the loan term or adjusting the repayment amounts to make it more manageable
for the borrower.
2. Purpose: Loan rescheduling aims to provide temporary relief to borrowers who are experiencing
short-term financial difficulties and are unable to meet their original repayment obligations.
3. Temporary Solution: Loan rescheduling is usually considered a temporary measure. It allows
borrowers to overcome their immediate financial challenges and resume regular repayment
once their situation improves.
4. Retaining Original Terms: In most cases, the original terms and conditions of the loan, such as
the interest rate and other contractual provisions, remain unchanged. The primary modification
is made to the repayment schedule.
5. Documentation: Loan rescheduling typically involves preparing a formal agreement that outlines
the revised repayment schedule and any other relevant adjustments. The borrower and lender
both sign this agreement to formalize the rescheduling arrangement.
Loan Restructuring:

1. Definition: Loan restructuring involves more extensive changes to the loan agreement beyond just
modifying the repayment schedule. It may involve altering various terms and conditions of the
loan, including interest rates, principal amounts, collateral, or other contractual provisions.
2. Purpose: Loan restructuring is often employed in more severe financial distress situations. It is
intended to provide a long-term solution by addressing the underlying issues that caused the
borrower's financial difficulties.
3. Permanent Solution: Unlike loan rescheduling, loan restructuring aims to bring about a
permanent resolution to the borrower's financial challenges. The modifications made to the loan
terms are usually intended to be sustained for an extended period.
4. Comprehensive Modifications: Loan restructuring involves a broader range of adjustments to the
loan agreement. It may involve reducing the interest rate, forgiving a portion of the principal,
changing the loan type or structure, or altering the collateral requirements.
5. Legal and Regulatory Considerations: Depending on the specific circumstances, loan restructuring
may involve more complex legal and regulatory requirements. It may require the involvement of
legal professionals and additional documentation to ensure compliance with applicable laws and
regulations.
6.
What is loan restructuring? Discuss the procedure of loan restructuring.

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Risk Management Division
Bank Asia Limited
Condition of restructuring: (BRPD circular letter no 33, date August 03, 2022)

1. Regular (Standard or SMA) term loans, the maturity date may be extended by a period of time
not exceeding 50% of the current remaining time to maturity.
2. Term loan can be restructured without taking any down payment
3. Decisions regarding loan restructuring loan should be approved by the board of directors
4. Rescheduled loan cannot be restructured

What is write off loan and what are the procedure as per BRPD circular no 01, date February 06, 2019

Loan write off:

Write off, simply meaning taking off the amount from the balance sheet against which provision has
already made for the bad debts.

Banks use the write-off facility to remove the non-performing assets from their balance sheet and
minimize their tax liabilities. However, a bank can still recover the loans which are written-off. Basically,
a loan write-off is a tool used by banks to clean up their balance sheets.

Loan write-off is a regular exercise carried out by banks to clean their balance sheet. However, even after
a bad loan is written-off, the borrower still remains legally liable for loan repayment, and the lender may
take legal action against the borrower and recover the outstanding amount.

Benefits of Loan Write-off:

By writing-off a bad loan or non-performing asset, a lender can enjoy the following –

1. It helps a bank or lender to set free the money originally blocked for a borrower. The money can
be now utilized by banks for doing their businesses.
2. Writing off a bad loan does not mean that the bank will lose the legal right to recover the due
amount so, any recovery made against a bad loan after writing off is considered as a profit for the
bank in the year of recovery.
3. It helps the bank to make its balance sheet clean
4. When a loan is written off, the lender or bank receives a tax deduction on the loan value. But the
lender is still legally allowed to pursue the debts and generate revenue from it.
5. Loan write-offs are done to clean up balance sheets of banks

Procedure:

01. Identification of account for eligible of write off

02. Procedure:
I. Steps for sell of mortgage property and getting confirmation from the guarantor
II. Suit a file in Artha Rin Adalat as per act 2003 but in case of BDT 2 lakh of eligible write off
loan no need for suit
III. Maintain required provision after charging interest
IV. Partial write off is not applicable
V. Required board approval
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Risk Management Division
Bank Asia Limited
03. As per bank company act 1991, the lender is still legally allowed to pursue the debts and can legal
procedure
04. Required to form a committee name debt collection unit
05. Can recruit 3rd party as per BRPD circular no 02/2015 for the collection
06. Write off loan cannot be rescheduled or restructured
07. Bank can write off their default loan that have been having in bad category from 03 years in
balance sheet

Single borrower and large loan exposure limit: BRPD Circular No. 01, 16 January 2022

Single person/ counter party or group:

(a) The aggregate principal amount of funded and non-funded exposure to a single person/counterparty
or a group shall not exceed 25% of the capital at any point of time. A conversion factor of 0.50 shall be
used against non-funded exposure; i.e. 100% of funded exposure and 50% of non-funded exposure shall
be considered.
(b) The aggregate principal amount of funded exposure to a single person/counterparty or a group shall
not exceed 15% of the capital at any point of time.

Large Loan:
Large Loan refers to any exposure to a single person/counterparty or a group which is equal to or greater
than 10% of the capital held by banks as per bank company act 1991 section 13 clause 1.

Aggregate Exposure of large loan:

Large Loan Portfolio Ceiling against
Percentage of Classified Loan to Total Outstanding
Bank's Total Loans & Advances
Less than or equal to 3% 50%
Greater than 3% but less than or equal to 5% 46%
Greater than 5% but less than or equal to 10% 42%
Greater than 10% but less than or equal to 15% 38%
Greater than 15% but less than or equal to 20% 34%
Greater than 20% 30%
However, the aggregate amount of large loan exposure shall not exceed 400% of bank‟s capital at any
point of time.

Conversion Factor of large loan: In order to determine Large Loan Portfolio Ceiling of any bank, 100% of
funded exposure, 50% of non-funded exposure except for power sector and 25% of non-funded exposure
in power sector shall be included in total Loans & Advances as well as in large loan exposure.

Example:
If a bank’s Classified Loan is 3%, according to this policy, the bank may have large loan exposure up to 50%
of its total Loans & Advances provided that such exposure does not exceed 400% of the bank’s capital.
Thus the large loan portfolio ceiling formula for the bank will be as below:

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Risk Management Division
Bank Asia Limited
(Total Funded Large Loan Exposure + Total Non-funded Large Loan Exposure except for power sector*50%
+ Total Non-funded Large Loan Exposure in power sector*25%)/ (Bank’s Total Funded Exposure+ Bank’s
Total Non-funded Exposure except for power sector *50% + Bank’s Total Non-funded Exposure in power
sector*25%) ≤ 50%

Distinguish between interest remissions and write off of a loan proposal. Which one you will prefer,
justify with your arguments.

Interest remission and write-off are two different approaches used in handling non-performing loans
(NPLs) or loans that have become difficult or impossible to recover. Here's a distinction between the two:
1. Interest Remission: Interest remission refers to the partial or complete forgiveness of accrued
interest on a loan while keeping the principal amount outstanding. In this case, the borrower is
relieved of the obligation to pay the interest portion of the loan, but the principal amount remains
due and payable. Interest remission is often considered as a form of debt relief to provide
temporary relief to borrowers experiencing financial hardship.
2. Write-off: Write-off, on the other hand, involves the removal of both the principal and the accrued
interest from the books of the lender. It is a recognition that the loan is unlikely to be fully repaid,
and the lender takes a loss on the loan by removing it as an asset from their balance sheet. A
write-off typically occurs when all reasonable efforts to recover the loan have been exhausted,
and the lender determines that the chances of recovery are remote.
The preference between interest remission and write-off depends on various factors and considerations.
Here are some arguments to support each approach:
Interest Remission:
 Maintaining Relationship: By offering interest remission, the lender shows flexibility and
willingness to work with the borrower during a period of financial distress. This can help maintain
a positive relationship and potentially enable the borrower to recover and resume regular
payments in the future.
 Potential Recovery: By keeping the principal amount outstanding, there is still a chance of future
recovery if the borrower's financial situation improves. Interest remission provides temporary
relief while preserving the loan for potential repayment.
Write-off:
 Prudent Risk Management: Writing off a loan recognizes the reality that the loan is unlikely to be
fully repaid. It allows the lender to accurately reflect the financial position by removing non-
performing assets from their balance sheet and avoiding potential overstatement of asset values.
 Focus on Recovery: Writing off a loan allows the lender to concentrate efforts and resources on
more viable loans and recovery strategies. It enables them to close the file on non-performing
loans and allocate resources towards more productive lending activities.
Ultimately, the preference between interest remission and write-off depends on the specific
circumstances, risk appetite, and objectives of the lender. It is crucial to assess the borrower's financial
situation, potential for recovery, and the overall impact on the lender's financial statements. Lenders
typically consider a range of factors, including the cost of debt recovery efforts, legal and regulatory
requirements, the borrower's repayment capacity, and the long-term viability of the loan before deciding
on the most appropriate approach.

Credit Recovery and Measures of Credit Recovery:

Credit recovery, in the context of banking and finance, refers to the process of recovering funds or assets
from borrowers who have defaulted on their loan obligations or are delinquent in their repayments. When

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Risk Management Division
Bank Asia Limited
a borrower fails to make timely payments or defaults on a loan, the lender initiates credit recovery efforts
to minimize losses and maximize the chances of retrieving the outstanding debt.
Banks usually pursue the following steps for recovering credit:
 Non-Legal Measure
 Legal Measure
Non-Legal Measure
01. Communication
02. Persuasion
03. Motivating Credit Collection Staff
04. Recovery Campaign
05. Alternative Dispute Resolution (ADR)
06. Appointment of Recovery Agent
07. Debt Restructuring
08. Corporate Restructuring of the Borrower‘s Business
09. Preparation and Circulation of List of Defaulters
10. Waiver of Interest
11. Rescheduling With/ Without Interest Waiving
12. Write-off
Legal measure:
13. The Money Loan Court Act-2003
14. The Public Demands Recovery Act 1913
15. Filing Suit under Money Loan Court Act 2003

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Mohiuddin Farhad, Risk Management Division, Bank Asia Limited
 Mohiuddin Farhad
Risk Management Division
Bank Asia Limited
Module-G Leasing and Hire Purchase

1. Leasing is a task of NBFIs, so a bank should not get involved in leasing‖ – Do you agree? Why or why
not?
2. Distinguish between lease finance and term loan finance.
3. How is Hire Purchase different from Lease Financing?

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Mohiuddin Farhad, Risk Management Division, Bank Asia Limited