Lesson-3 on Credit

Question: What is Risk?

Answer:. Risk is the uncertainty of future outcome.

Question: What is Credit Risk ?

Answer:

The risk of loss of principal or loss of a financial reward stemming from a borrower's failure to repay a loan or otherwise meet a contractual obligation.

Question: What is Systematic risk ?

Answer:

 The portion of an individual’s asset’s total variance i.e., the attributable to the variability of the total market portfolio.

Question: What is Unsystematic risk ?

Answer:

Ø    Individual assets have variance i.e., not related to the market portfolio due to unique features.

Ø    It is eliminated by diversified portfolio.

Question: What is Security?

Answer:

Security means things deposited as a guarantee of undertaking for loan to be forfeited in case of default

Lesson-2 on Credit

Question: How can you determine borrowers Creditworthiness?

Answer:

By 5 Ps

1. Person
2. Purpose
3. Products
4. Place
5. Profitability

5 Cs

1. Character
2. Capacity
3. Capital / Cash
4. Collateral
5. Conditions (Current Business condition, Performance, Sensitivity of changes)

Question: What are Characteristics of a good credit officer?

Answer:

1. Personal Characteristics

Ø     Honesty / Integrity

Ø     Industrious

Ø     Effective & Efficient

Ø     Self Motivated

Ø     Decision taking capacity

Ø     Ability to communicate / Negotiate

Ø     Diplomatic

Ø     Disciplined

Ø     Emotional Stability, etc

2. Knowledge about Business & Profession

Ø     Banking knowledge

Ø     Business Knowledge

Ø     Knowledge about the economy, marketing

Ø     Understanding legal rules & regulations

3. Knowledge about technology

Question: What are the different components of Credit Risk Grading (CRG) ?

Answer:

CRG: Principal risk component

1. Financial Risk (50%)
• Liquidity (10%)
• Profitability (20%)
• Leverage (10%)
• Coverage (10%)
2. Business Risk (18%)
• Size of the business (5%)
• Age of the business (3%)
• Business Outlook (3%)
• Competition (2%)
• Entry/Exit Barrier (2%)
• Growth                   (3%)
3. Management Risk (12%)
• Experience (5%)
• Succession (4%)
• Team Work (3%)
4. Security Risk (10%)
• Security Coverage (4%)
• Collateral Coverage (4%)
• Support (2%)
5. Relationship Risk (10%)
• Account Conduct (5%)
• Utilization of limit (2%)
• Covenants (2%)
• Personal Deposits (1%)

Lesson-1 on Credit

Dear friends,

I discussed about different issues of General Banking in my earlier lessons. Now , I will discuss about credit of a Bank. I will discuss different type of credit, principle of sound lending, borrower selection criteria etc step  by step to provide you idea about Banker's loan appraisal.

Question: What is credit?

Answer:

Credit is the confidence of the lender (Bank) on the ability & willingness of the Borrower to repay the debt as per terms & conditions of sanction advice.

Question: What are different types of Credit?

Answer:

01.  Funded Credit

v    Loan (G)/ Term Loan

v    Hire Purchase

v    Lease finance

v    Cash Credit (Hypo)

v    Loan against Trust Receipt (LTR)

v    Payment against documents (PAD)

v    Packing Credit (PC), etc.

02.  Non Funded Credit

v    Letter of Credit (L/C)

v    Guarantee (BG, PG)

Question: What is Difference between Loans & Advance?

Answer:

Loan

Ø     A credit made in lump sum for a specific period and repaid by specific repayment schedule. Once repayment is made in part or full loan can’t be withdrawn by the borrower. For example. Hire Purchase

Advance

Ø     Borrower can withdraw as many times as he wants upto the limit within the validity. For example, CC(Hypo).

Question: What is Principles of Sound Lending ?

Answer:

1. Safety

*    Credit should be given at right person at right time at right quantity.

*    It must be come back.

2. Liquidity

*    Bank should not have negative Duration Gap or Asset Liability Mismatch.

3. Profitability

*    Lending must reflect costs+earnings+ long term goal of a bank.

4. Purpose

*    Purpose must be productive & generates adequate cash for repayment.

5. Security

*    Security means things deposited as a guarantee of undertaking a loan to be forfeited in case of default.

6. National Interest

*    It should play a role for the economic development of the country.

7. Diversification

*    Don’t put all of your eggs in one basket

*    It reduces risks

Lesson-5 regarding General Banking

Question: How Banker-Customer relationship can be terminated?

Answer:

Ø     Customer Death

Ø     Attachment of the order of income tax authorities

Ø     Insanity

Ø     Insolvency

Ø     On receipt of Garnishee order

Ø     Undesirable Customer

Ø     Unclaimed deposit account.

Question: What is Contract?

Answer:

A contract is an agreement between two or more parties which, if it contains the elements of a valid legal agreement, is enforceable by law.

Question: What are Essential Elements of a Contract ?

Answer:

q      Lawful Offer

q      Lawful Acceptance

q      Lawful Considerations

q      Lawful object

q      Intention to create legal relationship

q      Capacity of the parties

q      Free Consent

q      Writing, Registration & Legal Formalities

Question: Who can’t enter into a Valid Contract?

Answer:

Ø     Lunatics

Ø     Minors

Ø     Insolvent

Question: What is Void Contract?

Answer:

An Agreement not enforceable by law.

Lesson-4 regarding General Banking

Question: Who is Holder in due course?

Answer:

Ø     All holder in due course are holder are holder but all holder are not holder in due course.

Ø     Transferee title is not affected by the defective title of the transferer

Ø     Person who receive the money for value without knowing the defective title of the previous owner.

Question: What are the Four conditions for Holder in due course ?

Answer:

1)     Without knowing the defective title of the previous owner.

2)     For value

3)     Good faith & with out negligence.

4)     Before it become overdue

Question: What is Crossing?

Answer:

Ø     It gives direction to the banker for payment.

Ø     To give more protection for the payment

Ø     It will not be paid over the counter.

Question: Who can cross a Cheque?

Answer:

Ø     Drawer

Ø     Any holder

Ø     Banker

Lesson-3 regarding General Banking

Question:  What is Endorsement ?

Answer:

Ø     Putting signature on the back of the instrument by the payee for negotiation.

Ø     Only payee can endorse a cheque.

Question: What is Allonge ?

Answer:

A paper attached to a negotiable instrument to enable writing endorsements when the back of the bill is full. An allonge is rare because bills of exchange are no longer very common.

Question: What is Payment in due Course ?

Answer:

Payment in accordance with the

Ø     Apparent tenor of the instrument

Ø     Payment in good faith & with out negligence.

Ø     Payment to a person who is entitled to receive the money.

Question: Who is Holder?

Answer:

Ø     Payee (who is entitled to receive the money)

Ø     In possession of the instrument

Lesson-2 regarding General Banking

Question: What are different types of insurance taken in Cash Management?

Answer:

a)     Vault limit Insurance- This is a insurance for the cash which is in the vault room.

b)     Counter limit Insurance- This is for cash counter

c)     Transit Limit Insurance –This insurance covered all cash carrying transaction.

Question: What are the different type of defective Notes ?

Answer:

1)     Altered Note- It is a note in which alteration has been made in the number, date, signature or value or in any other respect.

2)     Half Note- It is a half of a note which has been divided vertically through or near the centre.

3)     Mismatched Note- It is and imperfect note formed by joining a half note of one note to half note of another note .

4)     Mutilated Note- It is a note of which a portion is missing

5)     Obliterate Note- It is a note , not being a mutilated or altered note of which a portion has become or has been rendered undecipherable.

Question: What is Negotiable Instrument?

Answer:

A transferable signed document that promises to pay the bearer a sum of money at a future date or on demand.

o      Cheques

o      Bills of Exchange

o      Promissory notes.

Lesson-1 regarding General Banking

Dear Friends,

I have discussed about different issues of Accounting opening in Bank in my earlier lessons. Now I will discuss different issue of general banking in my lessons.

Question:  What is cheque?

Answer:

 A cheque is a bill of exchange drawn on banker to  pay account holder or bearer on demand.

Question: What are the parties of Cheque ?

Answer:

Drawer: Drawer is the account holder

Drawee: Drawee is the bank who is to pay the money

Payee: Payee is the beneficiary who is to receive the money.

Question: What is  Stale Cheque?

Answer:

 If a cheque is presented for payment after six months from the date appearing on the cheque.

Question: What is Promissory Note?

Answer:

Promissory Note  is an instrument in writing containing unconditional undertaking, signed by the maker to pay a certain sum of money only to, or to the order of an certain person, or the bearer of the instrument.

Question: What is Pay Order?

Answer:

 A pay order is a written order, issued by a Bank, to pay a certain sum of money to a specified person or a Bank

Lesson-8 regarding Account Opening in a Bank

Question: What are the different types of Account in Bank?

Answer:

In a broad sense there are two types Bank Account –

1. Multi Operational
2. Single Operational

Again Bank Account can be divided as-

1. Chequeable
2. Non-Chequeable

We may further divide the Bank Account as follows :

Demand Deposit

1.     Current Deposit Account

2.     Savings Bank Account. (10%)

Time Deposit

1.     Fixed Deposit (FDR)

2.     Bearer Certificate of Deposit (BCD)

3.     Short Term Deposit (STD)

4.     Contributory Savings Scheme (CSS)

5.     Lakhopati Deposit Scheme (LDS)

6.     House Building Deposit Scheme (HBDS)

7.     Monthly Benefit Deposit Receipt (MBDR)

8.     Double Benefit Scheme (DBS)

9.     Educations Savings Scheme (ESS)

FC Accounts of different Types

We may further divide the Bank Account as follows :

Personal Account

1.     Individual Account

2.     Joint Account

Non-Personal Account

1.     Corporate Accounts

2.     Sole Proprietorship

3.     Partnership

4.     Limited (Private and Public)

Special Types of Accounts

1.     Club/Society/School, College, University

2.     Trust/Provident Fund/Executor/Administrator/Solicitor/Liquidator

              Today I have discussed lot of thing regarding Account opening in a Bank . I think this will help a novice banker as well as experience banker to get in-depth knowledge regarding account opening in a Bank. I think it will be very much helpful for freshers who will look for banking job.

Lesson-7 regarding Account Opening in a Bank

Question: What are the Guard against repetition of lapses/irregularities  in account opening and maintenance in Bank?

Answer:

       I.     An account shall be opened only after it is approved by the Branch-Incharge or by his deputy (assigned with the supervision of General Banking Department).

     II.     Photograph of the A/C holder must be signed by the A/C holder, attested by the Introducer on the back of the photograph and signature of the Introducer be verified by an Authorised Officer.

   III.     Branch shall prepare a Check-List immediately after opening an Account to ensure all necessary documentations are not left out from the AOF. If there is any pending Identification/ Reference requirement and/or Documentation requirement, ‘Flagging’ posting must be done in the Computer restricting any withdrawal from the Account till full regularisation.

  IV. The Deposit In-charge/Manager Operation/Branch Manager shall monitor the print-out of ‘Computer Deposit Account Listing’ at least once in a weak and if any A/c is found running Nil Balance for a period of over 3(three) month, the same shall be closed giving 1(one) month’s prior notice to the Account Holder concerned. In this regard Branch also request the A/C holder to return unused cheque leaves.

    V.     The Deposit In-charge and the Branch Manager shall monitor the mode of transactions made in the A/Cs for tracing out of Suspicious Transactions.

  VI. Branch should be particular in sending Account Statements/Balance Confirmation Certificate irrespective of all CD/SB/STD Account Holders on regular basis with proper recording in the Despatch Register as per stipulations made in our Instruction Circulars No.32 dated 04.06.1998 and No.62 dated 19.12.1999 except against declaration of those Holders who do not want to have it. Branch should not discontinue or be irregular in sending Statement of Accounts/Balance Confirmation Certificate. Under any circumstances any return of the same needs proper investigation.

VII.  Addresses recorded on the AOF must be verified by sending Welcome Letter to the Account Holder and Letter of Thanks to the Introducer. In sending of the above Letters, Branch must not compromise. If returned undelivered, the cause of any return of such Letters must be ascertained and the Branch must take appropriate action. Physical verification of addresses is randomly needed as and when required.

VIII. One of the key principles of the Branch Officials should be, ”Know your Customer”. They should make reasonable efforts to determine their Customers’ genuine identity, have effective procedures for verifying the bonafides of new Customers’ and establish the intended nature of the conduct of Accounts.

  IX.     The Accounts associated with irregularities/lapses as pointed out by Audit & Inspection Division or Bangladesh Bank Inspection Team should be flagged in the computer till regulagisation for precaution.

 X.  Branch should conduct on-the-job training to train their Officers to be made aware of their responsibilities and must be familiar with the rules and procedures related to Account Opening and Maintenance covering the broad spectrum of General Banking which will be ultimately helpful to guard against fraud and forgery.

Lesson-6 regarding Account Opening in a Bank

Question: What are the irregularities and lapses found in account opening and maintenance in Bank?

Answer:

       I.     Introduction of the A/C holders not properly obtained.

     II.     Introducers' signature of the A/C holder not verified by an Authorised Officer.

   III.     A/C opened obtaining expired Passport in lieu of introducer.

  IV.     Copy of Trade Licence not obtained in case of Proprietorship/Partnership A/Cs.

    V.     A/C opened with expired Trade Licence.

  VI.    A/C opened without approval of the Branch Manager/Manager Operation/ GB In-charge.

VII. A/C opened in the joint name but special instruction regarding operation of the A/C not authenticated by both the A/C holders.

VIII.     Nominee Form not obtained.

  IX.     Father's name of the A/C holder not declared.

    X.     Occupation of the A/C holder not mentioned.

  XI.     Present Address of the A/C holder not declared/recorded in the AOF.

XII.     Permanent Address of the A/C holder not declared/recorded in the AOF.

XIII.     Business Address of the A/C holder not declared/recorded in the AOF.

XIV.     Incomplete/Vague/fictitious  Present and/or Permanent Address of the A/C holder recorded in the AOF.

XV.     Standing Instruction Register (PB-88) not maintained and followed properly.

XVI.     A/C opened declaring only nickname instead of full name.

XVII.     Date of birth of the A/C holder not mentioned.

XVIII.  Date and Time of Stop Payment Instruction not always recorded on Stop Payment instructions.

XIX.   A/C holder declared more than 1(One) Nominee but percentage of share among the Nominees not declared.

XX.     Transaction Profile not obtained as per ID Circular # 142 dt.30.09.02.

XXI.  Letter of Thanks (as per enclosed format placed at Annexure-VII) as per Bank’s standard proforma (P.F.12) never issued to the introducer immediately after opening of the account(s) and a copy be filed with each AOF. Therefore, auto-verification of the address was not made.

XXII.  As per directions made in the Instruction Circular No.98/64 dated 20.12.98, Dormant A/Cs not identified and listed on or after 15.12.99 which should have been treated as Dormant Account.

XXIII. Statement of Accounts/Balance Confirmation Certificate not sent on a monthly basis as per Instruction Circular No.32 dated 04.06.98/Instruction Circular No.99/62 dated 19.12.99 to the A/C holders. If those Statements/Balance Confirmation Certificates were bounced back, respective Branches might have taken appropriate measures to guard against fraud committed in the Branch using those Accounts. 

XXIV.   Date and Time of Stop Payment Instruction not always recorded on Stop Payment instructions.

XXV.     Many Cheque Books are found undelivered and kept in the officers’ drawers.

XXVI. Few Branches do not treat those Deposit A/Cs as ‘NRTA’ violating Foreign Exchange regulations holders of which are reportedly staying overseas.

XXVII.     Overseas address of the A/C holders not recorded by few Branches, thus those Deposit A/Cs are not being treated as ‘NRTA’ A/Cs.

XXVIII. A/C opened in the name of Minor but Date of Birth and Date of Attaining majority of the Minor not recorded on AOF.

XXIX. Opening of Account observed to have been made under introduction of Bank’s Officer to whom the A/C holders were known but not well known.

XXX.  Some Accounts were found opened impersonating own name of the Account Holder and father’s name as well. That means that sometimes Accounts were not opened by bonafide Customers due to Branches’ lacking of verification of particulars furnished by the holder in the AOF.

Lesson-5 regarding Account Opening in a Bank

Question: What are the requirements for opening and operation of Solicitor Account?

Answer:

       I.     Certified copy of professional group formation.

     II.     Consent letter from clients.

   III.     Identity of Solicitors.

  IV.     Solicitors Resolution / Mandate regarding the operation of Account.

    V.     No overdraft should be allowed in Solicitors Account.

  VI.     No mixing with Personal Account.

VII.     Careful operation bankers has no right to ‘Set off’ on client Account.

Question: What are the requirements for opening and operation of Government & Local Government Account?

Answer:

       I.     Before opening of the Account any Government or semi Government or Local Body a certified copy of the STATUTE will be taken.

     II.     Or, certified copy of any other Law/Regulations by which the body is created and governed.

   III.     A letter of request to be taken for open Bank Account.

  IV.     Copy of Resolution is passed by the Local Authority authorising an officer to open Bank Account with Bank name & Branch.

    V.     Branch Manager specially satisfy himself as regards the provision about the dealing with the fund, opening operation of the Bank Account in the ‘Statute’.

  VI.     Name, style and nature of Account must be stated in the Statue or Resolution.

VII.     Account of Regimental Fund (Army Account) should be opened & operated as per Authority Letter from ‘The Controller or Military Account’.

VIII.     Operation of Account in contravention of ‘Statue’ will not be allowed.

  IX.     Cash Transaction should be done cautiously. Pre advice should be taken in case of cheque drawings.

    X.     In case of changing Officer or Office Bearer new Authorising Letter will be taken issued by competent authority.

  XI.     Monthly statement of Account & Quarterly Balance Confirmation to be served.