Lesson-8 on Credit

Question: What are different types of loan for the purpose of classification?

Answer:

Continuous Loan: The loan Accounts in which transactions may be made within certain limit and have an expiry date for full adjustment will be treated as Continuous Loans. Examples are: CC, OD etc.

 Demand Loan: The loans that become repayable on demand by the bank will be treated as Demand Loans. If any contingent or any other liabilities are turned to forced loans (i.e. without any prior approval as regular loan) those too will be treated as Demand Loans. Such as: Forced LIM, PAD, FBP, and IBP etc.

Fixed Term Loan: The loans, which are repayable within a specific time period under a specific repayment schedule will be treated as Fixed Term Loans.

Short-term Agricultural Credit: This will include the short-term credits as listed under the Annual Credit Program issued by the Agricultural Credit Department of Bangladesh Bank. Credits in the agricultural sector repayable within less than 12 months will also be included herein. Short-term Micro-Credits will include any micro-credits for less than Tk.25,000/= and repayable within less than 12 months, be those termed in any names such as Non-agricultural credit, Self-reliant Credit, Weaver's Credit or Bank's individual project credit.

 Question: What are the rules for classification  of Loans/Advances?

Answer:

l       Any Continuous Loan if not repaid/renewed within the fixed expiry date for repayment or after Demand by the Bank will be treated as past due/overdue from the following day of the expiry date. This loan will be classified as Sub-standard if it remains past due/overdue for 3 months or beyond but less than 6 months, as `Doubtful' if for 6 months or beyond but less than 9 months and as `Bad-Debt' if for 9 months or beyond.

l       Any Demand Loan if not repaid/rescheduled within the fixed expiry date for repayment or after Demand by the Bank will be treated as past due/overdue from the following day of the expiry date. This Loan will be classified as Sub-standard if it remains past due/overdue for 3 months or beyond but not over 6 months from the date of claim by the bank or from the date of creation of the forced loan; likewise the loan will be classified as "Doubtful' and Bad/loss if remains past due/overdue for 6 months or beyond but not over 9 months and for 9 months and beyond respectively.

In case of Term Loans,

If the amount of `defaulted installment' is equal to or more than the amount of installment (s) due within 3 months, the entire loan will be classified as ``Sub-standard''.

l       If the amount of 'defaulted installment' is equal to or more than the amount of installment (s) due within 6 months, the entire loan will be classified as ''Doubtful.

l       If the amount of 'defaulted installment' is equal to or more than the amount of installment (s) due within 9 months, the entire loan will be classified as ''Bad & Loss.''

Question: What are the rules for maintain General Provision against loan and advances by Bank?

Answer:

(a) (i) Banks will be required to maintain General Provision in the following way :

(1) @ 0.25% against all unclassified loans of Small and Medium Enterprise (SME) as defined by the SME & Special Programmes Department of Bangladesh Bank from time to time and @ 1% against all unclassified loans (other than loans under Consumer Financing, Loans to Brokerage House, Merchant Banks, Stock dealers etc., Special Mention Account as well as SME Financing.)

 (2) @ 2% on the unclassified amount for Small Enterprise Financing.

(3) @ 5% on the unclassified amount for Consumer Financing whereas it has to
be maintained @ 2% on the unclassified amount for (i) Housing Finance and
(ii) Loans for Professionals to set up business under Consumer Financing
Scheme.

(4) @ 5% on the outstanding amount of loans kept in the 'Special Mention  Account' .

(b) (i) Banks will maintain provision at the following rates in respect of classified Continuous,  Demand and Fixed Term Loans:

(1) Sub-standard 20%
(2) Doubtful 50%
(3) Bad/Loss 100%

(ii) Provision in respect of Short-term Agricultural and Micro-Credits is to be maintained at the following rates:

(1) All credits except 'Bad/Loss'(i.e. 'Doubtful', 'Sub-standard', irregular and regular credit accounts) : 5%
(2) 'Bad/Loss' : 100%

c) Banks are required to maintain 1.00 % general provision against Off-balance sheet exposures with effect from December 31, 2008. (Provision will be on the total exposure and amount of cash margin or value of eligible collateral will not be deducted while computing Off-balance sheet exposure.)

 Question: What are the rules for calculation of Base for Provision for  classified loan?

Answer:

(i) For eligible collaterals of the  following types, provision will be maintained on the outstanding balance of the classified loans less the amount of Interest Suspense and the value of eligible collateral:

a. Deposit with the same bank under lien against the loan,

b. Government bond/savings certificate under lien,

c. Guarantee given by Government or Bangladesh Bank.

(ii) For all other eligible collaterals, the provision will be maintained on the balance calculated as the greater of the following two amounts:

a) Outstanding balance of the classified loan less the amount of Interest  suspense and the value of eligible collateral; and

b) 15% of the outstanding balance of the loan.

Lesson-7 on Credit

Question: What is Particular Lien?

Answer:

Particular lien is a right of the creditor to retain the goods of the debtor in respect of a particular debt and this debt  must have arisen out of service rendered or money expended on the goods.

 Question: What is General Lien?

Answer:

General  Lien is a right of the creditor to retain in possession of the goods and securities till the dues are paid. In case of General Lien the creditor has no right to sell or liquidate the property without filing suit against the debtor.

Question: What is Banker’s Lien?

Answer:

Banker’s Lien is more than a General Lien, it is an implied pledge . In the event of the default of the borrower, the banker has a power of sale to liquidate without intervention of the court.

Question: What is Banker’s Lien?

Answer:

The Banker sometimes asks a borrower to execute a letter declaring that his assets are free from encumbrance at the time advance is made. The borrower also undertakes that the assets stated in the said letter shall not be encumbered or disposed of without the Bank’s permission in writing so long the advance continues. This undertaking is a Negative Lien.

Question: What is Equitable Lien?

Answer:

An Equitable Lien is an equitable right conferred by law to a charge upon the movable or immovable property of another until certain claim is satisfied such as, a partner who  pays partnership debts on dissolution has an equitable lien on the property of the partnership.

Question: What is Maritime Lien?

Answer:

A maritime lien is a right specially binding a ship her furniture, machinery, cargo and freight for the payment of claim based upon the maritime law. For  example, the person who has suffered losses as a result of collision due to ship’s negligence has the right of lien on ship and her belongings.

Question: What are the essential conditions for exercising the right of lien by Banker?

Answer:

a)     The goods or securities over which the right of lien shall be exercised must be in the possession of Bank.

b)    There must be a lawful advance due to the bank.

c)     There shall be no contract contrary to lien

d)    Goods or securities over which right of lien shall be exercised must be suitably discharged in favor of bank.

Question: What are the rules/condition/formalities for exercising the right of “Set-Off” by Banker?

Answer:

a)     Mutual debts must be certain: Before exercising  right of set off the claim and the counter claim must be determined accurately.

b)    Debts must be due: Only those  debts which are due and revocable on the date of set off can be the subject of set off.

c)     Debts in the same right: The loan account and the deposit account which will be appropriated must be in the same right.

d)     No agreement to the contrary: The right of set off can not be exercised if there is  any agreement between Banker & Borrower to the contrary of set off.

e)     Notice of set off: Before exercising right of set off Banker’s should serve notice of set off to the borrower before reasonable time.

Question: Under what circumstances Banker can exercise the right of Set-Off without providing notice to the customer:

Answer:

a)     On the death, insanity or insolvency of the customer.

b)    On the insolvency of a partner of a firm.

c)     On the winding up of a company.

d)    On receipt  of a garnishee order.

e)     On receipt of an information of a second mortgage over the security which is charged to the bank.

f)      On receipt of a notice of assignment of the credit balance of the customer.

Question: What is Legal Assignment?

Answer:

A Legal Assignment is one where,

a.     Assignment must be in writing duly signed by the assignor. In banking practice, it is   done through a registered irrevocable power of attorney where transfer of actionable claim is clear & absolute.

b.     A written notice of assignment containing the name and  address of the assignee is to be sent by the assignor to the debtor.

c.     The assignee informs the principle debtor about the assignment and also gets confirmation of the notice. In banking business, banker informs the assignor’s debtor with a copy of P.A. and gets the confirmation of it.

 Question: What is equitable Assignment?

Answer:

An equitable assignment is one which does not fulfill any condition of Legal Assignment mentioned above. Banker does not allow equitable assignment in any case.

Lesson-6 on Credit

Question: What is Set-Off?

Answer:

 Set of is the right of a creditor to the total or partial merging of a claim against the counter claim of the debtor.

Question: What is Assignment?

Answer:

An assignment means a transfer of right property or debt(existing or future) by one person to another person.

Question: What are the types of Assignment?

Answer:

a) Legal Assignment

b) Equitable Assignment

 Question: What is bailment and its characteristics?

Answer:

Bailment is the delivery of goods by one person to another for some purpose, under a contract that the goods shall, when the purpose is  accordind , be returned or otherwise disposed of according to the directions of the person delivering them.

The essential characteristics of bailment are as follows:

i)           Bailment is always based upon a contract.

ii)         There can be a bailment of movable properties only, but money is not included in the category of movable goods.

iii)       Delivery of goods is essential for a contract of bailment. Delivery means transfer of possession, actual or constructive (symbolic), from one person to another.

iv)       In bailment, ownership is not transferred, but only special right of retaining the goods for the security is passed on to the lender until payment of debt.

v)         Goods are delivered upon a condition that  on accomplishment of the purpose the very goods in their original form are to be returned by the bailee or are otherwise to be disposed of according  to the directions of the bailor.

Question: Who can create Pleadge?

Answer:

Anyone who is in legal possession of the goods can pledge them. The parties who can make a valid pledge are:

a)     The owner of the goods himself.

b)    Mercantile agent (Section 178 of Contract Act 1872)

c)     A person, who has obtained possession of goods by fraud, mis-representation  coercion or undue influence, such person shall create a valid pledge provided the following conditions are fulfilled.

i)   The contract has not been rescinded before he enters into the contract of pledge.

ii) The pledge acts in good faith without knowledge of the defective title of the pledger. This principle does not apply to a thief who has no title to goods and can give none.

d)    Joint owner with the consent of other co-owner (s).

e)     A person who, with the consent of the seller, obtains possession of the goods or documents of title to the goods for which the title has not yet passed to that person provided the pledge acts in good faith and without notice of the pledger’s defect in the title therto.

f)      A seller who is in possession of the goods after selling them, can create a valid pledge provided the pledge must act in good faith and without notice of the previous sale.

g)    A pledge may repledge the goods for borrowing money to the extent of his interest in the said goods.

Lesson-5 on Credit

Question: What is mortgage?

Answer:

Mortgage is a method of charging. This type of charging is done in case of immovable property. Immovable property includes land & things attached to the earth like trees, buildings & fixed machinery.

Question: What are the differences among Mortgage, Pledge and Hypothecation?

Answer:

Ø    Mortgage is made as a security for the repayment of a debt- present or past, an interest of the owner in the property. Mortgaged is to some extent parted or transfer. The physical possession of the property may or may not be parted.

Ø    Pledge is the bailment of goods (under the possession of the Bank)  as security for payment of a debt. Title & ownership is not transferred but the pledgee has a right to sell the pledged item if the condition of the pledge is violated.

Ø    Hypothecation is a floating charge against stock of goods. It is used in case of advance against movable goods.In case of hypothecation neither ownership nor possession is transferred.

Question: What are different types of Mortgage?

Answer:

i)                Simple Mortgage

ii)              Mortgage by Conditional Sale

iii)            Usufructury Mortgage

iv)            English Mortgage

v)              Equitable Mortgage

vi)            Anomalous Mortgage

Question: What is Lien?

Answer:

A lien is the right of a creditor in possession of goods, securities or any other asses belonging to the debtor  to retain them until the debt is repaid

Question: What are the Different Type of  Lien?

Answer:

i)                Particular Lien

ii)              General Lien

iii)            Banker’s Lien

iv)            Negative Lien

v)              Equitable Lien

vi)            Maritime Lien

Lesson-4 on Credit

Question: What is Security?

Answer:

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

Question: What is Charges?

Answer:

Charges means taking the security lawfully so that it can be encashed/sold for the adjustment of bank dues.

Question: What are Classification of Charges?

Answer:

Fixed Charge

A charge is said to be fixed if it is made specially to cover definite and ascertained assets of permanents nature or assets capable of being ascertained, e.g. Charge on land and building or Heavy Machinery .

Floating Charge:

It is a charge on property which is constantly changing , e.g stock, other assets.

  

The other classification of charge are:

Pari- Passu Charge

Pari-passu charge is created in favor of several creditors , with the condition that they have equal priority.

Second Charge:

A. A creditor holding a second charge by of mortgage, is entitled to the proceeds after the first charge is met. He must inform the prior mortgage of his charge because the first mortgagee can not part with the proceeds or title of the property if he has notice of the second charge

Question: What are Common Methods of charging securities?

Answer:

Charging of securities means making it available as a cover for an advance.

The common methods of Charging of securities are

q      Pledge

q      Hypothecation

q      Lien

q      Assignment

q      Set off

q      Mortgage