Management of Loans & Advances
16
Term Paper of FIN-4209: Management of Financial Institutions
Transcript of Management of Loans & Advances
Term Paper of FIN-4209: Management of Financial Institutions
Term Paper On
Man
agem
ent o
f Loan
& A
dva
nces
Md. Omar Faruque
Assistant Professor
Department of Finance
Faculty of Business Studies
Jagannath University, Dhaka
Sultan Ahmed Khan
Representative of the group
Epimetheus
BBA 3rd Batch
Department of Finance
Faculty of Business Studies
Jagannath University, Dhaka.
Submitted by
Submitted to
Group Name: Epimetheus
Name of the members of the group:
Serial No: Name of the members of the group Roll Number
01 Sultan Ahmed Khan 091597
02 Md. Mynul Islam 091633
03 Md. Anik Mahmud 091636
04 Sharjil Ahmed 091623
05 Protiva Talukder 091602
06 Md. Mehedi Hassan 091590
07 Mohammad Didarul Islam Khan 091613
08 Mohammad Mahmudul Hasan 091534
09 Sakhawat Hosain 091574
Group Representative: Sultan Ahmed Khan.
Group Coordinator : Md. Mynul Islam.
Contact : [email protected]
Web : epimetheus.yolasite.com
NAME Page no
Vita
Acknowledgement
Abstract
Introduction
Loan & Advances and Difference between
both of this
01
Classification of Loan & Advances 02
Factor determining growth mix of loan 04
Step in lending process 05
Literature Review
Regulations in terms of Bangladesh 07
Classification of Supervision system 16
Regarded Department 18
Principle of Sound Lending 21
Objectives &
Hypothesis
Objectives 23
Recommendation 23
Research Methodology
Responsibility of Management 24
Factors affecting sound lending 25
CAMELS 27
Liquidity rating 28
Loan Proposal form 29
Data Analysis
Restriction of lending to Directors 50
Standard Bank Analysis 53
Premier Bank Analysis 66
Bank Asia Analysis 70
BRAC Bank Analysis 76
Southeast Bank Analysis 81
Conclusion
Summary of the findings 92
Suggestion 94
Bibliography Bibliography 95
Index 96
March 05, 2013
The Course Instructor
Md. Omar Faruque
Assistant Professor
Department of Finance
Jagannath University, Dhaka.
Sub: Thanks giving letter to the respective faculty member.
Sir,
We are the student of Department of Finance (3rd batch) of Jagannath University, Dhaka &
also from the group named “Epimetheus”. We are very much enthusiastic about our
presentation. We are really happy to have such a presentation of challenging and interesting
like this presentation & also thanks to you for making us worthy for corporate. Our topic is
“Management of Loans & Advances”. We have learned many things from this topic which
will help us in future to conduct as a finance official. There were some obstacles we have
faced at the time of collecting data about our topic. But we have overcome all the obstacles
by the endeavor effort by each member of our group and tried our best to give an overview of
our topic.
We the group “Epimetheus” tried our best to make this term paper impeccable, interesting,
informative and enjoyable by the help of electronic and print media in association with our
honorable teacher, mentor, counselor, instructor and advocate “Md. Omar Faruque”. We are
really grateful to him. We had limitations at the time preparing presentation. So mistakes may
occur in our demonstration of our presentation. We hope that, you will exempt our mistakes.
Thanking in anticipation,
Yours Fidel,
Sultan Ahmed Khan
Group Representative,
Group-“Epimetheus”
BBA 3rd Batch
Department of Finance
Jagannath University,Dhaka.
Name of the Researcher Roll Number Date of
Birth
Place of
Birth
Degree
Sultan Ahmed Khan 091597 26/12/91 Barisal BBA(Finance)
8th Semester
Md. Mynul Islam 091633 07/11/90 Barisal BBA(Finance)
8th Semester
Md. Anik Mahmud 091636 1/1/90 Natore BBA(Finance)
8th Semester
Sharjil Ahmed 091623 11/11/90 Rajbari BBA(Finance)
8th Semester
Protiva Talukder 091602 20/10/90 Sylhet BBA(Finance)
8th Semester
Md. Mehedi Hassan 091590 16/3/90 Barisal BBA(Finance)
8th Semester
Sakhawat Hosain 091574 4/5/90 Chittagong BBA(Finance)
8th Semester
Mohammad Didarul Islam
Khan
091613 16/5/90 Tangail BBA(Finance)
8th Semester
Mohammad Mahmudul
Hasan
091534 6/12/90 Dhaka BBA(Finance)
8th Semester
Publications: All the publications are available at https:// epimetheus.yolasite.com
First of all we would like to thank the Almighty for giving us the strength, and the aptitude to
complete this report within due time. We are deeply indebted to our course teacher, mentor,
and counselor, Md. Omar Faruque for assigning us such an interesting topic named
“Management of Loans & Advances”. We also express the depth of my appreciation to our
honorable course teacher for his suggestion and guidelines, which helped us in completing
this term paper.
We are also grateful to the following person who has helped us a lot
Senior Officer (in Charge)
Banking Regulation & Policy Department
Bangladesh Bank
Head Office
Dhaka
Customer Relation Executives
Standard Bank Limited
Customer Relation Executives
Premier Bank Limited
Customer Relation Executives
Bank Asia Limited
Customer Relation Executives
Southeast Bank Limited
Customer Relation Executives
BRAC Bank Limited
In finance, a loan is a debt evidenced by a note which specifies, among other things, the
principal amount, interest rate, and date of repayment. A loan entails the reallocation of the
subject asset(s) for a period of time, between the lender and the borrower. In a loan, the
borrower initially receives or borrows an amount of money, called the principal, from the
lender, and is obligated to pay back or repay an equal amount of money to the lender at a later
time. Typically, the money is paid back in regular installments, or partial repayments; in an
annuity, each installment is the same amount. Principle amount available when a borrower
draws from a line of credit, takes a cash advance against a bank credit card, or disburses a
loan at specific periodic stages. Advances may be secured or unsecured.
Lending institutions are among the most closely regulated of all financial services
institutions. Not surprisingly, the mix, quality and yield of the loan portfolio are heavily
influenced by the character and depth of the regulations. In order to strengthen credit
discipline and improve the recovery position of loans and advances by the banks, Bangladesh
Bank vide BCD Circular No. 34/1989 introduced a new system covering loan classification,
the suspension of interest due, and the making of provisions against potential loan loss.
Bangladesh Bank has already introduced 'Special Mention Account' vide BRPD Circular No.
02/2005 and09/2005 for the banks to raise early warning signals for accounts showing first
signs of weakness and making appropriate provisioning therein.
Supervision is the on-going monitoring of credit union’s financial and operational condition.
Examiners monitor their assigned credit unions as needed through on-site supervision,
supervisory contacts and off-site through submitted regulatory reports and financial
statements and periodic trend analysis of selected ratios. In credit union with more serious
financial problems, supervision may also include follow up examination and monthly
monitoring financial trends and ratios. There are two supervision system of Bangladesh Bank
such as: On-side & Off-side supervision.
Introduction
Loan & Advances
In finance, a loan is a debt evidenced by a note which specifies, among other things, the
principal amount, interest rate, and date of repayment. A loan entails the reallocation of the
subject asset(s) for a period of time, between the lender and the borrower.
In a loan, the borrower initially receives or borrows an amount of money, called the principal,
from the lender, and is obligated to pay back or repay an equal amount of money to the lender
at a later time. Typically, the money is paid back in regular installments, or partial
repayments; in an annuity, each installment is the same amount.
Principle amount available when a borrower draws from a line of credit, takes a cash advance
against a bank credit card, or disburses a loan at specific periodic stages. Advances may be
secured or unsecured
Difference Between Loan & Advances
Both Loan and Advance are to be repaid in installments for example: monthly installments of
equal amounts.
Loan Advances
The interest is calculated (Simple or
Compound type interest)
The interest amount is recovered at the end.
Example for Loan: Mr. Y took a Loan of
$10,000 with a a simple interest rate of
12% per year. Monthly installment is
$1,000. Accrued Interest is calculated
every month on balance principal amount.
Example for Advance: Mr. X working in an
organization. He took $10,000 as advance to
be repaid in 10 monthly installments.
Monthly recovery from salary is $1,000.
After 10 months, hi repays entire amount
Classification of Loan & Advances
Source: Bank Management & Financial Services (7th Ed.) Part 16-2
Lease
Financing
Receivable
Individual /
To Individual
Commerce &
Industry
Agriculture
Financial
Institution
Real Estate
Loan
Real Estate Loan
Real estate loan is secured by real estate property. It includes short-term loan for
constructions & long-term loan to finance the purchase of farmland & other properties.
Financial Institution Loan
Financial institutional loan include credit to bank, insurance companies & other financial
institution.
Agriculture Loan
Agriculture loan are extended to farms and ranches to assist in planting & harvesting crops
and supporting the feeding and care of livestock.
Commercial & Industrial Loan
Commercial & industrial loan are granted to business to cover purchasing inventories, paying
taxes & meeting payrolls.
Loans to Individuals
It includes credit to finance the purchase of automobiles, mobile homes, appliances & other
retails goods, to repair & modernized homes, & to cover the cost of medical care & other
personal expenses, & are either extended directly to individuals or indirectly through retails
dealers.
Miscellaneous Loan
It includes all loans not listed above, including securities loans.
Lease Financing Receivables
Where the lender buys equipment or vehicles and leases them to its customers.
Of the loan categories shown, the largest in dollar volume is real estate loans, accounting for
just over half of total bank loans. The next largest category is commercial & industrial loans,
representing about one-fifth of the total followed by the loans to individuals & families,
accounting for about one-sixth of all loans federally insured banks make.
Factor deterring the growth & mix of loans
Different kind of loans mix usually defers form institutions to institutions. One of the key
factors in shaping an individual lenders loan portfolio is the profile of characteristics of the
market area itself. It means each lender must respond to the demand.
Other factors are given below:
Dependent on the Local Areas
Lenders are not totally depended on the local areas they served for all the loans they acquire.
They can purchase whole loans or peace of loan credit derivatives to offset the economic
volatility.
Lender Size
Larger banks are often wholesale lenders to large denomination loans to business firms. On
the other hands smaller banks tend to emphasis retails credit. Actually the volume of capital
held to determine its “legal lending limit”.
The Experience & Expertise of Management
To prohibit loan officers from making certain kind of loans this make different types of loans
which composite the loan portfolio as the loan policy.
Expected Yield Rate
Finally loan mixes rely on the expected yield. Each loan offers relatively higher yield all
other asset the lender could acquire after all expenses & risks are taken into account.
Net Yield Rate
Actually the lender size gives a significant influence on the net yield. Both the smaller and
larger bank has their benefit. Of course customer size can affect relative loan yield.
Most Efficient Producer
Larger lender generally bears the lowest cost on credit loans. On the other hand smaller
lenders appear to have few cost advantages. But these smaller lenders are frequently among
the most effective at controlling loan losses.
Step in Lending Process
Finding Prospective Loan Customer
Most loans to individuals arises from a direct request from a customer who approaches a
member of lender’s staff and ask to fill out a loan application. The lending game is becoming
a sales position. Sometimes loan officer will call on the same customers for month before the
customer finally agrees to give the lending institutions a try by filling out a loan application.
Evaluating a prospective Customer character & sincerity of purposes
Once a customer decides to request a loan, an interview with a loan officer usually follows,
giving the customer the opportunity to explain his or her credit needs. That interview is
particularly important because it provides an opportunity for the loan officers to assess the
customer character & sincerity of purposes.
Making site visits and evaluating a prospective customer credit record
If a business or mortgage loan is applied for, a loan officer makes a site visit to assess the
customer location and the condition of the property and to ask clarifying the question. The
loan officer may contact with other officer to assess any information regarding the customer.
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