Lending Operations and Risk Management

1. Agri Finance
2. Asset Liability Management (ALM)
3. Back to Back L/C
4. Balance of Payment
5. Break-even Point
6. Capital Market
7. Corporate Banking
8. Debt Service Coverage Ratio
9. Debt-to-Equity Ratio
10. Discrepant L/C
11. Economic Rate of Return
12. Green Banking
13. Liquidity Management
14. Loan Documentation
15. Loan Portfolio
16. Loan Pricing
17. Loan Syndication (Dec-2013)
18. Merchant Banking
19. Micro Credit
20. Micro-credit Regulatory Authority (MRA)
21. Non-Performing Asset
22. Packing Credit
23. Pari Passu Charge (Dec-2013)
24. Portfolio Management
25. Preference Share
26. Sensitivity Analysis
27. SME Financing
28. SME Foundation
29. Social Corporate Responsibility (Dec-2013)

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1. Agri Finance
Agricultural credit is refers to loans that extended for agricultural purposes.
Agricultural credit systems promote the expansion and continued survival of
farm and livestock operations, covering the entire agricultural chain - input
supply, production and distribution, wholesaling, processing and marketing.
Banks lend to farmers for a variety of purposes, including (1) short-term credit
to cover operating expenses, (2) mid-term credit for investment in farm
equipment and real estate improvements, (3) long-term credit for composition of
farm real estate and construction financing, etc.

2. Asset Liability Management (ALM)

Asset-liability management (ALM) is the practice of managing risks that arise due
to mismatches between the assets and liabilities of the bank. Banks face several
risks such as the liquidity risk, interest rate risk, credit risk and operational risk.
The ALM is a strategic management tool to manage interest rate risk and
liquidity risk faced by banks and financial companies. Its functions extend to the
management of liquidly risk, market risk, trading risk, funding and capital
planning and profit planning and growth projection.

3. Back to Back L/C

Back to back L/C is two letter of credit that used together to help a seller finance
the purchase of equipment or services from a subcontractor. With the original LC
from the buyer's bank in place, the seller goes to his own bank and has a second
LC issued, with the subcontractor. The subcontractor is thus ensured of payment
upon fulfilling the terms of the contract.
Like most LCs, this is used primarily in international transactions, with the first
LC serving as collateral for the second.

4. Balance of Payment
The balance of payments is the method to measure and monitor international
monetary transactions for a period of time of a country. Usually, it is calculated
every quarter and every calendar year. All trades conducted by both the private
and public sectors are accounted for in the balance of payment in order to
determine how much money is going in and out. If a country has received
money this is known as a credit, and if a country has paid or given money, this
is known as a debit.

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5. Break-even Point
The Break-even Point is the point at which the gains equal the losses. The point
where sales or revenues equal expenses or also the point where total costs
equal total revenues. There is no profit made or loss incurred at the break-even
point.
Break-even point is the number of units (N) produced which make zero profit.
N = Fixed Cost / (Price per Unit Variable Cost)

6. Capital Market
A capital market is a market for securities, where companies and governments
can raise long-term funds. It is defined as a market in which money is provided
for periods longer than a year. It may be classified as primary and secondary
market.
In primary market, new stock or bond issues are sold to investors. In secondary
market, existing securities are sold and bought among investors or traders,
usually on a securities exchange, over-the-counter.

7. Corporate Banking
The Corporate Banking is banking services for large companies. Usually,
the definition of the business of banking for the purposes of corporate banking,
directed at large business entities. Banks often maintain specific divisions for
handling the needs of corporate clients, separate from consumer or retail
banking activities for individual accounts. This type of banking is designed to
deal with major financial transactions that do not generally a transaction for
retail or consumer or such kind of banking services.

8. Debt Service Coverage Ratio

Debt service coverage ratio is the amount of cash flow available to meet annual
interest and principal payments on debt, including sinking fund payments.
In government finance, it is the amount of export earnings needed to meet
annual interest and principal payments on a country's external debts.
In personal finance, it is a ratio used by bank loan officers in determining income
property loans. It meant to that the property is generating enough income to
pay its debts.
It is calculated by:

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9. Debt to Equity Ratio
Debt to equity ratio is the ratio of total liabilities of a business to its
shareholders' equity. It is a leverage ratio and it measures the degree to which
the assets of the business are financed by the debts and the shareholders'
equity of a business.

Debt-to-Equity Ratio = Total Liabilities/ Shareholders' Equity

Both total liabilities and shareholders' equity figures in this formula that can be
obtained from the balance sheet.

10. Discrepant L/C

Discrepant L/C is a kind of letter of credit that does not comply with the terms
and conditions under which it was established that is without a required item of
information, or the information provided is inconsistent with the associated
documents. The issuing bank of a discrepancy L/C is not obliged to pay its
beneficiary and (if it is a confirmed L/C) nor is the confirming bank. Such L/Cs
are normally referred back to the buyer or importer for instructions.

11. Economic Rate of Return

In general, Economic Rate of Return is the net benefits to all members of
society, as a percentage of cost and like market imperfection. It is refers to
interest rate at which the cost and benefits of a project, discounted over its life
are equal. Economic rate of return differs from the financial rate of return in that
it consider the effects of factors such as price controls, subsidies, and tax breaks
to computing the actual cost of the project.

12. Green Banking

Green banking is same as modern general banking, which considers all the social
and environmental factors with an aim to protect the environment and conserve
natural resources. Green Banking promotes environmental-friendly practices and
reducing the carbon footprint from banking activities. Using online banking
instead of branch banking, paying bills online instead of mailing them is the
example of green banking activities. The personal banking practices considering
green banking factors can help the environment.

13. Liquidity Management

Liquidity management is refers to activities to ensure that holdings of liquid
assets like cash, bank deposits and other financial assets are sufficient to meet
its obligations. It measures the ability to honor all cash payment as can be met
either by drawing from a stock of cash holdings, by using current cash inflows,
by borrowing cash or by converting liquid assets into cash. The basic objectives
are to honor all cash outflow, satisfy minimum reserve requirements, avoid
additional cost of emergency borrowing and forced liquidation of assets.

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14. Loan Documentation
Loan documentation is the documents that record the loan agreement between
a borrower and a lender. It refers to a loan where all income, assets and
liabilities are documented. A list of the various types of loans can be found at
loan documentation.
Some of the common documents when applying a loan are proof of earning,
profit and loss statements, bank statements, liquid cash, stocks, investments,
land, building, machinery, furniture; any credit facility like loan, credit card etc
and personal information of borrower.

15. Loan Portfolio

The loan portfolio is refers to loans that have been made or bought and are
being held for repayment. Loan portfolios are the major asset of lending
institutions. The value of a loan portfolio depends not only on the interest rates
earned on the loans, but also on their quality, that is, the likelihood that interest
and principal will be paid.
It is listed as an asset on the balance sheet. The value of a loan portfolio
depends on both the principal and interest owed and the average
creditworthiness.

16. Loan Pricing

Loan pricing is an important function for a lending company. Loan-pricing
decisions directly affect the safety and soundness through their impact on
earnings, credit risk and capital adequacy. Lending company must price loans
considering its cost, profit or loses to ensure the financial viability. An effective
loan pricing determine the company growth and minimize the market risk. Loan
pricing is a critical element in assessing and rating the capital, asset quality,
management, earnings and liquidity for a lending company.

17. Loan Syndication [Dec-2013]

Loan syndication is the process of involving several lenders in providing various
portions of a loan. Loan syndication most often occurs in situations where a
borrower requires a large sum of capital that can manage lender's risk exposure
levels. Thus, multiple lenders will work together to provide the borrower with the
capital needed, at an appropriate rate agreed upon by all the lenders. It is
common in mergers, acquisitions and buyouts, where borrowers need very large
sums of capital.

18. Merchant Banking

A Merchant Bank is a financial institution that provides capital to companies in
the form of share ownership instead of loans. A merchant bank also provides
advisory on corporate matters to provide guidance and service in term of
financial, marketing, managerial and legal aspect. Both commercial banks and
investment bank may engage in merchant banking activities. Modern merchant

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banking activities refers to issue management, portfolio management, credit
syndication, acceptance credit, advice on merger and acquisitions, insurance,
etc.

19. Micro Credit

Micro-credit is a variation on traditional credit service that involves lends to
individuals or micro-entrepreneurs whose are unable to secure credit due to
poverty. They are relatively unemployed or underemployed and have no
collateral and credit experience.
In Bangladesh, various kinds of company like Banks, NBFI, NGO and
International Funding Body doing the Micro credit operation to ensure poverty
reduction, self-employment, etc.
Micro-credit is one component of micro-finance, which also includes other
financial services such as savings accounts, insurance and money transfers.

20. Micro-credit Regulatory Authority (MRA)

The Micro-credit Regulatory Authority has been established by the Bangladesh
Govt. under the "Micro-credit Regulatory Authority Act 2006 to promote
sustainable development of micro-finance sector. It is the central body to
monitor and supervise micro-finance operations of NGO and other micro credit
organizations. License from the Authority is mandatory to operate micro-finance
operations in Bangladesh as an NGO.
Micro-credit institutions have been providing various social and financial services
to the poor to poverty reduction within the society.

21. Non-Performing Asset

Non-performing assets is a classification used by financial institutions that refer
to loans that are in jeopardy of default. Once the borrower has failed to make
the payment of credit within a certain time of period, the loan is considered to
be a non-performing asset.
Non-performing assets are problematic for financial institutions since they
depend on interest payments for income. It becomes a great problem to the
growth of financial institutions due to provision deposited to the Bangladesh
bank.

22. Packing Credit

Packing credit is one of the best financial assistance by bank to promote the
export trade that helps exporter finance the cost of buying or making a set of
products, and then packing and transporting them before shipment occurs. It
will often be extended if a letter of credit has been issued by a purchaser in
another country or a confirmed order for exporting the goods exists. To obtain
packing credit, the exporter has to approach the bank with export order. Bank
official visits the exporters factory and assess the goods value with export order.

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23. Pari Passu Charge [Dec-2013]
Pari Passu is a Latin phrase that refers to equal footing. It describes the
situations where two or more assets, securities, creditors or obligations are
equally managed.
In finance, the term pari-passu refers to loans, bonds or classes of shares that
have equal rights of payment, or equal seniority. In addition, secondary issues of
shares that have equal rights with existing shares rank pari-passu. Wills and
trusts can assign an in pari-passu distribution where all of the assets will be
equally divided between the named parties.

24. Portfolio Management

Portfolio Management provides supports to the investor in a method of selecting
the best available securities that will provide the expected rate of return in a
scale of risk and also to reduce the risks. It is a strategic decision which is
addressed by the top-level managers.
The main objectives are to security of principal investment, consistency of
returns, capital growth, marketability, liquidity, diversification of portfolio,
favorable tax status, etc. These objectives results in a proper analytical approach
towards the growth of the portfolio.

25. Preference Share

Preference share is a capital stock which provides a specific dividend that is paid
before any dividends which takes precedence over common stock. Preferred
stock shareholders do not enjoy any of the voting rights. The main benefit to
owning preference shares are that the investor has a greater claim on the
company's assets.
In general, there are four different types of preferred stock- (1) cumulative; (2)
non-cumulative; (3) participating; and (4) convertible preferred stock.

26. Sensitivity Analysis

Sensitivity analysis is a simulation analysis that the key quantitative assumptions
and computations are transformed systematically to assess their effect on the
final outcome for a project. It is a way to predict the outcome of a decision if a
situation turns out to be different compared to the key predictions. Financial
institutions
By using sensitivity analysis, financial institutions can evaluate the overall risk of
critical factors, changes in interest rate and capital cost for alternative outcomes
of their financial situations.

27. SME Financing

SME finance is the funding of small and medium sized enterprises, and
represents a major function of the general business finance market in which
capital for different types of firms are supplied, acquired, and priced. Capital is
supplied through the business finance market in the form of bank loans and
overdrafts; leasing and hire-purchase arrangements; equity/corporate bond

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issues; venture capital or private equity; and asset-based finance such as
factoring and invoice discounting.
SMEs are vital for economic growth and development in both industrialized and
developing countries, by playing a key role in creating new jobs. Small
businesses are particularly important for bringing innovative products or
techniques to the market.
[According to Bangladesh Bank (SMESPD Circular No.1 dated 19 June, 2011),
the cottage, micro & SME is newly defined the industry/enterprise:
Fixed assets excluding land &
building No. of manpower
Criteria
(Tk. in crore)
Sectors
Medium Small Micro Medium Small Micro
0.05- 100-
Manufacturing 10-30 0.5-10 25-99 10-24
0.5 250
Trade 1-15 0.05-1 <0.05 50-100 10-25 <10
Service 1-15 0.05-1 <0.05 50-100 10-25 <10

Cottage Industry <0.05 <10

An industry or enterprise can be treated as that category one following a
benchmark but the same can fall under higher category if another benchmark is
considered. In that case it will be treated as higher category industry.
A woman, who owns a private firm or she holds minimum 51% stake in firm run
jointly or registered, will be treated as women entrepreneur.]

28. SME Foundation

SME Foundation formed in year 2006 under the Company act-1994. It plays the
role in helping the SME entrepreneurs including the women entrepreneurs by
conducting various types of developing programs in Bangladesh. One of the
major aims is to promote the economic development through employment
generation, reduction of social discrimination and poverty. The main activities
are: implementation of SME policy, advocacy & research, credit wholesaling
program, capacity building & skill development, access to information &
technology, women entrepreneurship development, business support, etc.

29. Social Corporate Responsibility [Dec-2013]

Corporate Social Responsibility is defined as the voluntary activities to co-
operate in an economic, social and environmentally sustainable manner. As
voluntary activities, the financial institutions may be engaged in green banking,
rural development, education assistance, poverty reduction programs, assistance
to people physical disable people, and assistance to peoples affected by national
disaster. Some companies may engage in "green-washing" or feigning interest in
corporate responsibility, but many large corporations are devoting real time and
money to environmental sustainability programs, alternative energy, and various
social welfare initiatives to benefit employees, customers, and the community at
large.

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