Banking Portfolio

INSTITUTE OF MANAGEMENT SCIENCES
BANKING PORTFOLIO
FINAL PROJECT
BANK LENDINGS
BBA
PRESENTED TO :
MIS SHEHLA SOHAIL
PRESENTED BY: MUHAMMAD RAZA (081325) MUHAMMAD AFROZE(081304) JAWAD ANWAR (073361) MEHROZ HAIDER (081315)
BANKING PORTFOLIO Final project
What is Lending?
Lending is to give away money to people for some specific purpose for some particular period of time.
Bank lending
When lending process is carried on thorough banks is called bank lending.
Cash and non cash lending
Both cash and non-cash instruments are used by consumer and business to facilitate the purchase of goods and services. Consumers hold an inventory of cash which is drawn down over time to make purchases, businesses hold cash to make change for cash purchases, and banks hold vault cash for re-supplying these inventories either through ATMs or at branch offices. These cash holdings, part of which are the reserves required by the central bank, are not available for banks to make loans or purchase securities since they are employed in the daily liquidity payments (i.e. deposit withdrawals). In the loan context, these cash holdings are an idle asset in the banking system. In contrast, non-cash payment instruments -debit and credit cards, cheques, direct debits, credit transfers- are a substitute method for making payments by consumers and businesses but the assets they debit are not idle they are held as deposits and used by banks to make loans or purchase securities. Other things being equal, as the share of payments shifts from cash to non-cash instruments, loanable funds in the banking system rises.
Introduction
Bank lending is the transfer of fund from savor to borrower. Bank act as a financial intermediaries and help the deposit mobilization from one sector to another. The sector that lend
2 BANKING PORTFOLIO Final project
money to the bank for further lending is the sector which has surplus money. The sector which get loans from the bank is one which has deficit in fund. A banker or bank is a financial institution that as a payment agent for customer and borrows and lend money.
Bank act as a payment agent by conducting current accounts for customers , payment cheques drawn by customer on the ban, and collecting cheques deposited to the customer current account. Bank borrow money by accepting funds deposited on the current account, accepted term deposit by issuing debt securities such as banknotes and bonds. Bank lends money by making advance to customer on account by making installment loans and by investing in mark able debt securities and other form of lending.
Forms of lending
The various forms of lending are given below.
Cash financing (cash credit)

This is a common form of borrowing by commercial and industrial concerns and is made available either against pledge or hypothecation of goods, produced or merchandise. In case finance a borrowers is allowed to borrow money from the banker up to certain limit, either at once or as and when required. The borrower refers to the form due to the facility of paying markup service charges only on an amount he utilized. If the borrower does not utilized the full limit, the banker has to lose return on the un-utilized amount. In order to offset this lose the banker may provide for the clause in cash finance agreement according to which borrower has to pay mark up charges on at least one half or one quarter of the amount of cash finance limit allowed to him even he does not utilize that amount.
Overdraft
When the borrower require temporary accommodations, his banker allows with drawls on his account inn excess of the balance which is borrowing customer credit and an overdraft occur. this accommodation is generally allowed against collateral securities . when it is given collateral securities it is called secured overdraft. When the borrower customer cannot offer any collateral security expect his personal security the accodmandion is called clean overdraft. The main difference between cash finance and overdraft lies in the fact that cash finance used for long term by commercial and industrial concern on regular basis, whereas overdraft is a temporary accommodation .
Loans
When a customer borrows from a bankr a fixed amount repayable euther in periodic installment or in lump sum at a fixed future time , it is called a loan. When a banker allowed loans to their customer against collateral securities they are called secured loans and when no collateral security is taken they are called clean loans. The amount of loan is placed at the borrower disposal in lump sum for the period agreed upon and the borrowing customer has to pay interest on the entire amount. Thus the borrower get a fixed amount of money for his use, while the banker feel satisfied in lending money in fixed amount for definite short period against a satisfactory security.
Purchase and discounting of bills

Banker in Pakistan purchase and discount bills of exchange as a part of financing function. They also purchase out
station cheques of reliable customer. then bill of exchange are accompanied by document of title of good they are called documentary bills of exchange or clean bill of exchange. If bill of exchange is payable on demand it is a demand bill or usance bill. The banker purchased usance bill of exchange from a reliable person it is called discounting bill.
Principles of lending 1. Safety

Banker fund comprise mainly of money borrowed from numerous customer on various accounts, such as current account, saving account, call deposit account, special notice account and fixed deposit account. It indicates that whenever the money the banker holds is that of his customer who have entrusted the banker with it only because they have full confidence in the expert handling of money by their banker. Therefore , the banker must be very careful and ensure that his depositor money is advance to safe hands where the risk of loss does not exist. The elements of character, capacity and capital can help a banker in arriving at a conclusion regarding the safety of advances allowed by him.
2.
Liquidity
Liquidity Means the possibilities of recovering the advances in emergency because all th money borrowed by the customer is repayable in lump sum on demand. The borrower repays their loans and the funds thus released cab be use to allow fresh loans to the borrowers. The banker must ensure that the money he is lending is not blocked for undue long time and that them on a short notice. In such a situation it is very
important for a banker to study period in order to meet the shortfalls in the working capital. If the borrower asks for an advance for the purchase of fixed assets the banker should refuse because it shall not be possible for him to repay when the banker wants his customer to repay the amount. Hence the banker must adhere to the consideration of the principles of liquidity very carefully.
3.
Dispersal
The dispersal of the amount of advances should be based so that the large number of borrowing customer may benefit from the banker fund. The banker must ensure that his funds are not invested in specific sector like textile industry , heavy engineering or agriculture etc. he must see that his available funds he advances them to a wide range of sector like commerce industry, farming , agriculture, small business and other financial concern in order of priorities.
4.
Remuneration
The banker needs sufficient earning to meet the following 1 interest payable to the money deposited with him 2 salaries and fringe benefit payable to the staff member 3 overhead expense and depreciation and maintanece of the fixed assets of the bank 4 an adequate sum to meet possible losses 5 provision for a reverse fund unforeseen contingencies 6payment of dividends to the shareholders 7payments of dividends to the shareholder A major portion of banker earning comes from interest charged on the money borrowed by the customer. The fixation of the rate of interest for the advances of various classes depends on the type of security offered to him and also on the duration for which the consider charging
a lower rate of interest. Similarly the banker may consider a lower rate of interest on an advance for a fixed period as compared to that on a fluctuating overdraft.
5.
Suitability
It mean that advances should be allowed not only to the carefully selected and suitable borrowers but also in keeping with the overall national development plans by the authorities concerned. Before accommodating a borrower the banker should ensure that the lending is for a purpose in conformity with the current national credit policy laid down by the central bank of the country. Since the banker mainly provide short term working capital to commerce and industry, they should see that their lending solve the borrower financial problems. In doing so the banker should not assume the role of a partner in the business but should retain his primary status as a commercial lender only. Government have been exercising credit control through central bank since the second world war. The central bank allocates priorities for giving or not giving advances in a particular sector and regulates the minimum and maximum rate of interest to be charged.
TYPES OF LOANS
Loan types fall into four basic categories: construction, bridge (also known as interim), permanent and mezzanine. Lets look at each loan type and the role it plays in selfstorage.
Construction Loans
The construction loan provides you the debt capital to acquire a plot of land and develop a storage facility on it.
While all construction loans accomplish the same thing, theyre not all the same. In fact, every loan is unique.
The great majority of construction loans are provided by commercial banks and thrifts. But in recent years, some of the Wall Street-based lenders and life-insurance companies have entered the loan market, often combining construction and permanent financing into a single transaction (usually for larger deals). Shop alternatives, and pay attention to detail. Items that appear trivial or meaningless during the loan process may prove to be important later in the project.
Bridge Loans
A bridge, or interim, loan is usually a floating-rate loan offered for a short term, usually one to three years, with very liberal prepayment terms. Bridge loans may require personal guarantees, but some are no recourse. The choice between bridge and permanent financing involves a careful analysis of where your project stands now, and how successful you believe it will be in the future. Lets look at some scenarios in which bridge financing may be the smart choice
Permanent loans
Permanent loans are traditional fixed-rate mortgages, with terms as short as five years or as long as 30 years. Over the past decade, the 10-year loan term has become the most prevalent. Permanent loans differ from bridge loans in two primary areas. First, permanent loans generally have fixed interest ratesand, thus, fixed monthly paymentsin effect for the entire loan term. second primary difference between bridge and permanent loans: prepayment penalties. In most cases,
a lenders willingness to provide a long-term, fixed-rate loan is contingent upon a guarantee that it will receive interest for the entire loan term. To ensure this, lenders charge penalties if a loan is paid before its maturity.
Charge on security
Charge on security means its a right of bank to sell out security in case of non-repayment of loans. Charge can be occur in two ways Act of parties ( where there is consent of both parties) Operation of law ( when you get order from law)
Fixed and floating charges

Definition: A fixed and floating charge is a form of security interest usually taken by a lender from a company to secure repayment of a loan. The company granting the charge is usually referred to as the "Chargor" and the person in whose favor the charge is granted is typically called the "Chargee". This form of security is called "fixed and floating" because the chargee has:
an equitable charge over all the non-trading assets of the chargor, e.g. real property, plant and equipment, intellectual property rights, book debts, insurance contracts and other contracts; and a floating charge over cash and stock-in-trade
MODES OF CREATING A CHARGE

lien mortgage pledge hypothecation guarantees/ indemnity
1 LIEN
A lien is a legal claim or a "hold" on some type of property, whether personal or real property, making it collateral against monies or services owed to another person or entity. A lien usually exists in situations like second mortgages, loans against a vehicle title, or money loaned against any other substantial item owned by a borrower. It may keep the borrower from selling the property, or at least keep him or her from transferring title to the property. An ordinary creditor cannot sell the security under lien to secure his amount that is a particular lien. But banker lien is different from an ordinary lien. Bankers lien is an implied pledge
and so the banker can sell the security to recover his amount after giving notice to borrower. Bankers lien is also called general lien.
2 MORTGAGE
A mortgage is defined as the transfer of interest in specific immovable property for the purpose of securing payment of money advanced or to be advanced or performance of any promise which give rise to a pecuniary liability. mortgage, therefore creates a transfer of interest in an immovable property which is specific. The transferor is called the
mortgagor and the transferee is mortgagee. Principle, interest, and other payments which are secured by the mortgage are collectively called the mortgage debt. The deed executed to create mortgage is called mortgage deed. Immovable property includes land, buildings, benefits to arise out of land and things attached to the earth or permanently fastened to anything attached to earth. Building and machinery on the land cannot be mortgaged. Mortgaged property remains in the possession of the mortgagor.
Types of mortgage
1. equitable mortgage of immovable property by depositing title deed with the bank 2. Registered mortgage by getting the mortgage deed registered with the registration of titles.
EQUITABLE MORTGAGE
Equitable mortgage of any immovable property may be created by deposits of title deeds with the bank except in cantonment areas. Equitable mortgage by deposits of title deeds of immovable properties may be created by those who themselves avail of the finance against properties owned by them and which stand in their name. Equitable mortgage by deposit the title deeds of immovable properties may be created by any of the following three classes of persons 1. those who themselves avail of the finance against properties owned by them and which stand in their name 2. those who avail of the finance, for the purpose of their business, in the names of their firms or companies in which they happens to partners or directors, and deposit the title deeds of immovable properties held by them in their names as collateral securities. 3. those who deposit their title deeds of properties belonging to them and standing to their names, to
DOCUMENTS REQUIRED
secure the finance allowed to third parties on their guarantee and recommendation. Demand promissory note Personal guarantee of the owner of the property Finance agreement Memorandum of deposits of title deeds
LEGAL MORTGAGE AND REGISTERED MORTGAGE

Legal mortgage is created by registered instruments i.e. a registered mortgage deed which should also contain a specific/ special clause authorizing the bank to sell the property without going to court of law. DOCUMENTS REQUIRED FOR LEGAL MORTGAGE ARE 1. 2. 3. 4. Original title deed of the property being mortgage Extract from the property registrar Non encumbrance certificate No demand certificate from the income tax authorities 5. Valuation certificate 6. Urban property tax clearance certificate
3 PLEDGE
The pledge is bailment of goods as security fir payments of a debt or performance of promise by customer. Bailment is defined as the delivery of goods by one person to another person for some purpose. In the case of pledge bailer is called the pawner and bailee is called Pawnee. But in commercial parlance the pawner is known as pledgor and Pawnee is called as pledgee. The ownership
of goods remain with the pledgor. Valid pledge requires that:
delivery of goods must take place delivery must be made by one person to another the purpose of delivery shall be to provide security for payment of debt or performance of promise and the pledgee must return the goods or otherwise dispose them off as directed by pledgor after the purpose is accomplished. it is the responsibility of banker to hold the goods under pledge in its proper control, deliver the same to customer when the finance is repaid or effect sale ( in case of non adjustments of finance) after completion of necessary formalities, ensure that the goods are fully ensured andprotected from damage etc. the banker has to be very careful in evaluating goods. He has to satisfy himself about the marketability, quality, quantity as well as price of goods accepted under pledge. The customer should possess clear title to goods which should be free from any encumbrance. There should not be possibility in the steep fall in the price of goods as a result of their storage fro long or short period of time.
DELIVERY OF GOODS
Goods are delivered to the parties against delivery orders, signed by two officers of the bank, one of them must be the officer-in-charge, credit department. Before signing the delivery orders , the signature of the
customers should be invariably verified on the application form and after having delivered the stocks it should be ensured that the signature of the person taking delivery of the goods is obtained on the back of the delivery order.
GODOWN CHARGES
Godown charges are recovered from the parties in accordance with the utility of space and/or work involved.
Documents required for pledge are: 1. 2. 3. 4. Demand promissory note Letter of pledge Agreement Personal guarantee/collateral security.
4 HYPOTHECATION
When the property in the goods is charged as security for any finance but possession is left with the customer, the goods are said to be hypothecated. The essence hypothecation is that possession of the same is not given to the bank. The security is charged by the way of obtaining letter of hypothecation and in case of incorporated companies, registration of charge with the registrar of joint stock company. Therefore, finance the hypothecation being risky is granted after ensuring that the security has all the attribibutes of good banking security.
The customers has valid title to the goods or have sufficient interest entitling them to hypothecate the goods. The customer possesses adequate means to repay the advance and enjoy a good reputation. The guarantors are trustworthy and possess good means.
DOCUMENTS REQUIRED
1. Demand promissory notes 2. Letter of hypothecation 3. Agreement\ 4. Personal guarantee/ collateral security.
15
5 GUARANTEES AND INDEMNITY

GUARANTEE
a contract of guarantee is a contract to perform to perform the promise or discharge the liability of a third person in case of default
Indemnity
is a contract by which one party promise to save the other from losses caused by him by the conduct of promisor himself as by the conduct of any other person. Its a direct engagement by two parties
Requirement for guarantee

Guarantee must have to be in written form It must be enforceable in the court of law
Guarantee of minor in not allowed
There must be a sound mind of person who is giving guarantee Company cannot authorized to give guarantee in favor of its directors borrowings whereas directors can give guarantee for its company It should be signed by both creditors and customer. Customer is called principle debtor
16
Guarantee of woman cannot be given unless there is given some security. ( she must visit head office, she should be some solicitor, guarantee should be stamped at prevailing paper.
RELEASE OF GUARANTEE At the death of guaranter , the guaranty should stop immediately and should inform head office and should act according to head office. Release from guarantee is called discharge. REVOKE OF GUARANTEE Iif we see that guarantee is not suitable we can eliminate the guarantee by giving suitable notice to clients before revoking. Guarantee also revoke when the payment is made by principle debtor. When guaranter himself pay loan
When there is some misrepresentation
17
When there is some notice of guaranteer death or insolvency. When there is change in parties
18
Suggestion while giving loans

The Banking sector in Pakistan continues to suffer from a loan problem portfolio, due to a variety of reasons while there is no guaranteed procedures for ensuring loans do not go bad. The important thing to remember is not to be overwhelmed by marketing or profit center reasons to book a loan but to take a balanced view when booking a loan, taking into account the risk reward aspects. Generally we remain optimistic during the upswing of the business cycle, but tend to forget to see how the borrower will during the downturn, which is a shortsighted approach. Furthermore we tend to place greater emphasis on financials, which are usually outdated; this is further exacerbated by the fact that a descriptive approach is usually taken, rather than an analytical approach, to the credit. Thus a forward looking approach should also be adopted, since the loan will be repaid primarily from future cash flows, not historic performance; however both can be used as good repayment indicators. Having postulated above guidelines, following is a suggested general procedure for reviewing short term lending proposals Company Profile / Ownership: This should cover the legal structure of company, i.e. is it public / private / listed. If listed then broker reports can be an additional source of information besides share price. When dealing with individual Group companies it is essential go review overall Group exposure to ensure that the Group Risk is adequately analyzed and monitored, and Group limits also set.
19
Proposed Transaction: Following key items should be addressed:
Purpose of facility: This must be specific and general

terms should be avoided, such as "working capital facility." A specific need would be to "finance inventory" or "receivables" (or both). These two assets generally constitute the rationale for short-term borrowings. Source of repayment: The cash cycle including payment and selling terms must be reviewed, which impact cash flow. Normally there should be reliance on identifiable cash flows for the first way out to repay the loan rather than the security itself. The
lending officer should understand the cash production cycle and its tenor, and should question how the Bank will be repaid
if things do not work out as expected for the customer e.g. slow sales, increases in inventory costs, etc.
Financial Analysis Days Inventory and Days Receivable are crucial indicators of a Company's liquidity and show the need for an amount of borrowed funds, which are repaid through the liquidation of these assets. Earnings are key to a company's success. Therefore one should review long term earning power, consistency and trend of core earnings, earnings mix, and dividend policy. Balance sheet figures are at a point of time - therefore it is essential to analyze realistically e.g. borrowings/inventory can be reduced for balance sheet date
20
purposes. Thus average figures are more reliable where available. Figures can also be inflated for seasonal factors e.g. inventory build-up during the cotton-buying season, which should be recognized accordingly. Risk Areas: The lending order should review all risks officer relating to the lending point wise along with the mitigants and justified why lending is warranted, i.e. can the risks be covered or are these acceptable risks. Each borrower will have different risk profiles and therefore it is important to ensure there are adequately understood and addressed Checkings: Written checkings from other lenders should be obtained. Trade/market checkings can be obtained from various sources e.g. suppliers, etc. Talking to suppliers and other market information can give updated input on the company's financial position, e.g. if company is delaying payment to suppliers this could indicate liquidity problems. Also checks should be made from the market how the company's product is selling in the market or if it suffers from quality problems - these items are important since they impact sales and ultimately cash flow. Loan Profitability: Again this is an important area which helps evaluate the risk / reward aspects of a transaction. It is important to earn an acceptable spread on a loan, and therefore to arrange necessary funding, to compensate for the credit risk. Apart from this the Bank should make an adequate return on the loan to help build the up net worth which is a cushion to absorb loan losses. The Bank should maximize return on assets not only through spread income but other non funds income such as commissions, exchange etc. which are generated from contingent risk and do not involve the use of Bank funds There is no insurance against loan losses or problems, nor is lending a rocket science. The lending officer must therefore exercise common sense and follow basic lending rules when analyzing a credit. There is no short cut to this - after
disbursement it is also essential to maintain contact with the company and remain abreast of its financial position. A lending officer must not only have requisite credit skills, but develop problem recognition abilities to enable him to take necessary and timely action, as and when required.
The above is a basic guideline to reviewing short-term credits and is not all exhaustive. It should thus be reviewed on a case by case basis. Each borrower has different circumstances and should be reviewed as such.
However 3 'C' s of a credit are crucial and relevant to all borrowers / lending which must be kept in mind at all times
Character Capacity capital If any one of these are missing in the equation then the lending officer must question the viability of the credit.
Personal character of borrower should be considered. He should be of good moral character. (Should not be like hamesh khan)
There is no guarantee to ensure a loan does not run into problems; however if proper credit evaluation techniques and monitoring are implemented then naturally the loan loss probability / problems will be minimized, which should be the objective of every lending officer.
Security: Full details should be provided, besides description of security as the alternative loan repayment source and its realizable value, where possible. It should be properly insured by a Bank approved Insurance Company and covered against
various risks. Documentation must be precise, while security evaluation should cover control, marketability and lending margin, to protect against price fluctuations. Frequent independent verification of the security should take place.
Security is demanded to ensure the payment of loan with in the due time. Following qualities are essential for good securities. Easy marketability Stable price Reasonable margin Easily transferable
If the security taken is not saleable, then this should be recognized and the risk addressed e.g. if there is only a sole seller of the product, then there will be no other buyer for his assets, in event of a forced sale. The Bank will thus be left with an unrealizable asset. Where receivables are taken as security, then quality / ageing should be reviewed, which would enable the Bank to assess the reliability of this asset as a loan repayment source.
Security of loans Custody of security

Security may be in a shape of documents or property. It is favorable for bank to take al securities under its own custody
23
joint property
joint property might be a source of loss in case of nonpayment. So banks should avoid it. So in this case banks should take the consent of all owners in writing form.
Disputed property
the banks should not take disputed property as security of loans. It means the right of ownership of security should be confirm and clear.
Objectives of loan.
Loan granted for the productive purposes are more useful for the banks as compared to non productive purposes
Amounts of loans
instead of giving away huge amount of loans to single party, banks should give away small number of loans to large number of people so that the possibility of loss and risk could be avoided.
Insured security
merchandise, vehicles and building should be insured if these are kept as security of certain loans
24
25

Banking Portfolio

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Banking Portfolio

Uploaded by

Copyright:

Available Formats

INSTITUTE OF MANAGEMENT SCIENCES

MIS SHEHLA SOHAIL