Advancing and Monitoring Credit

8/8/2019 Advancing and Monitoring Credit

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In the name of Allah the most

Beneficent and the most Merciful..!


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Madam NaseemBukhari


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Presenters:

y U sman Ghaniy Sehrish mubaraky Nouman Farooqy Farah Shahy Fatima Khawaja


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Advancing & MonitoringCredit


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C redit

When a person obtains loan on thesecurity of his property and takesthe responsibility for its payment

in future, it is called credit. (D.G.Locket)


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General P rinciples of Lendingy Safety y Liquidity y Dispersaly Remuneration or Profitability y Security


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Safety: Six C s of Credit

"Safety of loan is always preferred over profit. " y C haractery

C apacity y C apitaly C onditionsy C ash flows


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Safety: Six C s of CreditC haracter

The sobriety, the promptness of payment, good habits,personality, the ability and willingness to carry aproject through from the beginning to the end, and

the reputation of the people with whom he deals, willgo to make the character of the customer.


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Safety: Six C s of CreditC apacity:

This is the management ability factor which tells howsuccessful businessman has been in the past and whatare the chances in future.


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C apitalThis is the monetary base of the business.

The bankers should know not only the extentof funds from the entrepreneurs but the sourcesof these funds too.


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C onditionsThe bankers must carefully examine the

conditions to foresee the situations which may affect the repayment of the loan by theborrower.


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P rinciples of Lending : Liquidity

Liquidity means the possibility of recovering theadvance in emergency, because all the money

borrowed by the customer is repayable on demand.


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P rinciples of Lending : Liquidity

The banker must ensure that the money he is lending is

not blocked for an undue long time and that theborrowers are in such a position as to pay back all theamount outstanding against them on short notice.


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P rinciples of Lending : Dispersal

y The banker must ensure that his funds are notinvested in only specific sectors

y He must see that from his available funds headvances them to a wide range of sectors

y Dispersal reduces risk


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P rinciples of Lending : Remunerationy A major portion of the banker s earnings

comes from the markup or the returncharged on the money borrowed by thecustomer

y He should prefer a borrower who offers:y

Higher rate of returny Lesser risk


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Suitability:y It means that the advance should be allowed not only

to the carefully selected and suitable borrowers, but

also in keeping with the overall national developmentplans chalked out by the authorities concernedbeforgiving the loan the banker should ensure that thelending is for the purpose in conformity with thecurrent credit policy laid down by the central bank of the country.


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Sehrish Mubarak


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P rinciples of Lending : Security

A security is an interest or a right in property given tothe creditor to convert it into cash in case the debtorfails to meet the principal and interest on the loan.


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Classification of Securitiesy Personal/ Intangible Securitiesy Tangible Securitiesy Primary Security y C ollateral/Secondary Security y Movable Securitiesy Immovable Securities


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Q ualities of a Good Securityy Marketabley Easy valuationy Stability y Storability y Less cost of supervisiony Transportability y Free from liabilitied


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C orporate financing deals with large scalebusiness.


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Small & Medium Enterprise BankingSales T/OSales T/O ProductiveProductive

Assets AssetsEmployeeEmployee

ManufacturiManufacturing concernng concern

Rs.300Rs.300millionmillion


250250

TradingTradingconcernconcern



5050


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Consumer Banking

A ny financing allowed to individuals for meeting theirpersonal, family or household needs.


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Consumer Bankingy C redit C ardsy

A uto Loansy Housing Financey Personal Loans


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It deals with small business such as soleproprietor


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Agricultural Finance

Farmers generally need 3types of loans:

y Short-term loansy Medium-term loans andy Long-term Loans.


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Nouman farooq


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Categorization of Loansy Secured loansy Unsecured loans


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Categorization of loansy Short term loansy Long term loansy Revolving Credit


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Short Term Loansy With maturities 1 year or lessy Finance working capital needsy May be Secured or Unsecured


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Long Term loansy Maturities more than 1 yeary Repayments are structured based on future cash

inflowsy Finance permanent working capital needsy Fully disbursed at inceptiony Max. tenure is of 10 years


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Revolving credity O ffers flexibility to buyersy Period of 1 year or morey U sually secured


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Types of Lendingy Fund based Lendingy Non-Fund based Lending


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Fund based lendingy C ash C redit / C ash financey Running finance / O verdrafty Demand Finance / Loans


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Cash Credity Similar to current deposit accounty Bank specifies a credit limit that is backed up by prime

securitiesy Provided on mark up basis


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Cash Credity Demerit:y Leads to higher transaction costs for the bank


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Running Finance / Overdrafty Most common form of lendingy It is the excess with drawl then the borrowers credit

balancey May be S ecured or Clean overdraft.


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Diff between cash credit and overdrafty Cash credity Long term concernsy U sed on regular basis

y Ov erdrafty Temporary

accommodationy O ccasionally used


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Demand Finance / loansy Have fixed amounty Repayable in periodic installments or lump sum at a

fixed datey May be secured or clean


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N on- Fund based credity Letter of C redity Bank Gurantee


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Letter of credity Generally used for international sales transactionsy Payment undertaking given by a bank to the seller on

behalf of the buyer


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Bank Guaranteey Bank acts as a guarantor for its clienty Bank has to pay if its clients gets default


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Farah shah


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Charge

Where property of one person is, by act of of law, made security for the repayment

of money to another, the bank is said tohave a charge on property and all theprovisions in this before contained whichapply to simple mortgage shall apply to

it.(Transfer of Property A ct)


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Types of Charge

First charge A charge that is being created by firstBank

Second C hargeFirstC harge has been executed in favor of some other lender.

C an be created only after obtaining N OC from the 1st charge holder.


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Types of Charge

Pari Passu C hargey Having equal rights, Risks and Rewards.y Rights attached to the property for one

financer are the same as for other financer


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Types of Charge

Fixed C harge / MortgageC

reated on some space and ascertainedproperty of companyPrevents dealing in these assets


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Types of Charge

Floating C hargeC harge on the current assets of the

company dually registered with SE C Py C ompany freely deals in its assets


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Kinds of ChargeLien

Lien is the banker s right to retain property belongingto a debtor until the claim on property is paid

y Merely a right to retain property and is lost when thepossession is lost


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Kinds of Charge: Lien

Banker s Lieny Implied pledgey

Banker has a right to sell security after areasonable notice.


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Kinds of Charge : Mortgage

Transfer of interest in immovable property,for the purpose of securing payment of

money advanced or to be advanced by way of loan (finance), on existing or future debt

.

y Instrument by which transfer is effected is

Mortgage Deedy The transferor is called mortgagor and the

transferee a mortgagee.


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From Bankers point of view:

y Legal (Registered) Mortgagey Simple (Equitable) Mortgage


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Legal (Registered) Mortgagey C reated via a separate Mortgage Deedy Registered under Registration A ct 1908y Mortgagor provides a right to Mortgagee to

sell the Mortgaged property for adjustmentof outstanding debt in case of default by

borrowery O riginal Title Deed also deposited with

bank


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Kinds of ChargeP ledge

The bailment of goods as security forpayment of debt or performance of a

promisey O wnership remains with the pledger

(Borrower)y Possession remains with the pledgee (Bank)


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Kinds of Charge : P ledge

y In case of default pledgee has power of saleafter giving due notice to the pledger

y Surplus, if any paid back to the borrower


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Kinds of Charge : Hypothecation

A legal transaction whereby goods may bemade available as security for a debt without

transferring either the property or thepossession to lender

y O wnership and possession with borrowery Relates to movable property

Documents

Advancing and Monitoring Credit