basic of loans & advances-01

8/22/2019 Basic of Loans & Advances-01

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Basic knowledge of Loans & Advances-01

1) Credit- is the confidence of the lender on the ability and willingness ofthe borrower to repay the debt as per schedule of repayment.

2) Categories of Loans and Advances :

All types of credit facilities can be broadly classified into two groups-

A. Funded credit,

B. Non funded Credit.

A. Funded credit

a. Loansi) Demand Loan;

ii) Term Loan (Short, Medium and Long)

b. Cash Credit (CC)/ Overdraft (OD)i) CC (Pledge)

ii) CC (Hypothecation)

c. Bill discounted and purchased

i) Discount-Allowing advances by discounting usance billsii) Purchase- Financing against sight/demand bills.

B. Non Funded credit

a. Letters of credit (LC)b. Bank Guarantee

i) Performance Guaranteeii) Bid Guarantee.

All loans and advances will be grouped into four (4) categories for thepurpose of classification, namely-

(a) Continuous Loan

(b) Demand Loan

(c) Fixed Term Loan and(d) Short-term Agricultural & Micro- Credit.

Compiled by-Farhadur Reza, BBA(Finance & Banking), MBA(CU), LL.B, PGD(CS), DAIBBSenior Officer & Credit In-charge, Bank Asia Ltd. Kamal Bazar Branch, Chittagong


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a) Continuous Loan: The loan accounts in which transactions may bemade within certain limit and have an expiry date for full adjustment will

be treated as Continuous Loan. Examples are: Cash Credit, Overdraft, etc.

b) Demand Loan: The loans that become repayable on demand by the

bank will be treated as Demand Loan. If any contingent or any otherliabilities are turned to forced loan (i.e. without any prior approval as

regular loan) those too will be treated as Demand Loan. Such as: ForcedLoan against Imported Merchandise, Payment against Document, Foreign

Bill Purchased, and Inland Bill Purchased, etc.

c) Fixed Term Loan: The loans, which are repayable within a specific time

period under a specific repayment schedule, will be treated as Fixed TermLoan.

d) Short-term Agricultural & Micro-Credit: Short-term AgriculturalCredit will include the short-term credits as listed under the Annual Credit

Programme issued by the Agricultural Credit and Financial InclusionDepartment (ACFID) of Bangladesh Bank. Credits in the agricultural sector

repayable within 12 (twelve) months will also be included herein. Short-

term Micro-Credit will include any micro-credits not exceeding an amountdetermined by the ACFID of Bangladesh Bank from time to time and

repayable within 12 (twelve) months, be those termed in any names suchas Non-agricultural credit, Self-reliant Credit, Weaver's Credit or Bank's

individual project credit.

Other different categories of loans:

i) Transport Loanii) Consumer Loan

iii) House Finance

iv) Auto Loan

v) SME Loan

vi) Agri Loan

vii) Micro-Credit

viii) Consortium Loan

ix) Syndicated Loanx) Lease financing

xi) Hire purchase

xii) Import fianance (LTR, LIM)xiii) Export finance (Packing credit, back to back LC)



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3) Principles of Lending- Banks are required to follow certain basicprinciples of lending.

a. Safety- security and repaying capacity,b. Liquidity- ability of an asset to convert in to cash without loss,

c. Profitability- brings addequate return for the bank,d. Purpose- shoud be productive,

e. Spread- Diversification of advance.

Some other models which may be followed at the time of lending-

The 5 Cs of Credit -

- Character- Borrower's Integrity, Honesty and Intention to repay the loan

money,- Capacity- Borrower's business ability, particularly profit making report,

- Collateral- Borroer's ability to produce additional securities,

- Conditions- It is general business condition, and-Capital- Financial strength to cover a business risk.

The 5 Ps of Credit -

- Person ,- Purpose,

- Product,- Place, and

- Profit.

The 5 Ms of Credit -

- Man,

- Money,

- Materials,- Market, and

- Management.

The 5 Rs of Credit -

- Responsibility,- Reliability,- Respectability,

- Resources, and

- Returns.



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4) Loan Classification: Loan Classifiation is the act of grouping of loansand advances according to their status based on given criteria.

Objective of loan classification:

i) Find out net-worth of a bank,

ii) Help for assessing financial soundness of a bank,

iii) Help for determining required provision and the amount of interestsuspense,

iv)Put the bank on sound footing in order to develop sound bankingpractice in Bangladesh.

As per laon classification criteria loans fall under the follwing status.

a) Unclassified;

i) Standard,

ii) SMA (Special Mention Account),

b) Classified;

i) SS (Sub-standard),

ii) DF (Doubt Full),iii) BL (Bad & Loss).

5)Basis for Loan Classification:

a) Objective Criteria: Past Due/Over Due, SMA, SS, DF, BL on the basis

of overdue period.

b) Qualitative Judgement:If any uncertainty or doubt arises in respect of

recovery of any Continuous Loan, Demand Loan or Fixed Term Loan, thesame will have to be classified on the basis of qualitative judgement be it

classifiable or not on the basis of objective criteria. If any situationalchanges occur in the stipulations in terms of which the loan was extended

or if the capital of the borrower is impaired due to adverse conditions or ifthe value of the collateral decreases or if the recovery of the loan becomesuncertain due to any other unfavourable situation, the loan will have to be

classified on the basis of qualitative judgment .


basic of loans & advances-01

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