credit policy guidelines

Credit Policy Guidelines 2014

© Baburam Subedi Page 0

Contents

Unit I .................................................................................................................................... 2

Overview of Credit Policy Guidelines ................................................................................ 2

1.0 Introduction ............................................................................................................... 2

1.2 Why Credit Policy? ................................................................................................... 2

1.3 Objectives of Credit Policy:....................................................................................... 3

1.4 Scope of Credit Policy: .............................................................................................. 4

1.5 Guiding Principles ..................................................................................................... 4

1.6 Credit Principles ........................................................................................................ 6

Unit II .................................................................................................................................. 8

Operational Guidelines ........................................................................................................ 8

2.1 Credit Risk Management ........................................................................................... 8

2.2 Credit Approval Discretion & Authority and Responsibility of Management ........ 10

2.2.1Credit Approval Discretion (CAD) & Authority of Management ..................... 10

2.3 Role and Responsibility of the Board of Directors: ................................................. 11

2.4 Duties and Responsibilities of Loan Officer/Credit Department ............................ 11

2.5 Portfolio Management: ............................................................................................ 12

2.6 YBL Credit Prohibition: .......................................................................................... 13

Unit III ............................................................................................................................... 14

Bank Lending .................................................................................................................... 14

3.0 Retail Lending ......................................................................................................... 14

3.1 Home Loan .......................................................................................................... 14

3.2 Education Loan .................................................................................................... 15

3.3 Loans against Gold & Silvers .............................................................................. 16

3.4 Vehicles Loan ...................................................................................................... 17

3.5 Wholesale Lending .................................................................................................. 18

3.5.1 Business Loan ....................................................................................................... 18

3.5.1.1 Overdraft: ....................................................................................................... 18

3.5.1.2 Long Term Loan/Medium Term Loan:.......................................................... 18

3.5.1.3 Short Term Loan:. .......................................................................................... 18

3.5.1.4 Working Capital Loan:. ................................................................................. 18

3.5.2 Import/Export Loan .............................................................................................. 19

3.5.2.1 Letter of Credit (Sight/Usance):..................................................................... 19

3.5.2.2 Trust Receipt Loan:. ...................................................................................... 19



3.5.2.3 Packing Credit: .............................................................................................. 19

3.5.3 Bank Guarantee .................................................................................................... 19

3.5.4 Other Loans .......................................................................................................... 19

3.5.4.1 Hire Purchase Loan ........................................................................................ 19

3.5.4.2 Loan against Fixed Deposit ........................................................................... 20

3.5.4.3 Deprived Sector Loan .................................................................................... 21

3.5.4.4 Consortium Loan ........................................................................................... 24

3.5.4.5 Pledge Loan ................................................................................................... 25

3.5.6 Requirements ........................................................................................................ 25

3.5.7 Security ................................................................................................................. 27

3.5.8 Customer Control ................................................................................................. 28

Unit IV ............................................................................................................................... 29

Pricing and Procedure of Loan .......................................................................................... 29

4.0 Loan Pricing ............................................................................................................ 29

4.1 Pricing of Customer/Customer Group ..................................................................... 29

4.2 Credit Procedures .................................................................................................... 30

4.3 Internal Ratings ........................................................................................................ 31

4.4 Credit Monitoring .................................................................................................... 31

4.5 Impaired Assets and their accounting procedure ..................................................... 32

4.6 Systems and Procedures .......................................................................................... 33

Unit V ................................................................................................................................ 34

FOLLOW UP AND REVIEW OF THE CREDITLINES................................................. 34

5.1 General: ................................................................................................................... 34

5.2. Follow-up of excess over limit: .............................................................................. 34

5.3 Follow-up of Securities and security related documents: ........................................ 34

5.4. Follow-up of Operations: ........................................................................................ 34

5.5 Defaults in Payments: .............................................................................................. 34

5.6 Review/Renewal of the Credit Lines: ...................................................................... 35

5.7 End of Credit: .......................................................................................................... 35

Unit VI ............................................................................................................................... 36

LEGAL ACTION .............................................................................................................. 36

Unit VII ............................................................................................................................. 37

LOAN WRITE-OFF .......................................................................................................... 37



Unit I

Overview of Credit Policy Guidelines

1.0 Introduction

This policy is entitled Yarsha Bank Ltd., Credit Policy Guidelines 2071’. Yarsha

Bank Ltd is ‘A’ class financial institution duly licensed by Nepal Rastra Bank. This

Credit Policy Guidelines 2071 will be effective from the date of approval by the board

of Yarsha Bank Ltd, and final approval from Nepal Rastra Bank.

The word "policy” covers matters ranging from high order strategy to administrative

detail. It provides guidance for managerial thinking as well as action.

A policy is a deliberate plan of action, usually based on certain principles indicating

the priorities of decision makers about allocations of resources for achieving rational

outcome. It is a written statement that communicates management’s intent, objectives,

requirements, responsibilities, and or standards.

Lending is one of the core activities of banks. Banks earnings, profitability,

reputation, net asset value etc., depend on its credit portfolio. A sound and healthy

lending portfolio is must for bank’s survival.

Nepal Rastra Banks issues guidelines from time to time relating to flow of credit and

directives about credit discipline by the borrowers and banks.

Keeping in view the economic conditions, fiscal deficit position of the country NRB

issue directives to banks about credit. NRB announces monetary and credit policy

each year keeping in view the significant changes in the regulatory framework for

financial markets. The policy has direct impact on the lending policy of banks.

1.2 Why Credit Policy?

In the process of financial intermediation banks are confronted with various kinds of

financial and non-financial risks. These risks are highly inter-dependent. One area of

risk can have ramifications for a range of other risk categories. Banks are attaching

considerable importance to improve the ability to identify measure, monitor and



control the overall level of risks undertaken. To mitigate the risk, banks prepare credit

policy which contains guidelines for the entire credit process, from credit origination

to problems in loan management and covers areas like mechanism for loan review,

interbank exposure, country risk, credit rating framework, portfolio management and

risk adjusted return on capital. Credit policy gives valuable guidance to the

operational units in credit dispensation, building up a diversified portfolio of quality

assets and credit monitoring. The policy also contains prudential limits to individual

borrowers, non-corporate borrowers, entry-level exposure norms, substantial exposure

limits, benchmark financial ratios, borrower standards, exposure limits, ceilings to

industries, sensitive sectors, rating categories etc. For effective implementation of

credit policy banks have also put in place a multi-tier credit approving system wherein

an “Approval Grid” clears the loan proposals before being placed to the respective

sanctioning authorities.

1.3 Objectives of Credit Policy:

The main objectives of a credit policy are:

To minimize credit risk.

To consciously focus on optimizing the use of capital funds and maintaining a

comfortable and adequate liquidity to meet the demands of funds.

To strengthen the credit management skills, supervision and follow up

measures for maintaining a healthy and quality credit portfolio in the bank for

ensuring overall profitability.

To regulate and streamline the financial resources of the bank in an orderly

manner for achieving objectives of the bank and to instill a sense of credit

culture in the operating staff.

To provide need based and timely availability of credit to borrowers.

To comply with various regulatory requirements, pertaining to exposure

norms, priority sector norms, income recognition and asset classification

guidelines, capital adequacy, credit risk management guidelines, etc., of Nepal

Rastra Bank and other authorities.



To comply with national priorities in achieving planned growth in various

productive sectors of the economy.

To see that credit portfolio has a balanced mix from different viewpoints.

To decide discretionary lending powers of various authorities

1.4 Scope of Credit Policy:

The prime focus of the Yarsha Bank’s credit activities will be on the promotion of the

indigenous business, Agricultural Business, Export/Import Business, Infrastructure

Development Project, Hydro Electricity Project and other productive sectors of Nepal.

However, Yarsha Bank will also extend credit to all others sectors within Nepal

Rastra Bank guidelines.

The board has the sole discretion to amend, delete, or add to any part(s) of this policy

in order to protect the interests of Yarsha Bank Ltd, to accommodate and adapt to the

changing business environment, or to comply with applicable laws and prevailing

Nepal Rastra Bank directives.

This is an internal and strictly confidential document for the use of YBL’s board,

management, staff, statutory body, and any person so authorized by the board. All

YBL staff engaged in any stage of the credit activities should be aware of the contents

and sprits of this policy. No any part of the policy shall be copied for any purpose

other than for reference within the YBL’s premises, unless otherwise specially

permitted by the board or the CEO.

1.5 Guiding Principles

Yarsha Bank Ltd’s credit portfolio planning and management shall be geared towards

safe, secure, low-cost profitable operation with the optimum utilization of YBL’s

resources. Credit Risk Management will follow the principle of risk dispersion. High

credit concentration in a single borrower group, industry type, sector, or geographical

area will be avoided at all the times. For proper risk diversification, YBL will, as

minimum requirement, follow prevailing NRB guidelines and definition with respect

to portfolio concentration. The management may however set its own, more stringent

guidelines that it feels are necessary to protect the interest of YBL.



In order to compete effectively in the market place, YBL will search new business

opportunity, apply new lending approaches and focus to develop credits products to

meet the demand of markets forces. All credits facilities will be for activities that

make sound economic sense and are for legitimate purposes.

No loans, advances and any facilities shall be granted over and above single

obligor limits prescribed by Nepal Rastra Bank.

All loans, advances and facilities will be granted after obtaining security as

defined in Section 8 of this policy manual.

Blacklisted individuals and firms will not be provided new credit facilities by

the bank. Similarly personal/ corporate guarantee from blacklisted individuals/

firms will not be accepted. In the event a current customer of the bank is

declared blacklisted, the bank shall endeavor to exit the relationship with such

customer as soon as possible.

New Customer/Customer Group should always be welcomed but with a

cautious approach until they have proven to be a good customer for the bank.

Care should be exercised in committing large exposure to a new customer.

Over dependence of bank on large exposure to a single Customer/Customer

Group (Top 25 names) should always be at the comfortable level. Exposures

to top 25 names should not exceed more than 35% of its total portfolio.

Exposures backed by Fixed Deposit receipts, Bank Deposits, Government

Bonds, NRB Debt instruments, Unconditional guarantee/s issued by

multilateral institutions including the World Bank, Asian Development Bank

and IFC, Unconditional guarantee/acceptance from a bank which rated by an

reputed rating agency and has a minimum of A+ rating, and 1st class Bank



categorized by Nepal Rastra Bank from time to time should be excluded from

the exposures for this purpose.

If more than one-business entities exist in one obligor group, cautious

approach will be taken by the bank while sanctioning loans, advances and

other facilities to these entities.

Diversification of the loan portfolio is critical to the bank and new investment

opportunities should be capitalized and stressed upon.

To compete in the market effectively and improve its present position among

commercial banks of the country, emphasis shall be given to developing and

offering innovative and new products to the customers.

The bank shall adhere to the norms described by the NRB in maintaining

Credit/Deposit (CD) and or Capital + Credit/ Deposit (CCD) ratio. However,

profitability part shall not be ignored while taking risk exposure. The board of

the bank will be notified with the monthly average CD ratio.

The bank will endeavor to gradually narrow down the gap between interest

and non-interest income.

Conscious efforts will be made to maintain the ratio of nonperforming loans

(as defined by the NRB as “restructured”, “substandard”, “doubtful” and

“bad” category) to total risk asset exposure below industrial norms.

The bank shall not encourage ever-greening loans to finance and repay other

loans, advances and facilities outstanding with YBL.

1.6 Credit Principles

All credit facilities must make economic sense and must be for a legitimate

purpose. The objective of the financing must be regularly monitored.

The six Cs of lending should be properly analyzed:



Character: The integrity of the borrower should be determined to ensure

their willingness to pay.

Capacity: Facilities should be extended to the customers who have

adequate cash flows and the capacity to repay.

Condition: Only extend credit if the bank sufficiently understands the risk

and condition in which the facilities are extended.

Collateral: Ensure that the facility is backed by acceptable and adequate

collateral.

Competence: Be satisfied to management capability of the customer.

Capital: Be satisfied as to the adequacy of the capital.



Unit II

Operational Guidelines

2.1 Credit Risk Management

Credit risk is the major risk that bank exposed during the normal course of lending

and credit underwriting. Within Basel II, there are two approaches for credit risk

measurement: the standardized approach and the internal ratings based (IRB)

approach. Due to various inherent constraints within the Nepalese banking system, the

standardized approach in its simplified form, Simplified Standardized Approach

(SSA), has been prescribed in the initial phase. Credit risk is the probability that a

Bank’s borrower or counter party will fail to meet its payment obligations in

accordance with the terms of approval of the credit. This includes non-repayment of

capital and/or interest within the agreed time frame, at the agreed rate of interest and

in the agreed currency. The goal of credit risk management is to maximize a bank's

risk-adjusted rate of return by maintaining credit risk exposure within acceptable

parameters. The effective management of credit risk is a critical component of a

comprehensive approach to risk management and essential to the long-term success of

any banking organization. For most banks, loans are the largest and most obvious

source of credit risk; however, other sources of credit risk exist throughout the

activities of a bank, including in the banking book and the trading book, and both on

and off the balance sheet. Banks increasingly face credit risk in various financial

instruments other than loans, including acceptances, interbank transactions, trade

financing, foreign exchange transactions, and in the extension of commitments and

guarantees and the settlement of transactions. YBL has developed methodologies to

assess the credit risk involved in exposures to individual borrowers or counterparties

as well as at the portfolio level. The credit review assessment of capital adequacy, at a

minimum, covers risk rating systems, portfolio analysis/aggregation, large exposures

and risk concentrations. Internal risk ratings are an important tool in monitoring credit

risk and supporting the identification and measurement of risk from all credit

exposures, and are integrated into our overall analysis of credit risk and capital

adequacy. The ratings system provides detailed ratings for all assets, not only for

problem assets.



Head Office the credit division critically analyzes the proposal from different

perspectives in line with statutory, regulatory and internal guidelines. Thereafter, if

the business proposal is found to be credit worthy, it is placed in the credit committee.

The Credit Committee is comprised of seasoned bankers who evaluate credit

proposals. The committee analyzes in depth financial as well as non financial

information regarding the borrower such as business history, market situation, futures

prospects of the market, managerial capabilities, cash flow and then declines or

recommends approval of the designated credit authorities. To ensure proper and

adequate risk analysis and timely customer service, our credit policy and procedures

guide (CPPG) provides various layers in the credit approval process. The CPG has

conferred specific discretion ranging from the General Managers to the Executive

Credit Committee, the penultimate credit authority of the Bank.

Adoption of international standards via our in-house Credit Policy and Procedures

Guide. Formation of Credit Quality Control (CQC) unit for monitoring the quality of

credit, both at the account level and portfolio level.

Regular review of the credit portfolio by the senior Management with periodic

reporting to the Board of Directors.

Separate independent audit and inspection of borrowers by internal auditors in

addition to audit and inspection by statutory auditors.

Strict adherence to the prudential guidelines of the Central Bank on Loan

Classification, Interest Recognition, Asset Classification, Single Obligor

Limit, Sectoral Exposure etc.

Establishing suitable exposure limits for borrowers and sectors and monitoring

the limits on a regular basis.

Risk mitigation steps with a special emphasis on collateral.

Setting counterparty limits based on their financial strength.

Training of lending and legal officers on documentation and professional

valuations. Developing skills and expertise of lending officers to scientifically

assess project viability and customer integrity.

Educating the staff on provisions in the Banks and Financial Institution Act

and other relevant statues and the regulatory guidelines of the Central Bank.

Seeking external legal opinion and advice.



Identifying Early Warning Signals (EWS) and taking prompt action thereon.

Constant posts sanction monitoring with special independent team for

verification of current assets

2.2 Credit Approval Discretion & Authority and Responsibility of Management

2.2.1 Credit Approval Discretion (CAD) & Authority of Management

All CAD rests with the Board of Directors of YBL.

The board may delegate a CAD to any sub-committee of the Board, Chief

Executive Officer or any senior executives of the bank. The CAD delegated by

the Board of Directors is as per Annex A which will remain valid until

otherwise amended.

The CEO may make a one-step delegation of the CAD to the Chief of

Business, Branch Managers and other officials as per the business needs.

All CAD held by the officers of the bank is on an individual capacity based on

ability, past performance, experience, understanding of credit and need of the

function. Hence, no ex-officio member/s is allowed to exercise the discretion

provided to a CAD holder.

CAD so delegated will be reviewed as and when required or at least once

every year to ensure that the delegated authorities are competitive enough to

meet and suit the business requirement and interest of YBL.

CAD should be exercised on a Customer/Customer Group basis as per Nepal

Rastra Bank rules.

Each credit proposal should bear at least three signatures – Recommending

Officer (Asst. Relationship Manager/ Relationship Manager/ Branch

Manager), Risk Officer (as designated by the CEO) and the Approving Officer

(CAD holder).



2.3 Role and Responsibility of the Board of Directors:

The board will ensure that the authority delegated to management is appropriate to the

business interests of YBL. The board will audit and ensure the lending authority is

effectively exercised.

The board will ensure that YBL’s policy and procedures are implemented in

compliance with prevailing NRB directives and applicable laws

The board will periodically monitor and review the credit portfolio, pricing strategy,

risk concentration, profitability and compliance of the policy to ensure effective

management and protect the interest of YBL’s stakeholders.

2.4 Duties and Responsibilities of Loan Officer/Credit Department

The key responsibility of loan officer is to manage the credit portfolio properly. The

staff engaged in credit management will be guided by the principle of

professionalism, honesty and integrity. All the staff will act ethically and maintain

complete transparency to protect the interest of YBL and its stakeholder. Loan officer

will ensure that YBL’s policy and procedure are implemented in compliance with

prevailing NRB directives and applicable laws.

The Duties of Loan Officer are:

Evaluates loan applications and documentation by confirming credit

worthiness.

Analyze applicants' financial status, credit, and property evaluations to

determine feasibility of granting loans.

Meet with applicants to obtain information for loan applications and to answer

questions about the process.

Explain to customers the different types of loans and credit options that are

available, as well as the terms of those services.

Obtain and compile copies of loan applicants' credit histories, corporate

financial statements, and other financial information.

Improves loan applications and documentation by informing applicant of

additional requirements



Approve loans within specified limits, and refer loan applications outside

those limits to management for approval.

Review and update credit and loan files.

Review loan agreements to ensure that they are complete and accurate

according to policy.

Compute payment schedules.

Stay abreast of new types of loans and other financial services and products in

order to better meet customers' needs.

Submit applications to credit analysts for verification and recommendation.

Handle customer complaints and take appropriate action to resolve them.

Work with clients to identify their financial goals and to find ways of reaching

those goals.

Negotiate payment arrangements with customers who have delinquent loans.

Market bank products to individuals and firms, promoting bank services that

may meet customers' needs.

Analyze potential loan markets and develop referral networks in order to

locate prospects for loans.

Prepare reports to send to customers whose accounts are delinquent, and

forward irreconcilable accounts for collector action.

Arrange for maintenance and liquidation of delinquent properties.

Maintains customer confidence by keeping loan information confidential.

Rejects loans by explaining deficiencies to applicants.

Completes loan contracts by explaining provisions to applicant; obtaining

signatures and notarizations; collecting fees.

2.5 Portfolio Management:

YBL will focus to build a sound and viable credit portfolio and to minimize loan

losses arising out of loan concentration and lack of risk diversification. The following

principles will be applied in achieving this goal.

The maximum exposure in single sector will be recommended by the

management in accordance with prevailing NRB directives.



Concentration of funded facilities to a single borrower group, excluding

exposure backed by cash, bounds or guarantees from acceptable institutions or

deposit held with first class financial institutions as specified by NRB, 10% of

the total loan portfolio of YBL, unless otherwise specific approval is obtained

from board subject to prevailing NRB directives

YBL will strive to maintain the ratio of non-performing loans (under sub

standard, doubtful and bad categories defined by NRB) to total credit exposure

at a minimum.

2.6 YBL Credit Prohibition:

YBL will not extend credit:

To political parties or for political purposes

To shareholders, promoters and directors to the extent prohibited by NRB

directives

To any person prohibited by NRB

To any applicant blacklisted by the credit information bureau.

To any defaulting or blacklisted customer of the YBL or any other bank or

financial institutions

For money laundering activities

For non-medical drugs

For speculation and gambling

To any project or business activities that creates extreme adverse environment

impact

To any activities restricted by prevailing laws and NRB guidelines



Unit III

Bank Lending

3.0 Retail Lending

3.1 Home Loan

3.1.1 Investing With Us Entitles

Finance up to NPR 12,000,000/-(Max) or 55% of the Total Value (whichever is

lower) for

Readymade Houses/Buildings

Construction of House/Buildings,

Readymade Apartment, Bungalow, Duplex

Renovation and / or extension of Building

Tenure:

Maximum of 15 years

Loan shall be terminated on /or before 55 years of age of the borrower.

Repayment: Equal Monthly Installments (EMI)

3.1.2 Eligibility

Self employed professionals having reliable/stable source of income or income

of own family supported by the documentary evidence.

Any other individuals having identifiable source of income supported by the

documentary evidence of the same.

Employees of corporate entities supported by salary slips and employer's

undertaking that salary will be routed through the Bank.

Borrowers' uncommitted income should be 25% more than the Equated

Monthly Installment (EMI)

Nepalese Citizens only but should be above 18 years of age and last

installment to be repaid within 55 years of his/ her service, unless steady and

regular income justifies.



For the corporate borrowers, company's past performance of 3 years and

projection reports of 3 years, (including current year) its financials as well as

the reputation of the promoters will be considered.

3.1.3 Fees and Charges

The following charges are to be levied

Processing fee: 1 %( Flat) of the loan amount.

Unscheduled payment: 1.5% of payment amount.

3.2 Education Loan


Finance for

Tuition fee

Living expenses

Travelling expenses

Interest Rate: 12.00% per annum

Period: Up to the completion of the course or maximum period of 10 years,

whichever is earlier?


3.2.2 Eligibility

Acceptance letter from University / College / School

No objection letter from Ministry of Education

Nepali citizens

Borrower/Guardians should be Professionals, salaried individuals, self

employed, etc. and their uncommitted monthly income to comfortably justify

for EMI





Management fee: 1% of loan amount

Documentation Fee: NPR 1500.00 flat

Prepayment Fee: 1.500% of pre-paid amount

Commitment Fee: 0.50% of unutilized amount

CIB Charge: NPR 750.00 per page

3.3 Loans against Gold & Silvers


Finance up to:

70% for Gold Ornaments

75% for Fine Gold

Interest Rate: 13.5% per annum Interest to be paid on quarterly basis (as per Nepali

calendar).

Period: Maximum 1 (one) year (if required – to be renewed every year from the Date

of maturity)

Partial Payment fee: 0.5% of total loan amount

Repayment: Can be repaid at any time

3.3.2 Eligibility

Age 18 years and above

Nepali citizens





Prepayment Fee: NPR 200.00 if prepaid within one year

For lost Gold Receipt additional NPR 150.00 will be charged

3.4 Vehicles Loan


Finance up to 80% financing of the total value for the following

The purchase of New Private Vehicles

The purchase of New Commercial Vehicles

And up to 50% of the Total Value for

The purchase of Second Hand Vehicles (not exceeding 5 years old)

Interest Rate: 14% per Annum.

Tenure

Maximum of 5 years

Loan shall be terminated on /or before 60 years of age of the borrower.


3.4.2 Eligibility

Over 18 years of age

Nepali citizens

Professionals, salaried individuals and self employed individuals



Management fee: 1% of loan amount

Documentation Fee: NPR 2,000.00 flat

Prepayment Fee: 1% of pre-paid amount

CIB Charge: NPR 750.00 per page



3.5 Wholesale Lending

Bank supports the financing requirement of the project through consortium lending as

the lead Bank and/or Co-lead Bank or participating bank. The Corporate bank

provides solutions as per the client's specific needs. It is committed to help privately

owned and publicly listed entities grow. The Corporate bank is always ready to lend a

helping hand for our clients for new business or willing to build / expand the existing

ones and it focuses on building and maintaining diversified branch portfolios. We

have a diversified sector wise lending like agriculture and forestry, mining,

manufacturing, beverage, construction, electricity, gas and water, metal products,

machinery and electronics equipment, transport, warehouse and communication,

wholesalers and retailers, finance, insurance and real estate, hotel and restaurant.

However, Corporate Bank is more focused on infrastructure development projects.

3.5.1 Business Loan

3.5.1.1 Overdraft: Overdraft Facility, a recurring (revolving) credit facility, is

offered to customers for meeting day to day working capital requirements for funding

current assets, overheads, administrative expenses etc.

3.5.1.2 Long Term Loan/Medium Term Loan: LTL or MTL shall be provided to

the client mainly for fixed assets investments such as construction of buildings or

purchase of plant and machinery.

3.5.1.3 Short Term Loan: STL could be advanced to the client for financing working

capital requirement for short period of time within one year.

3.5.1.4 Working Capital Loan: WCL is provided to the client to finance the working

capital requirements.



3.5.2 Import/Export Loan

3.5.2.1 Letter of Credit (Sight/Usance):

Letter of Credit (LC) The bank can open Letters of Credit in many countries through

its expanding list of corresponding banks to facilitate the import requirement of its

corporate/business clients.

3.5.2.2 Trust Receipt Loan: Trust Receipt Loan is provided to facilitate the

corporate/business clients to meet its working capital requirement for the purpose of

meeting the gap in its asset conversion cycle, the bank can provide loans against

import LCs as per the Central Bank (NRB) directives.

3.5.2.3 Packing Credit: Packing credits provide an exporter with finance

purchase/import of raw materials, processing and packing of the goods meant for

exports. This smoothens the exporter's cash flow while the goods are being packed

and waiting for shipment. The advance is repaid when the goods are shipped.

3.5.3 Bank Guarantee

The bank can issue various bank guarantees to meet the differing requirements of its

clientele for various purposes like bidding for tenders, issuing performance bonds and

advance payment guarantees. The bank can also issue local guarantees against the

counter guarantees of acceptable foreign banks.

3.5.4 Other Loans

3.5.4.1 Hire Purchase Loan

Purchase of office equipment, vehicles, machinery etc is possible through our Hire

Purchase Schemes.

Features

The whole amount of the loan is debited to the customer’s name on Hire

Purchase Loan Account and is disbursed to the borrower by way of payment

made to dealer/agent through a/c payee cheque or draft or pay order. However,

if the borrower has already paid the purchase8price of article (vehicle or

goods) partially or fully with an alternative arrangement, the bank may make

payment to the borrower's checking account up to the approved limit.



The facility is allowed only to the customers who earn income from the

financed article. However, the borrower having other sources of income would

be given preference to extend hire purchase loan.

This loan is for capital investment and limit shall normally up to70% of

quotation price of vehicles or equipment. For the higher financing,

preapproval from the credit committee is required.

This facility is usually allowed for 5 years on EMI basis but it may differ on

the economic life of article and borrower’s repayment capability and the

repayment period may be granted up to 10 years upon the prior approval from

the credit committee.

Interest is calculated on the outstanding amount of loan at daily basis.

The ownership on the goods/assets purchased shall remain with the Bank till

final repayment of the loan.

The cost of insurance shall be borne by the borrower.

In the case of article which need time for assembling or making (like body

making of vehicle), the Bank can provide moratorium period of maximum 6

months.

Hire purchase is usually secured by the financed vehicles or assets itself. If the

management deems it necessary, they may ask for additional collateral in

various forms. The latter case is often applicable for commercial vehicle.

3.5.4.2 Loan against Fixed Deposit

The bank can provide consumption loan demanded against FDR of the Bank at very

attractive rates.

Features

The whole amount of loan is debited to the customer’s FDR loan account and is

disbursed to the borrower by way of crediting his/her current/nominee account.

In case of overdraft, the limit is created in his/her current account.

The expiry of the loan corresponds with the expiry of the FDR. In other words, the

expiry of the loan cannot go beyond the expiry of the FDR.



Interest is calculated on outstanding balance on daily basis as the rate prescribed

by the management.

A loan once repaid in full or in part cannot be drawn again by the borrower. If the

borrower requires further accommodation, it will be treated as separate

transaction. In case of overdraft, the borrower may make as many debit/credit

transactions as the borrower wants, provided the borrower remains within the

approved limit.

Interest is calculated and charged on the whole amount of loan unless it is repaid

while the overdraft interest is charged only on the overdrawn balances.

This loan is secured by the lien on the respective FDR itself.

3.5.4.3 Deprived Sector Loan

Deprived" means low income and especially socially backward women, tribal people,

Dalit, blind, hearing impaired and physically incapacitated persons, marginalized

and small farmers, craft-men, labour and landless squatters family. All micro-credits

to be extended for the operation of self-employment oriented micro-enterprises for the

upliftment of economic and social status of deprived sector up to the limit specified by

this Bank is termed as "deprived sector lending". The bank can provide loans to the

deprived sector as defined by NRB directives.

Conditions

The whole amount or partial amount of the loan is debited to the customer’s name

on deprived Loan Account and is disbursed to the borrower by way of credit to

his/her current account.

This loan may include both the term loan and working capital and is to meet the

party’s long term fixed assets requirement and short term working capital

requirement.

Usually the equity of the party is to be made in the investment before the Loan is

allowed.

Regular inspection is made by the Bank’s Personnel time to time.

Interest is calculated and charged on the used amount of loan.



The provision that does not require additional 20 percent loan loss provision for

the loans provided directly or indirectly to the deprived sector on group/

individual/ institutional guarantee

Eligibility

Loan up to Rs. 60 thousands per group/individual against group/personal

guarantee to the deprived or low income individual for operating micro business;

Loan up to Rs. 60 thousands per family for the purpose of Micro Hydropower

Project up to 50 kilowatts, Solar-Home-System, solar cooker, solar dryer, solar

pump, bio-gas, improved water mills, improved cooking stoves and wind energy

according to renewable energy technology;

Micro enterprise credit up to Rs. 150 thousands for each business extended to

deprived or low income individual to operate the micro industries against

acceptable collateral/to group members against the guarantee of the group

gradually enhanced;

Loan up to 150 thousands per person extended to the individuals who are going

for foreign employment on the basis of the tripartite loan agreement between the

bank, the person going for foreign employment and the concerned Manpower

Company that can produce assurance letter from the employer companies of the

employing nation confirming the employment and recovery of loan in installment;

Loans extended up to Rs. 150 thousands per person with or without collateral to

persons going for foreign employment;

Loan up to Rs. 150 thousands to per individual/family eligible to receive deprive

sector lending for sheep farming to produce wool necessary for carpet or for

maintaining handloom to weave carpet against acceptable collateral security;

Loan up to Rs. 150 thousands to per household eligible (marginalized, small

farmers and farmers community) to receive the deprive sector lending for

purchasing fertilizer and seeds, to establish cold storage in collective ownership

for preserving products, products marketing, small irrigation, installation of

shallow tube wells.

Loan up to Rs. 250 thousands to per household for livestock, fishery, and

beekeeping.



Loan up to Rs. 300 thousands for micro enterprises operated by women.

Explanation: Micro enterprise refers to a registered or unregistered trading business

(like fruit shop, vegetable shop and dealer, cosmetic shop, beauty parlor and barber

shop, small grocery shop, small stationery shop, small hardware shop, small garment

shop, small beverage shop, small restaurant, small commercial farming etc.) small

and cottage industries (like bamboo product industry, dry fruit product industry (like

drying apple, drying cardamom etc.) roasting and dry vegetable product industry,

sweat and sour product industry, cotton and hosiery product industry, dry meat

product industry etc.)

Loans up to Rs. 200 thousands without collateral to youths from deprived

families for studying secondary and higher secondary level technical and

vocational education

Credit up to Rs. 10 million in hydropower project of up to 500 kw capacity

with at least 50 percent investment participation by community user committee

or private sector or cooperative

Loan up to Rs 150 thousands per household to establish cold storage in

collective ownership for preserving food grains

Credit of any amount for buying tractor, thresher and other agricultural

equipment

Credit up to Rs. 10 million to rural community hospitals which provide 10

percent of bed in free ship to deprived people

Loan up to Rs. 400 thousands for low cost housing to deprived people

Loan against rickshaw to purchase it for the purpose of self operation in

operator's ownership

Loan up to Rs. 10 million for cooperative operated in rural areas to operate a

project of post harvest services relating to agriculture

Loan up to Rs. 100 thousands without collateral to build home for socially

backward tribal people like Chepang, landless, MuktaKamaiya, Haliya,

KamlariBadi community.

Wholesale loan up to Rs. 10 million on the basis of no of group member to the

subjective Cooperative Societies (except saving and credit cooperative) for



collective farming, poultry farming or livestock farming through group

member not exceeding Rs 90 thousands per member.

Note: The eligible activities shall be as prescribed by NRB through Directives or

circulars.

3.5.4.4 Consortium Loan

Consortium Loans are provided for the establishment, capacity addition, up-gradation

of existing facilitates as well as acquisition of existing facilities. The loan is extended

to manufacturing as well as service sector which requires huge funding.

It is an arrangement whereby two or more banks and financial institutions join hands

to meet the credit requirements of the potential borrower. So, consortium is the

sharing of risks and income amongst the members involved in loan syndication. The

borrower may discuss about the proposal with the participating banks either

separately or in a conference. Each member bank collects and processes all the

information as in any other case of lending. The proposal will be sanctioned by the

respective banks on the basis of joint finance and on specified terms and conditions,

which are usually the same for each bank. Consortium does not arise because of the

types of credit facilities needs of a borrower, but because of the amount involved.

When the credit limits to be granted to the borrower are finally decided upon, one of

the participating bank usually as the Lead Bank and gets a draft of the joint agreement

drawn up by its legal department and circulates it to other participating member bank,

who in turn have the document approved by their own legal departments, so that the

credit instrument could be finally executed in an accepted form.

The borrower shall compulsorily maintain a current account with lead bank

and other loan account shall be maintained in lead bank and other participating

banks as per agreed terms.

The maturity of facility is for long period more than one year.

The interest rates for various facilities under consortium finance are decided

by all participating banks jointly.



The payment of interest and principal is made through lead bank to all

participating banks; repayment directly to member banks can be made if it is

mentioned in agreement.

In the consortium finance, the borrower will draw on his/her account with

respective banks in the same proportion as the limit sanctioned.

The following information are exchanged periodically as may be mutually

agreed up on:

The maximum and minimum balance during the week/fortnight.

The balance of the last day of the week/fortnight/month.

Any other business, including foreign exchange business, passed by the

borrower to any of the participating banks.

Lead bank or member banks as per agreement will be responsible for the

recovery of the entire advances for the benefit of all.

The loss, if any will be shared between/among the participating banks in the

ratio of the amounts sanctioned and disbursed.

Interest is calculated and charged as per agreement between banks and party.

3.5.4.5 Pledge Loan

Short term loans for up to six months against pledge of inventory.

YBL will provide credit to its customers from various different branches across the

country.

3.5.6 Requirements

Corporate/Commercial/Business entities, government entities (all units having > 50%

share by Nepal Government or managed by the government) /public enterprises,

financial institutions, individuals and other eligible entities require tailor made

products. Hence, the management shall structure and negotiate a product suitable for

such credit customers.

In general all products developed should attempt to follow the following norms:



Overdraft must be granted only by way of approved lines of credit. They should

not be sanctioned for the purpose of meeting other obligations of the borrower

such as payment of interest or repayment of loans.

Receivable Financing normally should not exceed 75 percent, (80 percent for

prime customer) of the eligible receivables. Eligible receivables are defined as

those receivables covering non-capital goods and are in the books of the borrower

for a period not exceeding the credit period specified in the sales agreement,

wherever available. If at any point in time the outstanding are not supported by

eligible receivables, the customer should be asked to settle the difference

outstanding immediately.

Stock financing should not exceed 75 percent (80 percent for prime customers) of

the stocks. If financing falls short of the required minimum, customer should be

asked to settle such differences promptly.

Working Capital Financing should also be to the extent of 70 percent (80 percent

for prime customers) of the net current assets.

In case of term loans, the debt equity ratio of the project/investment shall not

exceed 80:20 for prime and 70:30 for others.

Deviation from the above norms should be specifically approved by Chief

Executive Officer.

In case of any structured credit facility to Corporate/Commercial/ Business

entities/ individual CEO may approve a separate product paper in conformity with

the spirit of this policy.

Transaction backed by 100% cash, government bonds does not require a

structured product.



The Bank can do Credit Sell/ Purchase/ Repurchase/ Takeover Transaction with

other Financial Institutions. The CEO of the Bank is authorized to effect buy (with

repurchase clause) and sell transaction with other Financial Institutions up to (not

exceeding) NPR 500.00 million. All such transaction will be executed by taking

prior consent of the Board of Directors and to be rectified in the subsequent board

meeting. Transaction above NPR 500.00 million will have to be approved by the

Board of Directors.

3.5.7 Security

Each credit facility should be secured by tangible security in the form of fixed

assets, current assets, cash/near cash items mortgaged, pledged, assigned or

offered as hypothecation unless otherwise not required by the NRB or any other

law that governs the operation of the Bank.

Personal guarantees may be obtained as additional security. But no loans would be

granted only on the basis of personal guarantee unless otherwise allowed by the

NRB or any other law that governs the operations of the Bank.

Security of shares of private limited company shall not be accepted.

Security of shares of “A” class listed public limited company, which has been

actively traded, may be accepted with a acceptable margin. Actively traded share

is defined as at least 15 registered trade in the stock exchange floor in the last

three months. Facilities thus approved should be monitored at least on a monthly

basis to ascertain the value of the underlying shares. If such value falls below the

required margin, a margin call must be made promptly within 5 working days of

such assessment.

Security documentation should be executed in a format pre- approved by the

bank’s legal department.



The management of the bank shall formulate the procedure of accepting and

valuing the security through a detailed Circular/ Guidelines.

All fixed assets should be valued by the banks approved value in every case and

the valuation should be verified at least once every two years. The CEO shall

approve the list of values. However, the CEO may waive the valuation

requirement provided:

Financing amount is < 30% of the depreciated value of the fixed assets (except in

the case of real estate) shown in the latest audited financials of the borrower.

Consortium loans where the consortium takes a collective decision of such waiver.

In cases of fixed assets obtained from a prime customer where our primary

security is on hypothecation charge.

3.5.8 Customer Control

All customers should be grouped as per Nepal Rastra Bank directive for single

borrower limit purpose.

Each Customer Group should be centrally managed by the office, which has

access to the key official/s of the Customer Group. A branch/outlet may extend

credit facilities to a unit of a Customer Group. However, it will necessarily have to

be supported by the office, which is responsible to manage the Customer Group.

All Customer/Customer Groups should be managed by a designated Relationship

Manager



Unit IV

Pricing and Procedure of Loan

4.0 Loan Pricing

Bank has to decide the benchmark Prime Lending Rate for different types of loans

and advances. It also decides whether to have fixed rate of interest or floating rate of

interest or both and its applicability on different asset products. The advantage in

charging fixed rate of interest is that the revenue can be worked out well in advance.

The disadvantage is that in the event of interest rate going up and in the event of

declining rate regime (unless bank falls in line) borrowers desert bank and migrate to

other banks having lower interest rate. In case of floating interest rate it automatically

gets adjusted as per market forces; however it becomes bit difficult to project revenue.

Banks also permit borrowers to switch over from fixed to floating rate and vice versa

by levying migration fee.

4.1 Pricing of Customer/Customer Group

The management of the bank is authorized to apply appropriate pricing on

each Customer/Customer Group provided however, an account profitability

analysis is carried out and the overall relationship make good business sense.

The account profitability of each Customer/Customer Group should be

constantly reviewed. However, in case of revolving funded/ non-funded

facilities, it should be reviewed at least once at the time of account annual

review.

The authority of the management will be as per the Finance By-laws of the

Bank.



4.2 Credit Procedures

Each credit requests (regular or temporary) should be accessed through a set

Credit Appraisal Report. Following risks, as applicable, should be addressed:

Industry risk

Business risk

Financial and Cash Flow risk

Facility Structure risk

Security Cover risk

Transaction risk

Other

Each facility, except for terminating type of loans, should be reviewed and

renewed to assess the above risk at least once every year unless a specific product

paper allows otherwise.

Each request for approval of credit facility/ies should at least include, in addition

to points as dealt under sub-section 12.1 of this section, the following:

Amount

Purpose

Facility type/s

Maturity dates

Repayment terms

Pricing basis including fees

Condition precedent

Waivers, if any

Special Covenants, if any



Interest should be collected on a frequency of three months for all types of loan

other than the structured product under EMI basis. Interest for all short-term

transaction backed or trade related loans should be collected at quarterly rests and

at the final repayment dates.

All term loans should have a final drawdown date and should not be open-ended

commitment. Extension of date of drawdown should be done only after proper

risk assessment.

Apart from the above, the management of the bank must formulate detailed credit

procedures through Credit Circulars as and when necessary.

Any waivers related to credit administration norms and pricing of a credit

facilities will have to be specifically addressed/justified. The responsible officer

holding Credit Approval Discretion (CAD) may, within his/her discretion,

approve such waivers along with credit facilities.

4.3 Internal Ratings

All credit facility will be graded as per Nepal Rastra Bank directives i.e. Good,

Substandard, Doubtful, Bad and Restructured.

A technique/ procedure for internal rating should be developed by the

management of the bank.

The internal rating technique/procedure, once developed, should be applied for

all Loans. Such rating has to be reviewed at the time of facility review.

MIS on outstanding against each rating should be prepared on regular intervals

for periodic review.

4.4 Credit Monitoring

All monitoring of credit should be done by an independent unit – Credit

Administration & Control Department (CACD).



Credit Monitoring should include but not limited to:

Stock/ book debt registers.

Irregularity reports.

Stock and assets Inspection schedules.

All compliance checks including MIS (internal and Nepal Rastra Bank). Day

to day management of customers should be done by the relationship

managers, which should include but not limited to:

Exposure monitoring

Excesses monitoring

Customer contact

Covenant monitoring

Stock monitoring

Financial assessment and risk category

Identification of deteriorating credits and taking remedial actions

Facility expiry monitoring

4.5 Impaired Assets and their accounting procedure

A facility is classified as non-accrual when it is graded as “Doubtful”, income will

no longer be accrued ahead of its receipt.

When a facility is classified as non-accrual, any accrued but unpaid interest or fees

will be reversed from income, since the date last paid. This however does not

mean that the Bank reduces its entitlement to receive income. This legal right

remains even though it is doubtful that the income is collected. Income will

continue to be calculated manually.

If the documentation does not stipulate the order and in absence of any

regulations governing, cash received from a non-accrual facility (either from the

obligor or from the sale of security), in general, should be applied in the following

priority:

Statutory charges and fees

Overdue/Penal Interest

Interest



Principal this application, however, may be changed by Chief Executive

Officer with justification.

The Bank shall have a separate „Loan Write-off Bylaws.

4.6 Systems and Procedures

In order to implement the credit policy, the management shall devise systems and

procedures including but not limited to the following:

Specification of the lending authority given to each credit executive measuring

the maximum amount and types of credit that each person or group of person

can approve and whose signatures are required.

Lines of responsibility in making assignments and reporting information

within the department.

Operating procedures for soliciting, reviewing, evaluating, and making

decisions on customer credit applications.

The required documentation that is to accompany each credit application and

what must be kept in the bank’s credit files (required financial statements,

security agreements, etc.).

Lines of authority within the bank, detailing who is responsible for

maintaining and reviewing the bank’s credit files.

Guidelines for evaluating, obtaining and monitoring collateral.

Policies and procedures for setting interest rates and fees and terms of

repayment of credits.

A statement of quality standards applicable to all credit procedures.

Procedures for detecting, analyzing, and working out problem credit and

recovery situation.

Loan classification and provisioning procedure.



Unit V

FOLLOW UP AND REVIEW OF THE CREDITLINES

5.1 General:

The follow up is the responsibility of CRD. The Relationship Manager must keep a

regular contact with his/her clients and must remain abreast with all the information

relating to the borrower. The frequency of visit will depend upon the importance of

the risk, customer visits as frequent as possible is encouraged. It is the duty of

Relationship Manager to obtain the required documents along with the financial

statements from the client for renewal/review purpose well before the maturity date of

the credit facilities.

5.2. Follow-up of excess over limit:

In principle, excess over limit (EOL) should not be allowed in normal course credit

transactions. However, EOL may be allowed based on justified ground upon approval

of competent authority. Frequent and continuous EOL must be discouraged at all

times.

5.3 Follow-up of Securities and security related documents:

CAD, in coordination with Legal Department and CRD, shall make sure that the

securities and security related documents are renewed / executed timely and will keep

track of the renewals to be made in a diary and/or systems. CAD will also be

responsible for verifying the adherence of special covenants quoted in credit proposal

and offer letter. In case of insufficient security cover, the CAD will forward the credit

file to appropriate approving authority with information in writing for further decision

whether to deny the implementation or allow full/partial implementation.

5.4. Follow-up of Operations:

The Operations Department should immediately report to the CRD (Relationship

Manager) and to the CAD if any irregular movement in the account of the client is

observed so that further action could be taken at the earliest.

5.5 Defaults in Payments:

When a client fails to make a payment on due date or announces that s/he will not be

in position to pay on due date and asks for a rescheduling, this default must be



immediately reported in writing to the approving authority and/or CEO without

prejudice of any legal proceeding to protect our position. A letter must be sent to the

client stating the default of payment. The wording and the strength of the letter will

depend on the quality of the debtor and on the contacts that the Relationship Manager

5.6 Review/Renewal of the Credit Lines:

Periodic review and renewal of a credit facility is very important so as to foresee the

risks creeping in the borrower and take needful remedial/corrective action on time so

as to save the account from going into default. Hence, all the credits including the

medium term and long term loans shall be reviewed at least once a year and in case of

revolving working capital loans, credit facility limits should be renewed at the time of

review. In case of revolving working capital loans, credit facility is generally

reviewed/renewed at the time of maturity wherein tenure is generally 1 year from the

date of disbursement/implementation.

5.7 End of Credit:

A credit (loan) relationship shall come to an end when borrowers wants to settle the

dues and close the account and/or Bank decides to call back the loan due to

whatsoever reasons.



Unit VI

LEGAL ACTION

Generally, the bank will take legal action relating to loan recovery, collateral security

or auction of securities. At the mean time, the bank will defend if the borrowers file

the case against the bank making the claim that the bank has not followed the proper

procedures while auctioning the securities or recovery of loan from collateral security.

Therefore, the bank needs a legal department taking care of legal cases brought by the

bank or brought against the bank.

In the context of Nepal, the court proceedings are found to be very lengthy and time

consuming. Likewise, in Nepal, the banking laws and business laws are not very

sufficient. Therefore, the bank needs to be aware about the context and international

practices in order to minimize lots of claim against the bank. The Legal Department

of the bank may consider non judicial forms of legal proceeding such as arbitration

and mediation under prevailing laws.

Regarding legal actions taken by the bank, legal action should be taken if it is

absolutely necessary and required under the prevailing circumstances as the last

resort. When the bank takes any legal action regarding loan default, it should be

widely consulted with in the bank, especially among Relationship Manager, Loan

Recovery Department, Loan Recovery Committee and Legal Department and decided

mutually.

The following criteria are considered as the basic criteria for initiating the legal

action:

In case the borrower commits an act of Bankruptcy or is adjudicated as

Bankruptcy.

If the Relationship Manager/Credit Analyst has a reasonable doubt about the

company’s ability to collect interest in a interest in a timely manner

If interest and principal is overdue for more than 90 days.



Unit VII

LOAN WRITE-OFF

The bank will formulate the Loan Write-off Policy that guides the process and

decision for writing-off of loans/advances. When the bank considers any loan

unrecoverable, it may initiate the process of the loan write-off. It is the task of Loan

Recovery Department of the bank. The Loan Recovery Department will initiate the

process and the Board of Department will take the decision. Therefore, in the Loan

Write-off Policy, the decision relating to the loan write-off will be made a subject to

be approved by the Board of Directors. The borrower will not be told about the loan

write-off decision.

credit policy guidelines

Documents