Session

on
Loans and Advances
Md. Ataur Rahman Prodhan
Course Teacher
 Introduction

Bank is basically a profit earning organization. The major

portion of a bank’s deposit is invested by the way of loans and
advances. The substantial part of bank’s income comes from
interest earning. While lending its funds a banker always follow
the relevant guidelines & policies and conducts its business on
the basis of the well known practices of sound lending for
minimization of risks and maximization of profits.
 Principles of sound lending

There are three important principles of sound lending that is

being followed by the commercial bank since long. These are
safety, liquidity and profitability.

Safety:
As the bank lends fund entrusted to it by the depositors, the
most pertinent principle of lending is to ensure the safety of
funds. By safety it is meant that the borrower is in a position
to repay the loan along with interest according to the terms
and conditions of the sanction advice.
 Principles of sound lending (Cont.)

Liquidity:

Banks are intermediaries for short term lending. Therefore,

they lend funds for short periods and mainly for working
capital finance. The loans are, therefore, largely payable on
demand. The banker must ensure that the borrower is able to
repay the loan within a short period.
 Principles of sound lending (Cont.)

Profitability:

Commercial banks are meant for profit-earning. The state-

owned commercial banks are no exception to this. They must
employ their funds profitably so as to earn sufficient income
to pay interest to the depositors, salaries to the staff and to
meet various other establishment expenses and distribute
dividend to the shareholders.
 Style of Credit

Commercial banks in Bangladesh generally extend credit

facilities to the clients in the following categories:
1. Micro Credit (Bank prefers NGO linkage)
2. Agri & Rural Credit
3. Trading Loan (CC-Hypo, CC-Pledge)
4. SOD (Financial Obligation)
5. House Building Loan
6. SME
7. Industrial Credit
8. Import Finance
9. Export Finance
10. Seasonal Credit (Brick, Tannery, Jute)
11. Specialized Credit (Power Generation & Hotel and Resort)
 Cash Credit System

The cash credit account is an active and running account to which

deposits and withdrawals may be effected frequently. The
customer is required to provide tangible assets as security to cover
the amount borrowed from the banker. The borrower is charged
interest on the actual amount utilized by him and for the period of
actual utilization only. Cash credit facilities are allowed in two
ways: CC(H) & CC(P). In hypothecation customer is the
custodian of goods in trade and in pledge bank is the custodian of
pledged goods. Generally, bank discourages sanction of CC(P) for
many reasons.
 Overdrafts

It’s a common scenario to allow SOD limit against FDR &

deposit schemes. It is hundred percent secured & recoverable at
any time. Since the security is a liquid asset no scope is there to
refuse such proposal and thereby this is termed as financial
obligation on the part of bank.
 Loan System

Under the loan system, credit is given for a definite purpose

and for a predetermined period. Normally, these loans are
repayable in installments.
 Advantages of Loan System

1. Financial Discipline on the Borrower. As the time of

repayment of the loan or its installments is fixed in advance,
this system ensures a greater degree of self-discipline on the
borrower as compared to the cash credit system.

2. Profitability. The system is comparatively simple. Interest

accrues to the bank on the entire amount lent to a customer.
 Drawbacks of Loan System

1. Banks have no control over the use of funds borrowed by

the customer. However, banks insist on hypothecation of the
asset/vehicle purchased with loan amount.

2. Though the loans are for fixed periods, but in practice they
roll over.

3. Loan documentation is more comprehensive as compared to

cash credit system.
 Creditworthiness of Borrowers

The creditworthiness of a person means that he deserves a

certain amount of credit, which may safely be granted to him.
Such creditworthiness is judged by the banker on the basis of
his character, capacity, capital, collateral and condition.
 Factors limiting the level of a bank’s
advances

The level of advances sanctioned by a banker depends upon

the following:

1. The size and maturity wise pattern of deposits

2. Credit control by central bank
3. Seasonal variations in bank credit
4. The demand for credit
 Consortium Advances

Banks have in recent years adopted the concept of

consortium advance not only in case of working capital
financing but in term lending also. There is a lead arranger
for consortium finance, participating bank will provide
approved fund to the lead bank. Diversification of risk is the
main objective to extend credit jointly. Supervision from the
separate organization is a pertinent task to ensure proper
utilization of bank’s loan.
Thank You