Credit Policy of BIFFL · Products. Similarly, this year we need to make some amendments in our Credit Policy in adjustment of Credit Pricing, Specific Product Based / Sectoral Based

Bangladesh Infrastructure Finance Fund Limited (A Company under the Ministry of Finance)

Borak Unique Heights, Level-3, 117 Kazi Nazrul Islam Avenue, Eskaton Garden, Dhaka-1217. Bangladesh

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Credit Policy

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BIFFL

Credit Policy approved by BIFFL Board of Directors in its 13th meeting held on

18th September, 2013.

1st Revision: 05th August 2015

2nd Revision: 13th January 2017

&

Proposed 3rd Revision: 22nd February 2019

Credit Policy of BIFFL

Preface (i)

Preface

Bangladesh is steadily progressing towards a middle-income country and is expected to be there by 2021. In order to achieve this goal, Bangladesh targeted the GDP growth rate to go up to 8 percent by 2016 and 10 percent by 2021. For such an increase in GDP growth rate, the share of investment to GDP needs to be as high as 35-40 percent. At present, the average investment to GDP ratio is 24-25 percent, which is lower than the national savings ratio. To foster an enabling environment for growth, Bangladesh is seeking to make a steep change in investment in infrastructure, raising it from 2 percent to 6 percent of GDP during the Sixth Five-Year Plan. The plan targets 75 percent of this investment to come from Private sector participation, keeping PPP in the core of the policy. The Government of Bangladesh has also prioritized PPP program as a key initiative for increasing investment in infrastructure. PPP is considered worldwide as a unique window of opportunity for development of infrastructure sector for countries like Bangladesh. BIFFL has been established under the Ministry of Finance (MoF), as a special purpose vehicle (SPV) to finance infrastructure projects in the country, with the hope that BIFFL could serve as a conduit for mobilizing resources from the domestic private and foreign sources to finance infrastructure projects in the country. These steps definitely reflect the positive attitude of the Government in this regard. BIFFL wants to ensure that the money is well-managed and efficiently spent. The existing ‘Credit Policy’ and the principles of investment are followed by all BIFFL personnel, particularly those associated with the project appraisal, due diligence, credit monitoring, and associated activities since 18 September 2013 – the date of adoption of the policy. ‘Credit Policy’ of BIFFL ensures that enough risk management measurements are taken and that these measures are well-maintained. In course of formulating these credit policy guidelines, due importance has been given on introducing good risk management culture in conformity with the imperatives of Bangladesh Bank’s Credit Risk Management guidelines and regulation for Financial Institutions. It is our practice to review our business in comparison with our peer in the market and revise the credit policy as per market needs. It is also a regulatory requirement of Central Bank to review the policy as per market trends. In view of that our Credit Policy was amended for the first time on 5 August 2015 for fixing up financing limit, Security Packages, Interest Rate Mechanism & redefining Renewable Investment Products. Similarly, this year we need to make some amendments in our Credit Policy in adjustment of Credit Pricing, Specific Product Based / Sectoral Based allocation for Investment, Fees & Charges policy & modification of Foreign Currency Loan / Fund related policy and establishment of Internal Compliance Unit etc. BIFFL has taken the highest considerations in managing and expanding its endowed assets along with all of its stakeholders’ assets. To keep the measurements updated with the changing economic perspectives, revision will be made from time to time in response to the emerging needs and regulatory requirements if any. BIFFL declares that the modification/ amendment of policy will be in effect immediately (as per approval of the Board of Directors) and will remain in force until further amendments are called for.

(S.M. Formanul Islam) Executive Director & CEO Bangladesh Infrastructure Finance Fund Limited 4, Anjuman Mofidul Islam Road Kakrail, Dhaka-1000, Bangladesh Date: January 12, 2017


Glossary of Terms (ii)

Glossary of Terms

BIFFL = Bangladesh Infrastructure Finance Fund Limited

BL = Bad and Loss

BRTA = Bangladesh Road Transport Authority

CAT = Credit Application Template

CIB = Credit Information Bureau

CL = Classified Loan

CLRR = Classified Loan Review Report

CRG = Credit Risk Grading

CRM = Credit Risk Management

DSCR = Debt-Service Coverage Ratio

DF = Doubtful

ETP = Effluent Treatment Plant

ECA = Export Credit Agency

FCY = Foreign Currency

ICT = Information and Communication Technology

IDCOL = Infrastructure Development Company Limited

IIFC = Infrastructure Investment Facilitation Company

HHK = Hybrid Hoffman Kiln

KYC = Know Your Customers

LIBOR = London Inter-Bank Offered rate

LC = Letter of Credit

LCY = Local Currency

NOC = No Objection Certificate

NPL = Non-Performing Loan

PPPAC = Public-Private Partnership Advisory Council

RFP = Request for Proposal

RJSC = Registrar of Joint Stock Companies

RFQ = Request for Qualification

RM = Relationship Manager

RU = Recovery Unit

SRO = Statutory Regulatory Order

SS = Sub Standard

STD = Standard

VGF = Viability Gap Financing


Glossary of Terms (3)

Definitions

1. Basis Point means one hundredths of one percent.

2. BIFFL means Bangladesh Infrastructure Finance Fund Limited

3. Bond is an instrument of indebtedness of the bond issuer to the holders. It is a debt security,

under which the issuer owes the holders a debt and, depending on the terms of the bond, is

obliged to pay them interest (the coupon) as well as repay the principal at a later date,

termed the maturity.

4. Borrower is the entity that receives loan facilities from BIFFL.

5. Cabinet Committee on Economic Affairs (CCEA) is a committee that is mandated to

provide the in-principal and final approval for PPP projects as under Section 14 of PPP Act

2015

6. Clients means the borrowers seeking loans to implement any proposed project.

7. Equity is the ownership interest of shareholders in a company. Equity is the residual claim

when all the companies’ external liabilities have been deducted from its assets.

8. FDR or Fixed Deposit Receipt is a term deposit maintained with Banks/ FIs having a fixed

tenor and interest rate payable on maturity.

9. Financial Institution means an institution as established under the provisions of the

Financial Institutions Act, 1993.

10. Fund includes money received from GoB from time to time as equity as well as any other

fund/finance raised by BIFFL from the market, or received from Development Partners for

implementation of Infrastructure Projects.

11. Infrastructure Financing is an arrangement for extending financing facilities for

infrastructure projects in the form of debt or equity.

12. Joint Venture Agreement means an agreement between two or more parties in which

each party has defined roles, responsibilities, liabilities and financial contribution, profit

sharing etc. in a way that is beneficial for the project.

13. Large Project means a project as defined under Policy & Strategy for PPP 2010.

14. Lead Bank means the Bank/Financial Institution (FI) which act as a lead arranger of fund

as well as financier for the project and is designated as such by the Inter-Institutional Group

or consortium of Banks/Financial Institutions.

15. LIBOR means the London Inter-Bank Offered Rate.

16. Limited Partner is a kind of partner similar to a general partnership, except that in addition

to one or more general partners (GPs), there are one or more limited partners (LPs). It is a

partnership in which only one partner is required to be a general partner.

17. Local Institutional Investors are the Financial Institutions who work within the boundary

of Bangladesh and extend their investment facilities towards businesses.

18. Long Term Debt means the Debt provided by BIFFL to the project company where the

average maturity for repayment exceeds 5 years.



19. Market Swap Rate means at the time of last loan drawn, the fixed rate quoted in the

relevant swap market as the equivalent of the United States dollar six-month LIBOR

considering the repayment schedule, notional amounts outstanding on each repayment date

and the forward rates applicable to six-month LIBOR at such dates.

20. Medium Project means a project as defined under Policy & Strategy for PPP 2010.

21. PPP Authority means the authority that has been established under Section 4 of PPP Act

2015 as Public Private Partnership Authority.

22. Private Sector Company means a company in which 51 percent or more of the subscribed

and paid-up equity is owned and controlled by private entities.

23. Project Company means the company which is implementing the infrastructure project.

24. Project Term means the duration of the contract or concession agreement for a PPP

project.

25. Public Private Partnership (PPP) Project means a project defined as under Section 2

(11) and 2 (12) of PPP Act 2015.

26. Public Sector Company means a Company in which 51 percent or more of the subscribed

and paid-up equity is owned and controlled by the Government, jointly or severally, and

includes any undertaking designated as such by the Department of Public Enterprises and

companies in which majority stake is held by Public Sector Companies other than financial

institutions.

27. Senior Debt are defined as those claims on the project vehicle and its assets identified in

the financing documents as having priority rights over other debts owed by a Borrower

with respect to payment and security. Or in other words, Senior Debt can be defined as

those enjoying rights of payment and/or enforcement that are pari-passu with other senior

lenders.

28. Single Borrower Exposure is the loan facility exposure extended to a single entity, either

an individual or any institution.

29. Small Project means a project as defined under Policy & Strategy for PPP 2010.

30. Sovereign Guarantee is the Government's guarantee that an obligation will be satisfied if

the primary obligor defaults.

31. Subordinated Debt means a debt which ranks lower with respect to payment and security

than the senior debt.

32. Syndicated Loan is one that is provided by a group of lenders and is structured, arranged,

and administered by one or several commercial banks or investment banks known as

arrangers.

33. Total Project Cost means the total investment outlay of the project as approved by the

Lead Bank or Cabinet Committee on Economic Affairs, or the cost as ascertained by BIFFL

through a feasibility study, as the case may be.

34. Unsolicited Proposal means a proposal that has been submitted in writing individually at

the proposer’s own initiative, which has not been submitted against any official request of



the Government, or which is not related to any Private-Public Partnership project of

Government’s consideration.

35. Viability Gap Financing (VGF) is meant for projects where financial viability is not

ensured but their economic and social viability is high. VGF could be in the form of capital

grant or annuity payment or in both forms.


Table of Contents

TABLE OF CONTENTS

Title Page

Preface

Glossary of Terms

Table of Contents

1. INTRODUCTION ............................................................................. 1

1.1. Importance of Infrastructural Development ................................................................................ 1

1.2. Background ................................................................................................................................... 1

1.3. About BIFFL ................................................................................................................................... 2

1.3.1. Vision ..................................................................................................................................... 3

1.3.2. Mission .................................................................................................................................. 3

1.3.3. Goal ....................................................................................................................................... 3

1.3.4. Objectives .............................................................................................................................. 3

1.3.5. Funding of BIFFL .................................................................................................................... 4

2. CREDIT POLICY, STRATEGY & OTHER GUIDELINES ....... 6

2.1. Policy Guidelines ........................................................................................................................... 6

2.1.1. Introduction .......................................................................................................................... 6

2.1.2. Objectives .............................................................................................................................. 6

2.2. Credit Strategy .............................................................................................................................. 6

2.3. Eligible Sector ................................................................................................................................ 7

2.3.1. Power and Energy ................................................................................................................. 7

2.3.2. Natural Resource Development ............................................................................................ 8

2.3.3. Fertilizer ................................................................................................................................ 8

2.3.4. Transportation System .......................................................................................................... 8

2.3.5. Port Development ................................................................................................................. 8

2.3.6. Air & Railway Transportation Projects .................................................................................. 8

2.3.7. Telecommunication System .................................................................................................. 8

2.3.8. Tourism ................................................................................................................................. 8

2.3.9. Utility & Environmental Management .................................................................................. 8

2.3.10. Green, Renewable Energy and Energy Efficient Projects ..................................................... 9


Table of Contents

2.3.11. Social and Industrial Infrastructure Projects ......................................................................... 9

2.3.12. Poverty Alleviation Projects .................................................................................................. 9

2.3.13. Urban & Rural Development Projects ................................................................................... 9

2.3.14. Agricultural Development Projects ..................................................................................... 10

2.4. Restricted Sectors ....................................................................................................................... 10

2.5. Sectoral Allocation ...................................................................................................................... 10

2.6. Eligibility Criteria ......................................................................................................................... 11

2.7. Lending Guidelines ...................................................................................................................... 12

2.8. Types of Investment .................................................................................................................... 12

2.8.1. Guidelines under JICA Energy Efficiency and Conservation Promotion Financing Project . 12

2.8.2. Guidelines under IPFF Fund ................................................................................................ 13

2.8.3. Guidelines under Women Entrepreneurship ...................................................................... 14

2.8.4. Guidelines under SME Unit ................................................................................................. 14

2.8.5. Loan Products...................................................................................................................... 14

2.8.6. Equity Products ................................................................................................................... 14

2.8.7. Weights on Each Financing Product .................................................................................... 14

2.9. Nature of Loan ............................................................................................................................ 15

2.10. Financing Limit ........................................................................................................................ 15

2.11. Loan Facility Parameters ......................................................................................................... 16

2.12. Lending Terms & Conditions ................................................................................................... 19

2.12.1. Foreign Currency Loans ....................................................................................................... 19

2.12.2. Local Currency Loans........................................................................................................... 20

2.12.3. Renewable Energy & Eco-friendly project Scheme ............................................................. 22

2.12.4. Fees and Charges ................................................................................................................ 25

2.12.5. Repayment .......................................................................................................................... 26

2.12.6. Revision of Lending Policy ................................................................................................... 26

3. CREDIT ASSESSMENT & RISK ANALYSIS ............................ 29

3.1. Credit Assessment ....................................................................................................................... 29

3.2. Loan Syndication & Structured Finance ...................................................................................... 30

3.3. Credit Analysis ............................................................................................................................. 30

3.3.1. Project Analysis ................................................................................................................... 30


Table of Contents

3.3.2. Financial and Economic Analysis ......................................................................................... 31

3.3.3. Environmental Impact Analysis ........................................................................................... 33

3.3.4. Technology Analysis/Technical Aspects .............................................................................. 34

3.3.5. Country, Sector and Market Analysis .................................................................................. 34

3.3.6. Borrower/Sponsor Analysis ................................................................................................ 34

3.4. Financing Document ................................................................................................................... 39

3.5. Risk Assessment and Mitigation Measures................................................................................. 40

4. CREDIT RISK GRADING ............................................................. 44

4.1. Introduction ................................................................................................................................ 44

4.2. Credit Risk Grading Scale ............................................................................................................ 44

4.3. Credit Risk Grading Computation Process .................................................................................. 46

4.4. Sensitivity Analysis and Tolerance Level ..................................................................................... 51

4.5. Collection of CIB Report .............................................................................................................. 51

4.6. Approval of Credit Memorandum ............................................................................................... 51

4.7. Offer Letter ................................................................................................................................. 51

4.8. Credit Risk Grading Process ........................................................................................................ 53

4.9. Credit Risk Grading Review ......................................................................................................... 54

4.10. Risk Rating for Lending ............................................................................................................ 54

4.11. Approval Authority .................................................................................................................. 54

4.12. Internal Auditor/Control ......................................................................................................... 55

5. RISK MANAGEMENT STRUCTURE ........................................ 58

5.1. Risk Management Structure ....................................................................................................... 58

5.2. Key Responsibilities ..................................................................................................................... 59

5.2.1. Credit Marketing/Relationship Management ..................................................................... 59

5.2.2. Credit Risk Management ..................................................................................................... 60

5.2.3. Credit Administration .......................................................................................................... 60

5.2.4. Business Development ........................................................................................................ 61

5.2.5. Internal Audit/Control ......................................................................................................... 61

5.3. Procedural Guidelines ................................................................................................................. 61

5.3.1. Approval Process ................................................................................................................. 61

5.3.2. Internal Governance Risk Assessment ................................................................................ 65


Table of Contents

5.3.3. Role of Audit Committee .................................................................................................... 65

5.3.4. Internal Portfolio Risk Assessment ..................................................................................... 66

5.3.5. Asset Liability Management (ALM) ..................................................................................... 67

5.3.6. ALM Information System .................................................................................................... 68

5.3.7. Amendment of the Policy ................................................................................................... 68

5.3.8. Access to the Policy ............................................................................................................. 69

5.3.9. Review ................................................................................................................................. 69

6. CREDIT ADMINISTRATION ...................................................... 71

6.1. Introduction ................................................................................................................................ 71

6.2. Functions of Credit Administration ............................................................................................. 71

6.2.1. Documentation ................................................................................................................... 71

6.2.2. Disbursement ...................................................................................................................... 71

6.2.3. Credit Monitoring ................................................................................................................ 72

6.2.4. Facility Repayment .............................................................................................................. 72

6.2.5. Custodial Duties .................................................................................................................. 72

6.2.6. Compliance Requirements .................................................................................................. 72

6.3. Credit Monitoring........................................................................................................................ 72

6.3.1. Identification of the reasons behind default ...................................................................... 74

6.3.2. Early Alert Process .............................................................................................................. 74

6.4. Credit Recovery ........................................................................................................................... 75

6.4.1. NPL Account Management ................................................................................................. 76

6.4.2. Account Transfer Procedures .............................................................................................. 76

6.4.3. Rescheduling ....................................................................................................................... 77

6.4.4. Non-Performing Loan (NPL) Monitoring ............................................................................. 78

6.4.5. NPL Provisioning and Write-Off .......................................................................................... 78

7. CREDIT DOCUMENTATION ...................................................... 81

7.1. Introduction ................................................................................................................................ 81

7.1.1. Minimum requirements for documentation ...................................................................... 81

7.1.2. Documentation Function .................................................................................................... 82

7.1.3. Organizing the documents .................................................................................................. 82

7.1.4. Different Parts of Documentation ...................................................................................... 82


Table of Contents

7.1.5. Description of stamping ...................................................................................................... 83

7.1.6. Precautions to be taken in the execution of documents .................................................... 83

7.1.7. Law of limitation ................................................................................................................. 84

7.2. Guidelines for Documentation .................................................................................................... 84

7.2.1. For Limited Company .......................................................................................................... 84

7.2.2. For Partnership Firm ........................................................................................................... 85

7.2.3. For Mortgage Property ....................................................................................................... 85

7.3. Filling and Preservation of Documents ....................................................................................... 86

7.4. Charge Documents ...................................................................................................................... 86

7.4.1. Charge documents for Fixed Deposit Receipt (FDR) ........................................................... 86

7.4.2. Charge documents for shares and various other securities ............................................... 87

7.4.3. Charge documents in case of hypothecation of goods ....................................................... 87

7.5. Loan/Credit Facility Documents/Agreements ............................................................................ 87

7.5.1. Demand Promissory Note/Promissory Note ...................................................................... 88

7.5.2. Revival Letter ...................................................................................................................... 88

7.5.3. Letter of Arrangement ........................................................................................................ 88

7.5.4. Letter of Continuity ............................................................................................................. 88

7.5.5. Subordination Agreement................................................................................................... 88

7.5.6. Counter Guarantee ............................................................................................................. 88

7.6. Credit Facilities Secured By Various Types of Collaterals – Their Special Features .................... 89

7.6.1. Suitable Collaterals for Specific types of Credit Facilities ................................................... 89

7.6.2. Important Considerations in Establishing Security by Various Collaterals ......................... 90


CHAPTER – 1

INTRODUCTION


Chapter 1: Introduction Page | 1

1. INTRODUCTION

1.1. Importance of Infrastructural Development

The importance of infrastructure for ensuring sustainable economic development and thereby, the

amelioration of the socio-economic condition of the millions of people cannot be overemphasized.

Millions of people across the country still lack access to roads, transportation, electricity, safe

drinking water, proper sanitation, communication network facilities, etc. The country, at the same

time, has been failing to realize its full growth potential due to high transaction costs, mainly

arising from inadequate and inefficient infrastructure. One of the main reasons for such

infrastructure-related shortcomings has been insufficient investment. The Asian economies that

have been successful in achieving enviable economic growth have made substantial capital

investment in infrastructures. Such investment in infrastructure in Bangladesh, compared to its

GDP, had been extremely low.

1.2. Background

The Government of Bangladesh has prioritized PPP program as a key initiative for increasing the

investment in infrastructure and supporting the realization of Vision 2021; the Vision that seeks to

catapult Bangladesh towards the trajectory of a middle-income country by the year 2021. In order

to achieve this goal, Bangladesh is targeting 8 percent GDP growth rate by 2016 and 10 percent

by 2021. To achieve this GDP growth rate, the share of investment to GDP needs to be as high as

35-40 percent. This ratio is 24-25 percent at the moment, lower than the national savings ratio. To

foster the enabling environment for growth, Bangladesh is seeking to make a steep change in its

investment infrastructure, rising investment from 2 percent to 6 percent of GDP. The government

alone can hardly achieve such investment objective. It has to draw resources from the domestic

private and foreign sources. To reduce the investment deficit, participation of the private sector

through Public-Private Partnership (PPP) is an important route. PPP is considered worldwide as a

unique window of opportunity for development of infrastructure sector for countries like

Bangladesh. PPP model of financing paves the way for the enhanced role of private sector in the

government initiated projects which relaxes government’s resource constraint and at the same time

infuses dynamism, better efficiency and prudent management. A considerable number of countries

around the world have such initiatives in place including a good number of emerging economies

(e.g. China, India, Brazil, South Africa etc).

In order to create an enabling environment for attracting private investments on a sustainable basis,

the Government of Bangladesh (GoB) has also accorded due priority to materialize PPP concept

in right earnest for delivering its multipronged benefits to the national economy. Conceptually,

Public-Private Partnerships (PPPs) are contracts between the public sector and private sector,

which requires new investments by the private partners i.e. money or technology or expertise/time

or reputation, which transfers some key risks to the private sector (design/technology,

construction/installation, availability, demand etc., in which payments are made in exchange for



performance for the purpose of delivering a service traditionally provided by the public sector. The

present government for the first time, in its national budget for FY 2009-2010, has initiated a new

budgetary modality by introducing the Public Private Partnership (PPP) budget in addition to the

traditional Revenue budget and the Annual Development programme (ADP). The PPP budget aims

to provide support for upfront development of PPP projects, create a mechanism for targeted

subsidies and set long term financing of PPP projects.

The success of PPP presupposes that the legal framework must be transparent and exhaustive to

provide the private sector necessary legal coverage to finance, build, operate and collect revenues

or service payment. Issues pertaining to procurement regulations, land acquisition, risk and profit

sharing, pricing of services and handover of the facilities are also required to be well explained

and unambiguous as part of confidence building, which is of imperative need at this embryonic

stage.

The Government of Bangladesh has already approved ‘PPP Act 2015’, ‘Policy & Strategy for PPP,

2010’; ‘Guidelines & Scheme for PPPTAF 2012’; and ‘Guidelines for VGF for PPP Projects’. PPP

unit has been set up under Ministry of Finance (MoF) and BIFFL has been formed as a special

purpose vehicle (SPV) to finance infrastructure projects in the country. BIFFL will serve as the

conduit for mobilizing resources from the domestic private and foreign sources to finance

infrastructure projects. These steps reflect the positive attitude of the Government in this regard.

1.3. About BIFFL

Government of Bangladesh (GoB) has established Bangladesh Infrastructure Finance Fund

Limited (BIFFL) under Ministry of Finance (MoF) as a Special Purpose Vehicle (SPV) for

financing Infrastructure projects in Bangladesh. BIFFL has been designed to serve as a conduit for

mobilizing domestic and foreign private resources along with the public fund through Public

Private Partnership, popularly known in its short form as “PPP”.

BIFFL started its journey as a Public Limited Company on 21 March 2011, registered under

Company’s Act. 1994 (ACT XVIII of 1994). The Authorized Share Capital of the Company is

BDT 100.00 (One hundred) billion divided into 1 (one) billion shares of BDT 100.00 each and the

Subscribed Share Capital or Paid-up Capital is BDT 16.00 billion. Certificate of Incorporation was

issued by the Registrar of Joint Stock Companies and Firms (RJSC and Fs). The business of the

Company commenced from the same date and the Certificate of Commencement of Business was

also issued by RJSC. BIFFL has also received license from Bangladesh Bank on 16 October 2011

to operate as a Non-Bank Financial Institution under the Financial Institutions Act, 1993.

The main objective of BIFFL is to provide predominantly long-term financing for infrastructure

projects through issuance of bonds and debt instruments and equity offerings. BIFFL envisages

attracting private investments from local and foreign investors and to invest in companies that are

implementing infrastructure projects in Bangladesh. The Government will hold 100 percent



ownership of the company initially. After the private sector invests in equity, they will also get

ownership of the company.

1.3.1. Vision

Acceleration of economic growth by leveraging relative strengths of Public and Private Sector

through financing PPP Infrastructure Projects.

1.3.2. Mission

to perform as a highly dedicated Financial Institution of Bangladesh in a professional

manner by adopting the internationally accepted best practices, to keep high the ethical

values, and to maintain transparency in all our activities;

to promote Country’s economic development by facilitating and encouraging Private

Sector Investment in all infrastructural projects; and

to support sustainable economic growth of Bangladesh through facilitating

Infrastructure Development.

1.3.3. Goal

to provide long-term finance to critically important infrastructure projects in

Bangladesh, with a focus on promoting the evolving PPP program;

to catalyze co-financing from private financial sources through the comfort of a

professional domestic fund entity’s presence in such investments;

to provide a unique vehicle for capital market development by exploring a number of

avenues to capture domestic and foreign investment within the contexts of a robustly

designed and well-governed investment vehicle; and

Overcome current limitations on capital markets oversight and governance by creating

a self-sustaining ‘regulation-by-contract’ structure.

1.3.4. Objectives

to promote, encourage and finance Private Sector Investment in all infrastructure

sector;

to extend financing facilities for the infrastructure projects in the form of debt or equity;

to attract private investment in long term infrastructure projects overcoming the asset

liability mismatch of existing bank finance

both local and foreign fund;

deploy government fund to play a leveraging/catalytic role to attract more private

investment;

a financial intermediary to tap domestic capital to high quality long term asset; and

effective utilization of budgetary allocation on equity investment under PPP.



to receive and accept fund from Government of Bangladesh (GOB) and/or any other

sources, whether foreign or local, including official or semi-official development

sources, funds and moneys by way of loans, debt, debt backed by sovereign guarantees

etc. - for the development of infrastructure projects in Bangladesh and under

arrangements/concessions which facilitate or enable persons to do the same and

generally to finance and fund infrastructure projects in Bangladesh;

to create funds, sub-funds, including Islamic Funds, and any other type of Funds as

deemed appropriate by the Company;

engage Fund Managers, Investment Advisors, Management Consultants or any such

other Advisors or Staff to assist in the management of the business of the Company and

to do all such things as the company may require to do in order to achieve its objectives;

1.3.5. Funding of BIFFL

BIFFL will receive and accept funding support from the Government of Bangladesh and/or any

other source, whether foreign or local, including official or semi-official development sources, as

follows:

a) Funds and Moneys by way of loans, debts, debt backed by sovereign guarantees;

b) Debt from bilateral or multilateral institutional investors, such as World Bank (WB),

Asian Development Bank (ADB), Japan International Co-operative Agency (JICA),

Islamic Development Bank (IDB) etc.

c) Foreign currency debt, including through external commercial borrowings raised with

prior approval of the GoB;

d) Local Institutional Investors;

e) Short term debt from Banks/Financial Institutions (FI) only to manage any asset-

liability mismatch;

f) Bond specially designed for Non-resident Bangladeshis (NRB Bonds);

g) Sub-sovereign Bond;

h) Other Bond and Equity issuance;

i) Preference shares or any other quasi-equity instruments;

j) BIFFL Bond backed by Sovereign Guarantee;

k) Funds/Limited Partners (LP)including those promoted by multilateral or bilateral

agencies, e.g. IFC, CDC etc.

l) Additional GoB PPP Allocation.

m) Any other funding support as may be decided by BIFFL’s Board from time to time.


CHAPTER – 2

CREDIT POLICY, STRATEGY & OTHER GUIDELINES


Chapter 2: Credit Policy, Strategy & Other Guidelines Page | 6

2. CREDIT POLICY, STRATEGY & OTHER GUIDELINES

2.1. Policy Guidelines 2.1.1. Introduction

These Policy Guidelines provide the details on fundamental credit risk management policies,

outline general principles that are designed to govern the implementation of lending procedures

and risk analysis/risk grading systems. The guidelines have been established and will continue to

be developed from time to time taking market requirements into consideration.

2.1.2. Objectives

The main objectives of the guidelines are as under:

To identify proper lending areas;

To analyze all aspects related to credit and ascertain viability of lending;

To make appraisal procedure rational and uniform;

To ensure proper supervision, monitoring and follow up;

To make credit documentation exhaustive based on correct information;

To ensure safe return of money lent, avoid credit loss, and strengthen asset quality,

and protect BIFFL’s interest;

To provide directional guidelines to BIFFL to improve risk management culture and

establish minimum standards for lending.

To assess what form of debt, senior debt or subordinated debt, equity or a

combination of both are required or being sought by the sponsor.

To ascertain the pricing and tenor of debt.

2.2. Credit Strategy

The following general policy governs the credit strategy of BIFFL:

a) BIFFL will finance projects within the geographic boundary of the People’s Republic

of Bangladesh as well as overseas, subject to prior approval of the Board and

following due process as required by the concerned authorities.

b) BIFFL will comply with all applicable Laws and Regulations;

c) Projects processed through PPP Authority under the PPP Act 2015 will be given

preference for financing;

d) BIFFL will approve credit facilities primarily to Clients who are involved in business

activities having successful track record of profitable business growth.



e) At all times, the policy of “Know Your Customer (KYC)” and his/her credit standing

will be considered as the foremost requirement in processing loan applications;

f) BIFFL’s investment/lending decisions shall primarily be based on merit of individual

proposals analyzed from legal, financial, technical, marketing, social, environmental,

economic, and management points of view. Prime consideration will be the debt

service capability of the proposal out of fund generated from business operations.

Security coverage shall depend on the factors like financial viability, past history of

profitable operations, business goodwill, credit worthiness etc. of the

proposal/promoters. Additional security in the form of mortgage of land, building,

machinery and other fixed assets, lien of FDR, sponsor’s existing business cash flow

etc. may be obtained in appropriate cases; In addition to the project cash flows, BIFFL

should explore the possibility of creating a security structure of the sponsor’s existing

business’ cash flows.

g) BIFFL shall also support projects/investments related to innovative ideas, social,

community and infrastructure development;

h) BIFFL shall give priorities to projects wherein the developer has been identified

through a competitive bidding process. Projects where there hasn’t been a

competitive process for selection of the developer, necessary statutory/

administrative approvals and clearances from relevant government agency/ authority

would be required for considering the same.

i) BIFFL will not engage in name lending based only on the general reputation of the

Borrower; and

j) BIFFL will render total satisfaction to the customers through high standard of prompt

customer services.

2.3. Eligible Sector

BIFFL will promote, encourage and finance all infrastructure sectors, including but not limited to

the following:

2.3.1. Power and Energy:

Generation of power, energy, hydro-carbon exploration, hydropower, solar

power and wind power;

Production of biomass or biogas energy fueled by waste or processed by-

products in a manner that does not denigrate the environment within the

territory of Bangladesh;

Transmission of energy within the territory of Bangladesh or beyond for the

purpose of economic development of the country;



2.3.2. Natural Resource Development:

Exploration, Production, Transmission and Distribution of Oil and Gas,

Petrochemicals, Coal and other Mineral Resources;

Oil refinery and production of LPG;

2.3.3. Fertilizer

Production of chemical and organic fertilizer;

2.3.4. Transportation System:

Roads & Highways and Expressways including Mass Rapid Transport System;

Bridges, Tunnels, Flyovers, Interchangers, City Roads, Bus Terminals,

Commercial Car Parking etc.

2.3.5. Port Development:

Sea, River and Land Port including Inland Container Terminals, Inland

Container Depot and other related services;

Deep Sea Port Development;

2.3.6. Air & Railway Transportation Projects:

Airports, Terminals and related aviation facilities;

Railway systems, Rolling stock, Equipment and facilities;

2.3.7. Telecommunication System:

Cellular, Broadband, Satellite, Cable and Data Transmission, Networks and

services including Information and Communication Technology;

2.3.8. Tourism:

Basic and all necessary infrastructure related to tourism industry;

2.3.9. Utility & Environmental Management:



Water supply and distribution, Sewerage and Drainage, Effluent Treatment

Plants (ETP);

Land reclamation, Dredging of Rivers, Canals, Wetlands, Lakes and other

related facilities;

Environmental, Industrial and Solid Waste Management Projects;

2.3.10. Green, Renewable Energy and Energy Efficient Projects:

Solar Home System, Solar Mini Grid, Solar Irrigation Pumping System, Solar

PV Assembly Plant Installation;

Bio Gas Plant, ETP;

Production of Vermicompost;

Hydro-electric Power plant;

PET Bottle Recycling plant;

Solar Battery Recycling plant;

LED Bulb production plant;

Tunnel Kiln/Equivalent Technology based Brick field to reduce carbon

emission.

Energy efficient technologies

2.3.11. Social and Industrial Infrastructure Projects:

Economic Zone, Industrial estates and parks, City and Property Development,

including services to support Commercial and Non-commercial activities;

Social infrastructure, e.g. Health, Education, Human Resource Development,

Research and Development, and Cultural facilities;

E-service Delivery to citizens;

2.3.12. Poverty Alleviation Projects:

Pourashava and village water supply;

Remote area power supply systems, Rural gas supply;

Rural internet projects;

River passenger terminals/landing stations;

Rural health services and hospital; and

Irrigation and other agricultural services;

2.3.13. Urban & Rural Development Projects:



Fisheries and Livestock Development Projects;

Other urban, municipal and rural projects, that the Government views as

priority areas for development so as to support economic development

activities;

2.3.14. Agricultural Development Projects:

Agricultural infrastructure Projects;

Agricultural Processing Projects;

Agricultural Machineries;

Agricultural Production Projects; and

Any other sector determined by the BIFFL Board from time to time.

2.4. Restricted Sectors

BIFFL will not lend to the following areas of businesses:

Military Equipment/Weapons Finance;

Tobacco sector;

Finance of Speculative Investments, like lending to holding companies;

Logging, Mineral Extraction/Mining, or other activity that is ethically or

environmentally sensitive;

Counter parties in countries subject to UN sanctions;

Proposals relate to a sector or sub-sector where existing capacity is in excess of

market demand; and

Lending to companies listed on CIB black list or known defaulters.

2.5. Sectoral Allocation The proposed sectoral allocation is shown here:

SL. Sectors %

1 Power & Energy 40.00% 2 Connectivity & Economic Zone 36.00% 3 Green & Renewable Energy 12.00% 4 Tourism Infrastructure 5.00% 5 Social Infrastructure 5.00% 6 Women Entrepreneur 2.00% Total 100.0%



2.6. Eligibility Criteria

In order to be eligible for funding from BIFFL, a project shall meet the following eligibility

criteria:

(a) BIFFL shall consider only those projects for financing which will withstand the

viability test from the commercial and socio-economic viewpoints. Viable projects

may also include those projects that will become viable after receiving “Viability Gap

Financing (VGF)” from the Ministry of Finance, Government of the People’s

Republic of Bangladesh, as per approved “Guidelines of Viability Gap Financing for

PPP Projects”;

(b) Subject to the availability of fund, BIFFL will lend up to 40 percent of the total project

cost or US$ 100 million whichever is lower for a single project.

(c) Any “For-Profit” or “Not-For-Profit” entity legally registered in Bangladesh or abroad

at the time of submission of proposal(s) in response to Request for Qualification

(RFQ) or Unsolicited Proposal(s) will be eligible to apply for BIFFL financing.

However, at the time of contract signing, the foreign entity is required to be registered

as a legal entity in Bangladesh;

(d) The project shall be implemented (i.e. developed, financed and operated for the project

term) by a:

i. Public Sector Company, with 51 percent or more of the subscribed and

paid-up equity owned and controlled by the GoB, jointly or severally;

ii. Private Sector Company, with 51 percent or more of the subscribed

and paid-up equity owned and controlled by the private sector.

(e) A Private Sector Company not selected through a competitive bidding process would

be eligible for direct lending by BIFFL only after the necessary statutory/

administrative approvals and clearances from relevant government agency/ authority

have been obtained provided that-

The service to be provided by the infrastructure project is regulated and non-

monopolistic in nature;

The project is being set up under an agreement with the Government or a

public sector undertaking; and

Total lending for such private projects does not exceed 25 percent of the

lending program of BIFFL in any Fiscal Year (FY).

(f) Projects should be an integral part of the GOB's priority plan for the relevant

sector/sub-sectors;



(g) To ensure sponsor's commitment to the project, equity should represent not less than

20 percent of the total project cost;

(h) Projects should meet GOB and BIFFL’s Environmental and Social Assessment

Criteria; and

(i) The economic rate of return of the project should be at least 12 percent.

In case BIFFL management needs any clarification regarding eligibility of a project, the

same may be referred to the Board for appropriate directions.

2.7. Lending Guidelines

The Lending Guidelines shall be followed by the BIFFL management, advisers and consultants

for all kinds of funded or non-funded financing activities. The guidelines contained herein outline

the business development priorities and the terms and conditions that are to be adhered to for

approving credit facilities. The Lending Guidelines should be updated at least annually to reflect

changes in the economic outlook and the evolution of the facility portfolio, and be distributed to

all lending/marketing officers.

The Lending Guidelines should be approved by the Board of Directors based on the

recommendation of the management.

Any deviation from the lending guidelines to be explicitly identified in credit application and the

justification is to be approved by the Board.

2.8. Types of Investment

2.8.1. Guidelines under JICA Energy Efficiency and Conservation Promotion

Financing Project

Project Components

The project includes three components which are subject to the concessional loan by following

execution of Subsidiary Loan Agreement between BIFFL and GoB. These are listed below:

Component I- Industry/commercial sector component:

ODA loan for this component will be used to install energy efficient “listed”

equipment at factory, office, commercial facility, etc.

Component II- Building sector component:

Loan for this component will be utilized to set up energy efficient “listed”

equipment in buildings.



Component III- Home appliances component:

Energy efficient “listed” home appliances will be installed for this component.

Project Structure

There will be two types of loan:

i) A-type loan: This type of loan will be utilized for Component I and II. IFIs will

be directly extending the money to the borrower (industry/commercial business)

as the end users.

ii) B-type loan: This type of loan will be utilized for Component III only. In this

case, the IFIs will extend the loan to Participating Distributors (PDs). PDs could

be banks or other financial institutions who will offer the home appliances under

installment payment to end users.

iii) Proposed Lending Conditions:

Proposed lending conditions for A-type loan

Interest Rate (Currency)

Repayment Period including Grace Period

JICA - MOF 0.01% (JPY) 40 years

(Grace period: 10 years) MOF - IFIs

Subsidiary loan 1% (BDT)

20 years (Grace period: 5 years)

IFIs - Proponents On-lending loan

4% (standard) (BDT)

Varies

Proposed lending conditions for B-type loan

Interest Rate (Currency)

Repayment Period including Grace Period

JICA - MOF 0.01% (JPY)


MOF - IFIs Subsidiary loan

1% (BDT)


IFIs - PDs Participating Agreement

4% (standard) (BDT)

Varies

PDs- Residential/Small

Business

8% (4 points plus standard (BDT)

Varies

2.8.2. Guidelines under IPFF Fund



The Investment Promotion & Financing Facility IPFF-II is a Foreign Currency Investment

Support/Finance from World Bank/IDA. BIFFL is working with the World Bank and Bangladesh

Bank to become a PFI. Once effective, BIFFL will on-lend IPFF Fund for eligible projects subject

to the terms and conditions of IPFF-II. BIFFL will follow the IPFF operation manual issued by

Bangladesh Bank.

2.8.3. Guidelines under Women Entrepreneurship Unit has been incorporated and

approved by Boards

2.8.4. Guidelines under SME Unit has been incorporated and approved by the Board of Directors.

2.8.5. Loan Products : BIFFL may extend the following types of loan:

(a) Term Loan

(b) Working capital loan

(c) Bridge financing

(d) Factoring

(e) Take over financing

(f) Take out financing

(g) Lease financing

(h) Bond financing

(i) Commercial paper/instrument

2.8.6. Equity Products: BIFFL may invest in the following products/instruments:

(a) Ordinary Shares

(b) Preference Shares

(c) Mezzanine financing

(d) Convertible debt

2.8.7. Weights on Each Financing Product

Each product will have the following weights:

Long Term Finance

Large Infrastructure 50%

Green Bricks 5%

Sustainable Finance 5%

Women Entrepreneur & SME 3%

Bond 2%

Total Long Term Finance 65%

Short Term Finance



Commercial Paper /STL 10%

Bridge Loan 10%

Total Short Term Finance 20% Equity Investment

Preference Shares 10%

Others 5%

Total Equity Investment 15%

Grand Total 100%

2.9. Nature of Loan:

(a) Senior Loans: As a senior lender, BIFFL will generally be part of a syndicate of senior

lenders which may include local and foreign commercial banks and financial

institutions, multilateral and bilateral lending agencies etc. As a senior lender, BIFFL

will have, along with other senior lenders, first claim on the project assets and cash flows

as well as pari-passu security sharing with other lenders in the syndicate.

BIFFL would develop different financial products over time that are relevant and desired

by the infrastructure sector.

(b) Subordinated Loans: BIFFL will also provide subordinated loans to projects, as

required. In this case, BIFFL’s claim will be subordinate to that of senior lenders but

senior to any other claims including the equity holders in the project.

2.10. Financing Limit

(a) Subject to restrictions of the Bangladesh Bank from time to time, the maximum limit

of Single Borrower Exposure shall not exceed 30 (thirty) percent of BIFFL’s

equity/capital base; the maximum limit of Single group exposure shall not exceed 35

(thirty-five) percent of BIFFL’s equity/capital base; the maximum limit of a particular

sector exposure shall not exceed 50 (fifty) percent of BIFFL’s equity/capital base.

(b) BIFFL shall follow a cautious lending policy of Company’s resources - whether equity

funds or borrowed money. The Company will diversify its risks by spreading its

portfolio of investment to a wide variety of sectors;

(c) BIFFL facilities may be provided based on an appropriate formula, to be determined

by the appropriate authority that balances needs across sectors in a manner that will

ensure broad-based sectoral coverage and avoid pre-empting funds by a few large

projects;



(d) BIFFL will prefer to participate in the syndicated facility to diversify the portfolio and

minimize the risk;

(e) In case of Syndicated Loan, where BIFFL is not an arranger, investment by BIFFL may

be equal or higher than the amount invested by the arranger/lead financier(s) of the

project, subject to approval from BIFFL Board; and

(f) These financial limits may be reviewed by the Board from time to time.

2.11. Loan Facility Parameters

The loan facility parameters for BIFFL have been set as under:

(a) Priority: The project should be in line with the GOB’s priority plans for the sector.

(b) Eligibility: Refer to Section 2.5.

(c) Procurement: Projects will be expected to meet BIFFL’s requirement for International

Competitive Bidding (“ICB”), National Competitive Bidding (“NCB”) or Local

Competitive Bidding (“LCB”), as applicable. Appropriate limits for each of the process

would be set out from time to time. In cases where a project is unsolicited, BIFFL may

require that up to 40 percent of the total project cost or 100 percent of goods and services,

whichever is less, be procured on a basis acceptable to BIFFL.

(d) Currency: BIFFL will extend credit facilities in local currency. BIFFL will not offer

Foreign currency loans (FCL) unless BIFFL mobilizes foreign currency funds to on-lend.

Loan tenor shall not exceed the tenor for which BIFFL has raised such funds. Currency

Exchange risk should be passed on to the borrower entirely. Interest rate charged to

borrower should mirror the variable benchmark rate used for BIFFL’s borrowings. Foreign

currency loans may be provided only for projects which have a

natural hedge by way of income in foreign currency or projects which can bear adverse

exchange rate fluctuation without affecting the viability or repaying capacity.

(e) Tenor: BIFFL Loan tenor and grace period will be determined considering BIFFL’s source

of finance and as per project requirements.

(f) Interest Rate: Refer to Section 2.11.

(g) Limit/Amount of facility/Maximum size: Refer to Section 2.9.



(h) Equity: To ensure commitment, sponsors will be required to provide at least 20 percent of

the project’s equity.

(i) Return on Investment and Financial Charges:

i. The lending rate shall conform to the prevailing rates offered by other financial

institutions for long, medium and short term investments. At the same time, the

management, in deciding lending rates, has to keep in mind the average cost of

borrowing from various sources;

ii. The management while fixing lending rates, in addition to the considerations

given at (i) shall allow a gross average spread of 3 percent over its cost of funds;

iii. Financial Charges as appropriate will be levied for funds disbursed or

committed under the credit agreement until its execution/start of repayment by

the borrower. Enhanced interest and delinquent charges would be imposed for

delay in execution/start of repayment beyond the stipulated time;

iv. In case of Project Financing / Syndicated Financing the following fees and

charges are usually realized by Financial Institutions from Borrowers as a

worldwide practice:

(a) Application Fee;

(b) Due Diligence Fee;

(c) Arranger’s Fee;

(d) Delinquent/ Charges;

(e) Prepayment Fee;

(f) Agency Fee;

(g) Commitment Fee;

(h) Participating Fee;

(i) Facility Fee;

(j) Utilization Fee;

(k) Conduit Fee;

(l) Underwriting Fee.

However, as per Policy for Realization of fees from the Investment Customers , we

will realize the applicable fees for which we will provide item-wise/ specific service

and in accordance with the rules and regulation set by Bangladesh Bank / other

government offices .

It is pertinent to mention that as per DFIM Circular-10 dated December 07,2010

the fees like Commitment Fee, Supervision Fee & Cheque Dishonor Fee cannot be



charged from the clients as such we are not realizing these sorts of fees as per

guidelines.

(j) Annual Volume of Financing: BIFFL will follow the investment plan prepared for the

financial year and approved by the Board of Directors. This will be reviewed from time to

time.

(k) Security Package:

i. BIFFL financing may be full recourse, limited recourse or non- recourse basis. BIFFL

will not grant facilities where its security position is inferior to that of any other

Financial Institution in similar category;

ii. Valuations of property taken as security should be conducted, if deemed appropriate,

prior to facilities being granted. A recognized third party professional valuation firm

may be appointed to conduct valuations;

iii. Generally, all credit facilities will be provided based on the financial viability of the

proposal and creditworthiness of the borrower. Required security value and nature of

them may vary depending on factors like credit worthiness of the borrower, promoters’

stake in the business, nature of risk involved in the sector and industry, cash flow

projections, repayment capability, market prospects, etc;

iv. Security against BIFFL facilities shall include all or most of the following, subject to

approval of the Board;

a) Pledge/Hypothecation on all project assets;

b) Pledge/Lien on all shares in the project;

c) Assignment of all project insurance(s);

d) Where applicable, an Escrow Account / Trust and Retention Account with an

appropriate waterfall mechanism;

e) Where applicable, a Debt Service Reserve Account and a Major Maintenance

Reserve Account;

f) BIFFL’s right to Step in the projects allowing it to step into the project for recovery

of the loan;

g) Assignment of Borrower’s rights and benefits under the project agreements;

h) Advance repayment cheques, corporate and personal guarantees, where applicable;

i) Other securities as required by the Board e.g. third party Mortgage, corporate

guarantee, any other credit enhancement instruments;

(l) Legal Interest Protection:



i. Title searches shall be conducted periodically for collateral security both with

RJSC and land registrar for mortgages;

ii. BIFFL’s Panel Lawyers shall prepare the required legal documentation for a

borrower’s legal standing and enforcement of the Company’s interest;

iii. All Finance & Security documents for Investment shall be properly vetted by the

BIFFL’s Panel Lawyers or common counsel, as applicable. Any discrepancy/

mistakes to be corrected or wanting documents shall be obtained prior to final

disbursement of facility.

iv. Registered mortgage of property shall be supported by Registered Irrevocable

General Power of Attorney to sell the property in question;

(m) Cross Border Risk/Political & Sovereign Risk: In case of foreign sponsors seeking

credit facilities from BIFFL, a local project company needs to be formed and credit

facilities can be extended only to the local company, with appropriate security package.

2.12. Lending Terms & Conditions

2.12.1. Foreign Currency Loans

BIFFL will not offer foreign currency loans (FCL) unless BIFFL mobilizes foreign currency funds

to on-lend. Loan tenure shall not exceed the tenure for which BIFFL has raised such funds.

Currency Exchange risk should be passed on to the borrower entirely. Interest rate charged to

borrower should mirror the variable benchmark rate used for BIFFL’s borrowings. Foreign

currency loans may be provided only for projects which have a natural hedge by way of income in

foreign currency or projects which can bear adverse exchange rate fluctuation without affecting

the viability or repaying capacity.

BIFFL will not expose itself and recommend its borrowers to not take any foreign currency

exchange rate exposure, unless there is a natural hedge that the business / project provide.

(a) Interest rate:

For Senior Debt, a variable rate equal to the prevailing three-six month United

States Dollar LIBOR plus minimum 400 basis points;

For Subordinated Loans, a variable rate equal to the prevailing three-six month

United States Dollar LIBOR plus minimum 450 basis points;

A fixed rate based on the maturity of the loan and the market swap rate between

variable and fixed interest rates for United States dollar debt at the time the loan is



fully drawn, plus (a) a spread of minimum 400 basis points for senior loans; or (b)

a spread of minimum 450 basis points for subordinated loans;

(b) Final maturity in the case of a senior loan will be a maximum of fifteen (15) years

including up to three (3) years grace period. For subordinated loans, final maturity will

be a maximum of twenty (20) years, including up to five (5) years grace period;

However, loan tenor and grace period may be relaxed on a case by case basis, as

approved by BIFFL Board of Directors; but shall not exceed the concession period of

the project.The tenure of foreign currency loans by BIFFL should in no case be any

more than the tenure of the foreign currency funds that BIFFL has procured, and the

endeavor would be to have a tail to manage any exigencies.

(c) Principal and interest payable by the Borrower shall be determined in United States

dollars and the payments thereof shall be determined in United States dollars or the

equivalent in Taka of the US dollar-Taka exchange rate on the date payments are made;

(d) In case of syndicated lending, BIFFL’s spread plus fees will not be higher or lower

than that of other lenders offering similar loans; and

(e) As a prudent lender, BIFFL desires, and at times may require the Borrowers to enter

into an interest rate hedge arrangement to prevent potential project cash flow shortages

should LIBOR increase dramatically. Such a hedge may be arranged in the financial

markets by Borrowers or by BIFFL itself.

2.12.2. Local Currency Loans

a) BIFFL would define its Prime Lending Rate (PLR) or Base Rate based on “182 days

Government Treasury Bill Rate/Bank Rate/6 Month FDR rate (Circulated by Bangladesh

Bank)”, to be assessed semi-annually for all term loans

b) BIFFL would define its Prime Lending Rate (PLR) or Base Rate based on “91 days

Government Treasury Bill Rate/Bank Rate/6 Month FDR rate (Circulated by Bangladesh

Bank)”, to be assessed quarterly for all working capital loans.

PLR will be determined from the above mentioned three factors (T-Bill rate/ Bank Rate/ 6

Month FDR rate) by management with the permission of Board of Directors depending on

project merits and projects’ importance on national development.

Interest rate would be determined by its credit assessment and tenor of the loan. BIFFL will

not offer any loan at a rate below the PLR. While lending to projects that earn revenues in

local currency and cannot absorb foreign exchange rate risk without unduly endangering their



operating gross margin or debt service coverage ratios, or while the source of BIFFL loan is

in local currency, BIFFL loans will be denominated in local currency;

c) The lending terms of Local Currency Loans of BIFFL shall be determined on the basis of

either any one or all of the following:

(i) For medium and large infrastructure projects:

(a) Interest rate, on the basis of Market Conditions – would be determined by the

credit assessment and tenor. In general, the Interest Rates of Local Currency Loans

offered by BIFFL for commercially viable projects will be based on prevailing

market conditions. However, BIFFL may offer a rate lower than the prevailing

market rate considering the development impacts of specific projects. BIFFL will

not offer any loan at a rate below the PLR; or

(b) Interest rate, on the basis of “180 days Government Treasury Bill Rate” for the

Term Loan and “91 days Government Treasury Bill Rate” for the working capital

Loan

Bangladesh Bank’s Guideline on the Base Rate System for NBFI (DFIM Circular

# 06, dated: 20 August, 2013) states that “the actual lending rates charged to

Borrowers shall be the Base Rate plus the Risk Premium and the Tenor Premium.

In other way, actual lending rates charged to Borrowers shall be the Cost of Funds

plus Margin”.

BB Guideline also states that the “Risk Premium should be set by the Financial

Institutions based on the specific Borrower’s characteristics. Risk premium varies

from Borrower to Borrower” and “Tenor premium is based on the tenor the loan

facility extended to the Borrower. The premium should be set based on the specific

loan tenor by the Financial Institutions.”

The proposed Risk Premium Determination matrix depending on the project Risk

Grading is indicated below:

Sl. No. Risk Grading Short Name Risk Premium

1 Superior SUP 225 basis points 2 Good GD 275 basis points

3 Acceptable ACCPT 325 basis points 4 Marginal/ Watch list MG/WL 500 basis points 5 Special Mention SM 500 basis points



The proposed Tenor Premium determination matrix depending on the loan tenor

is indicated below:

Sl. No. Loan Tenor in Years Tenor Premium

1 Less than 5 years 100 basis points

2 5 ~ 8 years 150 basis points



5 More than 15 years 300 basis points

(c) In case of syndicated lending, BIFFL’s interest rate could be lower than that of

other lenders offering similar loans, in case the project benefits justify it, subject

to approval of the Board and could be higher in case longer tenor is offered;

(ii) In case of energy efficient and development projects having considerable

environmental and social benefits, BIFFL may extend credit facilities at a

concessionary rate, as approved by BIFFL Board of Directors.

(iii) Subject to availability of concessional funds, minimum annual interest rate for

projects implemented in rural areas or renewable energy projects that receive grants

or subsidies from multilateral agencies and/or GOB/Bangladesh Bank/International

Donors, Lenders or any Fund, or renewable energy/energy efficiency/urban

environmental services projects that are not feasible with commercial loans, or

pilot/demonstration projects of similar types, will be as follows:

2.12.3. (a) Renewable Energy & Eco-friendly project Scheme: (Category -1)

Scheme details are given below:

Sector Sub-Sector Description Interest

Rate Tenor

Renewable Energy

Bio-gas Large Bio-gas plant, based on

bio-mass Up to 9%

p.a.

Max. 5 yrs. Incl.

9 months Grace

Period

Large Bio-gas plant, based on

Poultry and dairy

Solar Energy Solar PV plant of capacity 1 MW

& higher

Up to 9%

p.a.

Max. 10 yrs. Incl.

1 yrs. Grace

Period

Solar Cooker Assembly Plant

Solar Water Heater Assembly

plant

Solar Air Heater & Cooling

System Assembly plant



Solar Energy Driven Cold

Storage Plant

Up to 9%

p.a.

Max. 10 yrs. Incl.

9 months Grace

Period

Wind Energy Wind powered Electricity

Generation Plant

Energy Efficient

Technology

Replacement of inefficient

products by Energy Efficient

lighting system, Efficient

Electronic Goods, Fuel efficient

Boiler in the Industrial Concern,

Par Boiling and milling on the

basis of Energy Audit Report.

Up to 9%

p.a.

Max. 5 yrs. Incl.

6 months Grace

Period

Auto censored power switch

assembly plant for saving

electricity.

ICS/ICS Renewable/Hybrid

Cook stove Assembly plant

LED Bulb/Tube light Assembly

plant

Solid Waste

Management

Methane recovery from

municipal waste and production

of electricity from it.

Up to 9%

p.a.

Max. 5 yrs. Incl.

6 months Grace

Period

Production of compost from

municipal waste.

Hazardous Waste

Management/Treatment

Fecal Sludge Management and

processing Plant

Liquid Waste

Management

Waste Water Processing Plant Up to 9%

p.a.

Max. 5 yrs. Incl.

6 months Grace

Period

Sewerage Water Processing Plant

Alternative Energy

plant

Production of oil/fuel from tyre

through Pyrolysis

Up to 9%

p.a.

Max. 5 yrs. Incl.

6 months Grace

Period

Non Fire Block

Brick

Manufacturing

Project

Compressed Block-Brick

Manufacturing Project

Up to 9%

p.a.

Max. 7 yrs. Incl.

1 yrs. Grace

Period

Auto Calved Aerated Concrete

Manufacturing Project

Recycling and

Recycling Enabled

Production of Paper by recycling

used paper



(b) Renewable Energy & Eco-friendly project Scheme: (Category -2)

Sector Description Interest Rate Tenor

Effluent Treatment Plant (ETP)

Establishment of Biological ETP

5 years

Establishment of ETP combining Biological & Chemical Technology Conversion of Chemical ETP Plants into ETP plants combining Biological & Chemical Technology

Replacement of conventional Limestone furnaces with new technology based furnaces

- 5 years

Production of Vermicomposting fertilizer

- 4 years

Hydro-electric Power Plant (Pico, Micro, and Mini)

- 5 years

PET Bottle Recycling Plant

- 5 years

Solar Battery Recycling Plant

- 5 years

LED Bulb Production Plant

- 5 years

Establishment of Hybrid Hoffman Kiln (HHK)/Tunnel Kiln/ Equivalent Technology

- 5 years

Product

Manufacturing

Project

Plastic waste

(PVC,PP,LDPE,HDPE, PS)

Recycling Plant

Up to 9%

p.a.

Max. 5 yrs. Incl.

9 months Grace

Period

Recycling enabled Baggage

Manufacturing (from Natural

Raw Materials, like bamboo

etc.).

Recycling enabled Non-oven

Polypropylene thread and

baggage manufacturing plant

Miscellaneous

Palm-oil production plant by

using energy efficient technology

Up to 9%

p.a.

Max. 5 yrs. Incl.

9 months Grace

Period



Sector Description Interest Rate Tenor

based Brick Field, to reduce the Carbon Emission.

Conditions applied:

(i) BIFFL will maintain at least 3 percent spread on its cost of fund at all times,

determined based on the credit risk assessment and tenor

(ii) In case of syndicated lending, BIFFL’s interest rate may be lower than that of other

commercial lenders

(iii) BIFFL may finance the entire portion of the loan to such projects.

(iv) BIFFL’s loan, however, will not exceed 80 percent of the project cost in any case.

(v) BIFFL loan in the above category / cluster of investment will also be administered

by norms as set by Bangladesh Bank / International Financiers in case of Tenor,

Pricing, Grace Period etc.

2.12.4. Fees and Charges

For Large & Medium Infrastructure Projects:

(a) The matrix of Service Charges and Fees for all Loans are as follows:

Note: 1. In case of syndicated finance, terms and conditions of the syndication will prevail as per syndication terms and conditions. 2. Net of all statutory deductions, AIT & VAT at source. 3. Fees may be negotiated among sponsors and BIFFL through different arrangement. (b) Arranger’s Fee (Both USD and BDT):

(i) BIFFL’s Arranger’s Fees will be up to 1% on the total financing arranged, depending on the amount raised and the complexity of the transaction.

(ii) In case of co-arrangement/participation, the fee will match that of other co-arranger(s)/ participant(s) under the transaction.

Description of Items USD Loans/ BDT Loans

(i) Non-refundable

Application Fee NIL

(i) Non-refundable Due

Diligence Fee At Actual

(i) Upfront Fee NIL



(c) Prepayment Fee (Both USD and BDT):

Minimum 1% on the outstanding Principal amount prepaid for USD loans; and

Minimum 1% on the outstanding Principal amount prepaid for BDT loans.

Mandatory Prepayment: BIFFL shall have a right to accelerate the Repayment of

the outstanding amount of the loan, in the event the cash flows of the company

are adequate for such acceleration. No prepayment premium would be levied in

such a case. There will be no fees applied on Mandatory Prepayment.

Voluntary Prepayment:

(a) There will be Lock-in period for voluntary Prepayment for the first two years

of repayment;

(b) Minimum Prepayment amount will be 5% of the Principal amount;

(c) A Prepayment Fee of 2% on the prepaid amount will be applicable;

(d) Prepayment has to be made on the scheduled repayment date;

(e) A notice of 15 days is required for the voluntary Prepayment.

(c) Default Charges (Both USD and BDT): 2% above Interest Rate on the outstanding amount.

(d) Other Fees/Charges to be borne by the Borrower (Both USD & BDT):

All Fees/charges and reasonable level of expenses for the Investment Advisor(s) and Consultant(s) appointed by BIFFL for appraisal, due diligence etc. This would include any costs incurred during the operations of the project such as Independent Engineer’s fees, Auditor’s fees, Facility Agent’s fees etc.

Cost incurred in connection with BIFFL officials' visits in relation to project due diligence, loan negotiations, meetings, project monitoring & evaluation etc.

All co-financiers’ fees and charges as may be applicable;

Cost incurred in connection to obtaining Legal opinion, Documentation & Legal expenses, Creation of Charges with RJSC, Mortgage of Land & Buildings, Environmental Assessment and Monitoring & Evaluation of the project etc.

2.12.5. Repayment (Both USD & BDT):

Repayment is normally in equal semi-annual/quarterly installments or be structured as per cash flow generation.

2.12.6. Revision of Lending Policy



The Lending Policy of BIFFL shall be reviewed by BIFFL Board at every year end and the management will take necessary measures for updating the same as deemed necessary to make it responsive to the prevailing market conditions.


CHAPTER – 3

CREDIT ASSESSMENT & RISK ANALYSIS


Chapter 3: Credit Assessment & Risk Analysis Page | 29

3. CREDIT ASSESSMENT & RISK ANALYSIS

3.1. Credit Assessment

A thorough credit and risk assessment will be conducted prior to granting any facility. The loan

application process begins with BIFFL’s receipt of the sponsor’s completed loan application form

and completes with issuance of a loan sanction letter.

Prior to formal application, the investment team should meet with sponsors in order to discuss the

following:

1. Eligibility criteria for BIFFL loans;

2. Loan application procedure;

3. Loan appraisal process and timeline;

4. General terms and conditions of BIFFL loans; and

5. Environment and social safeguards framework of BIFFL.

Once BIFFL receives a completed loan application form, a preliminary project review/scanning

will be conducted by the Investment Department of BIFFL using information supplied by the

sponsor/lead financing arranger of the project. Documents to be reviewed at this stage may include

project Information Memorandum (IM), key project agreements, business plan, third party reports,

etc. A project brief (Appendix II) will be prepared and submitted to the BIFFL Board for its initial

consent.

The project brief shall contain the following information:

1. Project name/Title

2. Project description

3. Sponsors and shareholding structure

4. Key project agreements

5. Project cost

6. Financing plan

7. Proposed terms, conditions and covenants

8. Project strengths and weaknesses

9. Proposed BIFFL participation

Once preliminary consent is obtained from BIFFL Board, a Preliminary Letter of Support (PLS)

will be issued to the sponsor(s) indicating BIFFL’s willingness to provide credit facility to the

project subject to satisfactory due diligence and legal documentation.

The Project Appraisal Team/Fund Manager will conduct detailed due diligence of the project using

information supplied by the sponsor/lead arranger of the project as well as information collected

from external sources. If needed, and in case of syndicated financing, if agreed by majority lenders,

an independent consultant and a common legal counsel will be appointed at this point. The purpose



of this step is to identify probable risks in the project and initiate discussions regarding potential

risk mitigation measures with the sponsors. A detailed project appraisal report will be prepared

and comments from independent consultant and common legal counsel, if any, will be incorporated

with due importance.

The guideline for appraising projects is provided in Appendix III, which may be amended by

BIFFL Board from time to time.

3.2. Loan Syndication & Structured Finance

Syndication means joint financing by more than one Bank/Financial Institution (FI) to the same

Client against a common security. This is done basically as part of risk sharing/dispersion, to

spread out the risk. It also provides a scope for an independent evaluation of risk and focused

monitoring by the agent/lead bank.

As part of its risk diversification strategy, BIFFL will give preference to participating in a

syndicated financing rather than being the sole lender of a project. However, the following aspects

will be analyzed in detail:

Credibility and market reputation of the lead arranger;

Credibility and market reputation of the sponsor(s);

Bankability of the project;

Market appetite for financing the project;

Adequacy of project due diligence;

Reasonableness of the financing terms; and

Time limit for the arrangement of financing.

3.3. Credit Analysis 3.3.1. Project Analysis

The Project Analysis will be carried out focusing on the following points:

a) Project description

b) Rationale of the project

c) Purpose of Credit

BIFFL must ensure that the credit is used for the purpose it was given. If the borrower utilizes

funds for purposes not shown in the original proposal, BIFFL should take steps to determine the

implications on creditworthiness. In case of corporate facilities where borrower has own group of

companies such diligence becomes more important. BIFFL should conduct credit assessment on

consolidated/group basis.



d) Implementation status

i. Status of clearances/permits

ii. Status of land acquisition

iii. Project agreements (incl. EPC, O&M contracts supply contracts, off take

contracts etc.)

e) Management team

f) Project cost

i. Choice of technology

ii. Technical design and adequacy

iii. Review of civil, mechanical and electrical designs

iv. Review of engineering, procurement and construction (EPC) contract

g) Financing plan

h) Revenue potential

i) Regulatory/Legal framework governing the project

j) Environmental compliance

k) Margins / Profitability and the factors that could adversely impact it

3.3.2. Financial and Economic Analysis

I) Financial Analysis

i. Project Cost

ii. Financing Plan

a. Debt and Equity Injection Plan

iii. Construction Cost Management

iv. Operations and Maintenance expenses (annual and periodic)

v. Tariff/User Fee structure

vi. Revenue streams

vii. Financial Statement Analysis

viii. Projected Financial Performance.

ix. Key Financial Indicators- NPV, IRR, Project Payback Period, DSCR,

LLCR etc.

a. NPV

NPV can be described as the difference amount between the sums of discounted cash inflows

and cash outflows.



�Cash Flow�

(1 + r)�

�

��

Where t= time period 1 to N

r = cost of capital

b. IRR

Internal Rate of Return is the Interest Rate at which the NPV equals 0.

NPV = �Cash Flow�

(1 + IRR)�= 0

�

��

Where t= time period 1 to N

And IRR = Internal Rate of Return

IRR could be calculated at the Project level and specifically for Equity as well (to indicate the

returns the project is generating, irrespective of the source of funds, and the returns the project is

generating for its equity shareholders).

c. Project Payback Period

Payback period in capital budgeting refers to the period of time required for the return on an

investment to repay the sum of the original investment. The time value of money is not taken into

account.

A +B

C

Where, A = last period with a negative cash flow

B = absolute value of the cumulative cash flow at the end of period A

C = the cash flow during the period A

d. Debt Service Coverage Ratio (DSCR):

This ratio shows the number of times the project’s cash flows cover the payment of interest

and repayment of principal of long-term debt.

It is computed as follows:

Cash Flow Available for Debt Service (CADS)

Debt Service (Principal + Interest)



e. LLCR

Loan Life Cover Ratio is defined as the NPV of project CADS over loan life to debt outstanding

on any given day.

Net Present Value of Cash Flow Available for Debt Service

Present Value of Outstanding DebtAmount of Principal Outstanding at any given Date

x. Sensitivity Analysis

Sensitivity analysis to be carried out taking into consideration key variables of the

project and ascertaining their impact on the project financials and key indicators.

II) Economic Analysis

Economic analysis also referred to as social cost benefit analysis is more concerned

with judging a project from the broader social point of view. In such an evaluation

the focus on the social costs and benefits of a project which may often be different

from its monetary costs and benefits. The questions sought to be answered in social

cost benefit analysis are:

- What are the direct economic benefits and costs of the Project measured in

terms of shadow (efficiency) prices and not in terms of market prices?

- What would be the impact of the project on the distribution of income in the

Society?

- What would be the contribution of the project towards fulfillment of certain

wants like self-sufficiency, employment and social order?

i) Valuation of Economic Costs and Benefits

ii) Determination of EIRR

iii) Sensitivity Analysis

The approach followed to the determine the EIRR should be in line with practices adopted

by ADB, World Bank etc.

3.3.3. Environmental Impact Analysis

In recent time environmental concerns have assumed a great deal of significance. Ecological

analysis should be done particularly for the major projects which have mentionable ecological

implications, like, power plants, bulk chemical plants and leather processing industries. The key

questions raised in ecological analysis are:



- What is the likely damage to be caused by the project upon operation to the

environment?

- What is the cost of restoration measures required to ensure that the damage to

the environment is contained within the acceptable level?

BIFFL would evolve a very clear standard of Environment and Social Impact

assessment (ESIA) that it would require to be undertaken for each project.

These sector-wise ESIA norms need to be developed and shared with potential

borrowers upfront, so that they adhere to these specifications. In the short term

BIFFL would adopt the practices adopted by IDCOL, and over time BIFFL

would endeavor to adopt Equator Principles.

3.3.4. Technology Analysis/Technical Aspects

a) Choice of technology

b) Technical design and adequacy

c) Review of civil, mechanical and electrical designs

d) Review of supply contracts

e) Review of engineering, procurement and construction (EPC) contract

f) Review of operation and maintenance (O & M) contract

g) Review of other contracts, if any

h) Review of the roles and responsibilities of the Sponsor and the

equipment/technology provider to assess the relative capacities.

i) Environmental compliance

j) Independent consultant’s report, if any

3.3.5. Country, Sector and Market Analysis

a. Country Analysis

b. Investment Outlook

c. Regulatory Framework

d. Market and Sector Analysis

e. Analysis of Market Forecasts

f. Credibility of off-takers, if any

g. Independent Consultant’s Report, if any

3.3.6. Borrower/Sponsor Analysis

(a) The project would be undertaken either by an existing company or through a Special

Purpose Vehicle (SPV) formed for the purpose of the project. The following would

need to be analysed with regard to the entity implementing the project.

a. Certificate of Incorporation



b. Memorandum of Association

c. Article of Association

d. Shareholding & Share Subscription Agreement (between the sponsors)

e. Board of Directors

f. Management Team

The majority shareholders, management team and group or affiliate companies should be

assessed. Any issues regarding lack of management depth, complicated ownership structures

or inter-group transactions should be addressed, and risks mitigated. The following issued to

be analyzed to assess the credit requirement:

b) Borrower/Sponsor experience:

- How long the borrower/sponsor is involved in the business

- Past track record of business

- Past track record of involvement with other business

- Reasons for diversifying business

- Other experience if any

c) Business skill:

- Analysis of last three years business growth.

- Comparing the growth with the industry condition.

- Assumption of future business prospects.

d) Management & succession:

- Qualification of the management personnel.

- Analysis of relevant experience of the management.

- Analysis of management competence.

- Analysis of resilience risk.

- Succession plan of the management.

In case the borrower is an SPV then the following analysis would be carried out with

respect to the sponsor-

The Sponsor Analysis will be carried out focusing on the following points:

- Corporate history of the Company

- Authorized and paid up capital

- Board of Directors

- Shareholding structure



- Sponsors net worth analysis

Whether the Borrower’s net worth justifies the level of credit facilities being

requested. Net worth is calculated by deducting total debt liabilities from total

assets and is made up of:

a) Paid up share capital; and

Accumulated surplus consisting of retained profits and reserves.

- Performance of group companies

- Historical Financial Analysis

If possible, an analysis of a minimum of 3 years historical financial statements

of the Borrower be presented. In case of corporate guarantor, guarantor’s

financial statements should also be analyzed. The analysis should address the

quality and sustainability of earnings, cash flow and the strength of the

borrower’s balance sheet. Specifically, cash flow, leverage and profitability are

to be analyzed.

Evaluation process includes:

a) Analysis of financial health & other conditions of existing business, and

b) Making future projections of business operation in the light of the past

operations.

For (a) audited financial statements for past three consecutive years or

management statements in lieu thereof will be required. In the light of results of

(a), the Credit Officer will use his/her skill to make realistic assumptions for

future projections.

Analysis of Financial Statements involves rearranging the figures of the annual

accounts into a form to study:

- The working capital involved in the business;

- Composition of receivables;

- Net worth;

- Liability & dependence on borrowed funds

- Projected cash flow statements

- Debt Service Coverage Ratios and Loan Life ratios



The above analysis will reveal the answers of the following:

i) Capital Gearing

The ability of a firm to generate cash from its business operation, sufficient enough

to principal and interest repayment of lender’s debt obligation is to be given highest

consideration while evaluating the credit proposal.

ii) Working capital

Whether the current assets as shown in the borrower’s accounts are sufficient to

meet the borrower’s current commitments and liabilities and the type and nature

of current assets should also be studied. For computation of working capital,

current liabilities are deducted from the current assets

iii) Profitability

Whether there are sufficient earning/ cashflows to repay the credit facilities

requested by the borrower leaving sufficient balance for payment of dividend at an

attractive rate and investment in the business.

iv) Liquidity Position and Cash Flow

When assessing the borrower’s liquidity position and profitability, the timing of the

borrower’s commitments must be considered. His commitments must be placed in

such a way that the business will not face a cash shortage in the foreseeable future.

The following important ratios may be included in the analysis:

a) Debt Equity Ratio

b) Debt Service Coverage Ratio

c) Net profit to Net worth ratio (ROI)

Each of these ratios is discussed in more detail in the following:

a) Debt Equity Ratio:

The amount of equity in a company can be considered its ‘Cushion’ by

which the company can absorb initial losses. Since the debt carries a fixed

rate of interest & contractual repayment of principal, too high amount of

debt may obligate the company to higher payment than it can meet.



This ratio measures the dependence of business on loan capital as a source

of long-term finance. The general view of gearing is the lower the ratio, the

lower the risk to a creditor in lending to a borrower. However, this cannot

be taken as a hard and fast rule; gearing must be considered in conjunction

with the other factors influencing the lending decision. On its own, a high

level of gearing would not be sufficient to deter the Financial Institution

from Lending to a customer.

b) Net profit to net worth ratio:

No firm can remain in business very long while it sustains losses. From a

lender’s point of view, the profits retained in the business are the primary

source for repayment of the loan facilities. The Net Profit to Net worth Ratio

is one of the best indications of a firm’s profitability. Since net worth

represents the borrower’s capital, this ratio is also known as return on capital

employment (ROCE).

There are many other ratios, which may further help in analysis the

borrower’s financial statements.

- Projected Financial Performance

In all cases, a projection of the borrower’s future financial performance should

be provided, indicating an analysis of the sufficiency of cash flow to service

debt repayments. Facilities should not be granted if projected cash flow is

insufficient to repay debts.

Financial analysis should include the following:

Sensitivity analysis for the key variables of each project

The financial projections should be undertaken at least for the tenure

of the BIFFL loan and a few years thereafter.

Ability of the Sponsor to get in equity before the disbursal of debt.

- Credit Information Bureau Report

Credit memorandum should clearly state the status of the borrower in the CIB

(Credit Information Bureau) report. The application should also contain liability

status with other Banks and FI’s and also should obtain their opinion of past

credit behavior.



e) Account Conduct

For existing borrowers, the historic performance in meeting repayment obligations (trade

payments, cheques, interest and principal payments, etc.) should be assessed.

f) Adherence to Lending Guidelines

Credit Applications should clearly state whether or not the proposed application is in

compliance with the BIFFL’s Lending Guidelines.

g) Name Lending

Credit proposals should not be unduly influenced by an over reliance on the sponsoring

principal’s reputation, reported independent means.

3.4. Financing Document

a) Facility Structure

The amounts and period of financing proposed should be justified based on the

projected repayment ability and facility purpose. Excessive long period or amount

relating to business needs increases the risk of fund diversion and may adversely affect

the borrower’s repayment ability.

b) Security

A current valuation of collateral should be obtained and the quality and priority of

security being proposed should be assessed internally and by a third party valuer, if

necessary. Facilities should not be granted based solely on security. Adequacy and the

extent of the insurance coverage should be assessed.

c) Legal and Security Aspects

i. Constitutionnel Documents i.e. Mémorandum and Articles of association, joint-

venture agreement etc.

ii. Project Documents i.e. Power Purchase Agreement, Land Lease Agreement,

Supplier Contract, Engineering, Procurement and Construction (EPC) Contract

Fuel Supply Agreement etc.

iii. Implementation Agreement, if any

iv. Environmental Compliance

v. Insurance



vi. Security Documents

vii. The vetting of constitutional documents of the borrower should ensure that the

borrower is indeed permitted to undertake such projects and is permitted to

borrow against the same.

viii. Analysis of the project documents should be geared towards assessing the risks

to the sponsor / project that are not mitigated.

3.5. Risk Assessment and Mitigation Measures

a) Technological Risk

It is preferable that a proven technology adopted for the project i.e successfully

implemented and operational in similar projects. The product’s stage in its life cycle

must be understood. Technical aspects of the products must be addressed. The Credit

Officer

must be satisfied with the mitigating factors of technical and technological risk,

associated with the products.

In analyzing the Technological Risk, the following points should be critically

examined:

- Analysis of the technical and engineering aspects of a project needs to be done

continually.

- Whether the availability of raw materials, power and other inputs have been

established.

- Whether the appropriate production process has been chosen.

- Whether the equipment and machines chosen are appropriate.

- Whether the provision has been made for the treatment of effluents.

- Whether the proposed layout of the site, buildings and plant is sound.

- Whether the provision has been made for independent power generation has

been made for uninterrupted supply of power and thereby production

b) Interest Rate Risk

The interest rate must be fixed based on different risk factors associated with the type

of business such as liquidity risk, commodity risk, equity risk, loan period risk. Interest

rate also arises from the movements of interest rate in the market. In assessing the

pricing and profitability, the credit officer must consider the income from ancillary

business like foreign exchange business, group business, volume of business etc.

Related questions to be addressed are:



- What is the rate of interest charged?

- Is the rate fixed in consideration to the risk factors?

- Will the rate charged be profitable to BIFFL?

.

c) Exchange Rate Risk

Credit memorandum should clearly state the assessment of exchange rate risk of the

applicant and identify the mitigating factors for its exposure to foreign currency.

d) Project Implementation Risk

In case of a large expansion, which constitutes investment of more than 30% of total

capital of a company or for a green field project, project implementation risk should be

thoroughly assessed. Project implementation risk may involve construction risk

(Gestation period, regulatory clearances, technology selection, availability of

infrastructure facilities) funding risk, and post project business, financial, and

management risks.

A cost benefit analysis could be undertaken to assess the possibility of giving a EPC

contract, ensuring no time and cost overrun risks. These and other possible means of

project implementation risk should be explored.

e) Cost Overrun Risk

This type of risk is generally involved in taking project finance decision. A high degree

of cost overrun may cause the failure of the project. Therefore, the credit officer must

consider the cost components of the project and their chance of devaluation. The

questions to be addressed are:

- Whether the construction cost may increase?

- Whether the imported machinery cost may increase for the fluctuation of the

foreign currency?

- Are all types of cost components addressed during preparation of feasibility

report?

- Does sensitivity analysis prove sufficient shock absorbing capability of the

project?

- Who bears this risk? If the sponsor bears this risk entirely, is the sponsor

financially capable of doing so? Is the Borrower providing overrun guarantees?



f) Environmental and Social Risk

g) Country Risk

h) Regulatory Risk

i) Political Risk

j) Exit Option

Credit memorandum should clearly state the exit option from the borrower in case of

early identification of deterioration of grading of the borrower.

The completed Project Appraisal Report (Appendix III) will be submitted to BIFFL Credit Risk

Management Committee headed by Executive Director & CEO, BIFFL and comprising heads of

all functional units and a presentation will be made by the concerned dealing officer.

Once approved by the Credit Risk Management Committee, the appraisal report along with draft

loan term sheet will be submitted to BIFFL Credit Committee for their review and approval. The

Credit Committee, if satisfied, will recommend the project to BIFFL Board for final credit

approval.

In case of infrastructure projects, it is critical to analyse the project’s (i) Off-take arrangement /

agreement; (ii) Pricing mechanism. The off take risk, payment for the same, the input (for ex.

Fuel supply) risk needs to assessed carefully , including impact of delays and loss of revenue.


CHAPTER – 4

CREDIT RISK GRADING


Chapter 4: Credit Risk Grading Page | 44

4. CREDIT RISK GRADING

4.1. Introduction

Credit Risk Grading (CRG) is an important tool for credit risk management as it considers various

dimensions of risk involved in different credit transactions. The aggregation of such grading across

the borrowers, activities, and the lines of business can provide a good assessment of the quality of

credit portfolio.

CRG will provide a quantitative measurement of risk associated with a credit exposure and hence,

facilitate informed decision-making. CRG outputs will be relevant for individual credit selection

as well as for pricing and specific features of the credit facility.

4.2. Credit Risk Grading Scale

The CRG scale will be applicable for both new and existing borrowers.

It consists of 8 categories, of which categories 1 to 3 represent various grades of acceptable credit

risk and 4 to 8 represent unacceptable credit risk.

Grading Short Name Number Superior SUP 1

Good GO 2 Acceptable ACCPT 3

Marginal/Watch list MG/WL 4 Special Mention SM 5

Sub Standard SS 6 Doubtful DF 7

Bad & Loss BL 8

BIFFL would only look at projects with an acceptable credit risk and between Categories 1 and 3. Cases which fall in categories 4 and 5 would be considered only under exceptional conditions due to strategic reasons.

The following Risk Grade Matrix is provided as a guideline. However, more conservative risk grading should be applied if there is a difference between the personal judgment and the Risk Grade Scorecard results.

Risk Rating Grade Definition

Superior- Low Risk

1

Credit facilities, which are fully secured i.e. fully cash covered

Credit facilities fully covered by government Guarantees Credit facilities fully covered by the guarantee of a strong

international bank




Good- Satisfactory Risk

2

Strong repayment capacity of the borrower The borrower has excellent liquidity and low leverage The Company has demonstrated consistently strong

earnings and has cash flow certainty Borrower has well established, strong market share Very good management skills and expertise Credit facilities fully covered by the guarantee of a strong

local bank Aggregate score of 85 or greater based on the Risk Grade

Score Sheet

Acceptable– Fair Risk

3

These borrowers are not as strong as ‘Good’ grade borrowers but still demonstrate consistent earnings, cash flow certainty and have a good track record

Borrowers have adequate liquidity, cash flow and earnings Credit in this grade would normally be secured by

acceptable collateral (1st charge over inventory/receivables/equipment/property)

Acceptable management Acceptable parent/sister company/guarantee Aggregate score of 75-84 based on the Risk Grade Score

Sheet

Marginal- Watch List

4

This grade warrants greater attention due to conditions affecting the borrower, the industry, or the economic environment

These borrowers have an above average risk due to strained liquidity, higher than normal leverage, thin cash flow and/or inconsistent earnings

Weaker business credit and early warning signals of emerging business credit detected

The borrower incurs a loss Facility repayments routinely fall past due Account conduct is poor or other untoward factors are

present Aggregate Score of 65-74 based on the Risk Grade Score

Sheet

Special Mention 5

This grade has potential weaknesses that call for management’s close attention. If left uncorrected, these weaknesses may result in a deterioration of the repayment prospects of the borrower

Existence of severe management problem




Facilities should be downgraded if sustained deterioration in financial condition is noted (consecutive losses, negative net worth, excessive leverage)

Aggregate Score of 55-64 based on the Risk Grade Score Sheet

Substandard 6

Financial condition is weak and capacity or inclination towards repayment is in doubt

These weaknesses jeopardize the full settlement of facilities Bangladesh Bank Criteria for sub-standard credit shall apply Aggregate Score of 45-54 based on Risk Grade Score Sheet

Doubtful and Bad (non- performing)

7

Full repayment of principal and interest is unlikely and the possibility of loss is extremely high

However, due to specifically identifiable pending factors such as litigation, liquidation procedures, or capital injection, the asset is not yet classified as Bad & Loss

Bangladesh Bank Criteria for doubtful credit shall apply Aggregate Score of 35-44 based on Risk Grade Score Sheet

Bad (non- performing)

8

Credit of this grade has been outstanding for a long time with no progress in obtaining repayment or is on the verge of wind up/liquidation

Prospect of recovery is poor and legal opinions have been perused

Proceeds expected from the liquidation or realization of security may be awaited. The continuance of the facility as a bankable asset is not warranted and the anticipated loss should have been provided for

This classification reflects that it is not practical or desirable to defer writing off this valueless asset even though partial recovery may be affected in the future. Bangladesh Bank guidelines for timely write-off of bad facilities must be adhered to. Legal procedures/suit initiated

Bangladesh Bank criteria for bad and loss credit shall apply An Aggregate Score less than 35 based on Risk Grade Score

Sheet

4.3. Credit Risk Grading Computation Process

The following steps outline the detail process for arriving at credit Risk Grading:

Credit Risk for counterparty arises from an aggregation of the following:

Step – I: Identify all the Principal Risk Components



Financial Risk

Business/Industry Risk

Management Risk

Security Risk

Relationship Risk

Completion Risk

Operating Risk

Political Risk

Legal and Regulatory Risk

Environmental and Social Risk

Force Majeure Risk

In addition to the already identified principal risk components, the following could be added:

Project Construction risk – both for time and cost overruns

Revenue risk

Each of the above mentioned key risk areas are required to be evaluated and aggregated to arrive

at an overall risk grading measure.

Evaluation of Financial Risk

Risks that causes counterparties fail to meet obligations due to financial distress. This typically

entails analysis of financials i.e. analysis of leverage, liquidity, profitability, and interest coverage

ratios. To conclude, this capitalizes on the risk of high leverage, poor liquidity, low profitability,

and insufficient cash flow.

Evaluation of Business/Industry Risk

Risks that cause adverse industry situation or unfavorable business condition that will impact

borrowers’ capacity to meet obligations. The evaluation of this category of risk looks at parameters

such as business outlook, size of business, industry growth, market competition, and barriers to

entry/exit. To conclude, this capitalizes on the risk of failure due to low market share and poor

industry growth.

Evaluation of Management Risk

Risks that cause counterparties to default as a result of poor managerial ability, including

experience of the management, its succession plan, and team work.



Evaluation of Security Risk:

Risks that might cause the bank to be exposed due to poor quality, or strength, of the security in

case of default. This may entail strength of security and collateral, location of collateral and

support.

Evaluation of Relationship Risk:

These risk areas cover evaluation of limits utilization, account performance, conditions/covenants

compliance by the borrower and deposit relationship.

According to the importance of risk profile, the following weightages may be applied for

corresponding principal risks.

Principal Risk ComponentWeight

Financial Risk 35%

Business / Industry Risk 25%

Management Risk 15%

Step – II: Allocate weightages to Principal Risk Components

CREDIT RISK

Financial Risk

Leverage

Liquidity

Profitability

Coverage

Management Risk

Experience

Succession

Team Work

Business/Industry Risk

Business Outlook

Age of Business

Size of Business

Industry Growth

Market Competition

Barriers to Business

Relationship Risk

Account Conduct

Utilization of Limit

Compliance of Covenants/Condition

Personal Deposits

Security Risk

Security Coverage

Collateral Coverage

Support



Security Risk 20%

Relationship Risk 5%

Principal Risk Components: Key Parameters: Financial Risk Leverage, Liquidity, Profitability, and Coverage

ratio. Business/Industry Risk Size of Business, Age of Business, Business

Outlook, Industry Growth, Competition, and Barriers to Business.

Management Risk Experience, Succession, and Team Work. Security Risk Security Coverage, Collateral Coverage, and

Support. Relationship Risk Account Conduct, Utilization of Limit, Compliance

of covenants/conditions, and Personal Deposit.

Principal Risk Components: Key Parameters: Weight: Financial Risk 35% Leverage 10% Liquidity 10% Profitability 10% Coverage 5% Business/Industry Risk 25% Size of Business 7% Age of Business 4% Business Outlook 4% Industry growth 4% Market Competition 3% Entry/Exit Barriers 3% Management Risk 15% Experience 15% Security Risk 20% Security coverage 8% Collateral coverage 8% Support 4% Relationship Risk 5% Account conduct 2% Utilization of limit 1% Compliance of covenants/condition 1% Personal deposit 1%

Step – III: Establish the Key Parameters

Step – IV: Assign weightages to each of the key parameters



After the risk identification and weightage assignment process (as mentioned above), the next step

will be to input actual parameter in the score sheet to arrive at the scores corresponding to the

actual parameters.

The following is the proposed Credit Risk Grade matrix based on the total score obtained by an

obligor:

Number Risk Grading Short Name Score

1 Superior SUP 100% cash covered Government

guarantee International Bank guarantees

2 Good GD 85+

3 Acceptable ACCPT 75-84

4 Marginal/ Watch list MG/WL 65-74

5 Special Mention SM 55-64 6 Sub-standard SS 45-54 7 Doubtful DF 35-44 8 Bad & Loss BL <35

The following is the proposed Interest Rate Determination matrix based on the total score obtained

by an obligor:

Number Risk Grading Short Name Interest Rate 1 Superior SUP PLR + 250 bps 2 Good GD PLR + 300 bps

3 Acceptable ACCPT PLR + 350 bps

4 Marginal/ Watch list MG/WL PLR + 500 bps

5 Special Mention SM PLR + 500 bps

The interest rates mentioned in the table above shall be the base category wise interest rate and

shall be applicable for a loan tenor of 7 years. For any loan tenor above 7 years, for every additional

3 years an additional 50 bps would be charged to the base category interest rate.

Step – V: Input data to arrive at the score on the key parameters

Step – VI: Arrive at the Credit Risk Grading based on total score obtained

Step – VII: Interest Rate Determination



In the event that BIFFL is part of the Lenders consortium then post Credit Risk Grading the interest

rate charged would be as per the other consortium lenders for the same tenor subject to the

condition that the interest rate charged should be higher than the base category wise interest rates

as mentioned above. Further if the tenor of the loans provided by the lenders are different than

BIFFL than BIFFL would adopt a differential pricing for the loan.

4.4. Sensitivity Analysis and Tolerance Level

Sensitivity analysis will be carried out for big loans to examine the effect of changes in input and

output prices, low capacity utilization and fall in demand etc.

4.5. Collection of CIB Report

Bangladesh Bank has established a central database in Credit Information Bureau (CIB)

department and issued directives to all banks and financial institutions not to entertain any credit

facilities without having a clean and unclassified CIB.

BIFFL will not disburse any credit facility to a Borrower before receiving a clean and unclassified

CIB report.

4.6. Approval of Credit Memorandum

All Credit Memorandum must be reviewed by Credit Department for independent assessment and

identification of risk and to be approved by respective committees or Board as per the delegated

authority.

4.7. Offer Letter

The sanction of a facility whether loan will be followed by an offer letter mentioning the detailed

terms and conditions of sanction, documentation requirements, amount of facility, interest rate,

period, size of installment, mode of repayment, amount of fees and charges etc. The offer letter,

amongst others, shall contain the following conditions:

(i) Borrower:

Correct full name(s) of the borrower(s) and/or guarantor(s) if any should be written.

(ii) Amount:

The amount of the credit facility would be provided.

(iii) Repayment:

The following terms and conditions must be included in all cases:



The facility period, i.e. the number of years over which repayments are to be made;

The amount of each repayment installment;

Frequency of (usually monthly) repayments;

Moratorium period, if any;

Rate of interest to be charged during the moratorium period; and

The date of repayment of first installment etc.

(iv) Interest rates:

The letter must include the following terms and conditions relating to interest rates:

The interest rate should be stated in the form of “x% over Bank rate” in all cases where interest

rate levels are fixed in relation to Bank rate. A minimum interest rate must always be stated.

Otherwise a fixed rate can be stated with semiannual/annual revive provisions.

(v) Fees:

Due diligence fees, upfront fees, commitment fees, monitoring fees and other fees as applicable

may be charged to the borrower. The fee rates in terms of amounts or percentages must be included

in the offer/facility letter, together with the basis upon which the percentages are to be calculated,

e.g. total loan, amount of facility, and whether on a one time or a per annum basis.

(vi) Security:

A full and accurate listing of all security to be charged to BIFFL must be included in the

offer/facility letter.

(vii) Terms and Conditions:

All other relevant terms and conditions should be explicitly depicted in the offer letter.

A general condition should be included in the offer letter to the effect that all clauses,

terms, conditions, covenants etc. of BIFFL’s standard facility agreement, are applicable

for this case unless it is mentioned in the offer/facility letter.

Special clauses may be included in some offer letters to protect BIFFL’s interest as per

instruction of the legal advisor.

Further, the following clauses may be included in some cases:

o BIFFL shall have the right to engage a professional evaluator/surveyor to

inspect the goods/security to ascertain its cost and quality.

o An undertaking from the borrower empowering BIFFL to dispose of goods,

stock and mortgaged property without any reference to borrower/any offer

either by negotiation of tender.



(viii) Availability:

Include a paragraph in the offer/facility letter covering the availability of the facility by the

borrower.

The offer letter is subject to the borrower fulfilling all the conditions identified during the credit

appraisal process.

4.8. Credit Risk Grading Process

Credit Risk Grading should be completed by BIFFL for all exposures.

For Superior Risk Grading (SUP-1) the score sheet is not applicable. This will be guided by the

criterion mentioned for superior grade account i.e. 100 percent cash covered, covered by

government and bank guarantee.

Credit risk grading matrix would be useful in analyzing credit proposals, new or renewal for

regular limits or specific transactions, if basic information on a borrowing client to determine the

degree of each factor is a) readily available, b) current, c) dependable, and d) parameters/risk

factors are assessed judiciously and objectively. The Investment/Relationship Officer as per Data

Collection Checklist as shown in Appendix-A should collect required information.

The Investment/Relationship Officer should ensure correct filling up of the Limit Utilization Form

as shown in Appendix-B in order to arrive at a realistic earning status for the borrower.

Risk factors are to be evaluated and weighted very carefully, on the basis of most up-to-date and

reliable data and complete objectivity must be ensured to assign the correct grading. Actual

parameter should be inputted in the Credit Risk Grading Score Sheet as shown in Appendix–C.

Credit risk grading exercise should be originated by the Investment/Relationship Officer and

should be an on-going and continuous process. The Investment/Relationship Officer shall

complete the Credit Risk Grading Score Sheet and shall arrive at a risk grading in consultation

with his/her supervisor and document it as per Credit Risk Grading Form as shown in Appendix-

D, which shall then be concurred by the Credit Officer in consultation with a Senior Credit Officer.

All credit proposals whether new, renewal or specific facility should consist of a) Data Collection

Checklist, b) Limit Utilization Form c) Credit Risk Grading Score Sheet, and d) Credit Risk

Grading Form. The credit officers then would pass the approved Credit Risk Grading Form to

Credit Administration Department and Corporate Banking/Line of Business/Recovery Unit for

updating their MIS/record.

The appropriate approving authority through the same Credit Risk Grading Form shall approve

any subsequent change/revision i.e. upgrade or downgrade in credit risk grade.



4.9. Credit Risk Grading Review

Credit Risk Grading for each Borrower should be conducted at the inception of lending and should

be periodically updated. Frequencies of the review of the credit risk grading are mentioned below:

No. Risk Grading Short Name Review frequency 1 Superior SUP Annually 2 Good GD Annually 3 Acceptable ACCPT Annually 4 Marginal/Watchlist MG/WL Half yearly 5 Special Mention SM Quarterly 6 Sub-standard SS Quarterly 7 Doubtful DF Quarterly 8 Bad & Loss BL Quarterly

4.10. Risk Rating for Lending

For lending, BIFFL will use credit-scoring models (Annexure-V) for processing facility

applications and monitoring credit quality. BIFFL will apply the above principles in the

management of scoring models.

4.11. Approval Authority

Approval authority for all loans and advances are to be determined based on loan amount, and the

delegation of loan approval authority is as below:

Board of Directors:

• Decision to proceed with formal project appraisal

• Approval of completed Project Proposal with specific terms and conditions

• Loan proposal above BDT 50 Crore, and

• Sanction of the loan.

Executive Committee:

• Approval of completed Project Appraisal and Final Draft Term Sheet

• Loan proposal Up to BDT 50 Crore, and


Executive Director &CEO:

• Projects of Women Entrepreneur Development Unit and SME Unit

• Decision to proceed with formal project appraisal;

• Approval of completed Project Appraisal and Final Draft Term Sheet

• Loan proposal Up to BDT 2.5 Crore, and




All loan and advances sanctioned shall comply with the requirements of BIFFL’s Memorandum

and Articles of Association, Financial Institutions Act, 1993 as amended from time to time,

Bangladesh Bank’s instructions and any other rules and regulations, as applicable.

The following guidelines will apply in the approval/sanctioning of facilities:

Approvals must be evidenced in writing, or by electronic signature. Approval records

must be kept on file with the credit applications;

All applications will be reviewed by the Credit Committee for independent assessment

and identification of risks and approved by BIFFL Board;

Respective credit officials will be responsible for identification of risks;

The aggregate exposure to any borrower or borrowing group must be considered to

determine the required approval;

Any credit proposal that does not comply with Lending Guidelines, regardless of

amount, will be referred to Credit Committee for review and the Board for approval;

The Executive Director & CEO must approve and monitor cross-border exposure risk,

if any;

A monthly summary of all new facilities approved, renewed, enhanced, and a list of

proposals declined stating reasons thereof may be reported by the Executive Director

& CEO to the Board; and

Any breaches of lending authority will be reported to the Board.

4.12. Internal Auditor/Control

The internal auditor of BIFFL will play a vital role in the operational system of the institution.

S/He will reflect the overall activities of the institution and provide the management with necessary

information for taking timely appropriate decision and action. Internal auditor will be responsible

for the following:

Verify the continuing adequacy and applicability of credit risk management policies

and procedures; provide an independent assessment of the credit portfolios' existence,

quality and value; ensure the integrity of the credit process; and promote detection of

problems relating thereto;

Prepare a yearly audit plan to be approved by the Board according to which the audit

is to be carried out. This audit plan should be carried out taking into account the size

and nature of the institution, as well as type, volume, complexity, and all risk level

activities;



Work with Board committees and the management to ensure that a system is in place

to identify and analyze all major risks on a regular basis;

Add value by acting as a facilitator in business risk management and carry out value

for money reviews, thereby assisting the management and the Board in the effective

discharge of their responsibilities;

Prepare a comprehensive written audit report following each audit. It will usually be

expedient to first report to the heads of the relevant functional units on the audit

findings in the course of a final meeting and to offer the opportunity to comment on the

findings;

Assessments of internal audit, at a minimum, will randomly test all aspects of credit

risk management in order to determine that:

Credit activities are in compliance with BIFFL’s credit and accounting policies and

procedures, and with the laws and regulations to which these credit activities are

subjected to;

Existing credit facilities are duly authorized, and are accurately recorded and

appropriately valued on the books of BIFFL;

Credit exposures are appropriately rated;

Credit files are complete;

Potential problem accounts are being identified on a timely basis and determine

whether BIFFL’s provision for credit losses is adequate;

Credit risk management reports are adequate and accurate; and

Improvement in the quality of credit portfolio has been done.


CHAPTER – 5

RISK MANAGEMENT STRUCTURE


Chapter 5: Risk Management Structure Page | 58

5. RISK MANAGEMENT STRUCTURE

5.1. Risk Management Structure

BIFFL’s risk management structure is described in the following chart:

The Board will decide the risk management policy of BIFFL and set limits for liquidity, interest

rate, foreign exchange and equity price risks. BIFFL management will have the overall

responsibility for management of risks.

The Credit Committee will be a subcommittee of the Management including the CEO as its

Convenor. In general, all credit proposals shall originate from the investment department of

BIFFL. The Credit Risk Management Committee shall conduct a thorough credit and risk

assessment prior to forwarding any proposal to the Credit Committee. Nevertheless, the credit

proposal should clearly state that all instructions and guidelines of the credit policy have been

complied with.



The Credit Committee shall analyze the credit proposal to see whether the proposal is consistent

with BIFFL’s credit policies and credit norms, guidelines/regulations of Bangladesh Bank,

relevant laws etc. and has been presented observing all the required formalities. The Committee,

in the light of its analysis, shall consider the positive and negative sides of the proposal and give

its opinion/recommendation. It is to be mentioned here that Credit Committee shall only give

recommendation/opinion about a proposal; credits will be finally approved by BIFFL Board.

The Credit Risk Management Committee will be headed by the General Manager (Investment)

and comprises of Heads of Finance & Administration, representatives from Credit Appraisal,

Renewable Energy and operational Risk Management Committees.

The functions of the Credit Risk Management Committee will be as under:

be responsible for the implementation of the credit risk policy/strategy approved by the

Board;

monitor credit risk and ensure compliance with limits approved by the Board;

recommend to the Board, for its approval, clear policies on standards for presentation

of credit proposals, financial covenants, rating standards and benchmarks;

taking decisions in terms of capital allocation and defining limits in line with the risk

strategy;

decide delegation of credit approving powers, prudential limits on large credit

exposures, standards for facility collateral, portfolio management, facility review

mechanism, risk concentrations, risk monitoring and evaluation, pricing of facilities,

provisioning, regulatory/legal compliance, etc.;

lay down risk assessment systems, develop MIS, ensure proper due diligence of

investment activities, monitor quality of facility/investment portfolio, identify

problems, correct deficiencies and undertake facility review/audit; and

undertake portfolio evaluations and conduct comprehensive studies on the environment

to test the resilience of the facility portfolio.

5.2. Key Responsibilities

The key responsibilities under the above functions are as follows:

5.2.1. Credit Marketing/Relationship Management

The persons in the department will be responsible for Relationship Management.

To act as the primary contact person with the borrower regarding marketing of credit

products.

To maintain thorough knowledge/up-to-date position of borrower’s business and

industry. The concerned officer must apply his common sense to ascertain whether the

proposals carry value and/or contribute to Bank’s profitability.



To cater to customer needs and summarize the facilities, rate of

interest/commission/charges, security arrangements etc. and place it to the higher

authority for further process.

To make periodic visits/inspections in Borrower’s business concern and facility and

submit the report to the Head of Credit Marketing.

To provide required information to the Credit Appraisal team for approval/concurrence

or other action and Credit Administration Team in case of need.

To monitor the financial performance and account conduct of the borrower and intimate

the updated position to the Credit Approval Authority/branches.

To prepare a Call report for all customer contact/visit and place it to the reporting

authority.

5.2.2. Credit Risk Management

Risk Management Functions

oversight of BIFFL’s credit policies, procedures and controls relating to all credit risks

arising from corporate/commercial/institutional/personal/treasury operations;

oversight of the BIFFL’s asset quality; and

to ensure that lending executives have adequate experience and/or training in order to

carry out job responsibilities effectively.

Credit Functions

to analyze Loan Applications and to provide independent risk assessment and submit

to Credit Committee for recommendation to the Board; and

to provide advice/assistance regarding all credit matters to line management;

Monitoring Functions

directly manage all Substandard, Doubtful & Bad and Loss accounts to maximize

recovery and ensure that appropriate and timely facility loss provisions have been

made.

5.2.3. Credit Administration

to ensure that all security documentation complies with the terms of approval and is

enforceable;

to monitor insurance coverage to ensure appropriate coverage is in place over assets

pledged as collateral, and is properly assigned to BIFFL;

to control facility disbursements only after all terms and conditions of approval have

been met, and all security documentation is in place;

to maintain control over all security documentation; and



to monitor borrower’s compliance with covenants and agreed terms and conditions, and

general monitoring of account conduct/performance.

5.2.4. Business Development

to act as the primary contact with borrowers;

to maintain thorough knowledge of borrower’s business and industry through regular

contact, inspections, etc.;

to be responsible for the timely and accurate submission of credit applications taking

into account the credit assessment requirements;

to highlight any deterioration in borrower’s financial standing and amend the

borrower’s Risk Grade in a timely manner. Changes in Risk Grades should be advised

to and approved by CRM; and

to seek assistance/advice at the earliest from CRM regarding the structuring of

facilities, potential deterioration in accounts or for any credit related issues.

5.2.5. Internal Audit/Control

Conduct independent inspections annually to ensure compliance with Lending Guidelines,

operating procedures, BIFFL’s policies and Bangladesh Bank directives. Report directly to BIFFL

Board.

The Internal Control and Compliance unit (ICCU) will have to administer the Circulars issued by

Regulatory Authority so that all the Rules & Regulations are properly complied in the investment

activities which is to be meticulously monitored by ICCU from time to time.

5.3. Procedural Guidelines

5.3.1. Approval Process

The approval process of BIFFL ensures segregation of business development and credit appraisal

functions from the approving authority. Investment department is responsible for appraising credit

applications and will forward to the Credit Risk Management Committee for its review and

assessment. The credit will then subsequently be approved by proper approval committee.



Figure: Flowchart of Approval Process



Credit approval process at BIFFL will be as follows:

(a) Loan Application

The sponsor(s) will be required to provide certain specific financial and technical

information. A formal application must be submitted to BIFFL by the sponsor(s)

containing required information including, for this purpose, a feasibility study

acceptable to BIFFL. The feasibility study would be reviewed by BIFFL to ensure

that it satisfies its requirements and those of concerned parties.

Credit Application Form is enclosed herewith at Annexure-A.

(b) Preliminary Scrutiny

After receiving necessary documents from the sponsor(s), preliminary investment

screening/preliminary project appraisal will be done by the Investment Division of

BIFFL, mainly on the following considerations:

Is the Project in accordance with the GOB Development objectives?

Is the Project enlisted with the PPP office?

Is the project likely to succeed as a PPP?

If the proposed project passed on the preliminary screening, then “Preliminary

Investment Development” process will be conducted on the following considerations:

Is the Project bankable?

Is the Project affordable and/or are fiscal risks acceptable?

If the proposed Project meets the criteria, then it will be forwarded to the Board of

Directors of BIFFL through CEO, along with the reports and findings of the

Investment Division of BIFFL on “Preliminary Investment Screening” and

“Preliminary Investment Development” process. If the Board agrees with the findings

of BIFFL’s in-house team that the investment is in line with national policies and

priority development programs of the GOB, then BIFFL board will give initial

Clearance.

After an initial clearance-in-principle by the Board, a non-binding Preliminary Letter

of Support (PLS), including a draft Term Sheet, will be issued to the

sponsor/borrower.



(c) Project Risk Assessment by CRM Committee

The responsibility for preparing the Credit Application rests with the Relationship

Management (RM) within the business unit. Credit Applications shall be

recommended for approval by the RM team and forwarded to CRM Committee

(consisting of General Manager (Investment) and comprises of Heads of Finance &

Administration, representatives from Credit Appraisal, Renewable Energy and

operational Risk Management Committees for their review and assessment. CRM

Committee will make risk assessment and conduct Appraisal, deal Due Diligence etc.

and forward it to the Credit committee with specific recommendations. BIFFL also

would solicit independent risk assessment from time to time.

(d) Appraisal of the Project Proposals, deal Due Diligence etc.

Policy of "know your customer" is the foremost in loan appraisal process of BIFFL.

The successful entrepreneurs are given full support in terms of loan, equity support

as well as through participation in the syndicating arrangements. The CRM

Committee of BIFFL will conduct Due Diligence services relating to Management,

Commercial and Financial, Environmental & Social aspects of the project, Project

Appraisals and Evaluation of Loan proposals. The independent appraisal of the

economic, technical and financial viability of each individual project will be

undertaken on the basis of the techno-economic feasibility report, supported by all

financial and technical information prepared and provided by the sponsors. Technical

experts of BIFFL will physically visit the proposed project site during appraisal to

investigate the infrastructure facilities available for the project and the impact of the

project on its surrounding environment. BIFFL will take minimum reasonable time

to complete the appraisal process depending on the scope, complexity and risk

elements of the venture. During the appraisal, BIFFL will also verify compliance with

environmental protection and procurement regulations.

In essence, the project financing will be approved primarily based on the economic,

technical, marketing and financial soundness of the project. The project should be

able to generate adequate cash flow to pay for operational costs, servicing of debts

and provide the entrepreneurs a comfortable rate of return.

BIFFL treats any information received in the course of its operations as confidential.

The detailed project appraisal report will be submitted to the Credit Committee for

its review and assessment.

(e) Overall review by the Credit Committee

The Credit Committee will be formed with members ratified by the Board, shall be

responsible for evaluating and approving investments by the Fund in accordance with

the Investment Agreement. The Credit Committee will thoroughly review the



Appraisal Report and recommendations of the CRM Committee. The Credit

Committee, after detailed in-house consultation as well as expert consultation

support, if required, for technical, financial, legal, management and environment

parameters, finalize their recommendation for approval by the BIFFL Board.

(f) BIFFL Board Approval

Following a careful examination of the final appraisal report as well as

recommendation by the Credit Committee, the Board of Directors of BIFFL will

make the final investment decision on the application. Effectiveness of the loan

from BIFFL will be subject to all other financing for the concerned Project being

irrevocably committed and effective.

5.3.2. Internal Governance Risk Assessment

Role of Board of Directors:

(a) To formulate policies and procedures for adequate internal control system and its

proper implementation by the management;

(b) To review periodically effectiveness of internal control and management information

system; to ensure that internal, as well as external, audit reports are sent to the Board

for ensuring accountability and transparency in all the business affairs of the

management;

(c) To make appropriate procedures and structures to allow the Board to function

independent of management;

(d) To constitute Audit Committee and other committees and define their terms of

references to assist the Board in carrying out its roles and responsibilities;

(e) To establish broad business strategies and significant policies for identification,

measurement and to set acceptable level of significant risks of the company and their

control by the management; and

(f) To review financial statements and other performance reports periodically and to

oversee its compliance with applicable audit, accounting and reporting requirements.

5.3.3. Role of Audit Committee

The Audit Committee will be a sub-committee of the Board, and could invite Special Invitees to

the meeting. The Audit Committee will assist the Board of Directors to fulfill their responsibility

in respect of:

(a) Audit

(b) Corporate Governance

(c) Financial Management

(d) Risk Management

(e) Regulatory Compliance.



The duties of the Audit Committee shall be:

(a) To advise the Board on appointment of the external auditor and the tax consultant

along with their fees.

(c) To discuss with the external auditor, before commencement of the audit, on the nature

and scope of the audit.

(d) To discuss problems and reservations arising out of the audit.

(e) To review the external auditor’s management queries and the management’s

response.

(f) To ensure co-ordination between the internal and external auditors.

(g) To evaluate and facilitate discharge of internal audit function of the company and

formulate and review the internal audit procedure.

(h) To monitor and review the company’s overall revenue earning position, giving

particular emphasis on the receivables and repayment of overdue installments.

(i) To enhance corporate governance procedure of the Company.

(j) To optimize Company’s performance in terms of quality, quantity, timeliness, cost

etc.

(k) To ensure application of appropriate accounting policies, accounting standards and

cost audits.

(l) To consider the major findings of internal investigation and management’s response.

(m) To oversee and appraise Company’s financial and operational reporting process and

review the half yearly and annual financial statements before submission to the Board

of Directors.

5.3.4. Internal Portfolio Risk Assessment

In order to establish effective portfolio risk assessment mechanism, management must ensure the

following:

a) Duties are divided in such a way that an individual officer cannot have absolute control

over key functions or activities of the Company;

b) All transactions shall require authorization before recording and execution;

c) Custody of Company’s fixed assets is separated from record keeper;

d) Records are examined and reconciled regularly to ensure that transactions are properly

processed, approved and recorded;

e) Stock of equipment, inventories, cash and other assets are taken periodically and

compared with amounts shown on control records;

f) Qualified and well trained employees are in place to ensure that control process is

functioning properly;

g) Code of ethics and business conduct for employees have been developed and

communicated among the employees;

h) The Head of Internal Control Unit directly reports to the Board’s Audit Committee;



i) Internal Control Unit provides periodic reports on the existing operational system;

j) Internal Control Unit ensures compliance with applicable laws and regulations;

k) Accounts are recorded timely so that outstanding items both on and off-balance sheet

are resolved;

l) Segregation of duties, existence of cross-checks, authorization, dual control, access to

and use of sensitive assets and records of risk taking activities are function to avoid

risk of having an officer of absolute control on operations;

m) Cash transactions are strictly restricted except petty cash expenses;

n) Bangladesh Bank conducts inspection on the activities of BIFFL at regular intervals.

Inspection reports should be placed before the Board for review and appropriate

actions, where applicable, are suggested for further improvement;

o) Auditors give management reports to the Board on the matters showing management

weaknesses with a view to strengthen further the accounting and internal control

systems.

5.3.5. Asset Liability Management (ALM)

BIFFL is exposed to market liquidity and interest rate risks in connection with the process of Asset

Liability Management. It is, therefore, important that the structure of the Company’s business and

the extent of Balance Sheet risk it assumes are effectively managed; appropriate policies and

procedures are to be established to control the direction of the organization. For this purpose, there

should be an Asset Liability Management Committee (ALCO) comprising of the following

members:

a) Executive Director & CEO;

b) EVP & Chief Operating Officer;

c) AVP & Chief Financial Officer;

d) SPO & Unit Head, Large Infrastructure;

e) PO & Unit Head, Credit Administration;

f) PO & Unit Head, Treasury

The ALCO shall take decisions for implementation of the following issues:

(a) Need for or Asset growth in right buckets to minimize asset-liability mismatch.

(b) Both short and long term Cash flow plan based on market interest rates and liquidity.

(c) Need for change in Fund Transfer Pricing and/or customer rates in line with strategy

adapted.

(d) Address to the limits that are in breach (if any) or are in line of breach and provide

detailed plan to bring all limits under control.

(e) Address to all regulatory issues that are under threat to non-compliance.

(f) Call special ALCO meeting when any contingency situation arises.



Duties and Responsibilities

The duties of the Asset Liability Management Committee shall be:

(a) To analyze the information relating to money market position and competition;

(b) To formulate policies regarding management of liquidity and interest rate risk of the

Company;

(c) To set guide lines for establishment of effective methods of Asset Liability

Management;

(d) To set guidelines for optimum utilization of the financial resource of the Company;

(e) To set limits for liquidity, interest rate, exchange rate and equity pricing risks;

(f) To assess and identify the possible sources of risk in connection with the funding and

lending activities.

(g) To evaluate the strength of existing risk management tools and find out its possible

ways of improvement; and

(h) To monitor compliance with the regulations of Bangladesh Bank in respect of

statutory obligations and ensure timely submission of reliable and relevant

information.

5.3.6. ALM Information System

a) ALM information system should be designed in such a way so that it could provide

reliable information on time to the ALCO.

b) An organization should have clear risk policies and definite tolerance limits.

c) Risk can be measured using different methods which ranges from the simple Gap

Statement to extremely sophisticated and data intensive Risk Adjusted Profitability

Measurement methods.

d) The Treasury Department with the help of IT Department should develop Modules,

which could provide information on the aspects of liquidity and interest rate regime.

5.3.7. Amendment of the Policy

The policy will be amended, revised, refined, rejected as and when required to accommodate the

changes in the market condition, cyclic aspect of the economy, government policy, industry

demand, Bangladesh Bank regulation and experience of the organization in managing investment

risk.

For this purpose, the Board of Directors will review the policy at least annually and make necessary

amendments.



5.3.8. Access to the Policy

The policy document has to be treated as strictly confidential and must not in any way be divulged

to any person not in the service of the BIFFL. The policy will officially be distributed among

concerned executives and officials, making them fully conversant with its clients.

5.3.9. Review

The progress of implementation of this policy shall be reviewed and evaluated by the Board of

Directors from time to time, at least annually, and changes, adjustments, and improvements will

be made herein where consider necessary.


CHAPTER – 6

CREDIT ADMINISTRATION


Chapter 6: Credit Administration Page | 71

6. CREDIT ADMINISTRATION

6.1. Introduction

Loan, Accounts and Legal departments are jointly responsible for functions related to Credit

Administration. The Credit Administration’s functions are critical to ensure that proper

documentation and approvals are in place prior to the disbursement of financial facilities. For this

reason, the functions of Credit Administration are strictly segregated from investment department

in order to avoid the possibility of controls being compromised or issues not being highlighted at

the appropriate level.

Ongoing administration of the credit portfolio is also an essential part of the credit process. Credit

Administration functions are basically back office activities that support and control extension and

maintenance of credit.

6.2. Functions of Credit Administration

a) To ensure that all security documentation complies with the terms of approval and is

enforceable;

b) To monitor insurance coverage to ensure appropriate coverage is in place over assets

pledged as collateral and is properly assigned to BIFFL;

c) To control facility disbursements only after the terms and conditions of approval have

been met and all security documentation is in place;

d) To maintain control over all security documentation;

e) To monitor borrower’s compliance with covenants and agreed terms and conditions

and general account conduct/performance.

Detailed functions of Credit Administration are as follows:

6.2.1. Documentation

It is the responsibility of Credit Administration to ensure completeness of documentation (facility

agreements, security documents, guarantees, transfer of title of collaterals etc.) in accordance with

approved terms and conditions. Outstanding documents should be tracked and followed up to

ensure proper execution. Security documents should be prepared in accordance with approval

terms and be legally enforceable. Standard facility documentation that has been reviewed by the

legal department would be used in all cases. Exceptions may be referred to external legal counsel

for advice.

6.2.2. Disbursement

Disbursements under facilities shall only be made when all security documentation is in place.

CIB report will reflect/include the name of all the lenders with facility, limit and outstanding. All

formalities regarding large facilities guided by Bangladesh Bank circulars and related section of

Financial Institutions Act, 1993 will be complied with. All credit approval terms (Conditions



Precedents or CPs to disbursement) must be met before disbursement. A sample Credit

Documentation and Disbursement Checklist is attached as Appendix - IV, which BIFFL will use

to control disbursements.

6.2.3. Credit Monitoring

After the facility is approved and drawdown allowed, the facility will be continuously monitored.

These include keeping track of borrowers’ compliance with credit terms, identifying early signs of

irregularity, conducting periodic valuation of collateral and monitoring timely repayments.

6.2.4. Facility Repayment

The borrowers should be communicated ahead of time as and when the principal/markup

installment becomes due. Any exceptions such as non-payment or late payment should be tagged

and communicated to the management. Proper records and updates should also be made after

receipt.

6.2.5. Custodial Duties

Security documentation will be held under strict control, preferably in locked fireproof storage.

Appropriate insurance coverage should be maintained (and renewed on a timely basis) on assets

pledged as collateral.

6.2.6. Compliance Requirements

All required returns will be submitted in the correct format and in a timely manner to the concerned

authorities. Bangladesh Bank circulars/regulations are maintained properly, and advised to all

relevant departments to ensure compliance. All third-party service providers i.e. valuers, lawyers,

insurers, CA firms etc. will be approved and performances will be reviewed on an annual basis.

BIFFL will engage qualified external audit firms as per Bangladesh Bank circular.

6.3. Credit Monitoring

To minimize credit losses, monitoring procedures and systems should be in place that provides

early indications of the deteriorating financial health of a borrower. The respective dealing officer

shall monitor and review all types of credit facilities regularly by preparing a monitoring report ()

at least on monthly/quarterly basis.

In addition, the actions below should be taken. in the following manner:

a) Maintain diary of installment payment;

b) Send at least 10 business days prior to the due date a billing statement to the client

c) On the due date, check if the installment has been received by BIFFL from the

borrower;



d) Make telephone call with the client immediately after dishonoring of the installment

cheques;

e) Send a polite letter to the client asking repayment within a week;

f) Second reminder letter is to be issued in the following week;

g) Pay a visit to the client’s office to assess business condition/cash flow in case of non-

payment after second reminder;

h) For liquidity problem of the client for a short period, obtain fresh repayment cheques

in exchange of the previously issued cheques.

i) For liquidity problem continuing for a longer period, consider rescheduling proposals.

The rescheduled installment is determined matching with the prospective cash flow of

the client’s business and as per Bangladesh Bank guidelines;

j) In case of non-response or negative attitude from the client, issue letters giving notice

for legal action;

k) Inform the guarantors (if any), issue letters giving notice for invoking the guarantee, if

any;

l) Take steps to issue letter of demand by company’s legal advisor;

m) The following exceptions should be reported to CRM Committee and also to the Board,

if necessary:

past due principal or interest payments, account excesses, and breach of facility

covenants;

non-receipts of financial statements on a regular basis and any covenant breaches

or exceptions made; and

action not taken on time for findings of any internal, external or regulator

inspection/audit.

Computer systems should be able to produce the above information for review. Until the automated

systems are established, a manual process will be in place that has the capability to produce

accurate exception reports. Exceptions will be followed up and corrective action taken in a timely

manner before the account deteriorates further. Refer to the Early Alert Process and Appendix -

IX.

At any point during the tenor of the loan if the risk grading falls to below Category 3 then the

subsequent disbursements of the loan would be stopped and a mechanism should be set in place to

improve the risk grading.

BIFFL would retain the services of an Independent Engineer to monitor the technical aspects of

the project implementation and operations from time to time



6.3.1. Identification of the reasons behind default

When reviewing the credit accounts, the dealing officer should, as a matter of priority, concentrate

on the reason(s) why the borrower is defaulting on interest payments and/or loan installments.

Concerned personnel will contact the borrower to ascertain:

1. Whether the default is due to an oversight on the borrower’s part: if this is the case, a

revised date for payment of outstanding interest and installments can be arranged, the

borrower having to pay interest on the outstanding installment as well as the interest

for the period of the delay;

2. Whether the default is due to temporary cash flow problems affecting the borrower’s

business: in this situation, may consider rescheduling the loan installments with

agreement of appropriate authority;

3. Whether the default is due to serious financial problems, and in BIFFL’s judgment,

which could lead to liquidation/bankruptcy of the borrower’s business. In this case, the

borrower may not be able to repay the due loan and it may be treated as a doubtful

credit and all necessary steps should be taken consequent upon it.

4. At the end of each month, the Credit Administration department should prepare a

Report for review of management.

6.3.2. Early Alert Process

An Early Alert Account is one that has risks or potential weaknesses of a material nature requiring

monitoring, supervision, or close attention by management. If these weaknesses are left

uncorrected, they may result in deterioration of the repayment prospects for the assets or in the

BIFFL’s credit position at some future date with a likely prospect of being downgraded to CRG 5

or worse (impaired status), within the next twelve months.

The purpose of introducing the Early Alert Account, among others, includes the

followings:

o To detect weaknesses of the Client earlier;

o To ensure proper monitoring, follow-up and close contact with the client;

o To take appropriate measures at appropriate time so that deterioration can be

arrested before it is too late;

o To maintain the health of the credit in all time good condition;

o To ensure timely repayment of the loan/lease; and

o To prevent the loan/lease from being stuck-up and ensure quality asset.

The accounts may be affected by the risks arisen from the following area:



o Concerned industry/sector has been affected by some external factors;

o Ownership/Management concerns;

o Increase of market competition/Development of new product;

o Technological obsolescence;

o Cash Flow Weaknesses (inappropriate cash management);

o Change in import policy/tariff rate/imposition of levy etc.;

o Others

Early identification, prompt reporting, and proactive management of Early Alert Accounts are

prime credit responsibilities of the loan department and must be undertaken on a continuous basis.

An Early Alert report (Appendix - IX) should be completed by the Loan Department and sent to

the approving authority in CRM for any account that is showing signs of deterioration within seven

days from the identification of weaknesses. The risk grade should be updated as soon as possible

and no delay should be taken in referring problem accounts to the CRM Committee for assistance

in recovery.

Despite the prudent credit approval process, facilities may still become troubled. Therefore, it is

essential that early identification and prompt reporting of deteriorating credit signs be done to

ensure swift action to protect the interest of BIFFL. The symptoms of early alert shown in

Appendix - X are by no means exhaustive and hence, if there are other concerns, such as a breach

of facility covenants or adverse market rumors that warrant additional caution, an Early Alert

report should be raised.

Moreover, regular contact with borrowers will enhance the likelihood of developing strategies

mutually acceptable to both the borrowers and BIFFL. Representation from BIFFL in such

discussions should include the local legal adviser when appropriate. An account may be

reclassified as a Regular Account from Early Alert Account status when the symptom, or

symptoms, causing the Early Alert classification have been regularized or no longer exist. The

concurrence of the CRM approval authority is required for conversion from Early Alert Account

status to Regular Account status.

6.4. Credit Recovery

The Recovery Unit (RU) should directly manage accounts with sustained deterioration (a Risk

Rating of Sub Standard (6) or worse). BIFFL may wish to transfer EXIT accounts graded 4-5 to

the RU for efficient exit based on recommendation of CRM. Whenever an account is handed over

from Loan Department to RU, a Handover/Downgrade Checklist (Appendix - XI) should be

completed.

The RU’s primary functions are:

determine Account Action Plan/Recovery Strategy;



pursue all options to maximize recovery, including placing customers into receivership

or liquidation as appropriate;

ensure that adequate and timely loan loss provisions are made based on actual and

expected losses; and

regular review of grade 6 or worse accounts.

The management of problem facilities must be a dynamic process and the associated strategy

together with the adequacy of provisions must be regularly reviewed. A process should be

established to share among different departments the lessons learned from the experience of credit

losses in order to update the lending guidelines.

6.4.1. NPL Account Management

All NPLs should be assigned to a designated officer within the RU, who is responsible for

coordinating and administering the action plan/recovery of the account, and should serve as the

primary customer contact after the account is downgraded to substandard. Whilst some assistance

from Loan Department may be sought, it is essential that the autonomy of the RU be maintained

to ensure that appropriate recovery strategies are implemented.

6.4.2. Account Transfer Procedures

Within 7 days of an account being downgraded to substandard (grade 6), a Request for Action

(RFA, Appendix- XII) and a handover/downgrade checklist should be completed by the Loan

Department and forwarded to RU for acknowledgment.

The account should be assigned to a designated officer within the RU, who should review all

documentation, meet the customer, and prepare a Classified Loan Review Report (CLR),

(Appendix- XIII) within 15 days of the transfer. The CLR should be approved by the Head of

Loans, and copied to the Investment Department where the facility was originally sanctioned. This

initial CLR should highlight any documentation issues, facility structuring weaknesses, proposed

workout strategy, and should seek approval for any loan loss provisions that are necessary.

Recovery Unit should ensure that the following is carried out when an account is classified as Sub

Standard or worse:

facilities are withdrawn or repayment is demanded as appropriate. Any drawings or

advances should be restricted, and only approved after careful scrutiny and approval

from appropriate authorities;

CIB reporting is updated according to Bangladesh Bank guidelines and the borrower’s

Risk Grade is changed as appropriate;

loan loss provisions are taken based on Force Sale Value (FSV); and

prompt legal action is taken if the borrower is uncooperative.



6.4.3. Rescheduling

BIFFL should follow Bangladesh Bank guidelines for rescheduling of their problem accounts and

monitor accordingly. The credit officer would analyse the reasons that necessitate a rescheduling,

and elements that would change upon a reschedulement.(i.e. those elements that would make the

project more sustainable). Rescheduling of problem accounts should be aimed at a timely

resolution of actual or expected problem accounts with a view to effecting maximum recovery

within a reasonable period of time. All rescheduling cases will be referred to BIFFL Board for

final approval. In case of syndicated loan, rescheduling will be done in consultation with the other

banks.

Purpose of Rescheduling:

to provide for borrower’s changed business condition;

for better overdue management; and

for amicable settlement of problem accounts.

Cases for Rescheduling:

Rescheduling would be considered only under the following cases-

overdue has been accumulated or likely to be accumulated due to change in business

conditions for internal or external factors and the borrower is not able to pay up the

entire accumulated overdue in a single shot;

the borrower should be in operation and the assets have a productive value and life for

servicing the outstanding liabilities; and

the borrower must be capable of and willing to pay as per revised arrangement.

Modes of Rescheduling:

Rescheduling can be done through adopting one or more of the following means:

extension of financing term keeping lending rate unchanged;

reduction of lending rate keeping financing term unchanged;

both reduction of lending rate and extension of financing term

bodily shifting of payment schedule; and

deferment of payment for a short-term period with or without extending the maturity

date.

However, under any circumstances, reschedule period must not exceed economic life of

the asset.

Analysis of Rescheduling Case and Decision on Different Modes of Rescheduling:



An account, which has been going through liquidity crisis, may be considered for

rescheduling after identifying symptoms, causes and magnitude of the problem. For

rescheduling an account, the criteria mentioned in Bangladesh Bank guideline, if any, has

to be followed strictly.

Post Rescheduling Requirements:

rescheduling of a contract must require prior approval of CRM and management;

all rescheduled accounts are to be kept in a separate watch list so that post-rescheduling

performance of the accounts can be monitored closely; and

an individual account cannot be rescheduled more than three times.

BIFFL may put in place some enhanced security and performance conditions, once the

loan is rescheduled.

6.4.4. Non-Performing Loan (NPL) Monitoring

On a quarterly basis, a Classified Loan Review (CLR) (Appendix XIII) should be conducted by

the RU to update the status of the action/recovery plan, review and assess the adequacy of

provisions, and modify BIFFL’s strategy as appropriate. The Board may decide the level of

authority for approving the CLR based on percentage of equity.

6.4.5. NPL Provisioning and Write-Off

The guidelines established by Bangladesh Bank for CIB reporting, provisioning and write-off of

bad and doubtful debts, and suspension of interest should be followed in all cases. These

requirements are the minimum, and BIFFL may adopt more stringent provisioning/write-off

policies. Regardless of the length of time, once a facility is past due, provisions should be raised

against the actual and expected losses at the time they are estimated. The approval to take

provisions, write-offs or release of provisions/upgrade of an account should be restricted to Board

of Directors based on recommendation from the Recovery Unit. The Request for Action (RFA)

(Annexure 12) or CLR reporting format (Annexure 13) should be used to recommend provisions,

write-offs or release/upgrades.

The RU should determine the Force Sale Value (FSV) for accounts grade 6 or worse. Force Sale

Value is generally the amount that is expected to be realized through the liquidation of collateral

held as security or through the available operating cash flows of the business, net of any realization

costs. Any shortfall of the Force Sale Value compared to total facility outstanding should be fully

provided for once an account is downgraded to grade 7. Where the customer is not cooperative, no

value should be assigned to the operating cash flow in determining FSV.

FSV and provisioning levels should be updated as and when new information is obtained, but as a

minimum, on a quarterly basis, in the CLR.

Following formula is to be applied in determining the required amount of provision:



1. Gross Outstanding XXX

2. Less (i) Cash margin held or Fixed Deposits/SP under lien (as per the eligibility criterion).

( XXX )

(ii) Interest in Suspense Account ( XXX )

3. Facility Value (For which provision is to be created before considering estimated realizable value of other security/collateral held)

XXX

4. Less: Estimated salvage value of security/collateral held ( XXX )

Net Facility Value XXX

Note: The amount of required provision may, in some circumstances, be reduced by an estimated realizable forced sale value (i.e. Salvage Value) of' any tangible collateral held (viz: mortgage of property, pledged goods/or hypothecated goods repossessed by the FI, pledged readily marketable securities etc). Hence, in these situations, it will be advisable to evaluate such collateral, estimate the most realistic sale value under duress and net-off the value against the outstanding before determining the Net Facility value for provision purposes. Conservative approach should be taken to arrive at provision requirement and Bangladesh Bank guideline should be properly followed.

6.4.6 Incentive Program

BIFFL may wish to introduce incentive programme to encourage Recovery Unit to bring down the

Non-Performing Loans (NPLs). The table below shows an indicative incentive plan for RU:

Recovery as a % of Principal plus Interest

Recommended Incentive as % of net recovery amount

If CG 7-8 if written off 76% to 100% 1.00% 2.00% 51% to 75% 0.50% 1.00% 20% to 50% 0.25% 0.50%


Chapter 7: Credit Documentation Page | 80

CHAPTER – 7

CREDIT DOCUMENTATION



7. CREDIT DOCUMENTATION

7.1. Introduction

Appropriate and legally enforceable documentation is important for the certainty of the terms of

agreement with an obligor for the grant/extension of credit facilities and legal recourse in the event

of breach of terms.

Recovery of the credit facility amount is largely dependent upon proper documentation. Proper

and enforceable loan and security documentation secure the right of foreclosure of the lending

institution on the assets provided by the obligator as security or under an arrangement by the

obligor, from a third party as collateral, in consideration of the grant/extension of the credit

facilities.

The security and collateral must confer a right to satisfy a debt out of the proceeds of the assets in

question in priority to other creditors in the event of default of obligor.

Immediately after approval of credit facilities, it needs to be well documented. The legally drafted

facility agreement must contain, amongst others, the name and address of the lender and the

borrower, amount and purpose of the facility, facility period, security and mortgage details,

guarantee and promissory notes, status of clearance of regulatory authorities, description of papers

and documents required, conditions of enforceability, legal authority of the persons executing the

agreement, conditions of disbursement, grace period, installment size, repayment period,

frequency of payment, conditions for breach of contract, force majeure, remedial measures, and

others.

It is essential to ascertain that the documents executed are complete, correct and proper, ensuring

the interest of both the parties. Such documentation should be completed prior to disbursing any

credit facilities precedes or otherwise extending credit. Improper documentation may be a cause

for delay in initiating legal action against a borrower, and as such, every precaution must be taken

to prevent such situations.

7.1.1. Minimum requirements for documentation

Legally vetted standard facility agreements should be used for documentation purpose to reduce

legal expenses and to minimize documentation errors. The minimum requirements for

documentation of loan, lease or other facility are as under:

1. Copies of the relevant office note and board memo in the approval process to be

obtained and checked to minimize errors;

2. A copy of the sanction letter addressed to the customer and his acceptance thereof;

3. All necessary documentation required, meeting the terms and conditions of the facility

in the manner in which it was approved.



The documents will be preserved both in soft copy (electronically) and hard copy (physical copies)

as per BIFFL’s IT policy.

7.1.2. Documentation Function

The documentation process must ensure that:

The credit/facility agreement correctly reflects the terms and conditions of approval;

To ensure that all documents received are properly signed, witnessed or notarized as

necessary;

To ensure that all required registration are complete; and

Satisfactory completion of all the above documents must be checked against a list,

recorded in writing, signed by the concerned person, and maintained in the respective

credit file.

In case of transfer, the Documentation officer, while undertaking his responsibility, shall satisfy

himself about the status of proper documentation from his predecessor.

7.1.3. Organizing the documents

The executed and signed documents will be safely preserved under the custody of Monitoring

Department.

Depending on the nature of the facility, whether fixed for a specific period or revisable after a

certain period, the documentation must be reviewed and such review should normally be part of

the annual credit review. In cases where conditions or covenants for a facility have changed, new

documentation should be prepared and reviewed.

7.1.4. Different Parts of Documentation

There are three parts of documentation process, namely:

a) Obtaining Instruments/Documents

b) Stamping

c) Execution and Registration

All Documents relating to credit facilities should be properly stamped as required under Stamp

Act.1899, and its subsequent amendments (if any). That is, the documents must be prepared on

stamp papers of required value.

There are three kinds of stamps, namely:

a) Judicial,



b) Non-Judicial; and

c) Adhesive.

7.1.5. Description of stamping

Non-Judicial stamps are printed on special paper in different denominations and used for execution

of Agreements, Indemnity Bond, Sale Deed, Mortgage deed, etc.

Revenue stamps and special Adhesive Stamps are affixed as required on documents like

Promissory Note, Letter of Continuity, Letter of Pledge, and Letter of Hypothecation etc. Such

stamps need to be cancelled in proper way to avoid its reuse.

Care must be taken to ensure that the date of purchase of stamps must be before the date of

execution of the contract to make the agreement legally valid and enforceable.

Documents to be executed (signed) by the parties concerned competent to do so either in their

official capacity or in personal capacity as the case may be. Moreover, in most of the cases, such

documents are required to be executed in presence of witness.

7.1.6. Precautions to be taken in the execution of documents

The following precautions are to be taken at the time of execution of documents:

a) Documents to be filled in and executed in the presence of the a authorized personnel of

BIFFL;

b) The client should sign in accordance with the specimen signature recorded with BIFFL;

c) If the documents consist of more than one page, all the pages are to be signed by the

executants at the end of form and also at the end of the schedule of securities;

d) Signatory(ies) signing on behalf of an entity should mention the capacity in which the

signatory(ies) is signing;

e) Mentioning of date and place of execution in a document is mandatory;

f) All documents must be duly prepared before execution;

g) Documents should not be filled in different inks, handwriting or typing. Such

differences may form the basis of allegations of material alteration of a document

without the consent of the signatory and render the documents void;

h) There should not be any cutting, overwriting insertion, cancellation or alteration in any

document. If any such things happen, it is to be authenticated by all the executants

under their recorded signatures;

i) After execution/registration of documents, they should be entered into the Documents

Register duly scrutinized and initialed by an authorized executive of BIFFL; and

j) Disbursement of any credit facility should not be allowed before completion of

documentation formalities.



The period of limitation within which a suit for recovery of a credit lies is the ordinary period

of three years from the date on which the credit is exposed.

7.1.7. Law of limitation

In case of equitable/legal mortgage of property, it is 12 (twelve) years;

In case of promissory notes payable on demand, the period of limitation, which is of 3

(three) years, begins to run from the date it bears. In case the date column is blank but

the signatures of the borrowers are dated, the period of limitation will begin to run from

the date whichever is later.

7.2. Guidelines for Documentation

In addition to standard charge documents duly vetted by legal retainer, the following documents

are to be obtained:

7.2.1. For Limited Company

a) Memorandum of Association and Articles of Association (MOA & AOA) of the

company duly certified by the registrar of Joint Stock Companies or notary public or

Chairman/Company Secretary of the borrowing company.

b) Resolution of the Board of Directors for taking credit facility from BIFFL and

authorizing the Director(s) to execute the security documents. Resolutions must be duly

certified.

c) Personal guarantee of all the Directors in their personal capacity.

d) If the facilities are allowed against hypothecation of goods/stock, book debts or other

fixed assets of the company, the following procedures has to be followed for getting

the charge registered in favor of BIFFL with the Registrar of Joint Stock Companies as

required under the law:

(i) Applications in the prescribed form duly filled in and signed by the borrower and

BIFFL along with Letter of Hypothecation, Hypothecation of Debts and assets,

Hypothecation of Fixed Assets or certified copy of Mortgage Deed, whichever is

applicable, to be submitted to the RJSC.

(ii) This must be submitted within 21 day from the date of execution of the Letter of

Hypothecation, hypothecation of Debts and Assets, Hypothecation of Fixed Assets

or Mortgage of immovable properties.



(iii)The Registrar on receiving the above documents will issue a “Certificate of

Registration of Charge” in due course.

7.2.2. For Partnership Firm

a) Registration certificate in case of partnership deed registered with Registrar of firms;

b) Duly certified Partnership deed registered at either the Registrar of firms or at Sub-

Registrar’s office. Unregistered firms will be unacceptable;

c) Resolutions of the partners for taking credit facility and authorized partner(s) to execute

security documents;

d) Personal Guarantee of all the partners;

e) An undertaking to the effect that partnership shall not be changed or altered or dissolved;

and

e) Inquiry be made about income tax liability and preferably, Digital TIN Number should

be obtained.

7.2.3. For Mortgage Property

a) Original title deeds must be obtained. If the original deed has not been received from

the Registration Office, then the certified copy with the duly discharged delivery

receipt may be accepted in lieu of original deed. Equitable mortgage with certified copy

of title deed cannot be created. The mortgagor must Deposit the title deed;

b) If the deed in question is not 8-12 years old, bia deeds i.e. previous title deeds of the

vendor and other papers showing the ownership of the vendor will be required;

c) Land revenue/rent receipts, record of right (mutation parcha/khatian) and other

supporting documents to prove possession;

d) Municipal rent receipts in respect of town property; and

e) Non-encumbrance certificate to be obtained from Sub-Registrar’s office issued by a

registered Searcher.

Memorandum of deposit of title deeds must be properly executed. Name, address (both

present and permanent), father’s/husband’s name must be stated in the memorandum.



7.3. Filling and Preservation of Documents

In addition to the legal documents mentioned above, it is important that Operations department

maintain pertinent memoranda, correspondence, financial data and other information about

customers in a credit file.

An organized filing arrangement is essential to the functioning of an efficient support and control

system. Each credit facility should be meticulously documented and retained in a separate folder

(or lever-arched file) divided into the following subsections:

a) Correspondence;

b) Financial Statements;

c) Credit Reports/Information;

d) Valuation/Survey Reports; and

e) List of Charge Documents/Certificates with validity.

Also, there should be a plastic sleeve to contain loose documents including charge documents etc.,

where punch-holes should not be made. All documents should be kept in a fireproof cabinet.

However, the above composition can be rearranged, if necessary, by the operations department.

7.4. Charge Documents

In some cases, as per approval conditions, BIFFL may have to create charges in the office of the

Registrar of Joint Stock Companies and Firms on the borrower company’s assets as security of

credit facility.

The following types of charge documents will be common for all types of collateral:

Demand Promissory Note

Letter of Continuity

Letter of revival

Letter of disbursement

It is notable that the nature of charge and security documents is largely dependent on the type of

lending, type of security and the type of borrower. In addition to the Charge documents that the

Credit Policy outlines,

First charge on the Project Account

First charge on the Debt Service Reserve Account, if it is different from the Project account

Tripartite agreement with the concessioning authority to provide BIFFL step-in-right

7.4.1. Charge documents for Fixed Deposit Receipt (FDR)

a) Letter of Continuity



b) Letter of Lien

c) Letter of Charge/Lien and Set-off

d) Fixed Deposit Receipt duly discharged

e) Continuing Guarantee (in case of third party)

f) Letter of authority for encashment of FDR.

7.4.2. Charge documents for shares and various other securities

a) Continuing Guarantee (In case of third party).

b) Memorandum of deposit of shares.

c) Original Share Certificate along with blank transfer deeds (Form 117) duly signed by

the holder of shares and his/her signature duly verified by the concerned company.

d) Letter of lien against shares and securities.

7.4.3. Charge documents in case of hypothecation of goods

a) Letter of Continuity

b) Letter of Hypothecation

c) Letter of disclaimer from the owner of the godown in case of rented godown to be

vetted by the legal retainer of BIFFL

d) Insurance policy covering the risks with Bank Mortgage Clause for a sum of 10 percent

above the sanctioned limit

However, the above is not an all-inclusive checklist. Legal opinion should be taken in

specific situations.

7.5. Loan/Credit Facility Documents/Agreements

Standard credit facility agreements for different products has to be prepared, inserting necessary

clauses and covenants protecting rights and obligations of BIFFL and the borrower, by the Legal

Experts and approved by the competent authority of BIFFL for use. The schedules should include

description of the credit facilities, amount, period, moratorium, interest rate, installment size,

frequency of payment, description of security and guarantee, termination clause, asset details etc.

New sets of legal documents are prepared and executed in special cases inserting special

conditions. The executive responsible for documentation must ensure correctness of required

documentation.

Besides facility agreement, described below are some important documents executed for

completeness of the documentation process.



7.5.1. Demand Promissory Note/Promissory Note

It is an unconditional written promise of the borrower made to the Financial Institutions, to repay

debt(s) on demand or at a fixed or determinable future date along with interest at a stated rate. The

Demand Promissory Note must be obtained while providing any type of credit facility.

An authorized executive verify the signature of the borrower. Where the borrower is a corporate

body, the relevant corporate resolution must be scrutinized to see that the Person(s) signing the

Demand Promissory Note on behalf of the corporate body has been fully authorized to do so. The

date, place, amount in words and figures as well as interest rate must be checked for correctness.

7.5.2. Revival Letter

This letter refers to and constitutes as an integral part of the loan documentation executed by the

borrower(s) including the Promissory Note. The letter is obtained in order to preclude any question

of law of limitation.

7.5.3. Letter of Arrangement

The borrower(s) confirm(s) the execution of charge/other documents and also acknowledge

BIFFL’s right to cancel the credit facilities allowed at anything with or without notice and promise

to repay on demand all outstanding including interest and other charges.

7.5.4. Letter of Continuity

In consideration of BIFFL allowing credit facilities, the borrower agrees to execute all relevant

documents and to remain liable for repayment of all outstanding, as principal debtor, or as

guarantor.

7.5.5. Subordination Agreement

Subordination agreement is an agreement on the part of one party not to collect or enforce an

indebtedness of a second party until certain obligations of such second party to a third party

(BIFFL) are fully met. In other words, the claim of the third party (BIFFL) is considered as a

primary lien.

7.5.6. Counter Guarantee

In consideration of BIFFL issuing guarantees/indemnities, the borrower agrees to keep BIFFL

indemnified from all liabilities, costs and legal expenses that may arise from the Guarantee.

However, all of the above loan documents as well as the charge documents are not the only

documents. BIFFL may execute other documents for any credit facility, if deemed necessary

and/or prescribed by the legal advisor of the company.



7.6. Credit Facilities Secured By Various Types of Collaterals – Their

Special Features

Generally, BIFFL’s credit facilities would be provided based on the financial viability of the

proposal. In some cases, additional security may be required. While considering security, its value

and nature like liquidity, authenticity and encashability, need to be examined, which may vary

depending on factors like credit worthiness of the borrower, their stake in the business, nature of

risk involved in the sector and industry, cash flow projections, repayment capability, market

prospects, etc.

Secured credit facilities offer a greater degree of protection to the lender than unsecured loans. The

existence of collateral by no means assures timely repayment. Before accepting any property as

collateral, legal opinion as to the title of the property, free hold or lease hold, possession of owner,

encumbered or non-encumbered, disputed or clean, no objection of local authorities and no

outstanding dues etc have to be obtained. However, security and collateral simply work as a

gearing factor in proper loan repayment behavior by the borrower.

The methods and procedures necessary to obtain a legal security interest in the assets of a borrower

or guarantor vary according to the specific type of collateral. Before considering creation of

mortgage on some asset as security of loan/credit facility, clear legal opinion must be obtained by

sending all necessary papers/documents to BIFFL’s legal advisor. If the title of the asset is not

valid and the documents are not legally acceptable, the purpose of mortgage may be totally foiled.

7.6.1. Suitable Collaterals for Specific types of Credit Facilities

All securities are not suitable for all types of credit facilities. Each security has its own suitability.

Specific securities to be obtained by against various types of credit facilities, such as:

Loans:

Various kinds of SanchayPatras, Government bonds, shares quoted in the stock exchange,

debentures, fixed deposit receipts, pledge of gold/gold ornaments, life insurance policies,

immovable properties such as land and buildings, machineries, etc.

Lease:

Lease finance is generally granted against the ownership of the leased assets in favor of the lessor

i.e the financial institution and are secured. The registration of the assets is done in the name of

BIFFL from registration authorities (such as BRTC, BIWTA, CAAB, etc). The rental installments

are secured by postdated rental cheques, advance rental cheques and a cheque covering full amount

of rental payment during the period etc. The lease asset is further secured by insurance in the name

of the lessor at lessee’s cost. However, depending on the nature of lessee and associated risk in



that particular sector, some collateral may be asked for in consultation with the lessee and

incorporated in the approval memo. After approval of the lease finance by the appropriate

authority, these are inserted in the lease agreement and proper documentation is to be assured.

7.6.2. Important Considerations in Establishing Security by Various Collaterals

In the process of accepting collateral as security of loans/credit facility, different types of collateral

being frequently used are given below:

7.6.2.1 Land and Buildings

Land and buildings have become increasingly more acceptable securities mainly due to steady

inflation. Land and buildings are accepted as collateral with increasing reliance in modern

financing to strengthen the lender’s security and reduce the risk factor considerably.

The word ‘land’ denotes not only the ground but also any building or fixtures upon it.

Consequently, if the borrower creates a mortgage of his ‘land’ in BIFFL’s favor and then proceeds

to build a factory on that ‘land’, the building automatically becomes part of BIFFL’s security.

The Surveyor (preferably a chartered surveyor) appointed by BIFFL must confirm the condition

and value of the property (both ‘open market’ value and ‘forced sale’ value) independently. All

costs associated with these professional services are to be realized from the customer.

Any property offered as security should be examined at the time of review of the credit facility to

which it relates. If it is considered that the value of the property has changed significantly either

due to market conditions, depreciation or any other factors, physical inspection of the property

may be carried out to assess the condition and actual value of the property.

In all cases, BIFFL should obtain a certificate from the appointed lawyer certifying the authenticity

of the documents, the genuineness of the owner, whether or not it is clean and not disputed, clear

from all outstanding dues, documents are legally valid and acceptable for creating a mortgage.

7.6.2.2 Fixed Deposit Receipt (FDR)

The Fixed Deposit Receipt (FDR) is to be scrutinized with regard to the following points:

a) The fixed deposit receipts are not in the name of a minor;

b) It is duly discharged by the depositor on revenue stamp of adequate value and his

signature is verified;

c) If the receipt is issued in joint names, it shall be discharged by all the depositors

named in the receipt on revenue stamp of adequate value. Their signatures are to be



verified. Creation of liability on fixed deposit issued in joint names by any one of

the depositors is irregular;

d) If the fixed deposit receipt is offered as security for allowing the credit facility, a

letter of lien shall be obtained from the depositors, on the appropriate form;

e) It is required to register lien against the fixed deposit and confirm in writing about

registration of lien favoring BIFFL from issuing Bank/Financial Institution.

Further, where the facility is allowed, shall directly get the signature of the

depository receipt duly verified from the issuing bank/financial institution. The

borrower shall not be allowed under any circumstance to have such verification

done by him;

f) The discharged receipt, the letter of lien duly verified by the issuing bank/financial

institution and the letter confirming registration of the lien on the deposit receipt

shall be kept along with other documents under safe custody of BIFFL. Lien on the

partial amount of fixed deposits shall not be accepted;

g) The lien on BIFFL has to be marked in red ink/rubber stamp on the face of the

deposit receipt by which credit facility has been secured. On adjustment of the loan,

lien shall be released on the bank of the deposit receipt;

h) An undertaking from the borrower/third party (if the deposit is in the name of a

third party) for encashment of the FDR and appropriation of the proceeds thereof

without reference to them must be obtained; and

i) An undertaking from the borrower/third party (if the deposit is in the name of a

third party) for renewal of the FDR without reference to them must be obtained.

7.6.2.3 Stocks and Share Certificates, Bonds, Scripts and Other Stock

Exchange Securities

Instruments like stocks and share certificates, bonds, scripts etc. are very common forms of

security offered to the Financiers, and they possess many advantages. They are readily marketable,

easily transferable and their market values can easily be determined accurately.

Only the dematted shares are considered to be more eligible for acceptance as security. Demattted

shares are pledged through CDBL by way of confiscation in the BO account in favour of the

lending institution.

BIFFL should ascertain the market quotations of the securities offered by referring to the stock

exchange list or a well-known daily newspaper. Securities not quoted in any stock exchange list



and shares in private limited companies or closely held public companies are not suitable because

their transfer is subject to restrictions.

Before allowing the facility, delivery of the shares with the blank Transfer Deed (Form-117)

should be ensured by operations department and also thoroughly scrutinized with regard to the

following:

a) They are original share scripts and bear the common seal of the Company;

b) The shares are fully paid up. Credit should not be allowed against partly paid up

shares;

c) The shares tendered as security for credit facility are registered in the name of the

borrower;

d) The shares are accompanied with blank Transfer Deed duly signed by the person in

whose name those shares stand and witnessed by somebody who is easily traceable;

e) The company concerned under its stamp verifies the Transferor’s signature on the

Transfer Deed;

f) The transfer Deeds are undated;

g) The Transfer Deeds, as far as possible, are in marketable lots, determined by the

stock exchange;

h) The borrower’s signature on the fresh set of Transfer Deeds are verified by the

company concerned and retained with BIFFL along with their respective share

certificates when received back from them after registration;

i) RM should obtain a letter of lien from the borrower in respect of all such shares

which stand in his name, or which have been sent to the various companies for

registration, in his name;

j) Where credit facility has been allowed to the borrower at the specified request of a

third party against share owned by them, the letter of lien shall be obtained from a

third party and not from the borrower;

k) BIFFL should not generally resort to transferring the shares registered in the name

of the borrower of any third party, in its own name;

l) The process of transferring the shares held in the name of BIFFL shall take special

consideration of any declaration of Dividends, Bonus Shares or any offer of Right



Shares made by the present companies concerned. The process also ensure that all

such Dividends and Bonus Shares are duly received by BIFFL;

m) The dividend will be deposited in favor of the borrower and the bonus shares are

kept along with the shares of the borrower;

n) In case of an offer of Right Shares, RM’s shall send an intimation to the borrower

concerned inquiring from them if they are interested to acquire them for the value

mentioned on the Letter of Right which should immediately be deposited by them

with BIFFL; and

o) If the borrower does not deposit the money from their own resources or make any

alternate arrangement in that behalf, the letter of right may be renounced with the

permission of the top management and the sale proceeds should be deposited in

favor of the borrower under intimation to them.

7.6.2.4 Life Insurance Policy

A preparation of a life insurance policy is that an insurable interest exists between the owners of

the policy and the life assured under the policy. It is presumed that such insurable interest exists

in an insurance taken out by an individual on his or her own life, by a husband on the life of his

wife, by a wife on the life of her husband and so on.

In general, if the policy has been issued by a reputable insurance company, no further investigation

into insurable interest is necessary. In doubtful cases, the acceptability of the document depends

on results of further investigation.

The following precautions should be taken while accepting a life insurance policy as security for

credit facility:

a) It is an Endowment Insurance Policy, not a Whole Life policy;

b) The policy can be assigned;

c) The policy does not bear any restrictive conditions likely to affect its value as a

security;

d) The surrender value of the policy to be ascertained from the Insurance

Corporation/Company and after retaining prescribed margin on surrender value

credit facility amount should be fixed;

e) The last premium receipt or other evidence of the payment is obtained along with

standing instructions from the borrower to pay further premiums;



f) Evidence of “AGE ADMITTED” must be incorporated in the policy;

g) Ascertain from the insurance company whether any prior changes on the policy

have been registered;

h) An undertaking to be obtained from the assured that he or she shall keep on paying

the premium punctually and produce the receipts to BIFFL and shall not do

anything which might cause the policy to be void; and

i) The policy is to be sent to the Insurance Company concerned for registering

assignment in favor of BIFFL along with a request letter from the assignor in the

format given in Annexure-VII, with a request for return of the policy to BIFFL.

7.6.2.5 Hypothecation of Goods

Credit facility against hypothecation of goods would not be a usual case for BIFFL as we cannot

provide Overdraft (OD) facility to our clients. However, if short-term loan is prescribed in lieu of

OD facility for working capital, hypothecation of goods may be necessary.

A credit facility secured against hypothecation of goods may be considered only for borrowers of

indubitable integrity.

In this case, the client signs a duly stamped Letter of Hypothecation, creating a charge against the

raw materials/furnished product/plant and machinery, etc. as primary security against the credit

facility. Both the ownership and physical possession of the goods hypothecated remain with the

borrower who binds himself by an agreement to surrender physical possession of the goods to

BIFFL as and when called upon to do so. BIFFL only acquires a right over the goods hypothecated.

Therefore, the borrowers may be insisted to furnish collateral securities by way of mortgage of

immovable property and/or third party guarantee where deemed fit.

While allowing any credit facility against hypothecation of goods/stocks, the following points

should be taken into consideration:

a) The facility is allowed only to the trustworthy and prudent clients;

b) The goods are readily saleable;

c) The goods have constant and effective demand in the market;

d) The goods are not perishable or subject to rapid deterioration due to shortage;

e) The borrower has an absolute title on goods;

f) The goods are not encumbered and or hypothecated to any other Bank/financial

institution;

g) Valuation of the goods is made carefully with reference to invoice, bill of entry,

landed cost, ex-factory price, market price, etc.;

h) The goods are insured with “Bank Mortgage Clause” ;



i) Stock report duly signed by the borrower is to be obtained periodically;

j) Stocks/goods must be inspected periodically by BIFFL (usually by the relationship

officer); and

k) A separate stock statement as on last day of the year duly certified by the external

auditors of the company must be obtained in case of limited company.

Valuation of goods

Valuation of goods to be hypothecated to the Company shall in no case exceed:

a) The landed cost at the port of entry as assessed by the customs in the case of

imported goods;

b) The ex-mill/factory price in the case of locally manufactured commodities;

c) The wholesale price fixed by the government, if any. Valuation will be based on the

competitive market price to be ascertained by BIFFL where no such wholesale price

is fixed by the government.

Insurance of the goods

All goods hypothecated to BIFFL must be insured at their full value in the joint names of

BIFFL and the Borrower. If the insurance cover provided is less than the value of the goods

hypothecated, then in the case of damage the insurance company provides the payment on a

pro rata basis because of the ‘average clause’ in the insurance document.

Insurance policies must be renewed in good time so that there is no break in the insurance

cover. Appropriate diary notes must be taken of the expiry dates of insurance policies and

sufficient care should be exercised so that the amount of premium is recovered from the

borrower and is remitted to the insurance company before the expiry of the policies. Standing

instructions may be obtained from the borrower to this effect.

7.6.2.6 Guarantee provided by third parties

A guarantee, when used to secure a credit facility, is an undertaking by a third party, the

“guarantor”, to repay the obligations of the borrower to the lender. The existence of a guarantee

does not execute the due diligence and approval process required for credit approval of the

borrower, even if the risk has been transferred to the guarantor as well as for the borrower.

Should a third-party volunteer to stand as guarantor, or offer a lien over their own funds, in

support of a credit facility for a customer, then the responsibilities associated with this action

must be clearly explained to that party by the BIFFL.



In all cases, a guarantor may be dealt with directly, and not via the borrower (or other Directors

in the case of a Company). These may help to avoid possible conflict of interests between

them.

Unless specific exemptions are given in the credit approval process, all guarantees must

conform to the following criteria:

Guaranty of payment, not of collection:

The guarantor is required to pay the lender when the debt becomes due. The lender is not

required to exhaust its remedies against the borrower before calling on the guaranty.

A guaranty that requires that the lender exhaust all remedies against the borrower is a “guaranty

of collection”.

a) Absolute and unconditional: There must be no conditions to be met by the lender,

borrower, or the guarantor before the guarantee can be enforced.

b) Irrevocable: The guarantor cannot revoke the guarantee until all the obligations to

the lender have been repaid in full.

c) Continuing: The guaranty must cover all loans extended under the credit facility,

which is subject to the guaranty for at least the duration of the loans.

d) Joint and Several: If there is more than one guarantor, each guarantor’s obligation

must be joint and several. This means that each guarantor is responsible for the full

amount of the obligation, i.e., the lender can choose to sue any one of the guarantors

for the full amount.

7.6.2.7 Valuation of Collaterals

However, all the above-described collaterals do not bear the same amount of value as a security.

Their denominations vary according to their specific features, encashability and other criterion.

Loan to market values of some securities are:

Acceptable security

Loan to market value

Cash and equivalents

100%

FDRs 90% (Face value) Lien of any other deposits

90%



L/Cs and Bank Guarantee

100%

Shares (Public Ltd. Co.)

50% (value will be obtained from the average of last six months’ market price)

Banker’s Acceptance

a) Private Banks

75%

b) NCBs 90% Commercial Paper

85%

Inventory 70% Precious Metal:

a) Gold 70% b) Silver 60% Real Estate 50%

* A loan to value requirement of, say, 80 percent, means that BIFFL should lend up to 80 percent of the market value of the security. Concerned executive from operations department may require a higher/lower loan to value percentage as circumstances dictate.