Credit Report on Mcb

7/28/2019 Credit Report on Mcb

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INTRODUCTION

Muslim Commercial Bank (MCB) unfolds 52 years of growth. In January 1974, the Government of

Pakistan nationalized MCB following the banks (Nationalization) Act 1947, Premier Bank Limited

merged with MCB.

A wave of economic reforms swept Pakistan in the late 1990, introducing the need for privatization of

state owned banks companies. In April 1991, MCB became Pakistans first privatized bank. The

government of Pakistan transferred the management of the Bank to National Group, a group of leading

industrialists of the country by selling 26% shares of the bank.

In terms of agreement between the Government of Pakistan and the National Group, the group, making

their holding 50% has purchased additional 24% shares. Now, 25% is purchased by the Government,

which shall be sold in the near future.

Credit department & credit Policy 0f MCB

Credit

From an accounting perspective when credit is granted an account receivable is created. Suchreceivables include credit to other firms called trade credit and credit granted consumers called

consumer credit

Credit Department:

MCB provides the facility to the people who need advance money to meet their requirements.

For getting the advance the following steps are there:

1. Information required by the bank

2. Preparation of credit proposals

3. Sanction advice

1. Initial Information

Following information is required to be submitted to bank.

Nature & structure of borrower business.

Names of proprietors, partners or directors.

Detail of all firms or companies associated with borrower.

Financial condition of borrower business.

An assessment of his business abilities.

Accurate and up to date financial statements of last two years for comparison

purposes.

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Market report on the borrower where borrower has maintained an account with

another bank, a report from his bank should also be obtained.

A report from credit standing bureau of State Bank of Pakistan.

2. Preparation of Credit Proposal

At first a formal application for credit approval is obtained from the party along with complete

group position. The partys credibility report is obtained from the bank with which the bank is

doing its business. The partys credibility report is also taken from the Head office of Trade

Information Division.

For obtaining credit, party has to submit the last two years Balance Sheet and Profit & Loss

statement duly attested by authorized auditors. If the party is also involved in export or import

business then the bank also considers the data of three years about import & export. Current debt

and equity ratio is also calculated by the bank. The type of data required to prepare the credit

proposal is to be gathered from the different departments. Some data is obtained from the foreign

Exchange department. Some data is available in Advance Department. The purpose of obtaining

Credit should be explained clearly. The securities offered by the party to the bank are also

evaluated. In case of pledging of property in shape of land or building the complete evaluation of

the property should also be attached.

After all the necessary documents for applying for advance is fulfilled by the party then the case

is sent to Manager for approval. If the credit limit is in his range then he can decide over it

otherwise the case is forwarded to seniors. If there is any discrepancy then the party is informed

of it.

3. Sanction AdviceWhen the documents required are complete and there is no ambiguity then the party is advised

that their credit or loan is approved and will be available to you soon. There is a separate form

for every annual approval or in case of a new facility.

Components of credit policy

1. Terms of sale

2. Credit analysis

3. Collection policy

1.Terms of Sale

The conditions under which a firm sells its goods and services for cash or credit

-The period for which credit is granted

-The cash discount and the discount period

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-The type of credit instrument

Factors that Influence credit period

There are a number of other factors that influence the credit period. Many of those also influence

our customer operating cycle.

i. Periciability

It has relatively rapid turnover and relatively low collateral value credit periods are shorter.

ii. Consumer Demand

Seller may choose much longer credit periods for off season sales.

iii. Cost, profitability and standardization

Standard product have short credit period

iv. Credit risk

The greater the credit risks of the buyer the shorter the credit period.

v. Size of the account

If the account is small the credit period may be shorter as small accounts are more costly tomanage.

vi. Completion

Longer credit period are offered in completion

Credit Function

i. Firms have expenses of running a credit department.ii. Firms chose to contract all or part of credit to a factor.

iii. Firms that manage internal credit operations are self insured against default.

iv. Firms buy credit insurance through an insurance company

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2.Credit analysis

Refers to the process of deciding whether or not to external credit to particular customer. It

usually involves two steps.

a. Relevant information

-financial statements

-credit agency

-banks

-market good will

b. Credit Worthiness

i. Character

The customers willingness to meet credit obligations

ii. Capacity

The customers ability to meet credit obligations out of operating cash flows

iii. Capital

The customers financial reserves

iv. Collateral

An asset pledged in the case of default

Credit scoring

The process of quantifying the probability of default when granting consumer credit

3.Collection Policy

Collection policy is the final element in credit policy. Collection policy involves monitory

receivables to spot trouble and obtaining payment on past due accounts

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AUTHORITIES / GROUPS INVOLVED IN CREDIT RELATED FUNCTIONS

1. Board of Directors

2. Credit Committee

3. Sub Committee

4. Business Groups:

Corporate & Investing Banking Group

Corporate Banking

Investment Banking

Commercial & Retail Banking Group

SME/Commercial/Agriculture financing Consumer Financing

Micro Financing

Financial Institution & Cash Management Division

Other Groups:

5. Credit Management Group

6. Operations Group

7. Special Assets Management Group

8. Compliance Group & RMD

9. Treasury Management Group

CREDIT MANAGEMENT GROUP

Credit Management Group (CMG) in its core function approves credit proposals received fromrespective business groups as per business discretionary powers in line with banks credit

policies and SBP regulations after an in depth credit risk assessment and placement of necessarymitigants. However, Credit proposals beyond the business discretionary powers of CMG are

referred to Credit Committee for approval.

Detailed functions of CMG and its counterpart i.e. Regional Credit Management Chief, are

elaborated below in this chapter.

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CREDIT ADMINISTRATION

Documentation:-

It is the responsibility of credit administration to ensure completeness of documentation (loan

agreements, guarantees, transfer of title of collaterals) in accordance with approved terms and

conditions. Outstanding documents should be tracked andCredit Disbursement:-

The credit administration function should ensure that loan application has proper approval before

entering the facility limits in to computer systems. Disbursement should be effected only aftercompletion of covenants, and receipt of collateral holdings. In case of exceptions, necessary

approval should be obtained from competent authorities.

Credit Monitoring:-

After the loan is approved and draw down allowed, the loan should be continuously watchedover. These include keeping track of borrowers compliance with credit terms, identifying earlysigns of irregularity, conducting periodic valuation of collateral and monitoring timely

repayments.

Loan Repayment:-

The obligors should be communicated ahead of time as and when the principal/mark-up paymentbecomes due. Any exception 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.

Maintenance of Credit Files:-

MCB devises procedural guidelines and standards for maintenance of credit files. The credit filesnot only include all correspondence with the borrower but should also contain sufficient

information necessary to assess the financial health of the borrower and its repayment

performance. It need to not mention that information should be filed in organized way so that

external/internal auditors could review it easily.

Collateral and Security Documents

MCB ensures that all security documents are kept in fireproof safe under dual control. Register ofdocuments are maintained to keep track of their movement. Procedure is established to track and

review relevant insurance coverage for certain facilities/collateral. Physical checks on securitydocuments should be conducted on a regular basis.

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FUNCTIONS OF REGIONAL CREDIT MANAGEMENT CHIEF

Analyze the credit Proposals

Both for fund and non fund based facilities (including trade financing), forwarded by RBC afterprocessing the proposal received from Branches, in the light of International Risk Managementpractices and procedure as laid down in Standard Procedure Manual (SPM) as well as other

circulars issued from time to time. RCMC also reviews risk rating for each borrower assigned by

the Branch/RBC.

Approve Credit Proposals

Involving both fund based and non fund based facilities jointly with Regional Business chief,

within their delegated powers as defined in the prevalent Document of Empowerment. Further,RCMC along with other Regional Committee Members shall recommend proposals falling

beyond their powers to Head Office. He will also ensure that proposals referred to Head Office

are complete in all respect and associated risks have been identified and appropriate riskmitigants are in place. However, credit proposals where allowing exception to the Banks

policies & procedures/SBP PRs is not justifiable or where expected pay-off doesnt

commensurate with the associated risk may be declined by RCMC at his end.

Confirmation of Action

Recommend/refer proposals approved in excess of the powers, if admissible under the Banks

policy for post facto confirmation of action by the appropriate authority at Head Office.

Confirmation of action of Branch Manager for cases approved beyond their delegatedpowers.

Issue Sanction Advices

When the documents required are complete and there is no ambiguity then the party is advisedthat their credit or loan is approved and will be available to you soon. There is a separate form

for every annual approval or in case of a new facility.

The form contains following information:

Nature and amount of limit.

Purpose

Security/ Collateral

Margin (%).

Mark up/ Charges

Validity

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TRAINING & PERFORMANCE APPRAISAL

VISIT OF BRANCHESHIERARCHY OF CREDIT

HIERARCHY

There is a distinct segregation among the functions of credit origination, credit approval, credit

operations / CAD, credit risk management, monitoring and measurement. Credit activities

involved in each of these functions are performed throughout the Bank, at the three distinctlevels, they are:

1. Branch

2. Regional Office3. Head Office

A hierarchy of officers/ executives, both within a group and inter group, is involved in almost

every stage of Credit cycle, the number becoming lesser in some stages whereas in some stages

its more.

Branch Branch Manger

Operations Manager

Credit Officer

Regional Office Regional Management Committee

Regional Business Chief

Regional Credit Management Chief

Regional Operations Chief

Regional Compliance Chief

Head Office Board of Directors

Credit Committee Group Chiefs

Wing Heads

Approval Stage:Approvals throughout the Bank would be of any of the following six levels

Approval Level I Branch Manager

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Approval Level II RBC jointly with RCMC

Approval Level III Regional Management Committee

Approval Level IV Group Chief CMG with GC CIBG orCRBG

Approval Level V Credit Committee

Approval Level VI Credit Committee with SBP approval forexemption

BANKS TARGET MARKET

MARKET SEGMENTS

Market segmentations shall refer to those subgroups of the market which can be differentiated on

the basis of their business structure, technical/managerial sophistication, financial needs,preferences or patterns and other changes which justify having different strategies.

Following are the Market segments of our bank :-

1. Corporate

2. Commercial

3. SME4. Agriculture or Agrarian Sector

5. Micro Enterprises

6. Consumer7. Banks/Financial Institutions

8. Govt. /Govt. Departments/ Agencies/ Autonomous Bodies

9. Public Sector Enterprises10. Non-trading Associations

11. Local Bodies

12. Trust

Types of credit by MCBNBP having a big market comprising of many types of groups to serve, has different kinds offinancing modes to respond to their varied financing needs. As different modes serve different

needs, modalities of each mode is different from others. The main terms and conditions of each

mode are covered in this chapter. The basic structure of any financing facility granted should notrun against the rules established hereunder:

METHOD WISE LENDING

Programmed Lending:

The structured financing to a targeted sector/industry by way of developing a Financial Productcatering the needs of that sector/industry. The underlying risks of the sector/industry have

already been identified; measured and proper risk mitigants have been put in place. The approach

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is quite opposite to Downscaling approach for SMEs under which customized solution is offered

to the clients. earch definition of Programmed lending

General Financing

As the existing exposure cannot be switched over to programs suddenly but SME financing PRs

encourage banks to lend under Program Lending Concept. But the existing loans will continueon their existing structure and to be called GENERAL FINANCING. Gradually we will lend on

structured program basis.

NATURE OF CREDIT WISE LENDING

Fund-Based Products

Facilities where funds are provided to customers upon sanction of the respective credit lines.

1. Fund based credit

Following are the Fund based credit:

Running Finance(RF)

Cash Finance(CF)

Finance against imported goods(FIM)

Export Refinance part-I (Pre-shipment)

Export Refinance Part-II

Finance against purchase collection(FAPC)

Finance against foreign bills(FAFB)

Foreign bill purchases(FBP)

Local Manufacturing Machinery(LMM)

Payment Against Document(PAD)

Demand Finance(DF)

Khud Rozgar Scheme

The detail of above-mentioned items is given below:

a. Running Finance (RF)

The max time of repayment is one year. It is according to will of customer. These types of advances are

given to Trade, Commerce and manufacturing general purposes. These finances as evident by the nameare given to meet their daily needs. The mark up is charged on daily balances. Normally 0.54 paisa per

thousand is charged on daily basis. It is drawn through cheque.

b. Demand Finance (DF)

The duration of DF is more than running or Cash Finance. These are made in Lump sum and are there is a

permission to repay the amount in periodic installment. Upon receipt of documents negotiated by the

seller bank, the opening bank makes sure that documents are according to terms and conditions of the

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credit. Bank makes the payment to the party against document and upon expire date, bank receives back

money with mark up rate.

c. Payment against Document (PAD)

LMM funds are provided by the SBP. The bank provides the facility to the businessman who wants tobuy the local manufactured machinery.

d. Local Manufacturing Machinery (LMM)

It is a long term financing. MCB also gives loan under the head of demand finance to individuals,industrial units and commercial business etc. This is a type of secured loan and demand loan is never

allowed without security.

e. Foreign Bills Purchases (FBP)

The exporters, which are under L/C, are also provided with the facility of loan. Amount is given to the

exporter after the approval of L/C by the issuing bank.

f. Cash Finance (CF)

MCB gives the facility of cash credit to the business. The borrower gives a specific reason for the need of

cash. The amount is passed through voucher and credited to partys account. Normally 0.52 paisa per

thousand is charged on daily basis to customers.

g. Finance against Imported Goods (FIM)

These types of advances are granted against the pledge of imported goods. These goods are pledged by

the bank. Bank pays all the charges to customs and keeps the goods in its control. The bank releases the

good on payment from the client to bank.

h. Export Refinance Part-1 (Pre-Shipment)

The government pursues the banks to provide the loan to the exporters to promote the export. The bank

provides this type of advance facility to only those exporters who have not enough money to make

shipment. Bank provides the loans to the customer at the rate of specific % for period of 150 days.

i. Export Refinance Part-1 (Post Shipment)

This means that the customer has enough amounts to make first shipment but not more. So the bank

issues a loan to the exporter. This financing is for period of 150 days. Finance is provided by the SBP to

the exporters for purchase of raw material, its processing, Packing and shipment. In case, if the party isunable to make the shipment within 150 days of financing. The party has to pay certain amount of finance

as asked by the SBP and after 150 days the rate of mark up also goes up @ 51 paisa per thousand per day.

So usually exporters try to make the shipment within the fixed period set by the SBP which is usually 150

days.

j. Export Refinance Part-11

In this case the bank after receiving the performance of years in export business of party sets the limit forthe period of one year. Here the limit cannot be set by the terms pledged of the permission of the bank.

k. Finance against Purchase Collection (FAPC)

A bill may be purchased by the bank. If a client is in urgent need of money and he has a bill whose

clearance may take a few days then he sells it to bank. Bank pays the amount to the client after deducting

its commission.

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l. Finance against Foreign Bills (FAFB)

Bank also provides finance against the foreign bills. This facility is given to the exporter, if he needs

urgent money. He gives bill of exchange to the bank as security and bank sends these bills for collection

and gives money to exporter.

Agricultural LoanBank provides the agriculture advances in order to enhance and support the agriculture sector of thecountry. Banks Agriculture division deals with the agriculture advances. These advances are of following

types:

Farm Credit

Non Farm Credit

Farm Credit

These are the credits provided by the MCB or purchases of inputs for development of agriculture sector.

Following are two main Sub classes of Farm credit:

Production Finance

These are short term loans. These loans are provided to farmers for purchases of different types of input,for example seeds, fertilizer, and pesticides.

Development Finance:

These are medium or long term loans. These loans are provided for the development of agricultural

sector. Main Purposes of these loans are as under:

To purchase tractors

To purchase implements (Trolley, Threshers, and Drill etc).

For installation of tube wells

For planting of gardens

Non Farm Credit

The second major form of agriculture advance is Non Farm credit. These loans are provided to boost up

agriculture sector to provide the sources of earning of foreign exchange as well as to provide employment

opportunities to people. These loans are providing against mortgage of land as security or pledge of

equipment as collateral security. These are long term or medium term investment depending upon the

project.

Following are the different types of small industries for which loans are provided to improve the economy

of the country.

Fish Farm

Cattle Farm

Poultry Farm

Dairy Farm

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1. Non Fund Based AdvancesThese are contingent liabilities, where no funds are provided at the time of sanction , rather bank

undertakes to provide funds, if client fails to discharge his obligation

When an applicant for an advance cannot offer any tangible security the banker may rely on personal

guarantees, letters of credit to protect himself against loss on advance or loan.

There are two types of advances which come under Non Fund Advances.

Guarantees.

Letter Of Credit.

GUARANTEES

Introduction

Bank examines customers relation with the bank 7 the nature of the business. Bank also sees hispast business with the bank. Sometimes bank issues Guarantee on the behalf of the customer by

getting some margin from him. This margin may vary from customer to customer.

TYPES OF GUARANTEES THE BANK MAY ISSUE

In the normal course of business the Bank may issue the following types of guarantees andBonds, categorized according to the nature of purpose its issued for:

1. Performance Guarantees.

2. Bid Bonds/ Tender Deposit Guarantee

3. Shipping Guarantees.

4. Guarantees for Advance Payments/Mobilization Guarantees.

5. Security Deposit Guarantees.

6. Guarantees for payment of dues/Court Guarantees.

PERIOD OF GUARANTEE:

TYPES

On the basis of the period for which a guarantee is issued, guarantees can be classified as under:

For a period of one year or less

For a period of more than one year but less than two year

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SPECIFIC PERIOD GUARANTEEIts the guarantee which has one time validity (time bond validity) after which its expired if

not invoked/claimed/ by the beneficiary or renewed.

On the basis of the period for which a guarantee is issued or guarantee is valid, guarantees canbe classified as:

Short term guarantee i.e. up to One year

Medium to long term guarantee i.e. for more than one year

Short-term guarantees should be preferred over medium and long-term guarantees as the laterinvolves wider risk.

Requirements for Guarantee

Banks issue guarantee on the behalf of customers. Limit proposals covering transactions should besubmitted with full details for the approval of appropriate sanctioning authority.

Generally Guarantees are issued in favoring of Shipping companies, Govt Departments guaranteeing

specific payments at future dates by customer on whose behalf the guarantees are issued. While executing

a guarantee, the terms and conditions of the guarantee are closely examined in order to determine the

extent of bank obligations and financial liability under the guarantee and the type of guarantee, all

condition are contained in the guarantee.

Procedure

Bank charges a commission on the amount for which guarantee is issued. Normally the validity period ofguarantee does not exceed one year. After the guarantee has been issued, a copy of same is issued to the

counter guarantee issued to the customer.

Letter of Credit

Definition of letter of credit

A letter of credit is a written instrument issued by a bank authorizing the seller to draw in accordance with

certain terms and stipulating legal forms, that all such bills will be honored.

Explanatory Definition

A letter of credit consist of an undertaking by an issuing bank that bills drawn by the exporter will be duly

owner provided the comply with the terms of credit.

Reasons for L/C

The exporters are uncertain of the importer capacity to pay.

The importers are unwilling to pay the amount unless the goods are actually shipped and the

documents received by the bank.

In case of non-payment the seller should be assured to legal rights in foreign country.

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There should be an agency, which should meet the sellers need of finance when the goods are

shipped.

The commercial banks come to the help of exporters and importers.

The importers can undertake the obligation to pay to the exporter for the purchase made by the

importer and this is usually done through a letter of credit.

Explanation

A letter of credit is a:

1. Written undertaking by importers bank to a third party i.e. the exporter.

2. That it will be pay or accept draft (letter of credit) drawn upon it up to a started sum of money

within a specified time.3. That the payment will only be made to the exporter if he complies with the specified terms of

credit.

Parties Involved in a Letter of Credit

There are four parties involved in a letter of credit

o Account party

o Issuing party

o Exporter

o Paying or negotiating bank

o Account party or Importer

The buyer or the importer on whose account and request the letter of credit is opened is known as account

party.

o Issuing party

The bank, which issues or opens a letter of credit at the request of importer, it is called the issuing bank.

o Exporter

The seller or the party in whose favor the letter of credit is draw is the third party and it is also known as

beneficiary.

o Paying or negotiating bank

The paying bank in the exporters country on which the draft is drawn is called the paying bank.

Operation of a letter of credit:

1. The importer of buyer contacts the seller in foreign country for the purchase of a particular good

or goods.

2. He settles with the seller the quantity and quality of the goods to be importer.

3. The sale contract also includes the method of payment.

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4. The importer then submits an application to his bank for the issuing of an individual letter of

credit.

5. The form on which the importer employees for a letter of credit is supplied by the bank.

6. This form contains all the necessary details discussed between the importer and exporter for the

shipment of goods which include the description of merchandise, port of shipment, port ofunloading, the documents against which the bank is the honor the draft, the total value of the

goods etc.7. If the documents supplied by the seller conform to the terms of contract the exporter will be paid.

8. The issuing bank will not be responsible if there is any fraud or the merchandise does not

conform to the sales contract.

9. The obligation of the buyers bank is,

To issue letter of credit on agreed terms and condition with the buyer.

To have a proper examination of the documents.

To honour draft when presented with proper documents.

PERIOD WISE

Short Term Financing

The loans having tenor of one year or less are called Short term

exposure.

Medium To Long Term Financing

The loans having tenor of more than one year are categorized as medium to long term loans.

An ideal concept demands that:

1. Businesses should meet fixed assets and permanent working capital needs through LongTerm Sources (owners Equity and Long term finance); and

2. The short term needs must be met through short term sources (Banks Borrowings or market

credit)

Therefore short term finance should meet the Working Capital requirements and the long termfinance should be used for acquisition of fixed assets / long term needs.

Structure of finance facilities should be based on the above concept as it will avoid emergence of

the liquidity problems (often called Technical Insolvency) that is, inability of a business to meet

its cash obligations.

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