Welcome to the sessionSanction, Documentation and Disbursement of Credit

By Sk. Nazibul IslamFaculty Member, BIBM

Introduction:

The two functions of a banker are borrowing money from public by accepting deposits and lending to the public for the development of trade, commerce, industry & agriculture. A bank is a business enterprise of the country. It is a profit-seeking concern as any other commercial & industrial organization. The profitability of a bank always depends on the able manner & the avenues in which its resources are employed to yield the maximum income.

Bankers resource usually comprises of

Paid-up capitalReserves & undistributed profitsDeposit from the public in various accounts Borrowings from Central Bank & other Banks.

Sanctioning process of credit

Sanctioning Loans & Advances is a tedious process and not an easy task.

Proper analysis based on valid & reliable information and data is very important for sanctioning any type/form of loan/advance.

Factors that influence the sanctioning process:

1.Type of loan/advance2.Nature of business/purpose3.Nature of security4.Amount of loan/advance (small or large)5.Nature of borrower (company, Firm, Individual)6.Nature & Tiers of Financial Institutions.

Basically sanctioning process comprises the following steps:

Receive loan Application in prescribed form with required papers/documents (If it is a permissible item and has budget) allocation.

Scrutiny & verification of loan application along with submitted papers/documents.

Physical verification/site inspection (business/project & offered security)

Assess/determine the actual amount needed.

Analyze in respect of viability through appraisal/FSS/CRG/Credit scoring (if require).

Steps: contd..

Fix-up basic conditions like margin/Debt-equity, security coverage etc.

Prepare office note/working paper

Place for approval of sanction

Obtain advice/approval

Entry into sanction register

Prepare disbursement & repayment schedules (incase of term loan)

Issue sanction advice with details terms & condition & loan agreement, if any.

Basic determinants:

Selection of borrower (5 C's)

Character: Commitment, credit Record, Dependability Business Experience, etc.

Capacity: Profitability, cash flow, Debt service Coverage, Technical Knowledge, Age etc. Capital: State in Business, Quality of Assets. Solvency, Retention of Earning, Ability to infuse more money etc.

Condition: Economic Trends, Industry Growth, Competitive & Regulatory Environments, working conditions etc.

Collateral: Asset Quality, Type, location, Title, Forced Sales Value etc.

Basic determinants:

b) Credit Investigation: Credit investigation refers to the assessment of a loan proposal from different points of view, specially credit status if any, for justifying the creditability of an intending borrowers.

Besides, banker must be known

Whether he indulges in speculative businessWhen he started his businessAssumed popularity & marketability of productsAvailability of raw materialsTransport & CommunicationLiabilities & involvements in other business, if any.

Keeping these fundamental points in mind the banker will form a balanced opinion on the following issues:

Moral risk i.e. borrowers reliability/ characterBusiness risk i.e. borrowers capacity/ capabilityProperty Risk i.e. borrowers capital/ means.

If the bankers opinion is favorable, banker will step in the starting point of lending i.e. he will supply the standard loan application form to the customer.

Banker will properly scrutinize the loan case & collect & correlate the information about the party/firm/company/project from available sources.

Sources of credit information:

Loan application Market report Study of accounts Financial statements Spot verification of factory/office/collaterals offered Confidential Reports from other banks CIB of Central Bank Other sources like press reports regarding purchase, sale auction,decrees etc. of properties. Registration records Municipal records Registrar of Joint Stock Companys records etc

Relationship Management/Marketing (RM) is to act as the primary bank contact with borrowers.

The approval process should reinforce the segregation of Relationship Management/Marketing (RM) from the approving authority.

The responsibility for preparing the credit Application should rest with the RM within the corporate/commercial banking Department.

Credit applications should be recommended for approval by the RM and forwarded to the approval team within CRM and approved by individual executives.

The recommending or approving executives should take responsibility for and be held accountable for their recommendations or approval.

Before approval/ sanction the banker ask himself-

Whether the proposed proposal is remunerative and expected to be recovered.Whether the banker has sincerely applied his knowledge, skill, tact, foresightedness and business motive.Whether the advance has conformity with the banks budget, govt. policy, credit restriction policy imposed by central bank etc.

The authority to sanction/approve loans must be clearly delegated to senior credit executives by the managing director/ CEO and board based on the executives knowledge and experience. Approval authority should be delegated to individual executives and not to committees to ensure accountability in the approval process.

It is essential that executives charged with approving loans have relevant training and experience to carry out their responsibilities effectively. As a minimum, approving executive should have :

At least 5 years experience working in corporate/commercial banking as a relationship manager or account executive.

Training and experience in financial statement, cash flow and risk analysis.

A thorough working knowledge of accounting.

A good understanding of the local industry /market dynamics.

CRM: security Compliance CertificateLoan Documentation Checklist

Compliance requirements :All required central bank Returns are submitted in correct format in a timely mannerCentral bank Circulars/regulations are maintained centrally and advised to all relevant departments to ensure compliance.All third party service providers (valuers, lawyers, insurers are approved and performance reviewed annually.

2. Loan Facility Parameters:Maximum size, Maximum tenor, covenant and security requirements.Bank should not grant facility where banks security position is inferior to that of any other financial institutions.Assets pledged as security should be properly insured.Valuations of property taken as security should be performed prior to loans being granted. A recognized third party professional valuation firm should be appointed to conduct valuation.

3. Credit Administration:

To ensure that all security documentation complies with the term of approval and is enforceable.

To monitor insurance coverage, appropriate coverage properly assigned to the bank.

To control loan disbursement 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.

To monitor borrowers compliance with covenants and agreed terms and conditions, and general monitor of account conduct/performance.

4. Points to consider for compliance about security:

Nature of security/proper identification about quality (in case of need)

Location and possession of security

Title of security

Valuation of security

Forced sale value(if required)/Market value.

Insurance

Primary security

Collateral security

Documentation.

DocumentationBefore disbursement of loan correct Documentation is essential from the point of view of the safety of an advance.It procures a written evidence of transactionIt identifies the borrowers, co-borrowers & guarantors.It defines the securityIt also identifies the nature of charge created by the bank.The Document will help the bank to include protective clauses tosafeguard the interest of the bank.

Steps for Documentation:

Drafting of documentsFilling of documentsExecution of documentsWitnessingStampingRegistrationSignature verificationSafe keeping of documents

Drafting of document:

Each bank has its own printed or prescribed forms to be taken for various types of advances.

Usually the legal advisors of the bank draft these forms so that the necessary clauses are included to safeguard the interest of the bank.

The clauses may varies, depending upon the types of security, the executant(s) etc.

The content of the document includes the terms and conditions of an advance as agreed upon between the banker and the borrower must be clear, definite and free from ambiguity.

Filling of documents of printed nature:

All columns of documents should be properly filled in and nothing is left blank. Keeping the documents blank or even one/more column in the documents blank may be invalidity of the whole documents.

The documents should be get completed in one sitting in the same handwriting using the same ink and pen.

Communication address must be business address and latest residential.

Execution of documents:Competency

A party competent to make a contract must execute the documents.

A minor , lunatic or insolvent shall not have the capacity to execute the documents.

A company, in execution of documents does not over step the power given in memorandum. In this case, a copy of resolution passed by the board of directors of the company must be obtained and carefully it should be examined.

b. Documents to be executed depends on-

Nature of advanceType of chargeNature of securityConstitution of businessRequirements of bank itself

C. The execution of documents should be done in the presence of officer responsible obtaining documents, that officer must able to identify the borrower personally.

D. The borrower must be asked to sign in full signatures in the same style throughout the documents the documents does not carry initial or marks, Signature using right hand, if in left hand a small note should be annex with documents.

E. All types of additions, alternations, insertions, cutting, overwriting, erasing, interlineations, declaration etc. where absolutely necessary in the documents must be authenticated by the borrower (fully signatures in the same style as signed the documents).

F. Date & Place of execution in each document should be mentioned invariably.

G. The document should not be double dated.

H. Document, if run several pages borrower puts his Signature on each page and on the last end of documents.

I. Where borrower is an illiterate person content of the documents should be explained with the help of Lawyer or respectable persons.

Witnessing:

Some of the documents compulsorily required to be witnessed such as mortgage deed, gift deed, Will etc. At least two witnesses are required for witnessing purpose.

Stamping:

i) Documents to be stamped as per Stamp Act. The stamp Act, 1899 with a schedule has classified various kinds of document indicating the amount of duty levy able on them. The liability of instrument to stamp must be determined on or before the time of execution because validity of documents depends on the amount of stamp. Last Amendments where made as per law No. 14 in the year 1998

ii) An under stamped or unstamped document is deemed that has not been executed for and the same would not be accepted as evidence in the Court of Law can not form the basis of a suit.

iii) Stamped which are needed to be affixed on various documents are properly cancelled and cancellation is done in such a way that the stamp can not be used again.

iv) Executants of the documents/lessee in case of lease deed will pay the stamp duty.

Type of Stamp

Judicial StampJudicial Stamps used mainly for judicial purpose in filing suits and for payment of addvaluerum Court fee. Judicial Stamps paper in the Court also used for certified copy of decree.

Non-Judicial Stamp

Non judicial stamps used for preparation of contract deed or sale deed. In banks these stamp used mainly in- Mortgage Deed both registered and equitable. Irrevocable Power of Attorney Deed of agreement, Deed of Redemption, Affidavit etc.

Adhesive Stamp

I) Revenue Stamp

Revenue Stamp used for any receipt of money. In bank this stamp is mainly used in Promissory Note, Debit Balance Confirmation, Credit Balance Certificate, salary register etc.

II) Special Adhesive Stamp/Impressed Stamp

Special Adhesive stamp used in banks mainly on Charge documents- Letter of Lien, Letter of Hypothecation, Letter of Pledge, Letter of Continuity, Letter of Guarantee, Letter of Trust receipt etc. This stamp affixed on banks printed form and duly Impressed by the Collector of Stamps. Tk 150/ (Tk one hundred fifty) stamp duty is to be required for above documents (as per last Amendment of the Stamp Act in the year 1998).

III) Embossed Stamp

Embossed Stamps generally used by the Notary Public, CCI&E, & other Govt., Semi-Govt. authority through pressing machine on the document.

Registration:

All documents need not require registration, but certain documents such as mortgage deed,Registered power of attorney etc. require registration.

Signature verification:

Signature of the borrower is verified from specimen signature card and the signature of other executant of document(if any) is first verified by the borrower under borrowers authorized signature and the same is verified by the banker.

Safe keeping of documents:

All the charge documents executed by the borrowers and original title deeds etc. must be taken under the bankers possession very carefully.

Each and every documents must be entered safe- in safe-out register stating the date of receive, name of documents, number of page.

If the documents is to be returned to the party after adjustment of debt then necessary entry to be passed in safe-in safe-out register.

This safe-in safe-out register must be under managers custody.Custodian should check time to time documents safe/almirah and spray insecticide t protect documents from insects.

Validity of document whether expired or not should be frequently checked in terms of law of limitation.

First obtain General Documents. Then identify the collateral, facility and obtain specific documents as per loan documentation checklist. Leave out documents not called for by the terms of the credit Approval and facilities Advice letter(sanction Letter)

When documents become invalid

Alteration and Interlineations in documents: If it is done after execution.Deed misled by the mis-statement.If the party is blind or illiterate and if the documents is read falsely.The party executing the documents in not competentImproper stamping/under stampingWant of attestation or witnessing, if necessary.Failure to register with competent authority within specific time.Ambiguous schedule of the offered securityForgery, tempering deleting of documents. Deed executed by undue influence or forcefully.Instrument executed in blank (amount, security, and liability) with a bad intention. When documents have become time barred.

Disbursement:Before release of sanctioned loan or advance, all terms and conditions as laid down in the sanction letter are to be complied with. To that effect, the following are the basic requirements:

Loan affectivity terms and conditions as to collateral security and equity of the borrower shall be fully met.Specified documentations (Mortgage deed, deed of hypothecation, pledge agreement, D.P. Note etc. as specified in the sanction letter must be completed.Verification of encumbrances of security properties

Non-encumbrance certificate Execution of HalapnamaVerification of liabilities from NCBs/DFIs/PCBs to be completed to the satisfaction of disbursing authority/ Manager.

4.Creation of charge on the collateral security: In case of limited company, the charges on the company assets should be intimated within 21 days from the date of creation of charge, by regd. post to the Registrar, Joint Stock Company.

5.Insurance for

Security properties, as applicable

(b) Assets created or to be created out of a loan fund or with the equity

(c) Stock of goods pledged with the bank as collateral should be taken with appropriate risk cover.

6.Strictly following the disbursement schedule.

7.End use verification.

THANK YOU

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