01 May, 2011

Bank's Credit or Loan facilitiy Types

Credit The word "Credit" is derived from the Latin word Credo or Krado meaning I believe. It is usually defined as one's ability to buy to a promise to pay. From the Banker's point of view Credit is the confidence of the lender on the ability and willingness of the borrower to repay the debt as per schedule of repayment.

A bank provides loan to a company, with a fixed maturity and often featuring amortization of principal. If this loan is in the form of a line of credit, the funds are drawn down shortly after the agreement is signed. Otherwise, the borrower usually uses the funds from the loan soon after they become available. Bank term loans are very a common kind of lending.

In other words, a loan that an individual or a business owner gets Atom a bank is called Bank Loan.

Types of Credit:
Credit may be classified on Various Basis. These are
• FUNDING
• TERM
• SECURITY
• SECTORAL
• CLASSIFICATION STATUS



Commercial Banks make credit in different forms. All types of credit facilities may broadly be classified into two groups on the basis of Funding.
1. Funded Credit
2. Non Funded Credit

Funded Credit
Any type of credit facility which involves direct outflow of Bank's fund on account of borrower is termed as funded credit facility. Funded credit facilities may be classified into four major types as below :
• Loans
• Cash Credit
• Overdraft
• LIM
• PC
• Bill Purchased/Discount
• Others

1) Loans
(a) Demand Loan : It refers to those loans that are repayable on demand by bank. In addition, it refers to those contingent and other liabilities that become forced loans (if there is no pre-sanction as regular loan). Example of demand loans is forced LIM.
(b) Term Loan : It refers to those loans that are repayable in a definite period and as per definite repayment schedule. Continuous Loan : It refers to those loans in which transactions can be made without having any definite repayment schedule, but there is a last date for repayment and a limit. Examples of continuous loan are OD, CC etc.

2) Cash Credit (CC)
a) Cash Credit Hypothecation (CC Hypo) Under this agreement borrower can borrow any time with in the agreed limit for certain period to meet their working capital need. Cash credit allowed against hypothecation of goods.
b) Cash Credit Pledge (CC Pl) Under this agreement borrower can borrow any time with in the agreed limit for certain period to meet their working capital need. This type of facility is always provided against Pledge of goods.

3) Over Draft (OD) Basically this is an agreement between banker and his customer by which the later is allowed to withdraw over and above his credit balance in his current account. Overdraft Facility may be allowed generally on the following ways:
• Overdraft against Salary
• Overdraft against Guarantee
• Overdraft against term deposit as FDR/DPS etc
• Overdraft against Bill Receivable (Work Order)
• Overdraft against Stock/Raw Materials

4. LIM (Loan against Imported Merchandise)

Loan against the security of merchandise imported through the bank may be allowed on pledge of goods, retaining margin 'prescribed on their landed cost, depending of their categories and credit restrictions imposed by the Bangladesh Bank. Branches obtain a letter of undertaking and indemnity from the parties, before getting the goods cleared through LIM account. LIM may be created in two ways :
i)    LIM on importer's request
ii)    Forced LIM. LIM is post shipment import finance.

5. Packing Credit
This type of credit is sanctioned for the transitional period from dispatch of the goods till negotiation of the export documents. The drawings under Export cash credit (Hypothecation/Pledge) limit are generally adjusted by drawing in packing credit limit which is, in turn, liquidated by negotiation of export documents. It is pre-shipment export finance.

6. Bill Discounted/ Bill Purchased

a) Bill Discounted
Bank allows credit to the clients by discounting Usance bills (Bill of Exchange) which matured after a fixed tenor. It may be clean or documentary.

b) Bill Purchased
Bank allows credit to the clients by Purchasing Demand bills (Bill of Exchange) which the bank collects immediately. It may be clean or documentary.

7. OTHERS
Other Important funded credit facilities are :
• Advance against hypothecation of Vehicles ( Transport Loan) • House Building Loan • Consumer Loan • Agriculture Loan -Farming -Non Farming • Weaving Credit • Micro Credit • Consortium Loan • Syndicate Loan • Lease Financing • Hire Purchase • Import Financing - Loan Against Imported Merchandise (LIM) - Payment Against Document (PAD) • Export Financing -Packing Credit (PC) -Trust Receipt (TR)

Consortium Financing:

A grouping of a number of companies in order to promote a common purpose, e.g. a consortium bank can be set up by three or four other banks for the purpose of joint financing of a project which is considered too big for the resources of any individual bank/institution. For such advances, financial intuitions appoint a leader of the consortium who takes the loan account.

Advantages: 
• spreading and sharing of risks
• making use of collective wisdom and expertise
• providing better service and
• taking care of the units complete financial requirements

Syndicated Loan: 
Syndicated loan means joint financing by a group of banks or financial institutions to a borrower against common security. This is done basically to spread the risk. One bank in the syndicate usually acts as a lead bank for the other institutions. Lead bank co-ordinates the activities at various stages of handling the deal. i,e. appraisal, sanction, documentation, sharing of security, disbursement, inspection, follow-up, recovery etc. The borrower will create, inter alia, in fixed assets and shall execute necessary charge documents in favour of respective banks separately or collectively as are called upon ranking pari passu charge on the securities.

Lease Financing:
The Leasing is defined as contract between a leasing company (called as "the Lessor) of the one part and the user of the equipment-asset (called "the Lesse") of the other part whereby the lessee/loanee agrees to pay the lessor an agreed amount of money as rentals over a specified/obligatory period of time in consideration for the use of capital equipment owned by the lessor. The lessor retains ownership if the equipment and seeks to recover the capital cost of the equipment puls a profit margin out of the lease rentals payable during the period of the lease.

Under this system of finance, financing company of bank initially purchases the assets and then leases to the user for a specified time in exchange of payments of rent on monthly or quarterly basis.
There are two types of lease recognized under this system of investment. Such as (1) Operational Lease; and (2) Lease Purchase.

NON FUNDING: 
Any type of credit facility where there is no involvement of direct outflow of Bank's fund on account of borrower is termed as Non funded credit facility. Though this type of Credit facilities are primarily non-funded by nature but at time it may turn into funded facilities. As such liabilities against these types of credit facilities are termed as contingent liability.

The major Non Funding Credits are • Letter of Guarantee • Letter of Credit •Performance Bond • Acceptance

On the basis of term Credits are Classified as:
• Short Term • Mid Term • Long Term
Short Term : Upto 1 year
Mid Term : Upto 5 Years
Long Term : More than 5 Years

Small and Medium Enterprises (SME):
The definition of SME varies from one country to another and from one time to another in the same country depending upon the pattern and stage of development, Government policy and administrative set up of the particular country.

But according to prudential regulations for small enterprises financing- Small Enterprise means an entity, ideally not a public limited company, does not employ more than 25 persons (if it is service concern) and 25 persons (if it is a trading concern) and 50 persons (if it is a manufacturing concern) and also fulfills the following criteria :

a) A service concern with total assets at cost excluding land and building from Tk. 50,000 to Tk. 50 lac.

b) A trading concern with total assets at cost excluding land and building from Tk. 50,000 to Tk. 50 lac.

c) A manufacturing concern with total assets at cost excluding land and building from Tk. 50,000 to Tk. 1.50 crore.

Medium Enterprise: 
Medium enterprise means that enterprise which is ideally not any public limited company and fulfills the following criteria:
a) Service Concern: In the case total fixed assets excluding land and building amount to BDT 50 Lac to 10 crore and/of working manpower does not exceed 50 persons.
b) Trading Concern: In the case total fixed assets excluding land and building amount to BDT 50 Lac to 10 crore and/of working manpower does not exceed 50 persons.
c) Manufacturing Concern: In the case total fixed assets excluding land and building amount to BDT 1.50 crore to 20 crore and/of working manpower does not exceed 150 persons.

>On the basis of Security Credits are Classified as: • Secured Clean  • Clean

>On the basis of Sector Credits are Classified as: • Public • Private • Commercial • Industrial • Transport • Agriculture • Micro Credit • Housing

>On the basis of CRG Loans and Advance are Classified in Category : • Superior • Good • Acceptable • Marginal/Watch list • Special Mention Account (SMA) • Sub Standard (SS) • Doubtful (DF) • Bad and Loss (BL)

>On the basis of Classifications Loans and Advance are Classified in Category :
• Continuous Loan • Demand Loan • Term Loan (1) Term Loans repayable within 5 years (2) Term Loans repayable more than 5 years • Short Term Agricultural Credit & Micro Credit.

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