Chapter VII

Bank Credit and Investment

Course Title: Banking & Insurance

BA-2105
 Group Members
130326 • Chaity Saha

130327 • Rashid Anjum Rabby

130328 • Md. Nazmul Hasan

130329 • Rahatul Islam

130330 • Pritam Raha

Presentation Outlines
 Advances & Credit: A difference
 Classification of Credit
 Secured And Unsecured Credits
 Different Categories of Borrowers
 Various Forms Of Bank Credit
 Composition of Banks’ Investment Portfolio
 Credit & Investment Mix
 Principles Of Lending
 Lending Risk Analysis (LRA)
 Security Vs Purpose Oriented Lending
 Different Securities For Different Types Of Advance
 Features Of Good Securities
 Advances & Credit: A difference

 Advances are type of loans given to people, but with no

interest on them.

 A contractual agreement in which a borrower receives

something of value now and agrees to repay the lender at
some date in the future, generally with interest. The term also
refers to the borrowing capacity of an individual or company.

 Advances, Loan, Credit these words are used synonymously in

day to day life. The difference between credit & advance is that
credit or loan carry interest while advance do not.
 Classification of Credit

Bank credit may theoretically be classified broadly under two

categories. They are:_

 Secured Credit
 Unsecured Credit
 Secured And Unsecured Credits

 Secured Credit: Secured credits means loans or advances

made against security of assets, the market value of asset will
not exceed the value of loan in any given time. It is called so
because security can be enforced in case of default by the
borrowers.

 Unsecured Credit: Unsecured or clean advance/loan/credit

is granted without obtaining any security from the borrower.
These kinds of credits may include ‘Clean Overdrafts’ and
Clean loans. Normally it is not granted until the authority is
sure about the ability of the borrower to repay it on demand
Do Banks Give Unsecured
Loans?
 Do Banks Give Unsecured Loans?

 Banks do not extend any loans without any security for

every customers.

But…..
 Those who make frequent transection and Bank has
legitimate information about the customers ability of
repaying the loan any time they can get ‘Clean Overdraft’ at a
very high interest rate for a very short period of time.
 Different Categories of Borrowers

The borrowers are of different categories; they are

 Individuals

 Self-Employed

 Sole- Proprietorship

 Partnership

 Limited Companies

 Voluntary Organizations' & so on………

 Various Forms Of Bank Credit
Banks classify their credits into various categories having their own
features. Each has it’s own utility to the customer. Generally they
are given in following forms:
 Loan: A sizeable amount of advance/credit of the banks is in the
form of loans. These are made in installments or lump sum amount
depending on the purpose. Interest is charged on the whole amount
of the period loan is available.
Saving Certificates, Debentures, FDR, Gold are the securities
against loans.

 Overdrafts (OD): Overdrafts constitute another important

segment of the credit portfolio of the commercial banks. This kind
of advance in form of Overdraft always allowed on current account
to be operated by cheques. The customer may be sanctioned a
certain limit within which he can overdraw his current account.
NFCD, Shares, Debentures, Government promissory notes,
FDR are the securities against OD.
Various Forms Of Bank Credit (Contd.)
 Cash Credit(CC): A very important credit portfolio of the commercial
banks. Cash credit is generally extended to the traders, industrialists
and large farmers for meeting their works. Cash credit is an active
account to which deposit and withdrawals are made frequently. The
debit balance of the account on any day can’t exceed the agreed limits.
Stock-in-Trade, Merchandise, Machineries, Land and Buildings
are the securities against CC

 Inland Bill Purchase (IBP): Purchasing of ‘inland bills of exchange’

arising out of commercial transection is called inland bill purchased
which is another important lending area of commercial banks. These
advances are created when banks are to purchase bill of exchange.

 Payment against Document (PAD): Another important element of

credit portfolio of banks is Payment Against Documents (PAD). Pad is
associated with import and import financing. Letter of Credit or LC is
a very popular example of PAD. Security for PAD is Shipping
Documents
Various Forms Of Bank Credit (Contd.)
 Loan Against Imported Merchandise (LIM): It happens when a
bank itself has to clear the imported goods under the letter of credit at
the request of the borrowers. When the importer does not come
forward to show the required documents inspire of repeated
reminders the bank is forced to clear the consignment on arrival of
the product stated in LC to avoid heavy demurrage at the port.

 Trust Receipt (TR): This is an arrangement where credit is allowed

against Trust Receipt. The goods to be exported or imported remains
in the custody of the borrower but to gain the credit he/she have to
provide the Trust Receipt. The money borrowed needs to be deposited
immediately after the sale of imported or exported goods.

 Export Cash Credit (ECC): A good amount money is lent by the

commercial banks as Exported Cash Credit (ECC). Such credits are
provided to the exporters to ensure the export of goods and
commodities on which there is an LC or Contract in hand. Trust
Receipt is the security for ECC.
Various Forms Of Bank Credit (Contd.)

 Foreign Bill Purchased (FBP): Purchasing of foreign bills of

exchange arising out of commercial transection is called foreign
bill purchased. In this case, Shipping documents for export is
treated as the security. Other formalities are similar to Inland
bills Purchased
 Composition of Banks’ Investment
Portfolio
All funds of commercial banks are not deployed as loan. As per
Central Bank’s requirement the commercial bank can presently lend
upto 84% . Investment/deployment of fund thus takes the following
forms:
 Cash in Hand: Cash in hand of the commercial bank statutorily
required cash in tills of the bank and demand deposits maintained
with other banks. Among these cash in tills is non-earning asset
since it is kept within banks to meet up with day to day
requirements of the customer

 Money at Call and Short Notice: Excess liquidity of a bank is

many times lent to other banks through the call money market
temporarily. This money can be called back any times for
investment in other fields.
Composition of Banks’ Investment
Portfolio (Contd.)

 Savings Investments/Treasury Bills: Certain percentage of funds

available is maintained in the form of various government
securities including saving certificate and treasury bills. These
instruments bear interest.

 Other Investments: Other investments may include investment in

the form of land and buildings, premises, capital, equipment,
investment abroad and shares etc.
 Credit & Investment Mix

 Credit and investment mix is the composition of credit and

investment portfolio.

 Very important aspect of bank as this ensures profitability along

with stability and growth.

 Bank design this mix under the guideline of Central Bank.

 A successful credit and investment portfolio ensures maximum

return for a bank.
 Principles Of Lending

Lending is the major source of income for banks. But it is also

a matter of risk & problems. To minimize these problems bank
examine a loan proposal from four angles. They are:

1. Bank’s Point of View

2. Borrowers’ Standing

3. Proposal of Loan itself

4. Social Point of View

 Bank’s Point of View

Banks generally examine 4 aspects their own before granting any

loan, these are:

I. Profitability

II. Liquidity

III. Safety of Funds

IV. Diversification of Risk.

 Borrowers’ Standing

The banks here judge three things which are called Three C’s. They
are

I. Character

II. Capacity

III. Capital

In addition to those three C’s, Collateral is also considered.

 Proposal of Loan itself

Proposal of Loan is also a very important component for bankers.

Normally a bank want four information from a loan proposal, they
are:
I. Purpose of Loan

II. Security against Loan

III. Sources of Repayment

IV. Period of which the loan is pursued

 Social Point of View

As banks Work in a society, they need to think about the society’s

demand. Society demands from a bank that it should work for the
wellbeing of the people. These can be done by:
 Savings mobilization,

 Lending money to the priority sectors and

 Employing the unemployed

The government of many countries ensures commercial banks

perform these functions.
 Lending Risk Analysis(LRA)

 Lending Risk Analysis (LRA) means the risk rating method of failure
of borrower to repay the loan.

 Under LRA a highly standardized format is used to analyze the credit

worthiness of a borrower from different business angles.

 Different Components of LRA is Business Risk analysis and Security

Risk analysis.

 Business Risk analysis has two components Industry and Company.

 Tools used in LRA are balance sheet, cash flow statement and ratio
analysis.
 Features Of Good Securities

 Good title and easy transferability

 Marketability

 Ascertainable Value

 Stability of Value

 Worth Storing

 Low maintenance cost

 Free from liabilities

 Perishability
Thank You