Credit Department

CD Banking business primarily involves accepting deposits from the public and investing or lending the same and thereby making profit out of it. However, lending money is not without risk and therefore banks make loans and advances to farmers, traders, businessmen and industrialist against either tangible (land, building, stock etc.) or intangible security. Even then, the banks run the risk of default in repayment. Therefore, the banks follow cautious measures while lending money to others. This core function of a bank is performed by the Credit Department of the bank. In this case, the relationship of bank and customer is that of the creditor and debtor.

CREDIT (LOAN AND ADVANCE)

The profit of a commercial bank depends primarily on the utilization of its fund. But Bank cannot lend its fund fully. As per Banking Company Act 1991 every banking company has to maintain a specified minimum (presently 16%) of the total of its demand and time liabilities in the form of cash and approved securities with Bangladesh Bank. This percentage or ratio is termed Statutory Liquid Ratio. Further every scheduled bank has to maintain with Bangladesh Bank an average daily balance, the amount of which has not to be less than a particular percentage (presently 4%) of the total of its demand and time liabilities. As such Commercial Bank generally goes for short-term finance although a small portion of its total deposit is invested as long term lending. Commercial banks allow different forms advance.

TYPES OF CREDIT OFFERED BY A BANK:

Banks usually offers following types of Credit (loans and advances):
? Cash Credit (Hypo).
? Cash Credit (Pledge).
? LTR
? Term Loan
? Lease Financing
? SOD
? Others

CASH CREDIT (HYPO):

Cash Credit or continuing credits are those that form continuous debits and credits up to a limit and have and expiration date. A service charge that is effect an interest charge is normally made as a percentsage of the value of purchases. These credits may be of the nature of pledged and /or hypothecated and banks should report these in separate heads incorporated under the main head cash credit. A detailed explanation of hypothecation is given below:
 
Under this arrangement a credit is sanctioned against hypothecation of the raw materials or finished goods. The letter of hypothecation creates a charge against the goods in favor of the Bank but neither the ownership nor its possession is passed on to it; only a right or interest in the goods is created in favor of the Bank and the borrower binds himself to give possession of the goods to the bank when called upon to do so. When the possession is handed over, the charge is converted into pledge. This type of facility is generally given to the reputed borrowers of undoubted integrity.

CASH CREDIT (PLEDGE):

Under this arrangement a cash credit is sanctioned against pledge of goods or raw materials. By signing the letter of pledge, the borrower surrenders the physical possession of the goods under the Banks effective control as security for payment of Bank dues. The ownership of the goods, however, remains with the borrower. The pledge creates an implied lien in favor of the Bank on the underlying merchandise. In the event of failure of the borrower to honor his commitment the Bank can sell the goods for recovery of the advance. No collateral security is normally asked for grant of such credit.

LOAN AGAINST TRUST RECEIPTS (LTR):

This is a loan facility up to a satisfactory limit to the traders / customers by a Bank against security of the value of the imported merchandise. This item also includes loan against Trust Receipts.

TERM LOAN:

A Bank advance for a specific period repaid with interest under fixed schedules. The term loans may be as follow:

Short Term: Up to and including 12 months.
Medium Term: More than 12 months up to and including 60 months.
Long Term: More than 60 months. [This item includes lease financing]

LEASE FINANCING:

An entrepreneur, under this Scheme, may avail of the lease facilities to procure industrial machinery (without having to purchase it by down payment) with easy repayment schedule. The clients also get special rebate in their income-tax payment under the scheme.

SECURED OVERDRAFTS (SOD):

A loan facility on a customer’s current account at a Bank permitting him to overdraw up to a certain agreed limit for an agreed period. The terms of the loan are normally that it is repayable on demand or at the expiration date of the agreement.

OTHERS:

Any loan that does not fall in any of the above facilities is considered as “other”. Blocked / Segregated continuing credits (Pledge, Hypothecation or Overdraft) when re-scheduled by the Banks for payments over a number of periods should also be reported against the head “other”.