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Risk Management
1
A Credit Policy of a Banking
Institute is a Combination of Certain
Globally and Locally accepted
Standards.
2
These standards are related to:
• SAFETY
• LIDUIDITY
• PROFITABILITY
• EXPECTED RISK
3
Financial Methodology:
General Guidelines for Banks:
1. Commercial Banks Should undertake only those
credit risks for which they have required level
of risk assessment expertise and
apparatus;
In terms: To supervise
Personnel
the
Risk
System support
4
General Guidelines for Banks:
2. Which Risk type the bank can and
should undertake.
5
General Guidelines for Banks:
4. Type and proportion of security / collateral
support needed for lending risks.
6
General Guidelines for Banks:
7. Management Level competent to sanction
credit facilities.
7
General Guidelines for Banks:
10. Current and prospective Market
Conditions.
consistent basis. 9
Who is the Borrower?
10
In extending financial facilities to
customer, it is always important to
know about the PURPOSE for
which a borrower is asking for
banks’ funds.
11
Who can borrow??????????
• Individual
• Joint Account holders
• Sole Proprietorships
• Role of Attorney Holder
• Partnership
• Limited Liability Companies
• Local Authorities and other statutory undertaking
• Persons Acting in fiduciary Capacity
• Trusts
• Non banking Financial institutions
12
Who can borrow?
1. Individual…
For customer – bankers relationship:
• Must be adult ( should be of 18 years of age and have CNIC)
13
For extending any Financing Facility the
following aspects must also be noted:
16
Who can borrow?
2. Joint Account Holder…
• Account of two or more persons. Who are
neither partner nor trustee.
17
For extending any Financing Facility the
following aspects must also be noted:
• A joint Mandate signed by all joint account
holders must be obtained.
18
Who can borrow?
3. Sole Proprietorship…..
- Business enterprises which are owned
and managed by a single person.
19
For extending any Financing Facility the
following aspects must also be noted:
20
Risk factors:
- These businesses generally tend to
have small base and loss sustaining
capacity.
- They are One –man / woman show.
- Managerial Capacity and good health of
the proprietor.
- Management style
- Book keeping
- Unprofessional skills
21
Who can borrow?
4. Role of Attorney Holder…..
• They are appointed by customer to
execute documents on their behalf as well
as operate their bank account.
22
Who can borrow?
4. Role of Attorney Holder…..
• Duties of attorney holder must clearly and
unambiguously spelled out in power of attorney (
on non-judicial stamp paper) to be signed by the
customer and witnesses by the bank.
23
Who can borrow?
4. Role of Attorney Holder…..
• Power of attorney is not issued for a
specific period, it can be revoked by
customer any time.
24
For extending any Financing Facility the
following aspects must also be noted:
• Job of banker is risky due to late submission of
notice of revocation.
27
Who can borrow?
5. Partnership…..
• According to section 4 of partnership Act
1932,
PARTNERSHIP is the relation between
persons who have agreed to share the
profits and losses of the business carried
on by all or any of them acting for all the
other partners.
28
5. Partnership….
• All partner may not be actively involved in
affairs of the partnership, though they
remain partner for all legal purposes, and
are liable to the creditors of the firm as
much as the active partners.
• Partnership may be created
– Verbally or
– In writing….. in the form a formal Partnership
Deed giving the particulars, share and role of
the partners of the firm.
29
5. Partnership….
i. Active and Non – Active Partners:
Partners may authorize one or more
partner or non-partner to operate the
firm’s account.
30
All partners jointly issue mandate to
one or more of the partner or a non-
partner giving him / her the power to:
33
5. Partnership….
• Partnership deed of continuing
partnership should clearly state the
circumstances in which the partnership will
stand dissolve.
35
5. Partnership….
iii. If the partnership account is not
overdrawn nor any of the financing
facilities are unpaid, admission of the new
partner may be accepted by the bank.
39
iv. Insolvency of Partnership
40
Who can borrow?
6. Limited Liability Companies…..
• As per Section 2 of the Companies Act 1913
(Re-enacted in Pakistan as Companies Ordinance 1984) Defines the
Joint Stock Company as
43
1. Private Limited Companies:
• They are formed and governed by the
same laws as applicable to Public Limited
Companies.
45
For extending any Financing Facility the
following aspects must also be noted:
• The manager must obtain the information
about the following questions from the
Memorandum And Articles of Association (
MAA)
i. Whether the Director of the company
have the power to borrow on behalf of
the company or not?
ii What are the limitations on the amount
which can be borrowed by the
company?
46
For extending any Financing Facility the
following aspects must also be noted:
iii. What is the purpose of borrowing? It
must be within the scope of the
company’s objective?
iv. What powers are there to pledge
company’s assets as security against
credit facilities availed from banks?
v. What are the requirements for
execution of the security documentation
duly supported by the board’s
resolution, and for the registration of
charge on the company’s assets 47
2. Public Limited Companies:
• They are formed generally for setting up large business.
• Major concessions for them are:
– Public subscription to their shares is allowed.
– The number of members ( share holders) is
unrestricted.
– Shares are usually held by large number of general
public who elect Directors to run the affairs of the
company on their behalf.
– The board of directors is authorized to appoint the
managing agents.
– Managing directors are accountable to the Board Of
Directors who are in turn accountable to the
shareholders of the company.
48
Who Can Borrow?
7. Local Authorities and statutory
undertakings:
49
Who Can Borrow?
8. Persons acting in fiduciary capacity:
• Trustees: Trust Act or Trust Deed
50
Who Can Borrow?
9. Trust
Who Can Borrow?
10. Non – Bank Financial
institutions ( NBFIs)
52
Fund-based Facilities:
Financing commercial and trade business
53
Fund-based Facilities:
Fund-Based financing for Working Capital broadly
includes facilities that customers avail from
commercial banks in order to finance one or all of the
following facilities:
ii. Acquire and hold stock-in-trade until it is sold or
processed or used for manufacturing.
iii. Processing / manufacturing overheads for converting
raw material into finished goods.
iv. Hold finished goods inventories until they are sold
v. Credit sales realization period
vi. Promote the sale of goods i.e. selling, General &
Administrative expenses
C O N T I G E N T L I A B I L I T Y:
Liability which may or may not occur,
but for which provision is made in a
bank’s accounts.
55
Non- Fund-based Facilities:
Meeting the banking needs of importers
and all types of contracting firms by
offering full range of :
56
Non- Fund-based Facilities:
57
Classification of Commercial Credit Facilities
Contingent Facilities
58
General Financing Facility
61
General Financing Facility: Demand Finance
1. Customer Credentials:
A customer should fulfill the following criteria:
c)Existing relationship with a satisfactory track
record of business reciprocity and meeting
re-payment commitment.
d)Good business judgment and market
reputation.
e)Availability of adequate un-encumbered
assets or otherwise as may be acceptable to
the bank. 62
General Financing Facility: Demand Finance
2. Purpose
3. Re-Payment
4. Security
63
General Financing Facility
4. Term Finance:
This facility required by customer for:
Term
Temporary Demand Finance
Running Finance
Finance
Running
Finance
65
Inland Bill Financing
Financing the Trade Receivables
67
1. Inland Bill Purchased (IBP) - Clean
69
Necessary points to be noted are:
2. For a one-time purchase prior approval
should be obtained from the competent
authority.
3. For regular utilization of this facility a
formal Inland Bill Purchased limit should
be obtained.
IBP involves the RISK of bills being
dishonored.
70
In the event a bill purchase earlier
is returned unpaid:
• It Should immediately be debited to the
customer’s account along with the mark-
up from its value date.
• The customer be informed in the usual
manner prescribed for returning unpaid
cheques.
71
2. Inland Bill Purchased- Documentary
73
Inland Documentary Bills
Sight Usance
Purchase Discounting
74
• Inland documentry bills purchase often
involves the risk…….dishonored on
presentation.
• CAUTION
A Bank lose the right of resources against
the drawer of if the Inland LC is confirmed
and advised through the same bank.
75
• The bank purchase the IDB and wait for
the realization of the bill proceeds from
drawee upon:
76
To qualify for being purchased the bills must be
accompanied by:
ii. Air Way Bill, RR, TR……evidencing
transportation of the goods to the buyer’s
location.
iii. Invoice in the name of the buyer
iv. Packing list
In case of LCs the customer must present all
other documents required by LC.
77
Inland Documentary Bills
Discounted (IBD)
• The bank will discount these bills, pay off
the customer and wait for realization of the
bill proceeds at maturity.
79
Inland bills facility
Inland Bills
Inland Bills Inland Bills Discounted
Purchased Purchased (IBD)
(IBP)-Clean (IBP)-
Documentary
80
3. Import Financing Facilities
81
Import Finance facility
82
Inward Foreign Bills (IFB)
Reimbursement instructions :
a) Claim Form Our account with ABC
Bank ( Payment date remains uncertain
which makes the timely funding of the
Nostro account rater difficult)
b) Claim from us by the telex / swift ( there
is enough cushion for timely funding of
the Nostro)
83
Remittance of funds against
Import Documents convert
the Contingent Liability into
Funded Liability.
84
Finance Against Imported
Merchandise (FIM)
• Under this facility imported goods come
under the custody of the bank as soon as
they are off-loaded from the carrier
( aircraft . Ship)
• Clearing / forwarding is carried out by the
bank’s approved clearing / forwarding
agents, and the agent is required to
transferred the goods to a warehouse
under the supervision of the bank’s either
directly or through the bank’s approved
Muccadam.
85
• The warehouse may be either rented
or stored by the customer /
Muccadam but the imported goods
stored therein remain under the
Bank’s custody.
• The safety , security and
maintenance of the record of the
receipt and release of good is the
responsibility of Bank’s Mucadam,
whose services are paid by the
Importer. 86
• Goods are released to the importer only
on payment.
• The process of determining the
proportionate value of the goods to be
partially delivered to the customer is
facilitated by making reference to the
packing lists accompanying the related
import documents.
• On receiving payment for goods the bank
will issue a Delivery Order; wherein the
Muccadam will be instructed to release the
goods or part thereof as the case maybe.
87
• If the goods are not sold in time, their condition
may be deteriorate and they may either
become un-saleable or may have to be sold at
a large discount.
The important points t be consider are:
c. Customer must be pursued for taking prompt
delivery of the goods against payments.
d. Every time the goods may be released a
Margin should be retain by bank
e. Goods should be inspected frequently to
ensure that they are being well looked after.
88
Finance against Trust Receipt
(FATR)
• Import documents are released to the
customer after the customer signs a “Trust
receipt” evidencing the fact that the
customer is receiving custody of the goods
as a “Trustee” of the bank not as the
owner of the goods.
• This is the liberal financing facility because
it allows the customer to freely “deal” in
the goods
89
• This facility is allowed to the imported for
60 or 90 days.
• This facility is extended under the
following circumstances:
– the customer is trustworthy and is not likely to
consume / sell the goods without paying their
proceeds to the bank.
– Security provided by the customer adequately
covers the interest of the bank.
90
• Under this facility imported goods
come under the custody of the
CUSTOMER as soon as they are off-
loaded from the carrier ( aircraft .
Ship)
• The warehouse where the imported
goods are stored shall be owned by
the customer. Even in the rented
house the imported goods must
remain under the custody of the bank.
91
• The safety , security and maintenance of
the record of the receipt and release of
good is the responsibility of Customer.
The important points t be consider are:
c. Customer must be pursued continuously for
depositing sale proceeds of the goods with the
bank to gradually reduce the FATR facility
ensuring its timely adjustment.
d. The customer must submit stock reports
regularly indicating therein the extent to which
goods have been sold / consumed, and the
outstanding FATR balance reduced
accordingly.
e. Goods should be inspected periodically to
ensure that they are being well looked after.
The frequency of the inspection will depend on
the nature of the goods 92
Import Finance Facility
Finance
Inward Finance against against
Foreign Imported Trust
Bills (IFBs) merchandise Receipt
( FATR)
(FIM)
93
4. Export Financing Facilities
• Exporters have to wait for six months
before they get paid by the importers.
• This creates a need for financing on :
– Pre-shipment basis
– Post-shipment basis
94
• Due to intense price competition in
exports, Government often provide a
variety of incentives to exporters so that
they can cut their costs and become price
competitive in the international market.
• To achieve these objectives government
insist the commercial banks to:
i. Re-financing on subsidized mark-up
rates the pre-shipment finance facilities
extended by commercial banks to their
exporter customers
95
ii. Rediscounting export bills earlier
purchase / discounted by commercial
banks.
Note: Such subsidized export finance is
provided for selected items only.
** financing exports of items other than
those covered by government sponsored
Re-finance Schemes is undertaken on
commercial rats of mark-up.
96
Export Re-finance
• Government provides subsidized Export
Re-finance facility through SBP.
• Under SBP’s Export Refinance Scheme,
exporters are provided funds at subsidized
mark-up rates.
• These funds are routed through
commercial banks which serve as a
medium for channeling them to exporters.
97
Export Re-finance
• SBP only Re-finance banks’ export
finance portfolio.
• Assumes No risk
• This facility is extended up to 150 to 180
days
• On maturity of facility, SBP simply
recovers it from commercial banks by
debiting their accounts along with mark-
up.
98
Export Re-finance
• In this scheme export re-finance proposals
are:
– Received by banks
– Investigated by the banks and examined for
their soundness
– Monitored for timely realization of export
proceeds like any other financing proposal
99
Export Re-finance
• All export Financing proposal should be
scrutinized and monitored by the Export
Re-finance Department of the bank.
100
Export Re-finance
• In export financing the Bank's risk rests
on:
– The basis of export i.e. whether under LC or
on contract basis.
– The ability of exporter to perform under the
export LC or contract.
– On the efficiency and diligence of the
negotiating or remitting banks abroad
101
Export Re-finance
• Assessing these risks call for judging the
exporter’s resources and ability to:
– Obtain contract / export LCs from well reputed
buyers abroad on reasonable prices and
supply terms
– Manufacture / process of or sub-contract
these activities
– Arrange requisite raw material in time for
manufacturing / processing the consignment
for effecting shipment on time.
102
Export Re-finance
• This call for thoroughly investigating
exporter’s:
– Past export records, especially for timely
realization of export bills sent on collection
basis because they involve a high risk of
recovery.
– List of buyers and countries they are located
in.
– Premises to verify manufacturing capability
and the extent to which the exporter is
dependent on sub-contracting.
– Obtaining bank references to verify the above 103
facts
Export Re-finance
• Banks can expect to realize export
proceeds only if the exporters:
– Effects shipment on time, whether as per LC /
contract terms or as amended later o
– Submits complete and correct documents
evidencing shipment of the goods
– Request for routing documents through
reputable banks abroad
– Can provide evidence of buyer’s timely
payments.
104
Export Re-finance
NOTE:
105
SBP Export Re-finance scheme:
• This scheme enables exporters to
purchase raw material and convert them
into finished goods for export or
alternatively obtain financing facility
against export receivables.
106
SBP Export Re- Finance
i. Pre-Shipment Pre-shipment
107
SBP Export Re-finance
• SBP sanctions a combine limit for both parts of
the scheme to each applicant bank.
• The limit is effective from 1st July for the current
year and remains valid until 30th June of the
following year.
• The limit is equal to 3.75 times of a bank’s
audited equity / net worth (paid-up capital plus
all reserves minus accumulated losses as on
31st December o previous year.
108
SBP Export Re-finance
• To avail the Re-finance limit, bank has to
provide an undertaking to the SBP
(standard text provided by SBP) wherein
the Bank unconditionally undertakes to
draw the facility exclusively for financing
exports.
109
i. SBP Export Re-finance Part-I
(Pre-shipment)
• Under Part-I of the scheme, exporters
become entitled to export finance facility
on fulfilling one of the following
conditions:
a) Receipt of export letters of credit favoring
the exporters
b) Executing firm sales contract with foreign
buyers.
110
When exporters want to avail financing under Part-
I (pre-shipment) of the scheme, they are required
to submit the following to the bank:
a) Export L/C or firm contract executed within the foreign
buyers (SBP to be provided photocopies of these
documents after bank has marked its lien on the above
original documents)