SME_Foundation_Training

SME Customer SelectionSME Customer Selection

SME FINANCING PRINCIPLES

SME financing is an essential service that the Bank provides to the economy and the community also it is a source of both profit and risk.

The Bank's ability to manage risk effectively has a direct impact on clients, Bank staff members, and shareholders.

FINANCINGFINANCING

Financing is an ongoing process of uncovering and understanding clients’ complete situation in order to better identify potential solutions, build and maintain relationships and identify opportunities for cross and up-sell.

Understanding who the borrower is What their needs are

– Determining if loans can be repaid– Understanding impact of leverage– Determining what security is available.

HOW DOES THE BANK MAINTAIN ITS FINANCIAL STRENGTHHOW DOES THE BANK MAINTAIN ITS FINANCIAL STRENGTH??

Effective and efficient management of credit risk enables the Bank to maintain itsfinancial strength.

What's The Role Of Credit Policy?

The role of Credit Policy is to:

– effectively and efficiently manage risk &

– develop, monitor, and revise credit policies

What's My Role?

It's up to you to ensure the credit policies are followed for the interest of Bank.

What Are Credit Principles?

General Principles : (which are universal)

Portfolio Principles : (which help ensure the overall portfolio quality)

Relationship Principles : (which bear directly on client relationships)

General PrinciplesGeneral Principles

which are universal

USE JUDGMENT AND COMMON SENSE

No amount of policy in the form of Principles, Rules,Guidelines, Risk Assessment Techniques, Rating Systems,Scoring Systems, etc., will ever replace the use of good judgment and common sense.

CREDIT QUALITY IS EVERY EMPLOYEE'S RESPONSIBILITYCREDIT QUALITY IS EVERY EMPLOYEE'S RESPONSIBILITY

Credit quality is crucial to the Bank's profitability. It is important for each employee to help maintain the desired quality of the Bank's portfolio.

CREDIT PROCESS ENDS ONLY WITH PERFORMANCE OR REPAYMENT

The credit process is a series of steps comprising:- Marketing - Strategy- Sales- Analysis - Application- Recommandation- Approval- Documentation- Monitoring- Collection- Full payment or other performance.

Quality can only be maintained if all the steps in the process are performed properly.

FOLLOW THE GUIDING PRINCIPLES

Guiding Principles contain guiding policies that bearon Credit Principles.

CONSIDER THE BANK'S REPUTATION

Appropriate due diligence must be conducted to ensure all clients meet normal criteria for establishing a business relationship with DBBL

Portfolio PrinciplesPortfolio Principles

which help ensure the overall quality and soundness of the portfolio

Spread The Risk

• The Bank reduces credit risk by diversifying the portfolio across several categories including:

– Client– Industry– Term– Product– Geographic area

• Too much exposure to a particular borrower or category of borrowers creates

an imprudent level of risk. This could result in material deterioration of the portfolio in a short period of time.

DO NOT COMPROMISE QUALITY FOR GROWTHS

The Bank wants to grow, although not at the expense of portfolioquality. Remember bad loans are usually made in good times.

PROVIDE QUALITY RESOURCES

The Bank does not engage in any business unless it is supported by:

– People with the right skills and training– Adequate strategies and policies– Appropriate systems and procedures.

Relationship PrinciplesRelationship Principles

which bear directly on client relationshipsThey apply at the transaction level.

KNOW THE CLIENT

The Bank is in the business of serving clients, but before entering into a new client relationship, it is imperative to check:

– Background– Character– Financial status– Banking history.

KNOW THE TRANSACTION

When Managers/credit analyst(s) are involved in recommending, authorizing, processing, and monitoring each transaction, it is imperative that you fully understand:

– The transaction– The risks inherent in the transaction– How the transaction fits within Bank strategies.

Proper assessment ensures that the Bank only assumes risk it fully understands

THE CLIENT MUST UNDERSTAND THE TRANSACTION

The Bank shall not enter into a transaction where it believes that the client does not have a reasonable understanding of the transaction.

REFERRALS ARE NOT APPROVALS

• Clients and/or transactions referred by Bank officers are subject to the same credit approval standards as from any other source.

– It is up to the credit officers to:– Assess the risk, and– Clearly understand documentations that they are fully responsible for the decisions

ONLY CASH REPAYS LOANS

Each lending proposal must identify:

The cash flow to repay the loan, &

Alternative sources of repayment.

COMPLETE DOCUMENTATION CORRECTLY AND PROMPTLY

In order to avoid uncertainty or confusion between the Bank and its clients, all credit facilities must be properly documented before or at the time funds are advanced or obligations are undertaken.

• To ensure that all security documentation complies with the terms of approval.• To control loan disbursements only after all terms and conditions of approval have been met,

and all security documentation as per the checklist • To maintain control over all security documentation.• To monitor borrower’s compliance with agreed terms and conditions, and general monitoring

of account conduct/performance.

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Necessary Documents for preparation of SME Loan Application Necessary Documents for preparation of SME Loan Application

ADVANCES AGAINST GOODS/STOCK IN TRADEADVANCES AGAINST GOODS/STOCK IN TRADEADVANTAGESADVANTAGES

About 2/3 of the total secured advances are sanctioned by banks against the security of goods which include food articles, industrial raw material plantation products, manufactured articles, minerals etc. Goods have many distinct advantages over other forms of securities:

• They are easily realizable on account of their having a ready market.

• Their value can easily be ascertained from the market.

• They are tangible assets and, therefore, can be realized in case the necessity arises.

• Loans against commodities are of a seasonal character. They are repaid before

the commencement of the next season. Therefore, there is no unnecessary

locking up of funds.

• In case of commodities which are used as necessaries of life, there is not much

of price fluctuations.

ADVANCES AGAINST GOODS/STOCK IN TRADEADVANCES AGAINST GOODS/STOCK IN TRADELIMITATIONSLIMITATIONS

However, goods as ‘security’ have their own limitations.

• Effective supervision over goods, may not be possible particularly when they are

hypothecated. Dishonest persons may cheat the banks.

• Quality of goods is difficult to verify. The goods actually pledged may be quite

different than those which were promised to be pledged.

• Goods deteriorate in quality with the passage of time. This results in erosion in

bank’s security.

• Heavy transportation costs may have to be incurred for realizing the best possible

price for the goods.

ADVANCES AGAINST GOODS/STOCK IN TRADEPrecautions and Procedures

We should keep in mind the following points:

1)Selection of borrower The banker should satisfy himself regarding the character, capacity and

capital of the borrower. Since in case of goods, chances of fraud are more,

this is all the more important.

2) Selection of commodities Commodities should be such which have fairly stable prices.

3) Charging the security Goods can be deposited by way of security either in the form of a pledge or

hypothecation. In case of hypothecation the borrower must be dependable

since the banker has little control over the movement of goods.

ADVANCES AGAINST GOODS/STOCK IN TRADEDeclaration from the borrowerDeclaration from the borrower

We must obtain a declaration from the borrower stating by way of stock report that

(I) The borrower is the owner of the goods hypothecated and(II) He shall not charge the same goods to any other bank without the prior consent of the bank.

ADVANCES AGAINST GOODS/STOCK IN TRADEStorage of goodsStorage of goods

Following points should be taken into account while storing the goods offered by way of security:

(a) The godown should safe from flood, fire etc. and situated in a good locality.(b) In case of hypothecation of goods the borrower should give an undertaking that he will

allow inspection of godown and stock books as and when desired by the bank’s officials.(c) In case of pledge the godown should have a bank lock with the bank’s name engraved on it.

A name plates declaring that the goods with the Bank(d) In case of payment of loan in installments it should be seen that the goods released are in

proportion to the amount paid by the borrower.(e) The goods should be insured for full value so that the bank may not have to suffer on

account of “average clause m case of under insurance.

ADVANCES AGAINST GOODS/STOCK IN TRADEConduct of the account

(a) Appropriate name plate that the goods are hypothecated with the bank should be prominently displayed.

(b) No EOL should be allowed which exceed the drawing limit.

(c) The drawing limit should be fixed by taking into account the value of the goods (calculated on the basis of cost or market price, whichever is less) and appropriate margin in respect of those goods. While valuing the goods both quantity and quality of goods should be seen.

(d) The borrower should clear the old debt before the commencement of the next season. In case he has not done so, necessary explanation should be called for.

(e) The advances should be made for genuine trade needs and, not for speculation activities.

ADVANCES AGAINST GOODS/STOCK IN TRADELegal documents requirements

Application for creditAccepted copy of sanction letterD. P. noteLetter of arrangementLetter of continuityLetter of lien (containing set-off clause).Letter of Hypothecation (if Hypothecated)Letter of Pledge (if Pledged).Stock reportLetter of delivery of stock (it pledged).Insurance policy in the joint name of the Bank and the borrower.Irrevocable power of attorney in favor of Bank.Letter of authority to pay the salary & allowances to the godown staff (if pledged).Letter of consent and Letter of disclaimer from the owner of the godown/warehouse (if rented).Letter of Guarantee from 3rd party (if any).

OBTAIN APPROPRIATE COLLATERAL

The Bank takes appropriate collateral security and / or other credit support documentation when appropriate to the transaction and clients involved. Analysis will indicate what type of collateral security and other credit support is necessary to mitigate risk.

READILY REALIZABLE ASSETSREADILY REALIZABLE ASSETS

Liquid assets and stocks pledged to the banks in possession, with ‘perfected lien’ duly supported with complete documentation.

LOAN DOCUMENTATIONLOAN DOCUMENTATION

For all facilities, banks must obtain (as applicable) and not limiting to following documents before disbursement of loan can be made:

1) Loan Application Form duly signed by the customer.2) Acceptance of the terms and condition3) Valid Trade License


Partnership Firm:

Copy of Registered Partnership Deed duly certified

as true copy.


Limited company:

a) Copy of Memorandum & Articles of Association of the company including Certificate of incorporation duly certified by Registrar Joint Stock Companies (RJSC) and attested by the MD accompanied by an up-to-date list of Directors,

b) Copy of Board Resolution of the company for availing credit facilities and authorizing Managing Director/ Chairman/Director for execution of documents and operation of the accounts,

c) An Undertaking not to change the management of the company and the memorandum and articles of the company without prior permission of the bank.

d) Copy of last audited financial statement up to last 3 years (as applicable)

e) Personal Guarantee of all the Directors including the Chairman and MD

f) Certificate of registration of charges over the fixed and floating assets of the company duly issued by RJSC

g) Certificate of registration of amendment of charges over the fixed and floating assets of the company duly issued by RJSC in case of repeat loan or change in terms and condition of Sanction Advice regarding loan amount, securities etc.,


Letter of revival:Section 19 of Limitation Act IX of 1908 Effect of Acknowledgment in Writing.- (1) Where, before the expiration of the period prescribed for a suit or application in respect of any property or right, an acknowledgment of liability in respect of such property or right has been made in writing signed by the party against whom such property or right is claimed or by some person through whom he derives title or liability, a fresh period of limitation shall be computed from the time when the acknowledgment was so signed.

Demand Promissory Note :a promissory note is a written promise to repay a loan or debt under specific terms - usually at a stated time, through a specified series of payments, or upon demand.

Promisor & Promisee,


Hypothecation:

Hypothecation is the practice where a borrower pledges collateral to secure a debt or a borrower, as a condition precedent to a loan, has a third party (usually an affiliate) pledge collateral for the borrower. The borrower retains ownership of the collateral, but the creditor has the right to seize possession if the borrower defaults.

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Letter of hypothecation of stocks and goodsLetter of hypothecation of book debts, Advance payments & receivablesLetter of hypothecation of plant & machineryNotarized IGPA in favor of Bank to sell hypothecated entire Stocks


Personal Guarantee

PG of Spouse/Parents/other family members.PG of One third party PG of MortgagorPG of all the Directors including the Chairman and MD (If Ltd. Co.)

ID card of PGs must be attested by the authorized officerGuarantee form kept unstampedNet worth statement not obtained Photograph of PG not attested by borrower


Insurance coverage:

Wherever practical, insurance policy for 110% of the stock value covering all risk with bank’s mortgage clause in joint name of the bank and client

Insurance on hypothecated stock expired and was not renewed


Mortagage Documents:

• Original Title Deed• Photocopy of Bia-deed• CS, SA, RS, BS Khatians• Mutation Khatuan/Parcha along with DCR• Up-to-date rent receipt• Municipal Tax Receipt• Non-encumbrance certificate• Mouza Map

LOAN DOCUMENTATION

Mortagage Documents:

Title / Property Search

A title search is performed when an owner wishes to mortgage his property and the bank requiresthe owner to insure this transaction.

Title deeds and related documents like C.S., S.A., R.S. Parcha, Khatian., Mutation Certificate with DCR,Municipal Holding Tax paid Receipt (if applicable), Site Plan of land, Rent Receipt (up-to-date), Non-encumbrance Certificate,etc. are to be verified by panel lawyer or legal advisor of the Bank and possession of the owner over properties are to be verified.)

Bia-Deed

A chain of title is the sequence of historical transfers of title to a property. The "chain" runs from thepresent owner back to the original owner of the property. In situations where documentation of ownership is important, it is often necessary to reconstruct the chain of title. To facilitate this, a record of title documents may be maintained by a registry office.


Khatian: Record of Rights

Khatian shows its own khatian number, plot numbers, bata plot numbers, area, mouza, names andshares of the possessors, descriptions of their rights and superior interests etc.

Khatians prepared during

• C.S. Khatian Cadastral survey (1892-1898) prepared under the Bengal Tenancy Act, 1885;• S.A. Khatian State Acquisition Survey prepared under the State Acquisition and Tenancy Act,

1950; • R.S. Khatian Revisional Survey • B.S. Khatian Bangladesh Survey

Wanting Documents by Panel LawyerWanting Documents by Panel LawyerRe-Vetting at the time of first renewalRe-Vetting at the time of first renewal

Valuation Valuation

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Risk & performance Management of SME ProductsRisk & performance Management of SME Products

SME financing is the funding of small and medium sized enterprises. The majority of lending is large volume, small ticket unsecured/secured lending is very similar to lending for personal customers but generally for higher amountt..

WHAT IS AN SMEWHAT IS AN SME

Type of businessValue of Fixed Asset

Employment Amount of lending

COTTAGE INDUSTRY/ENTERPRISE

Trading : Fixed Asset Less than Taka 5.00 Lac Employment Maximum 10 Persons

including the member of the family

If any entity falls in Cottage Industry/Enterprise under one standard, but it falls inMicro Industry/Enterprise under one standard, then the entity will be treated asMicro industry/Enterprise.

MICRO INDUSTRY/ENTERPRISE

Trading : Fixed Asset Less than Taka 5 Lac Employment Less than 10 Persons

Service : Fixed Asset Less than Taka 5 Lac Employment Less than 10 Persons

Manufacturing : Fixed Asset Taka 5 Lac to 50 LacEmployment 10-24 Persons

If any entity falls in Micro Industry/Enterprise under one standard, but it falls inSmall Industry/Enterprise under one standard, then the entity will be treatedas Small industry/Enterprise.

SMALL INDUSTRY/ENTERPRISE

Trading : Fixed Asset Taka 5 Lac to Taka 1.00 croreEmployment 10-25 Persons

Service : Fixed Asset Taka 5 Lac to Taka 1.00 croreEmployment 10-25 Persons

Manufacturing : Fixed Asset Taka 50 Lac to Taka 10.00 croreEmployment 10-25 Persons

If any entity falls in small Industry/Enterprise under one standard, but it falls inMedium Industry/Enterprise under one standard, then the entity will be treatedas Medium industry/Enterprise.

MEDIUM INDUSTRY/ENTERPRISE

Trading : Fixed Asset Taka 1.00 crore to Taka 15.00 croreEmployment 50-100 Persons

Service : Fixed Asset Taka 1.00 crore to Taka 15.00 croreEmployment 50-100 Persons

Manufacturing : Fixed Asset Taka 10 crore to Taka 30.00 croreEmployment 100-250 Persons

If any entity falls in Medium Industry/Enterprise under one standard, but it falls inLarge Industry/Enterprise under one standard, then the entity will be treatedas Large industry/Enterprise.

SME Financing Products and Operational Procedures

Eligibility of ClientEligibility of Client

Minimum 03 (three) months business operation

Age of Entrepreneurs between 21 to 65 years

Business having satisfactory cash flow to repay the loan

Having excellent succession or second line of management

Viable projects in consideration of Mgt, Mkt., Technical, Economical and Financial

Prospects of scope for expansion of business

Profitable business with annual sales growth not less than 10%

Sufficient income from other sources

Net-Worth/Debt relation minimum 2:1

Current ratio minimum 1:1

Satisfactory CIB/Bank report.

DBBL SME ProductsDBBL SME Products

DBBL SMART Cash Credit

DBBL SMART Term Loan

DBBL SMART Distributorship Financing

Small Shop Financing

DBBL SMART Festival Loan

DBBL SMART Women Entrepreneurs Financing

DBBL SMART Cash-Credit & Term LoanDBBL SMART Cash-Credit & Term LoanPurpose (Cash-Credit)To meet up working capital requirement of Business

Purpose (Term Loan)To enhance exiting business/procurement of fixed assets

Purpose (Festival Loan)To meet up emergency seasonal working capital requirement

Purpose (Women Entrepreneurs Financing)To meet up WC requirement/ procurement of fixed assets

Loan Type &Limit

Clean : Maximum Tk. 5.00 Lac but 25 Lac for WEFCollateralized : Maximum Tk. 1.00 Crore

Interest Rate

Clean : 20% P.A but 10% for WEFCollateralized : 17% P.A but 10% for WEF100% cash security : TD + 3% (if DBBL TD)

Processing Fee : NIL

General risks affecting enterprisesGeneral risks affecting enterprises

Economic slowdown Regulatory/legislative changes

Business interruptionIncreasing competitionCommodity price risk

Damage to reputationCash flow/liquidity risk

Distribution or supply chain failureThird-party liability

Failure to attract or retain top talent

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WHAT TO LOOK FOR IN BUSINESSES

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BB Guidance on Risk Mitigation on SME Loan

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Rejection of SME Loan

• Record of NPL on your personal and/or business credit history

• Business or industry appears too risky or unpredictable (non favorable industries)

• Incomplete business plan

• Insufficient cash flow to ensure regular repayment of the loan

• Applicant does not have ability to repay the facilities applied for

• Purpose of borrowing not in line with facilities applied for

• Unsatisfactory financial results of the applicant

• Applicant has other substantial borrowings resulting in high gearing (amount of loan is higher than capital)

• Unsatisfactory conduct of current account by the applicant

• Unsatisfactory repayment records with other lenders

• Applicant has cases which are pending legal action

• High business risk such as over dependence on single buyer or supplier

• Lack of financial commitments from business owners (i.e. not willing to commit additional working capital)

• Weak management of the applicant

• Not enough security for the loan

SME_Foundation_Training

Documents

Transcript of SME_Foundation_Training