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Muslim Commercial Bank (MCB) unfolds 52 years of growth. In January 1974, the Government of Pakistan nationalized MCB following the banks (Nationalization) Act 1947, Premier Bank Limited merged with MCB. A wave of economic reforms swept Pakistan in the late 1990, introducing the need for privatization of state owned banks companies. In April 1991, MCB became Pakistans first privatized bank. The government of Pakistan transferred the management of the Bank to National Group, a group of leading industrialists of the country by selling 26% shares of the bank. In terms of agreement between the Government of Pakistan and the National Group, the group, making their holding 50% has purchased additional 24% shares. Now, 25% is purchased by the Government, which shall be sold in the near future.
Credit department & credit Policy 0f MCB Credit From an accounting perspective when credit is granted an account receivable is created. Such receivables include credit to other firms called trade credit and credit granted consumers called consumer credit
Credit Department:
MCB provides the facility to the people who need advance money to meet their requirements. For getting the advance the following steps are there: 1. 2. 3. Information required by the bank Preparation of credit proposals Sanction advice
1. Initial Information Following information is required to be submitted to bank. Nature & structure of borrower business. Names of proprietors, partners or directors. Detail of all firms or companies associated with borrower. Financial condition of borrower business. An assessment of his business abilities.
Accurate and up to date financial statements of last two years for comparison purposes.
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Market report on the borrower where borrower has maintained an account with another bank, a report from his bank should also be obtained. A report from credit standing bureau of State Bank of Pakistan.
2. Preparation of Credit Proposal At first a formal application for credit approval is obtained from the party along with complete group position. The partys credibility report is obtained from the bank with which the bank is doing its business. The partys credibility report is also taken from the Head office of Trade Information Division. For obtaining credit, party has to submit the last two years Balance Sheet and Profit & Loss statement duly attested by authorized auditors. If the party is also involved in export or import business then the bank also considers the data of three years about import & export. Current debt and equity ratio is also calculated by the bank. The type of data required to prepare the credit proposal is to be gathered from the different departments. Some data is obtained from the foreign Exchange department. Some data is available in Advance Department. The purpose of obtaining Credit should be explained clearly. The securities offered by the party to the bank are also evaluated. In case of pledging of property in shape of land or building the complete evaluation of the property should also be attached. After all the necessary documents for applying for advance is fulfilled by the party then the case is sent to Manager for approval. If the credit limit is in his range then he can decide over it otherwise the case is forwarded to seniors. If there is any discrepancy then the party is informed of it. 3. Sanction Advice When the documents required are complete and there is no ambiguity then the party is advised that their credit or loan is approved and will be available to you soon. There is a separate form for every annual approval or in case of a new facility. Components of credit policy 1. Terms of sale 2. Credit analysis 3. Collection policy 1. Terms of Sale The conditions under which a firm sells its goods and services for cash or credit -The period for which credit is granted -The cash discount and the discount period
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-The type of credit instrument Factors that Influence credit period There are a number of other factors that influence the credit period. Many of those also influence our customer operating cycle. i. Periciability It has relatively rapid turnover and relatively low collateral value credit periods are shorter. ii. Consumer Demand Seller may choose much longer credit periods for off season sales. iii. Cost, profitability and standardization Standard product have short credit period iv. Credit risk The greater the credit risks of the buyer the shorter the credit period. v. Size of the account If the account is small the credit period may be shorter as small accounts are more costly to manage. vi. Completion Longer credit period are offered in completion Credit Function i. Firms have expenses of running a credit department. ii. Firms chose to contract all or part of credit to a factor. iii. Firms that manage internal credit operations are self insured against default. iv. Firms buy credit insurance through an insurance company
2. Credit analysis Refers to the process of deciding whether or not to external credit to particular customer. It usually involves two steps. a. Relevant information -financial statements -credit agency -banks -market good will b. Credit Worthiness i. Character The customers willingness to meet credit obligations ii. Capacity The customers ability to meet credit obligations out of operating cash flows iii. Capital The customers financial reserves iv. Collateral An asset pledged in the case of default Credit scoring The process of quantifying the probability of default when granting consumer credit 3. Collection Policy Collection policy is the final element in credit policy. Collection policy involves monitory receivables to spot trouble and obtaining payment on past due accounts
AUTHORITIES / GROUPS INVOLVED IN CREDIT RELATED FUNCTIONS 1. Board of Directors 2. Credit Committee 3. Sub Committee 4. Business Groups: Corporate & Investing Banking Group
Financial Institution & Cash Management Division Other Groups: 5. Credit Management Group 6. Operations Group 7. Special Assets Management Group 8. Compliance Group & RMD 9. Treasury Management Group
CREDIT ADMINISTRATION
Documentation:It is the responsibility of credit administration to ensure completeness of documentation (loan agreements, guarantees, transfer of title of collaterals) in accordance with approved terms and conditions. Outstanding documents should be tracked and Credit Disbursement:The credit administration function should ensure that loan application has proper approval before entering the facility limits in to computer systems. Disbursement should be effected only after completion of covenants, and receipt of collateral holdings. In case of exceptions, necessary approval should be obtained from competent authorities. Credit Monitoring:After the loan is approved and draw down allowed, the loan should be continuously watched over. These include keeping track of borrowers compliance with credit terms, identifying early signs of irregularity, conducting periodic valuation of collateral and monitoring timely repayments. Loan Repayment:The obligors should be communicated ahead of time as and when the principal/mark-up payment becomes due. Any exception such as non-payment or late payment should be tagged and communicated to the management. Proper records and updates should also be made after receipt. Maintenance of Credit Files:MCB devises procedural guidelines and standards for maintenance of credit files. The credit files not only include all correspondence with the borrower but should also contain sufficient information necessary to assess the financial health of the borrower and its repayment performance. It need to not mention that information should be filed in organized way so that external/internal auditors could review it easily. Collateral and Security Documents MCB ensures that all security documents are kept in fireproof safe under dual control. Register of documents are maintained to keep track of their movement. Procedure is established to track and review relevant insurance coverage for certain facilities/collateral. Physical checks on security documents should be conducted on a regular basis.
FUNCTIONS OF REGIONAL CREDIT MANAGEMENT CHIEF Analyze the credit Proposals Both for fund and non fund based facilities (including trade financing), forwarded by RBC after processing the proposal received from Branches, in the light of International Risk Management practices and procedure as laid down in Standard Procedure Manual (SPM) as well as other circulars issued from time to time. RCMC also reviews risk rating for each borrower assigned by the Branch/RBC. Approve Credit Proposals Involving both fund based and non fund based facilities jointly with Regional Business chief, within their delegated powers as defined in the prevalent Document of Empowerment. Further, RCMC along with other Regional Committee Members shall recommend proposals falling beyond their powers to Head Office. He will also ensure that proposals referred to Head Office are complete in all respect and associated risks have been identified and appropriate risk mitigants are in place. However, credit proposals where allowing exception to the Banks policies & procedures/SBP PRs is not justifiable or where expected pay-off doesnt commensurate with the associated risk may be declined by RCMC at his end. Confirmation of Action Recommend/refer proposals approved in excess of the powers, if admissible under the Banks policy for post facto confirmation of action by the appropriate authority at Head Office. Confirmation of action of Branch Manager for cases approved beyond their delegated powers.
Issue Sanction Advices When the documents required are complete and there is no ambiguity then the party is advised that their credit or loan is approved and will be available to you soon. There is a separate form for every annual approval or in case of a new facility. The form contains following information: Nature and amount of limit. Purpose Security/ Collateral Margin (%). Mark up/ Charges Validity
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Branch
Branch Manger Operations Manager Credit Officer
Regional Office
Regional Management Committee Regional Business Chief Regional Credit Management Chief Regional Operations Chief Regional Compliance Chief
Head Office
Board of Directors Credit Committee Group Chiefs Wing Heads
Approval Stage:
Approvals throughout the Bank would be of any of the following six levels Approval Level I Branch Manager
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Approval Level II RBC jointly with RCMC Approval Level III Regional Management Committee Approval Level IV Group Chief CMG with GC CIBG or CRBG Approval Level V Credit Committee Approval Level VI Credit Committee with SBP approval for exemption
is quite opposite to Downscaling approach for SMEs under which customized solution is offered to the clients. earch definition of Programmed lending General Financing As the existing exposure cannot be switched over to programs suddenly but SME financing PRs encourage banks to lend under Program Lending Concept. But the existing loans will continue on their existing structure and to be called GENERAL FINANCING. Gradually we will lend on structured program basis.
credit. Bank makes the payment to the party against document and upon expire date, bank receives back money with mark up rate.
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Agricultural Loan
Bank provides the agriculture advances in order to enhance and support the agriculture sector of the country. Banks Agriculture division deals with the agriculture advances. These advances are of following types:
Farm Credit
These are the credits provided by the MCB or purchases of inputs for development of agriculture sector. Following are two main Sub classes of Farm credit:
Production Finance
These are short term loans. These loans are provided to farmers for purchases of different types of input, for example seeds, fertilizer, and pesticides.
Development Finance:
These are medium or long term loans. These loans are provided for the development of agricultural sector. Main Purposes of these loans are as under:
To purchase tractors To purchase implements (Trolley, Threshers, and Drill etc). For installation of tube wells For planting of gardens
GUARANTEES
Introduction Bank examines customers relation with the bank 7 the nature of the business. Bank also sees his past business with the bank. Sometimes bank issues Guarantee on the behalf of the customer by getting some margin from him. This margin may vary from customer to customer. TYPES OF GUARANTEES THE BANK MAY ISSUE In the normal course of business the Bank may issue the following types of guarantees and Bonds, categorized according to the nature of purpose its issued for: 1. 2. 3. 4. 5. 6. Performance Guarantees. Bid Bonds/ Tender Deposit Guarantee Shipping Guarantees. Guarantees for Advance Payments/Mobilization Guarantees. Security Deposit Guarantees. Guarantees for payment of dues/Court Guarantees.
PERIOD OF GUARANTEE:
TYPES On the basis of the period for which a guarantee is issued, guarantees can be classified as under: For a period of one year or less For a period of more than one year but less than two year
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On the basis of the period for which a guarantee is issued or guarantee is valid, guarantees can be classified as:
Short term guarantee i.e. up to One year Medium to long term guarantee i.e. for more than one year Short-term guarantees should be preferred over medium and long-term guarantees as the later involves wider risk. Requirements for Guarantee
Banks issue guarantee on the behalf of customers. Limit proposals covering submitted with full details for the approval of appropriate sanctioning authority. transactions should be
Generally Guarantees are issued in favoring of Shipping companies, Govt Departments guaranteeing specific payments at future dates by customer on whose behalf the guarantees are issued. While executing a guarantee, the terms and conditions of the guarantee are closely examined in order to determine the extent of bank obligations and financial liability under the guarantee and the type of guarantee, all condition are contained in the guarantee.
Procedure
Bank charges a commission on the amount for which guarantee is issued. Normally the validity period of guarantee does not exceed one year. After the guarantee has been issued, a copy of same is issued to the counter guarantee issued to the customer.
There should be an agency, which should meet the sellers need of finance when the goods are shipped. The commercial banks come to the help of exporters and importers. The importers can undertake the obligation to pay to the exporter for the purchase made by the importer and this is usually done through a letter of credit.
Explanation A letter of credit is a: 1. Written undertaking by importers bank to a third party i.e. the exporter. 2. That it will be pay or accept draft (letter of credit) drawn upon it up to a started sum of money within a specified time. 3. That the payment will only be made to the exporter if he complies with the specified terms of credit. Parties Involved in a Letter of Credit There are four parties involved in a letter of credit
o Account party or Importer The buyer or the importer on whose account and request the letter of credit is opened is known as account party. o Issuing party The bank, which issues or opens a letter of credit at the request of importer, it is called the issuing bank. o Exporter The seller or the party in whose favor the letter of credit is draw is the third party and it is also known as beneficiary. o Paying or negotiating bank The paying bank in the exporters country on which the draft is drawn is called the paying bank.
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4. The importer then submits an application to his bank for the issuing of an individual letter of credit. 5. The form on which the importer employees for a letter of credit is supplied by the bank. 6. This form contains all the necessary details discussed between the importer and exporter for the shipment of goods which include the description of merchandise, port of shipment, port of unloading, the documents against which the bank is the honor the draft, the total value of the goods etc. 7. If the documents supplied by the seller conform to the terms of contract the exporter will be paid. 8. The issuing bank will not be responsible if there is any fraud or the merchandise does not conform to the sales contract. 9. The obligation of the buyers bank is, To issue letter of credit on agreed terms and condition with the buyer. To have a proper examination of the documents. To honour draft when presented with proper documents.
PERIOD WISE
Short Term Financing The loans having tenor of one year or less are called Short term exposure. Medium To Long Term Financing The loans having tenor of more than one year are categorized as medium to long term loans. An ideal concept demands that: 1. Businesses should meet fixed assets and permanent working capital needs through Long Term Sources (owners Equity and Long term finance); and 2. The short term needs must be met through short term sources (Banks Borrowings or market credit) Therefore short term finance should meet the Working Capital requirements and the long term finance should be used for acquisition of fixed assets / long term needs. Structure of finance facilities should be based on the above concept as it will avoid emergence of the liquidity problems (often called Technical Insolvency) that is, inability of a business to meet its cash obligations.
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