Credit Report on Mcb

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INTRODUCTION
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 Pakistan’s 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 party’s credibility report is obtained from the bank with which the bank is doing its business. The party’s 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

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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 customer’s willingness to meet credit obligations ii. Capacity The customer’s ability to meet credit obligations out of operating cash flows iii. Capital The customer’s 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

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AUTHORITIES / GROUPS INVOLVED IN CREDIT RELATED FUNCTIONS 1. Board of Directors 2. Credit Committee 3. Sub Committee 4. Business Groups: Corporate & Investing Banking Group
 

Corporate Banking Investment Banking

Commercial & Retail Banking Group

  

SME/Commercial/Agriculture financing Consumer Financing Micro Financing

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 MANAGEMENT GROUP
Credit Management Group (CMG) in its core function approves credit proposals received from respective business groups as per business discretionary powers in line with bank’s credit policies and SBP regulations after an in depth credit risk assessment and placement of necessary mitigants. However, Credit proposals beyond the business discretionary powers of CMG are referred to Credit Committee for approval. Detailed functions of CMG and its counterpart i.e. Regional Credit Management Chief, are elaborated below in this chapter.
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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.

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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 Bank’s policies & procedures/SBP PRs is not justifiable or where expected pay-off doesn’t 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 Bank’s 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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TRAINING & PERFORMANCE APPRAISAL VISIT OF BRANCHES
HIERARCHY OF CREDIT HIERARCHY There is a distinct segregation among the functions of credit origination, credit approval, credit operations / CAD, credit risk management, monitoring and measurement. Credit activities involved in each of these functions are performed throughout the Bank, at the three distinct levels, they are: 1. Branch 2. Regional Office 3. Head Office A hierarchy of officers/ executives, both within a group and inter group, is involved in almost every stage of Credit cycle, the number becoming lesser in some stages whereas in some stages it’s more.

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

BANK’S TARGET MARKET
MARKET SEGMENTS Market segmentations shall refer to those subgroups of the market which can be differentiated on the basis of their business structure, technical/managerial sophistication, financial needs, preferences or patterns and other changes which justify having different strategies. Following are the Market segments of our bank :1. Corporate 2. Commercial 3. SME 4. Agriculture or Agrarian Sector 5. Micro Enterprises 6. Consumer 7. Banks/Financial Institutions 8. Govt. /Govt. Departments/ Agencies/ Autonomous Bodies 9. Public Sector Enterprises 10. Non-trading Associations 11. Local Bodies 12. Trust

Types of credit by MCB
NBP having a big market comprising of many types of groups to serve, has different kinds of financing modes to respond to their varied financing needs. As different modes serve different needs, modalities of each mode is different from others. The main terms and conditions of each mode are covered in this chapter. The basic structure of any financing facility granted should not run against the rules established hereunder:

METHOD WISE LENDING
Programmed Lending: The structured financing to a targeted sector/industry by way of developing a Financial Product catering the needs of that sector/industry. The underlying risks of the sector/industry have already been identified; measured and proper risk mitigants have been put in place. The approach

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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”.

NATURE OF CREDIT WISE LENDING
Fund-Based Products Facilities where funds are provided to customers upon sanction of the respective credit lines. 1. Fund based credit Following are the Fund based credit: ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ Running Finance(RF) Cash Finance(CF) Finance against imported goods(FIM) Export Refinance part-I (Pre-shipment) Export Refinance Part-II Finance against purchase collection(FAPC) Finance against foreign bills(FAFB) Foreign bill purchases(FBP) Local Manufacturing Machinery(LMM) Payment Against Document(PAD) Demand Finance(DF) Khud Rozgar Scheme

The detail of above-mentioned items is given below:

a. Running Finance (RF)
The max time of repayment is one year. It is according to will of customer. These types of advances are given to Trade, Commerce and manufacturing general purposes. These finances as evident by the name are given to meet their daily needs. The mark up is charged on daily balances. Normally 0.54 paisa per thousand is charged on daily basis. It is drawn through cheque.

b. Demand Finance (DF)
The duration of DF is more than running or Cash Finance. These are made in Lump sum and are there is a permission to repay the amount in periodic installment. Upon receipt of documents negotiated by the seller bank, the opening bank makes sure that documents are according to terms and conditions of the 10

credit. Bank makes the payment to the party against document and upon expire date, bank receives back money with mark up rate.

c. Payment against Document (PAD)
LMM funds are provided by the SBP. The bank provides the facility to the businessman who wants to buy the local manufactured machinery.

d. Local Manufacturing Machinery (LMM)
It is a long term financing. MCB also gives loan under the head of demand finance to individuals, industrial units and commercial business etc. This is a type of secured loan and demand loan is never allowed without security.

e. Foreign Bills Purchases (FBP)
The exporters, which are under L/C, are also provided with the facility of loan. Amount is given to the exporter after the approval of L/C by the issuing bank.

f. Cash Finance (CF)
MCB gives the facility of cash credit to the business. The borrower gives a specific reason for the need of cash. The amount is passed through voucher and credited to party’s account. Normally 0.52 paisa per thousand is charged on daily basis to customers.

g. Finance against Imported Goods (FIM)
These types of advances are granted against the pledge of imported goods. These goods are pledged by the bank. Bank pays all the charges to customs and keeps the goods in its control. The bank releases the good on payment from the client to bank.

h. Export Refinance Part-1 (Pre-Shipment)
The government pursues the banks to provide the loan to the exporters to promote the export. The bank provides this type of advance facility to only those exporters who have not enough money to make shipment. Bank provides the loans to the customer at the rate of specific % for period of 150 days.

i. Export Refinance Part-1 (Post Shipment)
This means that the customer has enough amounts to make first shipment but not more. So the bank issues a loan to the exporter. This financing is for period of 150 days. Finance is provided by the SBP to the exporters for purchase of raw material, its processing, Packing and shipment. In case, if the party is unable to make the shipment within 150 days of financing. The party has to pay certain amount of finance as asked by the SBP and after 150 days the rate of mark up also goes up @ 51 paisa per thousand per day. So usually exporters try to make the shipment within the fixed period set by the SBP which is usually 150 days.

j. Export Refinance Part-11
In this case the bank after receiving the performance of years in export business of party sets the limit for the period of one year. Here the limit cannot be set by the terms pledged of the permission of the bank.

k. Finance against Purchase Collection (FAPC)
A bill may be purchased by the bank. If a client is in urgent need of money and he has a bill whose clearance may take a few days then he sells it to bank. Bank pays the amount to the client after deducting its commission.

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l. Finance against Foreign Bills (FAFB)
Bank also provides finance against the foreign bills. This facility is given to the exporter, if he needs urgent money. He gives bill of exchange to the bank as security and bank sends these bills for collection and gives money to exporter.

Agricultural Loan
Bank provides the agriculture advances in order to enhance and support the agriculture sector of the country. Bank’s Agriculture division deals with the agriculture advances. These advances are of following types:

♦ ♦

Farm Credit Non Farm Credit

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

Non Farm Credit
The second major form of agriculture advance is Non Farm credit. These loans are provided to boost up agriculture sector to provide the sources of earning of foreign exchange as well as to provide employment opportunities to people. These loans are providing against mortgage of land as security or pledge of equipment as collateral security. These are long term or medium term investment depending upon the project. Following are the different types of small industries for which loans are provided to improve the economy of the country.

♦ ♦ ♦ ♦

Fish Farm Cattle Farm Poultry Farm Dairy Farm
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1. Non Fund Based Advances
These are contingent liabilities, where no funds are provided at the time of sanction , rather bank undertakes to provide funds, if client fails to discharge his obligation
When an applicant for an advance cannot offer any tangible security the banker may rely on personal guarantees, letters of credit to protect himself against loss on advance or loan. There are two types of advances which come under Non Fund Advances.

♦ ♦

Guarantees. Letter Of Credit.

GUARANTEES
Introduction Bank examines customer’s 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 it’s 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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SPECIFIC PERIOD GUARANTEE
It’s the guarantee which has one time validity (time bond validity) after which it’s expired if not invoked/claimed/ by the beneficiary or renewed.

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.

Letter of Credit Definition of letter of credit
A letter of credit is a written instrument issued by a bank authorizing the seller to draw in accordance with certain terms and stipulating legal forms, that all such bills will be honored. Explanatory Definition A letter of credit consist of an undertaking by an issuing bank that bills drawn by the exporter will be duly owner provided the comply with the terms of credit. Reasons for L/C • • • The exporters are uncertain of the importer capacity to pay. The importers are unwilling to pay the amount unless the goods are actually shipped and the documents received by the bank. In case of non-payment the seller should be assured to legal rights in foreign country. 14

• • •

There should be an agency, which should meet the seller’s 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 o Issuing party o Exporter o Paying or negotiating bank

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 exporter’s country on which the draft is drawn is called the paying bank.

Operation of a letter of credit:
1. The importer of buyer contacts the seller in foreign country for the purchase of a particular good or goods. 2. He settles with the seller the quantity and quality of the goods to be importer. 3. The sale contract also includes the method of payment.

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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 (owner’s 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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