CHAPTER IV
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Loan & Advance
The main functions of a Commercial bank are two viz (1) to take deposit & (2) to make
advances. Making of advances is the most important & profitable function of bank. It make
advance out of deposits of the public which are payable on demand. So they cannot afford to
lode up their funds for long periods. FSBL usually grants short term advances that are utilized to
meet the working capital requirement of the borrower. Only a small portion of its demand and
time liabilities is advanced in long term basis where the banker usually insists on a regular
repayment by the borrower in installments. Advances in the FSBL are made in different forms
such as loans, overdrafts, cash credits etc.
Major types of Advances:
FSBL makes advances to different sectors for different purposes. They are as follows-----
Funded Facilities:
Funded facilities can also be divided into the following categories
Cash Credit
Cash Credit is allowed to the businessman, trader & industrialists etc. for meeting their
working capital requirements. Cash Credit is always allowed against hypothecation or pledge
of goods. But FSBL makes only Cash Credit (hypothecation)
Cash Credit (hypothecation)
Cash Credit allowed against hypothecation of goods as Cash Credit (hypothecation) limit. In case
of hypothecation, the borrower retains the ownership & possession of goods on which charge of
the lending bank is created. So, Hypothecation is a legal transaction whereby goods may be
made available as security for a debt without transferring either the property or the possession to
the lender. The document which creates charges of the lending bank on the hypothecation goods
is called of hypothecation. By signing this letter of hypothecation the borrower binds himself to
give possession of the hypothecation goods to the lending bank when called upon to do so.
Interest rate : 14%
Cash Credit (Pledge)
Cash credit allowed against pledge of goods is known as Cash Credit (pledge) limit the borrower
pledges goods to the banker as a security against the facility pledged has been defined as “a
bailment of goods as security for payment of a debt or performance of a promise”. The
ownership of the pledged goods remains with the pledges. Banks retain the effective control of
the pledge goods. Banks guards are posted round the clock to protect him go down. Sometimes,
pledge goose are stored in bank’s go down. Bank makes delivery of the pledge goods to the party
against payment.
Over Draft:
The overdraft is always allowed on a current A/C operation upon by cheques. The customer may
be allowed a certain limit up to which he can overdraw within a stipulate period of time. In an
overdraft A/C withdrawal & deposits can be made any number of times within the limit and
prescribed period. Interest is calculated & charged only on the actual debit balances on daily
product basis.
Overdrafts are four kinds. But FSBL makes on SOD (G) &SOD (FO).
SOD General:
When Overdraft are allowed against securities they are called Secured Overdraft. Overdrafts are
generally granted to contractors & suppliers for carrying on construction works & supply orders
& to businessman for expansion of their business.
Interest rate: 14%
SOD Financial Obligation: when SOD allowed against securities of fixed & term deposit,
shares/ debentures, PSP, insurance policy, real estate etc. depending on the nature & purpose of
advance are called Secured Overdraft Financial Obligation.
Interest rate: 14%
Term Loan:
Term loan is determined on the basis of period. These loans are provided in different sectors of
the economy.
Short term loans From 1 to 3 years
Mid term loans Form 3 to 5 years
Long term loans above 5 years
Types of term loans
Consumer Finance Scheme (CFS)
CFS is offered to fixed income group to finance purchase of consumer’s durable to raise their
standard of living. Loan is given for purchasing TV, refrigerator, air conditioner, washing
machine, movie camera, computer & computer accessories, furniture, kitchen items,(like oven
blender etc.), telephone, new/reconditioned vehicles. Loan is given to Govt., Semi- Govt. &
autonomous bodies, bank’s insurance & other finance institution, professionals like doctor, CA,
lawyers, teachers etc, officers of reputed private organization & MNC having corporate
structure, firms and corporate bodies.
Interest rate: 16%
Hire Purchase Scheme
Hire purchase facility is another form of term loan offered by FSBL. The feature of Hire
purchase that usually the deposit has to be paid and the rest of the purchase price are spread over
a period 6 month, 2 years or sometimes even longer, the article being regarded as the property of
the bank until the final pavement has been made. Hire purchase normally allowed to those
persons who have either fixed source of income or desire to pay it in lump sum.
Interest rate : 13% per annum
Loan General:
When an advance is made in a lump sum repayable either in fixed monthly installments or in
lumps and no subsequent debit is ordinarily allowed except by way of interest, incidental
charges, etc, it is called a loan. Loans are normally allowed to those parties who have either fixed
sources of income or who desire to pay it in lump sum or in a number of installments within a
period of short span.
After disbursement of the entire loan amount, there will be only repayment by the borrower. A
loan, once repaid in full or in part, cannot be drawn again by the borrower.
Entire amount of loan is debited to the loan A/C in the name of customer & is paid to him
through his SB/CD A/C. some times loan amount are disbursed in cash.
Demand Loan:
Demand loan can also e divided into the following categories--------
(a) PAD (Payment Against Document)
(b) LIM ( Loan Import Merchandize)
(c) LTR (Loan Trust Receipt )
(d) SOD Import
(e) IDBP (Inland Documentary Bill Purchase)
(f) PC (Packing Credit )
(g) FBP ( Foreign Bill Purchase)
(h) IBP (Inland Bill Purchase)
(i) SOD Exports
Non Funding facilities
Non-funding facilities are divided in following parts------
Guarantee: A credit facility is contingent liabilities from extended by the banks to their
clients for participation in development work, like supply goods & service. There are five
kinds of bank guarantee which are offered by the bank to their customer
(a) Performance guarantee (PG)
(b) Advanced payment guarantee (APG)
(c) Shipping guarantee
(d) Custom guarantee
(e) Bid bond
Letter of Credit: Letter of credit is a special credit facilities provided by the bank to their
client for import/ procurement of goods & services.
Classification loan statistics
Total sanction :593.25 million
Classified amount :572.35 million
Recovery : 56.32 million
Total Outstanding : 530.88 million
That is 9.84%
% classification compare with total advance
Total Advance 132.00 corer
Classified amount 5.30 corer
That is 4.01%
The advance according to the sector
Consumer finance scheme 40%
Hire purchase scheme 20%
Other 40%
Why Bank lost their customer?
Lost their customer mainly two reason
(1) customer generally transaction to the nearest bank
(2) which bank provide better service, customer like to go there and this is the main reason for
lost customer.
If the bank reduces their interest rates, advance & recovery increase?
If interest rate decreases than advance will increases but there is no reason that recovery
increases, because it totally depends on the company’s situation & individual habit.
If the company’s financial situation is bad than there is no benefit to decrease interest rate
Compare to India and Pakistan, why the bank interest rate of Bangladesh is more?
Because all the commercial banks cost of borrowing fund from Central bank in Bangladesh is
higher then the central banks of India and Pakistan. If the central bank decrease their interest
rate to the commercial banks in Bangladesh, then the commercial banks also able to decrease
their lending rate to the customers. If all the commercial banks together decrease their lending
rate, then only its possible to decrease the lending rate for the customer, otherwise if any single
bank decrease their rate of lending then it will be difficult for other banks to compete with that
particular bank in the banking sector. So, the only possibility of decreasing lending rate depends
on the Central bank of Bangladesh. Otherwise it difficult.
