An AssignmentOnPreparation of Credit Policy Manual
Submitted By:Rabindra RajbhandariMBA 5th TrimesterSection-A,
Roll-15Uniglobe College, KathmanduSubmitted To:Mr. Narendra
BstaFaculty: Banking Lending and ProceduresUniglobe College,
Kathmandu
CREDIT POLICY MANUAL
ContentsSection-11Preamble, Definitions and Commencements11.1
Credit Policy Guidelines11.2 General Guidelines31.3
Commencement41.4 Definitions5Section-26Mission, Vision, Goal,
Objectives of Banks Loan Portfolio62.1 Mission62.2
Objectives6Section-39Principal Guidelines93.1 Eligibility
Criteria:9Section-412Operating Procedures124.1 Loan Application
Process:124.2 Leverage:164.3 Security and Protective
Requirements:164.4 Types of Acceptable Security:174.5
Documentation:184.6 Credit disbursement Procedures:194.7
Implementation of the loan/fund:204.8 Renewal and Extension of
Credit: Credit monitoring:204.9 Credit Repayment/Credit
Recovery:214.10 Maintenance of credit files:214.11 Maintenance of
Collateral and security documents:214.12 Account Management
Procedures:214.14 Relationship Management:21SECTION-523Organization
Structure23Section-624Product Manuals246.15 Lease
financing28Section-633Credit Risk Management336.1 Risk Grading
& Risk Rating:336.2 Managing Problem Credits:356.3 NPL Recovery
Unit:366.4 Recovery of Non-Performing Loans & Investments:376.5
Recovery Write-off loans:386.6 Internal Audit & Compliance
(IAC):396.7 Review of the Credit Policy:39
Section-1Preamble, Definitions and CommencementsAs the time goes
on, the market place has grown more competitive in each and every
sector. The banking sector cant also remain an exception. Hence,
while we have come to this point of time, the banks and financial
institutes have proven that this sector is the most growing,
advanced and competitive sector. Therefore, these BFIs have always
been focusing their attention on innovating and developing new
tools and techniques to generate income and satisfy and retain
their customers to stand on the race of survival. Even in the least
developed country like Nepal, BFIs are the most regulated, advanced
and profit earning sector.The Nepalese banks too, like banks of any
other country, provides various financial products and services to
its customers. The basic principles of lending are for minimizing
risk, maximizing profit and protecting depositors funds to maintain
the trust and faith of customers. Loans are the lifeblood of a
bank. All businesses sell products, and a bank's product is money.
Banks make money by taking in funds from depositors and other
sources and then lending money out to customers. The bank spread is
the difference between what the interest a bank must pay to obtain
the funds and the rate the bank charges on the loan. For example, a
bank might pay two percent interest to a depositor and charge a
customer six percent interest on a loan. The four percentage points
is the bank's spread, and its profit.One of the major and the most
important activity that a bank provides is building up its risk
assets by providing credit facilities to its customers. The bank
under takes the risk while extending the loan; it is therefore
called risk assets. The risk is worth takin because about two-third
of the banks profit comes from extending loan. The investment of
the shareholders and the saving of the depositors could be
jeopardize if the credit risk is not properly assessed prior to
providing the loan and managed it prudently post disbursement. 1.1
Credit Policy GuidelinesThe success of a bank depends on its
lending program and successful lending which is only possible
through well-formulated credit policy. It is very important that
every commercial bank should have a written credit policy, which
should serve as a guideline covering every major aspect of the
lending procedures. The main objective of CPG is therefore to
assist the staff/ officer involved in credit processing to make
quality decision based on sound credit principles and procedures
and monitor its risk assets to maintain its health and take
recovery action if any early warning signal are observed in any
credit relationship.The primary objective of this Credit Policy
Guideline is to state the banks credit policy and define the
regulations, procedures and authorities necessary to approve and
monitor credit exposures. The objective of this credit policy is to
focus on the various kinds of loans that the bank provides which
are explained further. All the staff/ officers must at all times be
fully conversant with the CPG and ensure consistent application of
the principle and procedure laid down in the CPG and must be
familiar with both the regulation/ NRB guideline and policies and
ensure full compliance. This CPG intends to strengthen credit
culture and place the long term interest of the bank ahead than the
short term interest of any particular business unit. The CPG is
therefore a guideline to all credit decision, which shall be
supplemented by procedural guideline/ manual/ product paper/
circular to be issued from time to time by the Chief Executive or
his/her delegates within the framework of this CPG.The Public Bank
Limited has adopted this Credit Policy Manual, which is designed to
be consistent with sound and prudent bank lending practices in use
elsewhere in the world. The manual's purpose is to provide all
personnel with a comprehensive understanding of how credit of any
nature is to be extended by the Bank. It is expected that there may
need to be periodic exceptions to the policies contained herein,
and prior written approval must be obtained from the Bank's General
Manager or Senior Credit Officer before any commitments or advances
may be made pursuant to an exception. The manual has been developed
from existing policy and procedural instructions as well as
external sources. This manual and subsequent updates issued by the
Bank will help further define the bank's credit policy and serve as
a primary reference source for all credit-related issues. Any
proposed changes must first have the approval of the Bank's Senior
Credit Officer or the higher authority. The policies outlined
herein are intended to be general in nature and will be
supplemented by various procedures, which will contain implementing
details. Furthermore, they are supplementary to requirements
outlined in Nepal Rastra Bank and other internal policy documents.
This is intended to be both a sound and practical manual. It is
also instructional. However, no manual can replace prudent business
judgment, sound assessment of the borrower's ability, capacity,
integrity, and wise structuring of a credit facility that is
appropriate to the needs of both a borrower and the Bank. This
manual is also a living document and will be periodically reviewed
and up-dated. It is being presented in loose-leaf form to
facilitate a page-by-page update process. Each page is dated, and
the Table of Contents (which will be re-issued with each change)
will indicate the most recently issued version of that page or
section. The manual's value lies in the fact that that it
communicates to all staff involved in lending activities the
policies and procedures of the Bank, and insures that all staff has
current and consistent guidance. This Manual is strictly an
internal document and intended for guidance in the lending process
by branch managers, lending officers, credit department managers,
credit committee members, other members of bank management and
directors. It is not to be distributed to outside parties such as
other Banks, prospects, interested borrowers or any other
institution or individual. 1.2 General Guidelines All employees of
the Bank, engaged in any activity relating to lending must be
familiar with the contents of this CPG, its periodic amendments,
and supplements. This guideline must be adhered to by everyone at
all times except upon written approval/justification from the Chief
Executive Officer. Only the Board of Directors can amend any
content or part Credit Administration procedures and systems will
be planned and implemented by a Manager designated with the
approval of the Chief Executive Officer. These procedures and
systems, once introduced, must be strictly adhered to. In
formulating a credit judgment, it is mandatory that a lending
officer or credit analyst has at hand adequate information needed
to evaluate a borrowers character, management competence, capacity,
capital, collateral and the external conditions which affect his
repayment capacity. Notwithstanding what is or is not contained in
this CPG, every officer is required to ensure that the lending
operation follows the spirit of the CPG. Failure to take prudent
and proper action shall not be excused. In all business dealings,
officers and employees must be guided by: 1. The principles of
honesty and integrity, 2. The interest of the depositors,
shareholders and creditors of the Bank. 3. The laws, rules and
regulations of Government of Nepal and Nepal Rostra Bank that
affect business practices. 1.3 Commencementi. The policy set forth
shall be known as Credit Policy Guide 2015 and shall hereinafter be
referred as Credit Policy Guide Credit Policy Manual or CPG in
short.ii. CPG will policies/ procedure regarding extension of
credit and its administration/ management in The Public Bank
Limited (hereinafter called bank), which shall be supplemented by
Credit and other manuals for the credit operation /
administration.iii. It shall be the duty of the all
employee/officers of the bank to make themselves acquainted with
all the policies / procedures incorporated in CPG and other
policies/ rules/ regulation/ manual referred by CPG.iv. The Board
of the Directors (hereinafter called BOD) can suspend or add/
delete or amend any of the provision of this CPG.v. Chief Executive
of the bank is responsible for implementation of CPG within the
Bank.vi. This CPG shall come into force from the date of approval
by the BOD of bank.
1.4 Definitions
17
Unless otherwise specially indicated, the following term used in
CPG shall have the following meaning(s).i. Act means Bank and
financial Institution Act, 2063.ii. Public Bank or Bank means The
Public Bank Ltd also called TPBL established under Companies Act,
2063 and Bank and financial Institution Act, 2063.iii. Nepal Rastra
Bank or NRB means the Central Bank of Nepal established under Nepal
Rastra Bank Act, 2058.iv. Board means Board of Directors of the
Bank.v. Chief Executive means the person appointed as Managing
Director/Chief Executive Officer of the Bank and entrusted with
overall Management responsibility of Administration and Operations
and accountable to the Board. vi. Chief Business Officer mean the
Head of the Business Department who shall have the total
responsibility of driving the credit, deposit and transaction
banking business of the Bank.vii. Chief Risk Officer mean the Head
of Credit Risk Management Department who shall have the total
responsibility of credit risk assessment and credit
management.viii. Relationship Manager means Assistant Relationship
Officer/Relationship Officer/Assistant Relationship Manager/
Relationship Manager, who is responsible for selling the credit
product and developing and managing the relationship with the
customer.ix. Branch Manager means Head of the branch of The Public
Bank.x. Department Head means the Head of a particular Department
of the Bank.xi. Customer or Borrower means the customer availing of
credit facilities from the Bank.xii. xiii. SME loan mean loans
granted to the small firms to meet their financial
needs.Section-2Mission, Vision, Goal, Objectives of Banks Loan
Portfolio2.1 MissionThe investment and lending operations of The
Public Bank Limited are a fundamental expression of its role in
nation building, as expressed by its Charter. Specifically, the
Bank provides finance, investments and related advisory services to
viable enterprises and creditworthy individuals. It undertakes its
operations with a trained corps of officers and staff, who conduct
themselves with the highest degree of prudence and professionalism.
The Credit Department is responsible for maintaining a high quality
of accounts receivable while selling to all customers that
represent prudent credit risks. We will provide flexible mechanisms
to protect our substantial receivable investment. It is our policy
to provide credit to all potential applicants, regardless of
payment experience. The Credit Department will attempt to screen
out customers that will result in obvious bad debts. We will
attempt to build relationships with all other customers and affect
collection without jeopardizing a sales relationship.The CPG is
intended to help staff and board make loans that meet the
project-related credit needs of community development organizations
in our town while simultaneously meeting our obligations to
investors for safety, liquidity, and social and financial returns.
The bank expects and accepts credit risks beyond the tolerance of
regulated lenders. Management of these risks is the primary source
of risk mitigation. All professional staff are expected to be
actively involved in managing credit risks. 2.2 ObjectivesTimely
and Adequate Delivery of Assistance: The Bank will respond to the
needs of worthy customers through the provision of timely and
adequate financial assistance and advice. This is to ensure that
financial packages facilitate the implementation and operation of
customers' business plans and/or projects with neither too much nor
too little capital at each stage of the project or business cycle.
This implies the need to have a thorough knowledge of broad
industry requirements, in general, and of individual customers'
operations and financial needs, in particular.
Minimum Cost and Efficient Delivery of Services: The
profitability of the Bank's lending and related service operations
is of paramount importance, requiring the delivery of products and
services with maximum cost-efficiency. Appraisal and
decision-making, internal processes that assure the minimization of
project and credit risks, should be undertaken prudently and with
the least possible handling and delay.
Price Competitiveness and Service Quality: The competitive
business environment requires the Bank to deliver its services at
competitive rates and with the highest quality standards. Pricing
of services and financial products shall therefore be regularly
assessed, in order to assure that the Bank's costs are covered and
a reasonable return on its deployed capital is achieved. In pricing
its products and services, the Bank shall ensure that
inefficiencies that inflate capital and operating costs are to be
expunged from the system before profit margins are sacrificed; the
Bank shall also provide for pricing premiums in accordance with
perceived credit and investment risks. Officers and staff of the
Bank are to conduct themselves at all times with the objective of
satisfying customer needs keeping in mind, however, the Bank's
prudential guidelines and fiduciary obligations.Monitoring and
Control: To ensure the prudent conduct of the Bank's lending and
investment affairs, adequate control measures are to be maintained
in critical areas of its lending and investment operations. For
this purpose, the segregation of potentially conflicting functions
and independent assessments of operations and the Bank's portfolio
will be institutionalized. Accounts will be monitored with a view
to detecting early deterioration and appropriate
intervention.Profitability: The Bank's future profitability and
welfare is dependent on a base of healthy, earning assets. To this
end, the Bank shall manage its credit and investment risks in a
manner as to assure the Bank's stability and the attainment of
profitability and growth objectives. In the context of current
socio-economic conditions, lending and investment activities will
invariably encounter the following identified risks: a. Business
risk b. Economic & financial risk c. Management risk d.
Security risk, and e. Account performance (recovery) risk
Mitigation of Risk: The Bank's credit and investment policies,
procedures and best practices are hereby established in order to:
i. Develop a proper risk culture under which its activities are
undertaken, in order to assure that every loan and investment is
created and managed prudently.ii. Institutionalize a diligent
process to know the background and business needs of the customer
(KYC). iii. Ensure dependability (i.e., timeliness and accuracy) of
information related to credit and investment management, andiv.
Comply with internal policies and laws and regulations that are
promulgated from time to time by the NRB. Loan AmountRelationship
ExposureDelegated Approval Authority
< 25,000,000< 50,000,000Chief Credit Officer
> 50,000,000< 100,000,000CCO & CEO
>100,000,000>200,000,000Loan Committee / BOD
Loan authority limit for the department/ Heads:Note: The amounts
given in the table are in NRs.
Section-3Principal GuidelinesThe Bank makes loans and facilities
available to a wide range of commercially viable companies
generally categorized into six primary sectors where priority will
be given to the projects with national priorities: Commercial
Manufacturing and Industrial Agriculture Building and Construction
Tourism Projects Services SME3.1 Eligibility Criteria: The Bank's
criteria for loan and investment eligibility, which are to be
strictly adhered to, are the following: i. If the borrower is an
individual, proprietary entity or otherwise a natural person,
he/she/it must be: A citizen of Nepal of legal age, and of sound
mind ii. If the borrower is a corporation, a limited liability
company or similar entity, it must be: Organized, formed or
incorporated under the laws of Nepal. In the case of foreign
companies, authorized to borrow from local banks under the
guidelines of NRB. Authorized to do so by a resolution from its
Board of Directors.iii. The individual or corporate entity must be
engaged (or prospectively propose to engage) in a productive
enterprise, in the manufacturing, agro based, extractive,
Hydropower sector, export, service sectors, Trading and SME. iv.
The Bank will NOT grant loans or facilities be approved for the
following types of entities or purposes: Bankrupt companies.
Companies listed on CIC as classified or known chronic defaulters,
black listed companies or individuals. Military equipment/weapons
finance. Highly-leveraged transactions. Speculative investments.
Logging, mineral extraction/mining or other activity that is
ethically or environmentally sensitive. Share lending.v. Bank will
not consider loan facilities to the following parties: A director
of the bank; A stockholder of the Bank; and Other related interests
(wives, children, parents and relatives) as per Bank Company Act.
However, loan facilities may be granted under such other terms and
conditions that comply with NRB regulations.vi. Large loan
concentration : The policy relating to large loan concentration is
determined in line with the MOU and NRB guidelines (which is
subject to any change by the regulator). In order to avoid
concentration of large loans the bank will follow the single
borrower exposure limit as below: a. The bank's exposure (total of
funded and non-funded facilities) to a single client or group shall
not exceed the amount up to 25 percent of its core capital for fund
based and non-fund based facilities.b. The maximum limit is fixed
at 30 percent for export sector, small and medium industries,
pharmaceutical industries, agricultural sector, tourism, cement
industries, iron industries and other production-oriented
industries.c. Credit to the deprived and low income group person
may be extended up to the maximum of sixty thousand rupees per
group member/individual for operation of micro business, solar home
system or Bio-gas. The maximum of per family for micro enterprise
credit up to one hundred fifty thousand rupees per unit may be
provided against acceptable collateral/group guarantee.d. The
fund-based loan and non-fund-based facilities limit is 50 percent
of its core capital for hydropower, transmission line and cable car
projects.e. Credit facility extended to one customer, firm, company
or group of related borrowers in excess of the exposure limit, 100%
provisioning for excess credit or facility should be made to cover
the concentration risk.f. Only 40% of total outstanding loan and
advances can be provided to any one sector of economy.g. The
maximum amount of loan to be extended against the security of
housing land and real estate shall not be more than 60 percent of
the fair market value of the collateral security.h. Sectorial loan
limit for real estate credit including residential housing,
apartment, and commercial complex, land purchase, plotting and
developing) is fixed up to 25 percent of total loan. Limit for real
estate loan only for land purchasing, and plotting is 10% of total
loan. The real estate loan exceeding the limit, the risk weight of
150 percent shall have to be provisioned while calculating the
total risk weight assets for the amount so exceeded.Special care
shall be taken while allowing non-funded facilities, so that the
allowed non-fund facilities do not turn into funded facilities and
get classified. While granting such facilities under the above
mentioned exceptions, immense care shall be taken such that all
necessary formalities are accomplished and the exposures remain
within the prudent limit decided by Board. Exceptions: Public
limited companies, where 50% or more of the shareholdings are
public, shall not be considered as a single enterprise/group.
Credit facilities provided against government guarantees, to the
extent of the amount guaranteed. For credit facilities against cash
and cashable securities (e.g., FDR), where the actual level of
exposure shall be determined by deducting the amount of such
securities from the outstanding balance.
Section-4Operating Procedures4.1 Loan Application Process: The
client completes the Credit Application with the assistance of the
Branch Manager or his/her delegated Loan Officer. A suggested
format for the Application is enclosed in (Appendix-1). This form
will help ensure that adequate information about the financial
condition of the borrower is obtained. The application should be
filled in completely as possible to provide sufficient information
with which to begin the analytical process, form the basis for an
initial site visit and understand proposed collateral. a.
Collection of data: At the time of analyzing a credit proposal the
following information are to be collected from the
borrowers/guarantors in the prescribed format which is subject to
change as and when needed: Full particulars of the
borrowers/guarantors; Nature of business/ Place of business Purpose
of Loan. Up to date CIB report; Three years audited financial
statements; Statement of personal assets & liabilities;
Certified Tax Return Statement regarding income, Expenses, Assets
& Liabilities; Transaction profile; Schedule of collateral
offered and valuation thereof; Trade License, Environment
Department's clearance; Detailed liability position with contingent
liabilities; Credit Rating which should not be below BBB; Detail
data from Large Customer to prepare database; Sources of utility;
Invoice; Contract between Suppliers & Customers. Interim
financial statement. Personal financial statement of the
owner/guarantor. However a list of details information required for
analyzing of a proposal is attached as Check list (Appendix-2).
b. Initial site visit:One of the objectives of thorough initial
visits with the client is to determine the client's character,
business condition, prospects, and to gather supplemental financial
information. Identification and appraisal of collateral is also
essential during initial visits.c. Verification of Data : The above
data should be verified and confirmed and documented in regard to
the borrower:a. Identity(KYC)b. Physical Address c. Place of
Business d. Nature of Business/Purpose of Loane. Web Addressf.
Invoice and contract between Suppliers & Customers d. Appraisal
Analysis : Loan proposals will be appraised with updated market
price, quality and other information of the merchandise and
product. The appraisal / updates will be checked by the concerned
higher authority to ensure that it was in order & reviewed time
to time (at least annually). A detail analysis is documented to
arrive at the following aspects:a. Credit Worthiness; b.
Guarantor/Borrower's cash flow; c. Debt service coverage ratio; d.
Benefit cost ratio; e. NPV, BCR & IRR; f. Break even analysis;
g. Margin /Liquidity; h. Assessment of Working Capital i. Cash Flow
Analysis j. Environmental issues k. Ability to penetrate market
sectors and comparative factors. Before appraisal Banks officer
will verify the invoice & contract with suppliers &
customer and will ensure genuineness. During implementation period
disbursing official will verity the proper utilization of the loan
/ fund and ensure utilization for which loan is sanctioned. e.
Exception in Credit Policy : All exceptions to the credit policy
shall be clearly documented on the loan offering sheet, problem
loan report and other MIS; and to be approved by the Public Bank's
Board or a committee thereof before the loan is funded or renewed.
Any exceptions in lending policy will be effective after proper
approval by the board within their power/authority. f. Renewal and
extension of credit :Any Renewal or extension of credit is made
only after obtaining and documenting the current valuation of any
supporting collateral as per Nepal Rastra Bank circulars,
perfecting and verifying the Bank's lien position, and that
reasonable limits are established on credit advances against
collateral, based on a consideration of (but not limited to) a
realistic assessment of the value of collateral, the ratio of loan
to value, and overall debt service requirements. Any renewal and
extension of credit is made after obtaining and validating current
credit information about the borrower and the guarantor sufficient
to fully assess and analyze the borrowers and guarantors cash flow,
debt service requirements, contingent liabilities and liquidity
condition and only after the credit officer prepares a documented
credit analysis. At the time of any loan renewal accrued interest
will not be capitalized with the principal amount under any
circumstances; Excess over the credit limit must be adjusted before
forwarding the proposal for renewal and enhancement. Fresh Charge
documents must be obtained before effecting any renewal as per law.
For enhancement of loan additional collateral to be obtained to
cover the loan. The purpose of loan will always be mentioned in the
loan application and loan sanction memorandum. Loan proposals will
be appraised with updated market price, quality and other
information of the merchandise and product. The appraisal / updates
will be checked by the concerned higher authority to ensure that it
was in order & reviewed time to time (at least annually). All
exceptions to the credit policy shall be clearly documented on the
loan offering sheet, problem loan report and other MIS; and to be
approved by The Publics Bank's Board or a committee thereof before
the loan is funded or renewed. Any exceptions in lending policy
will be effective after proper approval by the board within their
power/authority. Any overdraft and C.C Hypothecation limit must
have 1.5 time collateral in the form of land, building, FDR &
other eligible security as prescribed by Nepal Rastra Bank and will
be documented in safe in and safe out register and in Loan
documentation check list.Any exceptions in lending policy will be
effective after proper approval by the board. The Bank will
complete the analysis and approval process within the following
time frame on complete submission of the papers/documents by the
borrower; StepsRenewalNew Proposal
ABranch10 days25 days
CHead Office10 days15 days
a) Viability: Financial assistance shall be granted only to
those entities whose operations have been evaluated as technically,
commercially and financially viable and environmentally feasible.
For this purpose, the Bank uses the screening processes with strict
pass-fail criteria, as well as a scoring system to determine
relative risks for the purpose of pricing and subsequent guidance
in the management of loan accounts (Appendix-3). b) Credit
worthiness: Applications for financial assistance may be granted
only when the entities and their principal proponents/management
teams are deemed credit-worthy (demonstrated by past repayment
performance with the Bank or other financial institutions,
capability to absorb debt repayments from sources external to the
main business being applied for, and general credit consciousness
and responsibility). Credit proposals should not be unduly
influenced by an over-reliance on the sponsor's reputation,
reported independent means, or their perceived willingness to
inject funds into various business enterprises in case of need.
Credit proposals should be based on sound fundamentals, supported
by a thorough financial and risk analysis. CIC reports are required
for all loans, and should reflect and incorporate credit limit,
outstanding balances and name/s. c) Sufficiency: No funded or
non-funded credit exposure may be granted unless it is sufficient,
together with the owners' equity, to fully finance the proposed
project or business requirements. Where the Bank's proposed
assistance is insufficient, it may be possible to fulfill the
financing requirements through either of the following means:
Additional loans from other banks/financial institutions,
preferably in a syndicated arrangement, or An additional loan from
the Bank, which is fully-secured by an unconditional guarantee from
an acceptable local or foreign bank or financial institution,
provided, however, that the over-all leverage of the complete
financial package does not exceed prudential limits. 4.2
Leverage:The debt-to-equity ratio for organized business entities
assisted by the Bank should NOT exceed 60-40 (or 1.5:1) computed
after the assistance.4.3 Security and Protective Requirements: a.
All forms of Cash Credit Hypothecation & overdraft limit and
funded financial assistance shall be extended on a fully-secured
basis, where coverage of the Bank's exposure by acceptable tangible
assets shall not at any time be less than 1.5 times the principal
exposure. Exceptions to this policy may be granted only by the
Board of Directors upon the recommendation of the Credit Committee.
b. As a matter of principle, the Bank should not participate in
credit transactions where it shall have an inferior security
position compared to any other pre- existing or proposed new
lendersc. In the case of private limited companies, all the
directors must execute a joint and several Deed of Guarantee
towards the performance of the terms and conditions of loan and
other credit facilities.d. The Bank shall require that its security
is fully protected against risk whenever applicable (e.g., fire,
riot, strike, damage) by a duly-authorized insurance firm.
Furthermore, such risk coverage shall always be in force until all
the obligations shall have been fully discharged. Expenses for such
coverage shall be for the account of the borrower, except when
these have been foreclosed and judicially awarded to the Bank.e.
Regular inspections (i.e., monthly, quarterly, half-yearly, and
yearly) are to be conducted as to the general state of the
securities.f. If value of securities found decreased at any time
bank will take additional securities to cover the loan limit or
will reduce the limit to the extent beyond the coverage. Such
condition will be incorporated in the credit sanction advice and
bank will take an undertaking from the borrowers/guarantors in this
regards.4.4 Types of Acceptable Security: Well-identified land and
landed property located in city corporations, municipalities,
district and commercial developments, industrial areas and other
developed areas, subject to the consent requirements applicable to
the type of property. a. Verification of security document: All
landed property offered as security shall have an official search
conducted by, and a clean report. The purpose of this verification
process is to ascertain the existence or otherwise of encumbrances
and/or breaks in the chain of title. The title deeds of the
proposed property should be verified by our legal Advisor/ Lawyer
and a certificate should be obtained mentioning that the title to
the property is alright and bank can take this property as
security. The branch manager/branch official will confirm that the
proposed property is under possession of the mortgagor. b. Consent
Requirements: All liens on offered security shall be premised on
the written consent of the owners or primary lessors of private
property as well as the concerned government ministries in the case
of public property. Buildings (Industrial, Commercial, and
developed Residential) Machinery and Equipment, provided that the
economic life thereof shall be equal to or more than the life of
the Bank's facility Vehicles (Industrial, Commercial, and Private),
provided that the economic life thereof shall be equal to or more
than the life of the facility c. Other acceptable forms of
security: Raw Material or Merchandise Inventories (preferably of
non-perishable nature); Shares of Stock of Companies listed in the
Nepal Stock Exchange Bank guarantee, provided that the issuing bank
(whether local or foreign) is considered to be acceptable (i.e.,
having the reputation and capacity to absorb the amount of facility
upon the Bank's proper demand) by or the Board; Government
guarantee; Security instruments such as treasury bills, NRB bills,
duly endorsed or assigned to the Bank. The loan value of these
instruments shall be derived by discounting the redeemable value of
the securities at the appropriate rate prescribed by the Treasury
Unit of the Bank. Fixed deposits, provided these are covered by
lien or assignment as per approved procedures.
d. Approval Procedures: All loans or facilities strictly require
the approval of designated authorities. A chart of authorization
for credit approval is enclosed in (Appendix-5). No officer of the
Bank, shall approve or otherwise commit the Bank to any credit,
guarantee, or investment without prior written authorization.
Furthermore, no officer or staff may make or enter into any
unauthorized arrangement/s that would result in the rescheduling,
restructuring of existing loan schedules or the postponement of the
recovery of the Bank's loans or investments without similar
authorization. Any breach of this policy shall be treated as a
fraudulent and criminal act, and shall be dealt with accordingly.
4.5 Documentation: It is the responsibility of credit
administration to ensure completeness of documentation (loan
agreements, guarantees, transfer of title of collaterals etc.) in
accordance with approved terms and conditions. Outstanding
documents should be tracked and followed up to ensure execution and
receipt. All forms of credit, investments or variations thereof,
and the security to cover these, require proper documentation in
accordance with approved legal forms and formats. Communications
with customers concerning their approved facilities should
incorporate all standard as well as special conditions that may be
imposed from time to time and, in line with best practice, the
customers should signify their written conformity thereto. No
modifications or deletions of approved terms and conditions will be
allowed without specific authorization from the Board of Directors
or the appropriate committees.For monitoring and verification
purposes, loan files for each borrower should incorporate a
duly-accomplished checklist of credit documents. This checklist
should always be available for inspection by management and
auditors. It is the duty of the credit Administration Department to
renew charges and mortgages which expire during the life of the
loans. Custodial responsibilities for all original copies of
documents evidencing transactions is specified below:
Custody & Safekeeping of Documents : Custodial
responsibility for original transaction documents shall be the
responsibility of the back office. These shall be retained in a
secure manner, preferably stored within fire- and burglar-proof
premises (e.g., vaults). Document Checklist:The approved document
checklist refer to (Appendix-6) must be maintained for every credit
facility, which contains:a. details of all general and specific
requirements;b. the dates on which these were submitted and
complied with; andc. the location of these documents. Said
checklist must be incorporated as an integral part of the credit
folders, and should be available for inspection at all times. Since
the original documents are to be held in safekeeping, copies
thereof should be appended to the checklist. 4.6 Credit
disbursement Procedures:The credit administration ensure that the
credit application has proper approval before entering facility
limits into ledger/computer systems. Disbursement will be effected
only after completion of covenants, and receipt of mortgage deed of
collateral holdings. In case of exceptions necessary approval shall
be obtained from competent authorities.It is the strict policy to
ensure that all documentation and formalities, and in particular
those related to large loans and loans to
Directors/Officers/Shareholders/ Related Interests should be
executed in compliance with Nepal Rastra Bank guidelines and the
BAFIA Act. If any fund is released without proper documentation,
the concerned manager and officer will be held responsible for
punishment. Moreover, all financial transactions should without
exception be properly recorded for accounting and monitoring
purposes. Non-funded loan cannot be converted in to funded loan
until all necessary approval have been obtained from the competent
authority and before completion of documentation formalities. Same
underwriting standards to be followed consistently for same
category of loans. Releases of funds, and the issuance of
instruments (e.g. LCs, Letters of Guarantee) that bind the Bank to
potential financial and legal obligations, are the final and
critical control stage of the credit and investment process.
Accordingly, these may not be undertaken unless and until the
following are accomplished: Documentation clearances have been
issued; Treasury has been advised of impending disbursements ahead
of time (24 hour notice in the case of NRs 1 up to NRs 10 crore,
and 5 working days in the case of amounts of NRs above 20 crore and
Transaction sheets are accomplished, showing sufficient detail
(date, amount, promissory note number when used, applicable
interest rate or fee, and payment period/dates for interest and
principal/fee. Booking of the transactions contemplated in this
section should be made at the originating front offices, and
advised to the International Division at Head Office within 24
hours using a triplicate copy of the transaction sheet.
International Division will maintain a centralized accounting
record of all funded and non-funded exposures relating to Import
& Export of the Bank for administration and monitoring
purposes. 4.7 Implementation of the loan/fund: During
implementation period disbursing official will verify the proper
utilization of the loan/fund and ensure utilization for which
purpose the loan is sanctioned. The loan will be disbursed phase by
phase after physical verification of the progress of work as per
implementation schedule mentioned in the sanction Advice or loan
Agreement. No loan can be funded until all necessary approved have
been obtained. This schedule of implementation will be meticulously
followed. 4.8 Renewal and Extension of Credit: Credit monitoring:
After the credit is approved and draw down allowed, the credit
shall be continuously monitored by branch managers/ branch
officials. These include keeping track of borrowers' compliance
with credit terms, identifying early signs of irregularity such as
loan proceeds being used other than for the intended purpose,
conducting periodic physical verification valuation of collateral
and monitoring timely repayments. Branch Managers/Branch Officers
bear the primary responsibility for monitoring and recovering the
Bank's credit exposures, in accordance with the Operating Rules and
Procedures. Monitoring and follow-up activities should be
intensified when the perceived credit risk of borrowers
deteriorate, based on the latest quarterly risk
grade/classification. Credit Divisions at Head Office, on the other
hand, will monitor the performance of the various credit portfolios
by analyzing the data base which it shall establish and maintain on
a current basis. Individual exposures in the Bank's portfolio will
likewise be classified by the branch in accordance with Nepal
Rastra Bank Bank guidelines. The Credit Risk Management unit will
develop risk guidelines and procedures in line with good practice.
Together with the CRM, the Internal Control and Compliance unit of
the Bank, will put their comments on the basis of experience
gathered from the branch inspection as to whether or not these
guidelines and procedures are working effectively and reflect the
actual positions indicated above. 4.9 Credit Repayment/Credit
Recovery: The borrowers shall be communicated by the branch
manager/branch officers ahead of time as and when the
principal/markup installment becomes due. Any exceptions such as
nonpayment or late payment should be tagged and communicated to the
management. Proper records and updates shall also be made after
receipt. 4.10 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. Information
should be filled in an organized way so that external/internal
auditors or NRB supervisors could review it easily. 4.11
Maintenance of Collateral and security documents: Branch Manager
will maintain title deed register and safe in safe out register to
ensure that all security documents are kept in a fireproof custody
under dual control. Proper records for security documents will be
maintained to track their movement. Physical checks on security
documents shall be conducted on a regular basis. 4.12 Account
Management Procedures: This stage in the credit process has the
longest duration, and key components of the Bank's credit risk
infrastructure have responsibilities to ensure that risk assets are
properly monitored and handled. 4.14 Relationship Management: Front
offices (i.e., the branch stations and corporate branches) shall
have over-all responsibility for account relationships and customer
interface. They have the obligation to monitor the accounts'
business and performance of credit obligations through client calls
(evidenced by call reports) and obtaining periodic financial
reports. They have the primary task to recover the Bank's
exposures, and to have a proper accounting of all credit-related
transactions aside from the normal banking routines related to
their deposit business. Pro-active monitoring of accounts is
underscored with the introduction of an early alert process under
which identification and prompt reporting of deteriorating credit
must be reported by the branch to the immediately higher level of
supervising authorities. The format for reporting accounts that
have been downgraded to "Watch-list" is shown in Appendix 7 and
covers the following: For accounts undergoing project
implementation: Slippage in over-all implementation schedules
Timely and correct installation of imported components Changes in
the scope and cost of project plans Repayment schedule For all
other aspects of credit (common to all operating accounts):
Deterioration in general business environment Decline in sales
and/or operating margins Delays in payment of interest during grace
period Delays in principal repayment Non-compliance with terms and
conditions, e.g., non-submission of required operating reports and
financial statements.
SECTION-5Organization StructureThe Bank's functions and
responsibilities relating to credit are organized on the basis of
appropriate segregation in order to assure objectivity in managing
credit. Accordingly the responsibilities is divided as follows:
Front Office Middle Office Back OfficeDetails functions and
responsibilities is shown in (Appendix-8).
Section-6Product Manuals6.1 Overdraft:Overdraft facility is a
kind of working capital loan. It is a running loan account and
shall be operated by cheques on a current account. The borrower
shall be allowed to overdraw his/ her current account within
prescribed limit and stipulated time period offered by the
competent authority. The borrower can deposit any amount in this
account. Thus the balance will be fluctuating due to withdrawal and
repayment of money by the borrower. Overdraft will generally be
granted to the businessmen for the fulfillment of their short-term
credit needs.6.2 Cash credit:6.2.1Cash credit- revolving (CCR):It
is a similar to that of overdraft limit in nature but unlike OD, a
separate loan accounts will be maintained for loan limit
implementation and is regulated by the drawing power within the
offered limit. The debt balance of account on any point of time
should not exceed the stipulated limit. Revolving cash credit shall
be provided against the pledge or hypothecation stock in trade,
goods, machinery, land, building etc.6.2.2 Cash credit
non-revolving (CCNR):It is basically a substitute to trust receipt
loan for financing the import of capital goods such as plant and
machinery. As per the general banking norms, TR loans are provided
only for date the credit request for importing the capital goods,
we provided the non-revolving cash credit for short term
period.6.2.3 Demand loan:It will be provided in lump sum repayable
either in provided in lump sum repayable either in fixed
installment or in lump sum. Once it is granted, it shall not be
considered as a running loan account. Once it granted, it shall
have a debit for the offered amount and only credits after
repayment therefore. Once it is repaid full or parts, the borrower
shall not be allowed to draw again. In case, the borrower requests
for further accommodation, the bank should treat the same as
separate transaction.6.3 Hypothecation loan:The bank may provide a
loan with security of movable property acceptable to the bank by
entrusting the possession of the security to the borrower on the
condition that bank may take possession of the property.6.4 Bills
purchase and discounting:Purchasing of bills of exchange from
borrower is called bills of purchase. In case the bank purchase or
discount the bills, the bank shall credit the borrow account with
the amount of bill after deducting the charge as specified by the
bank. There will be two types of such documentary bills.A) Demand
bills:Demand bills shall have no maturity and is repayable on
demand. The bank is entitled to demand their payment immediately on
presentation before drawer. If a bill is accompanied by documents
of the good (railway receipt, truck receipt, airway bill, bills of
lading) is called documentary bill. In the absence of such
documents, it is called clean bill.B) Usance bills:It has a
maturity period. The bank shall retain the bill for that period and
should realize the amount of the bill from the drawer on its due
date. This practice is called discounting of bills.6.5 Hire
purchase:This financing is a type of installment credit under which
the hire purchaser, called the hirer, agrees to take the goods on
hire at a stated rental, which is inclusive of repayment of
principal as well as interest with an option to purchase. The
ownership remains with the person that gives the goods on hire. The
bank may grant hire purchase loan to eligible applicants to
purchase goods having definite source to offer collateral generally
for personal use. Such loan may be extended to firm, company, or
institutions to acquire moveable fixed assets. It is granted mainly
for the purchase of vehicles, office equipment, construction
equipment and household goods. The bank would not finance 100% of
the value of goods under this scheme. A detailed viability study
will be done before granting the loan.6.6 Term loan:Generally, the
term loan will be granted for industry to finance the fixed assets
whose gestation period is high. The repayment period will generally
be more than three year. The maximum length of term loans should
not exceed 15 year in duration for infrastructure project and 7
year for other activities. Such loan is repayable an installment
over the period of loan.6.7 House loan:It is provided to build or
buy residential buildings only. The tenure of this type of loan
will be determined based on borrowers repayment capacity. The
borrower is required to submit his/ her income statement and / or
projected income statement along with the loan application
request.6.8 Project loan:Project loan will be generated on the
basis of viability of the project. The bank will ask the borrower
to invest certain portion of the project from their equity and the
rest will be financed by the bank as project loan. The maximum
debit equity ratio, in case of project loan, will be 70:30. The
project loan includes the term loan and working capital loan
required by the project. Project loan is basically considered for
the capital expenditure oriented companies/ project like
industrial, commercial complex, departmental stores etc, with
relatively long tenure.6.9 Working capital loan:It is the
difference between current assets and current liabilities. This
type of loan will b granted to meet the working capital of the
borrower. Working capital can be divided into fixed working capital
and variable working capital. Fixed working capital will be
financed by way of short-term loan whilst variable working capital
will be financed by overdraft facility. Normally loan outstanding
must not exceed 70% of eligible goods receivable and stocks. The
eligible goods receivable includes non-capital goods which is in
the books of the borrower for a period not exceeding the credit
period specified in the sales management. If at any point of time,
the outstanding exceeds the extended valuation of the stocks and
goods receivables after providing the margin of 30%, the drawing
power must be reduced immediately and the borrower should settle
the excess outstanding in cash promptly. This should be made clear
to the Clint on the offer letter itself. 6.10 Pledge loan:Pledge
loan is provided basically for maintaining the stock of the trading
items/ goods under the speculation that the price of the commodity
will increase in due course of time. Generally, the goods having
seasonal nature like food-grains, sugars etc are considered for the
pledge loan. Under the pledge loan, goods are kept under lock and
keys of the bank in the borrower go down for security of the loan.
The good will be released partially or fully as and when the sales
deal is made and corresponding amount of loan outstanding is
settled. A part from other considerations, the price history and
market tendency of the commodity are the most important factors to
be taken into account while providing pledge loan will be 70% of
the cost price of the commodity/goods under pledge.6.11 Priority/
deprive sector loan:The bank is required to extend advances to the
priority sector and deprive sector as per the NRB directive. At
present, out of the total credit outstanding of the bank, 12% must
be extended towards priority sector including 3% in deprived
sector. The loan extend to agriculture development bank, rural
development bank and other financial institution/NGOS as authorized
by NRB for micro-credit activities also fall in this category.6.12
Bridge financing:Bridge financing can be given if there is ample
evidence that the borrower is receiving financial from some other
sources and the fund is required for a short period of time. This
form of financing can be done to the extent of the full value of
collateral to the maximum 100% of the documented amount from the
primary lenders/ sources this type of loans shall not be made for
more than 12 month.6.13 Loan against fixed deposit:It can be
extended to the maximum of 90% of the fixed deposit amount with
additional interest rate above the fixed deposit rate as decided by
the management from time to time. Any deviation from the above
normal should be well documented and a written exception require
from the chief executive officer.
6.14 Loan against share:It can be given to the extend 50% of the
present market value or 180 days weight average value of the shares
whichever is lower. No financing against stockholders is a director
of the company in which she/ he holds the shares. Eligible limit
shall be monitored.6.15 Lease financing:Due to the nature and
complexity of lease financing, financing under this option should
be treated the same as financing under the term loan with amortized
payment and approval is required for additional conditions.6.16
Guarantees:A bank guarantee may be defined as the irrevocable
obligation of a bank to pay a sum of money in the event of
non-performance of a contract by a third party. Under the terms of
guarantee, the bank has to pay on first demand if the conditions
contains in the guarantee are not fulfilled. Guarantees are
normally require to give for bid bonds, earnest money, and
performance. The amount of guarantees is therefore always dependent
on the work order. It would be therefore necessary to examine
whether the borrower has the capacity to execute the order.
Whenever the work order is of higher value then annual sales, more
than ordering care is required to be exercised in ascertaining as
to whether the unit has got capacity to execute such orders. The
bank can issue these form of guarantees upon request of the Clint.
Guarantees should be treated the same as that of loans while
conducting analysis. The fees, margin and commission structure for
guarantee shall be per the approval by the chief executive officer
from time to time.6.17 Import credit-trust receipt loan (TR
loan):It is associated with import letter of credit only. This is
an arrangement under which credit is allowed against trust receipts
and imported goods remain in the custody of the importer. The
borrower has to execute a trust receipt in favor of the bank
declaring that he holds goods imported with the banks credit in
trust of the bank.
6.18 Export credit:6.18.1 Pre-shipment credit:Pre-shipment
credits are usually required by exports to purchase and procure raw
material, process and manufacture export goods, pack the goods for
export, pay for transporting goods to the sea ports/ airports for
export, pay the freight, insurance and export duty, if any
pre-shipment credit are usually liquidate by negotiating bills or
buy the post shipment credit. Pre-shipment credit will be granted
to the exporter on the basis of a confirmed letter of credit
against a firm export order. Like any other credit, the bank shall
consider a number of safeguard measures before extending the
credit, such as t exporters credit worthiness, their past
performance method of payment agreed upon period for which the
finance is required, their integrity and financial standing. The
pre-shipment credit, which will not normally exceed the FOB value
of the goods whichever is less, shall be liquidate form the
proceeds of the relevant export bill when purchase negotiated or
discounted as the case may be pre-shipment advances hall be
normally granted on a secure basis. Exporters are require to insure
their stock against fire and theft for the full value. Goods in
transit within the country and from port of loading to port of
destination also need to be covered by insurance by the exporter,
unless it is the responsibility of the importer.Pre-shipment credit
will be given by way of an overall overdraft offered for one year.
In such case, loan assessment will be made not with reference to a
particular export order, but with reference to the overall credit
requirement. Generally the credit limit operates on a revolving
basis and can be used for financing a series of export
transactions. In fixing the limit, however, the bank will look into
the credit worthiness of the exporter, his past performance, the
security made available to the bank.6.18.2 Post shipment credit:The
bank will extend post-shipment credit through purchase/ discount of
export bills or buy way of advance against such bills. The nature
of the bill as well as the term of payment as agreed to by the
exporter with the buyer shall be two important considerations for
the bank to provide post-shipment finance. The loan period will not
usually exceed 6 month. Post- shipment creates will be generally
applied to liquidate pre-shipment credit. The following are the
types of bills against which post shipment credit is normally
extended to exporters. Demand bill (document against payment-D/P)
Usuance bill (document against acceptances-D/A) Bills for
collection Bills under documentary 6.20 Education loan:Educational
loan is provided to cover education expenses of the borrower or the
family members of the borrower for higher studies in Nepal or
abroad. This type of loan can be extended to students or parents
/guardians to the extent of maximum l5% of the cost of the tuition
fee, travel costs, admission costs and hostel charges against the
mortgage charge over the fixed properties (land / building) or
other security acceptable to the bank. The borrower or parent /
guardian must produce evidence of regular source of income to meet
the repayment of principal and interest. The broad guidelines of
this loan shall be developed and executed through product paper.
Tenure of this loan not to exceed 15 years (including moratorium
period).The moratorium period for repayment of the loan not to
exceed regular tenure of the course undertaken plus one year.6.21
Loan Purchase from or Sale to other Banks / Financial Institutions:
In the normal course of business a financial institution may want
to off load a part of its risk assets. The reason for this could be
various such as pressure on capital adequacy requirement,
concentration and so on. The bank can purchase or sell loans
from/to other banks or financial institutions which may be with
recourse or without recourse to the selling bank. However, any type
of loan to be purchased must be a "good category" loan, with 1%
provisioning, at the selling bank / financial institution at the
time of sale. The bank or financial institution, with which the
Loan Sale / Purchase agreement is being entered into for the
purpose of purchasing /selling its part of the risk asset
portfolio, should be acceptable to the bank. The acceptability
shall be assessed in terms of its capability of analyzing the
underlying risk, capability of assessing the terms and conditions
of the underlying participation agreement, satisfactory financial
performance, level of nonperforming assets being less than 5o/o of
the total portfolio and quality of the overall management. Minimum
size of the transaction shall not be less than NPR 50 million. The
validity of the agreement shall not be open ended and the agreement
shall have a specific expiry period not exceeding two years.
Minimum authority for the decision to participate in such agreement
shall be Board Credit Committee of the bank. Loan Purchase or
repurchase or Sale from / to other banks / financial institutions
shall be governed by NRB directives in effect from time to
time.6.22 Retail and SME Financing:Basically, Retail and / or SME
loan will be guided by product papers and the will be granted to
business as well as individual with one of the thrust areas of the
banks for portfolio diversifications. Major identified retail
lending products are HP loan, Education loan, foreign Employment
Loan, personal I mortgage loan, Lease financing, FD loan, loan
against NSB, Loan against Bank Guarantee, loan against shares and
bonds, loan against gold & silver, and any other scheme based
loans, which may be re-designed / added from time to time depending
upon the need of the market. The tenure of all retail and / or SME
loans will be guided by separate related lending guideline and
product papers.Service charge:Service charge on loan accounts will
be levied as per the schedule of charges decided/ implemented from
time to time by the management. Any exception to this must be
approved by the CE in writing and properly documented in the
field.Management fees:Management fees on loan accounts will be
levied as per the schedule of charges decided/ implemented from
time to time by the management. Any exception to this must be
approved by the CEO in writing and properly documented in the
file.Moratorium period and interest capitalization:With the written
approval from the CEO, interest moratorium period up to 12 months
can be allowed to project loans, consortium loans, and industrial
loans. A moratorium may be allowed for a period beyond 12 months
but until the commercial operation of the venture in case of
start-up project being financed. This, however, need to be approved
by the CEO or above authority as exception to the rule. No interest
moratorium shall be given to individuals or for trading purpose.
Interest on these types of loans shall be capitalized on quarterly
moratorium period and interest capitalization terms will be set as
per the facility agreement or as decided by the consortium
meeting.
Loan payment structure:Credit facilities of revolving nature
like OD, demand loan, TR, etc, will be renewed on annual basis from
the date of disbarment and thus no repayment schedule will be
applicable. Such revolving loans will be fully settled only when
the credit facility is called back. However interest on such
revolving loans shall be paid on quarterly basis as per Nepalese
fiscal calendar. In case of schedule loan, repayment can be made in
any one of the following manners as determined by the credit
analyst and approved by the lending officer. Payments can be made
either monthly or quarterly. If payment cannot be made at least
quarterly on such schedule loans, then approval is required from
the CEO.Before disbursement of the loan all necessary papers and
documents shall have to be completed accordingly as per loan
documents checklist. Importantly the instrument must be duly
discharged by the owner and marked "lien" before allowing
withdrawal.
Section-6Credit Risk Management6.1 Risk Grading & Risk
Rating: The Bank will rate its individual risk exposures
continuously until these have been discharged through full payment
or otherwise written off. The process is similar to that undertaken
during the screening stage. However, actual account performance
will be an additional consideration in classifying the exposures
into one of the following eight categories: Superior - Low Risk
(AAA): Industry/Business & Financials: Strong industry and
business performance is indicated on the basis of volume trends and
operating margins; the account may be a dominant player in the
industry. Account Performance: Account is cooperative, pays on
time, and provides non-loan business. Security: Facilities are
fully secured by cash deposits, government bonds or an
unconditional guarantee from a top-tier international bank or
financial institution. Good-Satisfactory Risk (AA):
Industry/Business & Financials: The account's performance is
strong, having consistently strong earnings within a vibrant
industry, good liquidity and low leverage. Account Performance:
Account is cooperative, pays on time and provides non-loan
business. Security: Security is sub-prime but solid real estate.
Aggregate score would be 95 or above. Acceptable - Fair risk (A):
Industry/Business & Financials: Financial condition is
currently strong but may be unable to sustain any major or
continued setbacks. This classification indicates strengths below
that of the previous category, but shows consistent earnings and
positive cash flow. Account Performance: Account is paying, but may
be delayed by less than one month from time to time. Security:
Security position is satisfactory. Aggregate score would be 75-94.
Marginal -Watch list (BBB) : Industry/Business & Financials:
These borrower have an above-average risk due to strained
liquidity, higher than normal leverage, thin cash flow and/or
inconsistent earnings. Account Performance: Account is paying, but
may be delayed by less than one month from time to time. Security:
Security position could be less than satisfactory if default occurs
longer than 3 months. An aggregate score would be 65-74. Special
mention (BB): Industry/Business & Financials: These borrowers
deserve management's close attention because of consecutive losses
over two years with the potential to have negative net worth,
excessive leverage. Account Performance: Account is paying, but may
be delayed by less than three months from time to time. Security:
Security position could be less than satisfactory if default occurs
longer than 3 months. An aggregate score would be 55-64.
Substandard (B): Financial condition is weak, and capacity or
inclination to repay is in doubt. These weaknesses jeopardize the
full settlement of loans. An aggregate score would be 45-54.
Doubtful and Bad (Non-performing): Full repayment of principal and
interest is unlikely, and the possibility of loss is extremely
high. The adequacy of provisions must be reviewed at least
quarterly and the Bank should pursue a loan workout arrangement
(e.g., restructuring), failing which legal options should be
explored to enforce security to obtain repayment. An aggregate
score would be 36-44. Loss (Non - Performing): The prospect of
recovery is poor after exploring all options. Legal procedures have
been initiated. In accordance with Nepal Rastra Bank guidelines,
these accounts should be written off. An aggregate score would be
35 or less. The deterioration of any loan account is regarded as a
serious development that requires the attention of the Credit
Committee. For this purpose, any account which is downgraded to
"Substandard" should be the subject of a Classified Loan Report,
the format for which is attached as (Appendix-9). Any loan limit of
NRs .1 (one) crore and above will be rated by External Rating
Agency. The Public Bank Limited will not disburse any fund to the
client having credit rating less than BBB or equivalent or unrated.
6.2 Managing Problem Credits: In cases where the risk of credit
loss is significant and/or the underlying problems require special
expertise, NPL Unit will assume primary management of the problem
credit, keeping in mind that the originating Branch Manager will
remain available to coordinate recovery actions as required. In
cases where there is an imminent risk of loss, the loan should be
followed very carefully by the branch officials. At that time all
interest accrual should cease and any interest already accrued and
taken into income should be reversed. The assigned risk rating
should be changed to accurately reflect the loan or facility's
current deteriorated condition. The NPL Department will be
responsible for the following: Examine and evaluate the problem
credit situation including an assessment of the risk, a review of
the adequacy and completeness of credit documentation, and, if
applicable, collateral perfection, as well as an analysis of the
condition, marketability and current market value of the
collateral. Formulate a future strategy or an action plan to be
followed in dealing with and resolving the problem credit. Retain
outside counsel to provide specialized legal assistance when
required. Implement a strategy in order to restore the credit to a
fully performing status or get the outstanding balance fully
repaid, restructured, or adequately secured to mitigate against
loss. Estimate the probability of full recovery and the likely
costs (in terms of actual expenses, employee time and foregone
income) associated with succeeding. If there is a low probability
of full recovery coupled with high costs over an extended period of
time, the Bank, through action of its Credit Committee/NPLMC, might
make a business decision to attempt to settle the debt immediately.
Prompt and effective resolution of problem loans can reduce losses
for the bank. Problem loans are costly to the bank in terms of time
and effort as well as, frequently, foregone interest income and
additional expenses. Ultimately problem loans reduce profits and
can erode capital. 6.3 NPL Recovery Unit: This is a specialized
unit whose principal task is to maximize recovery and/or minimize
losses on non-performing assets through extra-judicial workouts, or
through litigation and the subsequent sale/lease/operations of
physical assets. The structure and reporting lines are diagrammed
below: Assets Management UnitAccount Workover UnitBranch
OfficesCommercial OperationsAssets AdministrationMD & CEOCredit
CommitteeGM or DGMHead of Recovery UnitPrivate Sector
AccountGovernment Account
The RU's (Recovery Unit's) primary functions can be to: a.
Determine action plan/recovery strategy; b. Pursue all options to
maximize recovery, including placing customers into legal
proceedings or liquidation as appropriate; c. Ensure adequate and
timely loan loss provisions are made based on actual and expected
losses; and d. Regular review of accounts classified as
sub-standard or worse. A problem credit management process
encompasses the following basic elements:
Negotiation & follow up:A proactive effort should be taken
in dealing with borrowers to implement remedial plans, by
maintaining frequent contact and internal records of follow-up
actions. Often rigorous efforts made at an early stage prevent
banks from litigations and loan losses. Workout remedial
strategies: Sometimes appropriate remedial strategies such as
restructuring of the credit facility, enhancement in credit limits,
or reduction in interest rates help improve the borrower's
repayment capacity. However, it depends upon business conditions,
the nature of problems being faced and most importantly the
borrower's commitment and willingness to repay the credit. A bank's
failure to address problem credits timely may threaten its
solvency. While such remedial strategies often bring up positive
results, banks need to exercise great caution in adopting such
measures and ensure that such a policy must not encourage borrowers
to default intentionally. The bank's interest should be the primary
consideration in case of any such workout plans. Before
implementation, the workout plan must be approved by the competent
authority at the bank; Reviewing collateral and security
documentsBanks have to ascertain the credit recoverable amount by
updating the values of available collateral with formal valuation.
Security documents should also be reviewed to ensure the
completeness as well as enforceability of contracts and
collateral/guarantee; and Status report and reviewProblem credits
should be subject to more frequent review and monitoring. The
review should update the status and development of the credit
accounts and progress of the remedial plans. Progress made on
problem credit should be reported to the senior management.6.4
Recovery of Non-Performing Loans & Investments: For early
problem loan identification, to ensure that credits are accurately
risk rated at least monthly, with formal classification and
provisioning conducted at least quarterly. Recovery & NPA
Management Division will remain responsible for overall monitoring
of the same.Identification and accounting procedure for nonaccrual
loans are consistent with the requirements established by Nepal
Rastra Bank. No interest against classified loan will be taken into
profit unless recovered in cash or as per Rastra Bank instructions
from time to time. Provision against the classified loans will be
made account for accordingly on a quarterly basis (by passing
necessary voucher).Loan policy underwriting standards will be
applied consistently; The NPL Recovery Unit will be responsible for
all accounts assigned to it by the Credit Committee. The unit will
be staffed by experienced senior officials who will undertake the
following activities: Review the accounts thoroughly and use a
decision matrix to: a) diagnose business prospects; and b)
determine the best way to recover the Bank's exposure with the
least possible losses. Restructure those accounts which are deemed
to be cooperative and in temporary distress, and monitor their
performance closely until they have substantially complied with the
revised terms including payment of at least six months'
installments; rehabilitated accounts may be returned to the
originating front offices for regular monitoring and supervision
after this prescriptive period. Prepare accounts with security,
whose operations are active but the owners are uncooperative, for
legal action; coordinate with the Bank's legal counsel and/or
external lawyers in the filing and prosecution stage; execute final
judgment as may be determined by the courts. For these types of
accounts, the NPL Unit may recommend further accounting treatments
(such as additional loan loss provisions) depending on the
perceptions concerning the Bank's security position. Blacklist the
borrowers to ensure they are not entertained for future
accommodations in the future (the blacklist should be updated).
(Note: The Bank may also consider taking over the properties with
potential commercial value with the help of the Court. The Bank
would be able to amortize its booked exposure through re-book it as
an asset of the bank by passing necessary vouchers). Prepare
accounts without any security, whose operations are either active
or inactive and the owners are uncooperative, for attachment of
personal assets through legal means; as above, coordinate with the
legal agents of the Bank until the cases are resolved. Recommend
write-off for accounts with no hope of recovery, and blacklist the
borrowers to ensure they are never entertained in the future. The
Board shall have the sole authority to approve write-offs as per
Rastra Bank guidelines issued time to time. 6.5 Recovery Write-off
loans: Debt Collection Unit of the bank will remain responsible for
collection of written-off loan. Any recovery from written-off loan
will be made account for as per BAFIA Act. Procedures for recovery
and management of write-off loans will be observed consistent with
the requirement established by Nepal Rastra Bank. Proper accounting
of write-off loan will be strictly followed as per BAFIA Act. The
write-off procedures will be followed as per the regulations set by
the NRB. 6.6 Internal Audit & Compliance (IAC): All front
office lending outlets must be audited regularly (at least
bi-annually) as an independent check on their activities. However,
more frequent inspections and audits may be conducted as situations
may demand. Particular attention should be paid to the corporate
and Authorized Dealer (AD) branches which are expected to originate
and maintain the bulk of the credit and investment portfolios. IAC
should review the efficacy of credit risk controls and validate the
effectiveness of screening tools in predicting borrower performance
through back-testing techniques.6.7 Review of the Credit Policy:
This policy will be reviewed / revised and updated at least
annually or time to time taking into account external and internal
economic conditions / circumstances and regulatory guidelines by
the board.