1. Revise Lecture 21

2. Loans and Advances Overdraft

3. Loans and Advances Overdraft Overdraft also is a credit facility granted by bank. A customer who has a current account with the bank is allowed to withdraw more than the amount of credit balance in it. It is a temporary arrangement

4. Loans and Advances Overdraft Overdraft facility with a specified limit may be allowed either on the security of assets or on personal security, or both. If there is a prior agreement with the account provider for an overdraft protection plan and the amount overdrawn is within this authorized overdraft, interest is normally charged at the agreed rate.

5. Loans and Advances Overdraft If the balance exceeds the agreed terms, fees may be charged and higher interest rate apply. Overdraft is an efficient form of borrowing as the customer pays interest only for the time he uses the money. It gives him flexibility.

6. Loans and Advances Discounting of Bills

7. Loans and Advances Banks provide short-term finance by discounting bills, that is, making payment of the amount before the due date of the bill after deducting a certain rate as discount. The party gets the funds without waiting for the date of maturity of the bills. In case any bill is dishonoured on the due date, the bank can recover the amount from the customer.

8. Loans and Advances Lending Policies

9. Loans and Advances Lending Policies While lending decisions are crucial for a bank, it is neither feasible nor desirable for the top management to review and clear every single loan proposal that the bank receives. Furthermore, for most of the loan proposals, whichever industry they may belong to, the modus operandi remain the same, analyzing, selecting, sanctioning and monitoring.

10. Loans and Advances Lending Policies Hence the top management needs to set the standards. Standards relating to the exposure limits for individual / company/ industry, credit quality of the borrowers, lending rate, risk level, etc, enable decentralized decision making by the lending officers.

11. Loans and Advances Lending Policies Volume of Loans The policy should specify the targeted composition of the loan portfolio, such composition being in terms of industry, location, size, interest rate or security. Decisions regarding the loan portfolio will depend on the size of the bank, the credit requirements in its operational areas and the expertise available with the bank.

12. Loans and Advances Lending Policies Geographical Distribution There are various locations from where a bank conducts its operations. Of these locations, some may be weak credit demand areas with a considerably high deposit potential and vice versa.

13. Loans and Advances Lending Policies Geographical Distribution While operating in any area, the bank should have the requisite funds and expertise to meet the credit demands. The policy should, thus, state the key trade areas of the bank for extending credit.

14. Loans and Advances Evaluation of Loan proposals

15. Loans and Advances Evaluation of Loan proposals The policy document shall specify a process for evaluation of loan proposals, which will enable uniform evaluation across areas / people. Evaluation involves a careful selection of the borrowers by understanding their creditworthiness.

16. Loans and Advances Evaluation of Loan proposals While evaluating the proposal, bank should assess not only the ability of the client to pay back the loan but also his willingness to repay. They need to consider the following variables while evaluating a loan proposals;

17. Loans and Advances Evaluation of Loan proposals Industry level credit analysis: It needs to be performed to study the prospects of the industry and it most importantly includes a study of the 1.Industry cycle 2.Threat from substitutes 3.Shifts in consumer demands 4.Regulatory environment

18. Loans and Advances Evaluation of Loan proposals Operational Efficiency: The company level credit rating is conducted to assess the operational efficiency of the client company. The critical aspects that are to be evaluated in this process fall into the following categories; 1.Operating margins 2.Stability and growth of market share 3.Access to key raw materials 4.Benefit from economies of scale

19. Loans and Advances Evaluation of Loan proposals Financial Efficiency: Repayment of the loan by the clients depends greatly on their financial soundness. Hence financial analysis becomes an imperative part of credit risk analyst. It includes an analyses of; 1.Financial leverage 2.Cost of capital 3.Working capital management 4.Interest rate risk management

20. Loans and Advances Evaluation of Loan proposals Management Evaluation: The management evaluation throws light on the willingness of the client to repay. It includes a study on the performance of the promoter, top management and also the performance of group companies under the same management.

21. Lecture 22

22. Negotiable Instrument

23. The term ‘negotiable instrument’ consists of two parts, viz, ‘negotiable’ and ‘instrument’. The word ‘negotiable’ means ‘transferable by delivery’ and the word ‘instrument’ means ‘written documents by which a right is created in favour of some person’

24. Negotiable Instrument It means an instrument possessing the quality of negotiability is entitled to be called a negotiable instrument. In other words, negotiable instruments are documents meant for making payments, the ownership of which can be transferred from one person to another many times before the final payment is made.

25. Negotiable Instrument A negotiable instrument must possess two features; 1. The right of ownership contained in the instrument can be transferred from one person to another by mere delivery if it is payable to bearer, or by endorsement and delivery if payable to order.

26. Negotiable Instrument 2. The transferee taking the instrument in good faith and for consideration gets a good title to the same even though the title of the transfer is defective.

27. Negotiable Instrument The essential characteristics of a negotiable instruments are; 1. Payable to order or bearer: It must be payable either to order or bearer. 2. Freely transferable: An instrument payable to order is negotiable by endorsement and delivery and an instrument payable to bearer is negotiable by mere delivery.

28. Negotiable Instrument 3. Presumption as to holder: Every holder of negotiable instrument is presumed to be holder in due course. 4. Title of holder in due course: A holder in due course i.e. the person who becomes the possessor of negotiable instrument before maturity, for valuable consideration and in good faith, gets the instrument free from all defects in the title of transferor.

29. Negotiable Instrument 5. Presumption as to considerations: Every negotiable instrument is presumed to have been made, drawn, accepted, endorsed, negotiated or transferred for considerations.

30. Negotiable Instrument The main negotiable instruments are;\ 1.Promissory notes 2.Bill of exchange 3.Cheques

31. Negotiable Instrument Promissory notes According to the definition; A document of promise in writing by a person to pay a certain sum of money unconditionally to a certain person or according to his order is called promissory note.

32. Negotiable Instrument The characteristic features of a promissory note are; 1. A promissory note must be in writing, duly signed by its maker and properly stamped as per the Pakistan stamp Act. 2.It must contain an undertaking or promise to pay. 3.The promise to pay must not be conditional.

33. 4. It must contain a promise to pay money only. 5. The parties to a promissory note, i.e. the maker and the payee, must be certain. 6. It may be payable on demand or after a certain date. 7. The sum payable mentioned must be certain or capable of being made certain. It means that the sum payable may be in figure or may be such that it can be calculated.

34. A promissory note does not require any acceptance because the maker of the promissory note himself promise to make the payment. There are primarily two parties involved in a promissory note; 1.Maker / drawer 2.Drawee /payee

35. Negotiable Instrument In course of transfer of a promissory note by payee and others, the parties involved may be the; The endorser: the person who endorses the note in favour of another person. The endorsee: the person in whose favour the note is negotaited by endorsement.