Loan Management

Introductions and Principles

Introduction

Commercial Banks are established to earn profit like any other businesses. The main
activity involves in earning profit are earning interest by providing loan. The main source
of loan is deposit. So credit should be returned with interest. Commercial banks should not
provide loans without knowing these.

Over the time, some principles, procedures and theories are invented and practiced. The
main purposes of these are to facilitate credit and ensure return and recycling the money
with profit. At first, a loan officer should have to know the definition of credit, features of
credit, functions of credit and their types. The loan officer should not perform his loan
giving activities without knowing or assessing the risks related with extending credit.

What is meant by loan?

The terms loan, credit and advance have both similarities and dissimilarities. In this
chapter, these three terms are used in the same meaning.

Credit in general sense means, as act of allowing person or persons immediate use of
money with payment until an agreed future date.

Bank can provide loan in different ways. Loans can be in cash or in non-cash. If any client
takes advantage from bank by using the goodwill of the bank and this happens in contract,
this will be treated as “goodwill loan” of a bank. L/C, traveller’s cheques, and traveller’s
note are the “goodwill loan” of a bank.

Functions of Bank Loans

Loans cannot be collected without price. Nobody wants to waste which is attained through
price. Loans are taken by individuals or corporate houses. Functions of bank loans are
given below:

Functions of bank loans

Individual Function Business Organization

a. Consumption Loan
b. House Loan a. Working Capital Loan
c. Automobile Credit b. Seasonal Deficit Capital Loan
d. Probate Loan c. Economic Cycle Generated Loan
e. Education and Medical Requirement
Loan d. Asset Re-establishment Loan
f. Holiday Tour Loan e. Fixed Asset Establishment
g. Wedding and Social f. Bridge Loan
Ceremony g. Export Import Loan
These points are described below:
Individual function:
Banks give loans to individuals to purchase the necessities, which they cannot buy with
their limited financial means. The loans can be of the following types:

1. Consumption Loan: The major part of the bank loan is given to for consumption
reasons. Banks give loans for these purposes according to the needs of the customers-like
for furniture, freeze, TV. Etc.

2. House loan: People of limited income face problems in building their own houses.
Banks help them by providing them the big amount of money for this purpose.

3. Automobile loan: Banks give loans to the customers for solving the convenience
problems.

4. Probate loan: It is necessary to register the willed assets after handover it to someone .It
is very costly. So banks provide this loan.

5. Education and medical loan: these needs are two essential needs of human being.

6. Holyday tour loan: For increasing the pleasure of the tour banks give holyday loan.

7. Wedding and social ceremony: It is difficult for fixed income person to bear the
expanse of wedding or ceremony .banks help to bear this expanse.

Business Function:

 Working Capital Loan: If the business organization face problem in production

due to lack of capital banks help them by lending the money.

 Seasonal Deficit Capital Loan: Some business organizations need more capital in
some seasons because of great demand in those seasons .They need lending money
from the banks.

 Economic cycle Generated Loan Requirement: In some weak cycles bank need a
great amount of cash so that it can bear the loss.

 Asset reestablished loan: Banks need loans for establishment of fixed assets.

 Bridge loan: Banks also need cash for the registration in the share market.

 Export import loan Export import business helps the economy grow fast. The
exporter importer takes loans to carry on their busyness.
Classification of Bank Loans:
LOAN

Based on Users Based on term Security

No-security
Individual Industry Businessman Landless Farmer

Commodity Full-security
Working Capital Non-crop
Home Loan
Crop Loan Partial-security
Export Import
Education,Medical Loan
Instrumental

Working capital Business loan

Distribution
Poultry Home Lone Medical

One term Installment

Short-term Medium-term Short term

Individual Loan:
 Commodity Loan: Loans for Freeze, TV, Computer, Car, etc.
 Home Loan: Loan given to the fixed or low income people for housing purpose.
 Education/Medical Loan: To Non businesspersons in the need for medical or
education after being sure of his paying back ability.

Industry Loan

 Working capita loan: Loans given for meeting the need of Inventory, wages,
interest etc.
 Fixed asset loan: Loans given for establishment of fixed assets, re establishment
Etc.

Business loan

 Working capital loan: For maintaining every day s transaction firms need a great
deal of capital.
 Export Import Loan: For encouraging foreign trade go helps the traders to carry
on their trade by lending to them and discounting their bills.

Farmer
  Crop Loan: For buying crops and cows and fertilizer farmers need money. They
borrow the money from the bank

 Non crop loan: Farmers also need money for poultry husbandry purpose.

 Instruments loan: For Instruments needed for farming purposes like-tractor fertilizer
spray etc.

Land less

 Farmers who have land less than fifty percent or no land at all these loans are given
to them.

 Poultry loan: loans given for poultry purpose.

 Home loan: loans given for building home loans that don’t have houses.

 Medical: Loans given for medical purposes.

Classification Based on term

 Short term loans: This loan is sanctioned for less than one year. These are two
types: 1.Loans on demand 2.loans on short notice

 Middle term: Usually loans given within 1to 5 tear is called loans for middle term.

 Long term: Loans for more than 5 year is called long term loans.

Classification based on security

 No security loan: Loans sanctioned to any reliable person who have profound
goodwill, and without any security is called loans with no security

 Full security loans: Security is taken with a amount same to the amount of loan.

 Partial security: Security is not valued same amount as the loan but a percentage pf
the loan amount.
 Process of Giving Credit, Loan Sanction, Approval, Documentation,
Mortgage

Loan Sanction Activities

The respective unit office sanctions loan to the clients if it is between 2 & 5 lacs and then
send the sanction letter including all necessary charge documents to the asset operation
division for disbursement the loan. If the amount is higher than 5 lacs then the respective
unit office sends the proposal to SME head office for sanction. The head of SME sanctions
the loan and sends the sanction letter including all documents to the AOD for disbursement
and inform the respective unit office regarding sanction of the loan.

Select potential enterprise: For loan, in this step the CRO conduct a survey and identify
potential enterprise. Then they communicate with entrepreneurs and discuss the loan
program.

Loan Presentation: The function of CRO is to prepare loan presentation based on the
information collected and provided by the entrepreneur about their business, land property
(Where mortgage is necessary).

Collect confidential information: Another important function of a CRO is to collect

confidential information about the client from various sources. The sources of information
are suppliers regarding the client’s payment, customers regarding the delivery of goods of
services according to order, various banks where the client has account which shows the
banks transactions nature of the client.

Open client’s accounts in the respective bank: When the CRO decided to provide loan to
the client then he/she help the client to open a bank account where Dhaka bank has a
STD.A/c. Dhaka bank will disburse the loan through this account. On the other hand the
client will repay by this account. Although there is some exception occur by the special
permission of the authority to repay by a different bank account.

Fill up CIB form: CRO gives a CIB form to the client and the client fill and sign in it. In
some case if the client is illiterate then the CRO fill the form on behalf of the client. Then
CRO send the filled and signed form to the SME, head office.

Sending CIB to Bangladesh Bank: The SME, head office collects all information and
sends the CIB form to Bangladesh Bank for clearance. Bangladesh Bank return this CIB
form within 10-12 days with reference no.

CIB report from Bangladesh Bank: In the CIB report Bangladesh Bank uses any of the
following reference no:

 NIL: if the client has no loan facility in any bank or any financial institution then BB
(Bangladesh Bank) use ‘NIL’ in the report
 UC (Unclassified): if the client has any loan facility in any bank or financial institution and if
the installment due 0 to 5.99 then BB use UC in the report
 SS (Substandard): if the client has any loan facility in any bank or financial institution and if
the installment due 6 to 11.99 then BB use SS in the report
 DF (Doubtful): if the client has any loan facility in any bank or financial institution and if the
installment due 12 to 17.99 then BB use DF in the report
 BL (Bad lose): if the client has any loan facility in any bank or financial institution and if the
installments due for more than 18 or above months then BB use BL in the report. This report
indicates that the client is defaulter and the bank should not provide loan the client.
1.2 CIB Obtaining Process

CIB is a regulatory requirement for Loan Documentation. Credit Information Bureau (CIB)
of Bangladesh bank has a central database for all the lenders of Bangladesh. It contains the
total credit history of a client and act as the most dependable source to analyze the credit
worthiness of a prospective client. Obtaining the CIB clearance is a precondition of fund
disbursement and all type of Retail, SME and corporate loan require CIB report before
disbursement. For some retail unsecured assets, BBL obtains post-facto CIB clearance.
However, in most cases AOD obtains the CIB for a client before disbursement of fund.

To obtain a CIB report, AOD fills up the following Bangladesh bank prescribed forms for
each loan application:

 Inquiry Form: CIB – 1A: For each individual/ institution

 Inquiry Form: CIB – 2A: Owner information if borrower is institution
 Inquiry Form: CIB – 3A: Group/ related business information of borrower
 CIB Undertaking form “KA”: For each individual/proprietor/director/partner

These forms are filled up by the business units and sent to the CIB segment of AOD. CIB
segment maintains a central database for all the CIB inquiry forms. Each form is registered
under a Head Office serial number and a Branch/ Unit office serial number. Therefore
AOD prepares a forwarding letter with reference to 20 such inquiry forms, and sent them to
Credit Information Bureau of BB once in a day. Usually the CIB reports are received
within 7-10 working days.

After receiving the reports from BB, AOD prepares a summary of the report and put that as
reference in the loan file along with the photocopy of the CIB inquiry forms, undertaking
and copy of the original CIB report. For any mistakes made in the forms, writing wrong
spelling, incomplete name of individuals or institutions, CIB report may show error as
mismatch exists there. Those CIB inquiry forms require to be sent again correcting the
facts. CIB reports are usually updated quarterly and half-yearly.

Therefore most updated CIB reports are required to be obtained and CIB report is also
require for the same client for repeat loan. All forms need to be supported by the
Applicant’s Undertaking and all the forms are signed by designated officers of the business
division:

• Relationship manager for Corporate Application

• Sales Manager for Retail Application

1.3 Sanction letter

All letters addressed to the borrowers sanctioning credit facilities should be prepared in
duplicate and signed by two authorized officers of the Bank. Among the two authorized
Officer one must be a Manager of the Credit Team. If the terms and conditions of loan
sanction letter are acceptable to him the borrower should return the duplicate copy duly
signed.

Client’s information & Loan details is matched with the Credit approval then loan is
sanctioned & a Loan Sanction Number is auto generated.
1.5 Loan Account Opening and Activation

Using the “Loan Advance Module” of MYSIS, AOD opens a new “Loan Account” for a
specific SME loan application and link the “Customer ID No.” and “Link Account
information (Which is in JB, AB, RB, PBL, BKB, CBL and BBL)”. All SME unit offices
have a “mother account” in any of the 6 banks mentioned above. A client has to open the
“Link Account” in that branch of the Bank. Before fund Disbursement AOD checks
whether the voucher for fee received from the respective unit office and payment voucher
from client’s link account for loan processing fee, documentation fee along with VAT and
data verification charges against the loan are received with the loan application. The loan
applicants also pay Insurance Premium along with other fees. After opening the loan
account, the officer authorized to sanction a loan “Sanctions” the approved amount and a
“Repayment Schedule” is prepared. After the Sanctioning, the Loan is then “Activated” by
the authorized officer. After the activation of the loan account, details of the securities
provided for this facility, are entered in MYSIS. When the loan account is activated a
disbursement instruction is sent to the central “NOSTRO Account” of the respective Bank
(Any of the 6 banks). After the disbursement, AOD fill up the security and guarantors’
information in MYSIS.

1.6 Pre Disbursement Activities

Prepare loan file: Receiving all documents, Loan Administration Division prepare a loan
file with all documents received from the unit office.

Charge documents checking: The loan administration division checks all charge
documents. Following charge documents are checked:

 Money receipt (Risk fund)

 Sanction letter
 Demand promising note (With stamp of Tk 20/=)
 Letter of arrangement (With stamp of Tk 150/=)
 General loan agreement (With stamp of Tk 150/=)
 Letter of undertaken (With stamp of Tk 150/=)
 Letter of stocks and goods (With stamp of Tk 150/=)
 Letter of hypothecation book debt and receivable (With stamp of Tk 150/=)
 Letter of disbursement
 Photocopy of trade license (attested by CRO)
 Insurance (Original copy)
 Blank cheque with signature (one cheque for full amount and others same as no of installment
on Favor of Dhaka Bank, no date, no amount)
 Two guarantors (one must be Spouse/parents)
 If the loan provide for purchase of fixed assets or machineries and if the loan amount is over
Tk 50,000/= then the stamp of a certain amount is require)

For all SME Loans, Applications are received from the following sources:

 From Zonal / TM Offices – For loans up to their approval limit

 From SME Credit department- For loans exceeding the limit
 From Credit Committee - For any Loan exceeding the PPG Limit

“Approved” Applications are received everyday and a list of documents received is

prepared everyday especially for the Loan Applications received from SME Unit Offices
via GIS (Dispatch section). Ref. No are unique for the applications. Any repeat loan
application requires AOD to bring the previous loan documents and process depending on
the previous documents also.
AOD checks the documents from various aspects as described for the retail loan
applications. Besides, some other documents are checked like:

Prepare disbursement list: The loan administration division lists all new sanctioned
clients’ details and send a request to the treasury through internal mail.

Disbursement of the amount: Sending the list to the treasury of Bank for disburse the
amount, the treasury disburse the amount to the client through the mother account of the
clients bank. Bank disburse amount through any of the following banks corporate branch
nearer the Bank head office and the corporate branch of the respective bank send the
amount to the client account in the respective branch.

After the loan documents are checked by AOD, complete and OK files are sent for
disbursement. All the files in AOD have a checklist attached and the officers who check the
documents initial the files and approve them for disbursement clearance. Disbursement
process for retail, SME and corporate are different as discussed below:

Client ID is created in the AOD and details customer information are filled in client
information module. Repeat applicants have the same client ID but a new Loan Account
number. After the client ID creation, a list of clients is created where the following
information are entered:

 Client ID
 Name of the business
 Bank information (Rupali, Agrani, Janata, Pubali, City, BKB, and BBL)
 Accounts information (Branch, A/C No.)
 Approved Loan amount
 Unit Office & CRO information
 Disbursement date (As per the Loan application)

The senior officers check this file and after loan account activation, disbursement is made
to clients’ link account, which is mentioned in loan application. Disbursement process flow
is: Opened Loan A/C BBL Central Nostro A/C in that Bank BBL mother A/C for that Unit
Office Client’s Link A/C

1.7 Post Disbursement Activities

- Repayment Schedule Sent to Business Unit

- Loan details MIS entry
- Loan files sent to Central Archive

1.8 Recovery Activities

- Receive & print SMS/ Fax for installment deposits (SME)

- Check SMS data in MYSIS & resolve problems
- Post recovery checking with unit office/ branch statement
- Repayment schedule checking
- Inter branch Account- Other Bank’s Cheque clearing (for corporate)

Completing the disbursement, loan administration division sent to the respective Customer
Relationship Officer informing the disbursement of the sectioned loan.
Approval process

Loan Applications in the prescribed format shall be received at Credit Approval unit
recommended by sales team along with annexure that covers comprehensive LPF
information detailed in the Prudential Guideline advised by Bangladesh Bank.

The sales team is responsible for loan sales and should be the owner of the customer
relationship, and must be held responsible to ensure the accuracy of the loan application
submitted for approval. They should be familiar with the bank’s Credit Policy and PPG and
should conduct due diligence on new borrowers, purpose of the loans and guarantors.
During recommending for a client it is expected that the respective Officer has adhered to
Know Your Customer (KYC) and Money Laundering guidelines.

Credit Approval Sheet should have, as a minimum, the following details:

• Amount and type of loan(s) proposed.

• Purpose of loan(s)
• Loan Structure (Tenor, Covenants, Repayment Schedule, Interest)
• Security (if any)

The following diagram shows the flow chart of the loan disbursement procedure.
Client Loan Application > Risk Assessment Unit Recommendation > Credit Approval >
Asset Operation, Docs checking, loan disbursement & Custodian of securities

Approvals must be evidenced in writing, or by electronic signature. Approval records must

be kept on file with the Credit Applications. Loans and advances on becoming inoperative /
stuck up should not be renewed and / or re-scheduled without getting prior approval from
the Credit Committee.

Approval Authority

Lending Authority is delegated to officers related with approval individually by the

Managing Director in writing. Records of such authority are retained with Head of Credit.
Copies of all Delegation of Lending Authorities are also retained by Loan Administrations
Department. Any breaches from Lending Authority should be reported to the Managing
Director, Head of Credit and Head of Risk Management.

The executives charged with approving loans shall have relevant training and experience to
carry out their responsibilities effectively. As a minimum, approving executives should
have 5 years experience working in Branch / Sales team as a relationship manager or
account executive. However experience can be compromised to some extent if it is
sufficiently compensated by the following:

• Training and experience in financial statement, cash flow and risk analysis.
• A good working knowledge of Accounting.
• A good understanding of the local market.
Registered Mortgage
In case of the loan files where registered mortgage is a requirement, AOD checks the
following land documentation:

• Original Title deed for the entire mortgaged property.

• Bia Deeds/ Duplicate of Bia Deeds to support the Title Deed.
• Mutation of the Mortgaged Property by the concerned AC Land
• Original Khatians
• Revisional Survey (R.S) - most important one
• Bangladesh Survey (B.S) –if done and issued
• State Acquisition (S.A) & Catetal Survey (C.S) – If there
• Up to Date Duplicate Carbon Receipt for the property after mutation.
• Non Encumbrance Certificate issued by the Sub-Registrar’s Office for the past 12 years.
• Up to date Rental Receipt for the property.
• Mortgage deed between AB Bank Limited and the enterprise.
• Notarized Memorandum of Deposit of Title Deeds.
• Legal Opinion
• Power of Attorney in Favour of Bank
• If the business is situated in land owned by Parents/ Siblings/ Spouse –
• Mortgage given by third party (For Registered Mortgage)
• MDTD sign by all land owner (For Equitable Mortgage)
• PG or NOC (Non objection certificate by third party)
• Ward commissioner’s (warission) certificate in case of clients parent’s death

If any documentation deficiency is found, the concerned CRO, ZO is informed for

resolving the deficiency. After checking the required fees submission for Loan
Documentation, the application is sent for Insurance Premium Checking.

Insurance Premium Checking Risk issues while checking Loan Documentation:

• No Fluid or overwriting should be there

• Missing of seal and sign (Check all Pages)
• Missing of Signature verification by CRO
• Lack of witness CRO and Guarantor
• Missing of any clause of charge documents
• Missing Guarantors sign in Guarantee page
• Mismatch in Client’s Name, Business Name, Addresses and business type
• Incomplete documentation for registered mortgaged property
• Validity of licenses and deeds
• Bank’s name, client’s name, seal, signature and number of undated cheques

Besides, some particular licenses are required for categorized enterprises, like:

• Drug license (Medicine Business)

• BSTI (Food Business)
• Diesel / LP gas / Petrol (Fire license from Directorate of explosives)
• Saw Mill (Permission from District Forest Department)
Credit analysis
By credit analysis we mean analysis of eligibility for getting loan in light of application of
applicant. In credit analysis, the information related with applicant, logic and purpose of credit
should carefully be examined by the loan officer. If the process of analysis and capability of the
analyst is not up to mark, credit analysis will turn in vain.

Granting loan without analyzing loan applicant and the type of the loan is very risky.

Main things to be eligible for getting loan-

1. History of the financial loan transaction of future credit owner.

2. Uses of loan ability and the characteristics of the potential borrower.
3. Ability to repay the loan.
4. The strength of borrower’s equity to support any contingency.
5. Impact of present and future economic condition on the borrower’s ability to repay the
loan.
6. The presence of any special item which will hamper the regular cash flow stream of the
borrower.

Steps of credit analysis

Credit proposal should be analysis by some logical steps. There are eight steps for analysis. These
areas are-

1. Collection of basic data about the future credit holder.

2. Collection of basic data about the loan applied.
3. Contain more data and find out the spread for final analysis to reexamine the primary loan
risk.
4. Collection of more and full data.
5. Examine the sensitive information
6. Keen Analysis of the risk.
7. Take final decision after analysis.
8. According to positive decision, draw loan structure.

The above steps are discussed below-

1. Collections of basic data about the future credit holder:

Collections of information about the applicant from the past and present business financial
statement given by the applicant. Analysis about the personal characteristics of the future credit
holder whether he is involved in any forbidden activities such as gambling, drinking habit or any
other wrong activities.

2. Collection of basic data about the loan applied:

To know about the purpose of the loan for which the loan applicant applied for. The amount of the
loan and whether it is possible to implement the project by the amount. It is essential to collect the
information about. The source from where credit holder would repay the loan. It should also collect
the information if the credit holder took loan before and what is the condition of that loan. To know
about the market price of the asset which the credit is willing to pledge against the loan.

3. Contain more data and find out the spread for final analysis to reexamine the primary loan
risk:

 Examines the total political and economical risk.

 Identification and collections of positive and negative sides when conducting business.
 Evaluate the positive sides of cash inflow and probability of stability in perspective of
historical demand of the business.
 Consider the future result and essentiality of the business in light of the proposal of applied
loan and repayment of the loan.
 Evaluate the impact balance sheet of the trader after uses of the loan.
 Taking the next steps after determine the deepness of the loan.

4. Collections of more and full data:

 Collections of detailed descriptions about the proposed loan.

 Collections of detailed information about the applicant
 Collections of speed of activities of the business.
 Detailed description about the economic purpose and plan of the business.

5. Examine the sensitive information:

 Inspection of the proposed business area.

 Collection of detailed information regarding traditional bank-client and other business
related relationships.
 Inspection of the internal business environment.
 Analyzing information regarding credit purchase or sale and the availability of getting
credit opportunity from the suppliers and the relation with suppliers.
 Analysis the examined financial statement.

6. Keen analysis of the risk:

 Analysis of the honesty and integrity towards the proposed business of the owner, employer
employee, staff and labor of the company.
 After considering the success of the management of the business, it should examine
mentality of the owner to repay the loan.
 Evaluate the possible political and economical risk.
 Identification of positive and negative sides of conducting of the business.
 Evaluate the probability of direction in consideration of proposed loan.
 Determination of demand of current capital for present and near future.
 Evaluate the security of pledged asset.

7. Take final decision after analysis:

 Determine the stage of risk for proposed loan.

 If the stage of risk is not acceptable then loan proposal should b closed with negative
comment.

8. Taking positive decision, draw the loan structure:

 Determination of types of loan, duration of loan and interest in light of risk of the
loan.
 Loan analysis process should be stopped if the condition for applied loan is not
acceptable.
 Loan should be permissible by the authority properly.
 Sit for discussion with the credit holder about the acceptable condition.
 Preparation and maintain documents of the loan permitted.

5. Analysis of
sensitive risk
6. Keen
4. Collection of analysis of risk.
full data.

7. Taking
3. Collection of final
primary risk related decision.
based on
information.
analysis.

2. Collections
of loan related
information.

1. Collections of
credit holder’s
information.

8. Give Loan structure based on

positive decisions.

Graph: steps of credit analysis

View Points of Credit Analysis:

Credit activity is very important step of a bank. It is very important step because most of the credit
amount comes from depositors which bank should pay on demand. So if bank unable to pay on
demand then bank face difficulty with his depositors. In fact, credit activity is the main source of
banks profit. Banks have no best alternative so utilize depositor’s faith to continue credit activity.

Bank takes some necessary information from borrower for recovery of loan and analysis his
situation. This analysis is called Credit Analysis. In 1975 Jack R Craggier describes this in his “An
Ocean of 5 C-s”. Five Cs very famous in many countries. CAMPARI, PARSAR and 5R’s this 3
view points effective through same principle.

Credit Analysis

CAMPARI PARSAR 5Rs 5Cs

1.C=Character 1. P=Purpose 1.Responsibility 1. Character
2. A=Amount 2. A=Amount 2. R=Reason
3.M=Means 3.Reliability 3. Reliability 2. Capacity
4. P=Purpose 4. S=Source of repayment 4.Resource 3. Capital
5.A=Accountability 5. A=Ability 5.Return Possibility
6. R=Risk 6.Return Possibility 4. Collateral
7.I=Insurance 5. Condition
Though 4 types of analysis are used in the above graph, “5-C” analysis is most widely used. This
“5-C” analysis is presented below:

5-Cs What does it indicate How it is determined

Character Will the potential borrower a. Prior experience with this bank regarding
repay the loan according to loan
the loan contract? b. Information from other lenders.
c. Justification of the information provided in
the loan application.
Capacity Does the loan applicant have a. Monthly income over monthly
the capability of repaying the expenditure
loan? b. Stability of the source of income
c. Stability of the financial position
d. Positive liquidity condition
Capital Does the loan applicant have a. Amount of net asset
the opportunity to collect b. Amount of personal assets in case of
capital from alternative proprietorship or partnership business.
sources to face the c. Claimable fund of shareholders
contingencies and repay the
loan?
Collateral Will the monetary value of a. Loan to deposit ratio
the collateral be sufficient to b. Easy salability
satisfy the full loan
obligation?
Condition Will the current financial a. Forecasting of general economic
position of business predict condition during the loan period
any possibility of arising b. The possibility of the stability of the
problem in repaying the source of income of the loan applicant
loan? under the forecasted situation.
Use of Financial Ratios for Credit Analysis

Ratio analysis is measure of comparison. From Financial statement we measure some core ratio
analysis for credit analysis.

Liquidity Ratios:

These ratios indicate the ability to payments its short term loan. They include the Current Ratio,
Quick Ratio, and Working Capital.

* Current Ratio = Total Current Assets / Total Current Liabilities

*Quick Ratio = Total Current Assets-Inventory / Total Current Liabilities

*Working Capital = Total Current Assets - Total Current Liabilities

*Current asset to Inventory Ratio=Inventory/Current Assets

Profitability ratios:

These ratios indicate that how much profit is being generated.

*Gross Margin Ratio = Gross Profit / Net Sales

*Net Profit Margin Ratio = Net Profit before Tax / Net Sales

Operations ratios:

These ratios indicate that measure the effectiveness of internal operations.

*Total Asset Turnover=Turnover/Total Assets

* Fixed Asset Turnover= Turnover/Fixed Assets
*Profit to Sales Ratio=profit/sales

Leverage ratios:

The leverage ratios measure the company's use of borrowed funds in relation to the amount of funds
provided by the shareholders or owners.

*Loan to Asset Ratio=Total Loan/Total Assets