Mahruf’s Helpline for The Banking Professional Examination

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S. M. Mahruf Billah

The Institute of Bankers, Bangladesh (IBB)

5th Banking Professional Examination, 2025
AIBB
Credit Operations and Management (COM)
Subject Code: 2 0 2
Time-3 hours
Full Marks-100
Pass marks-45
[N.B. The figures in the right margin indicate full marks. Answer any Five Questions.]
1. (a) What is the role of credit management in the banks? 5
(b) Briefly discuss different types of relationship between banker and customer. 8
What additional obligations come with this special relationship?
(c) Discuss the qualities of a good credit proposal? 7

2. (a) Write briefly about the financial statements prepared as per International 5
Accounting Standards (IAS).
(b) Discuss the three commonly used tools of Financial Statement Analysis. 6
(c) Write the ratings and score of 4-notched rating system under Internal Credit 5+4=9
Risk Rating Scores (ICRRS). Which types of loans are not applicable for
ICRRS?

3. (a) What is credit investigation? 5

(b) Discuss 6Cs that a banker should consider at the time of credit investigation 7
process.
(c) What are the general principles of good lending a banker should follow while 8
sanctioning credit to the customer?

4. (a) Define CMSME credit in light of Bangladesh Bank guidelines. How banks can 3+5=8
ensure inclusive financial growth through CMSME financing?
(b) When a loan should be classified on the basis of qualitative judgment? 6
(c) Define credit appraisal and explain its importance in the context of project 6
financing.

5. (a) What are the different types of default? Briefly discuss. 5

(b) Discuss the indicators of High Credit Risk in bank. 8
(c) What is loan provisioning? Discuss the role of provisioning in managing 3+4=7
credit risk.

6. (a) What are the potential areas of financing through leasing in Bangladesh? 5
(b) Why is leasing considered a preferred mode of financing? 8
(c) “Leasing is a task of NBFIS, so a bank should not get involved in leasing”- Do 7
you agree? Why or why not?

7. (a) Imagine you are a financial analyst tasked with implementing a portfolio 4
credit risk management strategy for a bank. Outline specific techniques you
would take to ensure effective risk mitigation and diversification within the
portfolio.
(b) Discuss the different techniques of capital budgeting. 6

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(c) XYZ Company Ltd. is considering to invest in a project. It has the following 4+4+2
options: =10
Cash Flows
Year 0 1 2 3
Project A (1,00,000) 40,000 50,000 40,000
Project B (120,000 60,000 50,000 80,000

Cost of capital for both projects is 10%, PV factor for last year is 0.90909, for
2nd year is 0.82645 and for 3rd year is 0.75131. On the basis of the above
information, compute the following:
i) Pay-back period for project A and B.
ii) NPV for project A and B
iii) Which project should be considered according to NPV?

8. (a) What is lien? What are the items over which a banker does not have lien? 3+5=8
(b) What are the main causes of non-performing loan in Bangladesh? 7
(c) How can you ensure effective credit monitoring system? 5

9. Write the difference between the following (any Four) 5×4= 20

(i) Rescheduling and Restructuring
(ii) Equitable financing and debt financing
(iii) Lease financing and Hire purchase
(iv) Margin and Drawing power
(v) Overdraft and Cash Credit
(vi) Lien and Mortgage

10. Write short notes (any five) 4X5= 20

(a) Break-even Point
(b) Off-shore banking
(c) Eligible collateral
(d) Internal Rate of Return (IRR)
(e) Loan Write-off
(f) Sensitivity analysis
(g) Alternative Dispute Resolution (ADR)
(h) Set-off
Comprehensive Books for preparing
The Banking Professional Examination (JAIBB & AIBB)
Written and AIBB Credit Operations and Management
Compiled by Published by Risk Management in Financial Institutions
Trade Finance and Foreign Exchange
S. M. Mahruf Billah Mullick Brothers
Treasury Management in Financial Institutions
Joint Director
Bangladesh Bank JAIBB Monetary and Financial System
Collect your Copy from: www.rokomari.com
Or
Mullick Brothers Book shop located at Banglabazar, New Market & Nilkhet, Dhaka

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1. (a) What is the role of credit management in the banks? 5

Credit management refers to the process of managing a bank's loan portfolio to ensure that the risk
taken is balanced with the returns expected. This process involves various activities such as credit
analysis, credit assessment, and loan portfolio management. The goal of credit management is to
minimize credit risk and maximize returns for the bank.
The significance of credit management in the banking industry cannot be overstated. Effective credit
management practices can result in a 15% reduction in bad debts and a 5% increase in profits for banks,
according to a recent study. Banks that fail to implement effective credit management practices face the
risk of loan losses, which can have a severe impact on the financial performance of the institution.

2. (b) Briefly discuss different types of relationship between banker and 8

customer. What additional obligations come with this special
relationship?
The relationship between banker and customer is of utmost importance. The relationship between a
bank and its customers can be broadly categorized into General relationships and Special relationships.
A. General Relationship
The relationship arising out of these two main activities is known as General Relationship.
a) Debtor and Creditor
When a ‘customer’ opens an account with a bank, he fills in and signs the account opening form. By
signing the form he agrees/contracts with the bank. When a customer deposits money in his account
the bank becomes a debtor of the customer and the customer a creditor. The money so deposited by
the customer becomes the bank’s property and the bank has a right to use the money as it likes. The
bank is not bound to inform the depositor of the manner of utilization of funds deposited by him. Bank
does not give any security to the depositor i.e. debtor. The bank has borrowed money and it is only
when the depositor demands, the banker pays. Bank’s position is quite different from normal debtors.
While issuing Demand Draft, Mail/Telegraphic Transfer, the bank becomes a debtor as it owns money to
the payee/ beneficiary.
b) Creditor and Debtor
Lending money is the most important activity of a bank. The resources mobilized by banks are utilized
for lending operations. Customer who borrows money from the bank own money to the bank. In the
case of any loan/advances account, the banker is the creditor and the customer is the debtor. The
relationship is the first case when a person deposits money with the bank reverses when he borrows
money from the bank. Borrower executes documents and offers security to the bank before utilizing the
credit facility.
B. Special Relationship
In addition to these two activities banks also undertake other activities mentioned in Sec.6 of the
Banking Regulation Act. In addition to opening a deposit/loan account banks provide a variety of
services, which makes the relationship more wide and complex. Depending upon the type of services
rendered and the nature of the transaction, the banker acts as a bailee, trustee, principal, agent, lessor,
custodian, etc.

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a) Trustee and Beneficiary (Bank as a Trustee and Customer as a Beneficiary)

b) Bailee and Bailor (Bank-Bailee and Customer- Bailor)
c) Lessor and Lessee (Bank- Lessor and Customer- Lessee)
d) Agent and Principal (Bank- Agent and Customer- Principal)
e) Indemnity holder and Indemnifier (Bank-Indemnity holder and Customer-Indemnifier)
f) Hypothecator and Hypothecatee (Bank- Hypothecatee and Customer- Hypothecator)
g) Pledger and Pledgee (Bank- Pledgee or Pawnee and Customer- Pledger or Pawnor)
h) Mortgagor and Mortgagee (Bank- Mortgagee and Customer- Mortgagor)
i) As a Custodian
j) As a Guarantor
k) Advisor and Client (Bank- Advisor and Customer- client)

1. (c) Discuss the qualities of a good credit proposal? 7

When the time comes to prepare your loan proposal, there are a few key elements to gather regarding
how much money your company needs to grow and how you plan to repay the loan. The features of a
good credit proposal are as follows:
(a) Executive Summary: This is your chance to describe your business and how the money you
borrow will be used to create success. This summary should introduce the details included in
the proposal.
(b) Purpose of the Loan: This should be a detailed description of how you’ll use the borrowed
funds through documentation, cost estimates, expansion proposals, and other relevant
information.
(c) Financial Statements: This section should include both business and personal financial
statements. Some lenders require individual tax returns for up to the last three years.
(d) Marketing Plan: It’s obvious to most that a loan proposal would include detailed
information about how the loan proceeds will be used paying for new staff, buying new
materials, and renting new operating space — however, many neglect to explain how the
company will source new customers to buy the end-product.
With today’s fast-moving digital communication platforms, bankers are taking a closer look at an
applicant’s marketing plans. You must address close competitors, pricing fluctuation, unpredictable
habits of buyers, and shifting trends. Knowing the risks of your business and having well-thought-out
ways to deal with them will show lenders that you’re prepared for the responsibility of a business loan.
Make sure the marketing section of your business loan proposal answers the following questions:
i. Who exactly are you trying to reach? Roughly how many of those people are out there?
This information is crucial in determining whether or not your business will succeed in the long–run.
Never assume that your target audience is “everyone.” Hone in on those most likely to spend money on
you over and over again.
ii. Who are your direct competitors? Why should your customers choose you over other
available options?

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Once you know whom to target, outline the competitive advantages that your company provides and
others do not. Think you don’t have any competition? Think again. There will always be another business
out there just like your own trying to solve the same problem for customers.

2. (a) Write briefly about the financial statements prepared as per 5

International Accounting Standards (IAS).
After transactions are identified, recorded and summarized, a set of FSs are prepared from the
summarized accounting data. A complete set of FSs comprises:
(a) A Balance Sheet
(b) An Income Statement
(c) A Retained Earnings Statement or Statement of Change in Equity
(d) A Cash Flow Statement and
(e) Notes, comprising a summary of significant accounting policies and other explanatory
notes.
Note: The Income Statement, Statement of Change in Equity, and Cash Flows Statement are all for a
period of time, whereas the Balance Sheet is for a point in time.

2. (b) Discuss the three commonly used tools of Financial Statement Analysis. 6

We use various tools to evaluate the significance of financial statement data. Three commonly used
tools are as follows.
 Horizontal analysis evaluates a series of financial statement data over a period of time.
 Vertical analysis evaluates financial statement data by expressing each item in a financial
statement as a percentage of a base amount.
 Ratio analysis expresses the relationship among selected items of financial statement data.

2. (c) Write the ratings and score of 4-notched rating system under Internal 5+4=9
Credit Risk Rating Scores (ICRRS). Which types of loans are not
applicable for ICRRS?
The ICRR consists of 4-notched rating system covering the Quantitative and Qualitative parameters. The
ratings and scores are mentioned below:
Rating Score
Excellent >= 80%
Good >= 70% to < 80%
Marginal >= 60% to < 70%
Unacceptable <60%
Exceptions to Credit Risk Rating
a) For a newly established company with no meaningful financial statements, the bank can apply a
rating based on the projected financial statements and the rating of the borrower shall not be

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better than Marginal. However, the bank must run the rating module once the full year audited
financial statements become available reflecting customer's full-fledged business operation.
b) For the companies under large business conglomerate, rating substitution is allowed based on
the rating of Corporate Guarantor of the performing concern of the same group or holding
company. In case of rating substitution based on the corporate guarantor, the guarantee must
be legally enforceable, irrevocable and unconditional. In this regard, a full-fledged ICRRS shall be
conducted on the guarantor to determine whether the guarantor has the ability to support the
borrower at the time of need. However, the rating substitution will no longer be required if
borrowing entity's rating becomes eligible for acceptable grading. If corporate guarantee is
required to continue then the ICRRS of both corporate guarantor of performing concern and the
borrowing entity will be done.
c) Rating generation is discouraged using outdated financial statements (i.e. available audited
financial statements are more than 18 months old). In exceptional cases where there is valid
reason for delay in audited financial publication, out dated financial statements can be accepted
only if up to date unaudited financial statement is submitted, but the rating shall not be better
than “Marginal”. In this case, the condition mentioned in para 1.10(a) is to be followed.
d) Rating shall be downgraded if there is any internal/external factors or information that have not
been captured in the rating/financial statements (because they are post balance sheet events)
having the material impact on the customer's business operation and loan repayment. A
conservative and consistent approach should be used in employing judgments in the case of
events like the death of key sponsor, prolonged factory shut down, deteriorating financial
profile reported in interim financial statements, change in tax structure/duty, large expansions
funded by debt, excessive leverage ratio, merger- acquisition, etc.
e) For the proprietorship & partnership concern where preparation of the audited financial
statements is not mandatory, an unaudited financial statement can be used for rating
generation but due diligence should be conducted on the accuracy of the financial statements
with high-level checking of the bank statements recording the sales collection, stock/receivable
position, peer analysis, bank liabilities, etc.
f) If the customer is in multiple lines of business, the most appropriate sector/industry shall be the
line of business generating the highest portion of total revenue.
g) This guideline and enclosed model will be the minimum standard of risk rating; and banks may
adopt more sophisticated risk rating model in line with the size and complexity of their business.
3. (a) What is credit investigation? 5
Credit investigation is the process of assessing an individual's or company's creditworthiness before
granting them credit.
 Credit is defined as the confidence of the lender on the ability and willingness of the borrower
to repay the debt as per the schedule of payment. As per this definition, we must build
confidence on the borrower’s ability and willingness. An in-depth analysis and investigation is a
pre-condition for building confidence on the borrower’s ability and willingness.

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 Investigation refers to the careful and official examination of facts about something. It is also
defined as a process of collecting information and evidences about something that helps to form
an opinion about the subject under investigation.
 Credit investigation refers to a process of carefully examining and assessing credit proposal and
other information from different dimensions for the purpose of collecting information and
evidences that will help forming an opinion regarding the credit. Credit investigation helps
greatly in the process of selecting quality borrower.

3. (b) Discuss 6Cs that a banker should consider at the time of credit 7
investigation process.
Before allowing credit facility a banker should be satisfied that the applicant qualifies the following
seven essentials which may be termed as 7 Cs. namely-
1. Character
2. Capacity
3. Capital
4. Condition
5. Collateral
6. Cash Flow
7. Common Sense
Credit investigation of a borrower may be completed in the following two stages:
 Collecting information;
 Assessing collected information

3. (c) What are the general principles of good lending a banker should follow 8
while sanctioning credit to the customer?
It explains that bank lending involves granting credit to borrowers at interest, based on collateral
security to be repaid later. The key principles of sound lending are safety, liquidity, dispersal, security,
and remuneration.

4. (a) Define CMSME credit in light of Bangladesh Bank guidelines. How banks 3+5=8
can ensure inclusive financial growth through CMSME financing?
In light of the National Industrial Policy 2016, Cottage, Micro, Small and Medium Industrial Enterprises
(CMSME) are defined as follows:
Type of Subsector Criteria for determining the type of industry
industrial
enterprise Value of total fixed assets Number of manpower
of industrial establishment employed/working in
including replacement cost industrial establishments
excluding land and factory
buildings
Cottage Manufacturing Below 10 lakh taka It will consist of other members

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industry Industry including family members but

not more than 15 people
Micro Manufacturing 10 lakh to below 75 lakh 16 to 30 people or less
Industry Industry taka
Service Below 10 lakh taka Maximum 15 people
Industry
Small Manufacturing 75 lakh to below 15 crore 31 to 120 people
Industry Industry taka
Service 10 lakh to below 2 crore 16 to 50 people
Industry taka
Medium Manufacturing More than 15 crore but not 121 to 300 people; But
Industry Industry more than 50 crore taka maximum 1000 for readymade
garment industry/labour
intensive industry
Service 2 crore to 30 crore taka 51 to 120 people
Industry

4. (b) When a loan should be classified on the basis of qualitative judgment? 6

BRPD Circular No-04 of September 23, 2012:
If any uncertainty or doubt arises in respect of recovery of any Continuous Loan, Demand Loan or Fixed
Term Loan, the loan will have to be classified on the basis of qualitative judgment be it classifiable or not
on the basis of objective criteria. If any situational changes occur in the stipulations in terms of which
the loan was extended or if the capital of the borrower is impaired due to adverse conditions or if the
value of the collateral decreases or if the recovery of the loan becomes uncertain due to any other
unfavorable situation, the loan will have to be classified on the basis of qualitative judgment.

4. (c) Define credit appraisal and explain its importance in the context of 6
project financing.
Credit appraisal process is an essential tool for investment decision and project selection. It is the prime
step in the process of decision making in respect of sanctioning of assistance by financial institutions.
However, credit appraisal may be defined as a detailed evaluation of the credit proposal to determine
the technical feasibility, economic necessity, marketing prospect, financial viability of the project and
managerial competence required for its successful operation. The main objectives of credit appraisal
are:
a) To decide whether to accept or reject the investment proposal.
b) To recommend, if it is not designed properly, in which way it should be redesigned or
formulated so as to ensure better technical, financial commercial and economic viability.
Importance of Credit Appraisal
From the viewpoint of Bank/Financial Institution
 Identification of right borrower with acceptable level of credit risk
 Evaluation of the commercial, technical, and socio-economic feasibility of a project
 Compliance with banking and legal laws of the country

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From the viewpoint of the Borrower

 Being sure about the overall viability of a project to be undertaken.
 A way to receive suggestions to improve any shortcomings of the project.
From national point of view
 Optimum utilization of resources.
 Achievement of national objectives.

5. (a) What are the different types of default? Briefly discuss. 5

In credit lending, defaults can be broadly classified into financial defaults and technical defaults.
Financial defaults occur when a borrower fails to make required payments, such as interest or principal,
while technical defaults arise from violations of covenants or agreements within the loan contract.
Elaboration:
Financial Defaults:
These are the most common types of defaults and occur when a borrower fails to meet their financial
obligations, such as failing to make timely payments on loans, credit cards, or mortgages.
Technical Defaults:
These are non-financial violations of the loan agreement's terms and conditions, such as failing to
maintain necessary insurance on collateral, failing to meet certain performance targets, or violating
negative covenants, says the Corporate Finance Institute.

5. (b) Discuss the indicators of High Credit Risk in bank. 8

Indicators of High Credit Risk (not an exhaustive list)
 The level of loans is high relative to total assets and equity capital.
 Loan growth rates significantly exceed national trends and the trends of similar banks.
 Growth was not planned or exceeds planned levels, and stretches management and staff
expertise.
 The bank is highly dependent on interest and fees from loans and advances.
 Loan yields are high and reflect an imbalance between risk and return.
 The bank has one or more large concentrations. Concentrations have exceeded internal limits.
 Existing and/or new extensions of credit reflect liberal judgment and risk-selection standards.
 Practices have resulted in a large number of exceptions to the credit policy.
 The bank has a large volume and/or number of classified loans.
 Even among standard and special mention account loans, the portfolios are skewed toward
lower internal ratings.
 Classified loans are skewed toward the less favorable categories (doubtful and bad/loss).
 Collateral requirements are liberal, or if conservative, there are substantial deviations from
requirements.
 Collateral valuations are not always obtained, frequently unsupported, and/or reflect
inadequate protection.

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 Loan documentation exceptions are frequent, and exceptions are outstanding for long periods
of time.
 The bank liberally reschedules and/or restructures loans in a manner that raises substantial
concern about the accuracy or transparency of reported problem loan numbers.
 Quarterly loan losses, as a percentage of the total loan portfolio, are high and/or routinely
exceed established provisions.

5. (c) What is loan provisioning? Discuss the role of provisioning in managing 3+4=7
credit risk.
Provisioning is the act of keeping aside small sums of money from the profits generated by the firm in
anticipation of future losses. The role of provisioning in managing credit risk:
 Provisioning is an activity that is fundamental to credit risk management.
 Provisioning helps companies create funds that help the company absorb the expected loss.
 Provisioning helps give more accurate and smoothened financial statements. Shareholders are
not misled about the true financial position of the firm by implicitly understating the amount of
expenses
Provisioning has been made mandatory for financial institutions by the Basel norms. The Bank of
International Settlements has acknowledged the fact that the only way to truly manage credit risk is to
have reserve funds. The only question is how much should those reserve funds be. This is being updated
in the various versions of the Basel norms as well as by the International Financial Reporting Standards
(IFRS).

6. (a) What are the potential areas of financing through leasing in Bangladesh? 5
Lease financing is a contractual agreement between the owner of the asset who grants the other party
the right to use the asset in return for a periodic payment and the other party who is the user of such
assets. The owner of the party is known as Lessor and the user of the asset under such agreement is
known as lessee and the rental paid is known as lease rental.
The following potential areas can be brought under a lease agreement:
 Vehicles including trucks, ships and freight cars.
 Construction machinery including heavy equipment for drilling and other work.
 Agricultural machinery, tractors, combine harvesters and equipment of all types.
 Pipelines, roads, overpasses, substations and power lines.
 Digital communications and electronic equipment.
 Machine tools and other production equipment.
 Commercial and industrial buildings.
 textiles, food and beverage
 transport
 apparels and accessories,
 paper and printing
 pharmaceuticals
 construction and engineering

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 chemicals
 telecommunications
 and leather and leather products.

6. (b) Why is leasing considered a preferred mode of financing? 8

Leasing is often favored as a financing method due to its flexibility, reduced upfront costs, and the ability
to spread payments over time. It also allows businesses to avoid large capital investments and can be a
way to access equipment or services without the burden of ownership.
Here's a more detailed look at the reasons why leasing is considered a preferred mode of financing:
1. Reduced Upfront Costs:
 Leasing often requires a lower upfront payment compared to purchasing an asset, allowing
businesses to conserve cash and allocate funds elsewhere.
 Some leasing arrangements even offer 100% financing, meaning no upfront down payment is
required.
2. Flexibility and Control:
 Leasing provides flexibility in terms of lease terms and durations, allowing businesses to choose
options that best fit their needs and cash flow.
 Leases can be structured to match the expected cash flow benefits from the asset, making them
a good option for assets with predictable income streams.
 Businesses can often vary lease terms if the asset becomes obsolete, although this may come
with an increased cost.
3. Avoidance of Capital Investment:
 Leasing allows businesses to acquire assets without having to make a significant upfront capital
investment.
 This is particularly beneficial for businesses with limited capital or those looking to avoid tying
up large amounts of cash in assets.
4. Tax Advantages:
 Lease payments can often be tax-deductible, reducing a business's overall tax liability.
5. Risk Management:
 In operating leases, the lessor assumes the risk of obsolescence, which can be advantageous for
businesses that want to avoid the risks associated with owning outdated assets.
 Leasing can also help businesses manage the risk of technology upgrades, as they can easily
upgrade to newer models without having to sell older assets.
6. Simplified Asset Acquisition:
 Leasing can streamline the process of acquiring assets compared to the more complex process
of purchasing and financing an asset.
 It can also be a faster and more straightforward process than negotiating a traditional loan
agreement.

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7. Other Benefits:
 Leasing can help businesses maintain a competitive edge by ensuring they have access to the
latest technology and equipment.
 It can also allow businesses to focus on their core activities rather than managing assets.
6. (c) “Leasing is a task of NBFIS, so a bank should not get involved in leasing”- 7
Do you agree? Why or why not?
The statement "Leasing is a task of NBFIs, so a bank should not get involved in leasing" is not entirely
accurate. While leasing is a common service offered by Non-Bank Financial Institutions (NBFIs), banks
can also participate in leasing, and often do. The key difference lies in the structure and how the asset is
financed. NBFIs may primarily focus on leasing activities, while banks often offer leasing as part of a
broader financial services package.
Here's a more detailed breakdown:
NBFIs and Leasing:
 NBFIs, such as finance companies or leasing companies, specialize in providing leasing
services, focusing on structuring and managing lease agreements.
Banks and Leasing:
 Banks, while not the primary leasing providers, can offer leasing as a financial service, often
structuring lease agreements in a similar manner to loan financing.
Overlap and Competition:
 There is significant overlap between NBFIs and banks in the leasing market. Banks may offer
leasing to their existing customer base as a way to diversify their financial services and cater to
specific business needs.
Different Approaches:
 NBFIs often focus on specific types of equipment leasing, while banks might offer a broader
range of leasing options.
Regulatory Considerations:
 The regulatory framework for leasing in banks and NBFIs can differ, with banks potentially
subject to stricter guidelines related to credit risk and asset management.

7. (a) Imagine you are a financial analyst tasked with implementing a portfolio 4
credit risk management strategy for a bank. Outline specific techniques
you would take to ensure effective risk mitigation and diversification
within the portfolio.
A robust portfolio credit risk management strategy involves a systematic approach to identifying,
assessing, and mitigating credit risk within a portfolio of loans or credit exposures. This strategy typically
includes diversification, stress testing, credit scoring models, and ongoing monitoring of borrowers'
creditworthiness

7. (b) Discuss the different techniques of capital budgeting. 6

The most common capital budgeting techniques:

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i. Cash Payback Period (CPP)

ii. Internal Rate of Return (IRR) and
iii. Net Present Value (NPV)
iv. Annual Rate of Return (ARR)

Cash Payback
The cash payback technique identifies the time period required to recover the cost of the capital
investment from the net annual cash flow produced by the investment. Following illustration presents
the formula for computing the cash payback period assuming equal annual cash flows.
Cost of capital investment ÷ Net annual cash flow=Cash payback period
NPV
The net present value (NPV) method involves discounting net cash flows to their present value and then
comparing that present value with the capital outlay required by the investment. The difference
between these two amounts is referred to as net present value (NPV). Company management
determines what interest rate to use in discounting the future net cash flows.

Internal Rate of Return Method

The internal rate of return method differs from the net present value method in that it finds the interest
yield of the potential investment. The internal rate of return (IRR) is the interest rate that will cause
the present value of the proposed capital expenditure to equal the present value of the expected net
annual cash flows (that is, NPV equal to zero). Because it recognizes the time value of money, the
internal rate of return method is (like the NPV method) a discounted cash flow technique.
Annual Rate of Return
The final capital budgeting technique we will look at is the annual rate of return method. It is based
directly on accrual accounting data rather than on cash flows. It indicates the profitability of a capital
expenditure by dividing expected annual net income by the average investment. Following illustration
shows the formula for computing annual rate of return.
Expected annual net income ÷ Average investment= Annual rate of return

7. (c) XYZ Company Ltd. is considering to invest in a project. It has the following 4+4+2
options: =10
Cash Flows
Year 0 1 2 3
Project A (1,00,000) 40,000 50,000 40,000
Project B (120,000 60,000 50,000 80,000
Cost of capital for both projects is 10%, PV factor for last year is
0.90909, for 2nd year is 0.82645 and for 3rd year is 0.75131. On the basis
of the above information, compute the following:
i) Pay-back period for project A and B.
ii) NPV for project A and B
iii) Which project should be considered according to NPV?

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(i) Pay-back Period:

Project A:
Year 1: 40,000 → Remaining = 100,000 - 40,000 = 60,000
Year 2: 50,000 → Remaining = 60,000 - 50,000 = 10,000
Year 3: 40,000 → Fully recovered
Pay-back Period = 2 + (10,000 / 40,000) = 2.25 years
Project B:
Year 1: 60,000 → Remaining = 120,000 - 60,000 = 60,000
Year 2: 50,000 → Remaining = 60,000 - 50,000 = 10,000
Year 3: 80,000 → Fully recovered
Pay-back Period = 2 + (10,000 / 80,000) = 2.125 years

(ii) Net Present Value (NPV):

Project A:
NPV = -100,000 + (40,000 × 0.90909) + (50,000 × 0.82645) + (40,000 × 0.75131)
NPV = -100,000 + 36,363.60 + 41,322.50 + 30,052.40
NPV = 7,738.50

Project B:
NPV = -120,000 + (60,000 × 0.90909) + (50,000 × 0.82645) + (80,000 × 0.75131)
NPV = -120,000 + 54,545.40 + 41,322.50 + 60,104.80
NPV = 35,972.70

(iii) Conclusion:
Since Project B has the higher NPV (BDT 35,972.70 > 7,738.50), Project B should be considered for
investment.

8. (a) What is lien? What are the items over which a banker does not have 3+5=8
lien?
A lien is a legal claim or right a creditor has on a debtor's property or assets as security for a debt.
Banker's lien, a specific type, allows a bank to hold onto a customer's assets until the customer repays
their debt.
A banker generally does not have a lien on items received for safe custody, held in a fiduciary capacity
(like in a trust), or entrusted for a specific purpose. Additionally, a lien doesn't apply when there's an
express contract like a counter-guarantee or if there's no mutual demand between the bank and the
customer.

8. (b) What are the main causes of non-performing loan in Bangladesh? 7

Causes of NPL from the Banks’ side:
 Excessive interest rate, many other service charges and some secluded charges raised the
amount of installments of borrowers that kicked in as the key factor to loan default.
 The failure of banks to provide the loans to the borrowers within the stipulated time.
Relying on banks’ commitment borrowers invested partially in the business/project before

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getting bank loans and finally they incurred large amounts of loss due to the lack of timely
finance (long delay in actual disbursement).
 When the borrowers were defaulted because of loss in business, banks denied lengthening
the current loan or granting a new loan. As a result borrowers couldn‘t escape from the
difficulties, hardly keeping up the businesses amiably and failing to repay the loans on time.
 Borrowers claimed that many things were not clarified to them like upward adjustment of
interest rate, imposition of different charges etc. Also borrowers did not give due focus to
that part since they stayed busy getting the loan, without knowing the loan conditions
appropriately.
 In other cases, depending only on the personal relationship, bank managers sanctioned
loans without adequate collateral and proper analysis of business. In many of these cases,
improper documentation causes the loans to default.
 Some clients divert their funds for other activities as they face no proper monitoring.
 Nepotism in the loan sanctioning process often favored politically exposed persons (PEPs)
making the loan risky especially when nepotism is shown by top level management. In many
circumstances managers were deeply pressurized to disburse loans to the PEPs. In such
cases, loans had been disbursed without proper credit valuation or sanction-approach either
in terms of the viability of the project or the proper valuation of collateral..
 Sometimes, the ignorance of bank officials in the assessment of the necessity of loans leads
to loan default.
 The greed of bankers is also liable for making a vulnerable banking sector to some extent by
disbursing loans to risky clients. b. Debt for Consumptive Needs
Causes of NPL from Clients’ side:
 There are some habitual defaulters who are actually willfully providing wrong information to
take loans from banks without any intention of repayment. Because of imperfect information,
very often banks failed to properly identify this class of people.
 Financial illiteracy of many clients causes their loans to default. They usually own small
businesses and have no idea of the pros and cons of banking operations. Financial literacy would
help them avoid these kinds of situations.
 Fund diversion is one of the root causes of the creation of NPL. In such instances, management
diversified the fund and their business. One type of mentionable fund diversion is share market
investment from business money. Also, funds are diverted for medical purposes, family affairs,
repaying loans taken from various sources, house building, and other businesses etc.
 The installment size is too big or rescheduling period too small for borrowers to avail conditions
for rescheduling.
 Due to sales on credit, in many cases, small businessmen face losses in businesses. When they
fail to run businesses, they fail to recover the money from the debtors in due time (or totally
unrecovered),.
 In other states, borrowers use the bank-disbursed working capital for buying fixed assets. rather
than starting businesses. Eventually, the loan becomes defaulted because of this.

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8. (c) How can you ensure effective credit monitoring system? 5

To ensure an effective credit monitoring system, it's crucial to establish a robust framework
encompassing proactive measures, automated processes, and regular analysis of credit reports and
financial data. This involves setting clear credit policies, using specialized tools for monitoring, and
maintaining open communication with customers.
To minimize credit losses, monitoring procedures and systems should be in place that provides an early
indication of the deteriorating financial health of a borrower. At a minimum, systems should be in place
to report the following exceptions to relevant executives in CRM and RM team:
 Past due principal or interest payments, past due trade bills, account excesses, and breach of
loan covenants;
 Loan terms and conditions are monitored, financial statements are received on a regular basis,
and any covenant breaches or exceptions are referred to CRM and the RM team for timely
follow-up.
 Timely corrective action is taken to address findings of any internal, external or regulator
inspection/audit.
 All borrower relationships/loan facilities are reviewed and approved through the submission of a
Credit Application at least annually.

9. Write the difference between the following (any Four) 5×4= 20

(i) Rescheduling and Restructuring
Rescheduling and Restructuring
There is not much difference between the two terms when you just read it. However, there are key
differences between both.
 Rescheduling of loans means to extend or add extra time to your existing loan tenure, resulting
in a revision of your monthly installment amount so that you may be able to pay a lesser amount
each month. This can help the borrower buy some time to adjust the repayment plan and also
not default on their loans. But this could result in the borrower paying more in interest as they
will have to service the loan for a longer time.
 On the other hand, restructuring of loans means changing the type or structure of the existing
loan to help the borrower improve their current cash flow. An example of this can be converting
an overdraft into term loans. Restructuring is more of a prominent change in the terms and
conditions of the existing loan when compared to rescheduling. However you may also incur
additional administrative and legal cost on top of the usual interest charges.

9. (ii) Equitable financing and debt financing
 Debt financing involves borrowing money, which must be repaid with interest, while equity
financing involves raising capital by selling ownership shares in the company.
 Equity financing is raising capital by selling a portion of ownership in a company to investors.

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Feature Equity Financing Debt Financing

Ownership Investor becomes a partial owner No dilution of ownership
Repayment No repayment obligation Principal and interest must be repaid
Risk to Company Investor takes the risk Company bears the risk of repayment
Control Investor can have a say in governance Company retains full control
Cost Potentially lower cost in the long run Interest payments can be a higher cost
Collateral Generally no collateral required May require collateral

9. (iii) Lease financing and Hire purchase

Hire purchase and lease financing are both methods of acquiring assets, but they differ in key ways:
 Hire purchase allows you to own the asset after making payments, while lease financing
provides the right to use the asset for a specific period without acquiring ownership.
 With hire purchase, you become the owner after paying all installments, while with lease
financing; the asset remains the property of the lessor throughout the lease term.
Feature Hire Purchase Lease Financing
Ownership You become the owner Lessor owns the asset
Payments Installments include principal & interest Lease payments cover use of asset
Depreciation You claim depreciation benefit Lessor claims depreciation benefit
Asset Type Cars, equipment, trucks, etc. Land, buildings, properties, etc.
Duration Can be shorter or longer Generally longer than hire purchase

9. (iv Margin and Drawing power

)

In business and finance, drawing power refers to the amount a borrower can withdraw from their
working capital limit, typically a cash credit account, based on their current assets. Margin, on the other
hand, can refer to different things depending on the context. It can be the percentage a lender applies
to assets like inventory and receivables to determine the drawing power, or it can be the difference
between a product's selling price and its cost.
Feature Drawing Power Margin
Percentage applied to assets or difference
Definition The limit a borrower can withdraw
between prices/amounts
Based on assets, liabilities, and margin Deducted from assets or a difference
Calculation
percentage between values
Provides a buffer for lenders and can also
Purpose Provides working capital to businesses
refer to trading practices
Typically associated with cash credit limits Can be used in various financial contexts,
Context
and working capital financing including trading and business

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9. (v) Overdraft and Cash Credit

Cash credit and overdrafts are both short-term financing options for businesses and individuals, but they
differ in purpose, security requirements, and repayment terms.
 Cash credit is a structured loan with a fixed limit, typically used for working capital and requiring
collateral.
 Overdrafts, on the other hand, are linked to a current account and allow withdrawals exceeding
the balance, often for short-term needs and potentially unsecured.
Key Differences:
Purpose:
 Cash credit is for long-term working capital needs, while overdrafts are for short-term,
occasional cash flow gaps.
Security:
 Cash credit usually requires collateral, like inventory or receivables, while overdrafts may be
unsecured, relying on the account holder's credit history.
Repayment:
 Cash credit has a fixed repayment schedule, often within a year, while overdrafts have flexible
repayment terms, allowing for repayment as funds become available.
Interest:
 Both charge interest on the utilized amount, but cash credit may have a lower interest rate due
to the collateral.
Account Type:
 Cash credit often requires a separate account, while overdrafts are linked to an existing current
account.
Eligibility:
 Cash credit is generally available to businesses with a good credit history and collateral, while
overdrafts may be easier for businesses with limited credit or collateral.

9. (vi Lien and Mortgage

)
A lien is any official claim or charge against property or funds for payment of a debt or an amount owed
for services rendered. The “property” doesn’t necessarily have to be real estate, just something of value
owned by the debtor.

A mortgage is a loan that has been secured by real estate. Typically a mortgage gives the lender the
right to seize and sell your home if you default on the mortgage payments. A mortgage can become a
lien if the mortgagor goes into default, but otherwise a mortgage is not technically a lien.

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10. Write short notes (any five) 4X5= 20

(a) Break-even Point
The break-even point is the point at which total cost and total revenue are equal, meaning there is no
loss or gain for your small business. In other words, you've reached the level of production at which the
costs of production equals the revenues for a product.
¿ cost
Breakeven point=
(Sales price per unit−Variable costs per unit)
10. (b) Off-shore banking
 Offshore banking is the practice of keeping money in a bank account located in a different
country than the account holder’s home country. Reasons people may choose offshore bank
accounts include the potential for tax benefits, asset protection, convenience, security, privacy,
and higher interest rates.
 The holder of an offshore bank account can use the account to make and receive payments,
hold money, and set up savings and investment accounts in multiple currencies.
 There are also some risks associated with offshore banking, including the high costs of
setting up and maintaining an account, the possibility that the offshore bank could default,
and increased regulatory scrutiny.
10. (c) Eligible collateral
Eligible collateral refers to assets or securities that a lender or financial institution deems acceptable as
security for a loan, credit facility, or other financial transaction. These assets must be easily valued,
liquid, and legally transferable.
10. (d) Internal Rate of Return (IRR)
The internal rate of return method differs from the net present value method in that it finds the interest
yield of the potential investment. The internal rate of return (IRR) is the interest rate that will cause the
present value of the proposed capital expenditure to equal the present value of the expected net annual
cash flows (that is, NPV equal to zero).
Capital investment ÷ Net annual cash flows=Internal rate of return
10. (e) Loan Write-off
A loan write-off occurs when a bank removes a loan from its balance sheet because it's deemed
unrecoverable. This allows banks to reduce the reported amount of bad loans but doesn't eliminate the
underlying liability.

10. (f) Sensitivity analysis

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Sensitivity analysis is a financial model that determines how target variables are affected based on
changes in other variables known as input variables. It is a way to predict the outcome of a decision
given a certain range of variables.

10. (g) Alternative Dispute Resolution (ADR)

Alternative dispute resolution (“ADR”) refers to any method of resolving disputes without litigation. ADR
regroups all processes and techniques of conflict resolution that occur outside of any governmental
authority. The most famous ADR methods are the following: mediation, arbitration, conciliation,
negotiation, and transaction.

10. (h) Set-off

In banking, "setoff" (also known as "offset") refers to a mechanism where a bank deducts funds from a
customer's account to cover a debt or outstanding balance owed to the bank by the same customer.
This allows the bank to settle mutual debts without the need for separate transactions.

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