Credit Policy Guidelines

Credit Policy Guidelines
2014
Contents Unit I.................................................................................................................................... 2 Overview of Credit Policy Guidelines ................................................................................ 2 1.0 Introduction ............................................................................................................... 2 1.2 Why Credit Policy? ................................................................................................... 2 1.3 Objectives of Credit Policy:....................................................................................... 3 1.4 Scope of Credit Policy: .............................................................................................. 4 1.5 Guiding Principles ..................................................................................................... 4 1.6 Credit Principles ........................................................................................................ 6 Unit II .................................................................................................................................. 8 Operational Guidelines ........................................................................................................ 8 2.1 Credit Risk Management ........................................................................................... 8 2.2 Credit Approval Discretion & Authority and Responsibility of Management ........ 10 2.2.1Credit Approval Discretion (CAD) & Authority of Management ..................... 10 2.3 Role and Responsibility of the Board of Directors: ................................................. 11 2.4 Duties and Responsibilities of Loan Officer/Credit Department ............................ 11 2.5 Portfolio Management: ............................................................................................ 12 2.6 YBL Credit Prohibition: .......................................................................................... 13 Unit III ............................................................................................................................... 14 Bank Lending .................................................................................................................... 14 3.0 Retail Lending ......................................................................................................... 14 3.1 Home Loan .......................................................................................................... 14 3.2 Education Loan .................................................................................................... 15 3.3 Loans against Gold & Silvers .............................................................................. 16 3.4 Vehicles Loan ...................................................................................................... 17 3.5 Wholesale Lending .................................................................................................. 18 3.5.1 Business Loan ....................................................................................................... 18 3.5.1.1 Overdraft: ....................................................................................................... 18 3.5.1.2 Long Term Loan/Medium Term Loan:.......................................................... 18 3.5.1.3 Short Term Loan:. .......................................................................................... 18 3.5.1.4 Working Capital Loan:. ................................................................................. 18 3.5.2 Import/Export Loan .............................................................................................. 19 3.5.2.1 Letter of Credit (Sight/Usance):..................................................................... 19 3.5.2.2 Trust Receipt Loan:. ...................................................................................... 19
Baburam Subedi Page 0
2014
3.5.2.3 Packing Credit: .............................................................................................. 19 3.5.3 Bank Guarantee .................................................................................................... 19 3.5.4 Other Loans .......................................................................................................... 19 3.5.4.1 Hire Purchase Loan ........................................................................................ 19 3.5.4.2 Loan against Fixed Deposit ........................................................................... 20 3.5.4.3 Deprived Sector Loan .................................................................................... 21 3.5.4.4 Consortium Loan ........................................................................................... 24 3.5.4.5 Pledge Loan ................................................................................................... 25 3.5.6 Requirements ........................................................................................................ 25 3.5.7 Security ................................................................................................................. 27 3.5.8 Customer Control ................................................................................................. 28 Unit IV ............................................................................................................................... 29 Pricing and Procedure of Loan .......................................................................................... 29 4.0 Loan Pricing ............................................................................................................ 29 4.1 Pricing of Customer/Customer Group ..................................................................... 29 4.2 Credit Procedures .................................................................................................... 30 4.3 Internal Ratings........................................................................................................ 31 4.4 Credit Monitoring .................................................................................................... 31 4.5 Impaired Assets and their accounting procedure ..................................................... 32 4.6 Systems and Procedures .......................................................................................... 33 Unit V ................................................................................................................................ 34 FOLLOW UP AND REVIEW OF THE CREDITLINES................................................. 34 5.1 General: ................................................................................................................... 34 5.2. Follow-up of excess over limit: .............................................................................. 34 5.3 Follow-up of Securities and security related documents: ........................................ 34 5.4. Follow-up of Operations: ........................................................................................ 34 5.5 Defaults in Payments: .............................................................................................. 34 5.6 Review/Renewal of the Credit Lines: ...................................................................... 35 5.7 End of Credit: .......................................................................................................... 35 Unit VI ............................................................................................................................... 36 LEGAL ACTION .............................................................................................................. 36 Unit VII ............................................................................................................................. 37 LOAN WRITE-OFF.......................................................................................................... 37
Baburam Subedi
Page 1
2014
Unit I Overview of Credit Policy Guidelines

1.0 Introduction This policy is entitled Yarsha Bank Ltd., Credit Policy Guidelines 2071. Yarsha Bank Ltd is A class financial institution duly licensed by Nepal Rastra Bank. This Credit Policy Guidelines 2071 will be effective from the date of approval by the board of Yarsha Bank Ltd, and final approval from Nepal Rastra Bank. The word "policy covers matters ranging from high order strategy to administrative detail. It provides guidance for managerial thinking as well as action. A policy is a deliberate plan of action, usually based on certain principles indicating the priorities of decision makers about allocations of resources for achieving rational outcome. It is a written statement that communicates managements intent, objectives, requirements, responsibilities, and or standards. Lending is one of the core activities of banks. Banks earnings, profitability, reputation, net asset value etc., depend on its credit portfolio. A sound and healthy lending portfolio is must for banks survival. Nepal Rastra Banks issues guidelines from time to time relating to flow of credit and directives about credit discipline by the borrowers and banks. Keeping in view the economic conditions, fiscal deficit position of the country NRB issue directives to banks about credit. NRB announces monetary and credit policy each year keeping in view the significant changes in the regulatory framework for financial markets. The policy has direct impact on the lending policy of banks. 1.2 Why Credit Policy? In the process of financial intermediation banks are confronted with various kinds of financial and non-financial risks. These risks are highly inter-dependent. One area of risk can have ramifications for a range of other risk categories. Banks are attaching considerable importance to improve the ability to identify measure, monitor and
2014
control the overall level of risks undertaken. To mitigate the risk, banks prepare credit policy which contains guidelines for the entire credit process, from credit origination to problems in loan management and covers areas like mechanism for loan review, interbank exposure, country risk, credit rating framework, portfolio management and risk adjusted return on capital. Credit policy gives valuable guidance to the operational units in credit dispensation, building up a diversified portfolio of quality assets and credit monitoring. The policy also contains prudential limits to individual borrowers, non-corporate borrowers, entry-level exposure norms, substantial exposure limits, benchmark financial ratios, borrower standards, exposure limits, ceilings to industries, sensitive sectors, rating categories etc. For effective implementation of credit policy banks have also put in place a multi-tier credit approving system wherein an Approval Grid clears the loan proposals before being placed to the respective sanctioning authorities. 1.3 Objectives of Credit Policy: The main objectives of a credit policy are:

To minimize credit risk. To consciously focus on optimizing the use of capital funds and maintaining a comfortable and adequate liquidity to meet the demands of funds.
To strengthen the credit management skills, supervision and follow up measures for maintaining a healthy and quality credit portfolio in the bank for ensuring overall profitability.
To regulate and streamline the financial resources of the bank in an orderly manner for achieving objectives of the bank and to instill a sense of credit culture in the operating staff.
To provide need based and timely availability of credit to borrowers. To comply with various regulatory requirements, pertaining to exposure norms, priority sector norms, income recognition and asset classification guidelines, capital adequacy, credit risk management guidelines, etc., of Nepal Rastra Bank and other authorities.
Baburam Subedi
Page 3
2014
To comply with national priorities in achieving planned growth in various productive sectors of the economy.
To see that credit portfolio has a balanced mix from different viewpoints. To decide discretionary lending powers of various authorities
1.4 Scope of Credit Policy: The prime focus of the Yarsha Banks credit activities will be on the promotion of the indigenous business, Agricultural Business, Export/Import Business, Infrastructure Development Project, Hydro Electricity Project and other productive sectors of Nepal. However, Yarsha Bank will also extend credit to all others sectors within Nepal Rastra Bank guidelines. The board has the sole discretion to amend, delete, or add to any part(s) of this policy in order to protect the interests of Yarsha Bank Ltd, to accommodate and adapt to the changing business environment, or to comply with applicable laws and prevailing Nepal Rastra Bank directives. This is an internal and strictly confidential document for the use of YBLs board, management, staff, statutory body, and any person so authorized by the board. All YBL staff engaged in any stage of the credit activities should be aware of the contents and sprits of this policy. No any part of the policy shall be copied for any purpose other than for reference within the YBLs premises, unless otherwise specially permitted by the board or the CEO. 1.5 Guiding Principles Yarsha Bank Ltds credit portfolio planning and management shall be geared towards safe, secure, low-cost profitable operation with the optimum utilization of YBLs resources. Credit Risk Management will follow the principle of risk dispersion. High credit concentration in a single borrower group, industry type, sector, or geographical area will be avoided at all the times. For proper risk diversification, YBL will, as minimum requirement, follow prevailing NRB guidelines and definition with respect to portfolio concentration. The management may however set its own, more stringent guidelines that it feels are necessary to protect the interest of YBL.
2014
In order to compete effectively in the market place, YBL will search new business opportunity, apply new lending approaches and focus to develop credits products to meet the demand of markets forces. All credits facilities will be for activities that make sound economic sense and are for legitimate purposes. No loans, advances and any facilities shall be granted over and above single obligor limits prescribed by Nepal Rastra Bank. All loans, advances and facilities will be granted after obtaining security as defined in Section 8 of this policy manual. Blacklisted individuals and firms will not be provided new credit facilities by the bank. Similarly personal/ corporate guarantee from blacklisted individuals/ firms will not be accepted. In the event a current customer of the bank is declared blacklisted, the bank shall endeavor to exit the relationship with such customer as soon as possible. New Customer/Customer Group should always be welcomed but with a cautious approach until they have proven to be a good customer for the bank. Care should be exercised in committing large exposure to a new customer. Over dependence of bank on large exposure to a single Customer/Customer Group (Top 25 names) should always be at the comfortable level. Exposures to top 25 names should not exceed more than 35% of its total portfolio. Exposures backed by Fixed Deposit receipts, Bank Deposits, Government Bonds, NRB Debt instruments, Unconditional guarantee/s issued by multilateral institutions including the World Bank, Asian Development Bank and IFC, Unconditional guarantee/acceptance from a bank which rated by an reputed rating agency and has a minimum of A+ rating, and 1st class Bank
Baburam Subedi
Page 5
2014
categorized by Nepal Rastra Bank from time to time should be excluded from the exposures for this purpose. If more than one-business entities exist in one obligor group, cautious approach will be taken by the bank while sanctioning loans, advances and other facilities to these entities. Diversification of the loan portfolio is critical to the bank and new investment opportunities should be capitalized and stressed upon. To compete in the market effectively and improve its present position among commercial banks of the country, emphasis shall be given to developing and offering innovative and new products to the customers. The bank shall adhere to the norms described by the NRB in maintaining Credit/Deposit (CD) and or Capital + Credit/ Deposit (CCD) ratio. However, profitability part shall not be ignored while taking risk exposure. The board of the bank will be notified with the monthly average CD ratio. The bank will endeavor to gradually narrow down the gap between interest and non-interest income. Conscious efforts will be made to maintain the ratio of nonperforming loans (as defined by the NRB as restructured, substandard, doubtful and bad category) to total risk asset exposure below industrial norms. The bank shall not encourage ever-greening loans to finance and repay other loans, advances and facilities outstanding with YBL. 1.6 Credit Principles
All credit facilities must make economic sense and must be for a legitimate
purpose. The objective of the financing must be regularly monitored.
The six Cs of lending should be properly analyzed:

2014
Character: The integrity of the borrower should be determined to ensure their willingness to pay. Capacity: Facilities should be extended to the customers who have adequate cash flows and the capacity to repay. Condition: Only extend credit if the bank sufficiently understands the risk and condition in which the facilities are extended. Collateral: Ensure that the facility is backed by acceptable and adequate collateral. Competence: Be satisfied to management capability of the customer. Capital: Be satisfied as to the adequacy of the capital.
Baburam Subedi
Page 7
2014
Unit II Operational Guidelines

2.1 Credit Risk Management Credit risk is the major risk that bank exposed during the normal course of lending and credit underwriting. Within Basel II, there are two approaches for credit risk measurement: the standardized approach and the internal ratings based (IRB) approach. Due to various inherent constraints within the Nepalese banking system, the standardized approach in its simplified form, Simplified Standardized Approach (SSA), has been prescribed in the initial phase. Credit risk is the probability that a Banks borrower or counter party will fail to meet its payment obligations in accordance with the terms of approval of the credit. This includes non-repayment of capital and/or interest within the agreed time frame, at the agreed rate of interest and in the agreed currency. The goal of credit risk management is to maximize a bank's risk-adjusted rate of return by maintaining credit risk exposure within acceptable parameters. The effective management of credit risk is a critical component of a comprehensive approach to risk management and essential to the long-term success of any banking organization. For most banks, loans are the largest and most obvious source of credit risk; however, other sources of credit risk exist throughout the activities of a bank, including in the banking book and the trading book, and both on and off the balance sheet. Banks increasingly face credit risk in various financial instruments other than loans, including acceptances, interbank transactions, trade financing, foreign exchange transactions, and in the extension of commitments and guarantees and the settlement of transactions. YBL has developed methodologies to assess the credit risk involved in exposures to individual borrowers or counterparties as well as at the portfolio level. The credit review assessment of capital adequacy, at a minimum, covers risk rating systems, portfolio analysis/aggregation, large exposures and risk concentrations. Internal risk ratings are an important tool in monitoring credit risk and supporting the identification and measurement of risk from all credit exposures, and are integrated into our overall analysis of credit risk and capital adequacy. The ratings system provides detailed ratings for all assets, not only for problem assets.
Baburam Subedi
Page 8
2014
Head Office the credit division critically analyzes the proposal from different perspectives in line with statutory, regulatory and internal guidelines. Thereafter, if the business proposal is found to be credit worthy, it is placed in the credit committee. The Credit Committee is comprised of seasoned bankers who evaluate credit proposals. The committee analyzes in depth financial as well as non financial information regarding the borrower such as business history, market situation, futures prospects of the market, managerial capabilities, cash flow and then declines or recommends approval of the designated credit authorities. To ensure proper and adequate risk analysis and timely customer service, our credit policy and procedures guide (CPPG) provides various layers in the credit approval process. The CPG has conferred specific discretion ranging from the General Managers to the Executive Credit Committee, the penultimate credit authority of the Bank. Adoption of international standards via our in-house Credit Policy and Procedures Guide. Formation of Credit Quality Control (CQC) unit for monitoring the quality of credit, both at the account level and portfolio level.
Regular review of the credit portfolio by the senior Management with periodic reporting to the Board of Directors.
Separate independent audit and inspection of borrowers by internal auditors in addition to audit and inspection by statutory auditors.
Strict adherence to the prudential guidelines of the Central Bank on Loan Classification, Interest Recognition, Asset Classification, Single Obligor Limit, Sectoral Exposure etc.
Establishing suitable exposure limits for borrowers and sectors and monitoring the limits on a regular basis.
Risk mitigation steps with a special emphasis on collateral. Setting counterparty limits based on their financial strength. Training of lending and legal officers on documentation and professional valuations. Developing skills and expertise of lending officers to scientifically assess project viability and customer integrity.
Educating the staff on provisions in the Banks and Financial Institution Act and other relevant statues and the regulatory guidelines of the Central Bank. Seeking external legal opinion and advice.
Baburam Subedi
Page 9

2014
Identifying Early Warning Signals (EWS) and taking prompt action thereon. Constant posts sanction monitoring with special independent team for verification of current assets
2.2 Credit Approval Discretion & Authority and Responsibility of Management 2.2.1 Credit Approval Discretion (CAD) & Authority of Management All CAD rests with the Board of Directors of YBL. The board may delegate a CAD to any sub-committee of the Board, Chief Executive Officer or any senior executives of the bank. The CAD delegated by the Board of Directors is as per Annex A which will remain valid until otherwise amended. The CEO may make a one-step delegation of the CAD to the Chief of Business, Branch Managers and other officials as per the business needs. All CAD held by the officers of the bank is on an individual capacity based on ability, past performance, experience, understanding of credit and need of the function. Hence, no ex-officio member/s is allowed to exercise the discretion provided to a CAD holder. CAD so delegated will be reviewed as and when required or at least once every year to ensure that the delegated authorities are competitive enough to meet and suit the business requirement and interest of YBL. CAD should be exercised on a Customer/Customer Group basis as per Nepal Rastra Bank rules. Each credit proposal should bear at least three signatures Recommending Officer (Asst. Relationship Manager/ Relationship Manager/ Branch Manager), Risk Officer (as designated by the CEO) and the Approving Officer (CAD holder).
Baburam Subedi
Page 10
Credit Policy Guidelines 2.3 Role and Responsibility of the Board of Directors:
2014
The board will ensure that the authority delegated to management is appropriate to the business interests of YBL. The board will audit and ensure the lending authority is effectively exercised. The board will ensure that YBLs policy and procedures are implemented in compliance with prevailing NRB directives and applicable laws The board will periodically monitor and review the credit portfolio, pricing strategy, risk concentration, profitability and compliance of the policy to ensure effective management and protect the interest of YBLs stakeholders. 2.4 Duties and Responsibilities of Loan Officer/Credit Department The key responsibility of loan officer is to manage the credit portfolio properly. The staff engaged in credit management will be guided by the principle of professionalism, honesty and integrity. All the staff will act ethically and maintain complete transparency to protect the interest of YBL and its stakeholder. Loan officer will ensure that YBLs policy and procedure are implemented in compliance with prevailing NRB directives and applicable laws. The Duties of Loan Officer are:

Evaluates loan applications and documentation by confirming credit worthiness. Analyze applicants' financial status, credit, and property evaluations to determine feasibility of granting loans. Meet with applicants to obtain information for loan applications and to answer questions about the process. Explain to customers the different types of loans and credit options that are available, as well as the terms of those services. Obtain and compile copies of loan applicants' credit histories, corporate financial statements, and other financial information. Improves loan applications and documentation by informing applicant of additional requirements
Baburam Subedi
Page 11

2014
Approve loans within specified limits, and refer loan applications outside those limits to management for approval. Review and update credit and loan files. Review loan agreements to ensure that they are complete and accurate according to policy. Compute payment schedules. Stay abreast of new types of loans and other financial services and products in order to better meet customers' needs. Submit applications to credit analysts for verification and recommendation. Handle customer complaints and take appropriate action to resolve them. Work with clients to identify their financial goals and to find ways of reaching those goals. Negotiate payment arrangements with customers who have delinquent loans. Market bank products to individuals and firms, promoting bank services that may meet customers' needs. Analyze potential loan markets and develop referral networks in order to locate prospects for loans. Prepare reports to send to customers whose accounts are delinquent, and forward irreconcilable accounts for collector action. Arrange for maintenance and liquidation of delinquent properties. Maintains customer confidence by keeping loan information confidential. Rejects loans by explaining deficiencies to applicants. Completes loan contracts by explaining provisions to applicant; obtaining signatures and notarizations; collecting fees.
2.5 Portfolio Management: YBL will focus to build a sound and viable credit portfolio and to minimize loan losses arising out of loan concentration and lack of risk diversification. The following principles will be applied in achieving this goal. The maximum exposure in single sector will be recommended by the management in accordance with prevailing NRB directives.
Baburam Subedi
Page 12
2014
Concentration of funded facilities to a single borrower group, excluding exposure backed by cash, bounds or guarantees from acceptable institutions or deposit held with first class financial institutions as specified by NRB, 10% of the total loan portfolio of YBL, unless otherwise specific approval is obtained from board subject to prevailing NRB directives
YBL will strive to maintain the ratio of non-performing loans (under sub standard, doubtful and bad categories defined by NRB) to total credit exposure at a minimum.
2.6 YBL Credit Prohibition: YBL will not extend credit: To political parties or for political purposes To shareholders, promoters and directors to the extent prohibited by NRB directives To any person prohibited by NRB To any applicant blacklisted by the credit information bureau. To any defaulting or blacklisted customer of the YBL or any other bank or financial institutions For money laundering activities For non-medical drugs For speculation and gambling To any project or business activities that creates extreme adverse environment impact To any activities restricted by prevailing laws and NRB guidelines
Baburam Subedi
Page 13
2014
Unit III Bank Lending

3.0 Retail Lending 3.1 Home Loan 3.1.1 Investing With Us Entitles Finance up to NPR 12,000,000/-(Max) or 55% of the Total Value (whichever is lower) for

Readymade Houses/Buildings Construction of House/Buildings, Readymade Apartment, Bungalow, Duplex Renovation and / or extension of Building
Tenure:

Maximum of 15 years Loan shall be terminated on /or before 55 years of age of the borrower. Repayment: Equal Monthly Installments (EMI)
3.1.2 Eligibility
Self employed professionals having reliable/stable source of income or income of own family supported by the documentary evidence.
Any other individuals having identifiable source of income supported by the documentary evidence of the same.
Employees of corporate entities supported by salary slips and employer's undertaking that salary will be routed through the Bank.
Borrowers' uncommitted income should be 25% more than the Equated Monthly Installment (EMI)
Nepalese Citizens only but should be above 18 years of age and last installment to be repaid within 55 years of his/ her service, unless steady and regular income justifies.
Baburam Subedi
Page 14
2014
For the corporate borrowers, company's past performance of 3 years and projection reports of 3 years, (including current year) its financials as well as the reputation of the promoters will be considered.
3.1.3 Fees and Charges The following charges are to be levied

Processing fee: 1 %( Flat) of the loan amount. Unscheduled payment: 1.5% of payment amount.
3.2 Education Loan 3.2.1 Investing With Us Entitles Finance for

Tuition fee Living expenses Travelling expenses
Interest Rate: 12.00% per annum Period: Up to the completion of the course or maximum period of 10 years, whichever is earlier? Repayment: Equal Monthly Installments (EMI) 3.2.2 Eligibility

Acceptance letter from University / College / School No objection letter from Ministry of Education Nepali citizens Borrower/Guardians should be Professionals, salaried individuals, self employed, etc. and their uncommitted monthly income to comfortably justify for EMI
Baburam Subedi
Page 15
Credit Policy Guidelines 3.2.3 Fees and Charges The following charges are to be levied

2014
Management fee: 1% of loan amount Documentation Fee: NPR 1500.00 flat Prepayment Fee: 1.500% of pre-paid amount Commitment Fee: 0.50% of unutilized amount CIB Charge: NPR 750.00 per page
3.3 Loans against Gold & Silvers 3.3.1 Investing With Us Entitles Finance up to:

70% for Gold Ornaments 75% for Fine Gold
Interest Rate: 13.5% per annum Interest to be paid on quarterly basis (as per Nepali calendar). Period: Maximum 1 (one) year (if required to be renewed every year from the Date of maturity) Partial Payment fee: 0.5% of total loan amount Repayment: Can be repaid at any time 3.3.2 Eligibility

Age 18 years and above Nepali citizens

Credit Policy Guidelines Prepayment Fee: NPR 200.00 if prepaid within one year For lost Gold Receipt additional NPR 150.00 will be charged
2014
3.4 Vehicles Loan 3.4.1 Investing With Us Entitles Finance up to 80% financing of the total value for the following

The purchase of New Private Vehicles The purchase of New Commercial Vehicles
And up to 50% of the Total Value for
The purchase of Second Hand Vehicles (not exceeding 5 years old)
Interest Rate: 14% per Annum. Tenure

Maximum of 5 years Loan shall be terminated on /or before 60 years of age of the borrower. Repayment: Equal Monthly Installments (EMI)
3.4.2 Eligibility

Over 18 years of age Nepali citizens Professionals, salaried individuals and self employed individuals

Management fee: 1% of loan amount Documentation Fee: NPR 2,000.00 flat Prepayment Fee: 1% of pre-paid amount CIB Charge: NPR 750.00 per page
Page 17
Baburam Subedi
Credit Policy Guidelines 3.5 Wholesale Lending
2014
Bank supports the financing requirement of the project through consortium lending as the lead Bank and/or Co-lead Bank or participating bank. The Corporate bank provides solutions as per the client's specific needs. It is committed to help privately owned and publicly listed entities grow. The Corporate bank is always ready to lend a helping hand for our clients for new business or willing to build / expand the existing ones and it focuses on building and maintaining diversified branch portfolios. We have a diversified sector wise lending like agriculture and forestry, mining, manufacturing, beverage, construction, electricity, gas and water, metal products, machinery and electronics equipment, transport, warehouse and communication, wholesalers and retailers, finance, insurance and real estate, hotel and restaurant. However, Corporate Bank is more focused on infrastructure development projects. 3.5.1 Business Loan 3.5.1.1 Overdraft: Overdraft Facility, a recurring (revolving) credit facility, is offered to customers for meeting day to day working capital requirements for funding current assets, overheads, administrative expenses etc. 3.5.1.2 Long Term Loan/Medium Term Loan: LTL or MTL shall be provided to the client mainly for fixed assets investments such as construction of buildings or purchase of plant and machinery. 3.5.1.3 Short Term Loan: STL could be advanced to the client for financing working capital requirement for short period of time within one year. 3.5.1.4 Working Capital Loan: WCL is provided to the client to finance the working capital requirements.
Baburam Subedi
Page 18
Credit Policy Guidelines 3.5.2 Import/Export Loan 3.5.2.1 Letter of Credit (Sight/Usance):
2014
Letter of Credit (LC) The bank can open Letters of Credit in many countries through its expanding list of corresponding banks to facilitate the import requirement of its corporate/business clients. 3.5.2.2 Trust Receipt Loan: Trust Receipt Loan is provided to facilitate the corporate/business clients to meet its working capital requirement for the purpose of meeting the gap in its asset conversion cycle, the bank can provide loans against import LCs as per the Central Bank (NRB) directives. 3.5.2.3 Packing Credit: Packing credits provide an exporter with finance purchase/import of raw materials, processing and packing of the goods meant for exports. This smoothens the exporter's cash flow while the goods are being packed and waiting for shipment. The advance is repaid when the goods are shipped. 3.5.3 Bank Guarantee The bank can issue various bank guarantees to meet the differing requirements of its clientele for various purposes like bidding for tenders, issuing performance bonds and advance payment guarantees. The bank can also issue local guarantees against the counter guarantees of acceptable foreign banks. 3.5.4 Other Loans 3.5.4.1 Hire Purchase Loan Purchase of office equipment, vehicles, machinery etc is possible through our Hire Purchase Schemes. Features The whole amount of the loan is debited to the customers name on Hire Purchase Loan Account and is disbursed to the borrower by way of payment made to dealer/agent through a/c payee cheque or draft or pay order. However, if the borrower has already paid the purchase8price of article (vehicle or goods) partially or fully with an alternative arrangement, the bank may make payment to the borrower's checking account up to the approved limit.
Baburam Subedi
Page 19
2014
The facility is allowed only to the customers who earn income from the financed article. However, the borrower having other sources of income would be given preference to extend hire purchase loan.
This loan is for capital investment and limit shall normally up to70% of quotation price of vehicles or equipment. For the higher financing, preapproval from the credit committee is required.
This facility is usually allowed for 5 years on EMI basis but it may differ on the economic life of article and borrowers repayment capability and the repayment period may be granted up to 10 years upon the prior approval from the credit committee.
Interest is calculated on the outstanding amount of loan at daily basis. The ownership on the goods/assets purchased shall remain with the Bank till final repayment of the loan. The cost of insurance shall be borne by the borrower. In the case of article which need time for assembling or making (like body making of vehicle), the Bank can provide moratorium period of maximum 6 months.
Hire purchase is usually secured by the financed vehicles or assets itself. If the management deems it necessary, they may ask for additional collateral in various forms. The latter case is often applicable for commercial vehicle.
3.5.4.2 Loan against Fixed Deposit The bank can provide consumption loan demanded against FDR of the Bank at very attractive rates. Features The whole amount of loan is debited to the customers FDR loan account and is disbursed to the borrower by way of crediting his/her current/nominee account. In case of overdraft, the limit is created in his/her current account. The expiry of the loan corresponds with the expiry of the FDR. In other words, the expiry of the loan cannot go beyond the expiry of the FDR.
Baburam Subedi
Page 20
2014
Interest is calculated on outstanding balance on daily basis as the rate prescribed by the management. A loan once repaid in full or in part cannot be drawn again by the borrower. If the borrower requires further accommodation, it will be treated as separate transaction. In case of overdraft, the borrower may make as many debit/credit transactions as the borrower wants, provided the borrower remains within the approved limit.
Interest is calculated and charged on the whole amount of loan unless it is repaid while the overdraft interest is charged only on the overdrawn balances. This loan is secured by the lien on the respective FDR itself.
3.5.4.3 Deprived Sector Loan Deprived" means low income and especially socially backward women, tribal people, Dalit, blind, hearing impaired and physically incapacitated persons, marginalized and small farmers, craft-men, labour and landless squatters family. All micro-credits to be extended for the operation of self-employment oriented micro-enterprises for the upliftment of economic and social status of deprived sector up to the limit specified by this Bank is termed as "deprived sector lending". The bank can provide loans to the deprived sector as defined by NRB directives. Conditions The whole amount or partial amount of the loan is debited to the customers name on deprived Loan Account and is disbursed to the borrower by way of credit to his/her current account. This loan may include both the term loan and working capital and is to meet the partys long term fixed assets requirement and short term working capital requirement. Usually the equity of the party is to be made in the investment before the Loan is allowed. Regular inspection is made by the Banks Personnel time to time. Interest is calculated and charged on the used amount of loan.
Baburam Subedi
Page 21
2014
The provision that does not require additional 20 percent loan loss provision for the loans provided directly or indirectly to the deprived sector on group/ individual/ institutional guarantee
Eligibility Loan up to Rs. 60 thousands per group/individual against group/personal guarantee to the deprived or low income individual for operating micro business; Loan up to Rs. 60 thousands per family for the purpose of Micro Hydropower Project up to 50 kilowatts, Solar-Home-System, solar cooker, solar dryer, solar pump, bio-gas, improved water mills, improved cooking stoves and wind energy according to renewable energy technology; Micro enterprise credit up to Rs. 150 thousands for each business extended to deprived or low income individual to operate the micro industries against acceptable collateral/to group members against the guarantee of the group gradually enhanced; Loan up to 150 thousands per person extended to the individuals who are going for foreign employment on the basis of the tripartite loan agreement between the bank, the person going for foreign employment and the concerned Manpower Company that can produce assurance letter from the employer companies of the employing nation confirming the employment and recovery of loan in installment; Loans extended up to Rs. 150 thousands per person with or without collateral to persons going for foreign employment; Loan up to Rs. 150 thousands to per individual/family eligible to receive deprive sector lending for sheep farming to produce wool necessary for carpet or for maintaining handloom to weave carpet against acceptable collateral security; Loan up to Rs. 150 thousands to per household eligible (marginalized, small farmers and farmers community) to receive the deprive sector lending for purchasing fertilizer and seeds, to establish cold storage in collective ownership for preserving products, products marketing, small irrigation, installation of shallow tube wells. Loan up to Rs. 250 thousands to per household for livestock, fishery, and beekeeping.
Baburam Subedi
Page 22
Credit Policy Guidelines Loan up to Rs. 300 thousands for micro enterprises operated by women.
2014
Explanation: Micro enterprise refers to a registered or unregistered trading business (like fruit shop, vegetable shop and dealer, cosmetic shop, beauty parlor and barber shop, small grocery shop, small stationery shop, small hardware shop, small garment shop, small beverage shop, small restaurant, small commercial farming etc.) small and cottage industries (like bamboo product industry, dry fruit product industry (like drying apple, drying cardamom etc.) roasting and dry vegetable product industry, sweat and sour product industry, cotton and hosiery product industry, dry meat product industry etc.) Loans up to Rs. 200 thousands without collateral to youths from deprived families for studying secondary and higher secondary level technical and vocational education Credit up to Rs. 10 million in hydropower project of up to 500 kw capacity with at least 50 percent investment participation by community user committee or private sector or cooperative Loan up to Rs 150 thousands per household to establish cold storage in collective ownership for preserving food grains Credit of any amount for buying tractor, thresher and other agricultural equipment Credit up to Rs. 10 million to rural community hospitals which provide 10 percent of bed in free ship to deprived people Loan up to Rs. 400 thousands for low cost housing to deprived people Loan against rickshaw to purchase it for the purpose of self operation in operator's ownership Loan up to Rs. 10 million for cooperative operated in rural areas to operate a project of post harvest services relating to agriculture Loan up to Rs. 100 thousands without collateral to build home for socially backward tribal people like Chepang, landless, MuktaKamaiya, Haliya, KamlariBadi community. Wholesale loan up to Rs. 10 million on the basis of no of group member to the subjective Cooperative Societies (except saving and credit cooperative) for
2014
collective farming, poultry farming or livestock farming through group member not exceeding Rs 90 thousands per member. Note: The eligible activities shall be as prescribed by NRB through Directives or circulars. 3.5.4.4 Consortium Loan Consortium Loans are provided for the establishment, capacity addition, up-gradation of existing facilitates as well as acquisition of existing facilities. The loan is extended to manufacturing as well as service sector which requires huge funding. It is an arrangement whereby two or more banks and financial institutions join hands to meet the credit requirements of the potential borrower. So, consortium is the sharing of risks and income amongst the members involved in loan syndication. The borrower may discuss about the proposal with the participating banks either separately or in a conference. Each member bank collects and processes all the information as in any other case of lending. The proposal will be sanctioned by the respective banks on the basis of joint finance and on specified terms and conditions, which are usually the same for each bank. Consortium does not arise because of the types of credit facilities needs of a borrower, but because of the amount involved. When the credit limits to be granted to the borrower are finally decided upon, one of the participating bank usually as the Lead Bank and gets a draft of the joint agreement drawn up by its legal department and circulates it to other participating member bank, who in turn have the document approved by their own legal departments, so that the credit instrument could be finally executed in an accepted form. The borrower shall compulsorily maintain a current account with lead bank and other loan account shall be maintained in lead bank and other participating banks as per agreed terms. The maturity of facility is for long period more than one year. The interest rates for various facilities under consortium finance are decided by all participating banks jointly.
Baburam Subedi
Page 24
2014
The payment of interest and principal is made through lead bank to all participating banks; repayment directly to member banks can be made if it is mentioned in agreement.
In the consortium finance, the borrower will draw on his/her account with respective banks in the same proportion as the limit sanctioned. The following information are exchanged periodically as may be mutually agreed up on: The maximum and minimum balance during the week/fortnight. The balance of the last day of the week/fortnight/month. Any other business, including foreign exchange business, passed by the borrower to any of the participating banks. Lead bank or member banks as per agreement will be responsible for the recovery of the entire advances for the benefit of all. The loss, if any will be shared between/among the participating banks in the ratio of the amounts sanctioned and disbursed. Interest is calculated and charged as per agreement between banks and party.
3.5.4.5 Pledge Loan Short term loans for up to six months against pledge of inventory. YBL will provide credit to its customers from various different branches across the country. 3.5.6 Requirements
Corporate/Commercial/Business entities, government entities (all units having > 50% share by Nepal Government or managed by the government) /public enterprises, financial institutions, individuals and other eligible entities require tailor made products. Hence, the management shall structure and negotiate a product suitable for such credit customers. In general all products developed should attempt to follow the following norms:
Baburam Subedi
Page 25
2014
Overdraft must be granted only by way of approved lines of credit. They should not be sanctioned for the purpose of meeting other obligations of the borrower such as payment of interest or repayment of loans.
Receivable Financing normally should not exceed 75 percent, (80 percent for prime customer) of the eligible receivables. Eligible receivables are defined as those receivables covering non-capital goods and are in the books of the borrower for a period not exceeding the credit period specified in the sales agreement, wherever available. If at any point in time the outstanding are not supported by eligible receivables, the customer should be asked to settle the difference outstanding immediately.
Stock financing should not exceed 75 percent (80 percent for prime customers) of the stocks. If financing falls short of the required minimum, customer should be asked to settle such differences promptly.
Working Capital Financing should also be to the extent of 70 percent (80 percent for prime customers) of the net current assets.
In case of term loans, the debt equity ratio of the project/investment shall not exceed 80:20 for prime and 70:30 for others.
Deviation from the above norms should be specifically approved by Chief Executive Officer.
In case of any structured credit facility to Corporate/Commercial/ Business entities/ individual CEO may approve a separate product paper in conformity with the spirit of this policy.
Transaction backed by 100% cash, government bonds does not require a structured product.
Baburam Subedi
Page 26
2014
The Bank can do Credit Sell/ Purchase/ Repurchase/ Takeover Transaction with other Financial Institutions. The CEO of the Bank is authorized to effect buy (with repurchase clause) and sell transaction with other Financial Institutions up to (not exceeding) NPR 500.00 million. All such transaction will be executed by taking prior consent of the Board of Directors and to be rectified in the subsequent board meeting. Transaction above NPR 500.00 million will have to be approved by the Board of Directors.
3.5.7 Security Each credit facility should be secured by tangible security in the form of fixed assets, current assets, cash/near cash items mortgaged, pledged, assigned or offered as hypothecation unless otherwise not required by the NRB or any other law that governs the operation of the Bank. Personal guarantees may be obtained as additional security. But no loans would be granted only on the basis of personal guarantee unless otherwise allowed by the NRB or any other law that governs the operations of the Bank. Security of shares of private limited company shall not be accepted. Security of shares of A class listed public limited company, which has been actively traded, may be accepted with a acceptable margin. Actively traded share is defined as at least 15 registered trade in the stock exchange floor in the last three months. Facilities thus approved should be monitored at least on a monthly basis to ascertain the value of the underlying shares. If such value falls below the required margin, a margin call must be made promptly within 5 working days of such assessment. Security documentation should be executed in a format pre- approved by the banks legal department.
2014
The management of the bank shall formulate the procedure of accepting and valuing the security through a detailed Circular/ Guidelines.
All fixed assets should be valued by the banks approved value in every case and the valuation should be verified at least once every two years. The CEO shall approve the list of values. However, the CEO may waive the valuation requirement provided:
Financing amount is < 30% of the depreciated value of the fixed assets (except in the case of real estate) shown in the latest audited financials of the borrower.
Consortium loans where the consortium takes a collective decision of such waiver. In cases of fixed assets obtained from a prime customer where our primary security is on hypothecation charge.
3.5.8 Customer Control All customers should be grouped as per Nepal Rastra Bank directive for single borrower limit purpose. Each Customer Group should be centrally managed by the office, which has access to the key official/s of the Customer Group. A branch/outlet may extend credit facilities to a unit of a Customer Group. However, it will necessarily have to be supported by the office, which is responsible to manage the Customer Group. All Customer/Customer Groups should be managed by a designated Relationship Manager
Baburam Subedi
Page 28
2014
Unit IV Pricing and Procedure of Loan

4.0 Loan Pricing Bank has to decide the benchmark Prime Lending Rate for different types of loans and advances. It also decides whether to have fixed rate of interest or floating rate of interest or both and its applicability on different asset products. The advantage in charging fixed rate of interest is that the revenue can be worked out well in advance. The disadvantage is that in the event of interest rate going up and in the event of declining rate regime (unless bank falls in line) borrowers desert bank and migrate to other banks having lower interest rate. In case of floating interest rate it automatically gets adjusted as per market forces; however it becomes bit difficult to project revenue. Banks also permit borrowers to switch over from fixed to floating rate and vice versa by levying migration fee. 4.1 Pricing of Customer/Customer Group The management of the bank is authorized to apply appropriate pricing on each Customer/Customer Group provided however, an account profitability analysis is carried out and the overall relationship make good business sense. The account profitability of each Customer/Customer Group should be constantly reviewed. However, in case of revolving funded/ non-funded facilities, it should be reviewed at least once at the time of account annual review. The authority of the management will be as per the Finance By-laws of the Bank.
Baburam Subedi
Page 29
Credit Policy Guidelines 4.2 Credit Procedures
2014
Each credit requests (regular or temporary) should be accessed through a set Credit Appraisal Report. Following risks, as applicable, should be addressed: Industry risk Business risk Financial and Cash Flow risk Facility Structure risk Security Cover risk Transaction risk Other
Each facility, except for terminating type of loans, should be reviewed and renewed to assess the above risk at least once every year unless a specific product paper allows otherwise.
Each request for approval of credit facility/ies should at least include, in addition to points as dealt under sub-section 12.1 of this section, the following: Amount Purpose Facility type/s Maturity dates Repayment terms Pricing basis including fees Condition precedent Waivers, if any Special Covenants, if any
Baburam Subedi
Page 30
2014
Interest should be collected on a frequency of three months for all types of loan other than the structured product under EMI basis. Interest for all short-term transaction backed or trade related loans should be collected at quarterly rests and at the final repayment dates.
All term loans should have a final drawdown date and should not be open-ended commitment. Extension of date of drawdown should be done only after proper risk assessment.
Apart from the above, the management of the bank must formulate detailed credit procedures through Credit Circulars as and when necessary.
Any waivers related to credit administration norms and pricing of a credit facilities will have to be specifically addressed/justified. The responsible officer holding Credit Approval Discretion (CAD) may, within his/her discretion, approve such waivers along with credit facilities.
4.3 Internal Ratings All credit facility will be graded as per Nepal Rastra Bank directives i.e. Good, Substandard, Doubtful, Bad and Restructured. A technique/ procedure for internal rating should be developed by the management of the bank. The internal rating technique/procedure, once developed, should be applied for all Loans. Such rating has to be reviewed at the time of facility review. MIS on outstanding against each rating should be prepared on regular intervals for periodic review. 4.4 Credit Monitoring All monitoring of credit should be done by an independent unit Credit Administration & Control Department (CACD).
Credit Policy Guidelines Credit Monitoring should include but not limited to: Stock/ book debt registers. Irregularity reports. Stock and assets Inspection schedules.
2014
All compliance checks including MIS (internal and Nepal Rastra Bank). Day to day management of customers should be done by the relationship managers, which should include but not limited to: Exposure monitoring Excesses monitoring Customer contact Covenant monitoring Stock monitoring Financial assessment and risk category Identification of deteriorating credits and taking remedial actions Facility expiry monitoring 4.5 Impaired Assets and their accounting procedure A facility is classified as non-accrual when it is graded as Doubtful, income will no longer be accrued ahead of its receipt. When a facility is classified as non-accrual, any accrued but unpaid interest or fees will be reversed from income, since the date last paid. This however does not mean that the Bank reduces its entitlement to receive income. This legal right remains even though it is doubtful that the income is collected. Income will continue to be calculated manually. If the documentation does not stipulate the order and in absence of any regulations governing, cash received from a non-accrual facility (either from the obligor or from the sale of security), in general, should be applied in the following priority: Statutory charges and fees Overdue/Penal Interest Interest
Baburam Subedi
Page 32
2014
Principal this application, however, may be changed by Chief Executive Officer with justification. The Bank shall have a separate Loan Write-off Bylaws. 4.6 Systems and Procedures In order to implement the credit policy, the management shall devise systems and procedures including but not limited to the following: Specification of the lending authority given to each credit executive measuring the maximum amount and types of credit that each person or group of person can approve and whose signatures are required. Lines of responsibility in making assignments and reporting information within the department. Operating procedures for soliciting, reviewing, evaluating, and making decisions on customer credit applications. The required documentation that is to accompany each credit application and what must be kept in the banks credit files (required financial statements, security agreements, etc.). Lines of authority within the bank, detailing who is responsible for maintaining and reviewing the banks credit files. Guidelines for evaluating, obtaining and monitoring collateral. Policies and procedures for setting interest rates and fees and terms of repayment of credits. A statement of quality standards applicable to all credit procedures. Procedures for detecting, analyzing, and working out problem credit and recovery situation. Loan classification and provisioning procedure.
Baburam Subedi
Page 33
Credit Policy Guidelines Unit V FOLLOW UP AND REVIEW OF THE CREDITLINES
2014
5.1 General: The follow up is the responsibility of CRD. The Relationship Manager must keep a regular contact with his/her clients and must remain abreast with all the information relating to the borrower. The frequency of visit will depend upon the importance of the risk, customer visits as frequent as possible is encouraged. It is the duty of Relationship Manager to obtain the required documents along with the financial statements from the client for renewal/review purpose well before the maturity date of the credit facilities. 5.2. Follow-up of excess over limit: In principle, excess over limit (EOL) should not be allowed in normal course credit transactions. However, EOL may be allowed based on justified ground upon approval of competent authority. Frequent and continuous EOL must be discouraged at all times. 5.3 Follow-up of Securities and security related documents: CAD, in coordination with Legal Department and CRD, shall make sure that the securities and security related documents are renewed / executed timely and will keep track of the renewals to be made in a diary and/or systems. CAD will also be responsible for verifying the adherence of special covenants quoted in credit proposal and offer letter. In case of insufficient security cover, the CAD will forward the credit file to appropriate approving authority with information in writing for further decision whether to deny the implementation or allow full/partial implementation. 5.4. Follow-up of Operations: The Operations Department should immediately report to the CRD (Relationship Manager) and to the CAD if any irregular movement in the account of the client is observed so that further action could be taken at the earliest. 5.5 Defaults in Payments: When a client fails to make a payment on due date or announces that s/he will not be in position to pay on due date and asks for a rescheduling, this default must be
2014
immediately reported in writing to the approving authority and/or CEO without prejudice of any legal proceeding to protect our position. A letter must be sent to the client stating the default of payment. The wording and the strength of the letter will depend on the quality of the debtor and on the contacts that the Relationship Manager 5.6 Review/Renewal of the Credit Lines: Periodic review and renewal of a credit facility is very important so as to foresee the risks creeping in the borrower and take needful remedial/corrective action on time so as to save the account from going into default. Hence, all the credits including the medium term and long term loans shall be reviewed at least once a year and in case of revolving working capital loans, credit facility limits should be renewed at the time of review. In case of revolving working capital loans, credit facility is generally reviewed/renewed at the time of maturity wherein tenure is generally 1 year from the date of disbursement/implementation. 5.7 End of Credit: A credit (loan) relationship shall come to an end when borrowers wants to settle the dues and close the account and/or Bank decides to call back the loan due to whatsoever reasons.
Baburam Subedi
Page 35
Credit Policy Guidelines Unit VI
2014
LEGAL ACTION Generally, the bank will take legal action relating to loan recovery, collateral security or auction of securities. At the mean time, the bank will defend if the borrowers file the case against the bank making the claim that the bank has not followed the proper procedures while auctioning the securities or recovery of loan from collateral security. Therefore, the bank needs a legal department taking care of legal cases brought by the bank or brought against the bank. In the context of Nepal, the court proceedings are found to be very lengthy and time consuming. Likewise, in Nepal, the banking laws and business laws are not very sufficient. Therefore, the bank needs to be aware about the context and international practices in order to minimize lots of claim against the bank. The Legal Department of the bank may consider non judicial forms of legal proceeding such as arbitration and mediation under prevailing laws. Regarding legal actions taken by the bank, legal action should be taken if it is absolutely necessary and required under the prevailing circumstances as the last resort. When the bank takes any legal action regarding loan default, it should be widely consulted with in the bank, especially among Relationship Manager, Loan Recovery Department, Loan Recovery Committee and Legal Department and decided mutually. The following criteria are considered as the basic criteria for initiating the legal action: In case the borrower commits an act of Bankruptcy or is adjudicated as Bankruptcy. If the Relationship Manager/Credit Analyst has a reasonable doubt about the companys ability to collect interest in a interest in a timely manner If interest and principal is overdue for more than 90 days.
Baburam Subedi
Page 36
Credit Policy Guidelines Unit VII
2014
LOAN WRITE-OFF The bank will formulate the Loan Write-off Policy that guides the process and decision for writing-off of loans/advances. When the bank considers any loan unrecoverable, it may initiate the process of the loan write-off. It is the task of Loan Recovery Department of the bank. The Loan Recovery Department will initiate the process and the Board of Department will take the decision. Therefore, in the Loan Write-off Policy, the decision relating to the loan write-off will be made a subject to be approved by the Board of Directors. The borrower will not be told about the loan write-off decision.
Baburam Subedi
Page 37

Credit Policy Guidelines

Încărcat de

Informații document

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

Credit Policy Guidelines

Încărcat de

Drepturi de autor:

Formate disponibile

Credit Policy Guidelines