Loan sanctioning & Disbursement

1. Loan Sanctioning & Disbursing Procedures
A presentation by
S.M.Salahuddin
FVP & Head of Rupnagar Branch
Bank Asia Ltd.
To the participants of
Foundation course for ADs
@
Bangladesh Bank Training Academy, Dhaka
August 2016

2. Sharing few real life cases out of many bitter experiences
encountered
• Case I : Sudden deterioration of loan
performance of a reputed Fashion house (Know
your customer better . Know the actual person behind the business.
The risk parameter can be too strange. Is present CRG system
adequate to incorporate all the credit risk components ? )
• Case II : Lending a Meat Processing firm ( Evaluation
an entrepreneur’s capacity of handling the business )
• Case III : Name lending to a Hospital ( fund diversion,
amidst of share market boom. )
• Case IV : Trusting a Car Importer ( Handing over title
deed in good faith & the mortgaged land sold out . )

3. Real life cases(Cont’d)
• Case V : Fleeing of owner of A Packaging Industry ( Effort
to depart the country. Salvaging the loan by selling out movable properties )
• Case VI : Security overvaluation in case of an RMG
(Impact of over-valuation of collateral. Impediment of recovery and strategic
shift )
• Case VII : Fraudulent Deeds submitted by the
entrepreneur of a Cable Factory (ill motive of entrepreneur,
rush of sanctioning & completion of documentation. Detecting fraudulent
deeds just before the disbursement & escaping the possible peril)
• Case VIII : Textile Mill (Mortgage was done by fake person who was
a 3rd
party )

4. Sanctioning & disbursement of credits
Definition
• Sanctioning: It is the meticulous procedure of
Credit appraisal and risk assessment
towards allowing the borrower a credit
facility.
• Disbursement: It is the systematic means of
allowing the withdrawal or drawdown of
sanctioned facilities after completion of
security documentation .

5. Loan Sanctioning
• Credit Applications should include, as a minimum, the
following details:
– Amount , type & purpose of facility(s) proposed
– Facility Structure (Tenure, Covenants, Repayment Schedule,
Pricing)
– Security Arrangements
• Credit and risk assessment are conducted prior to
sanctioning of loan.
• The results of this assessment are presented in a Credit
Proposal that originates from RM, and is reviewed by
CRM for identification and probable mitigation of risks.

6. Credit analysis
• Borrower Analysis.
• Industry Analysis.
• Supplier/Buyer Analysis.
• Financial Analysis.
• Credit Background.
• Account Conduct.
• Adherence to Lending Guidelines.
• Mitigating Factors.
• Facility Structure.
• Purpose of Credit.
• Security arrangement .

7. Risk Analysis /CRG
• Financial risk
– (Leverage/Liquidity/Profitability/Coverage)
• Business/Industrial Risk
– (Size of business/Age of business/Business outlook/Industry Growth/Market
Competition/ Entry or Exit barrier)
• Management Risk
– (Experience / Track Record/ Succession/ Team Work)
• Security Risk
– (Security coverage/Collateral coverage/support)
• Relationship Risk
– (Account conduct/utilization of limit/Compliance of covenants & conditions/
Personal deposits)
• Environmental Risk (General/sector –specific)

8. Purpose of loan sanctioning
• A banker while sanctioning any loan must
ensure that the credit facility is allowed to the
genuine borrowers for genuine economic
purposes ( for generation of income through
increased economic activities) and the
allowed credit is repaid in time.

9. Loan sanctioning procedure
• In the light of prudential guideline of Core Risk
Management every commercial Bank has formulated
their own credit manual. In that manual the detailed
sanctioning procedure is outlined.
• Every commercial bank has some levels of approval
authority such as Branch Level, Zonal Office level, Credit
Committee Level, Executive Committee level & finally
Board of Directors Level.
• Credit committee generally is formed by Head of CRM,
CRO of the Bank, Head of Business Marketing /Client
origination, COO & the CEO.

10. Delegation
• As per Bangladesh Bank CRM guideline,
Delegation
– 15% of the bank’s capital should be approved
at the CRM level
– 25% of capital should be approved by MD
– in excess of 25% of capital to be approved by
the EC/Board only after recommendation of
CRM, Corporate Banking and MD.
• However, Banks take conservative approach

11. Loan sanctioning procedure:
• Corporate Loan:Corporate Loan is marketed by the Branch
as well as Corporate Marketing unit of CO and sanctioned
by either Credit committee or higher delegation authority
i.e. EC/ Board. In most of the Banks, funded loan beyond
Tk. 5 crore is placed before EC for approval.
• Consumer and SME loan : Consumer loan and SME loans
are marketed by either ARO or by the Branch officials.
Branch recommends and forwards the loan file to
respective unit office/zonal office /Corporate Office for
approval. After the credit appraisal by respective office,
the loan is sanctioned.

12. Steps in sanctioning procedure :
• Selection of potential borrowers by sales /marketing
team/Branch of the Bank.
• Initial screening as per credit manual /Product Policy Guideline
(PPG) & own judgment.
• Collection and verification of necessary information , papers
and documents
• Obtaining credit report (CIB report)
• Contact point verification(CPV)
• Project and business site visit (in case of corporate loan)
• Obtaining Legal opinion
• Valuation of collateral

13. Steps in sanctioning procedure :
• Credit appraisal in various aspects such as Management, Marketing,
Financial, Economic, Technical etc. [Specially for project Finance]
• Financial analysis (such as Ratio analysis , Cash flow analysis,
sensitivity analysis, NPV ,IRR ,Payback period , CRG )
• Recommendation by Branch/Originating authority and then sent to
higher authority for sanctioning .
• CO Business unit conducts appraisal again.
• CRM team again performs risk analysis and finds mitigating factors
and the proposal is placed before credit committee .
• Credit committee sanctions or recommends to higher delegation
authority such as EC /Board .
• Head Office CRM dept. issues sanction advice to the Branch.

14. Credit Disbursement
• Disbursements should only be made when all
security documentation is in place unless otherwise
there is some deferral case .
• Credit Approval terms must be met before
disbursement.
• Legal advisor and Credit Administration
department ensures the authenticity of
documentation.
• LSC?(Lawyer’s Satisfaction Certificate)
• Utilized to meet the very genuine purpose for which
credit was sanctioned .

15. Credit Disbursement steps
• As per sanction advice clauses, C.O. Credit
administration dept (CAD) inputs those in the system .
• After completion of all documentation by the branch
level , Branch puts tick mark in systems as per listed
check list.
• Sometimes , time deferral (duly approved) issues are
there .
• CAD loads the credit limit in system .
• Finally Branch level disburses from the loaded limit .