Welcome to the session

Sanction, Documentation and Disbursement

of Credit

By
Sk. Nazibul Islam
Faculty Member, BIBM

Introduction:
The two functions of a banker are borrowing money
from public by accepting deposits and lending to the
public for the development of trade, commerce, industry
& agriculture. A bank is a business enterprise of the
country. It is a profit-seeking concern as any other
commercial & industrial organization. The profitability of
a bank always depends on the able manner & the
avenues in which its resources are employed to yield the
maximum income.
Bankers resource usually comprises of
a) Paid-up capital
b) Reserves & undistributed profits
c) Deposit from the public in various accounts
d) Borrowings from Central Bank & other Banks.

Sanctioning process of credit

Sanctioning Loans & Advances is a tedious process and not
an easy task.
Proper analysis based on valid & reliable information and
data is very important for sanctioning any type/form of
loan/advance.
Factors that influence the sanctioning process:
1.
2.
3.
4.
5.
6.

Type of loan/advance
Nature of business/purpose
Nature of security
Amount of loan/advance (small or large)
Nature of borrower (company, Firm, Individual)
Nature & Tiers of Financial Institutions.

Basically sanctioning
following steps:

process

comprises

the

1. Receive loan Application in prescribed form with

required papers/documents (If it is a permissible item
and has budget) allocation.
2. Scrutiny & verification of loan application along with
submitted papers/documents.
3. Physical verification/site inspection (business/project
& offered security)
4. Assess/determine the actual amount needed.
5. Analyze
in
respect
of
viability
through
appraisal/FSS/CRG/Credit scoring (if require).

Steps: contd..
6. Fix-up basic conditions
security coverage etc.

like

margin/Debt-equity,

7. Prepare office note/working paper

8. Place for approval of sanction
9. Obtain advice/approval
10.Entry into sanction register
11.Prepare disbursement & repayment schedules (incase
of term loan)
12.Issue sanction advice with details terms & condition
& loan agreement, if any.

Basic determinants:
a) Selection of borrower (5 C's)
Character: Commitment, credit Record, Dependability Business
Experience, etc.
Capacity:
Profitability, cash flow, Debt service Coverage,
Technical Knowledge, Age etc.
Capital: State in Business, Quality of Assets. Solvency, Retention
of Earning, Ability to infuse more money etc.
Condition: Economic Trends, Industry Growth, Competitive &
Regulatory Environments, working conditions etc.
Collateral: Asset Quality, Type, location, Title, Forced Sales
Value etc.

Basic determinants:
b)

Credit Investigation: Credit investigation refers to the

assessment of a loan proposal from different points of view,
specially credit status if any, for justifying the creditability of
an intending borrowers.

Besides, banker must be known

Whether he indulges in speculative business

When he started his business
Assumed popularity & marketability of products
Availability of raw materials
Transport & Communication
Liabilities & involvements in other business, if any.

Keeping these fundamental points in mind the banker

will form a balanced opinion on the following issues:
a) Moral risk i.e. borrowers reliability/ character
b) Business risk i.e. borrowers capacity/ capability
c) Property Risk i.e. borrowers capital/ means.
If the bankers opinion is favorable, banker will step in
the starting point of lending i.e. he will supply the
standard loan application form to the customer.
Banker will properly scrutinize the loan case & collect &
correlate
the
information
about
the
party/firm/company/project from available sources.

Sources of credit information:

Loan application
Market report
Study of accounts
Financial statements
Spot verification of factory/office/collaterals offered
Confidential Reports from other banks
CIB of Central Bank
Other sources like press reports regarding purchase,
sale auction,decrees etc. of properties.
Registration records
Municipal records
Registrar of Joint Stock Companys records etc

Relationship Management/Marketing (RM) is to act as the

primary bank contact with borrowers.
The approval process should reinforce the segregation of
Relationship Management/Marketing (RM) from the approving
authority.
The responsibility for preparing the credit Application should
rest with the RM within the corporate/commercial banking
Department.
Credit applications should be recommended for approval by
the RM and forwarded to the approval team within CRM and
approved by individual executives.
The recommending or approving executives should take
responsibility for and be held accountable for their
recommendations or approval.

Before approval/ sanction the banker ask himselfa) Whether the proposed proposal is remunerative and expected to
be recovered.
b) Whether the banker has sincerely applied his knowledge, skill,
tact, foresightedness and business motive.
c) Whether the advance has conformity with the banks budget,
govt. policy, credit restriction policy imposed by central bank etc.

The authority to sanction/approve loans must be clearly

delegated to senior credit executives by the managing
director/ CEO and board based on the executives knowledge
and experience. Approval authority should be delegated to
individual executives and not to committees to ensure
accountability in the approval process.

It is essential that executives charged with approving loans

have relevant training and experience to carry out their
responsibilities effectively. As a minimum, approving executive
should have :
At
least
5
years
experience
working
in
corporate/commercial banking as a relationship
manager or account executive.
Training and experience in financial statement, cash
flow and risk analysis.
A thorough working knowledge of accounting.
A good understanding of the local industry /market
dynamics.

CRM:
security Compliance CertificateLoan Documentation Checklist
1. Compliance requirements :
All required central bank Returns are submitted in correct
format in a timely manner
Central bank Circulars/regulations are maintained centrally
and advised to all relevant departments to ensure
compliance.
All third party service providers (valuers, lawyers, insurers
are approved and performance reviewed annually.
2. Loan Facility Parameters:
Maximum size, Maximum tenor, covenant and security
requirements.
Bank should not grant facility where banks security position
is inferior to that of any other financial institutions.
Assets pledged as security should be properly insured.
Valuations of property taken as security should be performed
prior to loans being granted. A recognized third party
professional valuation firm should be appointed to conduct
valuation.

3. Credit Administration:
To ensure that all security documentation complies with the
term of approval and is enforceable.
To monitor insurance coverage, appropriate coverage properly
assigned to the bank.
To control loan disbursement only after all terms and
conditions of approval have been met, and all security
documentation is in place.
To maintain control over all security documentation.
To monitor borrowers compliance with covenants and agreed
terms and conditions, and general monitor of account
conduct/performance.

4. Points to consider for compliance about security:

Nature of security/proper identification about quality (in
case of need)
Location and possession of security
Title of security
Valuation of security
Forced sale value(if required)/Market value.
Insurance
Primary security
Collateral security
Documentation.

Documentation

Before disbursement of loan correct Documentation is essential

from the point of view of the safety of an advance.
It procures a written evidence of transaction
It identifies the borrowers, co-borrowers & guarantors.
It defines the security
It also identifies the nature of charge created by the bank.
The Document will help the bank to include protective clauses to
safeguard the interest of the bank.

Steps for Documentation:

1.
2.
3.
4.
5.
6.
7.
8.

Drafting of documents
Filling of documents
Execution of documents
Witnessing
Stamping
Registration
Signature verification
Safe keeping of documents

Drafting of document:
Each bank has its own printed or prescribed forms to be taken
for various types of advances.
Usually the legal advisors of the bank draft these forms so that
the necessary clauses are included to safeguard the interest of
the bank.
The clauses may varies, depending upon the types of security,
the executant(s) etc.
The content of the document includes the terms and conditions
of an advance as agreed upon between the banker and the
borrower must be clear, definite and free from ambiguity.

Filling of documents of printed nature:

All columns of documents should be properly filled in and
nothing is left blank. Keeping the documents blank or even
one/more column in the documents blank may be invalidity
of the whole documents.
The documents should be get completed in one sitting in
the same handwriting using the same ink and pen.
Communication address must be business address and
latest residential.

Execution of documents:
a. Competency
A party competent to make a contract must execute the
documents.
A minor , lunatic or insolvent shall not have the capacity to
execute the documents.
A company, in execution of documents does not over step the
power given in memorandum. In this case, a copy of resolution
passed by the board of directors of the company must be
obtained and carefully it should be examined.
b. Documents to be executed depends on

Nature of advance
Type of charge
Nature of security
Constitution of business
Requirements of bank itself

C. The execution of documents should be done in the presence

of officer responsible obtaining documents, that officer
must able to identify the borrower personally.
D. The borrower must be asked to sign in full signatures in the
same style throughout the documents the documents does
not carry initial or marks, Signature using right hand, if in
left hand a small note should be annex with documents.
E. All types of additions, alternations, insertions, cutting,
overwriting, erasing, interlineations, declaration etc. where
absolutely necessary in the documents must be
authenticated by the borrower (fully signatures in the same
style as signed the documents).
F. Date & Place of execution in each document should be
mentioned invariably.
G. The document should not be double dated.

H. Document, if run several pages borrower puts his

Signature on each page and on the last end of documents.
I. Where borrower is an illiterate person content of the
documents should be explained with the help of Lawyer or
respectable persons.
Witnessing:
Some of the documents compulsorily required to be
witnessed such as mortgage deed, gift deed, Will etc. At least
two witnesses are required for witnessing purpose.

Stamping:
i) Documents to be stamped as per Stamp Act. The stamp Act,
1899 with a schedule has classified various kinds of
document indicating the amount of duty levy able on them.
The liability of instrument to stamp must be determined on
or before the time of execution because validity of
documents depends on the amount of stamp. Last
Amendments where made as per law No. 14 in the year 1998
ii) An under stamped or unstamped document is deemed that
has not been executed for and the same would not be
accepted as evidence in the Court of Law can not form the
basis of a suit.
iii) Stamped which are needed to be affixed on various
documents are properly cancelled and cancellation is done in
such a way that the stamp can not be used again.

iv) Executants of the documents/lessee in case of lease deed

will pay the stamp duty.
Type of Stamp
Judicial Stamp
Judicial Stamps used mainly for judicial purpose in filing
suits and for payment of addvaluerum Court fee. Judicial
Stamps paper in the Court also used for certified copy of
decree.
Non-Judicial Stamp
Non judicial stamps used for preparation of contract deed
or sale deed. In banks these stamp used mainly inMortgage Deed both registered and equitable. Irrevocable
Power of Attorney Deed of agreement, Deed of
Redemption, Affidavit etc.

Adhesive Stamp
I) Revenue Stamp
Revenue Stamp used for any receipt of money. In bank
this stamp is mainly used in Promissory Note, Debit Balance
Confirmation, Credit Balance Certificate, salary register etc.
II) Special Adhesive Stamp/Impressed Stamp
Special Adhesive stamp used in banks mainly on Charge
documents- Letter of Lien, Letter of Hypothecation, Letter of
Pledge, Letter of Continuity, Letter of Guarantee, Letter of Trust
receipt etc. This stamp affixed on banks printed form and duly
Impressed by the Collector of Stamps. Tk 150/ (Tk one
hundred fifty) stamp duty is to be required for above
documents (as per last Amendment of the Stamp Act in the
year 1998).

III) Embossed Stamp

Embossed Stamps generally used by the Notary Public,
CCI&E, & other Govt., Semi-Govt. authority through pressing
machine on the document.

Registration:
All documents need not require registration, but certain
documents such as mortgage deed,Registered power of attorney
etc. require registration.
Signature verification:
Signature of the borrower is verified from specimen signature
card and the signature of other executant of document(if any) is
first verified by the borrower under borrowers authorized
signature and the same is verified by the banker.

Safe keeping of documents:

All the charge documents executed by the borrowers and
original title deeds etc. must be taken under the bankers
possession very carefully.
Each and every documents must be entered safe- in safe-out
register stating the date of receive, name of documents,
number of page.
If the documents is to be returned to the party after adjustment
of debt then necessary entry to be passed in safe-in safe-out
register.
This safe-in safe-out register must be under managers custody.
Custodian should check time to time documents safe/almirah
and spray insecticide t protect documents from insects.
Validity of document whether expired or not should be
frequently checked in terms of law of limitation.

First obtain General Documents. Then identify the

collateral, facility and obtain specific documents as
per loan documentation checklist. Leave out
documents not called for by the terms of the credit
Approval and facilities Advice letter(sanction Letter)

When documents become invalid

1. Alteration and Interlineations in documents: If it is done
after execution.
2. Deed misled by the mis-statement.
3. If the party is blind or illiterate and if the documents is read
falsely.
4. The party executing the documents in not competent
5. Improper stamping/under stamping
6. Want of attestation or witnessing, if necessary.
7. Failure to register with competent authority within specific
time.
8. Ambiguous schedule of the offered security
9. Forgery, tempering deleting of documents. Deed executed
by undue influence or forcefully.
10.Instrument executed in blank (amount, security, and
liability) with a bad intention.
11.When documents have become time barred.

Disbursement:

Before release of sanctioned loan or advance, all terms and

conditions as laid down in the sanction letter are to be
complied with. To that effect, the following are the basic
requirements:

1. Loan affectivity terms and conditions as to collateral security

and equity of the borrower shall be fully met.
2. Specified
documentations
(Mortgage
deed,
deed
of
hypothecation, pledge agreement, D.P. Note etc. as specified
in the sanction letter must be completed.
3. Verification of encumbrances of security properties
a) Non-encumbrance certificate
b) Execution of Halapnama
c) Verification of liabilities from NCBs/DFIs/PCBs to be completed
to the satisfaction of disbursing authority/ Manager.

4. Creation of charge on the collateral security: In case of

limited company, the charges on the company assets
should be intimated within 21 days from the date of
creation of charge, by regd. post to the Registrar, Joint
Stock Company.
5.Insurance for
(a)Security properties, as applicable
(b) Assets created or to be created out of a loan fund or with
the equity
(c) Stock of goods pledged with the bank as collateral should
be taken with appropriate risk cover.
6.Strictly following the disbursement schedule.
7.End use verification.

THANK YOU