Time has come for bankers to rethink about the obsolete form of bank finance and thus restrict widespread use of OD/CC (Overdraft/Cash Credit) limit in bank finance.
The entire loan structure and, more precisely, all types of credit facility being offered by banks should undergo complete overhauling. OD/CC limit, as means of working capital finance, should be replaced with 'revolving time loans' (RTL). It is true that complete elimination of OD/CC limit may not be practically possible because there are some special types of requirement for which this credit facility is conveniently required.
However, the use of OD/CC limit should be restricted and kept to the very minimum. Since borrowers will keep this type of credit facility available for the purpose of meeting very short-term requirement, especially when any unforeseen situation arises, they will have to pay very high interest. All over the world, this kind of credit facility carries high rate of interest and thus borrowers keep it as an option for emergency funding requirement for very short time when no other means are available. In developed countries, base rate loans are good example of this kind of credit facility.
Eliminating or restricting obsolete OD/CC limit and introducing RTL could be helpful in preventing new non-performing loans (NPLs). The RTL form of credit facility suits best working capital requirement. Under RTL, a certain amount of loans based on requirement analysis is approved for a certain period of time which is known as loan validity period. Under this facility, time loan for different time periods matching with specific requirements may be disbursed. Each time, loan will be chronologically numbered and will carry fixed maturity.
It may be mentioned here that there is a fundamental difference between expiry and maturity dates as the former one applies as end date of the whole credit facility while the latter one applies for specific time loan disbursed. At the expiry, the borrowers' entire credit facility is reviewed and based on analysis as well as requirement, the facility is either renewed or terminated as the case may be. On the other hand, at each maturity, respective/matured time loan will be paid off along with interest accrued thereon.
However, on maturity, respective time loan may be rolled over for another term but accrued interest thereon must be paid off in cash. This is the special feature of revolving time loan and quite different from overdraft facility that interest accrued must be paid in cash for time loan while the same is only accounted for and added with the balance in overdraft limit so that real interest payment does not take place in this type of credit facility.
Further, time loans may be for different time periods ranging from one-week time loan to 180-day time loan depending on specific requirement. Borrowers will determine their requirement based on which loan disbursement request will be submitted to the bank. Accordingly, time loan-1 and time loan-2 with stated tenure will be disbursed. One hypothetical example will provide more clarity on this concept. Say one borrower's working capital requirement is assessed for Tk 50 million which can be approved as revolving time loan with expiry after three years since execution of documents. Under this Tk 50 million, borrowers need various amounts of loans viz. Tk 2.0 million, Tk 5.0 million and Tk 8.0 million for 60 days, 90 days and 30 days term respectively and accordingly the bank verifies the purpose and disburses as time loan-1, time loan-2 and time loan-3 for requested amounts. After 60, 90 and 30 days, borrowers are required to physically deposit money to pay off these time loans along with accrued interest thereon. However, they will have the option to roll over loan each time but interest accrued thereon must be paid in cash.
In this way, disbursement of time loans, repayment and rollover will continue during the next three years' validity period of credit facility and thereafter, the facility will be reviewed for renewal or termination whichever is found to be appropriate.
The RTL form of credit facility has many advantages because this is purpose-oriented loan disbursement. Each loan is paid off on maturity and interest is paid in cash. Besides, monitoring, follow-up and finally, ensuring end-use of disbursed loan are much easier than any other form of credit facility. This form of credit facility is very popular in the developed world's banking industry.
Our banking industry should actively consider introducing this kind of credit facility and thus permanently eliminate malpractice of allowing Excess over Limit (EoL).
CENTRALISING LOAN PROCESSING: Along with changing the structure of credit facility, a qualitative change is inevitably required in the entire loan processing area. We know some banks have already centralised their loan administration department but this has been done on a piecemeal basis which will not bring good result. Entire loan processing, i.e., from marketing to recovery will have to be streamlined by dividing into four specific segments of workflow. Sales or Corporate Credit Unit, Credit Analysis Unit, Risk Management Unit and Loan Operation Unit will have to be created under different reporting lines. Sales or Corporate Department will conduct market research of the business community and will prepare their preferred list of the potential customers. Branch and its manager will act as referral of the customer. Based on their research and target customer list, they will direct customers to the Analysis team. This unit will conduct necessary analysis including identification of relevant risks including financial, economic as well as non-economic risks and mitigating those. Based on their analysis and findings, a memorandum will be prepared and submitted to the bank's Risk Management Committee which will finally approve the credit facility, if found within the risk parameters of the bank.
Once approved, the file will move to the Loan Processing Unit which should comprise three separate sub-units viz. documents control unit, processing unit and special account unit. Documents control unit will complete all necessary documentation related to the approved terms and conditions. After completion of documentation, a compliance certificate will be issued and credit file will be transferred to the Loan Operation Unit which will disburse, recover, realise fees, interest etc. as per agreed terms and conditions. For the whole management of the credit facility, if any deviation is noticed, the file will be transferred to the Special Account Unit which will then take care to keep the account well performing. This is the entire loan operation process which is followed by banks and financial institutions of not only developed countries but also many developing countries.
The whole process may seem to be clumsy, complicated and time consuming. But if proper system using various computer programmes can be established, it will be become very simple, easy and faster. All large banks, including those of many Asian countries, have established sales and corporate loan departments in various places of the world and set up loan processing hub in different continents but the execution is done very smoothly and expeditiously. Branches of foreign banks operating in our country provide faster loan services than our local banks. Although they are required to obtain approval and processing permission from their Head Office or regional office, yet they can make it happen because of establishing proper system in place.
The writer is a banker based in Toronto, Canada.
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