Liquidity of bank, liquidity crisis

 The ability of a bank to meet its current obligations, the quality that makes an assets quickly and readily convertible into cash. The most liquid item is cash itself, since it does not need to be converted. Money market funds which can be immediately sold for cash. The time and demand can also turned into cash quickly. Every banking company shall maintain in Bangladesh in cash or gold or unencumbered approved securities, valued at current market price, the value of which shall not at the close of business on any day be less than the such percentage of its total time and demand liabilities as the Bangladesh bank determines from time to time.   liquidity crisis Banks cannot afford to fail in payment to its customers anytime. If it happens, banks may face the risk of liquidation, such failure is called liquidity crisis. It occurs when bank is out of enough cash needed to meet its financial obligation.   causes for liquidity crisis of a Bank Liquidity crisis is a dangerous & risky problem of Bank. Because of liquidity crisis bank lost its main strength. The reasons behind liquidity crisis are: o  When banks give out a great portion of long-term loan compare to cash deposit. Though long-term loan is profitable but bank have to pay back the money when customer call for it. o  When bank’s significant portion of loans has the chance for classification and besides this bank again give out new loan then there can be liquidity crisis. o  When depositors of the bank lost their faith against bank & withdraw their money, then bank may fall in huge liquidity crisis. o  If interest rate in deposit is less compare to different bank in the country & outside the country, so there is a huge possibility of liquidity crisis as because most of customer can be switch to other bank also money can be transferred from one country to another country. o  different kinds of social conflict  like war, internal crush, inflation, economic disaster may  discourage customer from savings in the bank, which cause liquidity crisis.  

Advance Against Fixed Deposit Receipts

 When money deposited by a customer is not repayable on demand and is payable only after the expiry of a specified period from the date of deposit or after a specified period of notice, such deposit is called a fixed deposit. The banker acknowledges such a deposit by a receipt known as Fixed Deposit Receipts.

Sometimes, it happens that customers require advances form the banker on the security of fixed deposit receipt maturing at a future date, or alternatively he may request the banker for the repayment of the deposit before its due date. This term is commonly known as an advance against fixed deposit receipts.

Practice and Procedure for an advance against fixed deposit receipts

1. Advances should, as a rule, be granted to the person in whose name the deposit stands.

2. If the deposit is in two or more names, payable to them on their joint signatures, they must all discharge the receipt by signing across a revenue stamp, as also all signing a memorandum of the pledge. The loan documents should also be signed by all of them and the loan amount should also be paid under joint signatures.

3. In case the fixed deposit is in the name of two or more persons and, is “payable to either or survivor”, no advance should be made to one of the parties on the security of the deposit receipt, as no single depositor is entitled to raise a loan on the security of the deposit without the consent of the other or all others. The desirable course is that all depositors should sign the documents including the demand promissory note and the letter of lien. Where this is not possible a letter of authority, signed by all authorizing the applicant to borrow money and to sing the documents and to discharge the receipt and pledge the same with the bank as security, should be obtained.

4. No advance should ordinarily be granted against a deposit standing in the name of a minor. In special cases, banks can make advances where a minor is a son or daughter of a guardian when a declaration from the guardian should be obtained standing that the money belongs to him, but has been kept in the minor’s name as a matter of convenience and, the amount of advances is intended to be utilized for the benefit to the minor.

5. The deposit receipt should be discharged by all the depositors on an appropriate revenue stamp on the reverse of the receipt. Where the receipt is payable “jointly” or, to “either-or survivor,” discharge by all the depositors must be obtained. The signatures must be tallied with the specimen signatures in the bank’s record.

6. The discharged receipt must be surrendered to the bank along with a memorandum of pledge signed by the depositor authorizing the bank to appropriate the proceeds of the receipt on maturity towards the repayment of the advance in case the customer fails to pay the loan on the due date. This letter is usually known as ‘Letter of Appropriation.’

7. The bank’s lien should be prominently noted in the deposit register, ledger, and, also, on the face of the receipt, under the signature of an authorized officer to avoid any complications at some later stage.

8. In case, loan in advanced against a fixed deposit receipt in the name of a third party, the fixed deposit receipt duly discharged by the depositor should be obtained along with the letter of authority, authorizing the bank to allow the loan to the person named in the letter against the receipt and, t apply the proceeds of the deposit towards payment of advance in case of default to liquidate the loan on the due date. Lien is registered in the bank’s books and on the deposit receipt.

9. Generally, no advance is granted by a branch against the fixed deposit receipt issued by another branch of the same bank. If at all such an advance is granted in a special circumstance, the branch granting the advance should get the discharge on the receipt on revenue stamp duly verified by the issuing branch and obtain confirmation that a lien is noted in the fixed deposit register with the branch who issued the receipt before granting the advance. As a further precaution, the lending branch should ascertain that no lien is already noted against the deposit receipt at the issuing branch. A letter should be taken from the borrower addressed to the issuing ranch t remit proceeds to the lending branch of maturity of the receipt issued by another branch of the bank, the depositor must be properly identified.

10. As a rule, no advance is to be allowed against a fixed deposit receipt issued by another bank become of obvious legal complications. A fixed deposit receipt is not transferable. So, if such advance is to be made then a deed of assignment is to be executed by the depositor in favors of the bank from whom he is going to borrow money and, that deed will attract ad valorem with the bank concerned to the effect.

11. In the case of an advance against fixed deposit receipt in the name of a limited company, the same procedure is followed as stated above but the bank should see that

• An inquiry is made to ascertain that no prior assignment in respect of the fixed deposit exists;
• A duly authenticated copy of the resolution of the directors to borrow against the receipts is kept on record;
• The bank’s charge over the fixed deposits has been registered with the Registrar, Joint Stock Company within 21 days of the creation of the charge.

Repayment

Usually, advances against fixed deposit receipts are automatically adjusted on maturity form the proceeds of the deposit receipts.

If, however, repayment is made before the due date, the deposit receipt is returned to the customer after the cancellation of the discharge thereon. All notes of lien taken in the deposit register and ledger are also canceled.

Documents

1. Demand Promissory Note
2. The fixed deposit receipt duly discharge on revenue stamp by the depositor and pledged to the bank.
3. Letter of authority duly signed by the depositor in favors of the bank to adjust the advance form the proceeds of fixed deposit on maturity for liquidation of loan or overdraft account.
4. Letter of Continuity (in case of overdraft only)
5. Letter of lien executed by the depositor. This generally contains the clause of set-off.
6. Letter of guarantee executed by the depositor (if the deposit stands in the name of a third party).

Advance against the savings account balance

The most popular of the secured loan is the loan that has collateral savings in the same bank. This collateral can be easily checked and its value is established with no loss of time, as just a reference to the ledger account will reveal it.

An assignment is given by the borrower and the savings balances are earmarked to show pledge of the account to secure a loan. Interest in savings account continues to be credited to the account at the usual rate of interest.

Lien on balances in current or savings account of third parties

Advances are sanctioned on the security of current or savings bank account against credit balances of third parties by obtaining a letter of lien. After the advance has been made the bank’s lien should be noted in the ledger against the account of the party guaranteeing the advance.  

As a matter of fact, the bank has the right of set-off in such a case which is created by agreement and by operation of law. By taking a letter of lien on stamped paper from the guarantor earmarking the balance in his account as a security for the advance, the banker can refuse to honor cheques drawn on the balance is reduced below the stipulated amount. If also gives the bankers a right to adjust the loan through set-off if the borrower makes a default.

Documents

1. Demand Promissory Note
2. Letter of continuity
3. Letter of lien from the account holder earmarking balance in his account. This creates a right of set-off both by agreement and by operation of law.

Though banks are not bound to allow such advances, it is customary to do so, as the depositor may require the facility for an urgent need which could not have been anticipated at the time the money was deposited.

For security point, it is certainly the most valuable, as there is no problem of valuation or inquiring about the title or the problem of storage and costs associated with storage. While making advances against the fixed deposit receipt, the banker should observe the following precautions.

a customer of your branch approaches you for an advance against fixed deposit of 50000 of another bank issued in his favor. What action would take in this case?

As a rule, no advance is to be allowed against a fixed deposit receipt issued by another bank become of obvious legal complications. A fixed deposit receipt is not transferable. So, if such advance is to be made then a deed of assignment is to be executed by the depositor in favors of the bank from whom he is going to borrow money and, that deed will attract ad valorem with the bank concerned to the effect.

Syndication Advance, Loan Syndication

Loan syndication is the process of involving several lenders in providing various portions of a loan. Loan syndication most often occurs in situations where a borrower requires a large sum of capital that can manage lender's risk exposure levels. Thus, multiple lenders will work together to provide the borrower with the capital needed, at an appropriate rate agreed upon by all the lenders. It is common in mergers, acquisitions and buyouts, where borrowers need very large sums of capital. 

In case of large loan, consortium/ syndication should be preferred. Consortium/ Syndication means joint financing by more than one bank to the same clients against a common security basically, to diversify the risk. All consortium/ syndicated banks have a pari passi charge on the security.

Consortium loan means joint finance by more than one bank to the same party against a common security. The entire security remains charged to all these banks for the total advances. All the consortium banks have a Pari Passu charge on the security.

 

Adv & Disadv:

 

Advantages of Syndicated Loans

 

In addition, economists and syndicate executives contend that there are other, less obvious advantages to going with a syndicated loan. These benefits include:

 

     Syndicated loan facilities can increase competition for your business, prompting other banks to increase their efforts to put market information in front of you in hopes of being recognized.

     Flexibility in structure and pricing. Borrowers have a variety of options in shaping their syndicated loan, including multicurrency options, risk management techniques, and  prepayment rights without penalty.

     Syndicated facilities bring businesses the best prices in  aggregate and spare companies the time and effort of negotiating individually with each bank.

          Loan terms can be abbreviated.

     Increased feedback. Syndicate banks sometimes are willing to share perspectives on business issues with the agent that they would be reluctant to share with the borrowing business.

     Syndicated loans bring the borrower greater visibility in the open market. Bunn noted that "For commercial paper issuers, rating agencies view a multi-year syndicated facility as stronger support than several bilateral one-year lines of credit."

 

Eligible Securities for advancing Loans :

        100% of deposit under lien against the loan.

        100% of the value of government bond/savings certificate under line.

        100% of the value of guarantee given by Government or Bangladesh Bank.

        100% of the market value of gold or gold ornaments pledged with the bank.

        50% of the market value of easily marketable commodities kept under control of the bank.

        Maximum 50% of the market value of land and building mortgaged with the bank.

    50% of the average market value for last 6 months or 50% of the face value, whichever is less, of the shares trader in stock exchange.

 

Undesirable Securities and Prohibited Advances :

        Unquoted shares

        Shares of private limited company

        Partly paid shares

        Shares standing in the thirty party‘s name

        Temporary receipt for shares

        Large block of shares of any one company

        Uncalled capital

        Second mortgage

        Sub-mortgage

        Advances against capital assets

        Goods in godown having no independent access

        Goods where title and purchase price cannot be verified.

        Insurance policies taken out for the benefit of the borrower‘s wife and children

        House property where original title deeds not available.

        Hypothecation advance against stock in process

        Accommodation bill

        Truck receipt of bank‘s unapproved Transport Agencies

        Advance against truck receipt for unreasonably long period

        Shares of other banking companies

        Advances opposed to the lending policy of the bank

        Equitable assignment of debt.

 

 

 

Industrial Sickness :

An industrial company (being a company registered for not less than five years) which has at the end of any

financial year accumulated losses equal to or exceeding its entire net worth.

 

Causes of Sickness :

01. Mismanagement or inefficient management.

02. Faulty project planning and site selection

03. Inappropriate financial structure

04. Inefficient working capital management and financial budgeting

05. Absence of costing and pricing

06. Inefficient system of record keeping