Thursday, April 21, 2011

Question: Issues with a DD !


Question:You have issued a DD of Rs.50000 on one of your branch in another city what you will do in the following problems
A) DD bears only one signature,instead of mandatory two
B)The TEST does not agree
C)DD has been presented for payment but Inter Branch Credit Instructions from the issuing branch have not been received in your branch
_______________________________________________________________
Following could be the solutions to the questions, 


A) Take Conformation of 2nd Signature through fax


B) ETD (Electronic Technology Division) HelpDesk 
Coz there might be some technical issue due to which the test is not agreed. Test is a method through which bankers confirm /verify the genuineness of a transaction


B) New test can be applied through preferred on NIL Amount.
If there is some technical issue in test, a new test can be applied with a NIL amount just to confirm the transaction. 


C) Will Demand Credit Advise from respective branch through Fax.
If funds are not transfered from the issuing branch, to the branch on which the DD is drawn (or who will pay the DD) then we can ask for the Credit Advice from the issuing branch. Such situations should make banker suspicious about the genuineness of the instrument but the reason could be some error at the end of issuing branch. 

C) Can pay from Suspense A/C but early settlement will be made on priority.

This option is only suggested when it is confirmed through phone or other medium that the DD is actually issued by the issuing branch. 


Friday, April 15, 2011

Question : Why does SBP require the banks to classify their loans?


A) Why does SBP require the banks to classify their loans?
B) What are different catagories of Classification?
C) Differentiate between time-based and subjective classification.which would you prefer for your bank?

__________________________________________________________________________

Those who are working in banks especially credits department are well aware of the term "classification".
In common words a classified loan is a loan which is not regular and is experiencing any problem.

Prudential Regulations of SBP comprehensively covers this topic and SBP have provided guidelines for banks to report their loans when they are not behaving regular. Regulation R-11 of PRs deals with the CLASSIFICATION AND PROVISIONING FOR ASSETS.

There are two types of classification, Time-based and subjective. 

In time based its obvious that we have to consider the time period in order to classify the loan,

Annexure III of SME PRs gives the following time based criteria for classification of loans,


Sub-Standard :       Mrak-up/Interest or Principal overdue 90 days or more from due date 
Doubtful :               Mrak-up/Interest or Principal overdue 180 days or more from due date 
Loss:                      Mrak-up/Interest or Principal overdue 365 days or more from due date 

(Time Based classification is different in different sectors, i.e. Agriculture, Consumer. Check PRs of those sectors for further details)

on the basis of this classification the SBP has provided the guidelines to make proper provisioning of income, details of which are available in PRs.


Subjective Classification

In addition to the time-based criteria prescribed in Annexure-III, subjective evaluation of performing and non-performing credit portfolio shall be made for risk assessment and, where considered necessary, any account including the performing account will be classified, and the category of classification determined on the basis 
of time based criteria shall be further downgraded. Such evaluation shall be carried out on the basis of credit worthiness of the borrower, its cash flow, operation in the account, adequacy of the security, inclusive of its realizable value and documentation covering the advances.

Hence, reason for subjective classification can be anything which shows some irregularity in the loan and give a hint that loan is attracting classification. Such classification help banks to make proper provisions and closely monitor such loans in order to minimize risk and NPLs. 

which would you prefer for your bank?

Time-based classification is more standardized and can easily be applied to a large number of clients, preferable in case of small clients.

However, subjective classification is not feasible in case of small loans, therefore, it is suggested for large borrowers. 

Question : What is meat by secured and unsecured Exposure ?

"What is meat by secured and unsecured Exposure. Mention facilities that are counted as exposure"


Its another question asked by an examinee, for such questions it is recommended that you should go through prudential regulations (PRs) of State Bank of Pakistan. PRs covers all such topics which are defined by SBP as a guideline provided to the banks and DFIs. 


PRs are available here  http://www.sbp.org.pk/publications/prudential/index.htm

I reproduce hereunder the definition from SME PRs of SBP ,


___________________________________________


 Exposure means financing facilities whether fund based and/or non-fund based and include:
s
i) Any form of financing facility extended or bills purchased/ discounted  except ones drawn against the L/Cs of banks/DFIs rated at least ‘A’ by 3 Standard & Poor, Moody’s,  Fitch-Ibca, Japan Credit Rating Agency
(JCRA) or credit rating agency on the approved panel of State Bank of  Pakistan and duly accepted by such L/C issuing banks/DFIs.
ii) Any financing facility extended or bills purchased/discounted on the  guarantee of the person.
iii) Subscription to or investment in shares, Participation Term Certificates,  Term Finance Certificates or any other Commercial Paper by whatever name called (at book value) issued or guaranteed by the persons.
iv) Credit facilities extended through corporate cards.
v) Any financing obligation undertaken on behalf of the person under a  letter of credit including a stand-by letter of credit, or similar instrument.
vi) Loan repayment financial guarantees issued on behalf of the person.
vii) Any obligations undertaken on behalf of the person under any other
guarantees including underwriting commitments.
viii) Acceptance/endorsements made on account.
ix) Any other liability assumed on behalf of the client to advance funds pursuant to a contractual commitment

Source : http://www.sbp.org.pk/publications/prudential/PRs-SMEs.pdf

_________________________________

The above definition is a comprehensive one and cover all kinds of exposures, but commonly speaking we can say that exposure means the risk a bank have taken upon a customer.That can be in shape of any banking facility whether funded or non-funded.

Exposure is also considered as the amount of risk after netting off the securities we have against those facilities. For example, if we have provided a loan to a client against a Property having a Forced Sale Value of Rs. 1.000 Million and the amount of loan is 1.500 Million then we have a net exposure of Rs. 0.500 Million because if situation arises or in worst case scenario we can only recover Rs. 1.000 Million by selling that property and the remaining amount of loan is at risk.

So, going back to where we started the second part of the question gives you a hint that you have to write down some facilities as defined in PRs considered as exposure. And the person who had gone through the Prudential Regulations of State Bank of Pakistan can only give the proper answer of this question.

Don't take PRs light, our whole banking depends upon these regulations. Go through them and study them well ! This knowledge would be helpful in exam as well as in practical banking field.

Wish you good luck !

Where is the Objective Portion ?

 Institute of Banker Pakistan (IBP) publishes old papers on their website after a few weeks of the exams. If you have noticed they usually omit objective portion of the paper.There could be various reasons for that.

Objectives are about 40 to 50% portion of the exam and your results depends a lot on this section. No doubt, to score high in objective portion you have to go through in detail from the course outline. And the reason might be that there is not much variety available with IBP to put new questions every time therefore, they preserve the old objective questions to use them again the next papers. Thus, they don't publish that part of the paper. But if that's the reason it doesn't sounds very positive. I think they should publish them along with the subjective part so the examinees can get an idea that what types of fill in the blanks and true false questions they would face in the paper. And the people who are preparing those exams should be more creative in producing new objective type questions to test the examinees of IBP.

Or, they might want to save trees, because when we take print-out of that objective part, they consume more paper sheets :-P ...... aaaahh !! Just a random thought I got :-)

Anyways, if anyone have the papers which still got the objective part, please email me and also if you have enough good memory that you remember some questions, please do share with us.

Knowledge increases when shared !

Good Luck ! 

What is difference between commercial and consumer loans?

What is difference between commercial and consumer loans? this question was asked by an examinee along with other questions. Beside replying to her I am sharing my thoughts here on my blog so others can also benefit.


Commercial Loans are for business purposes. Usually given to companies to meet their various business needs. There are many types of such loan depending upon the requirement of the business. 


Whereas, 


Consumer loans are those loans which are required by a person for their personal needs. 


If a car loan(finance or lease) is obtained by a company/individual for commercial purposes it is a commercial finance where as if the same kind of car loan is availed by a an individual who would use that car for his personal needs and would not gonna earn rent from that car that is considered a consumer loan. 


Hence, we can say that consumer loans would not become a source of earning for the borrower, however, commercial loans might help him earning more profits. 


Some examples are as follows,


Commercial Loans,
Running Finance, Cash Finance, Term Finance, Export Finance, FATR, FAPC II etc


Consumer Loans, 
Credit Cards, Personal Finance, Car Finance, Mortgage Finance

Sunday, April 10, 2011

One Month Left in Exams ! Crash Prep begins !

Now almost one month left for the preparation of JAIBP spring 2011 exams. You can find the schedule here : http://www.ibp.org.pk/Schedule.aspx

Now those examinees who are still trying to start preparation, I should say that its time for do or die. As they say its never too late, therefore, they should start some crash preparation. For that it is recommended that they get all the past papers of Institute of Bankers Pakistan and solve them one by one. This would now only help them studying the main topics through the questions, but they would also get familiar with the pattern of the paper. Although you never know when IBP changes the pattern of their exams and when they change the proportion of subjective questions and objective questions. But as its a crash preparation time therefore, it is obvious to take risk.

Now, its impossible to prepare in detail thus, solving old papers will do work for those who are yet thinking to start preparing. When you are solving past papers of IBP try to go through the whole topic for which questions were asked. This would help you cover the whole topic and your selective study would be effective. Its best that you have internet facility for finding answers to the questions, and some reference books for authentic sources.
Technology has made it very easy to search for the answers of the questions. I have also uploaded books on this blog and you can download them as reference books. I hope that would help you a lot in preparing for Junior Associateship of Institute of Bankers Pakistan (JAIBP) , and also for Associateship of Institute of Bankers Pakistan (AIBP). But sometimes there are questions which can only be answered after you have obtained considerable experience in the field of banking. For such questions, you have to consult to any banker around, ask some mentors of IBP, or you can ask me and I would try to answer that question.

Wish you all the very best for upcoming exams.

A teacher of mine mentioned this quote a lot during his lectures, "More Sweat in peace, less blood in war."

Plan and Prepare !