Allied Bank Ltd. has a history of about half the century in Pakistan with a mega network of branches that are numbered more than 1000, 200 out of which are automated branches, over 225 ALB. ATMs in 41 cities nation wide and network of over 12 banks on the meant ATM switch. Ten years after privation, ABL is now in spoliation stage designed to lock in the gains made in recent years and prepares the ground work for future growth.
The study examines the source and size of problems and recommendation to reduce it. For this purpose I have conducted interviews and literature survey in order to investigate the role of securities and organization effectiveness through important variables.
The main topic of the project is to conduct a survey on the securities and bad debts. The report is sequenced as firstly, I have defined a problem statement for the mentioned topic followed by theoretical frame work convening the relationship between depend variables i.e. securities can minimize bad debts and independent variables i.e. mortgage, pledge, hypothecation etc. related to the subject matter.
Together regarding the topic have prepared a questionnaire that has been filled by fifteen professionals of different banks and as well as of ABL belonging to different department working at different levels in the organization.
After completing literature survey and defining problem there is need to develop theoretical framework. In it I discovered that different variables can affect bad debts. I am considering all important variables that can affect company.
First we defined the loan and its types and then different types of securities which the customers give to the loan and its types. If the customers repay the on due date then these receivables become fruitful assets of the organization. If the customer does not return these loans on due date then bank declared these uncollectible receivables as bad debts. We discussed the reasons of these receivables, how securities play important role for bank to recover these receivables and how bad debts can be minimized. After making theoretical framework, we also conduct the testing which provides accurate and precise result of this research.
About the problem we obtained a lot of information from literature review, which contain information about securities, bad debts, and its recovery. I gave the recover ordinance that plays an important role in the recovery of the advances or loans i.e. ordinance of 1997 and 2005 that contains legal condition, rules and regulation.
After the analysis and findings conclusions is made followed by some recommendations. At least bibliography covers the list of references used for the completion of the research. Finally I have attached organization chart and some forms and applications about securities and its rule and regulation.
RHCRBG Regional Head Customer Risk Banking Group RCRR Regional Credit Risk Rating RSAM Regional Special Assets Manager RCAD Regional Credit Admin Department CIBG Corporation investment Banking Group BOD Board of Director DF Demand Finance FAFB Finance Against Foreign Bill LMS Lien on Marketable Securities SECP Securities Exchange Commission Pakistan DSC Defence Saving Certificate
As far concern the scope of study I have visited ABL the Mall Lahore (Regional Office) and met with Mr. Zahid Ali (Provincial Manager). I am really thankful to him for his cooperation that really helped me in providing information regarding organization and it is actually implementation at ABL. It was also taken because of its convenience although country head office is in Karachi. The branch at which I visited is located in Lahore Cant. Its Chief Manager is Mr. M. Haseeb and Manager Operation is Kaleem Ahmed.
The branch is online branch and have the deposits of the about 750 million Rupees and about the 5000 account holders. ATM is also installed in this branch. This branch came into existence in 1962 and is one of the old branches. It has total staff of 16 people, which includes 2 cashier and 2 security guards and one messengers.
The main objective of my project is to apply my concept and knowledge in practical scenario. And how the organization is getting competitive advantages through securities.
The purpose is to prove that how different securities contribute in implementing bad debts minimize within the organization. This research would produce affective result, that’s why we can say that research generates alternative result to solve problems.
There are many definitions to the word “Bank” even the standard encyclopedia and law books find it difficult to state exactly what a bank is. There have been many attempts by different writers to explain the exact significance of the term “Bank”. Here some of the definitions are quoted as follows:-
According to the Banking Companies Ordinance 1962
Section 5 (b) defines:
According to Pakistani banking law sec 5(b) banker means a person transacting the business accepting deposits and extend loan to the general public or invest it somewhere by itself it provide the facility of withdrawals of deposits by cheques drafts, order of otherwise, and include any post office saving banks.
According to Crowther
Bank is a dealer of debt, his own and of other people.
According to Gilbert
A bank is a dealer in capital or dealer in money. He is an intermediary party between the borrowers and lenders.
According to Samulelson
“The modern banker is primarily a dealer in credit”. Thus the comprehensive definition of the bank. A bank is financial institution, which deals with money and credit. It accepts deposits from individuals, firs and companies at a low rate of interest and gives at a higher rate of interest and gives at a higher rate of interest to those who need them. The difference between the terms at which it borrows and those at which it lends from the source of it profit. A bank, thus, is a profit earning institution.
Banks play very important role in the economic life of a nation. The growth of economy is dependent upon the soundness of its banking system. Although banks do not create new wealth but borrow, exchange and consume. These make generation of wealth. In this way they become most effective partners in the development of that country.
To encourage the habit of saving and to mobilize these savings is its basic purpose. Banks deposit surplus from the public and then advances these surpluses in the form of loans to the industrials, agriculturists, businessmen, and unemployed people under different schemes so that they set up their own business thus banks help in capital formation.
If there are no banks, ten there would e concentration of wealth in few hands and great portion of wealth of a country would be idle in the fewer developing countries rate of saving is very low and due to this, rate of investment and rate of growth is also very low. We can bank just like heart. In the economic structure and capital provided by it is like blood in it. As long as the blood is in circulation, the organs will remain sound the healthy. If the blood were not provided to any organ the organ would become useless. So, if finance is not provided to agriculture sector or top industrial sector it will be destroyed.
Loan facility provided by bank works as an incentive to the producer to increase production. Banks provide transfer of payment facility, which is cheaper, quicker, and safe. Many difficulties in the international payment have been over come and volume of transaction has been increased. These facilities are very much helpful for the development of trade and commerce.
The Indian Society was quite familiar with the banking, right from the beginning. There is also sufficient evidence to show that fifth country people were accustomed to use hounds a credit investment. Loans were given top the people against personal and other securities such as ornaments, goods and other immovable properties.
It was very difficult for Pakistan to establish its own baking system-immediately after independence with out resources. Following the announcement of the partition plan in June 1947 there was a haste movement on the part of the banks to transfer their funds and accounts across their orders. The banks having their registered offices in Pakistan were transferred to India. In an effort to bring about collapse of the new state by the persecuting and international policy of with drawl, the Indian bank offices closed quickly. Those banks, which stayed, were considering the winding up of their business. By the 30th June 1948 the number of scheduled banks in Pakistan declined from mere scratch.
Today there are more than 9137 branches of commercial banks along with an established network of supplementary financial institution. All this development in the banking sector is the result of untiring efforts of 4 decades.
Broadly speaking we can divide the development of commercial banking into four phases.
PHASE-1 1947-74 Establishment of commercial banking system
PHASE-2 1974-1979 Nationalization of banks
PHASE-3 1979-91 Islam station process
PHASE-4 1991-2005 Deregulation process
FIRST PHASE (1947-74)
This was the first phase of the development of Pakistan Commercial Banking system, which consists of the circumstances under which the development of the banking was started in the country.
There were 19 known Indians foreign Banks in Pakistan at the time of Independence, which the status of small branch networks, whose policies and operations their head offices abroad controlled. These banks were solely engaged in exports of crops from Pakistan. There were only two Banks in Pakistan at the time of partition, Habib Bank, which had transferred its Head office from Bombay to Karachi after the announcement of the partition, and Australian Bank, which has been working in Pakistani territories prior to June 1947. The Government of Pakistan tried hard to eliminate the Banking crises.
The Imperial Bank of India closed down most of its offices in Pakistan, which had been working, as the agent of Reserve Bank of India was not willing to purchase even token amounts of the Pakistan.
Securities on the plea that these securities were not marketable. The Reserve Bank of India was hardly of any help. It refused to help the Government of Pakistan with advance arguments ad-hoc securities t enable them to make essential disbursements such as salaries and other obligations to add to the difficulties.
The Indian Government withheld Pakistan shares of 750 million in cash balance held by at the time of independence. The for going developments clearly brought home the urgency of assuming the control and currency in Pakistan and brought to the fore the need to setup a central banking institution to take the place of reserve bank of India. Therefore, it was agreed between the government of India and Pakistan to authority of Pakistan from 30th September 1947 to 30th June 1948.
In order to make necessary agreement of establishment of the central bank of Pakistan a committee was appointed to recommend the necessary steps. Consequently the Governor of Pakistan and father of the nation Quaid-e-Azam Muhammad Ali Jinnah inaugurated the state Bank of Pakistan of 1st July 1948. After the SBP order was promulgated on 12th May 1948.
When it assumed full control of banking and currency in Pakistan the first important task before the SBP was to issue of currency notes and withdrawal of reserve bank of India, which had been in circulating in Pakistan so for.
Second Phase (1974-79)
The banking reforms turned out to the transitional and temporary step and hardly after 18 months have the government nationalized the banking system. Thus through the nationalization bank act 1974, SBP and all commercial banks incorporated in Pakistan and carrying on business in or out side of the country were brought under the government ownership with effect from January 1974. The ownership and management of all Pakistan banks stood transferred and rested in the federal government. The shareholders were provided compensation was equal to the brake up value of the shares in case of commercial banks. For the SBP shares the amount of compensation was estimate on the basis of average of the clearing quotations during the 6 working days preceding nationalization. The chairman, director and chief executive of various banks were removed from their offices other than those appointed by the federal government and the state bank. The central board of banks, managing comities and similar other bodies were dissolved. A Pakistani banking council was established for nationalized commercial banks to co-ordinate their activities.
As a result of merger of banks the following 5 major banking companies were formed.
1. National bank of Pakistan
2. Habib Bank Ltd.
3. United Bank Ltd.
4. Muslim commercial Bank Ltd.
5. Allied Bank of Pakistan
Causes of Nationalization
The nationalization of banks may be justified on the following grounds.
1. Large business and industrial houses dominate the lending policies of commercial banks; this brought forward the problem of concentration wealth.
2. Commercial banking operations were guided by profit motives and as a result the backward regions and the small entrepreneurs were never been their favourite customers.
3. The operation of banks, unlike after business, have direct implication on the entire national economy. For the instance if the banks raise the cost of their credit, the cost of every thing may go up.
4. Unhealthy complications among banks can lead to financial and economic problems.
5. The flow of bank advances towards national priority sector in general is not forthcoming because private banks ate not profit oriented.
Although there are doubts about the positive result of the nationalization but we can say that the nationalization of the banks provided efficient professional management to expand making services in every nook and corner of the country. Banks laid full emphasis on their lending policies on priority sector and national building projects, which discouraged non productive and un-healthy activities like speculation and hording; there was also a recorded increase in the foreign branches of Pakistan banks.
The growth of Pakistani banking system was significant. The banking facilities expanded in the rural area. The bank credit increased sharply especially in the public sector. A part from this expansion the banking systems activity seeking to gain credit targets laid down by national credit consultative council and to confirm to the priorities over the year to enlarge the flow of small banker and agriculturist as well as for exports.
Third Phase (1979-91)
In 1977 the Bhutto Government was toppled. The martial law government planned to reform the banking sector in a novel way. The over all policy was to Islamise the economy and the baking system, being based on interest was an important target of the new policy. The most preferred from of the Islamic bank financing profit and loss sharing would receive banks to receive deposit without guaranteeing return.
The Islamic bank has to acquire a high degree of confidence of the save of make him deposit his money with them not even return of the principal amount if guaranteed. The Islamic bank cannot finance the project of an investor merely on the furnishing of collateral. The bank will have to be a partner in the project. This will require to careful security of the project and the assessment of risk involved because profits are the function of the amount of risk involved because the profits are the function of the amount of the risk in the project.
The government headed by Prime Minister Nawaz Sharif was not fully satisfied with the performance of nationalized. The areas, which were severely criticized, were the following standard of the banking servicesd common red tapes. There were complains about the services as delay in home remittances, dispatch of cheques, drafts, inefficient counter services, bad debts of the bank etc. were on sector application of privatization of other banks namely UBL and HBL were also invited but the bidding response was quite poor. Legislation was elected to permit the private sector for the grants of the commercial banks licenses by SBP, out of these nine new banks have since been incorporated. Till March 1994 there were 20 domestic scheduled banks with 9825 branches and 21 foreign banks 66 branches in operation in the country. Overall investment of the scheduled banks in the current year rose to 76.7%. At present there are 24 domestic scheduled 8137 branches and 19 foreign banks with 71 branches are in operation in the country. Total assets of the domestic schedule banks amounting to Rs. 1536.73 billion on 30th March, 2004. Overall investment of the domestic scheduled banks in the current year declined by 80% over the same period last year.
1. Bank of commerce Al-Habib Ltd.
2. Soneri Bank Ltd.
3. Union Bank Ltd.
4. Mehran Bank Ltd.
5. Askari Commercial Bank Ltd.
6. Capital Bank Ltd.
7. Indus Bank Ltd.
8. Prime Commercial Bank Ltd.
9. Bolan Bank Ltd.
10. Republic Bank Ltd.
Now, Mehran Bank has been absorbed by National Bank Ltd. Due to its poor performance and ultimate failure.
Dream to become a vibrant bank to provide its customers with the integrated customers services to become their first banking choice.
Vividness in services
Quality of performance
Development & Growth
1.Provision of value added services to our customers to meet their requirements.
2.Maintain sustainable values by expansion, competence and variety of services for our valued 3.customers.
4.Provide a plate form to our dedicated team members for their self actualization.
5.Participate in the economics and fiscal growth of the country
Allied Bank of Pakistan was established in December 1942, at that time its name used to be Australia Bank Limited. Allied Bank has also a historical privilege being the first ever Islamic Bank on the soil of Indo-Pak subcontinent in 1942. When the bank was established somewhere near the second world-war, it’s paid up share capital was just .82 million rupees. But under the successful chairmanship of Khawaja Bashir Bux, the bank progressed very well in the initial one and half year of its inception the bank deposits became 0.43 million rupees. By the June 1944 the total assets of Australia Bank Limited (Allied Bank) were 1.573 million rupees.
Today’s financial position of the Allied Bank Ltd. is as followed:
Capital & Reserve: 28.50 Billion Pakistani Rupees
Total Deposits: > 445.0 Billion Pakistani Rupees
Total Assets: 470 Billion Pakistani Rupees
Australia Bank (Allied Bank Ltd) from 1942-1947:
The Indo-Pak sub continent was basically a land of multi religion natives. The Hindus were in majority and economically stable. They had been into the business and trade late in the nineteenth century and had captured the subcontinent’s trade industry by the mid of the twentieth century. By the time Muslims have not entered into the business and trade and it had become a common illusion that Muslims can never be a good businessmen. So as the Banking sector was fully dominated by the Hindu majority and it was assumed that Muslims can never become successful bankers. At that time a Muslim Businessman Mr Khawaja Bashir Bux understood the need of hour and decided to establied the first ever Muslim bank in the subcontinent. It was named Australia Bank Limited which later became Allied Bank Limited.
From 1942 to 1947, the deposits of the Australia Bank Ltd. (Allied bank) increased from 0.43 million Pakistani Rupees to 77.28 million Pakistani Rupees. That represents its operative success.
At the time of independence of Pakistan on 14-08-1947 Australia Bank was the one and only Muslim bank on the soil of the new country. The bank responded promptly with the freedom movement of Pakistan, in August 1947 when the subcontinent was divided into two separate countries Pakistan and India, all the branches in operation of Australia Bank in the Indian region were closed down in all of the cities fall in the territory of the India and at the same time new branches were open in the territory of Pakistan, initially in the eight major cities of Pakistan later with the time, expansion in branches reached to the small cities aswell. At that time the economic condition of the migrants was very miserable people don’t have cloth to wear and food to eat, the Australia Bank took a decisive step and fully financed the trade of basic needs at very flexible terms. The bank kept on progress and it had more than 100 branches by the end of the year 1970. In 1971 the bank has to suffer a huge loss of assets when East Pakistan was separated as Bangladesh, in the shape of more than 50 branches operating in East Pakistan. Further new branches were opened and the total number of branches reached almost 180 in 1973.
The Australia Bank Limited was renamed as Allied Bank Limited in 1974. This year remained a very successful for the Allied Bank Limited. 50% growth in deposits was observed and the deposited reached about 1460 million Pakistani Rupees, a 72% increase was observed in investments and the deposits of the Allied Bank first time exceed the barrier of 1000 Million Pakistani Rupees. During the year 1974 the Allied Bank Limited earned a profit of more than 10 million rupees.
More than 100 branches were opened in this year and the bank started financing the government in its agricultural program. From 1974 to 1991 the bank grew rapidly to total number of branches reached to 752 with the following financial position:
Total Deposits 1991: 1.48 Billion Rupees
Total Investment: 22 Billion Rupees
Achievement: 3 Branches were open in the United Kingdom
Allied Bank from 1991 to 2005
The Allied Bank Ltd. was privatised in 1991, and the bank achieved another historical mark being the world’s first bank that was owned and managed by its employees. Achievements from 1991 to 2005:
Capital & Reserves: 1.6 Billion Rupees
Assets: 88.456 Billion Rupees
Deposits: more than 75 Billion Rupees
Late in the year 2004 the capital reconstruction took place and the Allied Bank’s Ltd. ownership was given to the Ibrahim Leasing Limited.
Allied Bank Limited from 2005 to the date:
Allied bank limited kept on his story of growth and achieved many mile stones and ultimately the Allied Bank Limited got listed in the all three stock markets of the country during this period.
All the customers of the Allied Bank of Pakistan who maintain their accounts at any of the online branch of the country can avail the facility of the Online Banking. By using this service offered by the Allied Bank of Pakistan the customer can deposit cash in either branch of the bank that can be credited to the any remote branch instantly. The customers can also transfer funds between any 2 or more online branches as well as one can pay off their utility bills online and get his/her account balance and transaction information via email.
In addition to the above, account holders of all online branches can obtain Allied Bank’s Allied Cash + Card for use at ATMs as well as the Debt Card POS terminals.
To locate a Branch simply select the city
Achieve Remarkable Growth Rates
Allied Bank’s 56 annual general meeting was held on April 19, 2002 at Karachi. The meeting was chaired by Mr. Khalid Chairman, Board of Directors of Allied Bank and was attended by stakeholders and Directors of the Bank, and a representative from the State Bank of Pakistan.
The shareholders unanimously confirmed the minutes of the 55 AGM and audited accounts of the bank for the year ended December 31, 2001 together with Directors and auditor’s reports. The shareholders noted with satisfaction that the Bank had achieved remarkable growth rates in all the key performance indicators.
Mr. Rasheed M. Chaudhry, Chairman informed the house that Allied Bank’s all round progress was evident from the fact that its deposits had increased from the Rs. 63 billion at December end 2003, registering a 20% rise over the previous year’s figures. Total assets of the bank increased from Rs. 72 billion in 2000 to Rs. 89 billion in 2001 thereby increasing at the rate of 23.4% over the last year. This is the highest growth rate for the last four year, advances, net provision, had increased from Rs. 36 billion in 2002 to Rs. 43 billion in 2003 thus increasing by 18% during the year. He further informed that though the advances to private sector had declined countrywide yet in case of our bank share of credit to private sector remained unchanged as compared to the previous year. The investment has increased from Rs. 20 billion in 2002 to Rs. 26 billion in 2003, thus increasing by 27% during the year under review. Equity of the bank increased from Rs. 1.515 billion to Rs. 3.002 billion registering almost 100% rise. Pre-tax profit of the bank increased from the Rs. 29 million in 2000 to Rs. 170 million in 2001, thereby reflecting a growth rate of almost 490%.
The foregoing singular growth rates were achieved by the staff of the bank through their relentless efforts despite the fact that during the year under review the global economy experiences the after math of FAR EAST ASIAN financial crisis resulting in slowing down of average global growth rate of GDP. In South Asia, India and Pakistan detonated their nuclear devices during the first half of 2001 followed by the economic sanctions, which seriously affected the economics of these countries.
Immediately after denotation, Pakistan freezes foreign currency accounts which created crisis of confidence. Home remittances, which extends substantial support to foreign depts… The dispute with IPP’S worked as disincentive to foreign investment. As the economy was already in recession, the aforementioned events further deteriorated the economic growth and adversely affected the performance of almost every sector of the economy, as also observed in the State Bank of Pakistan.
A special business was transacted in the meeting and it was resolved to increase the authorized capital of the company from Rs. 2 billion to 5 billion. The chairman informed the shareholders that the management would continue to make efforts for further increasing profitability and equality. For improving quality of assets the management has decided to rigorously implement prudential regulations and bring down the quantum of non performing loans. Besides for insuring quality of assets the bank has made a policy decision to encourage short term self liquidation trade related secured financing. The management will also continue its computerization program and human resources development on priority bases. The shareholders expressed full confidence in the present management and appreciated its efforts.
All the staff working in the Branch Manager administrates the field under the branches. The public dealing/customer dealing is done at the branch level and entries range of service is extended at this level. The branches are the outlets in case of bank for the public. In addition to the normal banking services through the branch network. The 929 branches of M/S Allied Bank are spread over through the country and world over. The branch manager is delegated with the powers to conduct the usual daily business of branch as per rules and regulations promulgated by the State Bank of Pakistan as well as the instruction and policies of the Allied Bank conveyed from time to time. For their business transaction that does not fall with in the review of the branch manager are referred for decision of the control line depending upon the nature and higher authorities at Central Office Karachi.
The zonel offices are the immediate controlling offices of the branches. Their primary role to monitor working of the branches and ensure that these are practiced according to the set rules and regulations.
Moreover, they are given certain powers of granting loan/permissions to help branches working smoothly. These offices also monitor and help branches in improving business activities and activate liaison with the business community.
Circle office is the controlling office above zonal offices. The circle executive is the immediate controllers of the zonal offices as well the branches falling under the jurisdiction of that zonal office. These offices are delegated yet more powers for taking business decision regarding the branches and for business promotion.
The provincial office is the supervisors of the entire controlling offices working in province. They monitor and evaluate the performance of the field staff as well as the working controlling offices under their jurisdiction.
The provincial offices are delegated with very large powers to reinforce the field staff for the purpose of business promotion.
The central office is the ultimate authority, which control the entire function of the bank in the field through the custody of the provincial office up to branch level and at the central offices level through divisions and departments which controls different types of function.
There are as many as 20 divisions working at head offices in the Allied Bank the detail of which is given under:-
1. Field controlling and monitoring divisions
2. Adman & Human Resource Division
3. Computer and M.I.S. Division
4. Business Promotion Division
5. Agri. & Inspection Division
6. Audit & Inspection Division
7. Sports Division
8. Credit and Corporate Division
9. Customer Services Division
10. Finance Division
11. International Division
12. Islamic Banking Division
13. Investment & Funds Management Division
14. Legal Affairs Division
15. Maintenance Division
16. Merchant Banking Division
17. Recovery Division
18. Research and Development Division
19. Training Division
Different Securities required for financing can minimize bad debts
If someone owes your money and you are not able to collect that back from them, such amount of money is called as bad debts. Bad debts may be further divided into two categories; business & non business bad debts. Those debts that becomes bad during the normal course of business transactions, is called as business bad debts, here we are concerned only with the business bad debts. A deduction is allowed in the total taxable income of the business on account of the bad debts occurred during that tax year. Non business bad debts can not be claimed as deduction against the taxable income.
This point is to be remembered that only those debts are business debts whose supreme motive to incur is closely related to the business. And that was incurred to expand the business.
Sales made to the customers on credit basis is called as the credit sales, it is a major reason of the business debts. Often customers buy goods and services and promise to pay for them after a specific time, if the business is not able to collect full or a part of such amount receivable such part that had never been collected is recorded as the bad debts in the books of accounts. Bad debt is treated as an expense and it results decrease in the account receivables of the business. The amount of bad debts allowed as deduction against the taxable income are the lower of the actual amount of bad debts or the fair market value of the goods or services for which debts associated to which the debt became bad. At the time of the credit sales the accrued income is added in the sales of the year if such sales has not been taken into account for ascertaining the total sales for the period, bad debts related to those sales are not allowed as deduction against the taxable income.
If the business adopts an accrual method of accounting, where income and expenses are recorded into the books of accounts when they accrue regardless of when they have been received or paid respectively. In this method the uncollected amount of credit sales is also included into the total income for the period, tax deduction is allowed only while using the accrual method of accounting.
If the business adopts the cash basis of accounting, where income and expenses are recorded into the books of accounts when they are received or paid for respectively regardless of the fact when they were accrue. While using the cash basis of accounting, deduction on account of the taxable income on account of the bad debts is not allowed.
If the owner of the business sells his business to someone else but keep his receivable with him still such debts are called as the business debts as they were actually occurred during the normal course of business activity. If such debt subsequently becomes bad, still it is assumed to be the business bad debts. If the owner of the business sells his business to someone else and also sells the receivables to the same person, such debts are still business debts for the new owner of the business and if the same subsequently become bad these are the business bad debts for the new owner and he can have the tax benefit on account of those bad debts. If a person sells his business to one person and sells his receivables to another person, in such a case if those debts become worthless, the activities of the new owner of the receivables decides either those bad debts are the business bad debts or not. If the new owner of the receivables acquired those debts as a part of his business such debts are regarded as business bad debts if become worthless.
The treatment of the bad debts of the business acquired from a deceased person is ascertained exactly as it is treated in case of the sale of the business. If the deceased person’s business and receivables are received by the same successor, debts become worthless such receivables are treated as business bad debts as those were closely related to the business. If the business and receivables of the deceased person are received by the two different successors, the activities of the successor receiving the receivables decide either the debts became worthless are business bad debts or not.
Mr. Ali died in the year 2005, his business and business receivables were received by his son Mr. Akmal. Subsequently a part of those receivables become bad. Now Mr Akmal can deduct such bad debts against his taxable income because these are business bad debts being closely related to his business when become bad.
Mr. Ali died in the year 2005, his business was received by his son Mr. Akmal and business receivables were received by his daughter Miss Tehreem. Tehreem is not conducting any sort of business, in the subsequent year a part of those receivables become bad, Miss Tehreem can not have the tax benefit of these bad debts because these do not belong to any business activity at the time they become worthless and hence these are not the business bad debts.
If the business is liquidated, and after its liquidation some of its debts become bad, those debts are still assumed to be the business bad debts if the worthless debts are a part of the debts that were arose during the normal course of the business.
Political party is a non profit organization that gathers donations from the public and tries to influence the public elections. If the business has some receivables due to any political party and such receivables further become irrecoverable, the business can have the deduction of such bad debts against its taxable income if all of the following conditions are fulfilled:
The business maintain its accounting records on accrual method.
Amount due to the political parties is as the result of sale of goods as per the normal norms of the business.
If the credit sales made during the year to the political parties exceeds 30% of the total receivables of the business for the financial year.
Bad Debts as the result of capital contribution ;
If the business make some loan to any corporation and further such loan become irrecoverable, such bad debts are allowed as deduction because loan to a corporation is assumed to be the contribution in capital.
BAD DEBTS resulting from the insolvency of the partner :
If in the partnership business, one partner become insolvent and the partnership is dissolved, in this case the first partner can not pay off his part of the business liabilities, in such a situation the other partner can claim the bad debts deduction to the extent he pays on behalf of the former partner (amount due to be paid by the former partner) who became insolvent.
Deduction for the payments paid for the loan guaranteed by the business:
If any third party acquire some loan to any party other than the business, and the business guarantee the repayment of the loan incase the third party doesn’t pay it off, in this case if the borrower doesn’t pay to the lender and the business pay off to the lender on the behalf of the original borrower, such payments are not allowed as deduction.
If more than one debtor jointly own money of the business, and the business is not able to collect money from any one of such debtors, it doesn’t entitles the business to assume such amount as bad debt, because in this case the other partners of the debtor has severally and jointly liable and business has a legal right to call for the amount due from the rest of them.
Bad debts are to be deducted from the tax return of the year in which it become bad, however if you don’t do so even then you have a right to claim the refund on account of that, the following rules applies that:
If the debts fully become bad, in such a case you are allowed to claim for tax credit or refund with in seven years from the date to when the filing of the original tax was due or within two years from the date you actually paid the tax due for that period, which ever date is later.
The second situation is when partial debts become worthless in such a situation you can claim for the tax credit in the further years or claim of refund with in three years from when the business actually filed the tax return or with in two years from the date you actually paid the tax due fro that period, which ever date is later.
If the business is maintaining its accounting record on accrual method of accounting, it is allowed to use non accrual treatment of bad debts, where the business is not required to accrue its income from sale of services that is no more expected to be collected. It is allowed if and only if the following conditions are fulfilled:
The business normally uses non accrual method for the debtors arising as the result of the sale of service.
The services should be related to business or management related consultancy.
The annual receipt from the sale of services should not be more than 5 million Pakistani Rupees in any of the last three years.
Once the firm has determined an optional cash balance, the residual of its liquid assets is invested in marketable securities in the models examined, we assumed a given yield and no risk of fluctuations in market price. These assumptions are realistic for very short term, high grade securities used as buffer to replenish cash. Firms frequently hold securities with lesser characteristic for less immediate needs. In this section, then, we examine the types of marketable securities available to a company as near money investments, allowing for varying yields and for fluctuations in market price. First, we need to explore the reasons why the yields vary: the differences in default risk.
When we speak of default risk, we mean the risk that the borrower will not satisfy the legal compulsion in accordance with the agreement to pay back the principal and interest. Investors are said to demand a risk premium to invest in other than default. Treasury securities are usually regarded.
Marketability of a security relates to the ability of the owner to convert it into cash. There are two dimensions: the price realized and the amount of time required to sell the asset. The two are interrelated in that it is often possible to sell an asset in a short period of time if enough price concession is given. For financial instruments, marketability is the relationship between the sale of securities within a given time period at the normal market price. If the security is more marketable it has ability to executive a large transaction near the quoted price. If the marketability of is low, high yield is required to attract the investors. Thus, the yield differential between different securities of the same maturity is caused not only by differences in default risk but also by differences in marketability.
In this section, we describe briefly the more prominent marketable securities available for investment. Space prohibits the discussion of longer term investments, although corporation do invest excess funds about to be described mostly money market instruments, which by definition, are highly marketable and subject to little default risk. Also, the usual definition restricts maturity of a money market instrument to less than a year.
US treasury obligations constitute the largest segment of the money markets. The principal securities issued are bills, tax anticipation bill, and bonds. The treasury auctions bills weekly with maturities of 91 days and 182 days. In addition, 9 months and 1 year bills are sold very month. All sales by the treasury are by auction. Smaller investors can enter a “non competitive “bid which is fill filled at the average price of successful competitive bids. Treasury bills, carry no coupon but are sold on a discount basis. Denominations range from $ 10,000 to $ 1 million. These securities are popular with some companies as short-term.
The original maturity on treasury notes is 1 to 10 years, whereas the original maturity on Treasury bonds is over 10 years. With the passage of time, of course, a number of these securities have maturities of less than 1 year and serve the needs of short term investors. Notes and bonds are coupon issues, and there is an active market for them. Overall, Treasury securities are the safest a and most marketable investments. Consequently. They provide the lowest yield for a given maturity of the various instruments we consider.
This is an agreement where the business sells its securities to the investors for a specific time period with an agreement to repurchase the same from the investor after a specified time period at a pre decided price level. Government also issue these types of securities. Thus, repurchase agreements give the investor a great deal of flexibility with respect to maturity.
Obligations of various agencies of the federal government are guaranteed by the agency issuing the security, but not by the US government as such. In addition, there are a number of government sponsored, quasi-private agencies. Their securities are not guaranteed by the federal government, not is there any stated “moral” obligation, but there is an implied banking. It would be hard to Imagine the federal government allowing them to fail. Major government sponsored agencies include the Farm Credit System. Agency issues typically provide a modest yield advantage over Treasury securities of the same maturity, and they have a fairly high degree of marketability. Although interest income on these securities is subject to federal income taxes, issues of the Farm Credit agencies are not subject to state and local income taxes issues of the Farm Credit agencies are not subject to state and local income taxes. Maturities range from several days to approximately 15 years. About half of the securities outstanding mature in less than a year.
Banker’s acceptances are drafts that are accepted by banks, and they are used in financing foreign and domestic trade. The creditworthiness of bankers acceptances is judged by the bank accepting the draft, not the drawer. Acceptances generally have maturities of less than 6 months and are of high quality. They are traded in an over the counter market dominated by five principal dealers. The rates on bankers acceptances tend to slightly higher than rates on treasury bills of like maturity, and both are sold on a discount basis. Banker’s acceptance can be both on domestic banks and on large foreign banks.
Commercial paper of short term unsecured promissory notes issued by finance companies and certain industrial concerns. Commercial paper can be sold either directly or through dealers. Many large sales finance companies have found it profitable, because of the volume, to sell their paper directly to investors, thus by passing dealers. Among companies selling paper on this basis are the General Electric Credit Corporation, Ford Motor Credit Company, General Motors Acceptance Corporation (GMAC), and Sears, Roebuck Acceptance Corporation. Paper sold through dealers is issued by Industrial companies and smaller finance companies. Dealers very carefully screen the creditworthiness of potential issuers. In a senses, dealers stand behind the paper they place with investors.
Rates on commercial paper are somewhat higher than rates on Treasury bills of the same maturity and about the same as the rates available on bankers acceptances. Paper sold directly generally commands a lower yield than paper sold through dealers. Usually, commercial paper is sold on a discount basis, and maturities generally range from 30 to 270 days. Most paper is held to maturity, for there is essentially no secondary market. Often, direct sellers of commercial paper will repurchase the paper on request. Arrangements may also be made through dealers for repurchase of paper sold through them. Commercial paper is sold only in large denominations, usually $100,000.
A short term investment, the certificate (CD) is evidence of the deposit of funds at a commercial bank for a specified period of time and at a specific rate of interest. The most common denomination is $100,000, so its appeal is limited to large investors. Money market banks quote rates on CDs; these rates are changed periodically in keeping with changes in other money market rates. Yields on CDs are greater than those on Treasury bills and repose and about the same as those on bankers acceptances and commercial paper. Original maturities of CDs generally range from 30 to 360 days. A good secondary market has developed for the CDs of the large money market banks. Default risk is that of the bank failing. Life bankers acceptance, corporations buy domestic as well as CDs of large foreign banks. The letter are known as “Yankee” CDs, and they typically carry a higher expected return.
State and local governments are increasingly providing securities tailored to the short term investor. One is a commercial paper type of instrument, where the interest rate is reset every week. That is, the security is essentially floating rate where the weekly reset ensures that market value will vary scarcely at all. Some corporations invest in longer term municipal securities, but the maturity usually is kept within one or two years. A problem with longer term instruments is that marketability is only fair. Shorter term instruments designed for the corporate treasures and for municipal money market mutual funds have much better marketability and price stability.
Beginning 1982, a special type of preferred stock originated, and it found considerable favour in the marketable security portfolios of corporations. Straight preferred stock is a perpetual security where the dividend can be omitted by the issuer when its financial conditions deteriorates. For these reasons, we usually do not think of preferred stock as being suitable for the marketable security portfolio of a corporation. However, the corporate investor gains a considerable tax advantage, in that 70 percent dividend from preferred stock is exempt from federal taxation.
Theoretical frame work is a fishbone diagram to describe the problem definition. The theoretical framework is a conceptual model of how one theorizes or makes logical sense of the relationship among the several factors that have been identified as important to the problem. The theoretical work is a foundation on which the entire research project is based. The relationship between the literature survey and the theoretical framework is that the former provides a solid foundation for developing the later. Theoretical framework also elaborates the relationship among the variables.
Since the theoretical framework is none other than identifying the network of relationship among the variables considered important to the study of any given problem situation. It is essential to understand what a variables means and what the different types of variables are.
A variable is anything that can take on differing or varying values. The values can differ at various times for the same object or person, or at the same time for different object or persons.
There are four main types of variables.
1. Dependent variable
2. Independent variable
3. Moderating variable
4. Intervening variable
The dependent variable is the variable of primary interest to the researcher. The researcher’s goal is to understand and describe the dependent variable, or to explain its variability or predict it. In other word, it is the main variable that lends itself for investigation as a variable factor. Through the analysis of the dependent variable i.e. finding what variables influence it, it is possible to find answer or solution to the problems.
In this research dependent variable is bad debts.
An independent variable is one that influence the dependent variable in either a positive or negative way. This is when the independent variable is present, the dependent variable is also present and with each unit of increase in the independent variable, there is an increase or decrease in the dependent variable also.
The moderating variable is one that has a strong contingent effect on the independent variable, dependent variable relationship. In this research moderating variable are political and environment condition.
The function of advances department is to lend in the form of clean advances, against promissory notes, as well as secured advances against tangible and marketable securities. The bankers prefer such securities that do not run the risk of general depreciation due to market fluctuation.
Advances are classified into fund based and non fund based finances. The advances which are given by Allied Bank Ltd. Are as under.
1. Cash Finance (Commercial Loans Inward)
Cash finance is short term credit facility, extended to manufactures/traders for their working capital requirements. Period of this facility is normally one year, however a seasonal CF can be for a specific period.
Primary securities against this products are exclusively pledge of stocks of new raw material/work in progress/financial goods at appropriate margin not lower than the prescribed by SBP. Mark up is charged as per sanction advice and recovered on quarterly basis.
These following types of loans are given against following
i. Against locally manufactured goods
ii. Against pledge
iii. Against commodities
iv. Against trust receipts
Running finance (old name over draft) are advances, which are generally given to meet temporary requirements of the customers. A good customers use the bank running finance limit as a mean of protecting his credit in the market and as a line of security defence to meet his commitments.
Demand finances are those advances which are allowed in lump sum for fixed period and repayable lump sum or gradually in instalments. Demand finance is generally sanctioned for a period of 1,3,5 or 10 years secured against charge on fixed assets of the borrowing company or mortgage of different properties as acceptable for the bank.
a. Demand Finance (packing credit)
Scheme introduced by SBP for exporter of carpets, surgical instruments, at zero percent rate of interest. While banks provides at confessional rate of interest.
b. Ordinary Loan
Qurz-e-Hasana scheme loans are allowed to the student, teachers, without any interest or mark up with the recommendation of the MPA or MNA.
c. Loan for Staff
Loans are offered to be the staff of the following four categories
House building loans against mortgage of property
Loans for purchasing vehicles
Loans equivalent to months salary
4. Bridge Finance
Bridge finance is a short term loan granted to meet a customer’s immediate need pending arrangement of permanent funds with the bank. It may also be a loan sanctioned to finance the purchase of one asset on the evidence that a contract for the sale of other assets has been concluded and the sale proceeds are assured to be remitted to the lending agency.
5. Small loans
Loans are allowed to contractor’s cleaning agents.
6. Finance against the foreign bills (FAFB)
This facilitates is available to both local and foreign bills.
A. FAFB (local) advance against Railway and truck receipt, a company with bills of exchange and invoices, are given under this head.
b. FAFB (foreign) advances against foreign bill covering bills of exchange, bills of lading airway bills of exchange etc.
Loans to the farmers with holding up to 25 acres for meeting their short term, medium and long term agriculture production requirement such as:
Besides the short term loans play a part in working capital medium and long term loans are also given to industrial sector for purchases of machinery and other capital nature goods.
To secure the above financing products, different kinds of securities are obtained from customers as per requirements/acceptability of the approving authority of the bank, the most common type of which have been discussed below.
In this mode of securities, possession of stock remains with the borrower and sales proceeds of these stocks are deposited with the bank for adjustment of finance availed. It would, therefore be difficult for a bank to sell hypothecated property without going to court and seeking a court attachment. However, hypothecation agreements entered into by with their customers usually contains a clause which provides for banks to take possession of the hypothecated property.
The bailment of goods as securities for payments of a debts or performance of a promise is called pledge. The bailer in this case is called the pledge. The bailer is called pledge in this mode of security, possession of stock remains in custody of the bank lack and shares are released to the borrower against cash. While in case of the default the pledge has the power of sale after giving due notice.
In this mode of security, some liquid collaterals like defence saving certificates regular income certificates, DAG etc. are deposited with the bank and lien on these instruments is marked with the issuing bank, the instruments remain in safe custody of the bank till full and final adjustment of finance.
1. Customer’s own deposits
Letter of lien has been obtained from the same person as specified in sanction advice. Funds under line are in accordance with the terms of sanction.
2. Third party deposit under Lien
Letter of lien has been signed by the beneficiary/depositor and his signatures are verified. Credit balance in third party account is sufficient to cover the amount of lien.
3. Deposit under lien lying with other branches
Instruments is original like FDR, TDR/DSC and bonds etc. duly discharged are lodged with CAD along with letter of lien for safe custody.
4. Equitable of Mortgage of Properties
In this mode of securities, properties of borrower/company/third person include land, building and machinery and mortgaged in favour of the bank and proper lien in record of concerned department up to a specific amount is marked to avoid transfer of property without banks clearance certificate.
5. Charge on Current/Fixed Assets
In this mode of security, current and fixed assets of the company are assessed from the balance sheet and as per requirement of the bank, charge on these from assets is registered with security and exchange commission of Pakistan.
6. Personal Guarantees
In this mode, personal guarantees are obtained from the borrower/guarantors/directors/partners/companies/individuals, as the case may be along with other above mentioned securities.
Some promissory note is also accepted as a security a promissory note is an instrument in writing containing an instruments in writing containing a uncontrolled undertaking signed by the marker, to pay, on demand or at a fixed or determinable future time a certain sum of money only, to or to the order of certain persons, or to the bearer or the instrument.
A bad debt is money owed to you that you can’t collect, bad debts occur when you provide products or services on credit. While some customers just need more time to pay, others (hopefully a small number!) never will, and the income from the sale is never realized.
The Advantage of issuing long term debt include:
1. Interest is tax deductible, while dividend are not
2. Bondholder do not participate in superior earning of the firm.
3. The repayment of debt is in cheaper dollars during inflation.
4. There is no dilution of company control.
5. Financing flexibility can be achieved by including a call provision in the bond indenture a call provision allows the company to pay the debt before the expiration date of the bond
After research work we have found the following reasons, when banks rented its uncollectible receivables into debts such as
· Parties is also to pay but not willing to pay
· Weak financing position of the borrower
· Political factors involved, political situation of the country at that time period is suitable to the borrower to repay the loan.
· Management set up of the organization is disturbed.
· Acceptance of weak securities like joint property, illegal property
· Defective documentation
· Documentation subjects to limitation law.
· Improper follow up for recovery by the banks where borrower has expired
· Natural climate
· Suspension of transaction/turnover in running finance accounts for at least three months.
· Default in payment of three consecutive instalment.
· No movement in pledged stocks for at least period of three months.
· Short fall in drawing power for any reasons.
It is for each one to know/take such steps for making recovery, the results which are good and that would be that be method for him. It is the spirit, intention, honesty, and sincerity towards the work which count and bring fruitful results. There is saying, ‘if you forget the borrower is not going to remember, once the accounts have shown/developed a symptom of becoming difficult YOU HAVE TO WORRY ABOUT COLLECTING because now you are stuck with them. While a rigid parameter cannot be laid down for making recovery, the following guideline would prove useful.
A resume on such accounts on the standard form compiled and registered maintained so as to have detailed information and record of the progress/efforts made. Any individual should be assigned the responsibility for keeping/recording the same. Reviewing these resume very often is an important part of reasonability. On the contrary, they usually become larger ands more serious with the passage of time. Therefore, it is absolutely essential to identify them early and to start worrying about them early. The difficulty of recovery increases in direct proportion to the age of the account.
The personal letter gets attention and makes clean the seriousness of the matter. If it does not work, it should be followed soon with reminders with modified wordings showing firmness.
Although you must press him for payments, you would like to make things as easy possible for him. You know he is not dishonest that he intends to pay, and you are willing to discuss and consider a variety of ways that he might do it. If you could know the reason for the delay, you would be happy to sit down with him and try to work out some sensible way to resolve the matter.
But sometimes you find out even though your letter become very firm and insistent, they do not produce results. Then you must escalate your collection efforts to the conformation stage. After you have tried every thing you could think of forcing the issue to confrontation you must bring about a personal encounter either face to face or over the telephone.
In order to speed up recovery, recovery squads have been formed at different levels and provided with necessary transport and other facilities.
a. When you bring bout this kind of confrontation, you are meeting someone who is at a disadvantages, someone who is backed into a corner. It is a corner that is made largely on his own embarrassment work in your favour. For example one of the most effective telephone techniques in this.
Call the borrower at home in the evening. This way you are more likely to get him on the phone immediately without having to deal with somebody else or leave a message. And he is likely to be more relaxed and less on his guard you have made your point, but do not stop there. You do not want to let him off the hook so easily. It is essential that you press for a particular date when you will receive the cheque. After the time and effort you have put into this, including a number of collecting notice or letter, you will settle for vague reassurances.
Remember that the quality of your risk deteriorates steadily as a time passes. The longer the borrower waits to pay the less likely it is that he will pay at all. Therefore, it is essential to have a definite, systematic and scheduled procedure of following up over due debtors. You must keep after them. You must contact them regularly and often until they pay and for this purpose the date of payment has been promised and/or the borrower is to be contacted must be noted in RECOVERY DIARY
It is important that the borrower understands that you will persist, that you will not overlook or forget or forgive. A firm collection policy earns your borrower’s attention. You want the borrower to like you, but if it’s a choice between liking you and paying you the choice is obvious. Now you have reached the point where you abandon all politeness and restraints. Now you will anything you have to with in reason and within the law, of course to recover the money that is rightfully yours.
In case of absconding borrowers more efforts are needed. His neighbour, introducer and guarantor are good sources to know the whereabouts. Even the post man of the locality may be able guide you as he might have the new address to the area post office.
· The competitor of the borrowers in the market may be contacted to know the present activities, names of other bankers, assets etc, of the borrowers so that hands may be laid thereon lest it becomes too late.
· As for as possible to bring about the borrowers to a settlement instead of going to the courts.
· To arrange for disposal of stocks after completion of formalities.
· The pending suit cases to be examined with a view to arrive at settlement with the borrowers wherever possible.
· As soon as the case is decreased steps to be taken for obtaining final decree and get the decree executed.
· During the tendency of the suit. Obtain attachment on the properties/assets which are not mortgaged to the bank.
· Public notice appear in News papers about sale/transfer of properties. Therefore, it is essentials to peruse daily such notices appearing in leading news papers.
To develop contacts in the offices of the· registration of properties/records of rights to know if the borrower has any property in his name or in the name of family members.
· In case of limited companies to make a search in the office of assistant registrar, joint stock companies to know if charge of any other bank exists and if so on which assets.
In order to expedite filing of recovery suits against defaulters who do not come to terms for settlement of dues with the bank, the powers to grant permission for filing of recovery suits have been delegated to the provincial chiefs irrespective of the amount involved. Immediately after the filing of suits, the branch managers are required to submit the following papers to the Legal Affairs Division.
· Resume of account on banks standard proof
· Statement of account showing complete transactions in the account including application of up to date interest/profit under the PLS scheme.
· Copy of plaint with exact date of suit field.
· Copy of plaint with exact date of suit field.
· Professional free bill of the advocate in original
· Format of advocate already approved by the legal affairs division, with special references to fees negotiated and settled.
Where never required plaints should be got vetted by the legal affairs division before filling suit. Thereafter the branches should inform date wise progress of the cases to legal affairs division without waiting for reminders and un necessary correspondence. After the filling of exaction, the same process of submission of documents be adopted as mentioned against recovery suits.
The following documents are required to be submitted to legal affairs division.
· Copy of judgment/decree, if not submitted at the time of passing of ex-part/final decree.
· Copy of execution application, with exact date of filing.
· Professional fee bill of the advocate.
· Format of advocate, in respect of cases already assigned to him and professional fee paid.
Hypothesis can be defined as logically conjectured relationship between two or more variables expressed in the form of a testable statement. Relationship are conjectured on the basis of network of associations established in the theoretical framework formulated for the research study.
There is no relationship between securities and bad debts.
HO : U = 0
There is a relationship between securities and bad debts.
GH1: u = 0
Level of significant
A = 0.05 n = 30
Sop it is two tale tests
So a/2 = 0.025
Test statistic to be used
Since the responses size is more than 30 so I will apply t test
T = X – U
F X FX X2 Fx2 0 1 0 0 0 12 2 24 4 48 11 3 33 9 99 14 4 56 16 224 15 5 75 25 375 F=52S X=15S FX=188S X2=54S FX2=746S
FX = 188S
F = 52S
SD = FX2S FXS
SD = 1.13
= 15/5 = 3
Tcal > ttab
So I reject H0 and accept H1 that there is relationship between the securities and bad debts. So securities can minimize the bad debts of the banks.
As calculated value of t=3.97 is greater than t tabulated value 2.045 so I reject H0 and accept H1 that there is a relationship between securities and bad debts.
From what has been started above I am of like view that finances (loan) are major source of earning and generating revenue for the banks. To secure this portfolio, securities like principal and collateral from of marketable, sharp-edged and tangible from constitute a powerful tool to ensure that interest and principal and is repaid by the borrowers as per terms and condition of respective contracts. So quality of securities makes this process fruitful and result oriented. They provide 100% securities of recovery to the banks through normal course of recovery of through legal proceedings and minimize the risk of conversion of good assets to bad assets. Good and easily excusable securities against loans increased the quality of assets (fund based and non fund based) of any financial institution, and displays powerful image and loaning extended by the credit department to its customers/borrowers.
Banks officials engaged in process of lending should be well equipped of following qualities
* A big help can be take from credit scoring agencies
Skills in handling different type of finances
* Should have up to date knowledge for proper selection of securities of sound value for securing finances in view of requirement of time.
* Should be aware about important of obtaining complete flow less documentation.
* Satisfaction about actual credit worthiness of the borrowers may be obtained through reports about them. Their associates and sister concerns from other banks.
* Nature value, more ability of the securities offered by the customers should be properly assessed.
* Re-payment capacity and financial discipline of the customers may be obtained.
* The purpose and end use of the finance should be of a productive business nature.
* Quality of management of borrower in respect of integrity and ability is most important factor in success or failure of business which should be thoroughly investigated and assessed.
* Economic and technical viability of the project proposed to be financed should be examined in detail.
* Balance sheet of last three years and cash flow statement of last six three months be obtained to judge self liquidity ability of finances by the borrower.
* Preferential charges over the assets of the borrowers by way of lien or mortgage be accepted while week charges be avoided.
* Finance should be disbursed strictly in accordance with the term of contract.
* In case of hypothecation/pledge of goods stocks report be obtained and physically checked by the authorized officials.
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