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The Process of Credit Administration

The Process of Credit Administration


3.1 Primary requirements.
3.2 Security and Documentation.
3.3 Credit Proposal And Sanction
3.4 Monitorin and Super!ision of "oans # Ad!ances
3.$ Actions in case of non%reco!ery and the penal rate.
Credit Administration : A case study of First Security Bank Ltd. 22
C&APT'( 3
The Process of Credit Administration
"oan sanctionin and controllin Mechanism)
3.1 Primary requirements)
All proposals for loan and other facilities should ordinarily be initiated from the branches.
The loan proposals here!er necessary must be sent to "ead #ffice in proper Credit Line
Proposal $CLP% duly supported by re&uired information and documentary e!idence.
'ndustrial loan proposals must accompany properly conducted feasibility report. For
orkin( capital to industrial clients) full ork*sheet shoin( orkin( Capital
re&uirement of the industry must accompany the CLP.
Branches shall send proposal to "ead #ffice ithin lendin( ceilin( of the branch) hich
is determined by its deposit position and manpoer capacity. 'n e+ceptional cases and
ith prior permission from "ead #ffice) proposals beyond the limit can be sent to "ead
#ffice. Branches must ensure that only !iable proposals are sent to the "ead #ffice.
All loan proposals must be discussed at Branch Credit Committee $BCC% before the same
are forarded to "ead #ffice and shall bear si(natures of all members of BCC.
Before sendin( any proposals for any facility folloin( additional conditions must be
fully satisfied by the branches. "ead #ffice Credit Committee $"#CC% must also see that
these conditions ha!e been fulfilled.
,o ob-ection of the concerned bank.banks should be obtained if the borroer is in
debt ith them.
/eport from Credit 'nformation Bureau $C'B% of Ban(ladesh Bank that the
borroers or their allied accounts are not ha!in( any sticky loans ith other banks
should accompany the proposal.
Copies of statements of all types of accounts !i0. C.C. $"ypo%) C.C. $Pled(e%) PA1)
L'2 3 Current Account etc. maintained by the borroers shall accompany CLP and
ill be critically e+amined to determine the beha!iour of the accounts and !olume
of business to -ustify the amount of the proposed loan. This ill be re&uired for ne
accounts as ell as old accounts for sanction and also for reneal.enhancement.
Financial statements !i0. Balance Sheet) Fund Flo Statements) Cash Flo
Statements) Tradin( 'ncome Statements should be obtained and sent alon(ith
necessary ratio analysis to sho impro!ement or deterioration in the financial
position of the customers in comparison ith the past performance. Basic areas of
analysis should co!er 4
* Asset*e&uity /atio
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The Process of Credit Administration
* 1ebt*e&uity /atio
* Fi+ed Asset to 6&uity /atio
* Stock*7orkin( Capital /atio
* 'n!entory to Sales /atio
* 1ebtors Turno!er /atio
* Creditors Turno!er /atio
* /etained Profit to ,et Profit /atio
* Current /atio
* 8uick /atio
* 9ross Profit to Sale
* ,et Profit to ,et Capital Fund
For proposals in!ol!in( Tk.:;.;; lac and abo!e) on*site inspection by a Senior
9rade #fficer from the "ead #ffice should be conducted. The report re!ealin( facts
needed to sanction.rene.enhance the loan limit must be e+amined carefully before
sanction.reneal.
Loan super!ision capacity of the branch proposin( the loan and their capability to
mana(e crisis should also be taken into account by "#CC and if the branch capacity
is insufficient to cope ith the orkload loan proposal should be declined) in case
the manpoer cannot be au(mented.
The branch must analy0e usual lendin( risks before initiatin( the proposal and
"#CC shall !erify these risks and put them to tests. #nly if satisfactory le!el of
ratin( is found) the loan may be sanctioned. recommended to the "ead #ffice.
"ead #ffice shall sanction or place proposals to the Board.Committee for sanction
of loans only if it meets the criteria under credit policy. Loans shall not be appro!ed
and shall be recalled if:
* The lendin( limit of the bank e+ceedin( <; = of deposits
* Sectoral limit is e+hausted or e+ceeded.
* Collateral !alue is less than to times of the proposed loan ith e+ception of
Cash Credit in pled(e or security is in the form of financial instruments.
* 1ebt Ser!ice /atio is less than 2*5 times) /ate of /eturn is less than >;=)
pay back period e+ceeds : years in case of Term Loans and current ratio is
less than 2 times.
* Sales turno!er is less than ? times of the loan asked for and turno!er in the
account as less than 5 times of the loan.
* 6&uity is less than the limit prescribed from time to time for !arious items.
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The Process of Credit Administration
* Cash flo statement indicates insufficient li&uidity due to lo turno!er)
market debt and o!er tradin(.
* Cash flo statement) hich is to be obtained &uarterly in case of Cash Credit
of Tk.>: lac and abo!e) indicates deterioration in the financial position
throu(h di!ersion of fund for ac&uisition of assets not beneficial to the
company.industry.
* Finally) letters issued from "ead #ffice sanctionin(.appro!in( loans and
ad!ances must clearly state in detail all the terms and conditions so that there
remains no confusion or difficulty in implementation of the pro-ect or
operation of loan account. The sanction letters shall state :
* Limit of loans.ad!ances.facilities
* ,ature of loans.ad!ances
* @alidity period of limit for utili0ation
* /ate of interest.commission.fees on loans.ad!ances. facilities
* 2ar(ins to be retained
* 1etails of securities to be obtained a(ainst the loan.ad!ance. facilities and
instructions about creatin( le(al char(es on the securities
* #ther conditions if any.
* Special enablin( conditions namely the conditions of *
The ri(ht of the Bank to recall.re!oke loans.facilities any time durin( the
limit period ithout any reasonA re!ise or modify any terms or conditions of
loans durin( the currency of the limit and for hich Bank shall not be
responsible for any loss or losses of the customerA
The ri(ht to en(a(e independent financial and.or technical consultant to
e+amine the position of accounts) factory operation for protectin( the interest
of the BankA
The ri(ht to con!ert part of the loan into e&uity and if so pro!ided in
2emorandum and Articles of Association of the borroers. customersA and
The ri(ht of the Bank to obtain pre*dated che&ues to meet installment of loan
under letter of deposit of che&ues and ri(ht to obtain undertakin(*cum*
declaration of the borroer to the effect that till repayment of the loan in full
they shall not initiate any bankin( account ith other banks.
The sanctionin( mechanism can be ell understood from the folloin( dia(ram:
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The Process of Credit Administration
3.2 Security and Documentation)
The security and documentation of Loans and Ad!ances pro!ided by First Security Bank
Ltd. is done at Branch office. The security for loan is shon in the folloin(:
i% Fi+ed deposit receipts issued by any branch of the Bank.
ii% Balance in other deposits account ith the appro!al of "ead
#ffice.
iii% 9o!t. Promissory ,otes.
i!% Pratyrakhya Sanchay Patra) Ban(ladesh Sanchay Patra.
!% 'CB Bnit Certificates.
!i% Life 'nsurance Policies.
!ii% Shares of !arious companies appro!ed by "ead #ffice from
time to time and &uoted on the Stock 6+chan(e.
!iii% Stocks and (oods in trade) pled(ed or hypothecated.
i+% "ypothecation of poer dri!en !ehicles or ater crafts.
+% 'mmo!able property.
+i% 'mported merchandise pled(ed or hypothecated.
+ii% Trust receipts.
+iii% 9o!t..Corporation Salary and Pension Bills.
+i!% 'mport bills $PA1s%
+!% Bills purchased.
+!i% Schedule Bank.'nsurance (uarantees.
+!ii% 6+port bills.
3.3 C('D*T P(+P+SA" # SA,CT*+,
3.3.1 Application for Ad!ance-limit )
>. The party seekin( a secured ad!ance a(ainst any acceptable security must
make an application to the branch here he maintains his operati!e account.
2. Ad!ance may be alloed only after (ettin( a limit sanctioned by the
authori0ed officials.
3.3.2 Conductin preliminary study )
>. Conduct a preliminary study of the affairs of the intendin( borroer by
consultin( the folloin( :
i% BorroerCs application
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Branch Credit
Committe
Borroer "ead office
Credit
committee
The Process of Credit Administration
ii% /eports in confidence re(ardin( the state of business of the
intendin( borroer throu(h a!ailable means.
iii% BorroerCs on mode of dealin(s.
i!% Statement of accounts of the borroer ith on and other
banks.
!% Statement of assets and liabilities $ in detail%
!i% Balance sheet.profit 3 loss accounts $in case of limited
company% for 5 years.
!ii% 2emorandum 3 Articles of Association
!iii% 'ncome Ta+ certificates.
i+% Trade and other reports.
3.3.4 *nter!ie. of the proposed /orro.er)
>. 'nter!ie the intendin( borroer co!erin( the folloin( points :
a% Present 3 future prospect of the partyCs business.
b% Total in!estment in this business.
c% BorroerCs stake in the business.
d% Amount of ad!ance re&uired.
e% 6+perience in the line.
f% Purpose.
(% Period of ad!ance re&uired for.
h% Source of repayment.
i% PartyCs pre!ious banker) if any.
-% Present liabilities ith any other branch of the same bank or
other banks and conducts of the ad!ances.
k% Securities offered a(ainst ad!ances from other branch of the
same bank or other bank.
l% Proposed mar(in a(ainst the ad!ance.
m% Security offered a(ainst the proposed ad!ance.
n% Type of char(e to be created a(ainst the proposed security.
o% Terms of repayment.
3.3.$ 0an1er2s satisfaction)
>. Before final selection of the borroer it should be ensured that :
i% The party possesses character) capacity and capital.
ii% Account is a remunerati!e.
iii% ,ature of transactions in the account is at least moderate.
1ealin( items and primary security of the party possess the
&uality of easy marketability) durability 3 storability.
Procurement and sales arran(ements are satisfactory.
i!% Purpose of financial accommodation is (enuine.
!% Collateral security offered possesses the &uality of easy
marketability and is not encumbered and its !aluation is
-udiciously assessed so as to lea!e sufficient mar(in after
co!erin( the ad!ance and belon(s preferably to the borroer.
/eal estate taken as collateral should preferably be located in
the urban centre ith a homestead or other kinds of
constructions.
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!i% Period for hich the accommodation has been sou(ht is
alloable.
!ii% /epayment arran(ement is acceptable.
!iii% 2eans) standin( and respectability of the applicant and the
(uarantors $if any% are satisfactory.
i+% Credit orthiness of the applicant is reasonable.
+% Location of the business is (ood.
+i% Confidential opinion has been obtained from :
a% #ther banks.
b% "ead #ffice and .or branches.
+ii% Clean C'B report has been obtained from Ban(ladesh Bank.
3.3.3 4illin of credit proposal form)
>. a% The applicant has submitted credit proposal to(ether ith
onerFs declaration in the specified format detailin( appropriate
particulars.information.
b% The information furnished in the credit proposal form !erified
by the mana(er.branch in char(e and the officer in char(e)
Ad!ance 1epartment. The branch officials shall be fully
satisfied about correctness of the information.particulars and
(enuineness of the papers.documents) hile processin( the loan
proposal before sendin( the same to the sanctionin( authority.
3.3.5 Appro!al of limit)
>. The sanctionin( authority on receipt of the proposal shall scrutini0e the same
and ensure that :
i% The proposal bears all pertinent information relatin( to the
ad!ance and the borroer.
ii% The borroer has si(ned the proposal form for credit.
iii% All necessary papers.documents ha!e been enclosed ith the
proposal duly checked and !erified by the branch.
i!% The officer in char(e) Ad!ance 1epartment 3 the branch
mana(er has si(ned the proposal -ointly.
!% The proposal has been duly recommended.
!i% The proposal does not fall ithin the e+istin( credit restrictions.
!ii% 2inimum mar(in re&uirement a(ainst the ad!ance is proposed.
!iii% The primary security has (ot easy marketability) durability and
storability.
i+% @aluation of the property offered as collateral security is
-udiciously assessed by the en(ineer and branch mana(er as per
proforma circulated by "ead #ffice.
+% The intendin( borroer is not a defaulter of the Bank.other
banks includin( 1F's.
+i% There is no letter of re&uest from other banks for not alloin(
and or stoppa(e of facility to the proposed borroer.
+ii% 7orkin( capital may be considered on pro-ect financed by any
other bank includin( 1F's sub-ect to fa!orable status report and
obtainin( G,o #b-ection CertificateG from the financin(
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The Process of Credit Administration
institution.
+iii% 7here 2
nd
char(e on the fi+ed and floatin( assets $in case of a
limited company% or 2
nd
mort(a(e on real estate is offered)
clearance shall be obtained from the >
st
mort(a(ee in respect of
creation of 2
nd
char(e on the property to(ether ith the
confirmation that the documents ill be held by them on behalf
of the Bank and that they shall not part ith the same ithout
consent of the Bank..
3.3.6 Post sanction formalities)
>. After recei!in( the limit sanction ad!ice) the branch shall.
i% Con!ey the terms and conditions stipulated in the sanction ad!ice to
the proposed borroer in ritin(.
ii% #btain acceptance of the terms and conditions on duplicate copy of
the letter.
iii% Complete documentation in all respect.
i!% Loan sanction ad!ice issued by the "ead #ffice containin( some
clause meant for the branch only should be e+cluded hile sendin(
the loan sanctionin( ad!ice to the borroer.
3.3.7 Dis/ursement of ad!ance)
>. After bein( fully satisfied about the e+ecution of all documents and
obser!ance of all formalities) disburse the ad!ance to the party in accordance
ith the procedure hereinafter prescribed in the manual keepin( in !ie the
nature of security pro!ided by the party.
3.4 Monitorin and Super!ision of "oans # Ad!ances
a% Check the diary shoin( terminal dates of receipt of all statements of ad!ances and
statements of accounts. /eminders by tele+.call.fa+ ill be issued if any statement
remain un*recei!ed at "ead #ffice 5.: days after due date.
b% Total of outstandin( amounts shon in !arious statements of ad!ances of a branch
must a(ree ith the balances shon.reported in the statement of affairs of the
branch. #fficer concerned in Ad!ances 1epartment must report difference if any to
2ana(in( 1irector. Similarly total outstandin( loans and ad!ances reported by
indi!idual branches as per statements must a(ree ith total loans and ad!ances of
the Bank as per consolidated statement of affairs prepared in "ead #ffice.
c% Concerned #fficers in Ad!ance 1epartment ill then check.!erify e!ery loan
accounts reported hether it is ithin limit and security shon is clear and !alue of
security is correct and enou(h to secure the outstandin( loan amount.
d% i% 'f the loan officer at "ead #ffice finds any discrepancy such as the loan e+ceeds
appro!ed limit or e+ceeds security !alue or not co!ered by appro!ed limit or the
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The Process of Credit Administration
limit e+pired or there is no chan(e in the outstandin( compared to pre!ious months
!i0. static or contrary to any other terms of limit) he should immediately take up
ith branch mana(er for clarification. ad-ustment etc. and put up notes to the 'n*
char(e or the 2ana(in( 1irector.
ii% Borroers en-oyin( credit limit of Tk.>.;; $one% crore and abo!e ould be re&uired
to submit e!ery &uarter 4
* Pro-ected operatin( statements $Tradin(.Profit and Loss Account% for ne+t
yearA and
* Pro-ected fund flo statement for ne+t year and the credit officer at "ead
#ffice shall !erify 4
7hether on !erification of date as per statements actual operational results
$production) sales) profit% conformed to the pro-ected fi(ures or hether
there as any di!er(ence ithout plausible e+planations.
7hether end use of bank credit is accordin( to the purpose for hich it as
appro!ed.
'f any unfa!ourable chan(es in asset positions are found due to loss or di!ersion) it
should be located immediately throu(h ur(ent in&uires and brou(ht to the notice of
the 2ana(in( 1irector su((estin( remedial measures.
iii% 'n cases of all cash credit to industrial borroer for Tk.>;.;; $ten% lac and abo!e)
monthly pro(ress report should be obtained to sho comparati!e production and
sales) orkin( capital need on the basis of current asset and current liability in the
proforma prescribed for the purpose.

e% 'f the officer finds that a loan a(ainst Trust /eceipt $LT/% is remainin( unpaid
beyond due date and PA1s are unpaid for more than 5; days from the date of receipt
of same in case of shipment from 6urope.America. South America he should pursue
the concerned branch and brin( it to the notice of 'n*char(e of credit di!ision at
"ead #ffice. Special attention must be paid in case of PA1s ith shipment from
"on( Ion() Sin(apore) 2alaysia or 'ndia remain unpaid for >: days. 'n case of
shipment by land route by truck from nei(hbourin( countries not more than E days
should be alloed and "ead #ffice must keep a atch o!er timely retirement of the
documents.
f% i% All fresh facility statement must be checked thorou(hly ithin 2.5 days of their
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The Process of Credit Administration
receipt and comments if any must be sent to the branches &uickly. "ead #ffice must
see that branches re(ularly send Fresh Facility Statement as per policy directi!es
already issued. The branch mana(er shall (i!e no unauthorised facility.

ii% 'f on e+amination of statement of ad!ances any irre(ularity is detected in loan
accounts as stated in para $b% and realisability or repayment is unlikely) then the
branch must be asked to e+plain the situation. "ead #ffice should establish contact
ith borroers if necessary and officers from "ead #ffice shall (o to the branch for
e+peditin( reco!ery of the loans. "elp from speciali0ed account department may
also be sou(ht in e+treme cases.
iii% Stern measures shall be initiated a(ainst the branch man(er and credit officers if the
default is attributed to their ne(li(ence or indul(ence (i!en to the borroers.
(% i% 'n*char(e of "ead #ffice Credit 1epartment shall prepare rosters e!ery 5 months for
on*site inspection of ad!ances at branches by officers from "ead #ffice. Such
roaster shall remain only ith the 'n*char(e of 1epartment and not knon to any
one. 'nspectin( #fficers from credit department shall use spot inspection (uidelines
on ad!ance durin( re(ular on*site inspection.
ii% 'ndi!idual ad!ance account ith irre(ular transactions shoin( outstandin( o!er
Tk.2:.;; lac in C.C. $"ypo%.LT/) Tk.:;.;; lac in C.C. $Pled(e% must be inspected
by "ead #ffice once in 2 months and in case of Tk.:;.;; lac in C.C. $"ypo%.LT/
and Tk.>.;; Crore and abo!e in C.C. $Pled(e%.L'2 must be inspected once a monthA
$report ill be made to the 'n*char(e.2ana(in( 1irector%.
h% i% 'n case of term loans to industries in amount of Tk.2;.;; lac and abo!e upto
Tk.:;.;; lac) officers from "ead #ffice 'ndustrial Credit 1epartment $'C1% must
make on*site inspection e!ery 2 months and in case of loans e+ceedin( Tk.:;.;; lac
once a month.
ii% 'n case of Acceptance Bills liability in (arment industries under Back to Back L.Cs
for Tk.:;.;; lac and abo!e inspection must be made eekly.
i% "ead #ffice shall prepare monthly statement of o!erdue loans and ad!ances on the
basis of principles con!eyed to the branches in dealin( ith the ad!ances and
statement of classified loans half*yearly on the principles of classification of
Ban(ladesh Bank. "ead #ffice Credit Committee must discuss o!erdue and
classified accounts e!ery month and su((est measures to the 2ana(in( 1irector for
impro!ement in reco!ery of o!erdue and classified loans.
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The Process of Credit Administration
-% Court cases filed by the branches must also be re!ieed once a month by "ead
#ffice Credit 1epartment for further actions.
k% "ead #ffice shall prepare e!ery month a consolidated statement of loans and
ad!ances to indicate BankFs e+posure in each type of loans and ad!ances on the
basis of risks in!ol!ed and sectoral distribution for purposes of controllin( e+cessi!e
e+posure in unanted portfolios. #fficer*in*Char(e of Credit 1epartment) "ead
#ffice shall try to keep loan portfolios ithin the limits appro!ed in policy and place
to the 2ana(in( 1irector.
3.$ Actions in case of non%reco!ery and the penal rate)
Suit is the final steps to be taken in respect of reco!ery of an ad!ance) hen all endea!ors of the
Bank i. e. personal contact) moral suasion) re&uest) notice for repayment of the ad!ance turned
fruitless.
3.$.1 "eal ,otice)
>. As preparatory to fillin( suit) the branch shall ser!e le(al notice
upon the borroer$s%) (uarantor$s%. 1irectors of the company $in
case of ad!ance a(ainst Ltd. Co.% throu(h the le(al ad!iser.panel
layer under re(istered post demandin( ad-ustment of the liabilities
ithin a specific time.
3.$.2 Chec1in documentation and collectin property particulars)
>. 1ocumentation of the ad!ance shall be checked to ensure that these
are not barred by limitation for takin( le(al action. Full particulars
of the assets of the borroer and co*obli(ants of the ad!ance shall
be ascertained.
3.$.3 Preparin re!ie. form)
>. /e!ie form in respect of each party detailin( therein full
particulars about the borroer) his assets and the ad!ance shall be
filled in as per the proforma circulated by "ead #ffice. 7hile filin(
in the re!ie form) chance of reco!ery shall be clearly mentioned.
The re!ie form shall be sent to the competent authority ith due
recommendation statin( the reason for filin( suit.
3.$.4 4ilin of suit and special points of attention)
>. #n receipt of appro!al immediate steps shall be taken to file suit
throu(h the BankFs le(al ad!iser.panel layer. 7hile filin( suit it
shall be ensured that all the necessary parties) partners) directors $in
case of Ltd. Co.% (uarantor) as the case may be are made defendants
in the suit and steps are taken to attach the assets before -ud(ement.
'n case of mort(a(e of immo!able property either by ay of
e&uitable mort(a(e.or by re(istered mort(a(e) mort(a(e.title suit
and not money suit shall be filed.
3.$.$ Post suit follo. up)
>. After filin( of suit its &uickest disposal shall be arran(ed throu(h the
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The Process of Credit Administration
conductin( layer) throu(h constant and fre&uent liaison ith him.
For effecti!e follo up the suit filed the folloin( steps should be
taken:*
a% 8uick ser!ice of summons on the defendants shall be
arran(ed throu(h the layer.
b% 7hen the suit is decreed in fa!or of the Bank steps shall be
taken to ser!e the decree by the court and obtain a copy of
the decree immediately.
c% Branch shall ensure that the borroer.-ud(ement debtor in
terms of the decree pays the dues and in case of default
e+ecution case shall be filed ithout any delay.
d% After fillin( of the suit but before the issuance of the decree
if any borroer.obli(ant comes forard to settle the case
amicably) a compromise petition of the party mentionin(
therein the terms of compromise shall be sent to the
competent authority seekin( their appro!al. 'f appro!ed a
compromise decree shall be obtained from the court throu(h
the suit*conductin( layer and it shall be ensured that the
liability is settled in accordance ith the compromise decree.
'n case of its !iolation) the case shall be re!i!ed and
conducted in the usual manner ith appro!al of the
competent authority.
3.$.3 Difficulties in filin suit)
>. Banks usually face) amon(st others) the folloin( difficulties in
filin( and continuin( suits:
a% 1emand.Le(al notice can not be ser!ed for lack of proper
and correct address.
b% 1etailed description of property to be attached $other than
mort(a(ed property% can not be (i!en to the court.
c% The documents may be found to be time barred.
3.$.5.1 (ecordin of detailed particulars of the /orro.ers)
'n order to a!ert the abo!e situation.difficulties the folloin( steps
should be taken:*
a% At the time of openin( of account as ell as before makin(
ad!ances name) fatherFs name) business address) residential
and permanent address of the borroer) (uarantor)
partners.directors of the company shall be recorded.
3.$.5.2 Maintenance of particulars of assets and !erification thereof)
b% Before alloin( ad!ance) full particulars of the property and
assets of the borroer.obli(ants shall be checked throu(h
documentary e!idences and a clear note ith re(ard to the
particulars of the property shall be kept in the file of the
borroer.
3.$.5.3 Periodical chec1in of documents)
c% 1ocuments of each ad!ance shall be periodically e+amined
and actions shall be taken ell ahead of the e+piry of the
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The Process of Credit Administration
limitation period of documents. Process for filin( suit shall
be started ell in ad!ance of the e+piry date of the !alidity
of each document.
3.$.6 4ilin of suit .ith deficit court fee)
>. Sometimes occasion may arise to file suit to sa!e a case from the
mischief of limitation act. Bnder such situation the branch ith
deficit court fee of Tk. > shall file suit) after ser!in( due le(al notice)
ithout aitin( for formal appro!al of the competent authority. #n
filin( suit detailed re!ie form ith full particulars of filin( of suit)
shall be sent to the competent authority) seekin( their disposal
instruction. #n receipt of the instruction) the suit shall be disposed
of accordin(ly.
Credit Administration : A case study of First Security Bank Ltd. 5?