৪৯তম বিসিএস ⎯ ফিন্যান্স ও ব্যাংকিং [৭১১]

Cash Credit is a short-term working capital financing facility provided by banks to businesses.

It allows the borrower to withdraw funds up to a sanctioned limit against the hypothecation of inventory, receivables, or other current assets.

Unlike a term loan, there are no fixed installments; interest is charged only on the amount utilized.

Source:
Khan & Jain, Financial Management, Chapter on Working Capital Financing

Cash Credit is typically secured through hypothecation or pledge of current assets, including raw materials, finished goods, and receivables.

This ensures that the bank has a floating charge over these assets.

While personal guarantees (C) may be taken as secondary security, the primary collateral remains current assets.

Source:
ICAI Banking Module – Chapter on Credit Management

There is no requirement to maintain a minimum balance in a cash credit account, unlike savings or current accounts.

Its primary purpose is to meet fluctuating working capital needs, and interest is levied only on the utilized portion.

Source:
Commercial Banking by K.C. Shekhar, Chapter 8

Cash Credit → Designed to finance working capital needs of businesses, secured by inventory or receivables.

Overdraft → Generally granted to current account holders to manage short-term cash shortages, often backed by a fixed deposit or property.

Source: 
Commercial Banking & Credit Management by B.S. Raman

When the borrower withdraws beyond the sanctioned limit, it is called overdrawn. 
Such amounts attract penal interest and indicate weak financial discipline.

Source: RBI Circular on Lending Practices, 2023

Bangladesh Bank, as the central bank, issues policies on lending practices, including cash credit facilities.

Source: Bangladesh Bank Act, 1972

When sanctioning a cash credit limit, banks rely on quantifiable, objective criteria, including:

- Past financial performance (profitability, liquidity, debt-equity ratio), 
- Projected working capital needs, 
- Value of current assets pledged as security, 
- Regulatory guidelines, such as those issued by Bangladesh Bank or RBI.

The personal relationship between the borrower and the bank officer cannot legally influence the sanction decision.

While it may indirectly affect trust and communication, modern banking practices emphasize transparency and risk-based lending to prevent favoritism and corruption.

Sources: 
Bangladesh Bank Circular – Lending Guidelines, 2023 
Basel III Credit Risk Framework

Cash credit relies heavily on hypothecated stock statements submitted by the borrower.
If a borrower inflates stock values or understates liabilities, the bank’s decision to lend may be based on incorrect information, leading to credit losses.

Example of fraud:
A trader reports inventory worth BDT 50,00,000, while actual inventory is only BDT 25,00,000.
Based on inflated data, the bank calculates a higher Drawing Power and allows extra withdrawals.
If the borrower defaults, the bank’s security will be insufficient to cover the loss.
This type of operational risk is why banks conduct surprise inspections, audits, and require periodic stock verification.

Sources: Basel III Operational Risk Framework

A Clean Cash Credit (CCC) facility is granted without requiring tangible security or collateral. Instead, the sanction is based entirely on:

The borrower’s creditworthiness,

Strong financial track record,

Reputation and trustworthiness.

Typically, CCC is offered to large, established businesses, government agencies, or corporations with impeccable banking histories.

It is considered high risk for the bank because there is no direct physical asset to seize in case of default. Hence, interest rates are usually higher, and the monitoring process is very strict.

Example: A multinational company with a strong balance sheet may receive a CCC facility to manage seasonal cash flow fluctuations.

Sources: 
Principles of Banking – B.S. Raman 
ICAI Credit Management Notes

Cash credit limits are tied to the value of pledged or hypothecated current assets.

If the value of inventory decreases, the Drawing Power (DP) automatically falls because the bank must maintain its margin of safety.

Example: 
Initial stock value = Tk 10,00,000, Margin = 25% → DP = Tk 7,50,000 
If stock falls to Tk 8,00,000, DP reduces to Tk 6,00,000.If the borrower had drawn more than Tk 6,00,000, the account becomes overdrawn or out of order, forcing the bank to reduce the sanctioned limit.

This prevents over-financing and protects the bank’s exposure.

Sources: ICAI Working Capital Finance Module

In cash credit, ownership of stock remains with the borrower. The bank does not need a title deed because stock is hypothecated, not mortgaged.

Required documents include:

Financial statements → To assess past performance and creditworthiness.

Stock statements → To determine Drawing Power.

KYC documents → To comply with anti-money laundering laws.

Mortgages are relevant for term loans involving immovable property, not for CC.

Sources: 
Principles and Practices of Banking – IIBF Textbook 
RBI Loan Documentation Guidelines

An overdraft is a short-term financing option where a bank allows a customer to withdraw money beyond the available balance in their current or savings account.

It is a revolving credit facility, meaning the borrower can withdraw, repay, and withdraw again within the approved limit.

Unlike a fixed-term loan, there is no predetermined repayment schedule, and interest is charged only on the amount actually utilized, not on the entire sanctioned limit.

This makes overdrafts especially useful for businesses and individuals who face temporary liquidity shortages, such as covering payroll or supplier payments.

It is different from a grant because it must be repaid with interest and fees.

Source:
Modern Banking in Theory and Practice by S. Panandikar;
Bangladesh Bank Guidelines on Loans and Advances.

Banks do not charge interest on the entire overdraft limit, as the borrower might not use the full approved amount.

Instead, interest is calculated daily on the outstanding balance that the borrower has withdrawn and not yet repaid.

For example, if a business has a sanctioned overdraft limit of BDT 500,000 but only withdraws BDT 200,000, interest will be charged only on the BDT 200,000 until it is repaid.

This makes overdrafts more cost-effective compared to fixed loans where interest is charged on the entire principal amount from the beginning, even if the borrower doesn’t need the entire loan amount at once.

Source:
Principles and Practices of Banking by IIBF;
Bangladesh Bank Circulars on Overdraft Facilities.

Banks generally extend overdraft facilities to customers who have stable and predictable sources of income, such as salaried individuals or businesses, because they present lower default risk.

Students usually lack regular income, making them high-risk borrowers for banks.

Without stable repayment capacity, the bank cannot be confident that the overdraft will be repaid.

On the other hand, businesses with seasonal cash flow fluctuations (like agricultural businesses) are common recipients of overdraft facilities, as overdrafts help smooth out temporary cash deficits during off-peak periods.

Source:
Bangladesh Bank Credit Risk Management Guidelines (2022);
Financial Management by Khan & Jain.

Overdrafts involve formal, written agreements between the bank and the borrower. This agreement specifies:

Sanctioned overdraft limit

Collateral provided (if any)

Interest rate and fees

Repayment obligations and timeline

Legal remedies in case of default or breach of contract

An implied or verbal agreement is not legally enforceable, which could lead to disputes. Therefore, banks follow strict documentation requirements to comply with the Bank Companies Act, 1991 and other financial regulations.

Source:
Negotiable Instruments Act, 1881;
Banking Company Act, 1991 (Bangladesh)

An authorized overdraft is a pre-approved facility provided by a bank where the account holder is allowed to temporarily overdraw funds up to a certain agreed limit.

It is typically linked to a current or savings account.

The borrower must repay the overdrawn amount within a specified period.

This type of overdraft is often given to trusted customers with good credit histories.

On the other hand, an unarranged overdraft occurs when a customer accidentally overdraws their account without prior approval, often leading to higher penalties and fees.

Source: Principles of Banking, IIBF; Khan & Jain, Financial Management.

From a bank’s balance sheet perspective, overdrafts are part of the loans and advances portfolio, which includes all forms of credit extended to customers.

They are earning assets because the bank earns interest on the overdrawn amounts.

However, if a borrower fails to repay, the overdraft may later be classified as a non-performing asset (NPA) if overdue for a specific period (typically 90 days as per Bangladesh Bank regulations).

Source: Bangladesh Bank Balance Sheet Guidelines; Financial Accounting for Banks by IIBF.

If a borrower defaults on an overdraft facility, the bank can legally recover its dues using various methods:

Lien on collateral: If the overdraft was secured with assets such as fixed deposits or shares, the bank has the legal right to seize and sell them to recover the outstanding balance.

Legal proceedings: The bank can sue the borrower under the Bank Companies Act, 1991 and other relevant laws.

Credit reporting: Defaults are reported to the Credit Information Bureau (CIB), impacting the borrower’s future borrowing ability.

Banks do not automatically convert overdrafts into term loans unless there is a mutual agreement between both parties.


Source: Bank Companies Act, 1991 (Bangladesh), Sections 45 & 46.

Banks prefer fixed deposits (FDs) as collateral for overdraft facilities because they are:

Highly liquid: Easy to convert into cash.

Low-risk: The bank already holds the FD, reducing default risk.

Value stability: FD value does not fluctuate like shares or real estate.

For instance, a customer with an FD of BDT 500,000 may be granted an overdraft of up to 90% of that amount.

Land or buildings are also accepted but require valuation and legal verification, making them less preferred for short-term overdrafts.


Source: Bangladesh Bank Credit Policy Guidelines (2023).

The current ratio (Current Assets ÷ Current Liabilities) measures a company’s short-term liquidity position and its ability to meet immediate obligations.

A higher ratio indicates that the company has sufficient assets to cover short-term debts, making it a lower credit risk for the bank.

Since overdrafts are short-term financing tools, this ratio is crucial in assessing whether the business will generate enough cash to repay the overdraft quickly.

Debt-to-equity ratio and P/E ratio are more relevant for long-term financing decisions, not short-term liquidity assessments.


Source: Financial Management by Khan & Jain; Bangladesh Bank Credit Assessment Framework.

Loan management aims to maximize returns while minimizing risks, ensure liquidity, and maintain a diversified portfolio.

Concentration of loans in one sector increases credit risk.

Diversification spreads risk across different industries and clients.

Source: Rose, P. S., & Hudgins, S. C. (2019). Bank Management & Financial Services (10th ed.), Ch. 11.

The NPL ratio measures the proportion of loans where borrowers have stopped making scheduled payments.

A high NPL ratio signals poor loan portfolio quality and potential solvency issues.

Central banks set thresholds (e.g., Bangladesh Bank recommends <10% for commercial banks).

Source: Bangladesh Bank Prudential Guidelines, 2024.

The first step is credit analysis, which includes evaluating borrower capacity, capital, collateral, and conditions (the 5Cs).

Only after satisfactory analysis and approval are loans documented and disbursed.

Source: Fabozzi, F. J., & Modigliani, F. (2022). Foundations of Financial Markets and Institutions.

Internal factors: risk tolerance, capital base, management expertise.

External factors: monetary policy, inflation, economic conditions.

A bank with high risk appetite may engage in aggressive lending.

Source: Rose & Hudgins (2019), Ch. 12.

LDR = Total Loans / Total Deposits

A very high LDR means the bank has lent out too much, reducing liquidity.

Central banks often recommend a safe LDR range, e.g., 80–90%.

Source: Bangladesh Bank Circular, 2023.

During economic recessions, default risk rises.

Banks adopt conservative policies: tighten credit standards, focus on secured loans, and prioritize liquidity.

Source: Mishkin, F. S. (2021). The Economics of Money, Banking, and Financial Markets.

Bangladesh Bank classifies loans as NPL when payments are overdue for 90 days or more.

Substandard: 90–179 days

Doubtful: 180–269 days

Bad/Loss: ≥270 days

Source: Bangladesh Bank, Loan Classification Guidelines, 2024.

Diversification reduces systemic risk by spreading exposure across sectors, locations, and maturities.

Concentrating on one group creates credit concentration risk, violating Basel III norms.

Source: BIS – Basel III Framework, 2023.

CAMELS is a bank supervision tool used to assess overall health, especially loan quality and risk.

It is vital in loan portfolio review and regulatory supervision.

Source: FDIC Supervisory Manual, 2024.

CDS transfers credit risk to a third party.

Banks pay a premium to the CDS seller, who compensates the bank if the borrower defaults.

Source: Hull, J. C. (2022). Options, Futures, and Other Derivatives.

Loan policies are internal guidelines that define risk appetite, credit evaluation procedures, sector limits, and compliance requirements.

Source: Rose & Hudgins (2019), Ch. 13.

The 5 Cs:

Character – integrity of borrower

Capacity – repayment ability

Capital – financial strength

Collateral – secondary repayment source

Conditions – external environment

Source: Fabozzi & Modigliani (2022).

Ratio analysis evaluates a borrower's financial health using liquidity, leverage, profitability, and efficiency ratios.

Essential for loan approval decisions.

Source: White, G. I., Sondhi, A. C., & Fried, D. (2020). Financial Statement Analysis.

The Altman Z-score predicts bankruptcy likelihood:

Z > 3.0: Safe zone

1.8 ≤ Z ≤ 3.0: Gray zone

Z < 1.8: Distress zone (high risk)

Source: Altman, E. I. (1968). Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy.

Qualitative factors include management quality, industry outlook, and legal environment.

Quantitative factors include financial ratios and numeric data.

Source: Rose & Hudgins (2019).

Regulatory authorities like Bangladesh Bank impose Single Borrower Exposure Limits to prevent excessive risk from one client.

Example: no more than 15% of total capital for a single borrower.

Source: Bangladesh Bank Circular, 2024.

The CRG framework has 8 grades, ranging from Superior (1) to Bad & Loss (8).

Helps standardize loan evaluation across banks.

Source: Bangladesh Bank, CRG Guidelines, 2023.

Recovery strategies are created after disbursement and during delinquency stages, not during initial credit analysis.

Source: Rose & Hudgins (2019).

DSCR = Net Operating Income / Total Debt Service

DSCR > 1 means the borrower generates enough income to cover obligations.

Source: White et al. (2020)

Credit scoring models apply statistical methods to predict likelihood of default based on historical patterns.

Widely used in retail lending (e.g., credit cards).

Source: Fabozzi & Modigliani (2022).

Secured loans are loans in which you must pledge assets—such as land, buildings, gold, vehicles, or other valuables—as collateral. This means:

If you fail to repay the loan, the lender has the legal right to seize the asset to recover the outstanding amount.

Because the lender's risk is lower (thanks to the collateral), interest rates are often lower than unsecured loans.

Common examples include home loans, auto loans, and gold loans.

Source: Investopedia.

Overdraft: Banks allow you to withdraw extra money from your bank account compared to the actual balance you have in your bank account.

Cash Credit: Cash credit allows you to borrow money from the bank upto to the value of the asset pledged. It’s a flexible way to access funds when you need them, and you repay based on your usage.

Payday loans: Payday loans are instant loans, generally offered to salaried individuals for very short loan tenure. The only requirement to avail of a payday loan is that if you must have a job. You can repay the loan as soon as you receive your next paycheck.

Bill Purchase: Bill purchases are commonly used by business entities, wherein they can receive funds from the banks in exchange for keeping bills/ invoices as security.

Both loans and advances are offered by the banks and the NBFIs.

Both loans and advances are accessible to individuals and businesses.

Loans and advances both can be offered with or without collateral.

The borrower has to repay both loans and advances per the agreed terms between the lender and borrower.

Default in making repayments to loans and advances can impact the creditworthiness of individuals or businesses.

Making timely payments for both loans and advances improves credit scores.

Source: Investopedia.

Eligibility: To be eligible for a loan, you must have a good credit score and history. Advances are generally pre-approved based on your account usage patterns or existing deposits.
Interest Rate: Advances are given for very short term and mostly given without any security. Hence, it carries a high level of risk, and thus, lenders charge higher interest rates. On the other hand, loans are given for long durations with fixed repayment schedules and are only given if you have a good credit history. Hence, it carries a low level of risk and is given at lower rates than advances.
Purpose: Loans are generally given for long-term financing needs such as buying a car, purchase or construction of a house, family vacation, education expenses, etc. However, Advances are given for immediate short-term needs such as temporary cash requirements, unexpected expenses, working capital requirements, etc.
Repayment Terms: Loans are repaid as per the fixed repayment schedule given at the time of loan disbursement. Typically, loans are paid in EMI(Equated Monthly Installments), which are calculated as per the agreed interest rate. On the other hand, advances have flexible repayment tenures and depend on the terms between the lender and the borrower.

Source: Investopedia.

Cash Credit:
A Cash Credit (CC) is a short-term source of financing for a company.

In other words, a cash credit is a short term loan extended to a company by a bank.

It enables a company to withdraw money from a bank account without keeping a credit balance.

The account is limited to only borrowing up to the borrowing limit.

Also, interest is charged on the amount borrowed and not the borrowing limit.

Overdraft:
An overdraft allows you to continue transactions when your account lacks funds.

This bank-provided credit lets you settle payments but may incur fees and interest.

Essentially, it's an extension of credit from the financial institution that is granted when an account reaches zero.

The overdraft allows the account holder to continue withdrawing money even when the account has no funds in it or has insufficient funds to cover the amount of the withdrawal.

Source: Investopedia.

Loan management involves overseeing the entire lifecycle of a loan, from origination and application processing to servicing, repayment, and collection, often facilitated by specialized software for efficiency and accuracy. 

Key aspects include automated borrower communication, payment tracking, document handling, collateral management, and risk mitigation. 

Automated systems improve efficiency, reduce manual errors, and help lenders manage loan portfolios more effectively. 

Source: Investopedia

Key Stages of loan management: 
Loan Origination: The process of applying for and approving a loan, which often involves automated workflows and digital document submission. 

Loan Servicing: Ongoing management of the loan, including generating repayment schedules, handling payments, and providing online access for borrowers. 

Loan Collection & Recovery: Strategies and tools for managing delinquent accounts and recovering outstanding debts. 

Document Management: Digitizing, centralizing, and securely storing all loan-related documents. 

Borrower Communication: Automated emails and SMS messages to send reminders, updates, and important loan information. 

Analytics and Reporting: Generating data on loan performance, portfolio health, and key lending metrics to inform decision-making. 

Source: Investopedia

Benefits of Loan Management:
Increased Efficiency: Automates routine tasks, reducing manual effort and speeding up the loan process. 

Reduced Errors: Automation minimizes human errors in calculations and data entry.
 
Improved Borrower Experience: Provides easy online access to loan information, payments, and communication. 

Enhanced Risk Management: Offers tools for better debt collection and provides insights into portfolio performance. 

Streamlined Operations: Centralizes loan data and documents, making them easier to manage and access. 

Source: Investopedia

A bank's loan policy is a set of internal guidelines that establish the terms, conditions, and procedures for all lending activities, ensuring consistency, risk management, and compliance with regulations. 

Key components include borrower eligibility, approved loan types (secured, unsecured, commercial, personal), underwriting standards, documentation requirements, loan limits, collateral requirements, approval processes, and procedures for loan monitoring and recovery. 

Source: Investopedia

Provisioning for Non-Performing Assets (NPAs) means that banks must set aside a portion of their profits to cover potential losses from loans that may not be repaid. This directly affects:

Profitability: Because the amount set aside as provision reduces the bank’s net income.

Capital Adequacy: Higher NPAs require more provisioning, which can erode the bank’s capital base and affect its capital adequacy ratio (CAR), a key regulatory metric. 

Source: Journal of Emerging Technologies and Innovative Research (JETIR):