A TERM PAPER ONA TERM PAPER ON

Term Loan Operations of IDLC Finance ltd

Financial Markets and InstitutionsFinancial Markets and InstitutionsF-304F-304

Submitted To Salahuddin A Khan

ProfessorDepartment of Finance

University of Dhaka

Submitted ByMembers of Group-14

Section-B14th Batch

Department of Finance

DATE OF SUBMISSIONMay 16, 2010

Names Roll NoSORDAR WASI UDDIN AL AHMED 14-082

NAZMUL EHSAN OMIYA 14-054

GOLAM AZAM BAHAUDDIN 14-066

MAHMUD HASAN SABBIR 14-172

ROKIB AHMED MOJUMDER 14-136

LETTER OF TRANSMITTAL

May 16, 2010

Salahuddin A Khan

Professor

Department of Finance

University of Dhaka.

Subject: Submission of the term paper named “Term Loan Operations of IDLC Finance ltd”

Sir,

We submit here our term paper on “Financial markets and Institutions” that you assigned us to

prepare. We collected data from IDLC finance ltd and from the official website of this company

and prepared our term paper on the basis of our findings.

During preparation, our all group members contributed their best efforts. Surely it enriches our

knowledge and promotes study. We have also learnt much about the “Term Loan Operations of

IDLC Finance ltd”. We are grateful to you for giving us such an opportunity for working on the

topic.

We shall be available for any clarification, if required.

Sincerely

The members of group 14

Compiling a report is a rewarding task that requires both mental stamina and attention to detail.

The varied nature of the matters dealt with has entitled references too many sources, starting

from books to websites and to all of these we gladly acknowledge our indebtness for the ideas

and information they have provided.

First of all we want to give thanks to the Almighty. We get a lot of help from Internet. We also

want to give thanks to those persons who provide us information, Specially Md. Asaduzzaman

Khan ;( Assistant Manager, Accounts & Taxation) and Muhammad Nazmus Sadat ;( Assistant

Manager, Corporate Division) IDLC Finance ltd.

Now, we are glad to thank our faculty Salahuddin A Khan, whose vast support, advice,

encouragement and guidance ensured that this project saw the light of day. Whenever we face

any kind of obstacle, we went towards him and he never made us upset. We are really thankful to

him for his humble attitude toward us.

Last but not the least, our group members whose devoted effort make it easy for all of us to

accomplish the report within the time at an efficient manner. If they were not being so loyal to

their work it would not be possible to systematize a high-quality project like that.

EXECUTIVE SUMMARY

ACKNOWLEDGEMENT

Non-Bank Financial Institutions (NBFIs) play a significant role in meeting the diverse financial

needs of various sectors of an economy and thus contribute to the economic development of the

country as well as to the deepening of the country’s financial system. In our country there are

salient types of non bank financial institutions. As the topic of our term paper is term loan

operations of NBFIs in Bangladesh, we have chosen a multiproduct financial institution (IDLC

Finance ltd). IDLC Finance ltd is a leading non bank financial institution in our country. We

have focused only the term loan operations of this company. We have experienced that the

organization’s term loan operation is highly structured. The tenure of term loan varies from 3-7

years. Though the tenure of home loan is more than 7 years, we have also included home loan as

a term loan based product of IDLC Finance ltd. Other term loan based products are personal

loans, SME loans and Corporate Loans. The credit risk management department of IDLC

scrutinizes information about the borrowers and monitors them appropriately so that no default

would arise. IDLC is totally a client based organization; the Company values their clients and

seeks the potential customers for term loan arrangements. In term loan arrangements, both IDLC

and borrower can gain a competitive advantage over the market because IDLC offers

competitive interest rates to borrowers so that they can pay reasonably lower interest rates than

other companies and IDLC can expand its business operations though high volume of term loan

operations. Borrowers are paid term loan on the basis of their repayment character; credit history,

career history, capacity, capital and collateral. Recently IDLC focuses on SME sector of our

country for term loan operations. Term loan is one of the major components of the portfolio of

this company and the growth of term loan operations are increasing day by day in IDLC Finance

ltd. Finally we would like to recommend that IDLC Finance ltd can increase its term loan

operations by hunting new clients and by seeking out more profitable and potential clients

through undertaking more innovative steps.

Table of Contents

Topics

Letter of transmittal

Acknowledgement

Executive summary

Table of ContentChapter 1 (Theoretical Background)Chapter 2 (Company Information- IDLC Finance ltd.)Chapter 3 ( Structure of Term Loan in IDLC Finance ltd )Chapter 4 (Performance of IDLC Finance ltd regarding term loan operations)Chapter 5 (Term loan based Product offered by IDLC Finance ltd)

Findings & Policy Implications

Annexure

CHAPTER 1

Theoretical Background

Non-Bank Financial Institutions (NBFIs) play a significant role in meeting the diverse financial

needs of various sectors of an economy and thus contribute to the economic development of the

country as well as to the deepening of the country’s financial system. According to Goldsmith

(1969), financial development in a country starts with the development of banking institutions.

As the development process proceeds, NBFIs become prominent alongside the banking sector.

Both can play significant roles in influencing and mobilizing savings for investment. Their

involvement in the process generally makes them competitors as they try to cater to the same

needs. However, they are also complementary to each other as each can develop its own niche,

and thus may venture into an area where the other may not, which ultimately strengthens the

financial mobility of both. In relatively advanced economies there are different types of non-

bank financial institutions namely insurance companies, finance companies, investment banks

and those dealing with pension and mutual funds, though financial innovation is blurring the

distinction between different institutions. In some countries financial institutions have adopted

both banking and non-banking financial service packages to meet the changing requirements of

the customers. In the Bangladesh context, NBFIs are those institutions that are licensed and

controlled by the Financial Institutions Act of 1993 (FIA ’93). NBFIs give loans and advances

for industry, commerce, agriculture, housing and real estate, carry on underwriting or acquisition

business or the investment and re-investment in shares, stocks, bonds, debentures or debenture

stock or securities issued by the government or any local authority; carry on the business of hire

purchase transactions including leasing of machinery or equipment, and use their capital to invest

in companies.

The importance of NBFIs can be emphasized from the structure of the financial system. In the

financial system of Bangladesh, commercial banks have emerged in a dominant role in

mobilizing funds and using these resources for investment. Due to their structural limitations and

rigidity of different regulations, banks could not expand their operations in all expected areas and

were confined to a relatively limited sphere of financial services. Moreover, their efforts to meet

long term financing with short term resources may result in asset-liability mismatch, which can

An Overview of NBFIs in Bangladesh

create pressure on their financial base. They also could not broaden their operational horizon

appreciably by offering new and innovative financial products. These drawbacks led to the

emergence of NBFIs in Bangladesh for supporting industrialization and economic growth of the

country.

Initially, NBFIs were incorporated in Bangladesh under the Companies Act, 1913 and were

regulated by the provision relating to Non-Banking Institutions as contained in Chapter V of the

Bangladesh Bank Order, 1972. But this regulatory framework was not adequate and NBFIs had

the scope of carrying out their business in the line of banking. Later, Bangladesh Bank

promulgated an order titled ‘Non Banking Financial Institutions Order, 1989’ to promote better

regulation and also to remove the ambiguity relating to the permissible areas of operation of

NBFIs. But the order did not cover the whole range of NBFI activities. It also did not mention

anything about the statutory liquidity requirement to be maintained with the central bank. To

remove the regulatory deficiency and also to define a wide range of activities to be covered by

NBFIs, a new act titled ‘Financial Institution Act, 1993’ was enacted in 1993 (Barai et al. 1999).

Industrial Promotion and Development Company (IPDC) was the first private sector NBFI in

Bangladesh, which started its operation in 1981. Since then the number has been increasing and

in December 2006 it reached 29.1 of these, one is government owned, 15 are local (private) and

the other 13 are established under joint venture with foreign participation.

Term loan refers to the fixed-term business loan with a maturity of more than one year,

providing an organization with working capital to acquire assets or inventory, or to finance plant

and equipment generating cash flow. Maturities range from one year to 15 years, although most

term loans are made for one- to five-year periods. Term loans are paid back from profits of the

business, according to a fixed amortization schedule. Term loans may be secured or unsecured,

Emergence of Non-Bank Financial Institutions in Bangladesh

Term loan (a precise look)

and carry a rate based on the lender's cost of funds. Loan interest normally is payable monthly,

quarterly, semiannually, or annually.

Most business loans contain both affirmative and restrictive Covenants that impose certain

conditions on the borrower that permit acceleration of the maturity if the loan conditions are

violated. The lender may, for example, restrict cash dividends paid and loans taken out by

corporate officers, and usually will require the borrower to maintain the business in good order,

keep adequate insurance, and file quarterly financial statements with the financial institution.

Larger borrowings often are financed by several financial institutions through a Syndication

arrangement. 

Relevant factors

There are certain things relevant to a term loan arrangement. These are:

Availability of funds of the organization

Finding out Prospective borrowers

Determining spread from the loan arrangement, i.e. to determine whether the loan

arrangement is profitable for the company or not

Justifying a loan application by taking 7c’s of credit into consideration

Rules and Regulations regarding term loan operations

Interest rate determination

Managing credit risk

Managing prepayment risk

Determining the (EMI) Equated monthly installments for the repayment of the loan

Security against loan ( Collateral)

Managing loan against deposits

Convenience of borrower in the repayment of loan, structured settlements are

negotiated with the borrowers

Tenure of loan

Managing portfolio of loans

Innovations (mobilization of term loan operations)

Department of Finance under Faculty of Business Studies at University of Dhaka requires each

BBA student to undergo a course named “Financial Markets and Institutions”. Before the final

examination every group of students has to submit a term paper on a specific topic for getting

real life experience about the professional work. This project paper is guided by the course

teacher. The opportunity to prepare the term paper provides the students with a window to the

professional world related to their field of study. It also gives the students invaluable work

experience, which they can use later in the pursuit of careers or higher studies in their field of

specialization. The term paper was assigned by the course instructor Salahuddin A Khan

(Professor, Department of Finance, Faculty of Business Studies, University of Dhaka).

The paper will be constructed with an objective to illustrate an overall analysis of the term loan

operations of IDLC. However, salient objectives of our report are:

To provide an overview of NBFIs in our country and recent development in non bank

financial sector.

To provide an overall idea about how IDLC Finance ltd perform their term loan operations.

To assemble the basic structure of term loan operations of IDLC Finance ltd.

To highlight the performance of IDLC regarding term loan operations.

To present the term loan based product offered by IDLC.

Origin of the Term Paper

Objective

The methods that have been followed throughout the study may be detailed as follows:

Primary sources of data for this report have been collected through the interviews of IDLC

Finance Ltd officials.

The annual reports of IDLC Finance Ltd as well as their brochure have been great sources of

secondary data.

Website of IDLC Finance Ltd and Internet also help us a lot by providing secondary data.

There were some obstacles, which were hard to meet up with. The limitations are:

Lack of adequate information due to confidentiality.

Lack of documented and concrete secondary materials.

Direct observation of the customer service of the company requires extensive time

involvement, which may not be possible.

Organizational personnel’s reluctance to answer the questions.

Methodology

Limitations of the study

CHAPTER 2Company Information

IDLC Finance ltd

IDLC Finance Limited commenced its journey in 1985, as the first ever leasing company of the

country. In 1995, IDLC was licensed as a Financial Institution by the country's central bank,

Bangladesh Bank, following the enactment of the Financial Institution Act 1993. Over the last

two decades, IDLC has grown in tandem with the country's transition into a developing country

and has emerged as Bangladesh's leading multiproduct financial institution. To encapsulate the

evolving nature of the company, IDLC has changed its name to IDLC Finance Limited from

earlier Industrial Development Leasing Company of Bangladesh Limited in August 2007. Since

1985, when IDLC was formed as the pioneering leasing company in Bangladesh, the company

continues to evolve as an innovative financial solutions provider. The company is now able to

offer its customers, integrated and customized financial solutions - all under one roof. IDLC’s

wide array of products and services range from retail products, such as home and car loans,

corporate and SME products including lease and term loans, structured finance services ranging

from syndications to capital restructuring and a complete suite of merchant banking and capital

market services.

To become the best performing and most innovative financial solutions provider in the country

Create maximum possible value for all stakeholders by adhering to the highest ethical standards

For Customers

Relentless pursuit of customer satisfaction through delivery of top quality services

For Shareholders

Maximize shareholders' wealth through a sustained return on their investments

For Employees

Provide job satisfaction by making IDLC a centre of excellence with opportunity for career

development

IDLC at a Glance

Vision

Mission

For the Society

Contribute to the well being of the society, in general, by acting as a responsible corporate

citizen

Long term maximization of stakeholders' value in a socially responsible manner

Discharge their functions with proper accountability for actions and results and bind themselves to the highest ethical standards

IDLC's product and service offerings include:

Debt Products:

1. Lease Finance

2. Term Finance

3. Domestic Factoring of Accounts Receivable

4. Bill/Invoice Discounting

5. Work Order Finance

6. Corporate Real Estate Finance

7. Real Estate Developer Finance

8. Home Loans with Home Loan Shield

9. Home Equity Loans

10. Car Loans for Individuals

11. Business Loan

12. Machinery Loan

13. Double Loan

14. Festival Loan

Goal

Corporate Philosophy

IDLC's Products and Services

15. Personal Loan

Investment Products:

1. Common Equity investments

2. Preferred Equity Investments

3. Bonds

Liability Products:

1. Term Deposit Schemes

2. Debentures

3. Securitized Bonds

Corporate Services:

1. Project Finance Appraisal

2. Project Loan Syndication

3. Working Capital Arrangement

4. Syndication Agency services

5. Refinancing arrangements

6. Corporate Financial Advisory

7. Securitization of Receivables

8. Trusteeship Management

9. Professional supports to SMEs

IDLC collects funds from a wide range of sources including financial instruments, loans from

banks, their own equity as well as deposits from institutions and the public. The major supplier

of fund is Standard Chartered Bank for IDLC. Line of credit from banks also constitutes the

major portion of total funds for IDLC. Deposit from public is another important source of fund

for IDLC, which has been increasing over the years. IDLC is allowed to take deposits directly

from the public as well as Institutions. According to the central bank regulation, IDLC has the

restriction to collect public deposits for less than one year, which creates uneven competition

with banks as banks are also exploring the business opportunities created by IDLC with their

lower cost of fund. Although recent reduction of the minimum tenure of the term deposit from

one year to six months for institutional investor has had a positive impact on their deposit

mobilization capacity. Now IDLC can develop attractive term deposit products of different

maturities to have access to public deposits as these are one significant source of their funds.

Sources of Funds

CHAPTER 3Structure of term loan in IDLC

Previously all NBFIs earning source was only lease financing, but after the emergence of the

NBFI sector in our country, NBFIs begin to diversify their business activities and as a result

various kinds of products and services take place to expand the business activities of NBFIs. We

have previously stated those products and services. Term loan is one of these products and

services. Now, a simple question rises in our mind, why we should go to IDLC for term loan? As

a leading player of NBFI sector in our country, IDLCs term loan operations are increasing day

by day and customers are satisfied with that. The main reasons for choosing IDLC for term loan

are-

1. Quick Service

2. Healthy Relationship with Clients

Quick Service: Clients who need fund immediately or within shortest possible time, better go to

IDLC for a term loan. Because:

1

Time needed to deliver the loan to a client in IDLC almost half than that of other financial institutions after loan sanction process.

2

Consumer can get the loan without any hasle, because IDLC is a less complex place where Bureaucracy is not practised highly so that client can get the loan as early as possible

3

Though IDLC is conservative enough when arranging a term loan contract with a client, the execution of term loan is much quick after gathering details information of client

Why IDLC for Term Loan

Healthy Relationship with client: IDLC is good at maintaining a long term relationship with

clients. This helps clients to get loans with reasonable conditions and IDLC for expanding the

business activities.

IDLC seeks out prospective clients regarding term loan operations though appropriate marketing

strategy. Through proper Advertising and industry research IDLC finds out who needs loan and

who can repay loans without any confrontment. IDLC retains customers with its best efforts.

Prospective client search. (appropriate marketing)

IDLC’s sales executives are always looking for prospective clients for the term loan. They do

research on the market prospect and the conditions of possible clients’ business. Based on their

research they try to identify the trend of the economy and based on this trend analysis they plan

their loan portfolio.

Information checklist based on requirement

Whenever a client wants to take loan from IDLC they provide them an information checklist

based on their requirement. If the information provided by the client is considerable then they go

for further processing otherwise they reject the loan proposal.

Document submission

If a prospective client passed through the information checklist process then the client is asked to

submit some documents which are required for further assessment. These documents vary in case

to case.

Prospective Client Hunt

Term loan process

Appraisal report

After the submission of all documents the sales executive who bring the client to IDLC prepares

an appraisal report in which he/she gives his/her expert opinion about the loan proposal.

CIB report

For assessing a loan proposal IDLC has to verify the proposer’s credit report provided by the

Credit Information Bureau (CIB). CIB provides necessary about the credit condition of the

proposer. This CIB report is very much important for assessing a loan proposal. If the report is

favorable for the proposer only then IDLC go for further assessment. Otherwise they reject the

proposal immediately.

Justification through credit policy

After getting positive report from CIB IDLC justify the loan proposal through its own credit

policy. If the proposal complies with the credit policy of IDLC then they approve the loan

otherwise the proposal is rejected.

Sanction of loan

After justifying the loan proposal the loan is sanctioned to the proposer.

Document preparation

After sanctioning the loan IDLC officials prepare the documents for the loan signing.

Sign

After preparing the documents required both the parties sign the document and the loan is

provided to the client.

Internal control(credit administration)

Internal Control & Compliance Committee addresses operational risk and frames and

implements policies to encounter such risks. The Committee assesses operational risk across the

Company, as a whole, and ensures that an appropriate framework exists to identify, assess and

manage operational risk.

Term loan is one of the main operations in IDLC Finance Ltd. Basically term loan is given to

prospective and profitable customers. Finding out prospective customers by undertaking appropriate

marketing and advertisement is one of the potentials of this company. Even after that, IDLC has to

maintain some rules and regulations and some defensive measures to justify a loan application. One

significant aspect is that, for lease financing IDLC has the full control over the customer, i.e. IDLC

can monitor client’s operations regarding lease financing. But, in case of term loan financing, IDLC

can not entirely monitor the activities of the borrower. So that, before approving a term loan they

have to become meticulous about all possible phenomena and they have to be well-aware of

borrowers’ historical performances and capabilities.

Certain factors are investigated before approving a loan to a borrower. A different dimension is

applicable here. The 7 Cs of credit is an important aspect for perceiving a borrower.

7Cs of Credit

Character: IDLC must be comfortable with the borrower's integrity and confidence in his

willingness to repay the loan. Certain questions are important here, Has IDLC met the

customer? What is his reputation in the community? Is he an upstanding guy or is he a dead

beat? IDLC may consider checking references with other business-owners with which the

customer does business. Basically character means the repayment character of the borrower.

If borrowers’ history in repaying debt is fair, then IDLC takes the borrower into

consideration.

Credit History: Credit history of borrower is another important element to consider before

approving a loan. IDLC would never loan money to an applicant without first checking his or

her credit history. As a potential creditor, IDLC also has the legal right to obtain the

borrower's credit report and examine it in determining whether or not the institution can risk

extending the credit. IDLC will be checking borrowers credit report and gets written

permission before actually doing so.

Approval of term loan

Career History: IDLC asks about the borrower's business. Is it a successful business

venture? Has he been in it for a while? Has he had failed business ventures in the past? His

past successes or failures may be determinative of his future business success.

Capacity: Regarding this aspect of giving loan, IDLC must ask certain questions. In what

capacity is the credit going to be used in his business? Is it part of borrowers’ inventory?

Will the use of goods enable him to generate sufficient funds to repay IDLC and any other

creditors? IDLC may consider going over his inventory records with him. The faster he

moves his inventory, the more likely his business is a success.

Capital: Certain questions are material here, what is the borrower's financial net worth? A

customer with a positive net worth can survive low cash flow times in his business and still

pay creditors invoices.

Collateral: IDLC may consider extending only "secured credit." This usually means having

the customer pledge real estate or his inventory in exchange for providing the credit. If he

defaults on the loan, IDLC gets the pledged property. IDLC makes sure the property hasn't

been pledged before.

IDLC does not intend to sell the property, rather the value of the collateral is important here,

suppose the borrower has a land that resembles the memory of his parents. In such case,

borrower is unlikely to fail repaying the loan because he would think, “if I fail to repay, my

parents’ remembrance will be taken away by the creditor”. A psychological stunt is practiced by

IDLC in valuation of the collateral.

Conditions: IDLC always makes sure the conditions of the sale are clear and in writing,

signed by the borrower. This includes payment dates and amounts. If he defaults on any of

the conditions, IDLC’s collection efforts will go much more smoothly if the conditions of the

credit are clear.

Credit Risk Management in IDLC

Credit risk is the possibility that a borrower or counter party will fail to meet agreed obligations.

Thus managing credit risk for efficient management of a financial institution (FI) has become the

most crucial task. Given the fast changing, dynamic global economy and the increasing pressure

of globalization, liberalization, and consolidation it is essential that FIs have robust credit risk

management policies and procedures that are sensitive and responsive to these changes. At

IDLC, credit risk may arise in the following forms:

Default risk

Exposure risk

Recovery risk

Counter party risk

Related party risk

Legal risk

Political risk

To encounter and mitigate credit risk the following control measures are in place at IDLC:

Multilayer approval process

Policy for maximum sector and group exposure limit

Policy for customers maximum asset exposure limit

Mandatory search for credit report from Credit Information Bureau

Looking into payment performance of customer before financing

Annual review of clients

Adequate insurance coverage for funded assets

Vigorous monitoring and follow up by Special Assets Management Team

Strong follow up of compliance of credit policies by Operational Risk Management

Department

Taking collateral

Seeking external legal opinion

Maintaining neutrality in politics and following arm's length approach in related party

transactions

Regular review of market situation and industry exposure

The Credit Evaluation Committee (CEC) regularly meets to review the market and credit risks

related to lending and recommend and implement appropriate measures to counter associated

risks. The CEC critically reviews projects considering the current global financial crisis and its

probable impact on the project. An independent Credit Risk Management Department is in place,

at IDLC, to scrutinize projects from a risk-weighted point of view and assist the management in

creating a high quality credit portfolio and maximize returns from risk assets.

Credit Evaluation Committee (CEC)

The CEC evaluates all projects/proposals of financing activities of the Company from the risk

point of view. The Committee is headed by the CEO & Managing Director and consists of six

members. The members of the Committee are CEO & Managing Director, Deputy Managing

Director, Head of Credit Risk Management Department, CFO and Head of Corporate Division.

IDLC can give term loan to a client up to a 30 crore BDT. Maximum amount of a term loan

arrangement is based on IDLC’s total equity. IDLC gives loan to a client up to a certain

percentage of its total equity. This percentage varies from 15-20%. If conditions of a term loan

contract are fair enough, IDLC is able to sanction a loan of full amount of the ceiling. However

the loan ceiling is totally based on borrowers’ financial ability.

Loan Ceiling

Determination of Interest rate of a term loan

Interest rate determination of a term loan is very important. IDLC has various kinds of term loan

arrangements. Most of these loans have tenure of 3-7 years. IDLC values their customers. So, for

the convenience of prospective clients in a term loan arrangements, IDLC sets interest rate on

term loan based on customer requirements.

Predetermined interest rate rather than fixed

IDLC determines the interest based on relationship with the clients. A long term relationship

with customer can have an impact on interest rate determination. To retain prospective clients,

IDLC sets lower interest rate for a term loan. Another feature is that, Interest rates are

predetermined rather than fixed. Interest rates are negotiated with the borrowers and the

borrowers can get the loan with the negotiated interest rates. Interest rates are negotiated and

predetermined before the term loan is sanctioned to a borrower. We can say that, IDLC offers

competitive interest rates to their customers for a term loan, so that customers can receive a loan

with a suitable interest rate, this helps both the customer in receiving a loan with relatively low

interest rate and IDLC to gain a competitive advantage in the market.

Asset Liability Management Committee (ALCO) of IDLC

The Asset Liability Committee (ALCO) of the Company assesses the changes in interest rate,

market conditions, carries out asset liability maturity gap analysis, re-pricing of products and

thereby takes effective measures to monitor and control interest rate risk.

Dealing with Prepayment risk

Prepayment risk is the risk to a lender that part or all of the principal of a loan will be paid prior

to the scheduled maturity. Prepayments generally occur when market rates of interest decline

following the loan origination.

IDLC assesses prepayment risk before issuing borrowers loan quote. Basically, IDLC decides on

an interest rate that will generate the returns the organization needs in order to take the risk of

extending borrowers a loan. If there is a chance borrowers will prepay the loan, they may not pay

the full interest required in order for the organization to generate the desired profit. IDLC

reduces the flexibility of loans that have a high prepayment risk.

This can mean a few things:

Borrowers’ loan contract may pre-set very high prepayment penalties in order to dissuade

them from prepaying the loan.

Loan may be structured so borrowers are paying toward the interest for only a number of

years, meaning they will have already paid interest on the entire loan if they decide to prepay,

and they will not save any money in doing so.

IDLC may not agree to a long-term loan in order to hedge against the chance borrowers will

be able to pay for the loan before it matures.

IDLC may require high monthly payments from borrowers in order to accomplish the shorter

loan term without reducing the limits of the loan.

The penalty that is charged by IDLC for the prepayment of a loan is currently 2% of the entire

loan amount. But the entire situation can be different if IDLC finds that borrowers who have a

long term relationship with the organization are tending to prepay their term loan. In that case, to

retain prospective borrowers and clients and to maintain the relationship with borrowers IDLC

do not charge them for the prepayment of the loan. So again we can say that IDLC is a customer-

incentive place.

Equal monthly installments of a term loan

A borrower can repay a term loan by equal monthly installment basis. Based on certain

information, like, how much loan a borrower needs, what will be the tenure of the loan and

predetermined interest rates a borrower can know what will be the equal monthly installments of

that loan. By providing these information in the EMI calculator of IDLC a borrower get to know

what will be the equal monthly installments. EMI calculator looks as follows:

The structured settlements of a term loan are originated by IDLC for the convenience of the

borrower to repay the loan in a term-loan arrangement in a comfortable way. Through these

settlements, borrowers can repay the loan by equal monthly installments however they want.

The Step-Up Approach: In a term loan arrangement having tenure of 3 years with an EMI of

20000 BDT, a borrower may pay lower amounts than 20000BDT in prior years and then he can

pay higher amounts than 20000BDT in following years.

A hypothetical step-up format would look like following:

Structured settlements of a term loan

year 1 year 2 year 30

5000

10000

15000

20000

25000

30000

Series 1Series 2Series 3Series 4Series 5

The Step-Down Approach: In this type of settlement, borrower can pay higher amount than EMI in prior years, later he can pay lower amounts than EMI in order to repay the loan.

A hypothetical step-down format would look like following:

year 1 year 2 year 30

5000

10000

15000

20000

25000

30000

Series 1Series 2Series 3Series 4Serious 5

CHAPTER 4Performance of IDLC

(Term Loan Operations)

IDLC has always believed that diversification of products and services and revenue streams are

the best way of ensuring sustained financial performance. Accordingly, the organization has

continued to focus on multiple business areas in 2009 and have taken measures to encounter the

uncertainty that may arise in business activities from the aftermath of the global economic crisis.

IDLC’s total investment portfolio as on December 31, 2009 stood at Tk. 20,099 million which is

26.33% higher than the previous year. Out of the total portfolio, lease, term loan, real estate

finance and margin loans, respectively, represent 22.06%, 17.30%, 24.10%, and 29.50% of the

total portfolio. IDLC also maintains a well diversified investment portfolio in the major sectors

with highest allocation to services and apparel & accessories at 9.97% and 9.96%, respectively,

followed by food and beverages sector at 8.82%, transport at 7.72%, textiles at 7.02%, housing

& real Estate at 6.81%, pharmaceuticals at 5.72%, financial services at 4.76%, iron & steel at

4.45%, agro based industry at 4.38% and so on. This diversification of investment portfolio helps

them mitigate economic and sectoral risks.

IDLC’s BUSINESS ACTIVITYA SUCCESS STORY BASED ON DIVERSIFICATION

BUSINESS REVIEW

Lease and Term Loan

Amid intense and increasing competition amongst the financial institutions as well as the

commercial banks, IDLC maintained its leadership position in the market. During 2009, IDLC

executed Tk. 3,750 million in lease and term loans compared to previous year’s Tk. 3,411

million, showing a growth of 10%. The lease and term loans portfolio at the end of the year saw

a marginal growth of 4.0% over the previous year. This year IDLC has concentrated more on

acquiring better quality financial assets rather than volume achievement for its own sake. The

Company expects to continue its drive to diversify its client base, maintain portfolio quality and

improve service quality, which will enable the company to maintain a sustainable growth in this

operation.

Term Finance:

Revenue from term financing has also increased in 2009. We can notice an upward trend in term

finance activities of IDLC. Portfolio of term finance has increased 956 million BDT to 3437

million BDT.

Housing Finance

Although the real estate and housing industry experienced a setback during early 2009 with fall

in sales due to the uncertainty in the business and trade circles, IDLC’s housing finance

operation witnessed a reasonable growth of 14% in disbursements. Revenue of the operation also

witnessed growth of 22.46%. The housing finance assets as at the close of the year stood at Tk.

4,789 million, 22.32% higher than the previous year. IDLC believes that this operation will

continue to grow with increasing retail customer base in the years ahead.

Car Loans

During the year under report, your Company disbursed Tk. 148 million against previous year’s

disbursement of Tk. 125 million. This operation has, however, earned revenue of Tk. 56.1

million during the period, which is 1.03% higher than previous year. This business is facing

enormous competition from commercial banks, which are able to offer lower rates and spend

large amounts of money on aggressive marketing campaigns in conjunction with a large sales

force and branch network. However, they continue to operate in the IDLC trademark manner and

have their own market niche to serve which, they believe, will slowly see its own growth with

the passage of time.

IDLC has completed a very successful year in 2009, despite an initial setback due to political

uncertainty and global economic slowdown. There was a marked increase in business confidence

among customers during the remainder of the year. The NBFI-sector experienced significant

competition in 2009 from the Banking industry with Banks using low cost of funds and the high

liquidity prevailing in the market to enter the already crowded term loan market. It is expected

that interest rate competition will continue for the foreseeable future, particularly for traditional

OPERATIONAL PERFORMANCE OF IDLC DURING 2009

businesses such as leasing and term loans. IDLC continues to be recognized as the leading multi-

product NBFI in the Bangladesh and is a continuous role-model for all competitors. The

company’s vision, diversified business strategy and strong compliance culture has helped

overcome competition and achieve exceptional results in 2009.

Despite constantly increasing competition in the market IDLC will put in strenuous efforts to

achieve the business volumes targeted by all the departments as well as realize corporate

objectives. Innovative and relentless marketing drive will continue to attain quality asset growth,

while maintaining and improving existing portfolio quality. IDLC has succeeded immensely in

its diversification efforts resulting in growth in income streams from an array of business

segments. IDLC’s focus in 2009 and in the near future will be in further growing of its SME

business through expansion of branch network across the country and focusing more SME

businesses in all existing branches. IDLC shall also take extra efforts to offer more loans to

women entrepreneurs. The Corporate Division has been affected somewhat by the change in

depreciation policy by the Government and also by the reduction of the lending rate by the

commercial banks for corporate lending. Plans are afoot to explore the possibility of extending

new product to counter the loss of business. With all these expansion and diversification, IDLC

aims to be a truly specialized financial institution focusing on SME financing and investment

banking operation while maintaining its business share of corporate financing.

Future Prospects

CHAPTER 5Term Loan Based Product offered by IDLC

Term loan Services provided by IDLC:

Personal loans are those loans which are sanctioned for personal purposes to individual

borrowers. IDLC provided personal term loans for mainly two purposes. These are:

a. Home loan

b. Car loan

Home Loan

The need for a shelter is one of the basic needs for human being. Every single person in the

world wants to have a home for his own. But now-a-days it is becoming a dream that will never

come true for many of them. The cost of buying or building a home is so high that most of the

middle class people hardly manage to bear the cost. Home loan is an excellent solution for these

people. IDLC is the leading home loans provider in the country which offers the most convenient

home loans to suit their needs. With so many attractive benefits, the home they always wanted is

no longer a dream.

Benefits Of IDLC Home Loan:

Equal consideration for all applications irrespective of any professions

Dedicated and supportive service both before and after disbursement

Option to choose either Fixed or Variable rate of interest

Loan sanction within shortest possible time and also before starting construction of the

building or purchase of the apartment

Early pre-payment option either in part or full with convenient conditions

Income tax rebate on yearly interest payment on home loan up to Tk 2 million

Municipality holding tax rebate

Maximum loan offering to Non Resident Bangladeshi (NRB)

Competitive interest rate and lower fees

Personal loan

Home Loans Can Be Used For:

Purchase of apartment/ house/ commercial space/ approved housing plots

Construction of residential/ commercial building

Renovation or extension of residential house

Home Equity loan against mortgage of property

Home Loan under Bangladesh Bank Refinancing Scheme (@ 9% p.a.)

Eligibility For Home Loan:

25 years and above but not more than 60 years of age

Earning regularly from a sustainable source of employment or business

Factors Which Affect Loan Amount:

The home loan amount depends on repayment capability of the borrower. A number of factors

are considered such as:

Monthly net disposable income,

Age,

Qualifications,

Value of the immovable property,

Number of family members and dependants,

Monthly expense,

Other fixed obligations,

Nature of job / business

Savings habit etc.

Loan amount:

Residential Purpose: 70% of the purchase price including registration cost or 80% of the

construction cost of residential house.

Commercial Purpose: 70% of the purchase price including registration cost

Loan term:

Residential Purpose:

Category Maximum Term Maximum Age

Professional & Service

Holders

20 years 60 years

Businessmen 15 years 60 years

Non Resident

Bangladeshi (NRBs)

10 years 60 years

Commercial Purpose:

For any profession, the maximum term can be 7 years.

Repayment Method:

The entire loan has to be repaid by Equated Monthly Installments (EMI) that means through

equally paid monthly installment.

Security Requirement for The Loan:

Mortgage of the property itself or any other equivalent security acceptable to IDLC.

Interest Rate and Fees:

IDLC offers its clients a competitive interest rate and low fees. They set individual rates on the

basis of a customer's financial status, amount borrowed and repayment terms.

Property Insurance Requirement:

Mortgaged asset should have fire or earth quake insurance by any IDLC nominated insurance

company.

How To Apply:

To apply a borrower just need to visit any of the branches of IDLC and collect a home loan

application form and submit the form along with required documents after filling the form.

Required Documents:

a. For Employed Persons:

Recent passport size photo, copy of National ID Card and Bio data

Latest salary slip/salary certificate

Bank statement for one year

Statements of assets with copies of evidence

Evidence of other income (if any)

CIB Application Form

Allotment agreement with developer/ owner

Money receipts of amount already paid to developer/owner

b. For Self Employed Persons:

Recent passport size photo, copy of National ID Card and Bio data

Tax assessment paper for last 3 years (Tax return & Assessment order)

Profit & Loss account and Balance sheet of business for last 3 years

Evidence of presents work in hand and value

Bank statement for the last one year

Statement of assets with copies of evidence

Evidence of other income (if any)

CIB Application Form

Allotment agreement with developer/owner

Money receipts of amount already paid to developer/owner

Post Disbursement Services:

After the disbursement of loan IDLC provides Income Tax Certificate to enable its borrowers to

claim the tax benefits and this service is given without taking any fees for this.

Special Home Loan Features Provided By IDLC:

Home Loan @ 9% P.A.:

This scheme is designed for middle and lower middle class customers to purchase or construct

new apartment for own dwelling with in the area of 6 city corporation areas (Dhaka, Chittagong,

Rajshahi, Khulna, Sylhet, Barishal) and municipality areas of Tongi, Gazipur, Savar and

Narayangonj.

Eligibility:

Applicant's Monthly gross income is within Tk. 50,000/-

Applicant’s those who have no house/ apartment either in their name or their spouse/

children's name in the areas specified above

Applicant's those who have not yet availed home loan from any bank/ financial institutions

For salaried applicants, officially those who have no employee housing loan scheme or those

have so but still not avail the facilities are eligible for this loan

The property itself will be kept mortgaged as security

Features:

Maximum loan amount is Tk. 2,000,000/-

Maximum loan term is 20 years

The insurance coverage ranges from Taka 200,000/- to Taka 10,000,000/-.

Maximum size of apartment is 1250 sft.

Moratorium period is 1 year

Entire loan can be disbursed within one year from the date of first disbursement

Home Loan For NRBs (Non Resident Bangladeshi):

For Non-Resident Bangladeshis (NRBs) IDLC provides Home Loans to buy apartment or build

a house, extend or renovate a house or buy approved housing plot to build a house.

IDLC has been a part of a 10 years journey in the real estate financing arena with more than four

thousand customers. IDLC offers maximum loan amount and terms for NRB customers and

extend all possible cooperation to fulfill their dream to build up asset in their home land. IDLC’s

home loan marketing and sales officers are ready to give the time tested advice that suits NRB’s

requirements.

IDLC helps NRB clients with expert advices for legal documentation, project or builder

approvals, and technical advice and this service is absolutely free.

IDLC’s project approval facility provides its customers the comfort of purchasing properties

from builders who have complied with all basic documentation.

Property Selection:

NRBs can either select the property by themselves when they are in the country or by their

nominated local keens / representatives. they can always seek for IDLC’s expert opinion before

selection of property from any developers.

Documentation Required:

One copy recent passport size photograph

Latest salary slip/salary certificate showing all deductions.

Employment-contract

Photo copy of the passport with evidence of arrival at port of entry, visa stamped pages.

Residency permit or latest work permit (if applicable)

Copy of continuous discharge certificate (CDC) for merchant mariners

Overseas and local bank account statements for last 12 months.

Tax papers for last three years duly attested by Bangladesh Embassy

Bio data and family background.

Company Profile/Brochure/ Web Mail Address

Power of Attorney (POA) to a Bangladeshi resident as per IDLC's format. POA will also

provide Personal Guarantee to the loan (Attachment)

Personal guarantee from an employed Bangladeshi local resident (age below 50) as per

IDLC's format.

For the above document in a language other than English, please get it translated into English

and attested by the Bangladesh Embassy.

Home Loan Shield:

Another excellent service of IDLC is its Home Loan Shield. IDLC provides complete protection

to its home loan borrowers. Home loans borrowers of IDLC can avail life insurance coverage

equivalent to the amount of the outstanding home loan.

Home Loan Shield is a specially designed Group Life Insurance Scheme, which protects the

family of borrowers in his unfortunate death. The shield takes over the outstanding principal

amount of borrower’s home loan with IDLC thus protecting the beloved family of the borrower

from burden of loan repayment.

Benefits Of Home Loan Shield:

Borrower's family is secured from loan burden at the unfortunate death of main earner of the

family

Lowest possible single premium

Hassle free coverage merely on declaration (up to certain age limit)

Free of cost medical examination from recognized hospitals (cost will be borne by the

borrower only when application is turn down by the insurer)

Proportion return of premium for early loan foreclosure

Financing of the premium is also available (IDLC will provide, if required)

Income Tax relief on premium payment

Salient Features:

IDLC will be the master policyholder of the Group Life Insurance and borrower will get a

certificate as a member of the scheme.

Upfront single insurance premium is fixed based on borrower's age, loan tenure and

outstanding principal amount.

The insurance coverage ranges from Taka 200,000/- to Taka 10,000,000/-.

Insurance coverage of Tk. 1,000,000/- and Tk. 750,000/- will be granted merely on

declaration of borrower’s good health when his age is between 20-40 and 41-45 respectively.

Except for above, medical examination is required.

Borrower gets minimum 50% to maximum 100% of the home loan coverage under the

scheme.

This coverage will be on a single borrower only. In case of joint loan, the main income

earner can become a member of the scheme.

The insurance coverage will start from the very first day of loan disbursement.

This scheme is open to all IDLC home loan customers between the ages of 20 to 55 years.

The maximum age at maturity should not exceed 60 years.

Application Procedure:

To apply for Home Loan Shield borrower needs just to complete the "Insurance Application

Form" (attached with Home Loan Application Form) and hand it over to the dealing officer at

IDLC's any branch from where the borrower is taking jis loan along with a copy of the age proof.

Process For Claim:

In the event of borrower’s unfortunate demise, his nominee will have to:

Inform IDLC within 7 days of the event

Provide them with information and/ or documentation to establish the fact, date,

circumstances relating to and cause of the event

Co-operate with and assist IDLC in any investigation undertaken by the insurance company

Provide evidence in support of the claim at the request of IDLC

Car Loan:

Owning car is no longer a luxury anymore; rather it is a useful investment that improves the

quality of life. The family car is increasingly becoming a vital part of our everyday life. With

IDLC Car Loan, one can own his own car and add excitement to the life.

Benefits:

Loan sanction within 72 hours of application receipt

An opportunity to finance both brand new and re-conditioned cars

No security

No personal guarantee

Competitive interest rate

Expert advice on car market conditions

Dedicated and supportive service both before and after disbursement

Partial or full prepayment option with minimum charges

Provided that all required documents have been provided to IDLC

Eligibility:

A borrower is eligible for car loan if he is:

A salaried executive or professional or a businessman

Between 22 and 60 years of age

Minimum monthly income of Tk. 25,000/- (this will include income of spouse in case of

joint application)

A minimum of two (2) years of service

A resident of Dhaka or Chittagong

Loan Ceiling:

IDLC provides maximum assistance to fulfill borrower’s requirement. IDLC finances both brand

new and re-conditioned cars. Borrower can avail car loan from Tk 200,000/- to Tk. 4,000,000/-

or 70% of the value of the car (including registration cost), whichever is lower. But if borrower

is ready to provide 50% of the car value as cash deposit with IDLC, he will enjoy a special rate

for his entire car loan.

Payment Terms:

A borrower can repay the loan according to his convenience but he has can take a maximum of

sixty (60) months period to repay the loan for both brand new cars and re-conditioned car.

Required Documents:

Employed

One recent copy of passport size photo, National ID card and Bio data

Application form (properly filled up)

Employment confirmation form (properly filled up)

Price quotation from the vendor

CIB undertaking form (properly filled up)

Latest salary slip/salary certificate

Personal bank statements for last 12 months

Rental income/other income documents

Documents supporting other fixed assets

Documents supporting liquid assets

Self Employed

One recent copy of passport size photo, National ID card and Bio data

Tax assessment paper for last 3 years

Profit & Loss account and Balance sheet of business for last 3 years

Company bank statements for last 3 years

Memorandum & Articles of Association with form Xll of the company

Trade license

Price quotation from the vendor

Non Resident Bangladeshi (NRBs)

One recent copy of passport size photo and Bio data

Photocopy of the passport with evidence of arrival of port of entry, visa stamped pages

Employment contract

Residency permit/work permit

Latest work permit

Overseas bank statements for last 12 months

Tax papers for last three years

Utility bills copy

SME loan

Small Enterprises:

IDLC provides loan facility designed to finance small scale trading, manufacturing and service

ventures, especially to help small and medium entrepreneurs to meet their short-term cash flow

shortages and bridge the fund-flow gaps.

Eligibility

Entrepreneurs with minimum 2 years experience in the same line of business

Business must be a going concern with at least 2 years in operation

Loan Limit:

From BDT 3 lac to BDT 75 lac

Key Features

Loan without any collateral up to BDT 15 lac

For partly cash security loan up to BDT 35 lac

Loan for Working Capital Finance and/or Lease finance for business

Borrower having loan with other financial institute can also avail Small Business

Convenient repayment options of Equated Monthly Installment and Customized Repayment

Schedule

Quick, quality door step customer service

Medium Enterprises:

IDLC offers mid and longer term financial solutions to a wide range of clienteles who are in their

journey to emerge as promising corporate houses in near future. IDLC’s portfolio comprises of

various private limited companies, partnership and proprietorship concerns with promising

business opportunities.

Loans can be used for:

Meeting various regular capital/fixed expenditures like balancing of production line,

modernization of manufacturing process, expansion of capacity and space, etc.

Term for the loan:

Usually for minimum ½ year to maximum 5 years.

Repayment method:

Repayment through monthly installments

Installments may be equal or structured (step-up, step-down, bullet, etc.)

IDLC’s main term loan clients are the corporations. IDLC provides customized term loan

solutions for the corporate clients.

Loans can be used for:

Meeting various regular capital/fixed expenditures like balancing of production line,

modernization of manufacturing process, expansion of capacity and space, etc.

Term for the loan:

Usually for minimum ½ year to maximum 5 years. But it can be even 7 years also.

Repayment method:

Repayment through monthly or quarterly installments

Installments may be equal or structured (step-up, step-down, bullet, etc.)

Corporate loan

Findings

Throughout our term paper preparation, we have found out some salient features of term loan

operations of IDLC Finance ltd. These findings can be summarized as follows:

The major supplier of fund for IDLC is Standard Chartered Bank.

Term Loan Operation is considered as a major business activity for IDLC.

Recently IDLC is focusing more on SME loans.

The tenure for term loan is about 3 years to 7 years. But in case of home loan, the tenure of

loan is much longer.

IDLC offers competitive interest rate for the borrowers.

IDLC charges 2% penalty if any prepayment of loan occurs.

Corporate Loan is the most profitable one for IDLC.

IDLC seeks out prominent and profitable customers from the market through industry

research.

We would like to propose some policy implications so that IDLC can perform better in term loan

operations. These are as follows:

IDLC has to explore alternative sources of funds. Because the Cost of fund for IDLC is much

higher.

In order to sustain the high cost of borrowing, IDLC may be inclined to invest in the high

return segments, which can expose them to commensurately higher risks. Moreover, fierce

competition among competitors may also force IDLC to reduce the margin at the expense of

quality of the asset portfolio. Adequate risk management capabilities are needed to be

developed to face these types of challenges.

IDLC has to diversify its term loan based products more and offer more attractive term loan

arrangements to the borrowers so that the company can get the competitive advantage over

the market.

Policy Implications

The Industry analysis team of IDLC has to be more efficient in seeking out prominent clients

for term loan operations

IDLC will have to initiate new windows for term loan operations to attract new customers in

market segment.

Questionnaire

ANNEXURE

1. What is the main source of financing that IDLC is making?

2. What are the other sources of financing?

3. When IDLC started to give term loans?

4. When it did increase?

5. Is term loan financing is increasing In comparison to the banks or other financial institutions?

6. If yes, why term loan operations is increasing?

7. Are the banks offering term loans? What is the difference in between these two?

8. What is the process of term loans?

9. What is the total market share of the term loan it is absorbing?

10. What is the future prospect of term loan of IDLC as an NBFI?

11. Will you venture to any other customer that will open new windows for term loan?

12. Which criteria do you follow for justifying a loan application?

13. How much loan margin do you provide for a term loan?

14. What is the amount of loan ceiling?

15. How, variable interest rates are adjusted? Is it adjusted on the basis of movement of market index?

16. What is the convenient fixed interest rate for a loan arrangement?

17. How much IDLC charges a client if any prepayment takes place?

18. How (EMI) Equated Monthly Installments are computed?

19. In case of home loan, is additional collateral required?

20. In case of car loan, why there is no security or personal guarantee?

21. If 50% of the car value is deposited as cash, then what is the special rate offered by IDLC to the

customers?

22. How structured installments are determined, I.e., (step down, step up, bullets)

23. In case of SME loan, what is meant by partly cash security loan?

24. What is the minimum or maximum time period of SME loans?

25. We have come to know that, in case of SME loan, collateral is not needed, in that case, if the

borrower defaults, what steps IDLC would undertake?

26. What is meant by customized repayment schedule in SME loan arrangements?

27. Why businessmen are not allowed for personal loan?

28. What innovative steps are undertaken by IDLC in term loan operations?

Reference

1. Foundations of Financial Markets and Institutions, 3rd Edition. Written by, Frank J. Fabozzi,

Franco Modigiliani, Frank J. Jones, Michel G. Ferri.

2. Financial Markets and Institutions, 7th Edition. Written by, Jeff Madura.

3. Official website of IDLC Finance Ltd.

4. Official website of Bangladesh Bank.

5. Annual Report 2009, IDLC Finance Ltd.

6. Annual Report 2008, IDLC Finance Ltd.

7. Muhammad Nazmus Sadat, Assistant Manager, Corporate Division, IDLC Finance Ltd.

8. Md. Asaduzzaman Khan, Assistant Manager, Accounts & Taxation.