GROUP MEMBERS

HANIA FAYYAZ F10BA015

FARIHA NASIR F10BA045

JAVARIA GHALIB F10BA052

ANAM SHOUKAT F10BA053

NOOR SANA F10BA054

SUBMITTED TO:

SIR AMIR SARWAR

TOPIC:

CORPORATE LOANS

INSTITUTE OF BUSINESS AND INFORMATION TECHNOLOGY

(IBIT)

CORPORATE

“A legal entity that is separate and distinct from its owners. Corporations enjoy most of the rights and responsibilities that an individual possesses; that is, a corporation has the right to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets and pay taxes. ”

CORPORATE BANKING

“ Those products and services that relate to the lending activities between a bank and its clients. This could be a simple secured or unsecured loan, or it could be a highly sophisticated structured finance transaction with many different banks or syndicates involved in the transaction. Cash management and trade finance also fall under the definition of corporate banking.”

CORPORATE vs COMMERCIAL BANKING

• Corporate Banking means Financing to coporate institutions which has been declared as Corporate entity. Corporate entity means if more than one company falls in the same line of business, financing terms will be same to all the corporate insitution as whole.

Corporate Banking: Large-scale loans to businesses and major investments make up the largest part of this activity. Many large businesses would be unable to operate without the ready credit supplied by corporate banking.

• Commercial banking means each individual business units will be covered separate, according to the specific requirements for financing. Though more than one company falls in the same group, the financing terms will differ according to each enterprise demands and needs.

Commercial Banking usually describes banking that is focused on the average consumer. These are mostly the services provided by any local savings and loan bank. Checking and savings accounts, as well as personal accounts.

CORPORATE BANKS IN PAKISTAN

Corporate banks in Pakistan are :

• National Bank

• Allied Bank

• Habib Bank

• MCB

• Bank Alfalah Limited

• Meezan Bank

• Standard Chartered Bank

SERVICES & PRODUCTS

Following are the products offered by corporate banks:

• Business advisory service

• Company incorporation

• Accounting & tax services

Payroll

Corporation tax

Tax registeration

• Finance & banking

Corporate bank accounts

Brokerage account

Multi currency account

• Working capital finance

Corporate loans

LOAN

Definition:

• An arrangement in which a lender gives money or property to a borrower, and the borrower agrees to return the property or repay the money, usually along with interest, at some future point(s) in time.

TYPES OF LOANS

Loans can also be subcategorized according to whether the debtor is an individual person (consumer) or a business.

• Secured loans

• UnSecured loans

• Personal Loans

• Commercial or Corporate Loans

Secured loans

• A loan which is backed by some collateral or some assets..like mortgage/real estate…

UnSecured loans

A loan which is not backed by some collateral

Personal Loan:

• A loan that is provided to some individual.

• Common personal loans include mortgage loans, car loans, home equity lines of credit, credit cards, installment loans and payday loans.

• The monthly payments of personal loans can be decreased by selecting longer payment terms, but overall interest paid increases as well.

Commercial or Corporate Loans

• A loan to a business so that it can buy buildings, equipment etc, rather than to a person.

• To meet the temporary mismatch in the cash flows & for other general purposes, we sanction corporate loans.

WHAT IS CORPORATE LENDING?

Corporate lending is essentially the same thing as a personal loan, except instead of being made from a bank to an individual, it is made from a bank to a corporation. As a result, the amounts of money being dealt with tend to be substantially larger, and some of the protections are a bit different.

Corporate lending can take any number of forms, including

• Asset-based lending

• Cash flow corporate lending

Asset-based lending

• Asset-based lending is when the loan given is secured by means of some sort of asset.

• In corporate lending an asset-based loan may use real-estate, intellectual property, or expensive equipment.

• Asset-based lending is one of the more secured forms of corporate lending, since the bank lending the money has protected itself by balancing the value of the assets with the amount of the loan

Cash flow corporate lending:

• One of the more traditional routes is to obtain a loan based on company cash flow. Banks tend to favor these types of loans because they are based on actual revenue generation by the company.

• Cash-flow based loans don't require any collateral. Instead, they are based on the expected income of the company and its credit rating.

• This is probably the most dangerous form of corporate lending, as it is unsecured by any sort of real guarantee.

Various Types of Corporate Loans

• Working Capital Loan

• Real Estate Loan

• Venture Capital Loan

• Line of Credit (short term loan)

•  Equipment Loan

• Acquisition Loans

Working Capital Loan

• A working capital loan is funding for the business to use in its day-to-day activities

• Businesses may also use these loans to pay suppliers or pay employees.

• Working capital loans can be either secured or unsecured

Real Estate Loan

• Real estate loans are made so businesses can buy property.

• These corporate mortgages are used if businesses want to own office space instead of rent it, or if a business wants to buy land for a specific purpose, such as growing an orchard or harvesting raw materials.

• They are very similar to individual mortgages

Venture Capital Loan

• Venture loans are start-up loans given to entrepreneurs to start businesses.

• These loans are difficult for many entrepreneurs to obtain, because lenders want proof that they will be paid back.

• Collateral of some type is typically required, and banks ask to see detailed business plans so they can be sure that the entrepreneur has enough skill and experience to make the business profitable.

• These loans often have high interest rates and collateral requirements to make up for the risk.

Line of Credit (short term loan)

• Lines of credit are not immediate loans, but credit accounts that businesses can open to draw funds from when necessary. 

• An arrangement between financial institutions, usually a bank and a company that establishes a credit limit of a company, that is, the maximum amount of credit a company is allowed.

• The company can draw down on the line of credit at any time, as long as it does not exceed the maximum set in the agreement.

•  Lines of credit are often extended by banks, financial institutions and other licensed consumer lenders to creditworthy company customers .

Equipment/Asset Loan

• Equipment or Asset loans are among the simplest types of corporate loans. These smaller loans help businesses buy major assets.

• Manufacturers need to buy factory equipment, transporters need vehicles, and offices need computer software and hardware.

• These are large expenses, and many expanding businesses need a loan in order to buy such equipment

Acquisition Loans

• Acquisition loans are loans taken out by larger corporations interested in taking over another company.

• Takeovers require a large amount of cash, since the corporation must buy out seats on the board of directors and purchase a large amount of company stock.

• Acquisitions loans are designed to provide acquiring companies with the funds to absorb other businesses successfully.

COPERATE LOAN PROCEDURE

Loan Origination

Loan origination is the process by which a borrower applies for a new loan, and a lender processes that application. Origination generally includes all the steps from taking a loan application up to disbursal of loan.

Whenever a company approaches bank for corporate loan, NBP tells it about the necessary documents that would be required to start loan processing.

The necessary documents required for loan includes:

Loan Application Form (LAF) Borrows Basic Fact Sheet (BBFS) Feasibility Report Search Report Projected Financial Statements Certificate of commencement of business (COB) Certified Copy of Form A Certified Copy of Form 29

Loan Application Form (LAF)

Loan Application Form contains the basic information of a company like its legal name, physical address, and nature of business. It also contains information related to loan that what is the purpose of loan, is it startup loan or loan for the existing business i.e. loan for expansion or replacement. How much company will invest in the project and how much loan is needed by the company? What will be collateral given against the given loan?

Borrows Basic Fact Sheet (BBFS)

Borrows Basic Fact Sheet contains the basic profile information of the borrower like detail of directors, executive directors, management and nature of business whether it is partnership, public limited or private limited company.

F easibility Report

Feasibility Report is an evaluation and analysis of the potential of the proposed project which is based on extensive investigation and research to give full comfort to the decisions makers. Which resources will be required? What will be the required cost of the project and value to be attained?

Is the purpose for which company wants loan from the bank feasible? To identify about this entire bank wants feasibility report.

Certificate of commencement of business (COB):

A Certificate of Commencement gives the right to a Public Limited Company to commence business. A Public Company can commence business only after obtaining this certificate from the SECP. Bank will grant loan only to the company having Certificate of commencement of business.

Projected Financial Statements

Company should submit NBP its seven year projected Financial Statements along with their assumptions. With the help of financial information bank will make loan memo. The reason would be to check the ability of a company to repay the loan. This will help the bank to take decision about a company that will it be in a position to clear its debt or not.

Search Report

SECP contains record of the amount of charges present against different assets of the companies. Based on the charge information of a company provided by SECP, NBP create Search Report through its lawyers.

Certified Copy of Form A

Company has to submit National Bank of Pakistan the Certified Copy of Form A from SECP. Form A gives the shareholding structure of a company and contains information pertaining to authorized Capital, Paid up Capital, shareholders, share capital and brief particulars of Chief Executive, Chief Accountant, Legal Advisor, Company Secretary and Auditors along with list of directors.

Certified Copy of Form 29

Company has to submit National Bank of Pakistan the Certified Copy of Form 29 from SECP. Form 29 provides all relevant information pertaining to directors, chief executive, managing agent, secretary, chief accountant, auditors and legal adviser of a company. The form 29 provides detailed information about directors i.e. name, father name, CNIC number, address, nationality and business/occupation.

eCIB Report

National Bank of Pakistan sends loan and company’s director’s information to State Bank of Pakistan. SBP with the help of this information from eCIB report. Bank checks the credit worthiness of a company through eCIB report.

If eCIB report of the company is satisfactory NBP starts loan assessment and appraisal process.

Appraisal and assessment Report

Appraisal and assessment is an activity before sanction of any credit product offering to the company, analysis with respect to the company is done as a part of this activity.

After the loan application has been completed, it is turned over to loan processing department of NBP where the decision to approve or reject the loan is made. NBP considers company’s banking history, bank ratings, business credit history, and business financials to make its decisions.

NBP reviews credit reports, the amount of available collateral, income and existing debts of a company.

 In general they look at:

•    Personal credit history•    Feasibility of business starting and/or expanding•    Business plan•    Experience in the field of work company is doing•    Education or Experience

Company’s ability to make the monthly payments on the mortgage and to afford the costs associated is primary considerations in loan approval process.

Recording sanction is the last event in this activity.

Issuance of Sanction Letter

After checking the credit history of the company NBP issues company Sanction letter. In sanction letter NBP tells company about its terms and conditions, penalties, Repayment period and the amount of interest that will be charged, based on

Loan Interest Rate = KIBOR +interest

Execution of Loan Agreement

If the bank has no objection on the terms and conditions given by the bank in the sanction letter company then it signs the agreement for approval of loan.

Disbursement of Loan

When all the steps of loan processing are completed bank disburse loan to the company.

ISLAMIC BANKING

• Currently there are six licensed full-fledged Islamic Banks and twelve conventional banks with standalone Islamic Branches in Pakistan

• Islamic Banking department of SBP controls all the activities of Islamic banks.

ISLAMIC BANKS WHICH ARE PERFORMING CORPORATE FUNCTIONS

• Dubai Islamic Bank Pakistan Ltd

• Al-Baraka Bank Pakistan Ltd

• Bank Alfalah Islamic Banking

• Meezan Bank Ltd

• Standard Chartered Bank(Islamic Banking)

• HBL Islamic Banking

• Bank Al Habib Islamic Banking

• Burj Bank Ltd

• Dawood Islamic Bank Ltd

• UBL Islamic Banking

• MCB Islamic Banking

THE ISLAMIZATION MEASURES

The Islamization measures included the elimination of interest from the operations of specialized financial institutions including HBFC, ICP and NIT in July 1979 and that of the commercial banks during January 1981 to June 1985. The legal framework of Pakistan's financial and corporate system was amended on June 26, 1980 to permit issuance of a new interest-free instrument of corporate loan.

BANK ISLAMI PAKISTAN LIMITED

• The State Bank of Pakistan issued a No Objection Certificate in no time on August 19, 2004 and Bank Islami Pakistan Limited, the second full-fledge Islamic Commercial Bank in Pakistan, was incorporated on October 18, 2004 in Pakistan.

• Bank Islami Pakistan Limited was the first Bank to receive the Islamic Banking license under the Islamic Banking policy of 2003 on March 31, 2005

• . On September 26, 2005, Dubai Bank joined the Sponsors and became one of the founding shareholders of Bank Islami by investing 18.75% in the total Capital

TERM USED FOR INTEREST IN ISLAMIC BANKING

• In Arabic term Riba is a synonym for the term interest used in conventional banking operations.

• Riba means charging predetermined additional amount on a loan extended based on length of credit period.

• “Riba (interest) is a very important term in the Islamic terminology showing disapproval and it refers to the instrument by which a loaner charges some amount lump sum or in installments over and above his principal amount from the loanee and thus increases his wealth manifold without participating in the business process of profit and loss”.

MEDIUM TO LONG TERM LOANS

• Medium to long-term loans are provided for purchase or building of fixed assets by firms to expand or replace theexisting assets. Under Islamic financial system requirement of firms and individuals are fulfilled through MurabahaBaiMuajjal and Istasna. Another financing option for long-term financing is profit sharing under Musharaka and Mudaraba. Although financing under Murabaha, BaiMuajjal and Istasna is very much look like conventional loans with the only difference of provision of asset and not cash to client however differences exist in the contracts which alter the nature of risks and returns.

CORPORATE BANKING DIVISION

• The Corporate Banking Division (CBD) works on a long-term relationship based business to provide a single point within the bank for meeting all business requirements of its corporate and institutional customers, including public sector enterprises, with the primary objective of enhancing customer service.

• CBD operates through three focused Corporate Centers/Regions in Karachi, Lahore and Islamabad, staffed by a highly professional relationship management team comprising of qualified and industry experienced individuals. Each region is also supported by a dedicated Corporate Branch geared towards providing a one-stop solution to all branch banking needs including cash management, of its institutional clients.

•  The Asian Development Bank (ADB) has provided a $750,000 grant to promote Islamic banking in Indonesia, Pakistan, Bangladesh and Afghanistan.

Risks of Commercial Banks

• Systematic or market risk

• Credit risk

• Liquidity risk

• Operational risk

• Legal risks

Systematic or Market risk

Systematic risk is the risk of asset value change associated with systemic factors. By its nature, this risk can be hedged, but cannot be diversified completely away. In fact, systematic risk can be thought of as undiversifiable risk.

Credit risk

Credit risk arises from non performance by a borrower. It may arise from either an inability or an unwillingness to perform in the pre-committed contracted manner. The real risk from credit is the deviation of portfolio performance from its expected value. Credit risk is diversifiable but difficult to eliminate completely. This is because a portion of the default risk may, in fact, result from the systematic risk.

Operational risk

Operational risk is associated with the problems of accurately processing, settling, and taking or making delivery on trades in exchange for cash. It also arises in record keeping, processing system failures and compliance with various regulations. Operatingproblems are small but they expose a firm to outcomes that may be quite costly.

Legal risk

Legal risk arises from the activities of an institution's management or employees. Fraud, violations of regulations or laws, and other actions can lead to catastrophic loss. court opinions and regulations can put formerly well-established transactions into contention even when all parties have previously performed adequately and are fully able to perform in the future.

Managing Credit Risks

Acquiring clients with good creditworthiness and enhancing their proportion of the bank’s loan portfolio  Properly assessing the risks associated with lending to its corporate clients  Managing the bank’s overall exposure to corporate credit risks as represented in the loan portfolio  Setting up clear guidelines on what to do in case of a clients bankruptcy Achieving a price for its loans that is adequate for the risk the bank is exposed to by the individual loan.

Managing Systematic Risk

Establish a risk management committee Analyze variation of interest rate in market

Managing Operational Risk

Develop an operational risk management framework and policies Accountability for operational risk management All business and support functions should be an integral part of the overall operational risk management

IMPORTANCE

To run a success business depends upon a lot of things. A planned business strategy plays an important role. Second and foremost important thing is the finance. Without a good financial backup, you will not be able to get success in your business. Business finance loan may help you in running the business successfully.

Business finance loan is especially designed to fit all the business requirements. People from small, medium and big businesses can obtain business finance loan. On the other hand, people with bad credit suffering from CCJ’s, bankruptcy, defaults, arrears, etc. can also look for such loans.

Whether you are starting a business, expanding your present business or for any other business purposes, business finance loan could help you in all possible way.

Main benefits of business finance loan are its flexibility. Business profits are not fixed, it changes almost all the time so, it is a great help for the borrowers to manage their repayment period. Flexible business finance loan makes it more convenient for the borrowers in repaying the loan.

To get an easy loan approval, you need to show your business plans, projects and profit statements. You also need to shop around for getting the loans at competitive rates of interest. Browse different financial websites and search for different loan offers. Consider you financial requirements and choose one of the best loan deals.

Apply for Business finance loan now through online process and raise funds for your business. Implement your plans and strive for excellence.

Importance of Commercial Loans to the Banking Industry

Banking industry statistics show that commercial loans represent a very large share of the assets of the banking industry.Commercial Loans are an Important Source of Funds for the Business Sector.Commercial loans from banks provide an important source of funding to the business sector, according to Federal Reserve Flow of Funds data. According to this measure, bank loans on the balance sheets of the corporate sector reached $911.4 billion in the second quarter of 2000, or over 11 percent of the liabilities of nonfarm nonfinancial corporate business (includes nonfarm nonfinancial corporate business; nonfarm noncorporate business; and farm business). Table 2 provides a breakdown of the major liabilities of the corporate sector, including loans from banks

The Advantages of a Business Loan

It does not take a finance degree to know that the current economy is tough. Unemployment rates are still at an all-time high, and many companies have gone bankrupt, while others are barely hanging on by a thread. In fact, in today’s ever-changing and fluxing economic climate, business loans are about the only option small business owners have for obtaining cash to further their companies. With an efficient business loan, almost any enterprise can see immediate growth as long as they use the additional capital wisely.

Reasons for a Business Loan

Business loans are taken out for several reasons. A company may want to secure financing to maintain business operations, invest in equipment, start a new branch, or any number of other motivations. Not only are these loans beneficial for burgeoning businesses, but they are normally easy to obtain as there are a multitude of lenders who willing to partner with business owners with a credit score of 720 or higher, a stable income, and a decent business plan. However the biggest advantage of taking out a business loan during tough economic times is that companies can use it to increase their working capital. While companies that are looking to expand often already have enough money to become larger, taking out a loan allows them to maintain their operating cash flow, making it easier for them to cover any unexpected expenses. Thus, they are able to make payments on their loan by using the new income gained from expanding their business.

Benefits

Another benefit of getting a business loan is that, if the loan is lent to a corporate entity, the loan will not usually have to be repaid by the business owner if the company fails. In the event of failure, the business is liquidated, which helps pay back part (sometimes all) of the funds borrowed. Many business owners keep this advantageous aspect in mind when borrowing money because it is only the corporation that will go bankrupt in the event of loan default, not the owner personally.

What is particularly advantageous about seeking a business lone in the current climate is that interest rates are unbelievably low right now. As the liquidity of banks increases in the wake of the recession’s brunt, banks are increasing the rate at which they lend and interest rates will soon rise to compensate. A large loan taken out now or in the near future will have much lower overhead than will one taken out in two year’s time, making this the opportune time to plan expansion.

Ultimately, all business owners should evaluate their wants and needs before contacting a lender. This allows the business owner to see which type of lender is the best fit for their company. Similarly, it is crucial that business owners take the time to read the all of the terms and conditions accompanying any business loan they are considering. There are often early repayment penalties associated with a loan and it is important to obtain a business loan that does not incorporate these penalties, as prepaying a loan in full can save a business a large amount of money in interest.

What to Watch Out For

There are a number of things to watch out for when you decide to take out a business loan. When your liaison at the bank presents you with your options, make sure that you understand the terms. If you don’t, ask them to explain them again until you do understand. Under no circumstances should you enter any agreement until you know it through-and-through: the frequency and flexibility of payment deadlines, how interest will be calculated (and how often), any penalties associated with missing a deadline, what kinds of customer service you can expect, and whether or not you can renegotiate the terms in the future are all key points to grasp. Remember also that your current bank is not the only one willing to lend. Examine other lenders’ ability to offer you a loan to your specifications before making up your mind. With a little caution and patience, you can avoid most unforseen, negative consequences that might otherwise arise.

Is a Loan Right for you?

Despite the drawbacks, business owners should keep in mind the many advantages a loan can present. Expanding a business in the current economic climate could mean achieving far greater success once we bounce back from the recession, and the sudden, increased liquidity can help a business suffering under sudden expenses pull through until it can stand on its own feet again. The main thing to remember when obtaining a business loan is to shop around for the best loan rates and always partnering with a lender who is trustworthy. If you can secure a reasonable interest rate, payments, and the ability to repay the full amount at once, getting a loan just might take your business to the next level.