What are the different types of credit currently extended by commercial banks in Bangladesh?

Credit is one of the most important functions of a commercial bank. Commercial banks in Bangladesh mainly provide two types of credit facilities: Funded Credit Facilities and Non-Funded Credit Facilities.

Funded Credit Facilities

Funded credit is a type of credit facility in which the bank directly provides money to the borrower. The borrower uses the money for business or personal purposes and repays it according to the agreed terms.

The major funded credit facilities are:

Loan

A loan is a fixed amount of money provided by the bank for a specific purpose and a fixed period. The borrower repays the loan either in instalments or in a lump sum.

Loans are classified into three types:

Short-term Loan: Granted for up to 1 (one) year to meet working capital requirements.

Medium-term Loan: Usually repayable within 2 to 5 years. This loan facilitates business expansion, purchase of machinery, vehicles, or equipment.

 Long-term Loan (Term Loan): Granted for more than 5 years. It is mainly used for capital investment, factory construction, BMRE, and other long-term business projects.

Cash Credit (CC)

Cash Credit is a revolving credit facility provided mainly to traders, manufacturers, and industrialists to meet working capital needs. The borrower can withdraw money as required within the approved limit.

There are two types of Cash Credit:

Cash Credit (Pledge)

  • The borrower pledges goods to the bank.
  • The bank keeps physical possession of the goods.
  • Ownership remains with the borrower.
  • The goods are released after repayment.

Cash Credit (Hypothecation)

  • The goods remain in the borrower’s possession.
  • The bank has a legal charge over the goods.
  • If the borrower defaults, the bank has the right to take possession of the goods.

Overdraft (OD)

An overdraft is a credit facility linked to a current account. It allows the customer to withdraw more money than the available account balance up to an approved limit.

  • The borrower can withdraw and deposit money any number of times.
  • Interest is charged only on the amount actually used.
  • The outstanding balance must always remain within the approved limit.
  • The facility is generally renewed every year.

Bill Purchase and Discount

Under this facility, the bank purchases or discounts export bills before their maturity.

  • The exporter receives immediate payment from the bank.
  • The bank deducts interest and charges in advance.
  • The bill serves as the main security.
  • After maturity, the bank collects payment from the importer or the collecting bank.

Other Important Funded Credit Facilities

Commercial banks also provide several other funded credit facilities, such as:

Consumer Credit: Loans for personal needs such as housing, vehicles, education, or medical expenses.

CMSME Credit: Loans to Cottage, Micro, Small, and Medium Enterprises for business development and employment generation.

Syndicated Loan: A large loan jointly provided by several banks to finance major projects.

Lease Financing: A facility where the bank purchases an asset and leases it to the customer against periodic lease rentals.

NonFunded Credit Facilities

Nonfunded credit is a facility where the bank does not immediately disburse any money. Instead, the bank gives a written promise or guarantee on behalf of its customer.

If the customer fails to fulfil their obligation, the bank must pay, and the facility becomes funded at that point. These are therefore called contingent liabilities.

The major non-funded credit facilities are discussed below.

Letter of Credit (L/C)

A Letter of Credit (L/C) is a written undertaking issued by a bank on behalf of an importer. It guarantees payment to the exporter after the required shipping documents are presented according to the terms of the L/C.

  • It is the most common non-funded credit facility in international trade.
  • It provides payment assurance to the exporter.
  • The bank pays only after receiving the required documents.

Bank Guarantee (Bid Bond)

A Bid Bond is a guarantee issued by a bank on behalf of a customer who participates in a tender.

  • It assures the tender authority that the bidder is genuine and capable of completing the contract.
  • If the successful bidder refuses to sign the contract, the bank pays compensation to the tender authority.
  • The bank usually takes a cash margin and counter-guarantee before issuing the bond.

Bank Guarantee (Performance Bond)

A Performance Bond is a guarantee that the customer will perform the contract according to its terms.

  • It protects the project owner against non-performance.
  • If the customer fails to complete the work, the bank compensates the beneficiary.
  • It is widely used in construction, infrastructure, and supply contracts.
  • The bank normally obtains margin and security before issuing the guarantee.

Deferred Payment Guarantee

A Deferred Payment Guarantee supports the import of capital goods on instalment payment terms.

  • It allows the importer to pay the supplier over a specified period.
  • The bank guarantees payment to the foreign supplier.
  • It helps in importing machinery, plants, and industrial equipment.

Bank Guarantee (Customs and Excise Guarantee)

A Customs and Excise Guarantee is issued in favour of the customs authority.

  • It allows the importer to clear goods before paying customs or excise duties.
  • The bank guarantees that it will pay the duties on the due date.
  • If the customer fails to pay, the bank pays the customs authority.

Credit Operations and Management, Module A, 99th Exam Q1(c), 96th Exam Q2(a), 6th Exam Part A Q1(b)

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