FIN201: Financial Environment and Banking Term paper

Summer 2022

Topic: Analyzing the lending process of a IPDC Finance

Submitted to:

Mr. Md Shezanur Rahman

Lecturer of BRAC Business School, BRAC University.

Submitted by:

Prajit Giri-2110404
Payal Kumari Sah-20204070
Dechen-20204080
Kalpana Ghalley-20204071
Neong Ghalley-21104045

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 Letter of Transmittal

August 15, 2022

Md. Shezanur Rahman

Lecturer,
BRAC Business School
BRAC University
66 Mohakhali, Dhaka-1212.

Subject: Submission of term paper on “Analyzing the lending process of a IPDC Finance”

Dear sir,

With due respect, as per the requirement of completing FIN201 course, here we are submitting a
term paper on “lending process of IPDC Finance”.

This paper details our learning about IPDC finance and how it works in the loan providing
sector. We tried our best effort to complete this term paper keeping the privacy of IPDC in mind.
Thank you for your support and guidance throughout the completion of this paper.

Thank you.

Yours’ sincerely,

Prajit Giri-21104120
Payal Kumari Sah-20204070
Dechen-20204080
Kalpana Ghalley-20204071
Neong Ghalley-21104045

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Table of Contents.

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 Executive Summary.

IPDC finance limited has always been working persistently in an effective way in order to have a
smooth flow of the business as it has always been engaged in the supplying of financial services
such as home loan, Auto loan, Personal loan and Bhalo loan for long term basis bit it personal or
customer loans. Once the borrower applies for the loan they need to submit necessary documents
to the IPDC and have to fill up the Lead Generation Form(LGF) which includes all the details
that the bank requires. Next, the documents are further sent to the chief credit Analysis (CAA) to
do a survey about the borrowers, whether they can afford to pay the loan or not at the maturity
date.With the continuation of that, CIB(Central Information Bureau) checks about the mortgage
to avoid default risk in the Future. After that, CCA sends the files to the Credit Risk
Management (CRM) to check the information regarding the loan and behavior of the borrower
and if you don't find any unnecessary details then they will further send to Brand Manager for
screening the files again. In this way, the manager and the high level employee recheck the file
and finally dlsend to the management for approval.

On the other hand, Asymmetric information has been one the concerning scenario about the
banks but IPDC finance limited always looks forward to those situations and works accordingly
by updating the market information and regulating the policies in such condition. The best part
of IPDC finance limited is, they offer the privilege to invest the money in either deposit schemes
or saving schemes, along with different types of deposit schemes. On top of that, IPDC finds
ways and means to give the best service to the customers so that they don't feel insecure to
deposit their money and have doubts about it. One reason for the customers to choose IPDC is
based on shares of the company such as BRAC bank and other banks that own 40% of IPDC’s
share whereas the Bangladesh Government owns 20-25% shares.With the above information we
cannot say that IPDC finance limited is a risk free company because there are some of the
problems which were given more attention and manage by IPDC like, Default loans, fluctuation
of interest rates, liquidity risk, Industry problem, Operational risk and reputation issue etc were
all resolved one after another against these obstacles. Furthermore, In IPDC finance limited
when a customer takes a personal loan he /she must fill up the application form with all the
details asked by the company. To avoid problems in the future, IPDC takes action against
Adverse selection by calling the individual borrower to sign the form and if they find any
inconveniences against the borrowers then they will not provide the loan to them.

Therefore, IPDC finance limited is one of the well-known financial institutions (NBFIs) of the
country and a successful private company.

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Introduction

IPDC Finance Limited is the first private sector financial institution in Bangladesh, which was
established in 1981. IPDC was founded by a group of shareholders of the Government of the
People's Republic of Bangladesh (GOB), Aga Khan Fund for Economic Development (AKFED),
International Finance Corporation (IFC), and German Investment Corporation (DEG),
Commonwealth Development Corporation (CDC). Presently, IPDC Finance Limited is
incorporated with Bangladesh Limited Liability under the Companies Act of 1994, Which is
listed with Dhaka and Chittagong Stock Exchange Limited since 2006. Its head office is located
at Hosna Centre (4th Floor), 106 Gulshan Avenue, Dhaka-1212. IPDC is functioning under 12
branches of the customer base of over 6840. IPDC Finance is the first that comes up with a result
of an IBRD/IFC industrial sector mission in Bangladesh in 1978. This company is the most
centered company which is helping to uplift the condition of the private limited company of
Bangladesh.

SWOT analysis of IPDC Finance

Strength
● Affordable home loans
● Creating new entrepreneurs
● Experienced and stable management system

Weakness
● High interest rate
● Complex loan approval process
Opportunities
● Strong demand for long term loans
● Partnership with private banks

Threats
● Inflation, rising of foreign exchange rate
● Ongoing economic and political instability in the international sphere

Mr. Saquib Al Hossain, is the manager of IPDC, Finance Ltd, a leading non-banking financial
institution in Bangladesh. He has more than 5 years of experience in the financial sector.

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Loan Approval Process.

IPDC provides both long term personal/consumer loans. The different kinds of loans include
Home loan, Auto loan, Personal loan, and Bhalo Bhasha loan. To begin with, a person with an
attractive salary, self-employed, businessman, land owner, non-residential Bangladeshi can apply
for any loan they are seeking for. IPDC offers different schemes for different types of loans. To
illustrate, for home loans, they offer 85% of coverage of total property. For Auto loans, they
offer joint registration for ownership (in the name of IPDC and the borrower). For corporate
loan, they provide both a direct lease loan (rather than giving cash to buy the assets, bank rent the
asset) and term loan (the purchased assets acts as collateral of the loan) facility.

Fig 1: Steps for getting a loan

Secondly, after requesting for different kinds of loan, the borrower needs to submit necessary
documents. (Note: Documents varies based on which loan you are applying for.) Furthermore,
borrowers have to fill LGF (Lead Generation Form), which includes all the information’s that
bank requires from a borrower i.e. the basic information about the borrower, maturity date for the
loan , income status, employment status, loan amount, purpose of loan to carry out the further

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process, this task is done by the Relationship Manager (RM). After that, the documents are sent
to the chief credit Analyst (CAA) for the deep study of the client and analysis of the income
calculation, to know whether the client will be able to repay the loan or not. Moreover, CIB
(Central Information Bureau) checks the mortgage assets for security and to avoid the risk. Even
does some verification of the NID card of the client/borrower. For further procedure, CAA sends
the file to Credit Risk Management (CRM) to check about the loan information and loan
behavior of the client. Likewise, the CRM sends full documents of clients to the Branch Manager
(BM) for the screening of the file and re-sends it to the CRM. Subsequently, the most important
evaluation process starts which includes all the possible risk aspects like loan maturity,
repayment method, installment method, loan amount etc. Based on the client’s status, the interest
rate, terms and conditions are being set. For instance, he/she is a government employee and
seeking for the home loan then he/she gets a loan at11% interest rate but if he/she is a salaried
employee then the interest rate varies i.e. around 13%. The riskier the repayment status, more
will be the interest rate. The lowest interest rate for consumers provided by IPDC is 11% and it
increases upto 14% depending on the risk of loan repayment.

Fig 2: Based on employment status, the interest rate is fixed.

After all this, they prepare a final file, where Manager/high level employee rechecks the file and
sends it to the management sector for approval. If any changes are required for loan, it's sent
back to CRM if not, proceeds. At this point, Management has the right to reject or accept the file
for getting a loan. They mainly check credit history, credit score, employment status, income
status.

Employment status plays an important role in providing the loan. (Mr. Saquib Al Hossain,
Manager of IPDC). And finally, after the approval, they go for disbursement of the loan where
the borrower is very close to get his/her money. Then CRM makes an offer letter for the clients
with all the terms and conditions. Now, the client is ready to collect his loan amount.

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 Fig 3: File/document verification chart

Managing the adverse selection problem

The adverse selection in general word, a condition or a situation in which one party has more
knowledge or information than the other. Moreover, it is the condition where one party has
asymmetric information and he/she may be well aware of the future (Hayes, 2022). The IPDC
finance limited always cares for asymmetric information and they have a policy for it. The
employees, staff and directors do not have the right to purchase the share of IPDC nor their
family and relatives. IPDC is always updated with market information and they take it very
seriously for making any decisions. Moreover, in the words of Mr Saquib Al Hossain” IPDC
always tries to build trust among the parties. It doesn’t matter if it’s too small or too big for us.
We built trust between customers and IPDC, investors and IPDC and between the staff, board of
directors and chairman.

Persuading customers to deposits.

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IPDC offers its customers the flexibility to invest their money in either the deposit scheme or
saving schemes. In a deposit scheme, the hard-earned customers' small savings are given the best
value through the deposit scheme of IPDC Finance. There are different types of deposit
schemes, such as annual profit scheme, cumulative profit scheme, fixed deposit general, monthly
profit scheme, double money deposit scheme, and quarterly profit schemes. These are the
deposits offered by IPDC Finance. IPDC Finance is customer-friendly and it is fully supportive
of customers' needs and wants. Even they carried out research and surveys to find out what their
customers wanted. Furthermore, they even use their technology and expertise to provide the best
services and convenience to the customers. Therefore, the services they provide are the tools for
IPDC Finance to persuade their customers to deposit more in their company relatively when
other financial institutions also provide higher interest. Where interest rate is not only the tool for
attracting more customers for depositing, in the present scenario many people look for the
services they get from the company staff.

Moreover, customers keep their deposits based on trust in banks, in order to gain the trust of
customers IPDC sales people convince the potential customers by providing credit ratings where
IPDC has a AAA credit rating which is the highest. IPDC achieved it by maintaining a strong
Asset (loan) portfolio. Which persuades customers to deposit in IPDC. Secondly, looking at the
IPDC’s Shareholding structure where BRAC bank and other banks concern owns 40% of IPDC’s
share. Bangladesh Government owns 20-25% shares. The shares of the IPDCs are traded in the
stock market. After knowing the shareholding structure of the IPDC, sends a signal to customers
that IPDC has strong corporate governance and maintains strong regulatory compliance. (Mr.
Saquib Al Hossain, Manager of IPDC). Therefore, the above reasons mentioned helps the IPDC
to persuade their customers to deposit in their company, as the customers feel assured that their
money is in safe hands. However, other financial institutions also provide a high interest in the
same deposits.

IPCD finance limited managing the moral hazard problem

IPDC finance limited believes obeying the rules and regulations is one the phenomenon
strengthening work to develop corporate values, sustainable growth, government policies to
fulfill the expectations of customers, shareholders and regulators of the company. However,
IPCDs journey was not as easy as we think because they have to deal with complex problems
and need to manage the things in an appropriate manner such that it does not affect the reputation
of a company. Moving towards IPDC finance limited managing the moral hazard problems,
Default loans can be one of the reasons which lead to fund diversion in the banking sector in
Bangladesh but in such case, IPDC never fails to give their best to overcome the obstacles to

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achieve the fruitful result with the help of setting the strong monitoring cell. To avoid such
circumstances, the company holds a meeting with clients to sign the legal papers and necessary
documents before approving the term loans.The main aim of IPCD finance limited is to develop
the smooth flow of the bond market in Bangladesh as it is impossible to provide long term loans
by Banks and Non-banks, once the deposits are approved for the short term loans. Still then
Bangladesh Bank, Exchange commission and Bangladesh securities along with IPDC are giving
their best to remove liquidity pressure on banks and non-banking financial institutions especially
to conclude with a lively bond market.

The IPDC problem does not end here, fluctuation of interest rates, foreign exchange rate and
commodity prices of Market price can be another problem which leads to occur losses in the
balance sheet of the company. In such a situation, Net interest income plays a pivotal role as it
shows the interest rate IPCD receives from loans and they pay on deposit and borrowings. To
tackle such fluctuation in the company, IPDC performs stress tests facilities beforehand to be at a
safer side in the future and from the collection of daily or monthly management reports the
interest rates monitors with the movements in its portfolio. Additionally, IPDC finance limited
may experience the liquidity risk due to less liquid assets to meet maturity obligation or fail to
pay the expenses against organization which cause sudden unexpected cash outflows, and even
such risk can stop counterparties to trade and lend to the financial institution but IPDC solve
such obligation with the help of liquidity risk management framework to ensure that they make a
payment on liquidity fundings. The company works towards minimizing the liquidity costs on a
daily basis in the market situation by focusing on liquidity position and imposing limitations on
holding the cash and another phase to manage the liquidity can be done with the capital markets
and domestic money including repurchasing markets. On the other hand, Industry risk can
impact IPDC finance limited,due to rapid increase in competition among foreign and domestic
financial institutions which can bring harm on financial health of the company. To manage
industry risk, IPDC finance Ltd. Focus on varied products while launching new one in the
market by fulfilling customers requirements to increase the market share and concentrating on
introducing new infrastructural facilities.

Normally, some of the problem occurs regularly in the day to day activities of the company but
among all, operational risk is one the most devastating impact on the organization as it drags
down the corporate government process and internal control due to fraud, schemes, human error,
failed in internal processing and introducing of new technologies.Thus,Operation risk
management framework ensure IPCD with appropriate procedures and policies to apply against
operational failure and to minimize losses such that they can grab the new business opportunities
with adequate risk control and monitor quickly. For IPDC, reputation risk can create huge
damage to its name and fame of the company because all the income sources, capital, action or
inaction, liquidities will be in vain and considered all the work to be unethical and inappropriate.

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So, to overcome such problems IPDC makes sures that the policies are strictly followed in its
operation which ensures that the company is not against any reputational risks. As side this,
IPDC practices effective Communication with customers and collects feedback after giving the
service, ensuring public reporting to have effective reputation management of the company.
Furthermore, financial institutions file a report on cash transactions dispensary and other related
inappropriate activities which indirectly shows the money laundering risk and failure to meet the
regulatory obligations. Here, with the strategy of robust Know Your Customer (KYC), IPDC
spreads awareness about the risk and gives training sessions for the employee to be more
virtualized at the work.

Documents needed for personal loan, and how does these documents help the IPDC reduce
the two problems.

Application form filled and signed by the borrower, both applicant and guarantor’s copy of NID
or Passport, photographs (applicant’s and guarantors), utility bill copy, salary / income slips,
bank statements, other income related documents, and E-TIN Copy are the documents being
asked by the IPDC when someone applies for personal loan.

IPDC’s main mission is to provide fullest financial potential to all the customers in a transparent
and cost-effective manner thus they take every decision seriously. Adverse selection problem is
one of the major problems in all the financial institutions and IPDC specifically asks for
application form filled and signed by the borrower, applicant and guarantor’s copy of NID or
Passport, and their photographs to avoid those problems. Through the mentioned documents
IPDC with its data can clearly clarify whether the client is a relative or family member of the
company's employee or officials’. Thus, reducing the risk of adverse selection problems in the
company.

Another common problem in every financial intuition is the moral hazard problem which is very
risky and can cost serious loss to the company. To avoid moral hazard problems, IPDC
specifically asks for utility bill copy, salary/income slips, bank statements, other income related
documents, and E-TIN Copy from the personal borrower client. Through the mentioned
documents IPDC can choose their suitable customers and avoid giving loans to the borrowers
who have high chances of being default loans in future.

Conclusion:

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Reference:

● BRAC University. (2021, January). Processes of affordable home loan file appraising in

IPDC finance limited. Rajib Bala.

http://dspace.bracu.ac.bd/xmlui/bitstream/handle/10361/15625/19304117_BBA.pdf?

sequence=1&isAllowed=y

● BRAC University. (2019, September). How IPDC finance Ltd. Is re-engineering its

business operation process to serve with efficiency. Gazi Md Tasinul Islam.

https://drive.google.com/file/d/1MwJjOzCPrCZMQ3Qx2_eRHokJ76N38XMV/view

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