How a bank calculate interest rate?

 

Loan Pricing

Do we know, how a bank calculate interest rate for the borrower. If no, then following is the calculation

1.       Cost of fund= Interest paid/(deposit+borrowing) *100

Cost of fund refers to the cost which is necessary for the fund collection. Mainly bank has two sources for collection fund. 1. Deposit 2. Borrowing

2.       Cost of administration= Non-interest expense/ Loan and advance *100

Cost of administration refers to the cost that incurred for running the administration. Example: Salary, rent.

3.       Cost of capital= expected profit (in terms of percentage) *Equity/ Loan and advances

Cost of capital means return given to the capital providers or owners of the bank. It depends on the opportunity cost of capital necessary to be given to the owners for supplying the fund to the bank. 

4.       Base rate= Cost of fund + Cost of administration + Cost of capital

BBank can not charge below the base rate. This is the minimum rate, a bank can charge from the borrower.

5.       Risk premium: Risk premium is given based on the category of borrower. Risk premium refers to additional charge applied for the risky borrowers. In other word, bank will charge less interest for trustworthy borrowers, whereas a little bit higher interest will be charged for the relatively risky borrowers. Bank does not take any premium from “Excellent borrower”

6.   Margin: international standard is 1%. The amount what will be going to the banks’ pocket or amount that has been kept for the bank.

Loan pricing = Base rate + risk premium + Margin

Lease and its classification

 

Lease: using an asset by paying rent. Example: CNG driver takes CNG from the owner for a particular period by paying rent.

There are five classification of loan.

1.       Operating lease

2.       Capital lease

3.       Sell and lease back

4.       International lease

5.       In-house lease

Operating lease: It is a short term lease. Example renting a room for 3 months. Maintenance cost will be provided by lessor/borrower. In case of operating lease ownership will never be moved. In Bangladesh, operating lease is not used by any financial organization.

Capital lease: Financial Accounting Standard Board (FASB) stated that if present value of future rent is equal to 90% cost of asset it is called capital lease or if single person will use 75% of the asset, this is  called capital lease or increase of selling the leased asset if lessee will get the priority to buy, it is called capital lease. It is a long term lease. In case of capital lease, maintenance cost will be provided by the lease/borrower. Ownership will be moving to the lessee subject to giving all rents.

Difference between Operating lease and capital lease

1.       Operating lease is for short term

Capital lease is for long term.

2.       In case of operating lease maintenance cost will be provided by the lessor or the owner.

In case of capital lease maintenance cost will be provided by the lessee or the borrower.

3.       In case of operating lease ownership will never be moved

In case of capital lease ownership will be moving to lease subject to giving or paying all rents.

4.       Example of operating lease: renting a room for 3 months.

Example of capital lease: Leasing a car for 5 years.

Why operating lease is not used in Bangladesh?

1.       Absence of workshop of the leasing companies that is maintenance problem.

2.       Lack of gentle human behavior. Trust issue with the borrower or lessee. The lessee may use the machine roughly.

3.       Continuation of the use of the asset.

Solution

1.       Outsourcing the workshop facility from another company. Example: IDLC can outsource workshop facility from Navana.

2.       Operator must be provided from the lessor’s part to ensure proper maintenance.

3.       Strong website should be developed for the user so that they can order the asset by using virtual platform.

Benefit of leasing

1.       In case of loan the borrower has to pay equal monthly installment or EMI which includes both interest and principal amount. But only interest amount is treated as expense here. As a result the profit become high as well as tax is also become high.

But in case of lease, the lessee has to pay rent, which is treated as expense. Because of higher expense the profit become lower which results in lower tax. So, in case of leasing the borrower gets more tax benefit.

2.       In leasing full payment is not required at a time. The lessee can pay the amount by monthly rent.

3.       For the customers who follow Sariah law, lease is appropriate for them. Because according to Sariah law interest is haram but rent is halal.

Sell and leaseback

Where an owner of an asset sells it and then lease it back from the new owner. For example, Labaid have a machine. They sell it to IDLC for money and after that Labaid will lease the machine from the IDLC and paying rent. After the payment of rent they will be the owner of that machine again. In that case the machine will not move from Labaid.

Advantage of sell and leaseback

1.       Solving liquidity: Through sale-leaseback condition, owner get huge amount of money at a time. This amount may increase the working capital which helps to pay due amount to supplier or helps to expand the business.

2.       Opportunity to get back asset: Seller can get his/her asset back after the respected maturity period.

3.       No production interruption: Since sold machine does not take away by new owner. So, seller can use the machine as before. As a result, Production does not interrupt. 

4.       Reduction in tax liability: This works in two ways. The company which has now sold the asset and has it on lease, does not have to pay tax on any appreciation of the asset and rent outlet will reduce the profit in the profit and loss statement which in turn reduce tax liability.

International lease: It can be both operating or financial lease. Example, Pakistan borrows submarine from America for nine months. It was an operating lease.

In-house leasing: Both organization owned by group. Example: Uttara finance will buy the car from Uttara motors and give lease to the buyer or lessee and the lessee will pay the rent and after paying all the rent, lessee will be the ultimate winner. It is called in-house leasing because Uttara motors and Uttara finance are the same company. Leasing is the strong marketing tool. Through the leasing, the sale of the Uttara motors will increase and ultimately the company become benefitted. 

 

 

 

 

How to measure success

There are the following ways, you can aware of your level of success.

1. How much money you make
2. How much people know your name
3. How many live you have improved
4. How happy you are
5. How much stress you are dealing with
6. How much stories you can tell: Your experience level
7. How many successful people you have next to you
8. How much time you spend doing what you love
9. How happy you make there surround you
10. How much you helped advance humankind
11. How long will you live to enjoy this successful life

Make yourself feel better by using five senses

These are five senses' name of the human body. You can make yourself relax/better by using your five sense by following ways:

Sight

1. Low lighting
2. Soothing colors
3. Sleeping masks
4. Coloring books
5. Collages photo
6. ASMR videos

Sound

1. Calming noise
2. Nature sounds
3. Binaural beats
4. Guided meditation
5. Music playlists

Touch

1. Soft things
2. Cuddle things
3. Hot/Cold shower
4. Heated/Weighted blanket
5. Massage
6. Squeezy things

Smell

1. Aromatherapy
2. Time outside
3. Candle/incense
4. Flowers
5. Fresh air

Taste

1. Something yummy
2. Eat slowly
3. Strong flavors
4. Something healthy
5. Nostalgic flavors
6. Warm drinks

Decision making tools, which is beyond analytical tools

Seven New Management and Planning tools|  Many problem-solving situations in management call for collaboration among people from different departments, Here, hard data are scarce, and the available data are likely to be highly subjective.

For developing new product or new manufacturing method, we need data which is in the minds of people concerned, expressed in language and not in mathematical figures. Such verbal data must be rearranged into meaningful form so that a reasonable decision can be made.

Above for both cases, it is necessary to go beyond the analytical approach and to use a design approach (new Quality Control tools) to problem solving. This design approach is necessary in such areas as quality improvement, cost reduction, new-product development, and policy deployment.

Characteristics of Design approach are: 1. Attention to detail       2. Involvement of people from different background.

The seven new quality control tools are:

Relations Diagram: This diagram clarifies the interrelations in a complex situation involving many interrelated factors and serves to clarify the cause-and effect relationships among factors.

Affinity diagram: This is essentially a brain storming method. It is based on group work in which every participant writes down his/her ideas and the ideas are then grouped and realigned by subject matter.

Tree diagram: This is an extension of the value engineering concept of functional analysis. It is applied to show the interrelations among goals and measures.

Matrix diagram: This format is used to clarity the relations between two different factors. The matrix diagram is often used in deploying quality requirements into counterpart (engineering) characteristics and then into production requirement.

Matrix data-analysis diagram: This diagram is used when the matrix chart does not provide sufficiently detailed information. This is the only method which is based on data analysis and gives numerical results.

PDPC (Process Decision Program Chart): This is an application of the process decision program chart used in operations research. Because implementation programs to achieve specific goals do not always go according to plan, and because unexpected developments are likely to have serious consequences, PDPC has been developed not only to arrive at the optimum conclusion but also to avoid surprises.

Arrow diagram: This is often used in PERT (Program Evaluation and Review Technique) and CPM (Critical Path Method). It uses a network representation to show the steps necessary to implement a plan.

Collaboration between university and SME And economy of Bangladesh

Bangladesh is a densely populated country. So, it is difficult to make more job to meet the needs of all people. Besides, Bangladesh is very small country relative to its population. To make more industry can pollute our environment and make living space little. Here, SME (Small and Medium Enterprise) and startup business can be a alternative way to robust our country's economy.

At present, SME sector contributes about 25% to the national GDP. They can contribute more, if they can get access to global market. They cannot reach to the global market because of lack of knowledge. They do not know what means global value chain, standard quality, have language barrier, and technical problem etc.

Here, University can collaborate to the local SME. University is a national asset, where has research knowledge, talent, team work, renowned faculty, and network connection. At undergraduate level, students complete more than 50 assignments, projects, various articles, and case studies. If faculty provides students projects, case study for addressing challenges of SME sector, students can come up with new strategic business solution, developing technology, software, website,  and helping to make new product and service. Besides, many of the alumni of the university stay aboard, they can help SME by supporting to launch SME's product at abroad. Finally, university can host a hub to assist small enterprise by providing necessary resources.

University should redesign curriculum to meet the need of society and country's economy. In this way, all educated people can contribute to the country by transferring knowledge, acquiring skills, and involving in economic growth.