Q. Suppose you want to take a loan from a financial institution (Grade A, B, C or D) and you want to repay the sum in installment basis. Depending upon the following key points, prepare a report and present it in the class. Please do not forget to write the name and phone number of the people whom you meet in the process.

NOTE: This report is based on the assumption that the financial situation in the related banks is sound and suitable. Thus we are allowed to borrow the required sum of money without any sort of difficulty.

Introduction (Departmental store):

A departmental store is a retail establishment which specializes in satisfying a wide range of the consumer's personal and residential durable goods product needs; and at the same time offering the consumer a choice multiple merchandise lines, at variable price points, in all product categories. Department stores usually sell products including apparel, furniture, home appliances, electronics, and additionally select other lines of products such as paint, hardware, toiletries, cosmetics, photographic equipment, jewelry, toys, and sporting goods. Certain department stores are further classified as discount department stores. Discount department stores commonly have central customer checkout areas, generally in the front area of the store. Department stores are usually part of a retail chain of many stores situated around a country or several countries.

1. What is your detail plan after taking the loan?

We, as a group of five members, have decided to invest in a business. We plan to open a departmental store in the name of Empirical Investment Group (EIG). As we had planned, we decided to open a medium sized departmental store. Thus, with our calculations we would require a loan of about 40 lakhs. We plan to invest 60 lakhs from our personal funds. Those 60 lakhs would come from Rs. 1 lakh 20 thousand each from five members. Thus we would have a joint capital of Rs. 40 lakhs (loan amount) + 60 lakhs (invested amount) = Rs. 1 crore (total capital). We have assumed that it would take us of about 3 months to gather the capital

The world's largest department store, the Shinsegae Centum City in South Korea.

resources. Therefore, since the allocation of the capital started from the 1st week of 2010, we will have the necessary funds within the first week of April 2010.

The first thing that we plan to do after we have the required capital is to search for a suitable place for the departmental store. Baneshwor is a very suitable place for it can provide us with a good market. The large population prevalent there gives us higher chances of success. We would require a pretty big area for the store. The size of the store would be about the size of our college. Buying a land in this case might no be so feasible, so in a month or two, we have planned to rent a place. The task of searching for the right place goes parallel with the allocation of the funds. So, we would assume that we would have found a suitable place within the end of February 2010. The deal is such that Rs. 50 thousand is agreed as advance and we would require paying monthly rent of Rs. 1.5 lakhs of the tenure of 10 years.

After getting the building, we will require goods to sell in the store. Now, we plan to import goods from not only Nepal, but abroad as well. The contractual negotiations may take some time and cost us up to Rs. 50 thousand. We have separated about 3 months for this task. We assume we would be in the position to complete this task within the second week of April. Along with the goods we would also have to buy racks and shelves to display the goods. We have separated the budget of Rs. 5 lakh for buying these items. Along with this Rs. 25 lakhs would be spent for the goods that are to be sold in our store.

The next step is to hire employees. According to our plan the number of employees should not be greater than 17. These employees include receptionists, accountants, janitors, security guards, and maintenance staffs. Additional number of staffs may be hired if required. The hiring of staffs would be complete within the end of April or so and cost us Rs. 50 thousand (Approx.).

Thus we would be ready to commence our business form the first week of May 2010.

Summary: (Table Diagram)

Expenses AmountRent advance Rs. 50,000

Contractual Negotiations Rs. 50,000Racks/Shelves Rs. 5,00,000

Goods Rs. 25,00,000Employee Hiring Expenses Rs. 50,000

Rent till April (minus advance 50,000) Rs. 4,00,000Salary till April (from March) Rs. 1,75,000

Petty Expenses Rs.1,00,000Total Rs. 18,75,000

Expenses till May 1st 2010

Rent advanceContractual NegotiationsRacks/ShelvesGoodsEmployee Hiring ExpensesRent till April (minus advance 50,000)Salary till April (from March)Petty Expenses

2. Which bank do you choose and why?

Well, assuming that the economic state of the banks is stable and suitable, we plan to take loan from “Himalayan Bank Limited”. This is because it has seemed capable enough aid our needs in more than one way. Compared to other banks it would provide us with lower interest rates and better facilities. It seemed to us that a probable deal within us would benefit both of us in financial terms. It presented various schemes before us, among which we preferred to choose the “Small and Medium Enterprise Loan”.

Small and Medium Enterprises (SME):

As a step further to help establishment, growth and expansion of small and medium sized enterprises, Himalayan Bank has developed a special loan package meant just to suit small and medium sized enterprises. Business houses coming from industrial, trading and service sector can avail of this facility to meet their short-term and long-term financing needs. This could come in any form- funded or non-funded, depending on specific needs of the business enterprise:

i. Funded/Non-Funded Facility in range of Rs. 0.5 M to Rs. 40.0 M

The interest rates applicable on small and medium sized enterprise loan package range between 10.00% and 12.50% per annum and this depends upon the type of facility.

More about the Himalayan Bank:

Introduction

Himalayan Bank was established in 1993 in joint venture with Habib Bank Limited of Pakistan. Despite the cut-throat competition in the Nepalese Banking sector, Himalayan Bank has been able to maintain a lead in the primary banking activities- Loans and Deposits.

Legacy of Himalayan lives on in an institution that's known throughout Nepal for its innovative approaches to merchandising and customer service. Products such as Premium Savings Account, HBL Proprietary Card and Millionaire Deposit Scheme besides services such as ATMs and Tele-banking were first introduced by HBL. Other financial institutions in the country have been following our lead by introducing similar products and services. Therefore, it stands for the innovations that it brings about in this country to help our Customers besides modernizing the banking sector. With the highest deposit base and loan portfolio amongst private sector banks and extending guarantees to correspondent banks covering exposure of other local banks under our credit standing with foreign correspondent banks, the bank believes that it obviously lead the banking sector of Nepal. The most recent rating of HBL by Bankers’ Almanac as country’s number 1 Bank easily confirms its claim.

All Branches of HBL are integrated into Globus (developed by Temenos), the single Banking software where the Bank has made substantial investments. This has helped the Bank provide services like ‘Any Branch Banking Facility’, Internet Banking and SMS Banking. Living up to the expectations and aspirations of the Customers and other stakeholders of being innovative, HBL very recently introduced several new products and services. Millionaire Deposit Scheme, Small Business Enterprises Loan, Pre-paid Visa Card, International Travel Quota Credit Card, Consumer Finance through Credit Card and online TOEFL, SAT, IELTS, etc. fee payment facility are some of the products and services. HBL also has a dedicated offsite ‘Disaster Recovery Management System’. Looking at the number of Nepalese workers abroad and their need for formal money transfer channel; HBL has developed exclusive and proprietary online money transfer software- Himal RemitTM. By deputing our own staff with technical tie-ups with local exchange houses and banks, in the Middle East and Gulf region, HBL is the biggest inward remittance handling Bank in Nepal. All this only reflects that HBL has an outside-in rather than inside-out approach where Customers’ needs and wants stand first.

HBL is not only a Bank, It is committed Corporate Citizen

Corporate Social Responsibility (CSR) holds one of the very important aspects of HBL. Being one of the corporate citizens of the country, HBL has always promoted social activities. Many activities that do a common good to the society have been undertaken by HBL in the past and this happens as HBL on an ongoing basis. Significant portion of the sponsorship budget of the Bank is committed towards activities that assist the society as large.

The Bank’s Vision:

Himalayan Bank Limited holds of a vision to become a Leading Bank of the country by providing premium products and services to the customers, thus ensuring attractive and substantial returns to the stakeholders of the Bank.

The Bank’s Mission:

The Bank’s mission is to become preferred provider of quality financial services in the country. There are two components in the mission of the Bank; Preferred Provider and Quality Financial Services; therefore we at HBL believe that the mission will be accomplished only by satisfying these two important components with the Customer at focus. The Bank always strives positioning itself in the hearts and minds of the customers.

The Bank’s Objective:

To become the Bank of first choice is the main objective of the Bank.

The other banks consulted with include,

Nepal Bank Limited Nabil Bank

3. What is the process of taking loan from different banks?

The first thing that we need to do to acquire loan from a bank is to access our financial need. We also have to keep in mind the important things like collateral, interest rate and the time due. For the 40 lakhs that we have borrowed form the bank, we have assured a piece of land worth Rs. 55 lakh as collateral. That piece of land is an asset of EIG from previous investments in other programs.

Generally, to take loan from banks or any sort of financial institution, we must follow a set of actions. The things included in this procedure are:

1. Loan Application

We have to submit an application to the bank. The things mentioned in the application should be very precise. The important points not to be missed in the form are:

Name of borrower Legal status of the borrower Address Purpose

Amount sought Turnover Profitability Business worth Etc.

2. Interview

After the application is submitted, a detailed interview is taken. It is from this interview that the decision to be loaned the money is made. Thus correct information and facts should be provided. Any sort of financial facts should not be hidden.

3. Inspection and Enquires

Then the bank will further do some inspection on our provided information. Then it will assist to reconcile the available information with the actual one. The bank will do some further market enquires for extra information with regards to ours personal to business habits.

Loan from Nabil Bank:

There are tow type of loan schemes that Nabil bank has to offer and that also suites our demands. They are:

Working Capital Loan Overdraft / Short term loans to finance your day-to-day business activities. Basically, this loan will help us to build up our inventory and receivables to a desired level, against which the loan will be disbursed.

Fixed Capital Loan While we are looking to finance our projects or acquire fixed assets, the bank is always open to finance our requirements. Generally, this is a long term loan for acquiring or purchasing machinery, equipment, land and building. The tenure of repayment is cash flow based.

Loan from Nepal Bank LTD:

Any individual, companies, and firms can take some sort of loan from the bank. But, all the borrowers should be a Nepalese citizen. The loan can also be taken against the shares owned

by any person or company.

Further Details,

Maximum Loan Amount

Up to single obligor limit

Minimum Loan Amount

Rs. 500000

Draw Down The draw down is restricted to 60% of the shares of all listed companies and 70% of the shares of Standard Chartered Bank Nepal Limited.

Tenure The loan is revolving in nature until terminated

Interest Rate (%)

Approved LimitRs 50,00,000Rs 50,00,000 - Rs 100,00,000Rs 100,00,000 - Above

Interest Rate (%)9.598.5

Security Pledge over the shares and lien of right shares, dividends and bonus shares

Management fee: 0.25% of the loan amount upon approval of the loan.

Documents Required:

The bank required the following documents and criteria to be filled,

Loan application form duly filled and signed, by the borrower

Original share certificates.

Letter of consent issued by the borrower addressed to the concerned companies for the pledge of shares with NBL.

Letter of consent from Borrower to the concerned company for the lien over shares in favor of NBL and accretion (Dividend, Bonus shares, Right shares).

In order to obtain information regarding the loan scheme we contacted the person heading the General Inquiry section,

Loan from Himalayan Bank:

As a step further to help establishment, growth and expansion of small and medium sized enterprises, Himalayan Bank has developed a special loan package meant just to suit small and medium sized enterprises. Business houses coming from industrial, trading and service sector can avail of this facility to meet their short-term and long-term financing needs. This could come in any form- funded or non-funded, depending on specific needs of the business enterprise:

i. Funded/Non-Funded Facility in range of Rs. 0.5 M to Rs. 40.0 M

The interest rates applicable on small and medium sized enterprise loan package range between 9.00% and 12.50% per annum and this depends upon the type of facility.

4. How much do you want to take from the bank?

Our aim is to open a medium sized departmental store. So according our calculations we will need an amount of up to 1 crore. So beside the personal investment from us investors, which mounts up to Rs. 60 lakhs, we will further require a loan of about Rs, 40 lakhs.

5. When would you start to repay the sum?

From our calculations it would take us about 3 to 4 months to set up the store. Thus we would start to repay the sum from the fifth month. So, with the interest rate of 9.5% we would start to repay the sum from the start. We are planning to pay the sum form the 1 st month of us borrowing the money. This would help us in the long run. We can ease the financial burden upon us by starting to pay back the sum of money as soon as possible. At first, when use up the money we borrowed, we would not have any amount left to pay back to the bank as monthly installment with the additional interest of 9.5%. Thus in such condition we plan to use our personal invested money to pay back to the bank till the time that our department store starts to generate enough profit to sustain its existence as well as repay the loan amount to the bank with certain sum of interest.

1 2 3 4 5 6 7 8 9 100

2000000

4000000

6000000

8000000

10000000

12000000

IncomeExpenditure

Expected Earning and Expenditure

6. What is the rate of interest for the different payment schedule?

The bank has provided us with many schemes. These schemes have their own set of interest rates. From our research we have found out different interest rates ranging from 8.0% p.a to 12.5% p.a.

Nepal Bank ltd- interest rates ranged from 8% p.a to 10% p.a

Himalayan Bank- interest rates ranged from 7.5% p.a to 12% p.a

Nabil Bank- interest rates ranged from 8.5% p.a to 12% p.a

7. Which payment system do you prefer?

Considering our financial position we would prefer to pay back the sum in a monthly basis at the end of each month (immediate due). The sum of money we have borrowed is set to the amount of Rs. 40, 00,000. The interest rate is set to be at 9.5% p.a. The time we have set to pay back the sum is six years. It can also be termed as 72 months. So in each month we have to pay the amount of Rs. 75 thousand (Approx.). Thus following this schedule we can pay back our loan in 6 years. In this time we will be aiming to land huge sums of profits.

8. What is the present value, annuity due and interest which you are going to pay to the bank for he facility provided by the bank?

Present value:

Here,

Present Value = 4000000

The total sum of money borrowed acts as the present value.

Annuity Due:

P.V = 40, 00,000

R= 9.5% P.A = 9.5/12 (per month) = 0.1791

I= 0.0079

N=72 [6 × 12 (in months)]

P.V = P / I × [ 1 – {1 / ( 1 + I ) ^n } ]

4000000 = P / 0.0097 [ 1 – { 1 / (1.0097) ^72} ]

P = 73058.745 (Approx.)

Interest:

Interest = 9.5% of Rs. 40, 00,000 = Rs. 3, 80,000

So, in 1 year (total 6 years) = 63,333.33(Approx)

In a month = 5,277.77 (Approx)

9. How will you be benefited from this loan?

It is not always possible to have the immense financial power that an entrepreneur needs to start a business. So by taking loan, we would get the much needed financial assistance to operate a business. Of course we do have to pay back the sum with certain amount of interest, but that is a risk worth taking.

References:

I. Interneta. www.google.com b. www.wikipedia.com c. www.answers.com

II. LibraryIII. NewspapersIV. Magazines

Contact Information:

Nepal Bank Ltd:

Dharmapath, Kathmandu Tel.: 422 2397 Email: info@nepalbank.com.np

Himalayan Bank:

Thamel, KathmanduTel.: 4227749, 4250201 Email: himal@himalayanbank.com

Nabil Bank:

Tripureshwor, KathmanduTel.: 44117015-16 Web Address: www.nabilbank.com