Credit Management of Mercantile Bank Limited

Credit Management of Mercantile Bank Limited

Credit management in a bank is a dynamic sector where a certain standard of long-range planning is needed to allocate the fund in diverse field and to minimize the risk and maximizing the return on the invested fund. The objective of the credit management is to maximize the performing asset and the minimization of the non-performing asset as well as ensuring the optimal point of loan and advance and their efficient management. The credit policy of Mercantile Bank Limited is a combination of certain accepted, time tested standards and other dynamic factors dictated by the realities of changing situations in different market places. MBL aims to become one of the leading banks in Bangladesh by prudence, flair and providing quality of credit operations in the banking sectors. MBL intends to meet the needs of their clients and enhance their profitability by providing best credit facilities. I tried to make an overall analysis of credit activities of Mercantile Bank Limited.

Objective of the report:

Objective of the report is divided into two categories. There are: general and specific objectives.

General Objective:

The general objective of the study is to know about the credit management system at Mercantile Bank Limited as well as to view the current status of overall loan condition of MBL.

Specific Objective:

The specific focuses of the study are:

• To find out the overall activities of credit management system.
• To represent the procedures that bank follows for lending to the customers.
• To describe the detailed operational procedure of the different credit facilities.
• In which way MBL do site visit.
• How they recover the bad debts and get back the uncollected advances.

MBL Product & Services:

MBL has launched a number of financial products and services since its inception. These products and services are given bellow:

A) Deposit Product:

• Current deposit (CD) Accounts
• Savings bank deposit (SB) Accounts
• Fixed deposit receipt (FDR)
• Scheme deposit
• Monthly savings scheme (MSS)
• Double benefit deposit scheme (DBDS)
• Family maintenance deposit scheme (FMDS)
• Quarterly benefit deposit scheme (QBDS)
• Special saving scheme (SSS)
• Education planning deposit scheme (EPDS)
• Super benefit deposit scheme (SBDS)
• School Banking

It is popularly known as Current Account. Any individual, companies, firm, are eligible to open this type of account in its own name. This is non-interest bearing account. The account holder can deposit or withdraw money from his or her account any time he or she wants. The code for CD account is 111. To open current account a customer needs:

Current Deposit:

• 2 copy picture of account holder
• 1 copy picture of nominee
• Account holders voter id card photocopy, trade license photocopy, company seal
• Nominees voter id card photocopy

Savings bank deposit

This is an interest bearing account and only individuals can open this type of accounts. The code for SB account is 121. Customers can deposit or withdraw money from their SB account ten times in a month.

SB account is essential if anyone wants to apply for a debit card in MBL.

Individuals, Firms, Companies, Associations may open this account. The deposit is taken for a specific fixed period of time, such as 3 months, 6months, 1-year etc.

Fixed deposit receipt:

At present FDR rate is 8.75% in MBL.

MSS is one of the popular deposit schemes of MBL. The prime objective of this scheme is to encourage the people to develop their habit of saving. Under this scheme, monthly installments are in various sizes and one can adopt the schemes for a period of 03 tears, 05 years, 08 years or 10 years. Total outstanding balance against MSS account was BDT 26,704 million as on December 2013 registering 10348% growth over the year.

Online banking:

Online Banking has been activated in all Branches of the Bank from January 01, 2006. Online service is now available for all customers – Both Cash deposit and withdrawals, Cheque Deposits and Transfer in CD, SB, STD, Loan accounts (Cheque Bearing within limit) and Monthly Savings Scheme (MSS). Most customers are like MBL because of its suitable online banking services. Charges for online banking is free. MBL is using PCBANK2000 software, but now 78 branches using TEMENOS T24 software. In Narayanganj MBL Branch, they are using PCBANK2000. Within 2015, MBL all branches will cover by TEMENOS T24. TEMENOS T24 is more secured then PCBANK2000.

My cash

MBL launching its own mobile banking services “My Cash” in a bid to fulfill its vision of “Inclusive Banking”. In mobile banking system, basic mobile handsets are being used as bank accounts and will serve as a wallet for the transaction of money. This service will cater the much needed domestic and international money transfer services through mobile phones for all categories of people. MSS deposit holder can easily deposit their money in bank by using My Cash.

NRB division:

Remittance is the largest sources of earning net foreign currency, appreciating this importance to the cause of national economy, since inception MBL has given utmost priority to pave the way of remitting hard earned foreign exchange by the expatriate Bangladeshi worker in a safe and speedy manner using banking channel.

During the year 2014, MBL has executed money transfer arrangement with as many as 28 Overseas Exchange Companies based in USA, UK, CANADA, ITALY, UAE, QATAR, OMAN & MALAYSIA. Apart from this, MBL has established institutional relationship with 10 reputed global web based companies namely

• Western Union
• Money gram
• RIA financial services
• X press money
• Placid express
• Trans fast remittance
• Prabhu money transfer
• Al ansari
• NEC
• Instant cash worldwide

Corporate social responsibility:

Being a corporate citizen, MBL plays an important role for well-being of the society where it conducts business, MBL believes that, true success does not consist in profit maximization only rather in doing something for the betterment of deprived part of the society. With this consideration, MBL has established a foundation in the name and style, “Mercantile Bank Foundation” in 2000. MBL contributes 1% of its Operating Profit to the Mercantile Bank Foundation every year but not less than BDT 4 million. Poor children get education facilities through Mercantile Bank Abdul Jalil Education Scholarship. In this winter, Narayanganj branch MBL distributed 350 blankets to the poor people.

Department of MBL

In branch level, MBL has three departments. Those are:

1. General banking
2. Credit department
3. Foreign exchange department

Major function of general banking:

• Account opening
• Interbank transaction
• Remittance

Major function of credit department:

• Credit proposals and credit processing
• Documentation and loan disbursement
• Overview on all returns

Major functions of foreign exchange department:

• Opening of L/C (Back to Back, Local/Foreign)
• Purchase of foreign bills
• Negotiating of foreign bills
• Payment against import bill
• Export guarantees

Credit Management of Mercantile Bank Limited

Loans & Advances:

Mercantile Bank Limited is a new generation Bank. It is committed to provide high quality financial services/products to contribute to the growth of GDP of the country through stimulating trade & commerce, accelerating the pace of industrialization, boosting up export, creating employment opportunity for the educated youth, poverty alleviation, raising standard of living of limited income group and over all sustainable socio-economic development of the country.

In achieving the aforesaid objectives of a Bank, Credit Management has paramount importance as the greatest share of total revenue a Bank generates from it. Existence of the bank depends on prudent management of its credit operation where maximum risk is centered in it and. In most of cases, the failure of a commercial bank is usually associated with the problem in credit management as well as the result of reduction in the value of assets.

Therefore, credit management has not only featured domination in the assets structure of the bank but also critically important to the success of the bank.

The standards of credit relate to safety, liquidity and profitability whereas these dynamic factors are also related to different aspects such as interest or margin, credit spread nature and extent of risk and credit dispersal. In the MBL Narayangonj Branch’s Credit Department, there are 3 (Three) officials are working continuously with great effort and teamwork and they have quite efficient skills and talent to perform the jobs in this department. The Bangladesh Bank, Credit Division at Head Office of MBL and the respective officers of branch in the section control this credit department. The officers believe in teamwork and extreme hard working. In all business dealings, credit officers are guided by the principles of honesty, integrity and safe-guard the interest of the depositors and credit customers of the bank. Credit officers principally perform credit management task by providing loan (credit) to customers and receiving loan back by charging interest along with installments with obeying rules and regulations of the Bangladesh Bank and Head Office as well as maintaining the best business practices in the Bank.

Mercantile Bank Limited provides different types of loan. Those loan products are given bellow:

Retail Loans

1. Consumer credit scheme: Consumer’s credit scheme is one of the popular areas of collateral free finance of the bank. People with limited income can avail the credit facility to buy household goods including computer and other durables. Maximum loan limit is 1 lac.
2. Lease finance: This scheme has been designed to assist and encourage the genuine and capable entrepreneurs and professionals for acquiring capital machineries, medical equipment, computers, vehicle and other items.
3. Car loan: Car loan has been introduced to enable middle income people to purchase cars. MBL maintain some condition in car loan. Such as, a car price is 20 lac. Here bank will provide 10 lac, because in car loan bank will give loan 50% of the car. Maximum car loan limit is 20 lac.
4. Home loan: To meet the growing need of housing for middle and lower income people, MBL has introduced home loan scheme. Such loan will be available for purchase or construction of new apartments for self residing purpose. Bank will take mortgage against home loan.
5. Doctor’s credit scheme: Doctor’s credit scheme is designed to facilitate financing to fresh medical graduates and established physicians to acquire medical equipments and set up clinics and hospitals.
6. Any purpose loan (personal loan scheme): Personal loan scheme has been introduced to extend credit facilities to cater the needs of low and middle income group for any purpose. Maximum loan limit is 15 lac. Bank will not take any mortgage against this loan.
7. Overseas employment loan scheme: This scheme is designed to facilitate the Bangladeshi youths seeking employment aboard but who are unable to meet the expenses to reach the workplace from their own sources. By availing loan under this scheme, the active youths of middle and lower class can get overseas employment by avoiding borrowing from the mohajon at high cost or selling their paternal properties.
8. Cottage loan: Women entrepreneurs’ development scheme has been introduced to encourage women in doing business. Under this scheme, the bank finances the small and cottage industry projects sponsored by women.

Corporate loans

A) Short term finance: Short-term loans are used to finance inventory, account receivables or other current assets to finance the working capital requirement. The time period of short term loan is 1 month to 1 year. Forms of short-term loan are given below:

• Cash Credit (CC):

Cash credit account is like a current account with a limit up to which one can withdraw from the bank. Cash credit is normally sanctioned for a period of one year where a regular limit is sanctioned against goods to meet day to day expenses of business.

Secured overdraft (SOD):

Overdraft against guarantee

When overdraft is allowed against lien of FDR or other financial instruments, it is termed as Secured Overdraft (SOD). Secured Overdraft (SOD) facility to the borrower may be allowed generally in the following ways:

• Overdraft against FDR in the name of borrower
• Overdraft against savings certificate
• Overdraft against DPS

Bill discounted and purchased:

Long term finance: Long-term loans are used to finance equipment, real estate and other fixed assets. The forms of long-term loan are given below:

Mercantile Bank gives advances to customers by discounting or purchasing their bills of exchange. Such bills of exchange arise out of commercial transactions both in inland trade and foreign trade.

• Lease financing:

Under lease financing we cover equipment/vehicle financing. It is a term financing repayable through lease rental in the form of equal monthly installments. Ownership of the leased out vehicle under the lease agreement covering comprehensive risks belongs to the Bank.

Hire purchase: This is also given to procure equipment/vehicle. Ownership of the equipment/vehicle to be purchased under the hire purchased agreement covering comprehensive risks belongs to both the banker and customers. Hire purchase facility is repayable by depositing equal monthly installments (including principal and interest amount).

• Term loan:

Real Estate finance: This form of credit facilities is allowed to individual’s /groups/ Developers for construction of building and completion of finishing works to be used for commercial purposes.

This facility is used to meet the expenditure of civil construction and other infrastructure development. Term Loan facility is repayable by depositing equal monthly installments.

Import Finance: Importers are given this sort of facility to import different commodity items, capital machinery and any other permissible items. L/C related shipping document is kept as primary security. Cash margin and counter guarantee are obtained from the customer to secure its position. Two types of L/C facility are provided:

• Sight L/C- payment should be made just after receiving the documents
• Deferred L/C-the beneficiary allows the importer time to pay the documents

Loan against trust receipt:

Export finance: Mercantile Bank always gives priority to its export-oriented customers. Export finance constitutes an important part of an exporter’s requirement of finance. Exporters require finance at two different stages of their export operation. At each phase, exporter’s need different types of finance:

Loan against Trust Receipt (LTR) is a funded facility provided to importer to retire L/C related shipping documents. Advance against a LTR obtained from the customer is allowed when the documents covering an import shipment are given without payment. The customer holds the goods or their sale proceeds in trust for the bank until the LTR is fully paid off. Letter of Trust Receipt is kept as primary security, which creates the banker’s lien on the goods. LTR facility is adjusted from sale proceeds of Imported goods or cash from own sources of the customer within the validity. Validity of the LTR A/C vary from 30 to 180 days depends on the nature and amount of items imported or as per Bangladesh Bank guidelines.

Back To Back L/C: The export letter of credit backs a second letter of credit which is used to pay a supplier. When the exporter received a export letter of credit from the overseas buyer for export of goods, but the concerned exporter are not the actual manufacturer/ producer of the exportable goods. He is required to collect the goods/ raw materials from the actual producer/ manufacturer. In such a situation the exporter request his bank to open a letter of credit in favor of the actual producer against the export letter of credit he has obtained. In this situation bank open a letter of credit in favor of the actual producer of the goods keeping the export letter of credit as security. Since the letter of credit on the strength of and backed by the export letter of, the second letter of credit called back to back letter of credit. Bank may provide preshipment credit facilities up to 90% of export order including BTB LC. However banks are generally not in favor of back-to-back letters of credit as a means of financing export transactions due to risk they are exposed to. Papillon knit composite ltd is the main exporter customer of MBL narayanganj branch. When papillon found a LC from foreign importer, then papillon take loan against this LC. This whole process is called export financing. Papillon also give loan to other manufacturers against this L/C, it’s called Back to Back L/C.

• SME Financing:

Product program guidelines for SME financing of MBL are designed and developed to meet up all types of justified business requirement of SME customers. However, the features of the products so far developed may be changed, revised, while new products can also be developed to cope with the market demand as per guidelines for Bangladesh bank and banks own policy. The existing products are:

1) Chaka (Term loan) : The purpose of this loan are:

a) For expansion & smooth running of the existing business.

b) To purchase capital machinery or fixed assets of the business.

c) To purchase light or heavy vehicles for business use.

d) To set up financially, economically and commercially viable and justified new business.

2) Anannya (Women entrepreneur’s loan): About 50% of our total populations are women their active role as entrepreneur in not at all significant. For balanced & sustainable economic growth with inclusiveness of all classes people of the society, active involvement of women in the business in immediately required and our bank has given highest priority for financing to the women entrepreneurs offering a loan facility under the name “ANANNYA”.

3) Samriddhi (Continuous loan): Small and medium entrepreneurs need working capital at anytime to penetrate into prevailing business opportunity and to run the existing business smoothly. For thr purpose of helping SME customers to operate their business uninterruptedly, MBL has introduced “SAMRIDDHI”.

4) Mousumi (Short term single payment loan): Seasonal products or crops as well as religious and cultural festivals create short term additional business opportunity for small and medium entrepreneurs of our country. To fulfill SME customers demand MBL provides MOUSIMI loan.

Agriculture loan:

• Nabanno (Polli loan)
• Sakti (Solar energy loan/Bio gas)

MBL started agriculture credit disbursement since 2010 by formation of a separate and dedicated department namely “Agriculture credit department”. From the beginning Agriculture credit department is opening Agriculture credit activities of the bank as per Bangladesh Bank’s Agricultural & Rural policy and Guideline. MBL disbursed agriculture credit under the following ways:

• Through partnership with NGOs
• Through contract farming with reputed companies
• Directly to farmers

The new circular of Bangladesh Bank is that each bank must be give agriculture loan. The minimum loan limit is 50 lac.

Discouraging loan area:

MBL discourages lending to following areas of the businesses:

• Military equipment/weapons finance
• Tobacco sector
• Companies listed on CIB black list or known defaulters
• Highly leveraged transactions
• Activity which is ethically or environmentally sensitive.
• Bridge loans relying on equity/debt issuance as a source of repayment.

General system & procedure related to credit:

To grant advances is one of the most important functions of a bank. The strength of bank depends considerably on the quality of its advances and proportion of bearing to the total deposits. Traditionally bank has been following three cardinal principle of lending in different credit schemes, these are: safety, liquidity and profitability. Another determination but not principle, the bank also consider humanity where bank always looks for true entrepreneur who can really support society by establishing own-self. Confidence in the borrower is the basis of secured advances. The confidence is judged by five considerations Character, Capacity, Capital, Collateral and Condition.

Lending process of MBL goes through different steps with complying terms and conditions of Bangladesh Bank. The Credit department of MBL follows the following steps in lending-

1) Application for loan proposal:

Firstly, the borrower who willing to make a commitment with bank by taking loan, he must write an application through the ‘Head of Branch” of bank and submit it to the officer at credit department.

On proper scrutiny of the application, branch will inform the initial decision (acceptable for processing/decline) to the applicant within 3(three) working days from the date of receiving application. Applicant must present the following additional papers along with application-

• Trade license and TIN certificate for business
• Voter id card or birth certificate
• Details papers of business
• Salary certificate for service holders
• Bank statement of last six month
• Attested photocopy of current tax receipt, electric bill & lease agreement when the sours of income is house rent as a landlord.

2) Selection of borrower:

The selection processes include identifying source of repayment and assessing customer’s ability to repay, expected future cash flows, his / her past dealings with the bank, the net worth and information from CIB. The Bank must identify the key drivers of the borrower’s business as well as the key risks to their businesses. There is an age limit for borrower, age of the proprietor/partners/directors must be range between 21 years to 60 years.

3) Preliminary screening of credit proposal:

The management committee of credit department of bank gathers different documents and then evaluates all of the papers, documents. The credit management committee obtains these mandatory following documents.

Formal application for financing

• Business plan
• Personal guarantee
• Appraisal of asset to be financed
• Personal financial statement
• Business financial statement
• Purchase agreement
• Cash flow projection
• TIH certificate
• Bank solvency certificate
• Vat certificate
• Export license (applicable for export oriented business)
• Market reputation

4) CIB (Credit Information Bureau) Inquiry:

A bank does not know full information about a customer. But knowing the customer’s whole information is very important before giving loan. A customer all information is store in Bangladesh bank. Such as a customer kept loan from BRAC Bank. This customer came to MBL and applying for loan. When MBL filled CIB form and send to the Bangladesh bank, then Bangladesh bank will send all information about this customer and MBL will know that this customer has loan in BRAC Bank. A customers CIB report need to update after 2 month basis. When customers want to loan above 5 lac, those customers need CIB report. Below 5 lac customers do not need CIB report.

5) Security analysis:

To make the loan secured, charging security on the credit facilities is very important because it represents commitment of the borrower; it protects the interest and ensures the recovery of the money lent. The important modes of charging a security are the following:

• Lien: Here, bank will give loan against customers’ assets or properties.
• Pledge: A bank will give loan against customers’ products. Bank is Bailee and customer is Bailor.
• Mortgage: A bank will provide loan against customer’s land, building, properties etc. it is famous in MBL. To make the loan secured, MBL charging mortgage.

6) Site visit:

The bank management visits at borrower’s land, property which is placed as security against credit. Here, Head Office Credit Team assists (on need basis) in site visitation. After site visitation, Branch credit team forwards a detailed site visit report regarding the project to the Head Office of MBL duly signed by the officer and Head of Branch / Operation Manager. Patwery Sir gave me an opportunity to go with him in site visit. We went Ponchoboti, Narajangonj. Here we visit 3 borrower’s land. At first we analyses the business condition, the products, products market price and inventory. Then we were analysis the mortgage land and tried to calculate land’s market value.

7) Documentation:

Documentation can be described as a process or technique of obtaining the relevant documents. When bank is going to lend to a borrower after inquiring the character, capacity, collateral and capital of the borrower, the bank must obtain proper documents which are executed from the borrower to protect against willful defaults. Moreover, when money is lent against some security of assets, the document must be executed in order to give the bank a legal and binding charge against those assets. Documents contain the precise terms of granting loans and these serve as important evidences in the law courts if the circumstances so desire. That’s why proper documentation must be completed prior to the disbursement of the facilities. Charged documents as required for documentation are mentioned bellow:

1. Demand promissory note signed on revenue stamp
2. Letter of arrangement
3. Letter of undertaking
4. Letter of installment
5. Letter of authority
6. Letter of disbursement
7. Balance confirmation slip
8. Letter of revival
9. Letter of hypothecation
10. Letter of continuity
11. Letter of guarantee
12. Legal documents for mortgage of property
13. Valuation certificate of the collateral security in Bank’s form with photograph
14. Site visit report

8) Sanction of loans or advances:

When a branch manager writes letter to the customer accepting all terms and conditions of loan, it is called loan sanction. The most important conditions which are taken in loan sanction are given below:

• Limit of the loan amount
• Primary securities of the loan
• Rate of interest of the loan
• Expire date
• Repayment
• Documentation
• Brach authority as per their business delegation must take decision within maximum of 3-7 days.

Time requirement for approval of credit proposal:

• The head office credit committee, executive committee of the board of director, board of directors take decision within maximum of 5-7 days for simple types of finance facility, 15-30 days for project loan, 30-60days for loans under syndication
• Sanction letter to be issued within 1-2 days time from the date approval.

9) Disbursement of loans:

Loan disbursement has to be made after completion documentation. Disbursements of loan facilities are made when all documentation is in place. The steps of the disbursement-

• Finally Credit division at Head Office has completed documentation of the loan that sanctioned by them.
• After completion of the documentation and sanction, Credit Division sends a copy of “Disbursement Order” along with “Approval letter” to Head of Credit Administration Division (CAD) & the respective branch for disbursement of the loan.
• Security Documents of the loans sanctioned from Head Office are signed by customer(s) in branch of disbursement and retained original. A set of photocopy of originals is required to be sent to Head Office.
• A set of photocopy of loan documents is retained by Credit team at Head Office, the bursement branch retains the originals.

Credit file management

After completion of all steps in lending, the bank makes and reserves a ‘Credit File’ of the respective customer. The maintenance of credit files is disciplined to force the lending officer to obtain all relevant documents and encourages him to consider all relevant information when analyzing customer risk. Primary items in credit files include:

(a) Credit application & Credit approval notes/analysis. The analysis contains information about the borrower, credit purpose, credit repayment sources, details of collateral security with valuation and guarantee. It also contains an assessment of the competence and quality of the borrower’s management, the general economic and competitive environment of the borrower’s industry and any other pertinent factors, which present the borrower’s ability to repay the facility.

(b) All supporting data such as financial statements, reference, credit investigation results, CIB & other Bank reports and notes of all discussions with the borrower and other relevant parties with paper clipping.

(c) Correspondences, call reports, site visit reports stock reports etc. Each credit file is maintained in a secured location and access restricted to authorized personnel.

(d) Evidence of credit approval and data upon which approval was granted together with any comments, if appropriate. Copy of sanction & disbursement letter, a check list along with copies of all Legal & Banking documents.

Credit risk management:

There are many reasons to default a loan. Uncertainty, political bad condition, natural disaster can create huge losses for any business. Sometime loan holder willingly breaks the installment rules. When a loan holder failed to pay monthly installment, in this time bank take some steps:

• Such as the installment date is 30th January. But loan holder did not pay the installment. After 3 days of the installment date (2nd February) bank officer will call the loan holder and ask him to pay the installment immediately.
• If the loan holder did not pay after telephone him. Then MLB send (10-15 days later) an official letter and call him again.
• After all those process, if the loan holder did not take seriously then MBL will go to the loan holder organization(1-2 month later) and give him 2 days extra time for installment payment.
• If the loan holder failed to installment payment or do not want to pay the installment then MBL will take a lawyer and go to the organization and take the mortgaged property. Then MBL can sale this property for cash.

But if the loan holder is good person and he personally come to bank and discussed his business problem with credit officers. At this time, credit officer will send a letter in Head Office for requesting extend some time for installment payment. Head Office will discuss this issue in board meeting. In this condition, bank will give opportunity of 3 month to the loan holder. In this 3 month loan holder will focus in his business and try to earn profit. After 3 month the regular installment payment will continue. If the loan holder did not make any success in 3 month then bank will take his mortgaged property and can sale any time for cash.

Findings

1) Mortgage property:

The bank keeps mortgaged property (i.e. house, land) from borrower against the loan. Before mortgaging any property, the bank reviews all necessary documents related to ownership of property. But sometimes, complexity of mortgaged property has been found after the loan disbursement.

For instance, the property which is given by the borrower to the bank for mortgaging may have partial ownership of another person (i.e. person’s brother or sister) who lives outside country. When he/she gets acknowledgement about the mortgaging of his/her property, he/she may go for law-suit action against the bank and borrower. Therefore, the bank faces trouble with law-suit case and other legal difficulties.

2) Lack of proper support from Valuation Company:

Sometimes it has been found that the collateral security which is kept by borrower shows in higher-value (biased-over) than its actual value. For illustration, before taking collateral security (land, building) from the client against loan by bank, the bank goes for valuation of the collateral security and they assign this valuation task to a third party . Geometric Survey Co. Ltd. But after valuation, the respective survey company has presented the value of the security over than actual because the borrower intentionally made influences on Survey Company to show higher value to bank. As a result, the bank cannot recover reported value of securities if the borrowers become default.

3) Political and Social pressure:

Often the bank faces pressures from different political, social persons to make consideration in granting loan to their recommended person. Though the person who is applying for loan may fail to satisfy conditions in some cases, for example the collateral security is not matched with demanded loan amount (under-valued). But here the bank grants loan to this person who partially fulfills the requirement for loan because of continuous pressures from respective political person. Some directors of MBL have already involved in political and social activities and it has been found that the directors recommend to the bank’s officer on the behalf of their relatives and well-known persons to grant loan without fulfilling all requirements. As a result, here the principle terms and conditions for lending are violated.

4) Fund diversion by borrower:

The loan which is provided by bank for business purpose may be used in personal purposes by the client. Here the bank faces problem of getting installment from client within specific time. For instance, a person applies for the loan for extending his business, the bank evaluates all requirements which are fulfilled by customer. Then the bank authority finds that the person has capability to do a small profitable business and he also needs financial assistance to extend his business. But after taking loan from bank, the client intentionally invests it in the stock market instead of investing in his business extending purpose. Here, the client violates the conditions of credit. Ultimately, the bank confronts with problems to take installment if the client fails to pay the installment within the specific time.

Recommendations

While workings at MBL, there were certain things that came in front of my eyes which I have mentioned in findings, I think MBL should consider those criteria for the development of credit management. Perhaps MBL has its own options and strategy to follow in these issues, however I am not fully acknowledged about those. Here are some recommendations as permy findings-

1) The bank must analyze all evidences of mortgaged property: As title of mortgaged properties may have complexity, so a comprehensive and accurate appraisal of the property in every credit proposal of the bank is important and mandatory. No proposal can be put on place unless there has been found a complete, accurate evaluation of property. In order to safeguard the mortgage over the entire period of the advance, a comprehensive view of the capital of borrower, adequacy, and nature of security should be compliance with all regulatory/legal formalities and condition of all documentation. It is absolute responsibility of the Credit Officer to ensure that all the necessary documents are analyzed properly before the loan is placed for approval. On the other-hand, where Loans/Advances/Credit facilities are granted against the guarantee of the third party, that guarantor must be subject to the same credit assessment as made for the principal borrower.

2) Valuation task should be assigned to confident party: Sometimes the bank becomes swindled by valuation party. So the bank must assign property valuation task to that kind of confident party who strictly follows the terms and condition in evaluating proper value of the property, assets as well as maintaining confidentiality.

Enlisted Surveyor Company approved by the bank should make valuation of property and properly assess the quality and priority of the proposed security. The bank should keep a pleasant relationship with valuation party in order to acquire proper valuation.

3) Bank need to hire best lawyer to justify the mortgage land

4) The bank should being independent from pressures: Credit proposals should not be influenced by any political person whether it is the matter between bank and client.

5) The bank must keep close follow up after the disbursement: The loan should be utilized for the specified purpose for which it has been sanctioned. Furthermore, the bank must be vigilant so that the disbursed funds for a particular purpose are not diverted elsewhere without their knowledge.

Therefore, the bank must accept any difficulties and think of them as objective to pursue future goals by solving the problems instead of blaming other factors and MBL must be able to keep on playing its important roles in our economy.

Conclusion

Mercantile Bank has established credit relationship with many reputed multinational companies, semi-government organization as its customer group ranges from individuals, organizations and small businesses covering all sectors of Corporate and Retail businesses. MBL has aim to contribute in potential sectors like as agriculture, electronics, SME, healthcare etc. by providing not only credit services but also taking essential steps to expand these sectors through participating actively in economic development of the country.

Though MBL has been facing a number of problems regarding to credit service, it has been able to achieve “AA-” credit rating in last two consecutive years which indicates a banking entity with high credit quality, higher safety and have superiority in customer service. In believing, MBL will make a positive attempt to be more outward looking in their goals and emphasize on the domestic scenario more closely and analyze any certain trends and strategies of their competitors.