Credit Policy and Practices of Mercantile Bank Limited

Exclusive summery:

In Banks and Financial Institutions, Credit Risk is considered as an essential factor that needs to be managed. Credit Risk is the possibility that a borrower or counter party will fail to meet its obligations in accordance with the agreed terms. Credit Risk, therefore, arises from the Bank’s dealings with or lending to corporate, individuals and other Banks or Financial Institutions. Credit Risk Management needs to be a strong process that enables Banks to proactively manage loan portfolios in order to minimize losses and earn an acceptable level of return for shareholders.

Mercantile Bank prepared Credit Policy in May 2000 and circulated the same to the Branches /concerned Executives for compliance. In order to cope with the fast changing scenario of dynamic global economy, liberalization and globalization and in the light of the directives / suggestions of the Focus group of Bangladesh Bank, the Credit Policy has been revised in continuously. All Executives / Officers of the Branch as well as head Office especially those are entrusted with the responsibility of Credit marketing, approval processing, credit monitoring, recovery and compliance, must keep themselves thoroughly familiar with the contents of the Credit Policy for careful compliance.

Mercantile Bank Limited does everything within the context of its policy and Bangladesh Bank guidelines. Every private commercial bank formulates its policy for their operations to keep banks viable and profitable and also for the safeguard of depositors’ interest.

Practices of Credit are however, subject to additions, alternations and modifications as may be warranted by the change of circumstances due to passage of time, to suit the requirement of the Bank. Whatever the policy of Bangladesh Bank is most of the private commercial banks are inclined to invest in the highly profitable sector simultaneously where risks are lower.

 Only the credit department has been covered in the internship program, it is not possible to go to the depth of each activities of branch because of time limitation.  In this report   those credit schemes are high lighted only which are most familiar to common people as well as frequently practiced by MBL. And only the parts relevant to my focusing fields have been taken, thus the actual credit Policy has been shortened to facilitate the study.

MBL discourages the persons who are liable to get loan for their urgent purpose. Mode of disbursement, charge documents etc. creates bottleneck in loan approval process. Head office takes so longer time in processing and approval of corporate loan. The total sanctioning process event takes month after month to give the final decision. MBL does not sanction loan to all sectors equally as they require, rather it concentrates its loan and advances within some limited fields and category. It has Credit Card facilities, but ATM booths are located only in some commercial hubs in the city. Again the terms and conditions of the credit card are not changes with the changing environment. That’s why ATM card holders most often don’t take credit card facilities even in some cases employee of MBL use other banks’ credit card. Consumer credit schemes (CCS) are more popular and required things among the people of various classes, but the effective rate of interest is very high. And the terms and conditions of CCS loan are also very inconvenient and discourage people. Loan sanctioning and disbursement procedure are not so easy and flexible being considered the requirements of different classes of people. Sector wise loans in agro based industries and firms, leather technology can be convenient and flexible for the receiver. Loan facility parameter should be expanded so that all the people can get loan according to their needs. Average cost of fund is very high. On the contrary Business Power for sanctioning loans and advances at branch level is negligible.

Lots of new commercial bank has been established in last few years and these banks have made this banking sector very competitive. So, now banks have to organize their operation and do their operations according to the need of the market. Banking sectors no more depends on a traditional method of banking. In this competitive world this sector has trenched its wings wide enough to cover any kind of financial services anywhere in this world. The major task for banks, to survive in this competitive environment is by managing its assets and liabilities in an efficient way.

Every organization has its positive as well as negatives and in case of Mercantile Bank Limited existence of the later one is less then the earlier one and as the management is determined to reach the pick of success it seems that in near future the negatives will be eliminated. Eleven years is a very short span of time and the organization, which can establish itself as one of the most reputed private commercial Bank in the country within this short period deserves special credit and with their able leaders Mercantile Bank will reach the highest level of success very shortly. I wish the bank all success prosperity in their field.

Business Powers:

All powers of the Bank are vested in the Board. They are the source of all powers, and any person or body can exercise only the powers delegated by the Board in ways and manners specified by them. Mercantile Bank Ltd. believes in decentralization of powers. With a view to ensuring prompt and efficient services to its magnitude of clients spread far and wide, the Bank envisaged delegation of optimum powers to its Executives and officials at different level of operations.

• The Board can delegate the authority, not its responsibility.
• The evil of dual Subordination may creep in the chain of command if authority is not well defined and properly implemented.
• Exercise of the delegated authority must commensurate with the shouldering of the responsibility.
• Head Office is responsible for formulating Credit Policy for the Bank, for the proper conduct of the advances in the Branches and for the system of control over them. Head office delegate business powers of Branch-in-charges, devise method of forwarding credit proposals to Head Office for sanction and instructions regarding submission of periodical returns.
• Branch-in-Charges are primarily responsible for all advances at their Branches. They must exercise common sense, wisdom, prudence and judiciousness in the use of powers delegated to them and in recommending proposals to Head Office for sanction. In all cases, they must ensure that Bank’s interests are fully safeguarded..
• A secured credit facility may be allowed to a customer only after getting a limit sanctioned by the authorized officials.
• The customer seeking a credit facility against acceptable security must make an application in bank’s printed form “Request for Credit Limit” PF-146 (Annexure-l) enclosing necessary papers/documents to his nearest Branch of the Bank where he maintains his operative account.
•  Arranging an interview with the intending borrower to know on the following     points: Present and future prospect of the customer’s business

Responsibilities:

Processing of Credit Proposals:

1. Before finally selecting the borrower, bank is satisfied that ;

• The customer possesses character, capacity and capital & the account is remunerative one & repayment arrangement is satisfactory.
• Dealing items and primary security of the customer possess the quality of easy marketability, durability and storability
• Collateral security offered possesses the quality of easy marketability and is not encumbered and its valuation is judiciously assessed so as to leave sufficient margin after covering the advance and belongs preferably to the borrower.
• Means, standing and respectability of the applicant and the guarantor (if any) are satisfactory.
• Credit worthiness of the applicant is reasonable
• Location of the business is good.

The following Papers/documents are to be submitted by the Branch Managers along with the proposals:

a)      Request for Credit limit of customers

b)      Project Profile / Profile of Business

c)      Copy of Trade License duly attested

d)     Copy of TIN Certificate

e)      Certified copy of Memorandum and Articles of Association, Certificate of Incorporation, Certificate of commencement of business, Resolution of Board of Director, Partnership Deed, (where applicable)

f)       Personal Net worth Statement of the Owner/Director/Partner/Proprietor in Bank’s Format.

g)      Valuation Certificate in Bank’s Format along with photograph of collateral security with detail particulars on the back duly authenticated by the Branch Manager.

h)      3 years Balance sheet and profit and loss A/C

i)        CIB Enquiry Form duly filled in (For proposal of Tk.1.00 lac and above)

j)        Inspection/Visit Report of Factory/Establishment/Business premises of the customer-Annexure-5

k)      Statement of NC (CD/SB/CC) for the last 12 months. In case the customer maintaining account with other Bank, Statement of Account for the last 12 months of the concerned Bank should be furnished.

l)        In case of renewal/enhancement of credit facility, debit turnover, credit turnover, highest drawing, lowest drawing, and total income earned detailed position of existing liabilities of the customer i.e. date of sanction, date of expiry, present outstanding, remarks, if any.

m)    Declaration of the customer of the name of sister/allied concerns and liabilities with other Banks, if any, and an undertaking to the effect that they have no liability beyond those declared-Annexure-6

n)      In case of UC proposal, detailed performance of L/C during the last year i.e. No. and date of L/C opened, commodity, L/C value, Date of creation of PAD, date of retirement, mode of retirement etc.

• o)      In case of BTB UC proposal-

p)      Detailed list of machinery, production capacity, working capital (BTB UC) assessment, existing export UC in hand mentioning date of shipment, detailed position of outstanding BTB L/C/Accepted Bills, progress of production and expected date of shipment, statement of outstanding FDBP/IDBP, if any, Quota Position, Inspection Report, Copy of valid Bonded Ware House License, Customs Clearance or dispute, if any.

q)      Whether the applicant is Shareholder/Director of Mercantile Bank Ltd. as per definition of Banking Companies Act.

r)       Financial Analysis to be prepared by the Branch Manager based on the financial performance of the company & should show trends in sales/profitability, liquidity, leverage etc. It should also contain an assessment of the competence and quality of the business management, the general economic & competitive environment of the borrowers industry and any other pertinent factors which is relevant for our credit decision.

s)       Justification/consideration for the facility.

1. The sanctioning authority on receipt of the proposal shall scrutinize the same and ensure that:

• All necessary papers and documents have been enclosed.
• The proposal has been duly signed by the members of the Branch Credit Committee including the Manager.
• The proposal has been duly recommended.
• The proposal does not fall within the existing credit restriction
• Minimum margin requirement against the credit facility has been proposed.
• The primary security has got easy marketability, durability and storability
• The property offered as collateral security is judiciously assessed
• The proposal is viable and stands all credit tests
• The proposed borrower is not defaulter (classified) of any Bank/Financial Institution
• There is no request from other Bank/Financial institution for not allowing/stoppage of facility to the proposed borrower.
• Where the proposed accommodation in the form of working capital may be considered on the project financed by any other Bank including DFI, favorable status report and No Objection Certificate (NOC) from the financing Institution is obtained.
• Where 2nd charge on the fixed and floating assets (in case of a limited company) or 2nd mortgage on real estate is offered, clearance in respect of creation of 2nd charge on the property together with confirmation that documents will be held by them on behalf of the Bank and that they shall not part with the same without consent of the Bank, is obtained from the 1 is mortgagee.

1. Check list of action to be taken by the Branch Manager/Second Officer/Credit Officer before disbursement of Credit facilities

• Acceptance of customers to be obtained of the terms & conditions on the duplicate copy of sanction advice.
• They will thoroughly examine and ensure that the subject credit facility does not contradict to any law, rules and regulation of the country, Bangladesh Bank and our Bank.
• They will obtain NOC from Bank where the customer has existing liability.
• CIB Report on the borrower through Head Office.
• Lending Risk Analysis as per FSRP Formula in case of credit of Tk.50 lac and above.
• No objection certificate of Bangladesh Bank in case the credit facility exceeds 15% of Capital Funds of the Bank.
• Regularization/Adjustment of classified/overdue credit of the customer/their sister/allied concerns with our Bank/other Banks, if any.
• Sanction advice will be communicated by Head Office to the Branches and by the Branches to the customers under Double signatures authorized by the Bank.
• No Executives/Officers shall exceed prescribed limit of delegated business powers under any circumstances.
• Valuation of goods/produces/hypothecated to the Bank to secure any advance shall in no case exceed. The landed cost at the port of entry is assessed by the custom authority in case of imported goods.
•  Goods and produces against which advances are made should be readily      marketable.
• Loans & Advances allowed against FDRs, PSPs, MBDRs, and DBDRs etc. shall be adjusted immediately before the face value of the instruments and outstanding advance amount becomes equal or upon maturity, whichever is earlier.
• In case of advance against mortgage of property, original Title Deed and chain of documents i. e. C. S Parcha, R. S. Khatian, Mutation Certificate, Non-encumbrance Certificate, Municipal Tax Receipt, Approved plan, Rent Receipt (Upto date) etc. should be checked by a paneled lawyer or by the Bank’s Law Officer..
• Money suit/court cases against any defaulting borrower are to be filed by the branches after obtaining prior approval from Head Office.

Rules of sanctioning loans:

Credit Categories:

As initiated by Bangladesh Bank different kinds of lending were subdivided into 11 categories, and again to 7 prime sectors for fixation of rates of interest by the individual banks on competitive basis depending on the cost of funds, prevailing market condition and monetary policy of the country.

Loans and advances have primarily been divided into two major groups:

      a) Fixed term loan: These are the advances made by the Bank with fixed repayment

schedules. The terms of loan are defined as follows:

Short term                   : Up to 12 months

Medium term            : More than 12 and up to 36 months

Long term                   : More than 36 months

b) Continuous credits: These are the advances having no fixed repayment schedule, but have an expiry date at which it is renewable on satisfactory performance.

Further all categories of loans have been accommodated under the 7 prime sectors as under as:

 Agriculture:

Credit facilities to the agricultural sector falls under this category .It is subdivided into two major heads:

a) Loans to primary producers: This sector of agricultural financing refers to the credit facilities allowed to production units engaged in farming, fishing, forestry or livestock. Loans to processors or traders of agricultural products are not to be categorized as agricultural loans.

Loans to tea gardens for production are treated as agricultural loan, but loans to tea gardens for export should be treated under the category “Export Credit”. Similarly medium and long term loans to tea gardens are categorized as industrial term lending.

b) Loans to input dealers/distributors: It refers to the financing allowed to input dealers and (or) distributors in the agricultural sector. Agricultural loans may include short, medium and long term loans as well as continuing credits. As such, it may fall under the head. (a) Loans (General), (b) Hire Purchase or (c) Lease Financing.

c) Rural & Micro credit: The bank will provide rural credit through rural branches and other rural institutions engaged in rural up liftment through credit delivery. Small loan particularly micro credits will be extended without collateral security through proper supervision and monitoring. Individual supervising agency may be appointed for supervising such micro credits.

 Term Loan for Large & Medium Scale Industry:

This category of advances accommodate the medium and long term financing for capital structure formation of new Industries or for BMRE of the existing units who are engaged in manufacturing goods and services. Term financing to tea gardens may also be included in this category depending on the nature and size.

As the financing under this category has fixed repayment schedule it falls under the head

Loan (General), Hire purchase or Lease Finance.

Term Loans to Small & Cottage Industries:

These are the medium. and long term loans allowed to small & cottage industries Small Industries are presently defined as those establishments whose total investment in fixed capital such as land, building, machinery and equipment (excluding taxes and duties) does not exceed 30 million taka and investment in machinery and equipment (excluding taxes and duties) does not exceed 10 million taka. Cottage industries also fall within this definition.

Bangladesh Bank gives interest subsidy @3% to the Banks on loans extended under this category. No short term or continuing credits are to be included in this category. Medium & Long term weaver credits are also included under this category .Like the Large & Medium Scale Industry it is also allowed in the form of “Loan (Gen), Hire-Purchase or Lease Financing”.

Working Capital:

Loans allowed to the manufacturing units to meet their working capital requirements, irrespective of their size -big, medium or small, fall under the category. These are usually continuing credits and as such fall under the head “Cash Credit (Hypothecation)

Export Credit:

Credit facilities allowed to facilitate export of all items against Letter of Credit /and/or confirmed export orders fall under this category. It is accommodated under the heads “Export Cash Credit (ECC)”, Packing Credit (PC), Foreign Documentary Bills Purchased (FDBP), Local Export Bills Purchased etc.

Commercial Lending:

Short term loans and continuing credits allowed for commercial purposes other than exports fall under this category .It includes import financing, financing for internal trade, service establishment, etc. No medium and long term loans are accommodated here. This category of advances are allowed in the form of  (i) Loan against Trust  Receipt (LTR), (ii) Payment against Import Documents (PAD), (iii) Secured Overdrafts (SOD), (iv) Cash Credit (Hyp), (v) Loan (Gen), etc. for commercial purposes.

Other Lending:

Any loan that does not fall in any of the above categories is considered under the category of other lending. It includes loan to (1) Transport Equipment, (ii) Construction Works including Housing (commercial/residential), (iii) Work Order Finance, (IV) Personal Loans, etc.

Loan Syndication & Structured Finance:

Syndication means joint financing by more than one bank to the same clients against a common security. This is done basically to spread the risk. It also provides a scope for an independent evaluation of risk and focused monitoring by the agent / lead bank. In Syndication financing banks also enter into an agreement that one of the lenders may act as Lead Bank. In such case, lead bank has to co-ordinate the activities at various stages of handling the proposal i.e. appraisal, sanction, documentation, sharing of security, disbursement, inspection, follow-up, recovery, distribution of installments. / interest etc. It may also call meeting on syndication members, whenever necessary to finalize any decision.

The syndicate may generally be worked in two ways:

1. Best effort Method. 2. Underwriting Method. At present the Best effort method is in practice in our country

Types of Syndicated facilities:

• Credit enhanced syndicated loan.
• Working Capital Syndication.
• Loan for New Projects.
• Project Finance Loan
• Local Currency Loan under Structured Finance etc.

 Parties to the Syndication:

• Arranger (Single Arranger / Co-Arranger / Arranger Group). Arranger must obtain mandate from the customer / Borrower.
• Participants (Banks / Financial Institutions etc.).
• The Facility Manager / Agent (Banks / Financial Institutions).

Advantages of Lenders / Banks:

• Large Loan requirement within legal lending limit can be managed.
• For diversification of risk / sharing of risk.
• Scope of diversification across customers and industries.

Advantages of Customers:

• May get a large loan by contacting with one Bank / Arranger.
• Less time consuming and cost effective.
• Answerable to only one Bank.

Important factors for syndication:

• Mandate to be obtained from the Borrower.
• Market appetite – whether it is saleable to the market / participants.
• Whether the participants are confident enough of the capability of the Arranger.
• Whether the due diligence are properly conducted.
• Time Limit for the arrangement / Facility.

Project Finance:

A separate unit for Project Finance has been established in the Head Office Credit Division. The functions of the unit are to appraise / analyze the Feasibility of the project, conduct due diligence, address the risk factors and to be placed before the Head Office Credit Committee / Executive Committee / Board of Directors based on the lending authority.

 SME Lending:

The Bank intends to encourage the small and medium entrepreneurs and hence structured its SME financing activities. The Bank has set the definition of small enterprise in line with Bangladesh Bank guidelines. A special credit scheme under the name and style “Small and Medium Enterprise (SME) Scheme” has been introduced to extend credit facilities to the small and medium entrepreneurs of the country.

 Purpose:

• Contribute to the socio-economic development of the country.
• Encourage small and medium industry especially agro-based industry of the country.
• Participate in reduction of poverty through employment generation and income generating projects.
• Provide financial assistance to small and medium enterprise, which have limited access to the formal financial markets.

Target Customer Segment:

• Micro Enterprise
• Small Enterprise/Business
• Medium

 Extent of Facilities:

Facilities will be determined depending upon the experience of the entrepreneur and the size of the project.

• Small Enterprise
• Medium Enterprise
• Nationality

Product Forms:

• Working Capital Loan-Overdraft/Cash Credit (Hypothecation)
• Project Loan/Term Loan- Hire Purchase

Tenor of Loan:

• Up to 1 (one) for Working Capital Loan
• More than 1 (one) for Project Loan/Term Loan

 Bank Charges/Pricing:

• Rate of Interest: 14%p.a.
• Service Charge: 1% on the outstanding balance on monthly basis.
• Risk Fund: 1% one time to be realized at the time of sanction the loan.
• No charges will be realized for processing the loan proposal.

 Equity of the Borrower:

• New entrepreneur: 10%
• Experienced entrepreneur: 15%.

Equity must be deposited to the bank before availing the facility.

 Repayment Method:

It is done by making payment of specific number of installments.

Security/ Collateral:

• Hypothecation on the inventory, receivables, advance payments, plant & machineries.
• Equitable mortgage over immovable properties with registered Power of Attorney.
• Personal Guarantees of Spouse/Parents/other family members.
• One third party personal guarantee,
• Post dated cheques for each installment.
• Collateral Securities viz. Financial Instruments, Land and Building.

 Training:

Borrowers can also get training from their selected institutions, which must be recognized by the Bank. BIM, BSCIC, MIDAS are preferred training institutions.

Export Finance:

The Bank extended different types of credit facilities to the Export oriented Industries / Exporter from the very inception of the Bank. Recently the Bank has reviewed the position and revised its policy to increase the volume of export business by extending finance to well reputed export oriented industries having a track record. This will bring the bank a substantial profit as well as foreign currency to meet the obligation against import. The Bank extends facilities in both pre-shipment stage and port-shipment stage for working capital like procurement and procuring of raw materials, Packing and transporting of goods, insurance premiums, freight charges, inspection fees etc. Pre-shipment finance will be allowed either against irrevocable Letter of Credit of a reputed foreign Bank or against finance contract from reputed foreign buyers acceptable to the bank.

The bank does not grant any packing credit facility against (i) Restricted L/C and (ii) Revocable L/C. Before negotiation, the dealing officer must check and scrutinize the documents thoroughly to ensure that they have been drawn in exact conformity with the terms and conditions mentioned in the Letter of Credit.

Finance in Garments Sector:

The Bank’s policy is to increase the volume of export business substantially. In view of this the bank has established a separate unit under Head Office Credit Division for handling the Garments Business. In order to take necessary precautions during opening of Back to Back L/C for the import of fabrics and accessories, the Bank has strengthen its monitoring / supervisory functions for protecting the Bank’s interest.

Specialized Loan:

In order to cope with the changes in the economy and society, the Bank’s policy is to develop and introduce new products for different customers group.

 Small Loan Scheme:

With a view to provide financial assistance to the shopkeepers of different shopping center / market situated at various cities of the country, the bank has launched an especial program under Small Loan Scheme.

 Earnest Money Financing Scheme:

With a view to encourage the contractor financing against works, an earnest money financing scheme has been introduced.

 Doctors Credit Scheme:

In order to provide modern Medicare facility to the mass people of the country, a Scheme namely “Doctors Credit Scheme” has been introduced for newly passed MBBS Doctors, Specialist Doctors and Owner(s) of Clinic / Hospital / Diagnostic Centre.

 Personal Loan Scheme:

With a view to cater the Credit needs of Government / Semi Government Officials / Employees of Autonomous Bodies / Banks and financial Institutions / Multinational Companies / reputed private organization and Teachers of Public / private School / Colleges / Universities, a personal loan Scheme has been introduced.

Consumer Credit Scheme:

In order to provide financial assistance for purchasing household consumable items, the Bank has launched an especial credit program under Consumer Credit Scheme to upgrade the living standard of the people who happens to be the main driving force of the economy.

Women Entrepreneurship Development Project:

With a view to encourage women to take active role in Socio-economic activities, an especial project in the name of “Women Entrepreneurship Development Project” has been introduced for extending credit facility for establishment / Expansion of Small Cottage Industry and also as working capital to the project.

 Lease Finance Scheme:

Lease Financing is one of the most convenient sources of acquiring capital machinery and equipment whereby a client is given the opportunity to have an exclusive right to use an asset usually for an agreed period of time against payment of rent. It is a term financing repayable by installment. With a view to encourage the genuine and capable entrepreneurs for acquiring Capital machinery, medical equipment, Computers and various items, the bank has introduced Lease Finance Scheme. Interest rate fluctuates between 17-17.5%. Other terms and condition are applicable like term loan.

Types of Credit Activities:

Depending on the various nature of financing, all the lending activities have been brought under the following major heads:

 Loan (General):

Short term, Medium term & Long term loans allowed to individual/firm/industries for a specific purpose but for a definite period and generally repayable by installments fall under this head. These types of lending are mainly allowed to accommodate financing under the categories (I) Large & Medium Scale Industry and (ii) Small & Cottage Industry.

 House Building Loan (General):

Loans allowed to individual/enterprises for construction of house (residential or commercial) fall under this type of advance. The amount is repayable by monthly installment within a specified period. Such advances are known as House Building Loan (General).

 House Building Loan (Staff):

The Board of Directors of the Bank introduced a well- timed and pragmatic revised House Building Loan Scheme for the employees of the Bank in view of increase of price of land, cost of construction materials, purchasing price of ready-made flat/house in the major cities of the country as also to improve welfare of Executives/ Officers of the Bank. The scheme is called the “Employees House Building Loan Scheme of Mercantile Bank” The loan under the scheme is not claimed as a matter of right but is extended on first come first served basis subject to availability of Annual Budgetary allocation of fund for the Scheme approved by the Board.

Loan Ceiling:

The amount of the loan can not exceed the actual cost and other expenses relating to the land and/or construction of a house or purchase price of a readymade flat/apartment.  The loan ceiling has been determined which are as follows:

Car Loan Schemes

The Transport Policy of MBL for providing Cars to the Executives against loan was approved by the Board of Directors. In the light of increase of value of car, fuel, motor parts, maintenance cost and the cost of living index ,it has been observed that existing monthly Car allowance allowed to the Executives do not commensurate with the real operating cost of the vehicle. As such, the existing Car Loan Scheme may be re-designed in a way that the loan facility does not become a burden for the concerned executives.

It is also observed from the Car Loan Schemes of some Banks that they are providing Car loan to their Executives without any interest.  Moreover, their Car allowances are higher than MBL.

The ceiling of loan, monthly loan installment and monthly car allowance, have been fixed by making a comparison the same with new generation Banks (copy enclosed) are as follows

Cash Credits & Overdrafts (Against Hypothecation of Goods/Stocks)

Advance may are sanctioned to a client against primary security of hypothecation of raw materials and/or finished products. Under this arrangement, the borrower by signing a letter of hypothecation duly stamped, creates a charge against the goods for an amount of debt but neither the ownership nor the possession of the same is passed on to the Bank. Only a right or interest on the goods is created in favor of the Bank, but the borrower binds himself to give possession of the goods to the Bank when called upon to do so.

Hence, in order to secure the advance, Bank normally insists on the borrowers to provide suitable collateral security.

While allowing credit facility against hypothecation of goods/stocks the following points are considered subject to restrictions imposed from time to time:

• The facility is to be allowed only to the trustworthy having undoubted standing and credit worthiness.
• The goods are sellable and borrower has an absolute title in goods.
• Hypothecation advance is allowed by banks only for working capital and not for capital investment.
• The goods are not subject to rapid deterioration due to storage for short or long duration. The prices of the goods are steady
• The goods are not encumbered and/or hypothecated to any other Bank.
• In case agricultural crops, the crops should be of current season and the advance is adjustable before the crops of next season comes in the market.

 Sale of Stocks:

In default of repayment of an advance called upon by the Bank, the Bank has the right to sell the stock pledged to it as security after giving reasonable notice to the borrower. Such notice must be sent by registered letter, with acknowledgement due, whenever it becomes necessary to realize the security. In the event of the registered letter being refused, it must be kept unopened so that it can be produced in the court, if necessary, as evidence of notice having given

Hire-Purchase:

Hire-Purchase is a type of installment credit under which the borrower agrees to take the goods on hire at a stated rental, which is inclusive of the repayment of Principal as well as interest for adjustment of the loan within a specified period.

SOD (General):

These are advances allowed to individual/firms against financial obligation (i.e. lien on FDR/PSP/ BSP/ insurance Policy/Share etc). This may or may not be a continuous Credit.

SOD (Export):

Advance allowed for purchasing foreign currency for payment against LCs (Back to Back) where the exports do not materialize before the date of import payment. This is also an advance for temporary period which is known as export finance and falls under the category “Commercial Lending”.

SOD (Others):

Advances allowed against assignment of work order for execution of contractual works falls under this head. This advance is generally allowed for a definite period and specific purpose. I.e. it is not a continuous credit. It falls under the category SOD “Others”.

PAD (Payment against Document):

Payment made by the Bank against lodgment of shipping documents of goods imported through LCs falls under this head. It is an interim advance connected with import and is generally liquidated against payments usually made by the party for retirement of the documents for release of imported goods from the customs authority. It falls under the category “Commercial Lending”.

 LTR (Loan against Trustee Received):

Advance allowed for retirement of shipping documents and release of goods imported through L/C falls under this head. The goods are handed over to the importer under Trust Receipt with the arrangement that sale proceeds should be deposited with the Bank to liquidate the advances within a given period. This is also a temporary advance connected with import and known as post-import finance and falls under the category ‘Commercial Lending”.

Sector wise allocations of Loans and Advances:

MBL always prefers in well diversified portfolio investment. The portfolio continues to be free from undue concentrations in terms of exposure of any specific industry.

Source: Annual Report 2009

SWOT Analysis

SWOT analysis is an important part for evaluating the company’s Strengths, Weaknesses, Opportunities, and Threats. It helps the organization to identify how to evaluate its performance and scan the micro as well as macro environment.

As I was engaged to identify the current position of Mercantile Bank Limited in the competitive in the market, it is very necessary to have the SWOT analysis to identify the Strengths, Weaknesses, Opportunities, and Threats of MBL. This is one of the popular way by which one get take necessary action to improve their business because SWOT analysis is completely depend on the market. The SWOT analysis of MBL is given below:

Strength (S)

Mercantile Bank Limited is having the following strengths:

• Transparent and quick decision making.
• Efficient team of performance.
• Satisfied customers.
• Customers do not need to give any collateral to get the money.
• Diversification to perform business operation.

Weaknesses (W)

Mercantile Bank Limited is having the following weaknesses:

• Installment period and installment time duration is relatively low.
• Long management hierarchy.
• MBL has no promotional tools for their clients.
• Service charge and risk fund is 1% that is too high.
• Low geographical coverage of service
• Lack of success plan.

Opportunities (O):

Mercantile Bank Limited is having the following weaknesses:

• Huge demand from the customer.
• The bank can earn high profit from this sector.
• Further diversification of product.
• As the economic condition of the country is not so good, customers will have need of this loan.

Threats (T):

• People in Bangladesh have less involvement with the bank.
• Competitors are arising day by day.
• Switching of the customers to the other banks.
• Globalization of banking business.
• Borrowers are having the tendency to be the defaulter.
• Political instability in the country.

FINDINGS & ANALYSIS

Findings:

During internship period in Mercantile Bank Limited, Satmasjid Road Branch the following problems or shortage are observed.

• Lack of sufficient executives or officers especially in the credit division hampers the loan sanctioning process in time.
• MBL takes relatively more times in granting loans advances to different parties. It seriously discourages the persons who are inclined to get loan for their urgent purpose. Mode of disbursement, charge documents etc. Head office takes so longer time in processing and approval of corporate loan. The total sanctioning process event takes month after month to give the final decision.
• MBL does not sanction loan to all sectors equally as they require, rather it concentrates its loan and advances within some limited fields and category.
• MBL has Credit Card facilities but ATM booths are located in some commercial hub in the city. Again the terms and conditions of the credit card are not changes with the changing environment. That’s why ATM card holders most often don’t take credit card facilities even in some cases employee of MBL use other banks credit card.
• There is discrimination in sanctioning sector wise breakup of loans and advances.                    Consumer credit schemes (CCS) are more popular and require things among the people of various classes but MBL don’t have any customized schemes targeting various classes of people.  Even the effective rate of interest is very high. And the terms and conditions of CCS loan are also very inconvenient and discourage people.

Conclusion:

Lots of new commercial bank has been established in last few years and these banks have made this banking sector very competitive. So, now banks have to organize their operation and do their operations according to the need of the market. Banking sectors no more depends on a traditional method of banking. In this competitive world this sector has trenched its wings wide enough to cover any kind of financial services anywhere in this world. The major task for banks, to survive in this competitive environment is by managing its assets and liabilities in an efficient way.

So at last I would like to say that every organization has its positive as well as negatives and in case of Mercantile Bank Limited existence of the later one is less then the earlier one and as the management is determined to reach the pick of success it seems that in near future the negatives will be eliminated. Eleven years is a very short span of time and the organization, which can establish itself as one of the most reputed private commercial Bank in the country within this short period deserves special credit and with their able leaders, Mercantile Bank will reach the highest level of success very shortly. I wish the bank all success prosperity in their field.

Recommendations:

• MBL should disburse their loans in various sector rather than specific scheme.
• Loan sanctioning and disbursement procedure should be easy and flexible being consider the requirements of different classes of people.
• Amount of loan can be raised in proportion with the existing demand of people in SME loan, CCS and Personal loan. SME loan can be popular among the small trader and lower income group people like MBL DPS.
• MBL credit Policies can be revised being considered with the increase demand of telecom, transportation, Knit and packaging and plastic industry.
• Sector wised loan in agro based industries and firms, lather technology can be convenient and flexible for the receiver.

BIBLIOGRAPHY

1. Annual Report 2009

2. www.mblbd.com

3.  MBL database

4. Credit Manual of Mercantile Bank Limited