Credit Worthiness Analysis on Mercantile Bank

Main purpose of this report is to Credit Worthiness Analysis on Mercantile Bank Limited. Other objectives are analysis on credit management activities specially- credit policy and practices, credit appraisal, credit-processing steps, credit management, financing in various sector and recovery, loan classification method and practices of Mercantile Bank. Finally identify and suggest scopes of improvement in credit management of MBL.

Objectives

Study or working on any subject must have objective. It may be only one objective or a combination of some objectives. My study also have objective. Before submitting the report I need to discuss briefly my Main Objective and related Specific Objectives.

Main Objective

The basic objective of this paper is to be acquainted with how a banking financial institution evaluate individual potential borrower – based on which sanction different of credit limit to different customer and charges different interest rate to different borrower. That is what factors determine these decisions.

Specific Objectives           

The specific objectives are:

• To analysis- the pros and cons of the conventional ideas about credit operation of a Bank.
• To have better orientation on credit management activities specially- credit policy and practices, credit appraisal, credit-processing steps, credit management, financing in various sector and recovery, loan classification method and practices of MERCANTILE Bank Limited (MBL).
• To have an adequate knowledge about which factors mostly affects the loan sanctioning decisions, what amount of loan should be sanctioned to a particular loan applicant depending on his credit worthiness.
• To compare the existing credit policy of MBL with that of best practices guideline given by Bangladesh Bank, the central bank of Bangladesh.
• To identify and suggest scopes of improvement in credit management of MBL.
• To get an overall idea about the performance of MERCANTILE Bank Ltd.
• To fulfill the requirement of the internship program under BBA program.

Methodology

Sources of Data: The followings are the sources and methods of data collection for the purpose to prepare the report:

Primary Sources: The primary data have been collected mainly though working experience gathered by working through internship period and survey. The survey includes the following:

1. Observation
2. Interview
   1. Personal Interview
   2. Telephone Interview
   3. Personal interview through questionnaire

Besides these Oral & informal interview with officers and employees of the MBL and also Face to face meeting with the Company personnel and Face to face meeting with the different people.

Secondary Sources: The secondary data have been collected from different publications of different Private Banks in Bangladesh, publications of Private Banks, publications of MBL and related Magazines and Websites.

Organization Overview

Mercantile Bank Limited was incorporated in Bangladesh as a banking company under the Company Act 1994 and commenced operation on 2nd June 1999. Numerically it is just another commercial bank, one of many now operating in Bangladesh, but the founders are committed to make it a little more different and a bit special qualitatively. This bank will have a new vision to fulfill and a new goal to achieve. It will try to reach new heights for realizing its dream.

Mercantile Bank Limited, “A Bank for the 21st Century”, it is not a mere slogan. The Bank has been manned with talented and brilliant personnel, equipped with modern technology so as to make it most efficient to meet the challenges of 21st centuries.

As regard the second slogan of the bank “Efficiency Is Our Strength” is not a mere pronouncement but a part of their belief, which will inspire and guide them in there long and arduous journey ahead. Now the slogan is “Banglar Bank”.

Historical Background of MBL

The declaration of the Government’s bold and far sighted decision to allow banks in the private sectors to play its due role in the economy of Bangladesh, have started the process of creating new and dynamic financial institutions. MBL is one such institution. The emergence of MBL in the private sector is an important event in the banking arena of Bangladesh. MBL came into existence as a Public Limited Co. incorporated in Bangladesh on May 20, 1999 with the primary objective to carry on all kind of banking business in and outside Bangladesh and to give effect to the bank of credit and commerce international limited scheme, 1999. Framed by the Bangladesh Bank with a view to safeguard the interest of the depositors. MBL commenced its business from June 20,1999 with authorized capital 80 crore and paid up capital 24.5 crore. Famous 30 entrepreneurs gave helping hand to set up the bank at that time. Then Abdul Jalil was elected as chairman of the Board of directors. The bank stood 42 branches all over the country up to 31st December, 2008.

Company Analysis

Quantitative Analysis:

CAMEL Rating

The CAMEL rating system provides a general frame work for evaluating and assimilating all significant financial operational and compliance factors in order to assign a seminary or composite supervisory rating to each regulated commercial bank. The purpose of the rating system is to effect in a comprehensive and uniform fashion on institutions financial condition, compliance with laws and regulations and overall operating soundness. In addition it serves as a useful tool for the standard of a financial institution. It is the other operator to assess the grade of banks.

Mercantile Bank Limited

CAMEL Rating

For the year of 2007

Earning

Capital Rating

Capital & Reserve Total Risk

Liquidity Rating

Composite Rating

From the quantitative analysis it is found that the average rating of MBL is 1.7 which is between 1.5 to 2.4. According to standard rating the rating of those banking institution having this range is 2, ie, the rating is satisfactory.

Operation of MBL

The importance of the mobilization of savings for the economic development of our country can hardly be over emphasized. The bank considers savings and deposits as lifeblood of the bank. More the deposit greater is the strength of the bank. So they intend to launch various new savings schemes with prospect of return duly supported by a well-orchestrated system of customer services. Technologies such as computer, ATM, telecommunication etc. all would be harmonized and adapted to the system in order to provide found the clock and any branch services to the clients.

The Three main operating divisions of Mercantile Bank Ltd. are given here:

General Banking

It is the most important side for a bank. Bank is nothing but a middleman between lenders (surplus sector) and borrowers (deficit sector). To provide loan, bank needs a huge amount of money from the lenders. General banking is the side where bank offers different options to the clients to deposit (save) and remit their money. To invite the clients, bank offers different options in front to their clients. Most of these options are very much similar between the banks, but the customer services and facilities may not be the same.

Divisions of General Banking in MBL:

• Account Opening
• Clearing
• Remittance

Account Opening:                 

Usually a person needs to open an account with the bank to take services from it. Without opening an account, one can get a few services from the bank. So we can say that banking begins with the opening of an account with a bank. Generally, there are three types of accounts in our country’s banking system.

1. Current Deposit Account (CD Account);
2. Savings Bank Account (SB Account);
3. Time Deposit Account;

current deposit:

Current account is purely a demand deposit account because the bankers are bound to pay the amount to the account holder on demand at any time. It is a running and active account which may be operated upon any number of times during a working day. There is no restriction to the number and the amount of withdrawals from a current account.

savings bank account:

This is an account for a student, an employee, a widow and an organization that is not working for profit. It pays interest to the client and the service charge of this account is less than the CD Account.

fixed deposit A/C:

A deposit that is received for a specific period of time, paid with interest after the period is over, is called fixed deposit. It is also called Term Deposit.

Clearing:

There are two type of clearing:

• Out-ward Clearing
• In-ward Clearing.

Other banks cheques which are submitted to MBL for collection is known as Out-Ward Clearing Cheque. The bearer of the cheque has to have an account in MBL to clear the cheque. After submission of the cheque, the bearer has to fill up a deposit slip against the cheque, then the in charge of that department entry the information of the cheque in the log book and send the deposit slip to the computer section for computer entry. At the end of the day, the in charge make clearing slip for each cheque through computer using a customize software (NIKASH) supplied by Bangladesh Bank (BB). And finally these cheques are sent to the BB clearinghouse then clearing house sends these to the different banks. Remittance refers to sending of money that is the process of sending money from one place to another is called remittance. Banks remit funds one place to another through

Telegraphic Transfer:

Telegraphic Transfer, it may branch Telephonic or TELEX Transfer means fund/money transfer from one branch to another branch not in same area. Sometimes the remitter of the funds requires the money to be available to the payee immediately. In that case the banker is requested by him to remit the funds telegraphically. The bank passes T.T by a secret code, which input by the GB in-charge & branch Manager.

Remittance:

Remittance refers to sending of money that is the process of sending money from one place to another is called remittance. Banks remit funds one place to another through the network of their branches. The main instrument for remittance of funds is drafts, mail transfer, telephone transfer and traveler’s cheques.

Bank Draft:

A bank draft is an unconditional order issued by one branch of a bank on its branch to pay a certain sum of money to the named person or order of demand.

Payment Order (P/O):

Pay Order gives the payee the right to claim payment from the issuing bank. It can be encashed from issuing bank only. Unlike check, there is no possibility of dishonoring pay order because before issuing Pay Order, bank takes out the money of the pay order in advance. Pay Order cannot be endorsed or crossed and so it is not negotiable instrument.

Credit Department

It is a very important department and it’s a major income side for a bank. This department mainly deals with loans and advances. There is two major part of this department:

1. Funded Part (Providing Cash Amount to the Creditor).
2. Non-Funded Part (No Cash Amount Involve).
3. a) Funded Part:

Over Draft and loan comes under this section. By taking a collateral (most of the time holding nay financial instrument, like FDR, Sanchay Patra etc.) from the borrower bank allow to take over draft facility is a continuous process (borrower can deposit and withdraw money at same time) borrower has to pay interest on the withdrawn money. Interest of credited amount is 15%. To provide a loan, bank job is to do-lending risk analysis. There are two types of loan:

• Time loan (not more than one year).
• Term loan (more than one year).

Non-Funded Part:

There is no cash amount involved in this kind of loan. BLC (Bill for L/C) and bank guarantee falls in this kind of loan. In case of BLC foreign exchange department mainly deals with it.

Foreign Exchange

This department deals with foreign currency and the transaction of it. The major jobs of this department are listed below:

• Letter of Credit (For Export and Import).
• Dollar/Traveler Cheque (TC) endorsement,
• Foreign Remittance.
• Foreign Currency Account

Letter of Credit (L/C)

In case of any foreign trade there must be a L/C procedure. As we know, there is no guaranteed relationship between importer and exporter. As a result, they use a media to secure their goods and currency. So, exporter and importer use their respective bank as a media and L/C is a legal obligation between exporter and importer. In case of import the importer have to submit necessary documents to his respective bank (the issuing bank).

Dollar and Traveler’s Cheque Endorsement:

MBL is an authorized dealer of American Express T/C. At the same time, they can buy and sell T/C and dollar every morning they get a telex from head office, which carries the rate of foreign currency of that day. MBL do not fix the rate by them, they use the rate of Janata Bank. At the end of each month, they submit all supportive documents and transaction condition of the whole months and balance to Bangladesh Bank and their head office.

Foreign Remittance:

Foreign DD and paying or receiving any bill from foreign country is known as foreign remittance. The amount of foreign remittance is very significant in MBL.

Foreign Currency Account:

A foreigner a wage earner working in foreign country can open this account. MBL mainly maintain Dollar account, but it is possible to open an account in other recognize foreign currency (British pound, Deutsche Mark, Franc etc.). The account holder gets a cheque book against the account and has to mention the amount m respective currency.

Credit profile

The basic functions of bank are deposit extraction and credit extension. Credit is the hub of banking business. It helps this kind of organizations to earn more than 50% of the total revenue. Managing credit operation, thus, is the crying need for any bank. In case of failure in credit management, a bank may face extinction. It is, therefore, necessary that a bank has a proper credit profile that guides the credit operation of the bank in an effective manner. For proper management of credit each and every bank follows the profile for smooth approval, direction, monitoring and review of lending operation.

 Credit Policy of Mercantile Bank Limited

A credit policy includes all rules relating to loans and advances made by the bank to the borrowers. It includes types of credit extended by banks, method of judging the credit worthiness of borrowers, the collateral or securities that are accepted by the banks and so on. This policy guidelines refer to all credit facilities extended to customers including placement of funds on the inter bank market or other transactions with financial institutions. MBL Credit policy contains the views of total macro-economic development of the country as a whole by way of providing financial support to the Trade, Commerce and Industry. Throughout its credit operation MBL goes to every possible corner corners of the society. They are financing large and medium scale business house and industry. At the same time, they also takes care entrepreneur through its operation of Lease Finance and some Micro Credit, Small Loan Scheme etc. As a part of its Credit Policy MBL through its credit operation maintains commitment for social welfare. The bank is coming up with a scheme where the under privileged children will be given financial support for education and self-employment.

From operational aspects it is observed that as a matter of policy—

1. Charging of interest is flexible depending on the proposal and the customer.
2. It takes care in maintaining proper mix of short medium and long term finance for a period not exceeding 5 years.
3. MBL puts emphasis on the customers, i.e., the man and business not on the security in selecting borrowers.
4. It takes care of diversity in credit portfolio.

Sound Principles of Lending

Sound principle of lending is obvious to avoid loan default tendency and risk elements to safeguard of public money as well as business of a bank. So, there must be a principle of advance and efforts should be made to make it a sound one for which in depth study must be made on the following points by this bank.

1. When the loan is to be given
2. Why the loan is to be given
3. How the loan is to be given
4. What may happen after disbursement of the loan
5. Generally what happen (from past experience) after disbursement of the loan
6. Is it hopeful that the borrower will repay the loan?
7. Whether loan should be given only in private sector or also in government sector as well.
8. Whether only secured loan will be extended or provision should be kept for clean loan also
9. Whether only short term and mid term loan will be considered or long term will also be considered?
10. Whom to be financed?
11. Whether loan will be extended to trading sector only or industrial sector will also be considered.

Besides the above mentioned decision, the managers must ensure materialization of following safe guards for proper use and timely realization of loans, commission. Interest etc and minimize the risk and hazards:

1. Safety of Fund: Safety means the assurance of repayment of distributed loans. This depends mainly on integrity, business behavior, reputation, past experience in the particular line of business, financial solvency, quantum of own equity in business, capability to run business efficiently, capacity and willingness to repay the loan etc. of the loan.
2. Security: It must be ensured that repayment of the loan is secured and for this purpose manager must retain security against loan to fall back upon incase of borrower’s default. The securities must possess required basic qualities such as possession, title deed, parches etc.
3. Liquidity: The borrower should have liquid assets so that he can adjust liability on demand and as much as possible loan itself should be quasi liquid so that it can be realized on demand in case of need.
4. Purpose: Purpose of a loan should be production, development and economic benefit oriented.
5. Profitability: This is applicable both for bank and the borrower.
6. Diversification: Diversification means to distribute the loan to a large number of borrowers rather to a small number of borrowers. This will increase the services of the bank and it will reduce the risk of loan recovery.
7. National Interest: Nothing can be done legally if it jeopardizes national interest in any way.
8. Credit restriction imposed by Central Bank: At the time of sanctioning loan, the commercial banks must have to follow the restrictions that are imposed by Bangladesh Bank from time to time.

 Financial Data Analysis:  The credit manager has to compare financial statements of at least three years. For this s/he takes help of different ratios such as liquidity ratio, solvency ratio, profitability ratio and activity ratio. S/he also needs to examine bank account statement of the applicant very keenly. In addition to analysis, the manager should visit the business concern to get a true picture of it.

 Industry Analysis: In this part, the manager is required to study the business behavior, which includes market demand, competitors and government barriers.

Lending Risk Analysis: It is a systematic and structural way to assess lending risk, which covers all the factors described above. Here a form has to be completed by the lending officer. If lending risk is found to be low, financing can be done and vice versa.

Finally based on the above information provided by the loan applicant and after analyzing all the information and information provided by Credit Information Bureau. (CIB) a credit committee of a bank takes the lending decision.

Credit Facilities Extended by MBL

Lending of money to different kinds of borrowers is one of the most important functions of Mercantile Bank Limited (MBL). Major amount of income of this   Bank comes from its lending. MBL makes advances to different sectors for different purposes, such as financing in trade and commerce, imports and exports, industries, transport, house building, agriculture etc.

3.4.1 General Loan

When an advance is made in a lump sum repayable either in fixed monthly installment or in lump sum and no subsequent debit is ordinarily allowed except by way of interest, incidental charges, etc it is called a loan. The whole amount of loan is debited to the customers name on a loan account to be opened in the ledger and is paid to the borrower either in cash on by way of credit to his current/ savings account. It is given against Personal guarantee, hypothecation of goods and land & building.

Eligibility: Loans are normally allowed to those parties who have either fixed source of income or who desire to pay it in lump-sum.

Interest Rate: 16%

Loan disbursement system: One time.

Terms and Conditions:

• Bank reserve the right to cancel or amend the terms and  conditions  partly  or wholly  at its directions  without  assigning  any reason
• When the principal debtor fails to fulfill this obligation or promise, liability bestow on guarantor.

Cash Credit (CC) Hypothecation                        

Cash credit is another method of lending by MBL. Under this system, the banker specifies a limit called the cash credit limit, for each customer is permitted to borrow against the security of tangible assets or guarantees. Cash credit in its truest sense is against pledge of goods. Cash credit is sometimes allowed against hypothecation of goods.

In case of cash credit hypothecation the ownership a possession of the goods remain with the borrower. By virtue of the hypothecation agreement the bank can take possession with the borrower defaults

Eligibility: Hypothecation advances are normally allowed by bank to limited companies and businessmen for their working capital and not for any capital investment.

Interest Rate: 15%-16% which depends on the relationship between the banker and the client.

Renew System: It can be renewed after one year.

Terms and Conditions:

• Insurance policy to be obtained against the stocks to be hypothecated to cover in fire and RSD at the cost of the customer.
• Stock report to be submitted on monthly basis.
• Bank reserve the right to cancel or call back the sanctioned credit limit.

House Building Loan                                        

Another form of consumer credit is house building loan. The main objectives of the bank is to provide financial assistance for the construction, repair and remodeling of residential houses. Loan is also allowed to buy apartment. The feature of this loan is that the customer get 50% loan of the land value. Usually a deposit has to be paid the customer and the rest of the purchase price is spread over in a period of six months, two years or sometimes even longer; the article being regarded as the property of the bank until the final payment has been made.

Eligibility: This loan is allowed for the business person and service holder.

Interest Rate: 16%

Packing Credit

Packing credit is essentially a short-term advance granted by MBL a to an exporter for assisting him to buy process, pack and ship the goods. The credit is generally extended for payment of freight, handling charge, insurance and export duties. The packing credit advances docs not normally extend 180 days and has to be liquidated by negotiation/purchase of the export bill covering the particular shipment for which the packing credit was granted.

Eligibility: Packing credit facility has given for small-scale indigenous manufactures or exporters.

Interest Rate: 15.5%

Terms and Conditions:

• Disbursement will be made be made after completion of all formalities as per sanction terms.
• The amount of advance against packing credit will be adjusted from the amount payable to exporter on negotiation or purchase of bill.
• The exporter’s letter of credit should be irrevocable, constricted and valid and confirming bank must mark lien on it.

LTR (Loan against Trust Receipt)

MBL has given the facility of LTR under this arrangement, credit is allowed against trust receipt and the exportable goods remain in the custody of the exporter but he is required to execute a stamped export trust receipt in favor of the bank. Where in declaration is made that he holds goods purchased with financial assistance of bank in trust for the bank.

Eligibility: Loan against trust receipt is generally granted to Exporter for exportation of good.

Interest Rate: 15.5%-16% which depends on relation and frequency of taking loan.

Terms and Condition:

• Disbursement will be made after completion of all formalities as per sanction terms.
• Supplier credit report to be obtained before opening of L/Cs.
• Excess drawing over the sanction limit is strictly prohibited.

PAD (Payment against Document)

A loan facility provided by the banks to the customers against document/bills, like, Bill of Lading, Warehouse keepers Certificate/receipts, Railway receipt. Delivery order, Dock Warrant. In other word, payment made by the Bank against lodgment of shipping documents of goods important through L/C falls under this head. It is an interim advance connected with import and is generally liquidated shortly against payments usually made by the party for retirement of the documents for release of imported goods from the customer’s authority. If falls under the category “Commercial Lending”.

Eligibility: This type of credit facilities is given generally Exporter and importer.

Interest Rate:  15.5%

Terms and Conditions:

• In the of default  by the borrower  bank  has  the  right to sell  the
• Insurance policy to be obtained against the goods  covering  fire and  RSD  risk  at  the  cost of
• Bank reserve the  right  to  cancel  or amend  the  terms  and  conditions  partly  or wholly  at its  direction  without  any  reason

Secured Overdraft (SOD)

It is a continuous advance facility. By this agreement, the banker allows his customer to overdraft his current account up to his credit limits sanctioned by the bank. The interest is charged on the amount, which he withdraws, not on the sanctioned amount. When a current account holder is permitted by the banker to draw more than what stands to his credit, such an advance is called an overdraft. The banker may take some collateral security or may grant such advance on the personal security of the borrower. MBL has given this overdraft facility to clients.

Eligibility: Overdraft facilities arc generally granted to businessmen for expansion of their business, against the securities of FOR, MSP, MUDS, DBDS, SSS, against earnest money, work orders and general/others.

FDR, MSP, MBDS, DBDS are together called secured overdraft against Financial Obligation. For this, it can be classified in three types of SOD. These are follows:

1. SOD Financial Obligations
2. SOD against Earnest Money
3. SOD Work Order

SOD Financial Obligation

a) FDR (Fixed Deposit rate):

When   deposited by a customer is not repayable on demand and is payable only after the expiry of a specified period from the date of deposit or after a specified period of notice.

Interest Rate: Either FDR +2.5%

Or   DBDS, MPS, SSS, MBDS+3%

 b) MSP (Monthly Sanchay Prokolpo):

It is also known as “Monthly Saving Scheme”. The prime objective of this scheme is to encourage people to build up a habit of saving. Under this scheme, one can save a fixed amount of money every month and gel a lucrative amount of money after five, eight or ten years.

 c) MBDS (Monthly Benefit Deposit Scheme)

Under this scheme, one can deposit certain amount of money for five or more years and in return he will receive benefits on monthly basis. Benefits start right from the first month of opening an account under the scheme and continue up to five or more years.

 d) DBDS (Double Benefit Deposit Scheme)

Under this scheme, depositor’s money will be doubled in 08-year period and the scheme is one of the highest yielding deposit schemes in Bangladesh.

e) SSS (Special Saving Scheme)

Under this scheme, depositor’s money will be tripled in 11-year period. The main attraction of the scheme is that one can get his money after one year and onward with attractive benefits.

SOD against Earnest Money

Contractors have to participant in tender for being awarded of the work. For getting better probability, contractors usually participate in various names in the tender. Bank makes finance to the participating contractors for acquiring the works. If a contractors wish to participate in 10(ten) works. Bank receives the value of 1 (one) earnest money and finance the rest 9(nine) earnest money. Bank also keeps certain percentage of margin for adjustment of the interest amount no collateral security is required for this finance.

Interest Rate: 17.5%-18.5%

SOD against Work Order

This loan is specialized for contractor and suppliers. Bank makes finance to the customers after being awarded of a work order. The work order is assigned with the bank so that payment of bill is paid only through the account marinating with the lending bank. Maximum 20% value of the work order is paid to the contractor as loan. The loan amount is credited to the account of the borrower and from each bill certain percentage is debited for adjustment of the loan. Maximum validity period of the credit facility is up to the validity period of the work order.

Interest Rate: 16%

Car Loan

Car loan is a kind of consumer credit scheme. But the maximum limit on this specified type is different from others. The maximum limit is higher than other types of consumer credit scheme.

Eligibility: This is one kind of consumer credit scheme. So the qualification should be the same as required for consumer credit scheme.

Interest Rate: 16%

Staff Loan                   

Mercantile bank Limited provides advances to the staff for purchasing house building, Sanchay Patras, and meeting up certain requirements like family medical, personal medical, wedding purposes. Bank provides this facility under installments. Loan able amount varies on the basis of purpose.

Eligibility: The borrower must be executive and staff of this Bank.

Interest Rate: 10%

Hire Purchase

Another form of consumer credit is Hire Purchase facility also given by MBL. The feature of hire purchase is that usually a deposit has to be paid and the rest of the purchase price is spread over a period of six month, two years or sometimes even longer, the article being regarded as the property of the bank until the final payment has been made.

Eligibility: Hire Purchase is normally allowed to those persons who have either fixed sources of income or who desire to pay it in lump sum.

Interest Rate: 15.5%-16%

Lease Finance

This scheme has been designed to assist and encourage the genuine and capable entrepreneurs and professionals for acquiring capital machineries, medical equipments, computers and other items which may help them to be economically self-reliance.

Eligibility: Help the entrepreneurs to buy Capital Machinery, Medical Equipment, Automobiles, Lift and Generator etc.

Interest Rate:  15%-16%

Micro Credit

The credit program that promotes small credit to the poor people for creating self-employment with a view to alleviating their poverty and attaining sustainable development is referred here as micro-credit program. It is especially related to micro level development. But MBL thinks about micro-credit in different way. They are providing micro-credit facilities (mainly) among the mid level people. MBL has some strong reason behind it. Their main objective for providing micro-credit program in banking sector are given below-

• To small entrepreneurs for developing his business,
• Newly established doctors-for better treatment in the society,
• Purchase household equipment’s- for leading comfort life and fulfill the hope of humanity,
• Rural development.
• Increase self employment.

Different Micro Credit Program of MBL:

MBL provides different types of micro-credit programs among the poor/mid-class/lower mid-class categories person. Mainly the bank provides micro-credit loan among the minimum a fixed income group of people. Consumer Credit is a relatively new field of collateral-free finance of Bank. People with limited income can avail of this credit facility to buy households goods including car, computer and other consumer durable.

The main objectives of this scheme are to help the lower mid-class people for purchase different types of household equipment’s. And also help to the mid-class people for buy car/microbus for personal use.

 a) Small Loan Scheme (SLS)

This scheme has been evolved especially for small shopkeepers who need credit facility for their business and cannot provide tangible securities. Maximum loan amount of this program is to TK. 2 lac, which is payable within 2 years (extensional). Creditors have to pay 15% interest, Risk Fee 0.5% and Supervision fee 1% (for one time).

Eligibility: Small and Medium Entrepreneur are financed this loan.

Interest Rate: 16%

b) Personal Loan Scheme

Personal loan is another method of lending by MBL. Under this system, the banker specifies a limit called the credit limit, for each customer, up to which the customer is permitted to borrow against the security of tangible assets of guarantees.

Eligibility:  To have personal loan scheme, the loan applicant should be –

• Government Officials
• Semi-Government Officials
• Employees of Autonomous Bodies
• Employees of Banks and other Financial Institutions
• Employees of Multinational Companies
• Employees of reputed private Organizations
• Teachers and staff of public/private Universities
• Teachers of recognized Schools and Colleges

Interest Rate: 16%

c) Consumer Credit Scheme (CCS):

Consumer credit is a relatively new field of micro-credit activities; people with limited income can avail of this credit facility to buy any household effects including car, computer and other commercial durable. Mercantile Bank Limited plays a vital role in extending the consumer credit.

Eligibility: The borrower must be confirmed official of any of the following organization-

• Government Organization
• Semi-Government Organization
• Multinational Organization
• Bank and Insurance companies
• Reputed Commercial Organization
• Professionals

Interest Rate:  16%

Terms and Conditions:

• Creditor will procure the specified goods from the dealer / agent / shop(s) acceptable to the bank.
• All the papers/ cash memos etc. related to the procurement of the goods will be in the name of the ensuring ownership of the goods. The ownership shall be transferred in the name of the client after full adjustment of bank’s dyes.
• The client shall have to bear all the expenses of license, registration and insurance etc. of the articles wherever necessary.
• The client shall have to bear all the cost of repair and maintenance of the acquired articles.

 d) Doctors’ Credit Scheme:

Doctors’ Credit Scheme is designed to facilitate financing to fresh medical graduates and established physicians to acquire medical equipments and set up clinics and hospitals.

Eligibility: Only the doctors are financed through this scheme.

Letter of Credit

Opening or issuing letter of credit is one of the important services provided by MBL. A letter of credit is a document authorizing a bank to pay the bearer a specified sum of money; it provides a useful means of settlement for a foreign trade transaction, the purchase establishing a credit in favor of his credit at a bank. Letters of credit are of two types:

• Traveler’s letter of credit issued for the convenience of the traveling public and
• Letter of commercial credit issued for the purpose of facilitating trade transaction.

Eligibility: Letter of Credit facilities are given to exporter/manufacturer/producer and importer for exportation and importation of good.

Interest Rate:  17.5%

Terms and Conditions:

• It should stipulate the name of the loan.
• It should bear the name of the designated bank.
• Items mentioned in LCA form must contain with the permissible items.
• The bank officer periodically inspect  the goods  and  verify  that they  conform  the  top  quality  and  quantity  as mentioned  in the  particular letter  of  credit.
• In case of first class customer , the facility  may, however , be granted  against  firm’s  contracts  with  overseas buyer.

Bank Guarantee

Guarantee has been defined very clearly in various statues of law in various parts of the world; however, the substance of all these definition is same. The Contract of Guarantee has been defined under Section 126 of the Contract Act which reads:

“A contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default”.

In the course of normal trading, customer may need guarantee to be given by the bank to support a trading transaction or bank may take guarantee as security against advance.-

Eligibility: This loan is allowed for the business person.

Disbursement Situation of Different Types of Loan

Types of Borrowers                                                 

A borrower should be legally competent to enter into a contract, as borrowing is a contract between the lender and the borrower. Minors, lunatics, drunkards and insolvents cannot enter into a valid contract and cannot, therefore, be entertained as borrowers. Before entertaining an application for loans and advances, banker should verily borrowers’ capacity to contract and, his power to borrow, so as to effectively charge the security offered as a cover for the advances.

There are certain conditions to be fulfilled by the consumer to apply for the loan. Consumer should be eligible to apply for a loan. Service person get loan only when the retirement date must be after the date of expiry of loan. The target customer of the Bank is all people. Business, service, doctors, suppliers, contractors are he customers. Now it can be classified into four types:

 Types of Borrower at a glance

Loan Recovery

To lend money is an easy matter. To be sure of recovery of the loan is not that easy. In whatever form bank advances are granted, they are repayable on demand or at the expiry of some fixed period. Overdraft and cash credit are legally repayable on demand. Loans are repayable on the expiry of the periods for which they are granted. In case loan is repayable in installments and default occurs in the payment of any installment, entire loan usually becomes immediately recoverable at the option of the bank. Letter against trust receipt, payments against documents, letter of credit are payable on maturity. Banker has to keep a close watch on the borrower and to take adequate follow-up measures for ensuring that recovery of advances is smooth and timely.

Most of the loan of this bank is recovered but not 100%. Situation of loan disbursement and recovery of MBL is given below:

Classification of Loans and Advances

The management of the institution as well as their supervising authority i.e. the Central Bank evaluates the assets of the institution keeping in view the aforesaid aspects. This evaluation at stipulated intervals is called “Classification of Advances”. It is in fact, placing all loans and advances under pre-determined different heads/classes based on the depth of risk each and every loan has been exposed to and to bring discipline in financial sector so far risk elements concerned in credit portfolio of banks.

At present loans and advances are classified under three heads according to degree of risk element involved these are-

1. Sub-standard
2. Doubtful
3. Bad

1.Substandard: A loan value of which is impaired by evidence that the borrower is unable to repay but where there is a reasonable prospect that the loan’s condition can be improved is considered as substandard.

2. Doubtful: A loan is doubtful when its value is impaired by evidence that it is unlikely to be repaid in full but that special collection efforts might eventually result in partial recovery.
3. Bad: A loan is considered as bad when it is very unlikely that the loan can be recovered.

Good loans are classified as un-classified loans. Naturally depth of risk is more in doubtful or bad loans than unclassified ones.

Conclusion

The Banking sector in any country plays an important role in economic activities. Bangladesh is no exception of that. As because it’s financial development and economic development are closely related. That is why the private commercial banks are playing significant role in this regard. This report focused on and analyzed Operational Performance of Mercantile Bank Limited, Green Road Branch. Mercantile Bank Limited is a new bank in Bangladesh but its contribution in socio-economic prospect of Bangladesh has the greater significance. Total deposit of MBL Branch was Tk. 24959.5 million as on 31^st December 2005, whereas total Loans and Advances were Tk 21857.7 million . Here we observe its deposit figure is not so strong, so the bank should take necessary action for increasing deposit promptly. MBL attaining offer special deposit scheme with higher benefits, which is a crying need for long-term position in financial market. Because of the entrance of more banks in the financial market, deposits will be spreaded over. So it is high time to hold some permanent customers by offering special deposit scheme otherwise in future amount of deposit may come down. To strengthen the future prospect of branch, it is emergency to collect more deposit. Comparably the MBL’s local remittance is less than the other banks because of less number of branches. MBL should extend its branches to become a sustainable financial institution in this country. Yet last year MBL has obtained second position in CAMEL rating. As a new branch Green Road Branch of MBL has been able to maintain its recovery position in sector-wise credit financing is up to the satisfactory level. At last it should give more emphasis in this sector to acquire more profit.

Descriptive Analysis of Factors Under Consideration

MBL provides different types credit facilities to its customers. Different types of credit facilities have different terms and conditions. MBL considers some factors in determining interest rate that include loan purpose, no of installment, personal guaranty, collateral, age, experience, total asset , total liability, income.. These factors have relation with interest rate to different extent. Now, through some statistical analysis the effect of these factors are being described including interest rate-

Table-Frequency Table of Interest Rate

In the frequency table, it is found that most of the clients are in category seven where the no of frequency is 31 out of sample size 50 and interest rate is 15.5%.This implies that most of the customers of our sample are taking the loan which charges 15.5% interest rate.

Table- Frequency Table of Net Asset

In the above table, it is found that most of customers fall in category 1 that is they have net asset ranging from tk.100000 to tk. 300000 and no customer belong in category 5 and 6.It is observed that category 1 customer takes consumer credit scheme, personal loan scheme that is they normally avail small amount of loan as have small amount of net asset.

Table- Frequency table of loan purpose

Here, different loan purpose has been given different score and thereafter have been categorized. In the above table it can be observed that most of the customer falls in category 3 and 5. Here the frequency of both categories is same which is 12.

Table- Frequency Table of Age

 The above frequency table is based on age category. Here, the sample size has been categorized based on age differences of the client. That is in what aged people take the loan most from the bank. Here we can see that category 2 aged people take the loan most that fall in the age range of 29 years to 31 years. The next most frequent category is 3 and then 2.

Table- Frequency Table of Income

 From the table it is obvious that most of the customers of our sample fall in category 1 the frequency of which is 21. The range of income of this category is from tk.5000 to tk. 15000.This implies that middle income level customer most frequent in our sample. The next most frequent category is 2 which indicate the income level from tk.15000 to tk.25000.

Table- Frequency Table of no of years of Experience

The above table is based on the no of years of experience in job. Here, we can see that in category 2 most of the customer belong which is 14 and the range of this category is 5 to 10 years.

Table- Frequency Table for Credit Rationing

Credit rationing is the ratio of amount of loan sanction and amount of loan demand. The no of most frequent category here is category 5. This implies that most of the loan application the bank sanctioned 55% to 65% of the total loan demanded. There are a few customers who get the total of their demanded amount

Table- Frequency Table for the category based on Personal Guaranty

 Like the loan purpose, personal guaranty has also been given score based on judgment for the analysis purpose as it is a qualitative factor affecting our decision. Based on the score, they have been categorized. Here, the most frequent category is 7.there is no customer who belongs in category 5.

Summary of the Major Findings

Through Correlation Analysis, interest rate has significant relationship with loan purpose whereas credit rationing has with income  level .The Regression Analysis  indicates that the factors that MBL considers in determining interest rate and credit rationing are not sufficient Because  the factors that have been used as input variables  in  interest rate determination can explain only 28.3 % variance  in interest rate and in case of credit rationing only 27.3 % is explained through these variables. Again by the F-value it is obvious that the contribution of these variables is not highly significant. But the adoption of regression analysis along with other reform measures, for example, Lending Risk Analysis (LRA) in the banking sector, the concept of lending can be changed. Nowadays, it is production and purpose oriented not security oriented. Today, more emphasis is given on the background of the customers, soundness and viability of business, cash flow of the business etc. But I think sometimes security is needed for the protection of any adverse situation. In my study it is also found that bankers and executives of MBL as well as others don’t use any statistical tools in   their lending decision. But in my opinion, it is important for the entire bank to use some statistical tools, eg. regression analysis to assess which factor is mostly important that the  bank should consider along with LRA. Again the  existing LRA form have been designed only for manufacturing concerns but in reality there are other concerns exist as well. That’s why besides LRA some other tools should also be used in lending decision and before sanctioning any credit limit.

Implication of the Study

Credit Worthiness Analysis helps to assess   whether the potential borrower will be able to repay the loan that is the risk of failure to repay loan. The findings of the empirical study might serve the interests of a number of parties. The Bank can get effective feedback regarding their promotional performance. This study will help the MBL to have a thorough assessment about the financial quality of the before sanctioning any credit and ensure repayments. This study will make the bank more careful in lending activities and it will help the Bank in the long run. This study will also help MBL to grow efficiently in this competitive business world. This research will help the planners, executives and practitioners in understanding about Regression analysis and the recommendations will help for future application of statistical tools in banking sector. The other Bank’s can redesign their banking policy according to the requirement of the Bank’s need. The findings of this study will also provide more valuable information to the teachers and academicians, who can find the study useful in designing academic curriculum, preparing and delivering class lectures, designing course outline etc. The students can also use the findings for their academic purpose.

Recommendations

Mainly, my topic was credit worthiness analysis but I have also focused and analyzed on Operational Performance of Mercantile Bank Limited Green Road Branch. MBL is a new bank in Bangladesh but its contribution in socio-economic aspect of Bangladesh has greater significance. Though my topic is connected on the overall banking divisions or sectors, I have tried to identify the process of disbursement of loan, performance and problems of the bank as a whole. I have found a fewer number of factors, which impede the achievement of ultimate goals of MBL. It is not easy to find out the solution for an inexperience internee like me. But I do believe that the suggestions mentioned below will obviously increase the efficiency of Mercantile Bank Limited.

Weak Network

There is no question about the returns to scale for the banks that developed their financial products and built the delivery system on a global scale. The Bank whose network system is strong enjoys a cost and competitive advantage over the financial institutions. In the electronic world the nature of competition is different and efficient bank can get a benefit from being and innovator, which sticks with a bank for a long time. Mercantile Bank Limited as a new Bank hasn’t yet setup proper network system. It is really very important of present time. At present all the branches of MBL can’t share online banking at the same time. Now MBL is thinking to implement software where a client can deposit, withdraw, get loan by only one account. This should be implementing as early as possible to meet the challenge of 21st century.

AD Facility

AD stands for Authorized Dealer. Bangladesh Bank provides Authorized Dealership to the commercial banks. Some branches of MBL has got AD license but Green Road Branch is yet to get this. Green Road Branch is providing the service of AD to its honorable customers via other branches (Kawran Bazar, Dhanmondi) which kill the valuable time of its customers. For this reason Green Road Branch is losing its expected customers. To capture those customers MBL should take necessary steps to have an AD license for Green Road Branch.

Keep the Given Commitment

MBL has committed to their prospective customers to payment of cheque within 30 seconds after submission but unfortunately they are not able to payment of that cheque. I think the bank should try to keep its commitment hearty or it should be remove form the characteristics of MBL. Otherwise the customers can think that the bank has no uniformity between its word and action.

Credit Management

MBL Green Road Branch is now doing well in credit management especially in Micro Credit Division. Moreover the bank may face problem if it does not take some necessary steps to correct the flows that are identified.

For increased effectiveness of various activities of MBL-the bank should not sanction any loan to those clients / customers, whose necessary information is not fully disclosed to the bank. To get information, which is needed for credit appraisal, the bank should not only depend on the client but also should try to explore the other sources of information for its authentication. They must rationalize portion of loans and advances to different sector for risk diversification. The bank also should go for long-term investment, which will diversify the risk.

Conclusion

Credit worthiness analysis reflects the degree of credit worthiness of individual borrower which measures the risk of repayment involved with the borrower. Regression analysis for credit worthiness determination is not still in practice in any banking sector. All the banking sector in Bangladesh use LRA in lending risk determination but they do this only as formality. They sanction loan based on interview and the reputation of the borrower and after sanctioning loan they do LRA as formality. So I think as they don’t follow LRA strictly and only as formality, mainly based on interview and reputation, they should apply some statistical tools such as regression analysis. For a long time, MBL have been carrying the burden of huge amount of classified loans. I hope that, MBL will minimize the dangers regarding the bad loans and advances through implementing the credit worthiness analysis. Obviously, this is not the ready prescription on all ills but it would be helpful to the MBL to go one step forward of their mission to minimize lending risk.