Credit Worthiness Analysis on Mercantile Bank Limited

 1.1 Introduction

Modern banks play vital role in promoting economic development of a country. Banks provide necessary funds for executing various programs underway in the process of economic development. They collect savings of large masses of people scattered through out the country, which in the absence of banks would have remained idle and unproductive. These scattered amounts are collected, pooled together and made available to commerce and industry for meeting the requirements.

Mercantile Bank Ltd. is one of those banks that plays important role in the economy of Bangladesh. There are forty two branches of Mercantile Bank all over the country. The activities of the branches are more or less same but there are some differences as per the size of the branches. As I was placed to Green Road Branch of Mercantile Bank as an intern, my focus of the report will be basically on the functions of Green Road branch only. The format of the report is being followed as per the guideline given by The University of Asia Pacific authority.

Loans comprise the most important asset as well as the primary source of earning for the banking financial institutions. On the other hand, this (loan) is also the major source of risk for the bank management. A prudent bank management should always try to make an appropriate balance between its return and risk involved with the loan portfolio. An unregulated banking financial institution might be fraught with unmanageable risks for the purpose of maximizing its potential return. In such a situation, the banking financial institutions might find itself in serious financial distress instead of improving its financial health. Consequently, not only the depositors but also the general shareholders will be deprived of their money from the bank. The deterioration of loan quality will also affect the intermediation efficiency of the financial institutions and thus the economic growth process of the country. This establishes the fact that banks should provide increasing emphasis on various analytical tools and techniques for screening proposals and loan decision taking. Credit Worthiness Analysis is one of the most important activities before sanctioning any credit to a new borrower as well as existing borrower to avoid any default risk and for improving the operational efficiency of nationalized and private sector commercial banks.
1.2 Origin of the Report

Internship report is one of the very important and vital requirements, for business graduates. For this it is very important to gain practical knowledge on this subject that, why our honorable Head of the department Mr. Shahriyar Anam assigned us to prepare a report on internship working period. For the fulfillment of his requirement I have chosen Mercantile Bank Limited for my Internship.

1.3 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.

1.3.1 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.

1.3.2 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

1.4 Rationale of the Study

The principal function of the bank is to lend. Lending comprises a very large portion of a bank’s total activities. Sound lending practice therefore, is very important for profitability and success of a bank. Like other financial intermediary, commercial banks also intermediate between the savers and borrower to mobilize the financial surplus of the savers and allocate these savings to the creditworthy borrowers of different sectors of the economy. In this way they not only help in financial development of a country, but also facilitate its economic development. For the sake of sound lending, it is necessary to develop a sound policy and modern lending techniques to ensure that loans/ advances are safe and the money will come back within the time set for repayment. For this purpose, proper and prior analysis of credit proposals is required to assess the credit worthiness for avoiding risk. Risk is inherent and absolutely unavoidable in banking.  Lending itself is risky and the very purpose of analyzing the credit worthiness is to determine whether a particular loan applicant is credit worthy or not. While deciding a loan proposal we should judge the degree of credit worthiness of individual potential borrower, risk in a given situation. Lending is a judgment which depends upon ones ability to assess the shortcomings in the proposals and to identify the risk. Ability in taking prior measures to minimize the risk is very much important. In the background of the above things, the issue “Credit Worthiness Analysis” has been undertaken as a comprehensive research topic, which will serve the BBA program.

1.5 Scope of the Report

The scope of the report is to make a critical study regarding the project management of that above mentioned private bank in Bangladesh. We had to make heavy preoccupation in internship report. The results of this internship period are presented in this report. To prepare this I have generally used both the primary and secondary sources.

1.6 Sources of Information

To prepare this I have generally used both the primary and secondary sources.

1.6.1 Primary Sources

I have collected my data during the working period in the bank, MBL’s magazine, annual report, newspapers and also from the website of the company.

1.6.2 Secondary Sources

I have collected information from their corporate office by discussing with the employees.

1.7 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:

a)      Observation

b)     Interview

i)       Personal Interview

ii)     Telephone Interview

iii)  Personal interview through questionnaire

iv)   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.

1.8 Limitations

When I developed this report, then I had to face some problems, which disrupted the fulfillment of this report.  There were several constrains while preparing this report. Only twelve weeks were not sufficient to visit all the desks of the division. Some desks were remained unvisited moreover some officers in desk were found non-cooperative. In course of my internship I faced a number of problems, which may be termed as the limitations of the study. These are as follows:

I could not spend sufficient time required to make an in-depth study on such an important subject because of office time constraint.

Sometimes it was very difficult to get sufficient help from the employees of MBL due to their limited executive hours.

There is no sufficient informative Web site of MBL.

They did not give us exact information for maintaining their secrecy.

It was very difficult to get the actual information. In many cases, the questionnaire had to be explained elaborately to the respondents.

Sufficient records, publications were not available. The constraints narrowed the scope of real analysis.

Sufficient information was not attainable because officers were very busy with their day-to-day work; they could hardly provide enough time.

Last but not least lack of time has also limited the scope for the research work.

2.1 Introduction

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”.

2.2 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.

2.3 Head Office and Branch Network

Currently MBL is operating with one head office and forty two branches. The locations of the head office and name of the branches are described below:-

Head Office
61, Dilkusha Commercial Area
Dhaka-1000, Bangladesh
Tel: 880-2-9559333, 01711-535960
Fax: 880-2-9561213
Telex: 642509 MBLID BJ
E-mail: mbl@bol-online.com
Website: www.mblbd.com

2.4 The Corporate Structure of Mercantile Bank Limited

The Board of Directors, the apex body of the Bank, formulates policy guidelines, provides strategic planning and supervises business activities and performance of management while the Board remains accountable to the company and its shareholders. The Board is assisted by the Executive Committee and Audit Committee.

Board of Directors           

The board of Directors consists of 13 members elected from the sponsors of the bank. One-third of the members retired every two years.

Executive Committee

All routine matters beyond delegated powers of management are decided upon by or routed through the executive committee, subject to ratification by the board of Directors.

Audit Committee 

All matters relating to the principles, policies, rules and regulations, ethics etc. for operation and management of the bank are recommended by the committee to the Board of Directors.

2.5 Company Analysis

2.5.1 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.

2.6.2 Qualitative Analysis

SWOT Analysis:

SWOT analysis is an important tools for evaluation the company strengths, weaknesses, opportunities and threats. It helps the organization to identify how to evaluation which in turn would help the organization to navigate in the turbulent ocean of competition.

Although MBL very much conscious about its activity, there also occurs some irregular activities in its operation specially, in the lending side.

Insufficient manpower is another shortcoming for proper functioning of the credit operation. There is a policy to conduct lending risk analysis but it is hardly done. The main strength of the bank is the attitude of its employees toward organization. They are very much united and motivated and devoted to the bank. Their morale is very high. The recovery rate (less than 10%) of the classified amount is also unsatisfactory, though it is not worse than the overall position of the countries other banks.

2.7 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:

2.7.1 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.

A. Current Deposit Account (CD Account);

B. Savings Bank Account (SB Account);

C. Time Deposit Account;

a. 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.

B. 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.

C. 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.

2.7.2 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:

a.   Funded Part (Providing Cash Amount to the Creditor).

b.   Non-Funded Part (No Cash Amount Involve).

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).

b. 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.

2.7.3 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

a. 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).

b. 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.

c. 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.

d. 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.

3 Online Banking

Online Banking is an optional service to the MBL clients. The interested clients should apply for the service. Online Banking has so far been activated with 42 Branches of the Bank from January 01, 2006. Online service is now available for all customers –Both Cash deposit and withdrawals, Cheque Deposits and Transfer in CD, SB, STD, Loan accounts (Cheque Bearing within limit) and Monthly Savings Scheme (MSS) . For Monthly Savings Scheme (MSS) TK. 10 (Ten only) including 15% VAT per transaction. Yearly service charge is not applicable.

2.8.4       ATM  & Credit Card

MBL is committed to provide ATM & Credit Card service for its valuable customers which adds an extra edge to its competitive strength

3.1 Introduction

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.

3.2 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.

3.3 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.

a)      When the loan is to be given

b)     Why the loan is to be given

c)      How the loan is to be given

d)     What may happen after disbursement of the loan

e)      Generally what happen (from past experience) after disbursement of the loan

f)       Is it hopeful that the borrower will repay the loan?

g)     Whether loan should be given only in private sector or also in government sector as well.

h)     Whether only secured loan will be extended or provision should be kept for clean loan also

i)       Whether only short term and mid term loan will be considered or long term will also be considered?

j)        Whom to be financed?

k)     Whether loan will be extended to trading sector only or industrial sector will also be considered.

3.4 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  whatsoever.

When the principal debtor fails to fulfill this obligation or promise, liability bestow on guarantor.

3.4.2 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.

3.4.3 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%

3.4.4 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.

3.4.5 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.

3.4.6 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  goods.

Insurance policy  to be obtained  against the goods  covering  fire and  RSD  risk  at  the  cost of  customer.

Bank  reserve  the  right  to  cancel  or amend  the  terms  and  conditions  partly  or wholly  at its  direction  without  any  reason  whatsoever.

3.4.7 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.                                                         i.            SOD Financial Obligations
2.                                                      ii.            SOD against Earnest Money
3.                                                    iii.            SOD Work Order

i. 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.

ii. 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%

iii. 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%

3.4.8 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%

3.4.9 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%

3.4.10 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%

3.4.11 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%

3.4.12 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.

3.4.13 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  etc. 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.

3.4.14 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”.

3.7 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:

3.8 Interest Rate

Interest rate is the extra money that pays back when someone borrows money or that someone receives when invest money. It’s the percentage of the principal paid by the borrower to the lender for the use of the lender’s money. Interest rate fixed after negotiation between banker and customer. Business experience, security value and relationship between banker and customer are the main factor for fixation the loan. When loan is taken against FOR, MBDS & DBDS, the interest rate is specified by the summation of the interest rate of FDR, MBDS & DBDS and 3% of the deposit. In the case of FDR, the interest rate is different in different durations.

3.9 Type of Security for Loan

Security is obtained as a line of last defense to fall back upon. It is meant to be an insurance against emergency. By taking security, bank acquires a claim upon the assets of the borrower if repayment is not made as planned.

A collateral security is a security belonging to and deposited by borrower himself or by a third party to secure loans and advances. Collateral security in a wider sense is used to denote any type of security that runs parallel to or side by side with the personal right of action against a debtor in respect of an advance.

3.12 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.

3.13 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.

3.14 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.

4.1 Introduction                   

Research is a process with a set of interrelated activities such as the identification of research problems, choice of research methodology, data collection, sample, data analysis and recommendations. Research problems are the first stage of the secondary research process. These indicate gaps in the scope or the certainty of our knowledge. They point out problematic phenomena, observed events that are puzzling in-terms of our currently accepted ideas or current ideas that are challenged by new questions (Ghauri et al.1995). This study is based on research topic “Credit Worthiness Analysis”. It has been identified by the experts and bankers that risk involved in providing loan to a particular borrower is the main reason for failing to recover the ban’s money and the issue of risk analysis remains as one of the main factors in determining the status of loan/investment in-terms of recovery. For this purpose, banks need to determine the credit worthiness of individual loan applicant   before sanctioning any credit.

4.2 Methodology

The research has been done through regression method in the empirical way. I have done these calculations in three ways:

First : In this case I have assumed  interest rate is a dependent variable or interest rate is a function of loan type, loan demand, total asset, total liability, district, age, experience, personal guaranty, no of installment, loan sanctioned and credit rationing.

Second : In this case I have assumed  credit rationing is a dependent variable or credit rationing is a function of loan type, loan demand, interest rate, total asset, total liability, district, age, experience, personal guaranty, no of installment, loan sanctioned and interest rate.

4.3 Literature Survey                

The study has been conducted by extensive review of related literature available in various libraries and collections such as various books, publications, periodicals and journals. For this purpose, I have l also taken help from the websites containing information pertinent to my study.

4.4 Populations and Sampling

This research has been conducted using sampling method. Due to time constraint, study of the whole population has not been possible. Fifty clients of Mercantile Banks have been selected   with the help of simple random sampling method to test the hypothesis.

4.5 Data Collection

Data constitute the foundation of statistical analysis and interpretation. Hence the first step in statistical work is to obtain data. Data can be obtained from three important sources, namely:

a) Primary Source: Primary data are measurements observed and recorded as part of an original study. When the data required for a particular study can be found neither in the internal records of the enterprise, nor in published sources, it may become necessary to collect original data, i.e., to conduct first hand investigation. When the data to be collected are very large in volume, it is possible to draw reasonably accurate conclusions from the study of a small portion of the group called a sample. The actual procedures used in collecting data are essentially the same whether all the items are to be included or only some items are considered. There are two basic methods of obtaining primary data, namely

Questioning, and

Observation

b) Internal Records: Internal data refers to the measurements that are the by- product of   routine business record keeping like accounting, finance, production, personnel, quality control, sales, R & D etc.

c) Secondary Source: Secondary data can be obtained from journals, reports, and government publications, publications of research organizations; trade and professional bodies. My project paper is conducted based upon the secondary source of information. Information is collected from the records of the bank,. Web Sites, Annual Report of MBL. Before using secondary data some, some aspects should be considered

• Data should be suitable for the purpose of investigation.
• Data should be tested for adequacy
• Data should be reliable
• If the enumeration based on sample, sample should be representative.

For preparing the project paper, I have collected suitable, adequate, reliable and representative data. Some information is qualitative they are organized on the basis of rational judgment and scores have been given to those qualitative factors.

4.6 Data Processing

Data was analyzed both manually and with the aid of computers. Relevant descriptive and inferential statistical tools have been used.

4.7 Analysis of Data

Regarding data analysis utilized techniques are-

4.7.1. Classification of Data

 Classification is the grouping of related facts into different classes. The process of classification gives prominence to important information gathered while dropping unnecessary details facilitates comparison and enables a statistical treatment of the material collected.

Types of Classification

Broadly, the data can be classified on the following four bases:

Geographical: In geographical classification, data are classified on the basis of geographical or locational differences between the   various items .That is area wise, e.g., Cities, districts, etc.

Chronological: When data are observed over a period of time the type of classification is known as chronological classification. I have collected data for 2005 up to December.

Qualitative: In qualitative classification, data are classified on the basis of some attributes or quality such as sex, purpose, types etc.  I have collected data based on some qualitative factors such as loan type, purpose of the loan of the borrower.

Quantitative: Quantitative classification refers to the classification of data according to some characteristics that can be measured such as income, net asset   etc.  It includes interest rate, total asset, total liability, personal guaranty, no of installment, loan sanctioned and credit rationing of the borrower.

4.7.2. Tabulation of Data

One of the simplest and most revealing devices for summarizing data and presenting those in meaningful fashion is the statistical table. A table is a systematic arrangement of statistical data in columns and rows. I have presented data in the tabulation form highlighting loan type, loan demand, interest rate, total asset, total liability, district, age, experience, personal guaranty, no of installment, loan sanctioned and credit rationing.

4.7.3. Charting Data

One of the most convincing and appealing ways in which data may be presented is through charts. A chart can take the shape of either a diagram or graphs. For representing the data I have used many graphs than charts.

4.8 Summary and Conclusion

This chapter has two main objectives one is to introduce the choice of particular research methodology which have been used in this paper and the other is to provide the description about the sample that has been used in this study. The study follows both the qualitative and quantitative research method. The choice of the both method is influenced firstly by the research topic of this study, which is subjective and have influenced the choice of qualitative research method. On the other hand, details about classification tabulation and charting have been given here.

5.1 Introduction

It is fundamental precept of banking everywhere that loan is made to customers in return for interest .Interest is the price charged by the bank against the loan taken by customers. Security is required by the banker as a protection against unexpected default in repayment by the customer. But bank charges different rate of interest to different customer based on the purpose of loan, amount of loan demanded, personal guarantee and the collateral provided the customers. In addition to these, bank also charges different interest rate based on the occupation. Those who are the staff of the bank are normally charged lower interest rate.

5.2           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-

5.3 Correlation Analysis

If two quantities vary in such a way that movement in one are accompanied by movements in other, these quantities are said to be correlated. For example, there exist some relationship between interest rate and no of installments. The statistical tool with the help of which this relationship is measured is called correlation.

For determining why interest rate differs  from  customer to customer  and thereby for determining the credit worthiness of individual borrower the correlation between different  two variables has been calculated .Under this study , the variables that are taken into consideration are interest rate , loan purpose, personal guaranty, no of installments, age, experience, net asset , income and loan sanction-loan demand ratio.

From the correlation matrix, it is found that interest rate has positive correlation with loan purpose, loan sanction- loan demand ratio , age and experience  which indicates that if the value of these variables increase , the interest rate will also increase or vise versa. The other variables-no of installments, personal guaranty, income level have negative relation with interest rate .This means that if the values of these variables increase then interest rate decreases or vise versa. But here the degree of correlation is not so much significant here it can be observed that the degree of correlation between interest rate and the loan purpose is the largest.

5.4 Regression Analysis

Regression is a statistical tool with the help of which we are in a position to estimate or predict the unknown values of one variable from known values of another variable. With the help of regression analysis, we are in a position to find out the average probable change in one variable given a certain amount of change in another. For the research purpose I have done regression analysis to determine the reason of different interest rate upon which the credit worthiness analysis for individual borrower can be done by the bank.  For regression analysis purpose it is assumed that interest rate is dependent on loan purpose, no of installments, personal guaranty, age, experience, net asset, income, and loan sanction –loan demand ratio. I tried to analyze it through regression analysis using SPSS. For convenience two additional variables Age² and Age*Experience have been taken. Now, the regression equation can be written as-

Interest Rate =f (age, experience, personal guaranty, income, loan purpose, age²,      age*experience, net asset, no of installment, Loan sanction- loan demand ratio)

Analysis:

All the independent variables have been entered as specified in the regression equation. Here the dependent variable is interest rate. For regression analysis, I have used standard multiple regression under which I have entered all the independent variables to examine the relationship among the whole set of predictors and the dependent variable. But here I have used my judgment to enter the variables which variables affect the most the interest rate.

All the variables together explain only 28.3% of the variance in interest rate which is insignificant as indicated by the F-value. An examination of the t-value indicates that loan purpose contributes more to the prediction of interest rate which is also supported by correlation analysis. Analyzing the significance level from the above table, only loan purpose, no of installments and income are important as the determinants of interest rate variation for determining credit worthiness.

An examination of the Mahalanobis distance values indicate that there are no multivariate outliers among the independent variables, that is no values that are greater than or equal to the critical chi-square value of 13.8 at an alpha level of .001

5.5 Findings and Conclusion

Interest rate is an important factor to the entire potential borrower and the bank. It is the most important source of income for bank. From the correlation analysis and regression analysis it is obvious that loan purpose is the most important factors in determining interest rate this means mainly based on loan purpose among other variables   bank charges different interest rate for different borrower which indicates their credit worthiness. But the factors that MBL takes into consideration are not sufficient factors.  It should consider some other factors for determining credit worthiness before sanctioning any loan for more security and avoid default of customers.

6.1 Introduction

Credit rationing means the amount of loan sanctioned against the amount of loan demanded. Usually, Bank does not sanction the whole amount of loan for which it accepts the application. Based on some quantitative information and judgment, it takes the decision whether it will accept the loan application or not and if yes then what should be the sanction limit based on the credit worthiness of individual potential borrower. This chapter is about why credit rationing is different for different borrower

6.2 Correlation Analysis

Correlation analysis is an empirical estimation through which it is possible to estimate the degree of relationship of one variable with another variable other variables. Through this estimation, we are able to determine the degree of relationship between two variables at a time. Like the interest rate ,as determinants of credit rationing , I have considered some variables which include age , experience, no of installments, income , net asset, personal guaranty, loan purpose and interest rate .The degree of relationship of each of the variable with  credit rationing is represented in the following correlation matrix.

From the above correlation matrix, we can see that credit rationing has positive relationship with most of the variables which include loan purpose, interest rate, no of installments, income level, age and experience. Among these variables, credit rationing has significant positive relationship with income level considering 1% significance level and with age when the significance level is 5%.It has negative relationship only with personal guaranty. Among all the variables credit rationing has the largest relationship with income, age and experience.

6.3 Regression Analysis

Under this empirical analysis loan sanction-loan demand ratio has been considered as the dependent variable and other variables (interest rate, loan purpose, net asset, age, experience, personal guaranty, no of installments and income) have been considered as independent variables. Here, two additional variables Age² and Age*experience has been taken for convenient. The regression equation can be written as

Loan sanction/Loan demand  ratio = f (interest rate, loan purpose , net asset, age , experience , personal guaranty, no of installments , income, age² , age*experience)

Analysis

In the analysis, credit rationing  has been entered  as dependent variable and the other variables as independent variables .For this  case, I have selected the independent variables by turn and entered them so to find out which variable contribute  the most based  on my judgment.

7.1 Introduction

Credit Worthiness Analysis is undoubtedly a milestone in the modern technique in assessing the risks for lending bankers in Bangladesh. It can be confidently said that through implementing the statistical tools, e,g. Correlation Analysis, Regression Analysis, the financial institutions and banks in Bangladesh will get the necessary help and thus would reduce the lending risk to minimum level. The objectives of this chapter are to discuss the research summary and the conclusions of this paper. The substance of the empirical results of this study and the especial findings are discussed here.

7.2 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.

7.3 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.

7.4 Limitations of the Study

Though I have given utmost effort to prepare this paper but there are some limitations of the study. They are as follows-

1. This paper has focused on the most sensitive part of the organization i.e. loan and advance. So the bank authority hesitated to disclose important information to maintain business secrecy.

2. Only 3 months time is not enough to complete such a study in a lucid manner.

3. There is also cost constraints, because I am a student; it is very difficult for me to spend much money.

4. Bank was not that much willing to provide the required data.

5. To make a comprehensive study on Credit Worthiness Analysis through Regression analysis it was difficult for me as I was not a research student it is crucial to make a broad based survey on this topic. All things cannot be possible to consolidate by an individual within 3 months period. So absence of extensive survey, limits the depth of the study.

7.5 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.

7.6 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.

Bibliography

1. Financial Institution Management, A Risk Management Approach, Fourth Edition, by Anthony Saunders and Marcia Millon Cornett
2. Annual reports of MBL years 2000, 2001,2002,2003,2004
3. Financial Management, Theory and practice, by Brigham and Ehrhardt (10th Edition)
4. Introduction to Financial Management by Charles P. Jones
5. Business Statistics, Ninth Thoroughly Revised & Enlarged Edition, by S.P. Gupta & M.P. Gupta.
6. SPSS Analysis, Sheridan J. Coakes. Lyndall.G.Speed.
7. SPSS Manual
8. Web Site of MBL-www.mblbd.com

=======================