Loan Disbursement Process of Mercantile Bank Limited

Main objective of this report is to analysis Loan Disbursement Process and Present Condition of Mercantile Bank Limited, Rajshahi Branch. Other objectives are  briefly analyze on the Loan Disbursement and Recovery Scenario and find out the process of loan activities of the Bank. Report also focus on how effectively developing there services as well as satisfy customer. Finally recommend ways and means to solve problems regarding the Loan Disbursement & Recovery Scenario of Banking.

Objectives of the Study

The result of a study depends upon the proper selection of the objectives. Before starting the fieldwork, it is essential to set up the objectives and then arrange the total procedures according to the objectives. I have some objectives about preparing the report.

Broad Objective: The major objective of the report is to fulfill the requirement of my internship and achieving academic and practical knowledge, how organizations are managed in real life situation which I can apply in my future life.

Specific Objective: 

• To know the historical background of the organization including its mission, objectives and strategies.
• To briefly analyze on the Loan Disbursement & Recovery Scenario Of Mercantile Bank Limited in Rajshahi Branch.
• To find out the process of loan activities of the Bank.
• To briefly analyze on how effectively developing there services as well as satisfy customer.
• To recommend ways and means to solve problems regarding the Loan Disbursement & Recovery Scenario of Banking.

Methodology of the Study

Data collecting is very important for preparing a report. In order to make this report more dependable and meaningful I used both primary and secondary two types of sources:

Primary Sources:

1. Practical desk work.
2. Face to face conversation with the officers.
3. Direct observations.
4. through Questionnaire.
5. Daily note taken during the Internship period.

Secondary Sources:

1. Annual reports of MBL.
2. Various books related with the subject.
3. Web sites of MBL.
4. Files and Folders.
5. Various articles published in newspapers

Profile of the Organization

Banking system occupies an important place in an economy. A bank is the financial institution that deals with money. Banks can be defined as an economical organization. Without adequate banking facility agriculture, commerce, and industry cannot flourish. They provide trust services, arrange mergers and acquisition, and guarantee payment from one party to another through letters of credit and other devices. A banking institution is indispensable in modern society. It plays a liberalization of economic policies in Bangladesh. The commercial banking system dominate Bangladesh’s financial sector with limited role of non bank financial institution and the capital market. The banking sector alone accounts for a substantial share of asset of the financial system. The number of banks in all now stands at 49 in Bangladesh. Out of the 49 Banks, four are Nationalized Commercial Bank (NCB’s), 28 local private commercial banks, 12 foreign banks and the rest five are Developed Financial Intuitions (DFI’s).

Among the list Mercantile Bank Limited (MBL) is one of the prominent banks in the banking sector of Bangladesh. Mercantile Bank limited emerged as a new commercial bank to provide efficient banking service with a view to improving the socio-economic development of the country. The Bank encompass a wide range of service including accepting deposits, making loans, discounting bills, conducting money transfer and foreign transaction and performing other related services such as safe keeping,  collections, issuing guarantees, acceptance and letter of credit.

Historical Background of MBL

Mercantile Bank Limited has been incorporated on May 20, 1999 in Dhaka, Bangladesh as a private limited company with the permission of the Bangladesh Bank under the Bank Company Act, 1991 and as a Private Ltd Company under the Company Act 1994. Mercantile Bank limited commenced formal commercial banking operation with head office at 61 Dilkusha C/A, Dhaka Bangladesh from the June 2, 1999. The Bank went for public issue for shares on in 2003 and its shares are listed with Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) in 2004.

There are thirty sponsors involve in creating Mercantile Bank limited. The sponsors of the bank have a long heritage of trade, commerce and industry. They are highly regarded for their entrepreneurial competence. The sponsors happen to be members of different professional groups among whom are also renowned banking professionals having vast range of banking knowledge. There are also numbers who are associated with other financial institutions like insurance companies, leasing company etc. Numerically it is no doubt just another commercial bank, on of the many now operating in Bangladesh, but the founder are committed to make it a little more different and a bit special qualitatively. This Bank has new vision to fulfill and a new goal to achieve. It is trying to teach new height for realizing its dream. Mercantile Bank Ltd, “A Bank for 21^st Century”, is not a mere slogan. The Bank has been manned with talented and brilliant personal, equipped with most modern technology so as to make it most efficient to meet the challenges of 21^st centuries. As regards the second slogan of the “Efficiency is Our Strength” is not a mere pronouncement but a part of its belief that inspiration and guideline for the long journey ahead.

Mission and Vision of MBL:

Mission is the prime purpose of a firm. It makes goal more transparent to the people related to it and shows them path to reach to that destination. Again, Oxford Dictionary describes vision as “imaginative insight”. It is the long term goal of an organization.  From this, we can assume how much these two are important for the successful operation of a firm. It is said, “Mission without a vision is a daydream and vision without a mission is a nightmare”.

Mercantile Bank Limited is a third generation bank. They mainly emphasize on the excellence and starving to develop a new horizon of banking. Their aim is to make a difference in banking sector. The missions and visions are as follow:

Mission of the bank:  The mission of the bank is-

“Will become most caring, focused for equitable growth based on diversified deployment of resources, and nevertheless would remain healthy and gainfully profitable Bank”

Vision of the bank:  The vision of the bank is-

“Would make finest corporate citizen”

Objectives of Mercantile Bank Limited (MBL)

Mercantile Bank Limited aims at excellence and is committed to explore a new horizon of banking and provide a wide range of quality products and services comparable with those available with any modern bank in the world. The objective of MBL is not only to earn profit but also to keep the social commitment and to ensure its cooperation to the person of all level. There are two type of objective of MBL. These are given below:

Strategic Objectives:

• To achieve positive Economic Value Added (EVA) each year.
• To be market leader in product innovation.
• To one of the top three Financial Institution in Bangladesh in terms of cost efficiency.
• To be one of the top five Financial Institutions in Bangladesh in terms of market share in all significant market segments are serve.

Financial Objectives:

• To achieve a return on shareholders’ equity of 20% or more on average.

So MBL is committed to maintain the highest quality of services by upgrading banking technology and by applying high standard of business ethic through its established commitment and heritage.

Financial performance of MBL (Rajshahi Branch)

The Mercantile Bank Rajshahi branch is one of the most successful private commercial bank in our country, though it started its operation only eight back. It has achieved the trust of the general people and made reasonable contribution to the economy of the country by helping the people investing allowing credit facility.

Performance of the Branch at a Glance (Figure in Lac BDT)

Source: Account of Statement of Affairs 2000-2008

Existing Services of MBL Rajshahi branch

MBL Rajshahi Branch provides the following services:

General banking:

Different types of accounts for transactions:

• Savings Accounts
• Current Accounts
• Short Term Deposit (STD)

Different Deposit Schemes:

• Fixed Deposit Receipt (FDR)
• Double Benefit Deposit Scheme (DBDS)
• One and Half Time Benefit Deposit Scheme (1.5 TBDS)
• Family Maintenance Deposit Scheme (FMDS)/ Monthly Benefit Scheme (MBS)
• Quarterly Benefit Deposit Scheme (QBDS)
• Advance Benefit Deposit Scheme (ABDS)
• Monthly Savings Scheme (MSS)
• Pension & Family Support Deposit

Remittance:

• Pay Order (PO)
• Demand Draft (DD)
• Telegraphic Transfer (TT)
• Online Transaction

Credit:

• Cash Credit (Continuous Loan)
• SOD (Term Loan / Continuous Loan)

Term Loan:

• SME (Small and Medium Entrepreneur) Loan
• Personal Loan
• Home Loan (Commercial, Residential & Refinance)
• Car Loan
• Overseas Employee Loan
• Loan for staff only
• Tender Guarantees & SOD Bids
• Performances Guarantees
• SOD Work Orders

 Foreign Exchange:

• Import Service (vide L/C)
• Export Service
• Foreign Remittance (Inwards & Outwards Foreign Remittance through Foreign TT, SWIFT etc.)
• Foreign Currency Buy & Sale
• Foreign cheque, draft, bill collection

Cash:

• Cash Receive
• Cash Payment

 Others:

• Card Services (Debit Card & Credit Card)
• Locker Services
• SMS Banking

Grameen Phone Bill Collection

Like all other Commercial scheduled bank Mercantile Bank Ltd Rajshahi Branch performs all the above functions with the following three departments:

1. General Banking Department
2. Advance Department
3. Foreign Exchange Department

Project part

Introduction

Mercantile Bank Limited Rajshahi branch performs all types of banking activates by its various sections to achieve and fulfill its objective of earning profit, economic development as well as to strength its position.

• Advance: It is a fundamental precept of banking that advances are made to customers I reliance on his promise to repay rather than the security held by the bankers. The banker requires security as a protection against unexpected default.
• Loan: When an advance is made on     lump sum repayable either in fixed monthly installments or in lump sum and subsequent dept is ordinarily allowed expect by way of interest, charges etc it is called a loan.
• Sources of loan able funds: The main source of bank loan-able fund is deposits. Besides this grant, financial instruments etc are another source of loan-able fund.

Classifications of Loans & Advances

The MBL Rajshahi branch offers different types of loan facilities. These are given bellow by its nature:

• Term Loan (including HP)
• Time Loan
• C.C (H)
• SOD (security over deposit)
• Import finance (LTR+ PAD)
• Other (ccs, sme, Pl, scheme etc)

Sector wise loan & advance in Rajshahi branch (Figure in Lakh BDT)

 Source: Statement of Affairs 2007

Different categories of loan:

MBL has segmented its credit schemes into different categories, which are as follows:

 A) Continuous loan:

Cash credit (CC hypothecations): This loan is given to the businessmen. It is a continuous lending facility. Borrower is allowed to borrow money up to a certain limit and can’t withdraw the sanctioned amount at once. They are to keep mortgage against loans. Interest is charged on the withdrawal only. Document of this loan may be as follows:

• Pay slip
• Demand promissory note
• Letter of arrangement
• Letter of authority
• Letter of undertaking
• Letter of guarantee
• Letter of continuity
• Letter of Hypothecation
• Supplementary agreement for letter of hypothecation
• Letter of revival
• Memorandum of deposit of title de

Disbursement procedure:

• Client must have an account in the stated bank
• Trade license is also required
• Written application for regarding loan
• A/C statement
• CIB report from Bangladesh bank
• Confidential report from local banks
• Field verification report
• Personal nit worth statement
• stock report
• Land valuation

Mortgage:

• Registered  mortgage of land
• Irrevocable power of attorney for sale mortgagee property
• Legal opinion
• Current rent receive
• Original deed
• CS, RS, SA
• Non-encumbrance certificate with money receipt.

 B) Term loan:

House Building: This loan is restricted for only making house building of business. The term of this credit is up to 18 years. The amount of given loan is 70% of total value.

Lease finance: This loan is sanctioned for purchasing factory equipments, automobile and other machineries:

SOD/Loan secured: This type of loan is given against DBDS, MSS, MSP, FDR and others scheme for the term one year only. In such case, the amount of loan given by a branch is 80 % of the above instrument.

 C) Personal Loan:

This loan is restricted on service holders only, holders must be officer rank except insurance and NGO’s.

Procedure: A credit holders need one granter, the loan must be repaid with 12-36 installments, and Monthly installment must not exceed 50% of monthly net salaries.

D) SME Loan:

This type of loan is sanctioned to the businessmen only. Two granters & Business documents are required in such case. The amount of given loan is 50,000 to 5,000,000. The loan must be repaid with 12/24/36 installment.

Some other credit facilities are available in MBL given below:

• Staff loan house building.
• SOD against work order
• SOD general earnest/other.
• LTR
• Doctors credit scheme etc.

E) Loan facilities in MBL Rajshahi branch:

The bank’s loan and advance portfolio also indicates an impressive growth. There is variety type of loan facilities. The main loan elements have been show in the following table.

Table: Type of loan & interest rate

F) Loan Disbursement Procedure

Bank provides loan by collecting deposits and other sources of fund. This branch has various types of loan disbursement programs. Before disbursing loan bank follows the following sanctioning process.

 Application for Loan: A borrowers first applies for loan to sanction certain amount of loan allowing with certain required papers & documents.

 Credit Investigation: Bank lends its depositors money; therefore, it is required to return back in the ordinary course of business.

Selection of the borrower: A careful and systematic study of the affairs of the intending borrower is needed to the right selection of borrower. Therefore lending banker should analyze 5C of borrower- Character, Capacity, Capital, Collateral and Condition.

Lending Principals: The banker should consider lending principals. These are- Safety, Security, Liquidity, Profitability, Purpose, National Interest, Diversity.

Personal Interview: For assessing attitude, Skill, Achievement needs, Knowledge etc.

Collect Information From Various Sources: Bank’s own record, borrowers’ loan application, spot verification, reports from friends & relatives other sources.

Credit proposal appraisal:

• The following have to be considered for these feasibility testing-
• Location, land & building, product, raw material
• Profitability , cost, demand of sales
• Cash flow, income statement
• Planning, organizing, marketing etc.

Documentation:

The security offered for an advance is only a caution. A banker would not normally like to recover the advance form the safe of security. A banker accepts properly as security, which is highly liquid, easily realized, easily marketable, sound title, easy to store, stable in its market price.

The bankers create charge on the security by following methods:

Lien: It is the right to retain the property or goods of the borrower as security until the debt are adjusted. In this case the banker can only hold the possession of the goods; he can sell them after giving reasonable notice to the borrower.

Ledge: It is created only for movable property like goods, document etc. In case of it the ownership of goods remains with the banker but possession of goods rests with the loan.

Mortgage: Only immovable properties are kept under mortgage total possession of the property is not transferred, only the interest is transferred. In case the mortgager fail to repay the loan the bank gets right to recover the debt out of the sell of the mortgage property.

-Hypothecation: In this case both possession and ownership remains with the borrower.

 Classification of securities:   

• Personal: Personal bond, promissory note, letter of acceptance etc.
• Impersonal: Land, shares, building, stocks, goods etc.
• Direct/Indirect: Direct security is deposited by the customer himself and the indirect is deposited by the third parts.

– Advance against FDR.

– Advance against insurance policies.

– Advance against hypothecation and pledge.

 Collateral: It means these securities, which runs parallel to or side by side with personal right of action against a debtor in respect of on advance. These types of securities are – Share certificates, bearers bind, insurance policies, and legal mortgage.

 Guarantee: At times when the personal security and collateral is not considered sufficient to a banker then he may ask for a guarantee of third party whose financial ability and credit is acceptable to the bank.

Execution of Documents:

It is the procedure of stamping a document. If mistake arises it is to be cancelled. So it is to be properly signed and correctly filled by the executants. The following are to be observed at the time of execution-

• The documents filled by the executants correctly.
• Specimen signature.
• The entire page is to be signed by all the executants.
• Should not have cutting, overwriting.
• Documents should be kept safely.

Sector wise loan disbursement in MBL Rajshahi Branch

Source: Statement of Affairs 2007-08

Sector wise loan disbursement in MBL Rajshahi Branch

  Source: Statement of Affairs 2008-09

The collected data shows that the bank gives SOD loan against FDR in 2007 & 2008 that was about same. But the bank gives more SOD loan against WO in 2008 than 2007. And the bank also gives more SOD loan against SPE & others in 2008 comparatively 2007. The bank provides staff H/B & staff L/C to its staff in 2007 & 2008. These loans are about same in these two years.

From the above observations it is said that the bank gives more SOD loan in 2008 comparatively 2007. The reason can be specified that the political & economic environment overall financial situation of the country was better in 2008 than 2007. The column chart explains it more clearly.

The bank gives more PAD cash, loan secured, personal loan, hire purchase and time loan in 2007 comparatively 2008. The time loan was dramatically changed in 2007. The fact is that the demand for time loan was high but the recovery ratio was unsatisfactory. And the ratio of LTR loan was same in 2007 & 2008.

The bank gives more CC loan, house building loan, SME loan, term loan & CF loan in 2008 comparatively 2007. The demand for SME loan is not available, because the number of entrepreneur & the business opportunity are not available in the Rajshahi City. Another reason is that the political environment and also the overall situation of our country were not favorable for the entrepreneur and business man.

Loan Risk Evaluation:

A comprehensive and accurate appraisal of the risk in every credit proposal of the Bank is mandatory. No proposal can be put on place before approving authority unless there has been a complete analysis. In order to safeguard Bank’s interest over the entire period of the advance, a comprehensive view of the capital, capacity, integrity of the borrower, adequacy, nature of security, compliance with all regulatory /legal formalities, condition of all documentation and finally continues and constant supervision on the account are called for. It is absolute responsibility of the Credit Officer/RM to ensure that all the necessary documents are collected before the proposal is placed for approval. Where Loans/Advances/ Credit facilities are granted against the guarantee of the third party, that guarantor must be subject to the same credit assessment as made for the principal borrower. While making lending decisions, particular attention shall be given to the analysis of credit proposals received from heavily leveraged companies and those dealing in non-essential consumer goods, taking special care about their debt servicing abilities.

Emphasis shall be given on the following several loan principles:

1. Present and future business potentiality for optimum deployment of Bank’s fund to increase return on assets.
2. Preference for self liquidating quality business
3. Avoiding marginal performers
4. Risk depression is basic to sound credit principle and policies. Bank shall be careful about large and undue concentration of credit to industry, one obligor and common product line etc.
5. Managing the amount, size nature and soundness of one-obligor exposures relative to the size of the borrower and Bank’s position among his other lender.
6. Personal guarantee of the principal partners or the Directors of the Company shall be obtained.

Risk Area:

The following risk areas shall be considered for analyzing a loan proposal. Borrower Analysis (Management/Ownership/Corporate Structure Risk):

The majority shareholders management teams and group or affiliate companies shall be assessed. Any issues regarding lack of management depth, complicated ownership structures or inter-group transactions shall be addressed, and risks to be mitigated. The following questions may be asked to assess the Management Risk.

• Who is the borrower? Does any particular/special characteristic of borrower need particular attention. For example, if the borrower is a Trust, this calls for examination of Trust Deed.
• Are there adequate abilities and experience in senior management?
• Is there adequate depth and succession planning?
• Is there any conflict amongst owners/senior managers that could have serious implications?
• Is the Manager/Credit Officer satisfied about the character, ability, integrity and experience of the borrower?

Industry Analysis (Business and Industry Risk)

The key risk factors of the borrower’s industry shall be assessed. Any issues regarding the borrower’s position in the industry, overall industry concerns or competitive forces (demand supply gap) shall be addressed and the strengths and weaknesses (SWOT Analysis) of the borrower relative to its competition to be identified. For the above purpose the Credit Officers/RM may obtain/collect data from the statistical year book/ economic trends of Bangladesh Bank/public report/newspaper/journals etc. The following questions may be asked to assess the Business and Industry Risk.

• Are there any significant concentrations of sales (by customer, industry, country region)
• How does the borrower rate with its competitors in terms of market share?
• Can increased direct production costs be easily passed on to customers?
• Does the borrower deal in any specific product that may be subject to obsolescence?
• Is the purpose of borrowing consistent with the objectives of the Company?
• Is the purpose legal? Does it contravene any rules and laws of the country and any instruction issued by the Bangladesh Bank/Head Office?

Supplier/Buyer Analysis/Market Risk

Any customer or supplier concentration shall be addressed, as these could have a significant impact on the future viability of the borrower.

Market Risk

The sufficient market data is to be obtained to identify clients/borrower’s market share in the industry/demand-supply gap in the market.

Technological Risk

The product that is manufactured must be technologically viable i.e. whether the technology applied is updated. The product’s stage in its life cycle must be understood. Technical Aspects of the products must be addressed. The Credit officer/ RM must be satisfied with the mitigating factors of technical and technological risk, associated with the products.

Security

A current valuation of collateral must be made by Bank’s approved enlisted surveyors and the quality and priority of security   being proposed shall be assessed properly. Loan shall not be granted solely on security consideration. Adequacy and the extent of the insurance converge shall be assessed. The Credit Officer/RM must look into the client’s interest/dependability on the collateral offered as security.

• Is security offered acceptable and adequate?
• Has all security been perfected in accordance with the loan application?
• Have any valuation and inspection been undertaken since the last application?
• If you hold guarantee, do you consider it has value?
• Has the credit rating of the Borrower deteriorated and have you considered the requirement for additional security?
• Can a valid charge be obtained on the security?

Conclusion

Mercantile Bank Limited has started its journey as a full-fledged commercial Bank in 1999 to provide efficient banking service with a view to improving the socio-economic development of the country. They have already passed nine long years of their Banking life. MBL has already developed an image of goodwill among its clients by offering its excellent services. The Bank constantly looks for ways and means to improve productivity by rendering to its clients in order to remain competitive in the market. The success is resulted from dedication, commitment, and dynamic leadership of its management over the periods.

I completed my internship program from the Rajshahi Branch of Mercantile Bank Limited. As part of the MBL this branch is also developed an image of goodwill among its clients by offering its excellent services. As my main objective is to concentrate on the activities related with Loan Disbursement scenario in the Rajshahi Branch, of MBL, from my practical experience, observation and discussing with the employees I learn about the Loan Disbursement scenario and use of these in the organization.

As massage from the Founder Chairman, Human Recourse policy of the Bank is focused on recruitment, training, and development. The human capital of the Bank has continuously been nurtured and properly managed to bring out the best. They are also committed to the performance culture where recognition, promotion, and rewards are based on individual merit and demonstrated performance. So, from the statement of the top authority it is understandable that how much they aware about the proper use of Loan Disbursement in Mercantile Bank Limited. I hope that the authority always aware about employees so they can provide excellence service with efficiency, accuracy and proficiency to the clients and meet the ultimate objectives of MBL.

5.2 Recommendation:

Mercantile Bank Limited has been successful in all of its operation since its inception. It has outperformed all its peer and competitor and peer banks in virtually all area of its activities. Still there is scope for improvement for the bank and the any or all of the following could be which Mercantile Bank Limited can implement to better its performance:

• The Bank should as soon as possible install highly automated banking software like Flex cube to add value to its service. This will not only allow faster service but also reduce the wok load.
• The bank should employ an outside company for recovery of its dues because it takes a great amount of time for the bank’s employees to recover stuck up loans.
• The bank can increase its retail credit loan by allowing credit to more customers. This can be possible through relaxation of credit norms like waiver of guarantee from third parties.
• The bank can attract more lease finance customer through reduction of cost of borrowing on the part of the customer. This can be made possible through return of a fraction of the lease deposit taken by the bank at the time of sanction and disbursement. Similarly the bank can return the risk fund realized from retail credit customers in case of timely and smooth adjustment of the loan by the customers. This will provoke customers to repay the loan timely.
• The bank can enhance its asset quality through offering rebate on interest rate and hence provocation of timely repayment by the customers. This will be offered only to regular customers.

• The loan sanction process should be easier that the clients can feel convenient to take loan from the bank.
• The valuation of the property should be calculated by the surveyors.
• Online Banking should be provided for fast services
• The number of computer is not sufficient, especially every desk need one computer.
• For selling their products this branch need strong marketing to sell their products.
• Space shortage is another major problem for decoration Mercantile Bank Limited, Rajshahi branch is congested than other private banks. Management should consider this for external marketing.
• For uninterrupted electricity supply a central generator is required. Because due to load shading every day employees can’ not work one to two hours on an average.
• While the whole world is depending on information there is no clear information for customer in Rajshahi Branch. So, management should take proper step for it.
• Ad is the key factor for a business organization to up hold it in the market and for making market share and goodwill in future. That’s why management should give priority on it.
• Bank should always adopt modern technology and facilities to keep itself in business with other banks and to improve the working efficiency of its employee’s use of ATM brings speed in banking services.
• Consumer loan should be continuing.
• Decision should be decentralized. Manager should be considering the opinion of the subordinate.
• All of work should be computerized instead of manual posting because of better services.