Loans and Advances of Mercantile Bank Limited

Origin of the Study

Internship report is a partial requirement of the BBA program and has been done after completion of three months organizational attachment period. I was assigned to do my internship with Mercantile Bank Limited (MBL).

Before completion of the degree, every student must undergo the internship program. Internship program is a nice opportunity for the graduates to have a taste of the real business world before starting their career. In the modern business world, internship program help the students to demonstrate skills and competence from their supervised experience and, in addition, enables them to demonstrate maturity and acceptable professional, personal and interpersonal behavior. As the classroom discussion alone cannot make a student perfect in handling the real business situation, therefore it is an opportunity for the students to get accustomed with the real life situation through this program.

The study on Loans and Advances of Mercantile Bank Limited: A Study of Main Branch, Dilkusha, Dhaka. is prepared by Hasan Md. Adel individually under the supervision and guidance of Dr. Md. Serajul Islam, Professor, Department of Management Studies, University of Dhaka and MD. Quamrul Islam Choudhury (Senior Executive Vice President & Head of branch) of Mercantile Bank Ltd., to meet the requirement of the internship program of BBA.

Throughout the last few years Bangladesh has been experiencing a rapid and significant change in the banking sector. Not only in our country, all over the world the dimension of banking has been changing rapidly mainly due to the technological innovation, globalization and deregulation. This change all over the world has significantly affected the banking industry of our country, the result of which is the change in this sector in our country. Now the condition is such that banks must compete in the market place both with local institutions as well as foreign ones.

 Background of the Study

The Internship program is an essential and mandatory of the BBA Program of University of Dhaka. After completion of four years theoretical training, I got the opportunity as a practical exposure to business horizon through internship program. Mercantile Bank Limited one of the well- reputed private commercial bank of Bangladesh with paid up capital of BDT 1798.68 (in million, 2008). Banks strong capital base allows it to make large chunk of advances to its corporate clients.

My internship supervisor and respected teacher Dr. Md. Serajul Islam, Professor, Department of Management Studies, University of Dhaka, assigned me the topic Loans and Advances of Mercantile Bank Limited: A Study of Main Branch, Dilkusha, Dhaka. I hope this report would able to portray the real picture of the operation of Loans and Advances of Mercantile bank Ltd.    

 Objectives of the Study

The Main Objective of the study is to development an understanding about the practical banking activities and to relate them with the theoretical knowledge acquired from the banks. Besides this specific objectives are as follows:

1.  To study & give an overview of MBL.

              2.  To evaluate the operation of MBL.

3.  To acquire knowledge about the overall credit policy of MBL

4.  To evaluate the credit performance of MBL.

5.  To know the reconciliation between banking rules and regulation and their

     implementation.

6.  To find out the distribution of classified loans according to business sectors

     And find out the problem area.

1. To identify the strength, weakness and critical risk factor of this bank.

 Methodology of the Study

The study requires various types of information, past and present policies, procedures, and method of Loans and Advances. Both primary and secondary data available have been used in preparing this report.

Sources of data-

1. Primary Sources:

a)      Discussion with officials of MBL.

b)      Expert opinions comment.

c)      Work with them.

1. Secondary Sources:

a)      Relevant books, newspapers, journals etc.

b)      Monthly reports

c)      Published documents

d)     Office circular

e)      Others published papers, documents and reports.

f)       Annual reports.

g)      Journals

h)      Bangladesh bank publication.

Scope of the Study

In my report I have highlighted the various steps of Loans and Advances of the MBL. I have also discussed about the background of the sector, market structure, risk management factor etc. Before that a brief overview of the MBL has been given to understand its operation and activities. So the scope of the report covers the comprehensive knowledge on the organization of MBL. I have tried to analyze and evaluate of banking credit performance based adequate information contained in documents and interviews of banking officers.

Rationale of the Study

This report is broadly organized into two broad parts. The first part (first 2 chapters) is an overview of the organization itself. The second part concentrates on the assigned topic Loans and Advances of Mercantile Bank Limited: A Study of Main Branch, Dilkusha, Dhaka of the bank. Finally it includes the evaluation of credit performance, findings, and recommendation to make understood the scope of overall Loans and Advances with its constraints of MBL.

Limitations

On the way of the study, I have faced the problems that are given below that may be terms as the limitation or shortcoming of the study-

 Short Time Period

The first obstruct is time itself. Due to the time limit, the scope and dimension of the study has been curtailed. For an analytical purpose adequate time is required. But I got a short time period for prepare the report.

Data Insufficiency

It was very difficult to collect data, because the branch of Mercantile Bank Limited is very large. But the data is very essential to prepare the report. All of the employees of this branch are very busy. For the time limitation they could not able to supply my topic related data.

 Lack of Records

      Sufficient books, publications, facts and figures narrowed the scope of accurate

      analysis. If these limitation were not been there, the report would have been more

      useful and attractive.

Poor Library Facility

     Most of the commercial banks have its own modern, rich and wealthy collection of

     huge and various types of banking related books, journals, magazine, papers, case

     studies, term papers, assignment etc. But the library of Mercantile Bank Limited is

     not well ornamented and decorated.

Lesser Experience

Experience makes a man efficient. I do such kind of research activity for the first time. That’s why inexperience creates obstacle to follow the systematic and logical research methodology.

AN OVERVIEW OF MERCANTILE BANK LIMITED

 General Information

The Mercantile Bank Limited has been incorporated in Bangladesh as a public limited company with limited liability under the bank companies’ act, 1991 as on May 20, 1999 and commenced commercial banking operation on June 02, 1999. The company went for public issue of shares on October 21, 2003 and its share was listed with Dhaka Stock Exchange and Chittagong Stock Exchange.

 There are thirty sponsors involved 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 members who are associated with other financial institution like insurance companies, leasing companies etc.

 Nature of Business

Mercantile Bank Limited offer services for all banking needs of the customers, which include deposits, making loans and advances, discounting bills, conducting money transfer and foreign exchange transactions and performing other related services such as safe keeping, collections, issuing guarantees, acceptances and letters of credit.

Authorized Capital:

The authorized capital of the bank was BDT 3,000.00 million of 30,000,000 ordinary shares of BDT 100 each as of December 31, 2008.

Source: Audited annual report of MBL, 2008.

Paid up Capital:

Paid-up Capital of the bank was BDT 1498.90 million of 14,988,983 ordinary shares of BDT 100 each as of December 31, 2008.

Source: Audited annual report of MBL, 2008.

Vision

 “Would make finest corporate citizen.”

MBL dreams to become the bank of choice of the general public that includes both the consumer and the corporate clients. They want to build such an image that whenever people will think of a bank, they will think of Mercantile Bank Limited. MBL have created a cadre of young professionals (YP) in banking profession. This has helped boosting productivity in the bank.

 Mission

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

Mercantile Bank Limited aims to become one of the leading banks in Bangladesh by prudence, flair and quality of operations in their banking sector. The bank has some mission to achieve the organizational goals.

Objectives of MBL

Strategic Objectives:

• To achieve positive Economic Value Added (EVA) each year.

• To be market leader in product innovation.

• To be one of the top three Financial Institutions 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 it serves.

Financial Objectives:

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

Business Philosophy of MBL

The philosophy of MBL is not to ‘Carry coal to the new castle’.

Features of Mercantile Bank Ltd

There are so many reasons behind the better performance of Mercantile Bank Limited than any other newly established banks:

  Highly qualified and efficient professionals manage the bank.

  MBL has established a core Research & Planning Division with efficient persons.

  The bank has established correspondent relationship with 240 of foreign banks.

  The computerized operation system in all branches of MBL has provided the frequent and prompt customer service.

  The strict leadership along with the supervision of efficient management directs all the branches.

  The inner environment and teamwork, of all branches in MBL motivated all experienced employees to achieve the ultimate object of MBL.

  MBL has become a member of the SWIFT system expedite foreign trade transaction.

  MBL has become introduced some scheme for the purpose of saving of low income people which are not available in other banks like “Family Maintenance Deposit (FMD)”, “Personal Loan Scheme”, “Car Loan Scheme” etc.

  The bank offers attractive saving rate than other financial institutes.

  MBL provides loan to the customers at lower interest with easy and flexible condition than the others do.

  Along with the profit generation Mercantile Bank Limited also maintain social responsibilities.

  Mercantile Bank Limited charges lower commission from their customer in comparison with other banks.

The Bank is always guided their potential customers by giving valuable advises.

MBL Main Branch at a Glance

 Start of Operation

Main branch is one of the most profit oriented branch of Mercantile Bank Limited which started its operation at 61, Dilkusha Commercial Area on 02 June, 1999 with the 25 efficient and responsible officers. Now the number of employees of main Branch is about 120.

Division of MBL

A.      General Banking & Deposit Management:

Account opening and KYC procedures.

Issuance of DD/TT/PO/FDR.

Interbank Transaction, OBC/IBC.

Account section.

Clearing Section.

It Section.

2. Credit Department:

1. Credit Proposals Processing Procedures.
2. Documentation and Loan Disbursement Procedures.
3. Overview on all returns.

3. Foreign Exchange Department:

1.   Cash L/C
   1. Opening of L/C.
   2. Lodgment of Import Bill.
   3. Payment against Import Bill.
   4. B/E Matching.
   5. IMP Reporting.

1. BTB L/C
   1. Export L/C Checking
   2. Opening of BTB L/C (Local/ Foreign/ EDF/ EPZ).
   3. Lodgment and confirmation of maturity date.
   4. Allowing of PC.
   5. Payment against realization of Export Proceeds/ Forced Loan.
   6. B/E Matching.
   7. Reporting.

Export

• 1. Scrutinizing/ Negotiation/ Send on Collection.

Follow-up.

• 1. Realization.

Reporting.

  IV.      Foreign Remittance

  Inward

1. FDD.
2. FTT.
3. Others.

  Outward

1. Endorsement of Traveling.
2. Education/ Treatment/ Others.
3. Cash Rebate.
4. FC issuing.
5. FDD/ FTT etc.

Services offered by MBL

The Bank launched several financial products and services since its inception. Among them are:

Deposit Schemes:

1. Family Maintenance Deposit (FMD).

2. Monthly saving scheme (MMS).

3. Pension and Family Support Deposit (PFSD).

4. Monthly Benefit Scheme.

5. Quarterly Benefit Deposit Scheme.

6. 1.5 Times Benefit Deposit Scheme.

7. Double Benefit Deposit Scheme (DBDS).

8. Special Saving Scheme (SSS).

Credit Schemes:

• Consumer Credit Scheme (CCS).
• Loan against Monthly Savings Scheme (MSS)
• Car Loan Scheme.
• Doctors Credit Scheme.
• Rural Development Scheme.
• Lease Financing.
• Personal Loan.
• Small Loan Scheme.
• Women Entrepreneurs Development Scheme.
• Ajibon Pension Scheme.
• SME Financing Scheme.

As I worked with the Loans and Advances of the Mercantile Bank Limited only, I am describing the credit schemes below:

Credit Schemes

Consumer Credit Scheme

Consumer Credit is a relatively new field of collateral-free finance of the Bank. People with limited income can avail this credit facility to buy household goods including car, computer and other consumer durable.

Objectives:

• Help fixed-income people for buying household durable.
• For the amount up to Tk. 4,00,000 for car or micro bus, the period is four years and Tk.100000 for house hold, the period is two years. 
• Interest rate will be charged quarterly rest.

Terms & Conditions:

• Interest rate   16.00%
• Risk fund  1% for house hold and 2% for car.
• Supervision charge (per year on outstanding balances) 0.25%
• Application fee BDT 200.00

Special Feature:

The loan amount is directly credited to the customer’s account.

Small Loan Scheme

This Scheme has been evolved especially for small shopkeepers who need credit facility for their business and cannot provide tangible securities. The present maximum range of loan under the Scheme is Tk. 2.00 lac.                                                                    

Objectives:

• Extend credit facility to small shopkeepers.
• Give collateral-free credit.

Modes:

• Maximum amount of loan Tk. 2,00,000.
• Interest rate 16.00%
• Risk fund 1.00%
• Service charge 0.25% per year on outstanding balances
• Application fee BDT 200.00
• Loan limit BDT 2.50 Lac
• Repayment period 3 years
• Interest rate will be charged at quarterly rest

Lease Finance

This has been designed to assist and encourage the genuine and capable entrepreneurs and professionals for acquiring capital machinery, medical equipment, computers and other items, which may help them to be economically self-reliant. Terms and conditions of this credit have been made easier than before in order to help the potential entrepreneurs to acquire equipment of production and services and repay the liability gradually from earnings on the basis of “Pay as you earn.”

Objectives:

Assist and encourage entrepreneurs for acquiring capital machinery, medical

Equipment, automobiles etc.

Terms & Conditions:

• Lease period 3 to 7 years
• Lease rent @ 16.00%
• Risk fund 1.00%
• Service charge 0.25% per year on outstanding balances.

Security:

• Primary: Ownership of fixed items.
• Collateral: Landed property, Bank Guarantee, ICB Unit Certificate etc.

Doctors Credit Scheme

Doctor’s Credit Scheme is designed to provide financing facilities to doctors, clinics and hospitals on easy terms.

 Objectives:

• Help new F.C.P.S. or post-graduate doctors for setting up chambers and buying medical equipment.
• Help experienced doctors for refurbishing chambers and buying medical equipment.
• Assist private clinics for acquiring modern medical equipment.
• Interest rate will be charged quarterly rest.

Terms & Conditions:

• §  Equity

1. For new doctor 10%
2. For experience doctor 15%
3. For Hospital, Clinic and Diagnostic Center 20%

• Interest rate 16.00%
• Risk fund Tk. 1.00%
• ·         Repayment period 5 years

Credit Limit

a. For new doctor 5.00 Lac.
b. For experienced doctor 15.00 Lac.
c. For Hospital, Clinic and Diagnostic Center 50.00 Lac.

• Application Fee BDT 200.00
  • Service charge / Ledger fee 0.25% per year on outstanding balances.

 Rural Development Scheme

Rural Development Scheme has been evolved for the rural people of the country to make them self-employed through various incomes generating activities. This Scheme is operated through the rural branches of the Bank.

 Objectives:

• Raise the standard of living of rural people.
• Initiative to break the vicious cycle of poverty.
• Enhance the purchasing power of rural people.

Terms & Conditions:

• Group Formation
  a. 30 person in a group
  b. 1 group leader
  c. 6 sub-groups consisting 5 person each in a group
  d. 1 sub-group leader in each sub-group

Credit Limit

1.  Maximum Tk. 5,000 per person.
2. Gradually enhance able up to Tk. 10,000.

• Interest rate 14.00%.
• Risk fund 1.00.
• Service charge 0.25% per year on outstanding balances.
• Repayment period 1 year.
• Security: Group guarantee, no collateral.

Women Entrepreneurs Development Scheme

Women Entrepreneurs Development Scheme has been introduced to encourage women in doing business. Under this Scheme, the Bank finances the small and cottage industry projects sponsored by women.

SME Financing

Women Entrepreneur

(Date: 26.04.2008)

Small Enterprise (Limit Max. Tk. 50.00 lac):

 Source: Credit Policy of MBL, 2008

Interest rate:

Maximum bank rate + 5%

Security:

For limit of Tk. 15.00 lac, personal guarantee may be sufficient.

Ajibon Pension Scheme

Ajibon Pension Scheme has been designed mainly for providing income after retirement Under this Scheme one can get life long benefit if he deposits specific amount per month for a period of 10,15,20 or 25 years. The Scheme can also be opened in the name of minors.

SME Financing Scheme

Small and Medium Enterprise (SME) Financing Scheme has been introduced to assist new or experienced entrepreneurs to invest in small and medium scale industries.

Small Enterprise (Limit Max. Tk. 20.00 lac):

 Medium Enterprise (Limit Max. Tk. 50.00 lac):

 Purpose:

  Working capital

  Purchasing of capital machinery

  Delivery van/transport for business purpose

  Refurnishing office/business premises

  Other eligible portfolio of the bank.

Target Segments:

 Fees & Charges:

• Interest rate                 : 15%
• Risk fund                    : 1%
• Service charge             : 1%
• Application fee           : Tk. 200/-
• Loan Processing fee    : Tk. 500/-

 Collateral Security:

• Collateral security for more than Tk. 8.00 lac (Valuation to be done by a survey Co.)
• Two personal guarantees.

 Repayment of Loan:

• Term Loan                   : Max. 5 years.
• Working capital           : Max. 1 year. (40% to be recovered within 1^st 06 months)

Insurance:

Fire insurance & other insurance.

Application Procedure:

  Prescribed application form duly filled.

  Other supporting doc. (application in pad, photos, board resolution, trade license, lease agreement/original deed, TIN certificate, list of stock, IRC, ERC, bank statement, liability with other bank (s), collateral security doc.)

  Identifying source of repayment, ability of repayment, expected future cash flows, past dealing with the bank, net worth, Info. from CIB, Age limit: 21-60 years.

  Site visit report.

  Command area: Preferably be within radius 5 km.

  Approved applications must be checked against Bank’s database.

  Age limit: 21-60 years.

Delegation of Power: 

 Statement:

  Monthly consolidated             (within 10^th of every month)

  Quarterly Statement    (within 04^th day of every month)

Car Loan Scheme

Car Loan Scheme has been introduced to enable middle-income people to purchase Cars/SUVs/Jeeps. Government and semi-government officials, employees of autonomous bodies, banks and other financial organizations, multinational companies, reputed private organizations, teachers of recognized public and private universities and businessmen are eligible for the loan facilities.

 Objectives:

• Help fixed-income people for buying car
• Interest rate will be charged quarterly rest.

Terms & Conditions:

• Maximum loan amount is BDT 25.00 lac.
• Tenure of loan is 05 (Five) years
• Interest rate   16.00%
• Risk fund   1.00%
• Supervision charge (per year on outstanding balances) 0.25%
• Application fee BDT 200.00

Special Feature:

BDT 7.50 Lac for reconditioned Car/Jeeps/SUVs and BDT 25.00 Lac for new Cars/Jeeps/SUVs.

Personal Loan Scheme

Personal Loan Scheme has been introduced to extend credit facilities to cater to the credit needs of low and middle-income group for any purpose. Government and semi-government officials, employees of autonomous bodies, banks and other financial organizations, multinational companies, reputed private organizations and teachers of recognized public and private schools, colleges and universities are eligible for the loan facilities.

Objectives:

• Help fixed-income people for buying house hold Durable.
• For the amount up to Tk. 3, 00,000 the period is 03 (Three) years.
• Interest rate will be charged quarterly rest.

Modes:

• Interest rate    16.00%
• Risk fund    1.00%
• Supervision charge
  (per year on outstanding balances) 1.00%
• Application fee    BDT 200

Special Features

1. The loan amount is directly credited to the customer’s account.

2. Loan limits BDT 3.00 Lac or 8 times of monthly evidenced income, whichever is lower.

3. Repayment period Maximum 3 years that is 36 monthly installments.

A.1: Lends Money

Banking business essentially involves lending. In fact the deposits are accepted for lending and investment. Depending on the requirements of the borrowers, lends money in the following:

a)      Loans: In case of loan, the entire amount is paid to the borrower in lump-

sump, either in case or by way of transfer to his account. The borrower can withdraw the amount at any time. The loan repaid either in installments or lump-sump. Interest is calculated and charged on the debit balance usually with quarterly rests.

b)     Overdraft: Overdraft is usually a temporary agreement where the customer is allowed to allow the withdraw money exceeding the credit of the current account up to an agreed limit. Unlike loan, withdrawals or deposits can be made any number of time, provided the total amount overdraws does not exceeds the agreed limit. Interest is-charged only for the amount drawn.

c)      Cash Credit: A cash credit is an arrangement where the customer is allowed to withdraw money up to the sanctioned limit. Unlike overdraft this a permanent arrangement and usually used to meet the working capital needs of business housed, industries etc. in cash credit account withdrawals and deposits may be effected frequently. Interest is charged on daily balanced and thus the borrower can be save interest by reducing the debit balance with his surplus amount. Cash credit arrangement is usually made against pledged or hypothecation of goods but this could also be extended against personal security.

d) Bill Discounted and Purchased: Another mode of advancing money is discounting of the issuance bill of exchange. The banks buy of the bill before its maturity at a price less than the face value. The amount which the banks deducts from the face value of instrument, is actually the interest calculated up to the date of maturity of the bills. On maturity the bank realizes the amount from the drawer of the bill.

A.2: Creation of Credit

The creation of credit is one of the important functions of commercial bank. In the ordinary course of business, bank accepts deposit from the public and lends money to its customers. When a bank extends loan, it does not pay the amount in the bank account of the borrower and allow withdrawing the required amount by cheque. In this way, a bank creates credit or deposit, which is regarded as money and can be used for the purchase goods and services and also for the payment of debt just like currency notes.

Advances

The Bank has formulated its police to give priority to small and medium business while financing large-scale enterprise through consortium of Bank Total loans and advances of the Bank stood at BDT.41, 993.95 million as of December 31, 2008 as compared to BDT. 31877.86 million In 2007.

Source: Audited annual report of MBL, 2008.

Major score in which the bank extended credit includes trade and commerce, garments industry, large and medium scale industries and constructions.

Source: Audited annual report of MBL, 2008.

OPERATIONAL PROCEDURES OF THE CREDIT PROGRAM

Introduction

The word credit comes from the Latin “Credo” meaning, “I believe”. It is a lenders trust in persons/firms/company’s ability or potential ability to command goods or services of another in return for promise to pay such goods or services of another in return for promise to pay such goods or services at some specified time in the future. The making of loans and advances has always been prominent profitable function of bank. Sanctioning credit to customers and others out of the funds at its disposal is one of the principal services of a modern bank. Advances by Mercantile Bank Limited made in different forms, such as overdraft, cash credits, bills purchased and discounted etc.

Mercantile Bank Limited deals with the money from the depositor repayable on demand.

So, it cannot afford to lock up it fund  for long periods. Mercantile Bank Limited usually grant short- term advances, which are utilized to meet the working capital requirements of the borrower. Only a small position of a bank’s demand and time liabilities is advanced on long-term basis where the banker usually insists on a regular payment by the borrower in installments.

Procedure of Disbursement of Loans & Advances

Loans and Advances

To have crystal clear idea about the Loans and Advances of Mercantile Bank Limited.

Critical analyses of the followings are essential:

• Credit policy of the Mercantile Bank Limited.
• Credit sanctioning authority of Mercantile Bank Limited, and
• Processing and screening of credit proposal.

 Credit Policy of Mercantile Bank Limited

Mercantile Bank Limited 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 Mercantile Bank Limited goes to every possible corners of the society. They are financing large and medium scale business house and industry. At the same time they also take care entrepreneurs through its operation and lease finance and micro-credit, small loan scheme etc.

From Financial Aspects it is observed that as a Matter of Policy

1. Charging of interest is flexible depending on insisting of the proposal and the customer.
2. It takes care and maintaining proper “Mix” of Short, Medium and Long term finance for a period not exceeding five years.
3. Mercantile Bank Limited put emphasis on the customer.
4. It takes care of diversity in credit portfolio.

 Credit Sanctioning Authority of Mercantile Bank Limited

Mercantile Bank Limited in believes in decentralization of power and authority. Because of the evil duel subordination may creep in the chain of command it authority is not well defined and properly implements with a view to ensuring prompt efficient services to its multiple plans spread far and wide, the bank envisages delegation of optimum power to its executive and officials at different level of operation.

In order to implements the system of delegation of power effectively and to drive the desired for the bank as well as the executive concerned, bank has develop a system to ensure that delegated authority by the executive can be evaluated realistically and qualitatively.

The basic guideline they follow to achieve the objective of delegation of authority is-

• The Managing Director can exercise all the powers vested in other executives of the bank.
• The Managing Director may suspend exercise of delegated power of any executive through specific or general order.
• Other than Managing Director, the delegation of powers is exercise by the executive through specific or general order.

Delegated powers are expected to be exercise by the authorized executives judiciously keeping the bank interest in mind. In exercising the powers so delegated authorized executives shall also have credit restrictions as governed by banking company act, Bangladesh Bank for exercising the delegated power-

1. The borrower must be a man of integrity and must enjoy good

       reputation in the market.

1. The enterprise of the borrower must be viable and profitable. That is proposal of the borrower must be evaluated properly and carefully so as to ascertains its profitability.
2. The borrower must have the capital and capability for utilizing credit properly and profitably.
3. No sanctioning officer can sanction any credit to any of his near relations to any firm/company where his relations have financial interest.
4. A customer to who credit to be allowed should be far as possible within the command area.
5. There shall be no power to sanction clear advance.

Tools for Appraisal Credit

The 10 C’s of good and bad loan.

In addition to the formal credit appraisal, the credit of Mercantile Bank Limited tries to judge the possible client based on some criteria. These criteria are called the C’s of good and bad loans. These C’s are described below:

1. Character              Make sure that the individual or company you are leading to the

                                 Outstanding integrity.

2. Capacity               Make sure that the individual or company you are leading to have

                                 The capacity of repaying your loan.

3. Conditions           Understanding the business and economic conditions can and will

                                 Change after the loan is made.

4. Capital                 Make sure that the individual or company you are leading to have an

                                 Appropriate level of investment in the company.

5. Collateral              Make sure that there is a “Second way out” of a credit but do not

                                 Allow that to drive the credit division.

6. Carelessness        Remember that documentation, follow up and consistent monitoring

                                 Are essential to high quality loan portfolio.

7. Communication   Share credit objectives credit decision making both vertically and

                                 Laterally within the bank.

8. Contingencies      Make sure that you understand the risk, particularly the downside

                                 Possibilities and that the structure and price the loan consistently

                                 With that understanding.

9. Complacency       Do not rely on past history to continue. Start alert to what can go Wrong in any loan.

10. Competition       Do not get swept away by what others are doing.

Others tools of good and bad loans are as follows as:

a)      Liquidity

b)      Profitability.

c)      Purpose of loan.

d)     Nature of loan.

e)      Source of repayment.

f)       Diversification of investment.

g)      Policy of Central Bank.

h)      Education and dealings lender.

Lending of Risk Analysis (LRA)

LRA stands for Lending Risk Analysis. LRA is a financial tool used to analyze the risk associated in a loan proposal. According to Bangladesh Bank order every Bank has to conduct LRA for every loan amounting tk.1 core and above Mercantile Bank Limited is frequent user of this technique.

This technique firstly divides all risk into broad aspects:

1. Business Risk.
2. Security Risk.

1. Business Risk

This risk can be analyzed from two aspects-

a)      Industry risk

b)      Company risk

a)      Industry risk: Industry risk can be sub-divided into two segments.

i)        Supply risk

ii)   Sales risk

      Supply risk: It analyze the risk of failure due to disruption in the supply

      of input.

      Sales risk: This risk arises from the failure due to disruption of sale.

b)      Company Risk: This risk can be sub-divided into two sectors.

j)        Company position risk.

                    ii)   Management risk.

Company position risk: It is of two types.

                     i) Performance risk: By analyzing performance risk is a credit officer can

                     Be sure what the risks that the company position is so weak that it performs

                     Well enough to repay the loan, given expected external condition.

                   ii) Resilience risk: By analyzing resilience risk is a credit officer can analyze

                    What the risks of failure due to lack of resilience to unexpected external

                    Condition.

                  Management risk: It is of two types:-

                   Management competency risk: Management competency risk is the risk of

                   Failure due to competency of the management, which run the company.

                   Management integrity risk: Management integrity risk is that type of risk,

                   Which occurred due to lack of management integrity?

2. Security Risk

               Security risk basically two types , these are:-

                 i) Security control risk: Security control risk is that type of risk when bank

                 Fails to realize the security.

                 ii) Security covers risk: Security covers risk is that type of risk when the

                 Realized security value is less than the exposure.

 Processing and Screening of Credit Proposal

There some common regulatory directives governed by Banking Companies Act, Bangladesh Bank and The Law of the State which or to be followed strictly at the time of screening a credit proposal. In addition credit proposals are appraised critically by Mercantile Bank Limited credit officers from various angle tom judge the feasibility or viability of the proposal.

The customers at the branches of the bank place credit proposals. When a customer comes with a credit proposal, the credit department of the branch makes an open discussion with the customer on different issues of the proposal to judge the worthiness of the proposal and the customer. If the proposal seems to be worthwhile in all respects then the proposal is placed before the credit committee of the bank. After threadbare discussion, if the committee agrees in principle the proposal is sanctioned as par the delegated business power of the branch.

Again if the merit magnitude of the proposal is beyond the delegated business power of the Head Office Credit Committee/Managing Director they forward the proposal to the Board of the Bank with recommendation for approval. It is pertinent to mention that there is a credit committee at the branch headed by the branch incumbent and at the Head Office headed by the Managing Director. Branch Manager and the Managing Director of the bank are authorized to exercise business power up to the extent as delegated to them. Beyond the delegation of the Managing director, the approving authority is the Board. However, the Board Directors again authorized a committee of the Board consisting a number of Directors namely “The Executive Committee” to exercise business power up to an extent so delegated to them.

Mercantile Bank Perspective

MBL is a unique characteristic in its loan management. To make it sure that there will be no bad loan in its loan portfolio. MBL established a loan monitoring and supervision cell headed by an Assistant Vice President under the nursing of its chief advisor Lutfar Rahman Sarker. They frequently visit customer premises/business whether the loan amount which is taken used properly of not, sometimes it happens that customers need
more fund or other type of facilities to run its business profitably. The monitoring authority takes necessary steps to meet the customer’s need.

Bangladesh Bank Perspective

The Bangladesh Bank formulates and implements monetary and Bank supervision policies and advises the Government on economic policy within the framework of the Bangladesh Bank order 1972. The Banking companies/company Act, 1991 and the Financial Institution Act, 1993 that give the Bangladesh Bank general powers to direct banks and financial institutions to conduct monetary policy and to specify and implements prudential rules and requirements.

Bangladesh Bank is empowered to conduct inspection of the scheduled Bank under section 44 of Banking companies Act. 1991 Section 44 of the Act says the Bangladesh Bank at any time may either, or its own motion or on being directed to do so by the Government shall. Cause an inspection to be made by one or more of its of any banking company ad its books of account.

An inspection team normally consisting of a Deputy Directors as a term leader and two Assistant Directors inspect each bank branch. In case of large branches having advances of Tk. 5.00 core and above a joint Directors lead the inspection team instead of Deputy Director. The leader of the team fixes up time and place where the team wills meet on the date of inspection. The leader of the team is supplied with a directive for inspection, which is addressed to the Manager of the branch concerned. The team reaches the concerned bank branch before it opens for transactions and cash is brought out of the vault. The first duty of the team is to take into their custody, casebook and general ledger before starting physical verification of cash balance. It includes the verification of foreign currencies, prize bonds, stamp and stamp papers and stoke of cheaque books, D.D. forms and shares and securities. Usually the books off account of the book are examined as on a particular data but inspections, especially to find out cases of violation of Bank Company Act, 1991, credit restrictions and other instructions issued by Bangladesh Bank and Government from time to time.

 Security

It is essential that the proposal define clear the purpose of the facility, the sources of the repayment, the agreed repayment schedule, the value of security (Land, Machineries, Security paper etc.) and the customer relationships consideration implicit in the credit decision.

Where security is to be accepted as collateral for the facility all documentation relating to the security shall be in the approved form.

All approved procedures and required documentation shall be completed and all securities shall be place, prior to the disbursement of the facilities.

The bank for creation of mortgage on the property requires the following documents:

• Original Scale Deed favoring owner of the landed property.
• Certified copy of Mutation khatian.
• Duplicate Carbon Receipt (DCR).
• Certified copy of the Scale deed of the previous owner of the same property.
• Up-to-date Rent receipt and Municipal Tax Receipt.
• Clearance from Rajuk/Works Ministry (if the property is lease hold property of any of them) in connection of availing the loan facility from Mercantile Bank Limited, Dhanmondi Branch, Dhaka by mortgaging the property.
• Valuation certificate.
• Rajuk approved plan of the building with the approval letter.
• Site plan/Mouza Map.
• Photograph of the property from three different angles and the owner of the landed property.
• Board Resolution for mortgaging the property if the same belongs to any Limited
• Company.
• Certified copy of C.S, S.A, R.S Khaitan.

The borrower is request to submit the above-mentioned papers in original for verification by the bank lawyer and creation of mortgage on the property intended to mortgage against the mortgage.

 Documentation

A document is a written statement of facts of proof or evidence arising out of particular transaction, which on placement may bind the parties there to answerable and liable to the court of law for satisfaction of the charge in question.

The execution of documents in proper form and according to the requirements of law is known as documentation. The documentation does establish a legal relationship between the lending bank and the borrower.

The terms and condition of the loan and advances, the securities charged and the repayment schedules are recorded in writing proper documentation is sine quinoa to safeguard the future interest of the bank.

Document is necessary for the acknowledgement for debt by the borrower and charging of securities to the bank by him. Proper and correct documentation is essential not only for the safety of an advance but also necessary for taking legal action against the debtors in case of non-payment of dues. Depending on the types of loans an advances different documents are required. Such as:

 Loan

1. Demand Promissory (D.P) note.

2. Letter partnership (in case of partnership concerns) or Resolution of the Board of

    Directors (in case of Limited Companies).

3. Letter of arrangement.

4. Letter of disbursement.

5. Letter of pledge (in case of pledge goods).

6. Letter of hypothecation (in case of advances against shares).

7. Trust Receipts (in case of LTR facility).

8. Letter of lien and transfer authority (in case of advance against PSP, BSP, etc.).

9. Letter of lien and ownership (in case of advance against shares).

10. Letter of lien for packing credits (in case packing credit).

11. Letter of lien (in case of advance against FDR).

12. Legal documents for mortgage of property (as drafted by legal advice).

Overdraft

1.  Demand Promissory (D.P) Note.

2.  Letter of arrangement.

3.  Letter of partnership (in case of partnership concerns) or Resolution of the Board of

     Directors (in case of Limited Companies).

4.  Letter of continuity.

5.  Letter of lien (in case of advance against FDR).

6.  Leal documents for mortgage of property (as drafted by legal adviser).

7.  Letter of lien and transfer authority (in case of advance against PSP, BSP,etc.).

8.  Letter of lien and ownership (in case of advance against shares).

Cash Credit

1. Demand Promissory (D.P) Note.

2. Letter of arrangement.

3. Letter of partnership (in case of partnership concerns) or Resolution of the Board of

    Directors (in case of Limited Companies).

4. Letter of continuity.

5. Letter of pledge

6. Letter of hypothecation.

7. Letter of lien (in case of advance against FDR).

8. Leal documents for mortgage of property (as drafted by legal adviser).

9. Letter of lien and transfer authority (in case of advance against PSP, BSP,etc.).

10. Letter of lien and ownership (in case of advance against shares).

Bill Purchase

1. Demand Promissory (D.P) note,

2. Letter of hypothecation bill.

3. Letter of arrangement.

4. Letter of partnership (in case of partnership concerns) of Resolution of the Board of

    Directors (in case of Limited Companies).

All required documents, as enumerated above, should be obtained before any loan is disbursed Disbursement of any credit facility requires approval of the competent authority that should ensure, before exercising such delegated authority, that all the required documentation’s have been completed.

Main Branch like other branches ensures proper documentation and submission of monthly statement to Head Office on Prescribed format confirming such compliance.

Short Notes of these Documents

  Demand Promissory note (D.P)-Joint & Several D.P note for limited company.

  Letter of Disbursement- The loan amount has been sanctioned in favoring the customer.

  Letter of Hypothecation with supplementary- In case CC (Hypothecation) and where there is hypothecated charge on goods and assets.

  Letter of Continuity- In case of continuity loan as CC (Hypothecation) SOD etc.

  Letter of Lien- To be given by the holder/owner of the instrument where PSP, BSP, FDR, DBDR etc. are kept under lien as security.

  Letter of Security Deposit- where PSP, BSP, FDR, DBDR etc. are kept under lien as security.

  Letter of Undertaking-In case of Heir Purchase Loan, Lease Finance, Consumer Credit.

  Letter of Installment- In case of loan where loan is repaid in installment.

  The land lord gives letter of Disclaimer- To where the customer is at a rental premises.

  Personal Guarantee- Proprietor all Directors in case of Limited Company and of the owner of the property to be mortgage if any.

  Memorandum of Deposit of Title Deeds- Where properties is mortgaged as security.

Execution of Documents

Documents to be executed by the parties concerned competent to do so either in capacity or in personal capacity as the case may. In some cases some cases such documents are required to be executed in presence of witness.

The following precautions are to be taken at the time of executions of documents-

  Documents to be filed in and are executed in the presence of manager or an authorized officer of the bank.

  Mentions of date and place of execution in a document in mandatory.

  If the documents consists of more than one page. All the pages are to be signed by the executions at the end of the form and also at the end of the schedule of securities.

  The client should sign in according with the specimen signature recorded with the bank.

After execution/Registration of documents, these should be entered in to the Register duly scrutinize and initiated by an authorized officer of the Bank.

Different Types of Advances

This section leads the funds what the bank mobilizes through its various deposit accounts. This is the second function of banks two genetic function-

  Deposit Mobilization and

  Credit Creation.

Since major part of banks income is derived from credit and since the money banks credit is customers’ fond, bank should take extreme caution in lending. Otherwise, defaulted loan may increases. If defaulted loan increases, bank profitability and credit-giving capacity will fall which in turn may result in bank run.

Credit is continuous process. Recovery of one credit gives rise to another credit. In this process of revolving of funds, banks earn incomes in the form of interest. A bank can invest its funds in any ways. Bank makes loans and advances to traders, businessmen and industrialist. Moreover nature of credit may differ in terms of security requirement, disbursement provision, terms and conditions etc.

MBL deals with the money from the depositor repayable on demand. So, it cannot afford to lock up it fund for long periods. MBL usually grant short-term advances, which are utilized to meet the working capital requirement of the borrower. Only a small portion of a bank’s demand and time liabilities is advanced on long-term basis where the banker usually insists on a regular repayment by the borrower in installments.

Total Loan & Advance of Main Branch up to 31 December, 2007 was 158,77,91,022.23.

Total Advances of Main Branch

 Source: Statement of affairs of Main branch.

 Recovery & Follow up of Nonperforming Loans & Advances:

Loans and advances in whatever form granted by the Bank to its clients are repayable either on demand or at the expiry of fixed period or as per repayment schedule agreed upon while granting the facilities. If loan is repayable on installment basis, default may be purely an oversight on the part of borrower but in other cases, it may be much more serious, giving the Bank the first tangible evidence that the borrower is in financial difficulty. At this point the procedure for dealing with potential loan losses comes into operation. The Head of Branch should, therefore, keep a close and constant watch on all their loans and advances to ensure that timely action is initiated in each case for adjustment of the account or its renewal, if it is decided to continue the facility.

For this purpose, each Branch should maintain a diary/card in prescribed format in which the due date of expiry of credit facility, a notice should be sent to the borrower reminding him of the due date of repayment and making a formal demand for repayment/renewal as the case may be. Vigorous follow up action should thereafter be taken by issuing repeated reminders and putting pressures on the borrower by calling on him personally. In other words, all out efforts should be taken to recover the advance on its expiry. However, if in spite of vigorous persuasion the borrower fails to adjust the liability within the date of expiry of the facility, the liability should be downgraded to Special Mention (Grade-5) to facilitate monitoring and further follow up. The branches should however, still make constant efforts to recover the advance if necessary, through legal process. Before filing of the suit, Head Office approval should be obtained.

CREDIT FACILITIES EXTENDED BY MBL

Credit Facilities Extended by MBL

The Credit facilities extended by MBL can be divided into two ways:

 Loans and advances in different sector as on 31 December, 2008(Main Branch)

 Source: Statement of Affairs as on 31.12.2008 of Main Branch.

Credit Monitoring / Supervision of Cell

MBL is a unique characteristic in its loan Management to make sure that mere will be no bad loan in its loan portfolio. Mercantile Bank Limited established a loan monitoring and supervision cell headed by and Assistant vice President under the nursing for its chief advisor.

They frequently visit Customer premises of business whether the loan amount, which is
taken is used properly or into, sometimes it happens that customers need more fund or
other type facilities to run its business profitably. The monitoring authority takes
necessary steps to meet the customer’s need.

Interest rate of different Types of Advances

 Sources: Credit policy of MBL, 2008.

Funded Credit

Detailed Operation Mechanism of Each Criterion Overdraft

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 are generally granted to businessmen for expansion of their business, against the securities of stock-in-trade, shares, debenture , Government promissory notes, fixed deposit, life policies, gold and gold ornaments etc.

Nature – Short term loans.

Interest rate: 16% per annum.

Terms and conditions:

1) Bank may cancel/alter the sanction without assigning any reason whatsoever.

2) In case of client failure to pay the Bank’s dues with in the algidity of the limit bank

     may encase client pledge without any prior intimation to client,

Consumer Credit

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 organizations:

  Government Organization

  Semi-Government Organization

  Multinational Organization

  Bank and Insurance companies

  Reputed commercial Organization

  Professionals.

Nature: Mid-term Micro credit.

Interest rate: 13.50% per annum.

Terms and Conditions:

1) Credit will procure the specified from the dealer/agent/shop(s) acceptable to bank.

2)  All the papers/cash memos etc. related to the procurement of the goods will be in the

     name of the Bank ensuring. Ownership of the goods. Where applicable. The

     ownership shall be transferred in the name of the client after full adjustment of bank’s

     dues.

3)  The client shall to bear all the expenses of License, Registration, Insurance etc. of the

     articles wherever necessary.

4) The client shall to bear the cost of Repair and Maintenance of the acquired articles.

Modes of Recovery

Incase of Consumer credit scheme dues shall be recoverable in the following manners;

   In equal monthly installments.

   The monthly installment shall be repayable by the 7^th of every month, but the 1^st installment shall be payable by the 7^th of the subsequent month of disbursement.

   Through deduction from the monthly salary of the client wherever applicable, by his employer to deduct the said amount from his monthly salary. The authority can only revoked by the client with the concurrence of the Bank.

 General Loan

When an advance is made in a lump sump repayable either in fixed monthly installment or in lump sump and no subsequent debit is ordinarily allowed excepted 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 of by way of credit to his current/savings account.

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

 Interest Rate: 14.50% per annum.

Loan disbursement system: One time.

Terms and Conditions:

i) Disbursement will be made after completion of all formalities.

ii) Bank reserve the right to cancel or amend the terms and condition partly or wholly at is direction without assigning any reason whatsoever.

iii) When the principle debtor in fulfilling this obligation or promise liability bestow on guarantor.

Loan against Trust Receipt (LTR)

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 requiring 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 are generally granted to exporter for exportation of goods.

Interest rate: 14% per annum.

Terms and Conditions:

   Disbursement will be made after completion of all as per sanction terms.

   Supplier credit report to be obtained before opening of L/C’s.

   Excess drawing over the sanction limit is strictly prohibited.

   Customer will maintain effective and constant supervision and follow up to ensure timely adjustment of the loan to avoid overdue.

 Loan against Trust Receipt

 Source: Half Yearly Report of Mercantile Bank Limited, 2008.

Packing Credit

Packing credit is essentially a short-term advance granted by MBL 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 does 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 exporter.

Interest rate: 7% per annum.

Terms and Conditions:

   Disbursement will be made after completion of all formalities as per sanction terms.

   The amount advance against packing credit will be adjusted from the amount payable to exporter on negotiation or purchase of the bill.

   The exporter letter of credit should be irrevocable, constricted and valid and confirming bank must mark lien on it.

Source: Monthly Statement of Main Branch, 2008.

Hire Purchase

Another form, of consumer credit such as Hire Purchase facility also given by MBL. The feature of Hire Purchase that usually a deposit has to be paid and the rest of the purchase price are spread over a period -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: Hire purchase normally allowed to those persons who have either fixed source of income or who desire to pay it in lump-sum.

Interest rate:  14.50% per annum.

Terms and conditions:

   The durable will be covered by first party comprehensive insurance throughout the loan period and the premium for the policy of each year will be borne by the client.

   Retailed feasibility report containing marketing, financial. Technical and socio-economic aspects showing detailed break up of project cost and other usual financial analysis duly supported by its assumption.

PAD (Payment against document)

A loan facility provided by the bank to the customers against document/bills, like. Bill of leading, Warehouse keepers’ certificate / receipts, Railways 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 authority. If falls under the category “Commercial Lending”.

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

Interest rate: 14% per annum.

Terms and conditions:

   In the event of default by the borrower ban 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 reserves the right to cancel or amend the terms and condition partly or wholly at its direction without assigning any reason whatsoever.

Personal Loan Scheme

Personal loan is another method If 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:

   Government Officials

   Semi-Government Officials

   Employees of Autonomous Bodies

   Employees Bank and Other Financial Institution

   Employees of Multinational Companies

   Employees of reputed Private Organizations

   Teachers and staff of Public/Private Universities

   Teachers of recognized Schools and Colleges

Loan Limit

Maximum loan limit is TK. 3 (three) Lac However, the loan should not exceed eight times of the gross salary per month of the person.

 Loan Repayment Period

The maximum loan period is 3 years i.e, repayable by maximum 36 equal monthly installments.

Purpose of Personal Loan

Personal loan may be allowed to cater to the following credit needs of the eligible persons:

1.      House Renovation/Decoration.

2.      Home Furnishing

3.      Home Appliances

4.      Communication Gadgets (Land phone, Cellular phone, Fax machine etc.)

5.      Kitchen Appliances

6.      Cookeries and cutleries

7.      Office Equipment (Computer, Copier, Scanner, etc.)

8.      Audio/Visual appliances

9.      Travel

10.    Medical Treatment

11.    Education

12.    Marriage.

Source: Yearly Report of Mercantile Bank Limited, 2008.

The Branch will apply interest rate @ 16.00% on personal loan scheme.

   For MBL employees’ interest will be @ 10.00%.

   Interest rate will be charged at quarterly interest.

   Other existing terms and conditions of personal loan scheme will remain unchanged.

Cash credit against 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 an 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:  14.50% per annum.

Renew system: It can be renewed after one year.

Terms and conditions:

1.   Insurance policy to be obtained against the stocks to be hypothecation cover in fire

      and RSD risk at the cost of the customer.

2.   Stock report to be submitted on monthly basis.

3.   Banks reserve the right to cancel or call back the sanctioned credit limit.

 Non-Funded Credit * 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.

Letter of Credits are Two Types

i) Traveler’s letter of credit issued for the convenience of the traveling public,

ii)Letter of commercial credit issued for the purpose of facilitating trade transaction.

Eligibility: Letter of credit facilities are given to exporter, manufactures/producers.

Terms and Conditions:

   It should stipulate the name of the loan/credit/grant.

   It should bear the name of the designated bank.

   Items mentioned in the LCA form must contain with the permissible items.

   The bank offices periodically inspect the goods and verify that they confirm top the quality and quality etc. as mentioned in the particular letter of credit.

   In case of first class customers, the facility may, however, be granted against firm contracts with overseas buyers.

 Rate of Commission:

0.50% per annum.

Letter of Guarantee

A letter of guarantee has special significance in the business of banking as a means to ensure safety of funds lent to the customers. In case the borrower is unable to provide the security of tangible assets or, the value of the assets falls bellow the amount of the loan, and the borrower’s personal security is not considered sufficient, an additional security is sought by the banker in the form of a guarantee giver by third person.

Terms and Conditions:

1.       The banks legal adviser must verify all security documents.

2.      When the principal debtor default in fulfilling this obligation or promise the liability bestow on guarantor.

3.      Banks reserve the right to cancel or amend the terms and condition partly or wholly at its direction without assigning any reason whatsoever.

Different Micro credit programs provided by 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.

Micro credit program of MBL

Customer credit is a relatively new field of collateral-free finance of Bank. People with limited income can avail of this credit facility to buy house holds goods including car, computer and other consumer durables.

Objectives:

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.

Eligibility:

MBL has some limitations to take loan under CCS. That is very much important to the bank to recover the loan/disbursement amount within due time. Some of them are-

   The consumer should be at least Govt./Non-Govt. Officer.

   In case business, that should be established and that should be accepted by the Bank.

   Applicant’s working place/business firm must be under Dhaka City Corporation.

   Applicant’s age limit should be 15 to 50.

  Guarantor should be sign in the Guarantor Letter and Main application form where indicated.

   Working place/business firm of Guarantor must be under Dhaka City Corporation.

   Applicants will give two attested photographs.

Facilities:

Lubricant facilities of this scheme is that, the loan amount directly placed to the consumer account and not necessary any collateral security for this loan.

Interest Rate/Service Charge/Risk Fund/installment:

 In case of this credit facility the consumer have to pay 14% of equity, 1% service charge and 1% risk find. payment should be made by monthly (24 installment up to 1 lac) within the 1^st week of every month. Incase of car, maximum loan amount should be 4 month. Installment amount is compound made (interest with principal).

The rate of interest is 14% in case of Consumer Credit Scheme.

Total outstanding: Total outstanding of CCS at Main Branch from January 2007 to April 2007.

Main Branch

Outstanding CCS Loan Position

At the end of April 2008

 Source: Monthly Statement of Main Branch.

Small Loan

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 with in 2 years (extensional) Creditor has to pay 14.50% interest, Risk Fee 1% and Supervision fee 1% (for one time.

 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-reliant.

 Objectives:

   Help the entrepreneurs to buy tools, treatment instrument, car, generator, Air conditioner etc.

   To help improvement of industries in the country.

Categories of Lease Items

Capital Machinery, Medical equipment, Automobiles, Air-conditioner, Lift and Generator etc.

Securities

Primary the applicant will mortgage his /her all document of property and than Land, Bank guarantee, Shanchay patra, ICB unit certificate etc.

Facilities:

Terms and conditions of this scheme have made easier than ever before in order to help the potential entrepreneurs to acquire equipments to production and services and reply the liability gradually from earning on the basis of “Pay as you earn”

 Interest Rate/Service charge/Risk fund/Time Limit:

Rate of return of Lease Finance per annum 15% and service charge 1% and risk fend 1% of loan amount for one time. Loan amount (with interest) will be paid within 3 to 7 years depend on lease category.

Doctors’ Credit Scheme

Doctors’ Credit scheme is designed to facilitate financing to new doctors, established doctors, Clinic and Hospitals at easy terms. It is not available in Mirpur Branch.

Objectives:

   To make chamber, purchase treatment instruments etc. for newly FCPS or  postgraduate holder doctors.

   Redecoration, purchase modern tools for establishment doctors.

   To help the purchase modem tools, for batter treatment in to the private Hospital and private Clinic.

Equity Share

For new Doctors 10%, experienced Doctors 15% and for hospital, clinic and diagnostic Centre 20%.

 Source: Audited annual report of MBL, 2008.

The branch will apply interest rate @ 13.50% on Doctor’s Credit Scheme (DCS).

a) Interest will be charged at quarterly interest.

b) Other existing terms and conditions will remain unchanged.

Rural Development Scheme

Rural Development Scheme has been evolved for the rural people of the country to make them self-employed through financing various income generating activities.

This scheme is operated through the rural branches of Mercantile Bank Limited. It is not available in Mirpur Branch.

 Objectives:

   To developing rural people.

   To increasing purchasing power among the rural people.

Loan Limit:

Per person Tk. 5,000.00 to Tk. 10,000.00

Security:

Group guarantees not essential others.

Interest rate/Service charge/Risk fund/Time limit:

Rate of return of Rural Development Scheme-per annum 14% and risk fond 2% and service charge 1% for one time. Loan amount (with interest) will be paid within 1 year.

Sector Wise Break-up of Loans

 Source: Credit division of MBL.

Classified Loans of MBL

MBL Follows a 1 to 4 Scale status for each of their credit, in the line with Bangladesh Bank guidelines. The Scale are as follows.

Unclassified

Classified

   Substandard

   Doubtful

   Bad

Unclassified Loan: All loans except the classified loans are called unclassified.

Classified loan:

Substandard:

The criteria For a Substandard ratings are:

   Problem in Industry

   Loosing market share

   Severe management problem

   Company operating at losses with sales going

   down

   Unsatisfactory payment record

   Liquidity below 1X/ Insufficient cash flow

   High leverage

   Financial information not available

   Account has past dues over 180 days old.

Doubtful: The criteria of substandard are:

   All criteria of substandard

   Client out of business

   Past due over 270 days

Bad & loss: The criteria of BL are:

    All criteria of doubtful

   Past due over 360 days.

Outstanding amount of various types of loans

Main branch

Taka in Thousand

a.   Substandard

b.   Doubtful

c.   Bad & loss

Total loan and Advances

 Source: Credit division of  MBL, 2008.

Risk in lending to Borrowers

  Borrower’s ability to repay Borrower’s ability to repay again depends on

           Various factors:

• Management risk
• Financial risk
• Operational risk
• Business risk
• Country Risk

INTERNSHIP POSITION AND DUTIES

Position and Duties

I joined the Mercantile Bank Limited, Main Branch at Dilkusha 03 October 2010 for completion of my three months internship period. From very beginning my duty was in Credit Section as an intern under Md. Delwar Hossain (Senior Executive Officer), Niladri Biswas (Executive Officer), Md.Shakawat Hossain (Assistant Officer). Actually, I have been worked with loan sanctioning against MSS (Monthly Savings Scheme) of the Client. I have worked whole the period of my internship in the credit department under the supervision of Md. Dewan Reza Ali (First Assistant Vice President) up to completion my internship period.

My learning experiences from this department are given below one by one as a bullet point:

Credit Section:

• Accept customer loan offer.
• Process that offer in the form of credit.
• Lien of customer accounts.
• Sorting the loan form and put that form in according to customers file.
• Fill up the limit form, sanction letter.
• Take signature in charge documents from the customers.
• Opening of loan account.
• Preparing credit proposal.

FINDINGS, CONCLUSIONS AND RECOMMENDATIONS

 Findings

• MBL committed to their prospective customer to honor its cheque within 30 seconds after submission but unfortunately most of the time they are unable.
• Lacks of motivating mid and lower level officers.
• Lower level officers compare to the upper and mid level officers are not happy regarding their promotion.
• In a few case I have seen that the right person isn’t placed in the right place.
• Centralization of MBL some times in turn leads to slow down of their activities.
• MBL has introduced Q-cash service in the city. But unfortunately all the branches of MBL are not providing this service. To get Q-cash service the customers have to wait several days because the head office issues it.
• MBL has not yet setup proper network system, which is very important to compete with the others in this technical world.
• The software those are used by the Bank is not compatible to the technical world. The others competitive Banks are attracting the people with new technologies for the new generation.
• Loans and Advances is mainly concerned with the credit disbursement & recovery.
• In order to strength Loans and Advances & recovery position of the loans and            advances by a bank it has been decided by MBL to follow some tools and techniques for credit appraisal.
• MBL provides high quality financial services to strengthen the well-being and success of individual industries & business communities.
• The objectives of MBL is not only to earn profit but also to keep social commitment & to ensure its cooperation to the person of all level, to the businessman, industrialist-specially who are engaged in establishing large scale industry by consortium and the agro-based export oriented medium & small scale industries by self inspirati

Conclusions

In the changing concept of banking, financing in some areas, especially in advances to agriculture, small industries, small borrowers and export oriented industries are assuming great importance. Investment is the most important asset as well as the primary source of earning for the bank. On the other hand this is also the major source of risk for the bank. So the bank should always try to make an appropriate balance between its return and risk involved with the investment portfolio. Close supervision and effective follow up of investment activities might reduce the risk to a great extent. An unsupervised investment might be stuck up. Consequently not only the depositors but also the general share holders will be deprived of getting back their money from the bank.

So as a private bank MBL is trying it’s best to extend their service to the public. MBL, Main Branch provides all kinds of commercial banking services to its customers. Foreign Exchange department is doing well in rending all the services related to the international trade and remittance. Though the advance of Main Branch is high, the Credit department will be in a good position if the Branch able to recover that. General banking is engaged in cash receipt, payment, cheque clearing, opening accounts, deposit scheme, and local remittance etc. So if the MBL wants to continue a profitable business and position itself as one of the top bank in the bank arena then it has to earn the trust of their assets andmust be concerned about their commitment to the customers.

Recommendations

• The number of customer is increasing. To keep the commitment MBL must increase its manpower. So the customer gets their result without wasting time.
• MBL should take necessary action to motivate its officers to encourage them to work hard to make them believe that they are also a part of the team and the bank does think about them.
• Management should place right person in the right place.
• MIS cell should be developed through internal, tax e-mail etc.
• Accounting system of the Bank should be software base.
• Fund management of the Bank should be more efficient. This will reduce the average cost of working fund.
• Productivity measurement should be done from time to time through developing customer services.
• Stuck up advances should be reduced through more recovery at lower rate of interest.
• MBL should take necessary step to increase their network facilities.
• ATM card facilities are not easy of MBL. So they are losing their many potential customers. So I think MBL should take necessary step to easy their ATM card facilities for their customers.

BIBLIOGRAPHY

Reference Books

• Altman, E. I. (1970).Corporate Bankruptcy Prediction and its implications for commercial loan evaluation.
• Newman, A.M. (1936), “The Doctrine of Liquidity”, The Review of Economics, Vol-3.
• Rose, Peter S. (1999), Commercial Bank Management, Fourth Edition, Irwin-McGraw-Hill New York.
• C. R. Kothari, Research Methodology

Annual Reports

• Mercantile Bank Limited, Annual Report 2007 and 2008.
• Bangladesh Bank, Annual report 2007.

Website

• Website of MBL (www.mblbd.com)

Other References

• Daily Statement of Mercantile Bank Limited at Main Branch, Dhaka.
• Monthly Report of Mercantile Bank Limited of the year, 2008.
• Schedule Bank Statistics of Mercantile Bank Limited, July-December,2008,
• Statement of affairs of MBL, Main Branch.