Abstract

In Banks and Financial Institutions, Credit Risk is considered as an essential factor that needs to be managed. Credit Risk is the possibility that a borrower or counter party will fail to meet its obligations in accordance with the agreed terms. Credit Risk, therefore, arises from the Bank’s dealings with or lending to corporate, individuals and other Banks or Financial Institutions.

Credit Risk Management needs to be a robust process that enables Banks to proactively manage loan portfolios in order to minimize losses and earn an acceptable level of return for shareholders.

Mercantile Bank prepared Credit Policy in May 2000 and circulated the same to the Branches / concerned Executives for Compliance which was revised in August 2003.In order to cope with the fast changing scenario of dynamic global economy, liberalization and globalization and in the light of the directives / suggestions of the Focus group of Bangladesh Bank, the Credit Policy has been revised in October, 2005.

All Executives / Officers of the Branch as well as Head Office especially those are entrusted with the responsibility of Credit marketing, approval processing, credit monitoring, recovery and compliance, must keep themselves thoroughly conversant with the contents of the Credit Policy for meticulous compliance.

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

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

In this report those credit schemes are high lighted only which are most familiar to common people as well as frequently practiced by a bank especially MBL Gulshan Branch. And only the parts relevant to my focusing fields have been taken, thus the actual credit Policy has been shortened to facilitate the study.

1.1 Forward:

This report has been done as per the requirement for successful completion of the Internship program. Exposure to the business world and acquiring practical work experience was the primary objective of this report. I was attached with Mercantile Bank Ltd at its Gulshan Branch for my internship. The report focuses on credit division as I was attached with that division during the period of my internship program. The topic for this report was decided upon after approval by my Honorable Program Supervisor Mrs. Nadia Newaz Rimi, Lecturer, Department of Management Studies, Faculty of Business Studies, and University of Dhaka.

1.2 Problem Statement:

Banks Practice, and how it runs and what function it does in providing loans to clients are technical job and have a great prospect in our country. Credit Policy of all the private commercial banks is almost same, as they follow and are to follow the common instructions and guidelines of Bangladesh Bank. But they differ in actual practice of loans and advances. Again each bank has some special schemes of loans and advances that are fully or partly exclusive.

1.3 Objectives of the report:

The present study has been designed to achieve the following objectives:

v The first objective is to know about the MBL Credit Policy as a private commercial bank.

v Secondly how MBL operates its credit division being controlled with rules & regulations of Bangladesh Bank.

v The another basic objective of the report are to see whether the process of Credit Practice Operation in Mercantile Bank Ltd. is complying with the guideline issued by Bangladesh Bank and how Mercantile Bank Ltd. is handling the loans & advances.

v To find out barriers or bottlenecks in sanctioning the overall loans and advances process.

v To recommend on those problems.

1.4 Methodology of the Study:

The study was based on secondary data. In order to prepare the report fruitful various source & method of data collection were used.

1.4.1 Sources of data:

In this report only Secondary data have been used. For both the Organization part and Project part, quantitative information from the Annual reports of MBL and qualitative information from other literature regarding the various divisions and their functions, operations were used. So, only secondary data were utilized. For the project part, primary data were collected by holding informal interviews with the employees to learn about their response/reaction to the change that is occurring in the organization. While I was conducted the study I collected various types secondary data. Data has been collected through different sources, by interviewing the responsible officers, bank’s annual report, and from different circular published by the Bank.

1.4.2 Methods of Data Collection:

There are so many methods of data collection which was relevant & important for the study. The methods used in this report were as follows:-

Interview Method: To collect information direct interview was taken of the manager of operation, loan in charge, executives, officials etc.

Observation Method: To collect some information relating to the practice of loans and advances in terms of approval, sanctioning and mode of disbursement an observation was conducted.

1.5 Limitations of the Study:

The following limitations are apparent in this report:-

v The branch at where I was sent for doing internship was 2 and ½ years old. So the branch does not and can not practice of all the Schemes, Loans and Advances as prescribed by the policy.

v There was little or no scope of work at credit division of the branch for the internee students. So I could not realize well all the procedures of credit.

v Only those loans & Schemes which are highest practiced by the branch have been focused in this report.

v No amount of sector wise allocation of loans and Advances of entire MBL was given. Rather than the figures relating to Gulshan Branch only has been used. Collecting all data of allocated loans of entire MBL was impossible being attached with a branch.

1.6 Rationale of the Study:

In this 21^st century Banks are the life-blood of modern economy irrespective of its size & pattern. Banks are established to earn profit and help economic and financial activities so as to help economic development of a county. In such a context, the main business of Banking is to take deposits from customers and sanction credit to the borrowers. In performing multidimensional activities like borrowing and lending of money, the world of banking is under going a transformation. Beside banks are direct agents to create opportunities for the development of a country and also provide large scale of employment opportunities. Banks are the most important functionary of financial system of a country and Mercantile Bank Limited is one of them. It plays a dynamic role in the economic development of a nation through of saving and allocation of credit to privates and industrial sectors. It diverts and employs the funds in such avenues which are aimed to develop a country’s economy.

Banking today has evolved into a highly competitive and sophisticated business in which technology increasingly provides the edge. The study is attempted to know & learn about the credit Practice of a private commercial bank as a sample of all private commercial banks. How they work that is the procedure and how much challenging and competitive the sector is, what is it potentiality and what contribution actually they provide for the economic development for the country. As a business graduate specialized in Management Studies, Financial institutions are the most appropriate field to gather the experience and among the financial institution Bank is the most prominent place.

1.7 Scope of the Study:

Banking Sector is a robust and sensitive area. A Bank has different products, different services and different customers. Different departments of a Bank perform different activities. However, scope of the study is limited within a specific area of an organization that is Mercantile Bank Limited. Again it was prepared on the basis of data and information gathered from Gulshan Branch. So this study says only about the activities of the Mercantile Bank Limited Gulshan Branch in the light of MBL as a whole. This study covers only various parts and provisions of MBL Credit Practice as a sample of private commercial banKs in Bangladesh.

Mercantile Bank Limited was established in June 2, 1999 as a private commercial bank and started its operation. Its Head Office is at 61, Dilkusha C/A, Dhaka, Bangladesh, and started operation on 2^nd June 1999. The Bank has 42 branches spread all over the country. With assets of TK. 13078.93 million, the bank has diversified activities in retail banking, corporate banking and international trade.

Mercantile Bank is playing an important role while giving loan for the small and medium enterprises. In the terms of credit mercantile bank has introduced new schemes mostly for the business people in Bangladesh. Different categories of loan been provided to the businessman. The total amount of loan been provided was 26842.14 million BDT till 2006 its main investing projects are business, garments, micro credit, construction and others. Consumer Credit Scheme: Mercantile Bank has been providing loan to medium and low-income peoples. This policy has gained a great popularity among consumers.

1.8.1 Objectives of MBL

Mercantile Bank Limited (MBL) aims at excellence and is committed to explore a new horizon of banking and private a wide range of quality products and services comparable with those available with any modern bank in the world. It is a bank for the common people including businessman and professionals. It intends to serve with quality at a price competitive to achieve in the financial market. It would constantly keep on exploring the needs of the clients. The management of the bank bears in mind the fact they are on the threshold of a new millennium, which will pose extra ordinary challenges to be faced and at the same time open up new opportunities and possibilities. As young and talented team of business entrepreneurs and managers will be required to guide the destiny of nation in the 21^st century. For this reason the bank will be developed a youthful and exuberant management team-technologically sound and rich in experience. They would work hand in hand with zeal and enthusiasm to achieve the objectives of the bank in the new millennium.

1.8.2 The Structure of MBL

The organization structure and corporate of Mercantile Bank Limited (MBL) strongly reflect its determination to establish, uphold and gain a stronger footing as an organization which is customer-oriented and transparent in its management.

Board of Directors: The Board of Directors consists of 13 member elected from the sponsors of the Bank. The Board of Directors is the apex body of the bank.

Board Committee: The Board of Directors who also decides on the composition of each committee determines the responsibilities of each committee.

Executive Committee: All routine matter beyond delegated powers of management are decided upon by or routed through the Executive Committee, subject to ratification by the Board of Directors.

Policy Committee: All mater relating to the principles, policies, rules, and regulation, ethics etc. for operation and management of the bank are recommended by the Committee to the Board of Directors.

1.9 Divisions of MBL:

All policy formulations and subsequent executions are done in the Head Office. It comprises of nine major divisions namely Credit Division, International Division, Central Accounts Division, Human Resources Division, Information Technology Division, Marketing Division, Training Division, Research and Development Division, Audit and Compliance Division. Besides these main divisions, there are thirty five branches all over the country to look after the Bank’s day-to-day operations. The structures and Sanctions of each of the divisions of MBL are described below:

1.9.1. Credit Division:

The primary objective of this division is to evaluate the credit worthiness and debt payment capability of present loan customers and loan applicants. It is also responsible for keeping track of the credit portfolio by obtaining regular information from the branches. It sets prices for credits and ensures affecting it at the branches. This department also monitors the various loan accounts of the branches and prepares various statements for Bangladesh Bank.

1.9.2 Human Resources Division:

The employees are Mercantile Bank’s most valuable resource. Having competent and professional employees is becoming increasingly important in today’s competitive world, and MBL has a significant competitive advantage in this respect many of its employees have worked here since the BCCI area and therefore have vast experience in their respective fields. Also the new employees are recruited with sound academic background and given proper training after recruitment to groom up for their responsibilities. They plan to inculcate a high performance culture where the employees will work with fun and pride.

1.9.3 Audit and Compliance Division:

The main function of this division is to provide legal assistance to the branches and to ensure strict adherence of rules and policies by all concerned officials of the bank through routine and surprise inspection and audit.

1.9.4 Central Accounts Division:

Finance and Accounts division task is to maintain daily liquidity positions, treasury bills, call money, debentures, placement of funds etc. Monthly-accrued interest calculation of all interests bearing accounts, inter-branch calculation for Head Office, amortization of all fixed and other assets. It prepares statement of accounts and profit and loss account for the bank. Weekly deposit and advance analysis and Cost of fund analysis are the two major functions done by this department.

1.9.5 Information Technology Division:

Previously, Mercantile Bank had a very low level of automation. There was hardly any PC in the whole Bank before 2001. But when the new management took over in 2001, they gave huge emphasis on computerizing the bank’s operations. After 2 years, almost all the operations in the bank are now automated. The Bank is also shifting to a new IT platform, which aims at maintaining, operating and strengthening the technology base of the bank to enable error free production of information that ensures ongoing efficiency and profitability of operation, A world class banking software called Flex Cube has been installed which will centralize operations and provide Online Banking, Internet Banking, Automated Teller Machine, Telephone Banking, Point of sale dispenser, Credit Card facility etc. Last November, 05 Introduced New software called PC Bank 2000.

1.9.6 International Division:

International Division is responsible for assisting the authorized branches to deal in foreign trades, that is, import and export businesses on account of the customers of the bank by giving approval for transactions and controlling them at various stages. It deals with all correspondents of foreign banks having arrangement with the bank. Every year new agents are added. The larger the number of correspondents and the wider the coverage area, the richer will be the international connections of the bank.

1.9.7 Marketing Division:

The main function of this division is to build relationship with the potential customers and strengthen the relationship with the existing customer. To inform and explain the potential customer about the facilities provided by the bank and searching for new area of business and collect information about the potential sector as well as to prepare strategy for getting competitive advantage. To provide information to other division about the present market scenario and to keep close contact with the existing clients are another two foremost functions.

1.9.8 Training and Development Division:

The main function of this division is to prepare the employee of the bank as competent and quality workforce. The function of this division is s follows:

v Arrange training and orientation program for the fresh bankers.

v Provide specific training program for the employee to make them more professional.

1.9.9 Research and Development Division:

Excellence in banking operation depends largely on a well-equipped and efficient Research and Development Division. Such activities require the investment of substantial money and a set of highly qualified personnel with multidisciplinary background. Although it is not possible at this stage to undertake R&D activities similar to those of the banks in the developed countries, Mercantile Bank has established a core Research and Planning Division comprising skilled persons from the very inception of the Bank

Management:

The management of the bank is vastly on a Board of Directors, for overall supervision and directions on policy matters by the board. The power of general supervision and control of the affairs of the bank is exercise by the president and managing director of the bank who is the chief executive officer. Above all, the bank will be manned and managed by a galaxy of talented professionals proficient in their individual fields and dedicated to the cause of the bank.

Management Hierarchy Chairman

Vice Chairman

Managing Director and CEO

Additional Managing Director

Deputy Managing Director

Senior Executive Vice President

Executive Vice President

Senior Vice President

Vice President

First Vice President

Assistant Vice President

First Assistant Vice President

Staff Officer

Senior Executive Officer

Executive Officer

Officer

Assistant Officer

Trainee Assistant Office

Credit Practices of Mercantile Bank Limited (MBL)- Extent & Restrictions

It is applied to all the Branches of Mercantile Bank Limited in Bangladesh. Extension of Credit facilities are subject to Credit Policy of the Bank and credit restrictions, margin restrictions, stipulations regarding security, period of repayment and other instructions and restrictions imposed from time to time in this respect by Head Office, Bangladesh Bank rules and regulations and overall Government policy of Bangladesh.

3.1 Credit Department & its Function

The Credit Risk Management Department is assisted by the Credit Administration Department, which is mainly concerned with the post-approval functions of the Credit Division. The aspects that are critically tracked and monitored by Credit Admin are

Credit expiry
Past dues
Excess over limit
Document deficiency
Reporting

Credit Division is involved in basically 2 broad functions:

Loan Monitoring:

The important aspects of this part are:

Follow approval terms
Proper loan disbursement
Monitor interest payments and principal repayment
Balance with general ledger

Documentation:

The important functions of this part are:

v Look at sanction terms and Fill up loan documentation checklist,

v Ensure Proper loan documentation and Obtain client sign off

v Filing with the Registered Joint Stock Corporation ( RJSC)

v Registered mortgage deed execution

3.2 Business Powers:

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

(a) The Board can delegate the authority, not its responsibility.

(b) The evil of dual Subordination may creep in the chain of command if authority is not well defined and properly implemented.

Business power for General Loans and Advances:

Figures in Lac Taka

Sl. No.

Type

Delegation of Powers

Remarks

DMD

EVP

SVP

SAVP

SPO

Cash Credit (Hypothecation of Goods

300

200

100

–

With Collateral02

Hire-Purchase

200

150

100

–

Period not exceeding 4 (four) years with collateral03.Real Estate Finance (Finance to Developers /owners ) :

a) For Construction of Apartment building

200

–

-To be repaid within 2(two) years.

b) For Purchase of flat :

–

-50% margin, 5(five) years

c) House Building Loan (Residential)

–

-Period not exceeding 5 (five) years.

d) House Building Loan (Commercial)

–

-Period not exceeding 5 (five) years.04 Lease Finance :

200

150

100

–

-Period not exceeding 5(five) years.05

Advance Against Work Order/Supply Order

100

–

06.

Loans Against Pledge of-

a) FDR / MBDR/ DBDR of Mercantile Bank Ltd.

200

150

100

With 20% margin which can be relaxed by the Managing Director

b) Various Sanchay Patras of Jatiyo Sanchaya Bureau :

200

150

100

With 10% margin

c) Life Insurance Policy against Surrender value:

–

With 10% margin

d) Shares / debentures listed in stock Exchange

–

As Per Policy

07.

Consumers Credit

As per Policy

08.

Small Loan :

As per Policy

09.

Performance Guarantee/Cash Guarantee:

a) At 100% Margin

–

b) At 50% Margin

200

100

–

With collateral security which may be relaxed in special cases by the Managing Director

c) AT 25% Margin

150

–

d) At 15% Margin

100

–

e) At 10% Margin

–

f) At 5% Margin

–

DMD

EVP

SVP

SAVP

SPO

10.

Bid Bond/Bank Guarantee / SDR :

a) At 100% Margin

100% cash collateral or 100% covered by FDR, PSP /BSP/ ICB Unit certificate, MBDR, DBDR etc. b) At 50% Margin

300

150

100

–

Bid Bond will be issued after making necessary arrangement forconsequent Performance Bond c) At 25% Margin

200

–

d) At 15% Margin

150

–

e) At 10% Margin

100

–

f) At 5% Margin

–

11.Term Loan/ Loan(G)

200

–

12.Inland Bill PurchasedWL

200

100

13.Investment in approved Govt. Securities :The Managing Director is authorized to make investment in approved Govt. Securities as per requirement

3.2.1 Responsibilities:

Head Office is responsible for formulating Credit Policy for the Bank, for the proper conduct of the advances in the Branches and for the system of control over them. Head office delegate business powers of Branch-in-charges, devise method of forwarding credit proposals to Head Office for sanction and instructions regarding submission of periodical returns.
Branch-in-Charges are primarily responsible for all advances at their Branches. They must exercise common sense, wisdom, prudence and judiciousness in the use of powers delegated to them and in recommending proposals to Head Office for sanction. In all cases, they must ensure that Bank’s interests are fully safeguarded..
The Branch-in-Charges must see that the selection of borrowers is judicious, the accounts of the borrowers are properly conducted, the security is sufficient. They must supervise end-use of the Credits. Should occasion arise; they must take immediate steps to protect the interest of the Bank. In respect of returns of Credits, even though the details are checked by a subordinate officer, remains a primary responsibility of the Manager.

3.3 Processing of Credit Proposals:

A secured credit facility may be allowed to a customer only after getting a limit sanctioned by the authorized officials.
The customer seeking a credit facility against acceptable security must make an application in bank’s printed form “Request for Credit Limit” PF-146 (Annexure-l) enclosing necessary papers/documents to his nearest Branch of the Bank where he maintains his operative account.
Making a preliminary study of the affairs of the intending borrower by consulting the followings:

Borrowers application
Confident Reports collected through all feasible means regarding borrower.
Borrower’s own mode of dealing
Statement of accounts of the borrower with own and other Banks
Statement of assets and liabilities
Financial statements for the last 3 years
Income Tax statement
Trade and other report.

4) Arranging an interview with the intending borrower to know on the following points: Present and future prospect of the customer’s business

Total investment required in the business
Borrower’s stack in the business
Amount of advance required
Experience in the line
Purpose
Period of loan
Source of repayment
Customer’s previous Banker
Present liabilities, if any.
Securities offered
Proposed margin
Type of charges.
Terms of repayment
Rate of interest.

5) Before finally selecting the borrower, bank is satisfied that ;

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

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

a) Request for Credit limit of customers -PF-146 (Annexure-l)

b) Project Profile / Profile of Business

c) Copy of Trade License duly attested

d) Copy of TIN Certificate

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

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

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

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

i) CIB Enquiry Form duly filled in (For proposal of Tk.10.00 lac and above)

j) Lending Risk Analysis for Credit facilities of Tk.50.00 lac and above

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

l) Stock Report duly verified (where applicable)

m) Credit Report from other Banks -Annexure-7

n) Indent/Pro-forma Invoice/Quotation (Where applicable)

o) Price verification report (where applicable)

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

q) In case of renewal/enhancement of credit facility, Debit Turnover, Credit Turnover, highest drawing, lowest drawing, and Total income earned detailed position of existing liabilities of the customer i.e. Date of sanction, Date of expiry, Present outstanding, Remarks, if any.

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

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

t) In case of BTB UC proposal-

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

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

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

x) Justification/consideration for the facility.

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

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

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

a) Acceptance of customers to be obtained of the terms & conditions on the duplicate copy of sanction advice.

b) They will thoroughly examine and ensure that the subject credit facility does not contradict to any law, rules and regulation of the country, Bangladesh Bank and our Bank.

c) They will obtain NOC from Bank where the customer has existing liability.

d) CIB Report on the borrower through Head Office.

e) Lending Risk Analysis as per FSRP Formula in case of credit of Tk.50 lac and above.

f) No objection certificate of Bangladesh Bank in case the credit facility exceeds 15% of Capital Funds of the Bank.

g) Regularization/Adjustment of classified/overdue credit of the customer/their sister/allied concerns with our Bank/other Banks, if any.

h) Non encumbrance certificate from the registration department on the mortgage property.

i) Deed of Mortgage and power of attorney to be drafted and executed under supervision of B.L.A.

j) Lawyer’s certificate to the effect that proper Registered/Equitable Mortgage (as the case may be) has been created on the land and building in favour of the Bank & the Bank has acquired effective title on the property.

k) Registered Power of attorney to be obtained from the borrower (contractor) as per Head Office’s approved specimen assigning the work order favouring the Bank.

l) The power of attorney to be registered with the work order giving Agency. A consent letter to be obtained from them that they will issue all cheques in payment of bills against the work order favouring the Bank NC the customer as per power of attorney.

m) Abstention of pledge goods in Bank’s godown (as the case may be) duly secured and insured.

n) Insurance Policies covering risks as per sanction terms & conditions.

o) Execution of 2(two) sets of charge documents -one set duly filled in and the other set blank signed.

p) Abstention of certified copies of Blue Book/Registration Certificate, Route Permit, Tax Token, Fitness Certificate, Insurance Policy in respect of vehicles finance.

q) Abstention of post-dated cheques against installments of 10ans/Hire-Purchase/Lease/CCS (as the case may be).

r) Satisfaction certificate of the lawyer in respect of all documentation both banking & legal. The Branch Managers should show all the legal & charge documents to their lawyer & obtain their certificate that documents have been completed as per sanction terms & are in order for extending the facility.

s) Entry has been made in the Safe-in and Safe-out Register and the documents are preserved under joint custody of two authorized Executive/Officer.

8. Interest:

a) Interest charged on daily products: Charge interest on all outstanding advances on daily products calculated in multiple of 100 at the rates fixed by the Head Office from time to time.

b) Interest entries: Pass interest vouchers as under:-

For overdrafts and cash credits:

i) Debit. Party’s Account

ii) Credit. Income Account interest on overdrafts and/or cash credits.

For Loans:

i) Debit : Loan Account Party

ii) Credit : Income Account -Interest on Loan

iii) Debit : Current/Savings Bank Account Party

iv) Credit : Loan Account Party

Entries marked (iii) and (iv) are passed only when there is a credit balance in the account of the customer, if there is no balance, then entries marked (I) & (ii) only should be passed.

9. Rules of sanctioning loans:

1. Sanction advice will be communicated by Head Office to the Branches and by the Branches to the customers under Double signatures authorized by the Bank.

2. No Executives/Officers shall exceed prescribed limit of delegated business powers under any circumstances.

3. Valuation of goods/produces/hypothecated to the Bank to secure any advance shall in no case exceed. The landed cost at the port of entry is assessed by the custom authority in case of imported goods.

i) The ex-mill/factory price in case of domestically manufactured items/goods.

ii) The wholesale price fixed by the government, where applicable. The ruling market price to be certified by the Branch Incumbents, in cases where the above norms do not apply.

4. Goods and produces against which advances are made should be readily marketable.

5. Loans & Advances allowed against FDRs, PSPs, MBDRs, and DBDRs etc. shall be adjusted immediately before the face value of the instruments and outstanding advance amount becomes equal or upon maturity, whichever is earlier.

6. In case of advance against mortgage of property, original Title Deed and chain of documents i. e. C. S Parcha, R. S. Khatian, Mutation Certificate, Non-encumbrance Certificate, Municipal Tax Receipt, Approved plan, Rent Receipt (Upto date) etc. should be checked by a paneled lawyer or by the Bank’s Law Officer..

7. Money suit/court cases against any defaulting borrower are to be filed by the branches after obtaining prior approval from Head Office.

10. Monthly statement of loans and advances:

The branch will submit to the Head Office monthly statement of loans and advances as per pro-forma supplied by Head Office from time to time.
Any other statement by the Branches to Head Office as per requirement from time to time.

3.4 Credit Categories:

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

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

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

schedules. The terms of loan are defined as follows:

Short term : Up to 12 months

Medium term : More than 12 and up to 36 months

Long term : More than 36 months

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

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

1. Agriculture:

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

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

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

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

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

2. Term Loan for Large & Medium Scale Industry:

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

As the financing under this category has fixed repayment schedule it falls under the head — Loan (General), Hire purchase or Lease Finance.

3. Term Loans to Small & Cottage Industries:

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

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

4. Working Capital:

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

5. Export Credit:

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

6. Commercial Lending:

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

7. Other Lending:

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

It is to be always remembered that the Bank is the custodian of public money and as such must be judicious, careful and selective while lending out the depositors’ money to ensure timely recovery .The deciding factors for recovery of loans are selection of right type of borrowers, end-use of credits and effective follow-up and proper supervision.

Loan Syndication & Structured Finance:

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

The syndicate may generally be worked in two ways:

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

Types of Syndicated facilities:

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

Parties to the Syndication:

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

Advantages of Lenders / Banks:

Large Loan requirement within legal lending limit can be managed.
For diversification of risk / sharing of risk.
Scope of diversification across customers and industries.
Opportunity to increase asset base.
Captive transaction business shared by the syndicated members.

Advantages of Customers:

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

Before making syndication a loan the arranger must be aware of the following:

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

Flow Chart of Syndicated Finance:

Borrower

Mandate to

Arranger / Facility Manager / Agent

Preparation of IM / Due diligence by Arranger

Invitation to Participants

Participants

Approval process

Documentation (Financial Closure)

Disbursement

Monitoring

Recovery / Repayment

Project Finance:

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

SME Lending:

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

Purpose:

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

Target Customer Segment:

Micro Enterprise
Small Enterprise/Business
Medium

Service concern and production concern will be financed under this scheme. There are another financial scheme of the bank named “Small Loan Scheme” for financing in the trading concern.

Classification of Entrepreneurs:

Two types of entrepreneurs will come under this scheme:

New and inexperienced entrepreneurs.

Experienced and successful entrepreneurs.

Extent of Facilities:

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

Small Enterprise: Project value up to Tk10.00 lac.

Medium Enterprise: Project value above Tk10.00 lac but or/within Tk50.00 lac

Nationality: Must be Bangladeshi citizen or company/firm must be registered in Bangladesh and shares owned by Bangladeshis.

Age Limit – Minimum age- 20 Years & maximum age- 60 Years.

Product Forms:

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

Tenor of Loan:

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

Bank Charges/Pricing:

Rate of Interest: 13%p.a.
Service Charge: 1% on the outstanding balance on monthly basis.
Risk Fund: 1% one time to be realized at the time of sanction the loan.
No charges will be realized for processing the loan proposal.

Conditions for Savings:

The borrower will have to open a savings account and he/she will have to deposit minimum Tk.2/- per thousand per month to his/her savings account.

Equity of the Borrower:

New entrepreneur: 10%
Experienced entrepreneur: 15%.

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

Repayment Method: It is done by making payment of specific number of installments.

Security/ Collateral:

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

Commend Area: The branches of the bank covering five kilometers of area are considered.

Supervision: A responsible bank official will regularly supervise the projects and will report to the manager.

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

Export Finance:

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

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

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

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

Small Loan Scheme: With a view to provide financial assistance to the shopkeepers of different shopping center / market situated at various cities of the country, the Bank has launched an especial program under Small Loan Scheme. The salient feature and terms and conditions has been circulated to all concerns vide Instruction Circular # 09/99 dated September 30, 1999.

Earnest Money Financing Scheme: With a view to encourage the Contractor financing against Works, an Earnest Money Financing Scheme has been introduced. The modus operandi and terms and conditions under the Scheme has been circulated to all concerns vide Instruction circular # 50 dated August 26, 2000.

Doctors Credit Scheme: In order to provide modern Medicare facility to the mass people of the country, a Scheme namely “Doctors Credit Scheme” has been introduced for newly passed MBBS Doctors, Specialist Doctors and Owner(s) of Clinic / Hospital / Diagnostic Centre. The detailed guidelines under the scheme has been circulated to all concerns vide Instruction circular # 51 of August 2000.

Personal Loan Scheme: With a view to cater the Credit needs of Government / Semi Government Officials / Employees of Autonomous Bodies / Banks and financial Institutions / Multinational Companies / reputed private organization and Teachers of Public / private School / Colleges / Universities, a personal loan Scheme has been introduced. The detailed guidelines and terms and conditions has been circulated vide Instruction circular # 240 dated July 7, 2004.

Consumer Credit Scheme: (CCS) In order to provide financial assistance for purchasing household consumable items, the Bank has launched an especial credit program under Consumer Credit Scheme to upgrade the living standard of the people who happens to be the main driving force of the economy. A brief outline on the terms and conditions of the CCS has been circulated to all concerns vide Instruction circular # 05/99 dated September 09, 1999.

Extent of Facilities:

Will be determined depending upon the need of consumer products & living Status.

Nationality: Must be Bangladeshi citizen or company/firm must be registered in Bangladesh and shares owned by Bangladeshis.

Age Limit – Minimum age- 20 Years & maximum age- 60 Years.

Bank Charges/Pricing:

Rate of Interest: 16%p.a.
Risk Fund: 1% one time to be realized at the time of sanction the loan.
No charges will be realized for processing the loan proposal.

Repayment Method:

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

Security/ Collateral:

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

Commend Area: The branches of the bank covering five kilometers of area are considered.

Flow Chart of Consumer Credit Scheme processing

Yes

Loan disbursed and application and charge dox lodged in safe custody

Application sent to Loan Admin

Yes

Women Entrepreneurship Development Project:

With a view to encourage women to take active role in Socio-economic activities, an especial project in the name of “Women Entrepreneurship Development Project” has been introduced for extending credit facility for establishment / Expansion of Small Cottage Industry and also as working capital to the project. The detail guidelines, terms and conditions and modus operandi of the Project has been circulated vide Head Office, Credit Division Instruction Circular # 139/2002 dated September 23, 2002.

Purpose:

Contribute to the women development of the country.
Participate in reduction of poverty through employment generation and income generating projects of women.
Provide financial assistance to small and medium enterprise, which have limited access to the formal financial markets.

Target Customer Segment:

Women Entrepreneur
Women’s Business enterprise
Projects and Schemes financed or supported by women.

Classification of Entrepreneurs: Two types of entrepreneurs will come under this scheme:

New and inexperienced entrepreneurs.

Experienced and successful entrepreneurs.

Extent of Facilities:

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

Small Enterprise: Project value up to Tk10.00 lac.

Medium Enterprise: Project value above Tk10.00 lac but or/within Tk50.00 lac

Nationality: Must be Bangladeshi citizen or company/firm must be registered in Bangladesh and shares owned by Bangladeshis.

Age Limit – Minimum age- 20 Years & maximum age- 60 Years.

Product Forms:

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

Tenor of Loan:

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

Bank Charges/Pricing:

Rate of Interest: 13%p.a.
Service Charge: 1% on the outstanding balance on monthly basis.
Risk Fund: 1% one time to be realized at the time of sanction the loan.
No charges will be realized for processing the loan proposal.

Equity of the Borrower: Equity must be deposited to the bank before availing the facility.

New entrepreneur: 10%
Experienced entrepreneur: 15%.

Repayment Method: It is done by making payment of specific number of installments.

Lease Finance Scheme:

Lease Financing is one of the most convenient sources of acquiring capital machinery and equipment whereby a client is given the opportunity to have an exclusive right to use an asset usually for an agreed period of time against payment of rent. It is a term financing repayable by installment. With a view to encourage the genuine and capable entrepreneurs for acquiring Capital machinery, medical equipment, Computers and various items, the bank has introduced Lease Finance Scheme. Interest rate fluctuates between 15-15.5%. Other terms and condition are applicable like term loan.

3.5 Types of Credit Activities:

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

Loan (General):

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

House Building Loan (General):

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

House Building Loan (Staff):

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

The details of terms and conditions of the Scheme are as follows

Eligibility

The eligibility for availing loan under the scheme is as follows:

a) House Building Loan is allowed by the Bank only to its confirmed employees:

Who have completed 8 years continuous length of banking service including 2 years continuous service in Mercantile Bank Limited and/or
Who have completed minimum 5 (five) years continuous service in Mercantile Bank Limited in case of New/ Fresh employees of the Bank and/or
Who are willing to join in Mercantile Bank Limited having such Loan with their previous employer and the Bank will take over such Loan liability towards adjustment.
House Building Loan is allowed to employees of the Bank once in his entire service life.

b) House Building Loan is not allowed to an employee of the Bank who is under Charge-sheet or under Suspension.

c) Employees of the Bank who have already a house within the municipal area of any district will not be entitled to the “House Building Loan.

Purpose:

The House Building Loan is allowed by the Bank-

a) For construction of building on the land already owned.

b) For purchase of land and construction of building thereon.

c) For purchase of a readymade Flat/Apartment.

d) For completion or extension of incomplete house /apartment.

Loan Ceiling:

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

Sl. No.	Category of Employees	Amount of Loan
01.	Senior Vice President and Above	Tk.32.00 lac
02.	Asstt. Vice President to Vice President	Tk.27.00 lac
03.	Senior Officer to Senior Principal Officer	Tk.17.00 lac
04.	Asstt. Officer to Officer	Tk.12.00 lac
05.	Employees other than Officer	Tk.5.00 lac

Mode of Disbursement: The loan is disbursed as House Building Loan in the form of Term Loan, preferably in phases, in the following categories as decided by the Management from time to time:

Category A. For construction of building:

Phase one : 40% of total loan upto the Plinth level

Phase two : 35% of total loan upto the Roof construction

Phase three : 25% of total loan for the Finishing works.

Category B. For purchase of land and construction of building:

Phase one : Not exceeding 40% of the sanctioned loan amount.

Other Phases : As applied for construction of a building under ‘A’ above

Category C. For purchase of readymade Flat/Apartment

Amount not exceeding 20% of the loan ceiling is paid to the seller of the Flat/ with instruction of the concerned employee for entering into agreement. The balance 80% is paid to the seller for handing over the flat. However, the registration must be completed within 1 year from final disbursement.

Category D. For completion of incomplete House /Apartment or for extension of house.

Payment is allowed as per actual construction cost depending on the progress of construction work preferably in 3(three) phases not exceeding the loan ceiling.

Category E. For taking over of House Building Loan

In case of taking over of EHBL from other Banks/financial institutions the total amount of loan is disbursed at a time.

Period of Loan & Rate of Interest: Maximum period is 18 years excluding moratorium period of 1 year from the first disbursement. Interest will be charged on the loan @ 7% P.A at simple rate.

Securities:

a) Registered mortgage of land, land and proposed construction thereon.

b) A Power of Attorney is executed by the owner of the property to sell the mortgaged property without intervention of the court.

c) Personal Guarantee of the concerned employee and his/her spouse.

Other Terms and Conditions:

Before disbursement of the loan the disbursing authority must be satisfied about the genuineness of the title deeds.
The title Deed and other documents must be verified by the approved lawyer of the Bank and a legal opinion shall have to be obtained at the cost of the concerned employee.
Mode of Repayment under installment
Construction of a House shall be in accordance with the local Authority or RAJUK.
The loan must be availed of within 1 (one) year from the date of sanction after which the sanction will lapse and no disbursement will be made.

A loan application in the prescribed Form is to be submitted to the In-charge, Credit Division, Head Office, Dhaka through the Branch Manager or Divisional Head at Head Office as applicable along with their recommendation.

Loans allowed to our Bank employees for purchase/construction of house / flat shall be known as House Building Loan (Staff)

Other Loans to Staff: Among the loans fall under this category, employees’ car loan scheme is mentionable.

Car Loan Schemes:

The Transport Policy of MBL for providing Cars to the Executives against loan was approved by the Board of Directors. In the light of increase of value of car, fuel, motor parts, maintenance cost and the cost of living index (Driver purpose), it has been observed that existing monthly Car allowance allowed to the Executives do not commensurate with the real operating cost of the vehicle. As such, the existing Car Loan Scheme may be re-designed in a way that the loan facility does not become a burden for the concerned executives. It is also observed from the Car Loan Schemes of some Banks that they are providing Car loan to their Executives without any interest. Moreover, their Car allowances are higher than MBL. The ceiling of loan, monthly loan installment and monthly car allowance, have been fixed by making a comparison the same with new generation Banks (copy enclosed) are as follows:

Sl. No.

Designation of the Executives

Loan Limit

( New Car)Loan Limit (Recondition Car)Monthly Allowance01.AVP/FVP1500000/1800000Tk.8,290.00Tk.30,000.0002.SVP/VP1800000/2000000Tk. 9,200.00Tk.32,500.0004.EVP2000000Tk.11,700.00Tk.35,000.0005.SEVP/DMD/AMDAt Actual

Terms and conditions:

Car loan facilities are provided to the Executives from Asstt. Vice President to Deputy Managing Director for purchasing new/re-conditioned Car under the Scheme.

The Executives will be allowed the Car loan only once in every 5(five) years subject to adjustment of entire outstanding car loan availed earlier under the scheme.

The rate of interest on the car loan shall be @5% P.A. (simple). The loan amount shall be repaid within 6(six) years from the date of availing the same. Upon full payment of loan in 6(six) years, the ownership of the car shall be transferred in the name of the concerned Executives and they shall be the owner of the Cars.

The Cars to be registered in the name of the Executives concerned with Hire-Purchase clause. All Cars must be covered by comprehensive Insurance Policy.

The power exercisable under this rule is exercised by the Managing Director or any other Executives/Officers of the Bank as may be authorized by the Management.

The concerned Executives may purchase a re-conditioned car which should not be more than 6 years old. An Executive may apply for further new loan under the Policy after having full adjustment of the previous loan.

The allowances as mentioned at Sl.No. 03 above will be provided to the Executives if he/she also possess a car by himself/herself.

The car can also be used for development works of the Bank by the Executives. The Bank reserves the right to make any amendments/alternations in the Scheme at any time.

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

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

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

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

a) The facility is to be allowed only to the trustworthy having undoubted standing and credit worthiness.

b) The goods are sellable and borrower has an absolute title in goods.

c) Hypothecation advance is allowed by banks only for working capital and not for capital investment.

d) The goods are not subject to rapid deterioration due to storage for short or long duration. The prices of the goods are steady

e) The goods are not encumbered and/or hypothecated to any other Bank.

h) In case agricultural crops, the crops should be of current season and the advance is adjustable before the crops of next season comes in the market.

i} Careful valuation of the goods and its quantity has to be made.

i) The selling price of goods is to be ascertained from the market.

k) The goods are to insured covering all risks under Bank mortgage clause.

l) Stock report duly signed by the borrower is to be obtained in Bank’s printed pro-forma at least once in fortnight but while releasing funds, upto date position of the stocks should be obtained. In the event of default, the Bank would be free to stop further drawings.

m) A name plate indicating that the goods have been hypothecated to Mercantile Bank Ltd. is displayed at a conspicuous place both inside and outside the godown/place where the goods are lying.

n) Fixation of margin, valuation of commodity and drawing power of a borrower to be done carefully in the manner as advised under advances against pledge of goods/stocks.

Charge Documents: Obtain the following charge documents duly stamped prior to disbursement:

1. Demand Promissory Note (PF-152)

2. Letter of Arrangement (PF-158)

3. a) For Loans : Letter of Disbursement(PF-159)

b) For Overdrafts and Cash Credits. : Letter of Continuity (PF-162)

4. Letter of hypothecation of goods (PF-163)

Additional Documents:

1. Letter of Partnership along with Registered Partnership deed in case of Partnership Accounts.

2. Resolution of Board of Directors along with Memorandum & Articles of Association in case of Accounts of Limited Companies. In case of Corporation, Resolution of the Board along with Charter is required.

3. Personal guarantee of all the Partners in case of Partnership Accounts and of all the Directors in case of Limited Companies.

4. An undertaking from the Directors of the Public Limited Company to obtain prior clearance from the Bank before declaring any interim/final dividend.

5. In case of Limited Companies where the credit facilities are allowed against Hypothecation of goods/stocks, the following procedures are to be adopted for getting the first charge on the fixed and floating assets of the companies favouring Bank registered with the Registrar of Joint Stock Companies as per Companies Act:

Advances (Loans) Against Hypothecation of Cars, Buses, Trucks, Scooters & Water Crafts, Capital Machinery etc.

Points for General Consideration:

1. Banks allow advances against power driven Vehicle and watercrafts, subject to Credit restrictions as applied from time to time.

2. The following points are considered before selecting a proposed borrower :

(a) The customer is trustworthy and has got fair relation with the Bank.

(b) The constituent is preferably a transport operator.

(d) Where the constituent is not a transport operator, Branch Manager is fully satisfied with the Management of the Vehicle and its plying arrangements.

(e) He has got capacity to bear his equity portion.

(f) The value of the vehicle and Projected cash flow vis-a-vis size of repayment installments.

(h) This is a medium term loan and this is generally allowed under Hire-Purchase or Lease Financing.

Papers to be submitted: The proposed borrower selected for financing shall submit:

(a) Application seeking Loan and mentioning his equity portion to be invested in the Vehicle.

(b) Valid quotation obtained from 3 (three) approved reputed dealers in respect of the complete Vehicle or Chassis (as the case may be).

(d) Layout and design of the vessel to be constructed approved by IWTA (for water crafts).

(e) In case of default of the borrower to pay consecutive 2(two) installments the Bank may repossess the vehicle and sell it for adjustment of the loan and initiate legal action for the shortfall amount.

(f) Valuation Certificate obtained from a Civil Engineer in case of real estate offered as collateral security.

Scrutiny of quotation: The quotation submitted shall be scrutinized as under as:

(a) That the quotation is issued by an approved reputed dealer. It is signed and dated.

(b) Model No. of the Vehicle, brand name, capacity, value and all other pertinent information are mentioned.

(d) Financing of the model is not restricted.

(e) It is valid

Approval: On being fully satisfied, a proposal is sent to the competent Authority with due remarks/recommendation of the Branch. In recommending the proposal, the proposing authority must submit a certificate as to the correctness of the quotation sent with the proposal. Approval of the proposal is obtained.

Disbursement:

(a) Equity money of proposed borrower is deposited in the loan amount and total value is paid to the supplier creating loan of the sanctioned amount.

(b) Delivery of the vehicle is taken under supervision of an officer of the Bank. The ownership of the vehicle remaining in the name of the Bank till full adjustment of the loan.

(d) Registration of the vehicle is done in the name of the Bank which is transferred to the borrower after full adjustment of the loan.

(e) The vehicle is insured under comprehensive policy with the Bank as beneficiary. The Policy is held by the Bank and renewed from time to time at the cost of the borrower.

(f) Valid copies of blue Book, route permit, tax token, fitness certificate are held by the Bank.

Fixation of Margin: Margin is the difference between the value of securities offered by the borrower and the drawing power i.e. the amount that can be advanced by the Bank.

The fixation of margin depends on the nature and type of security, and the financial stability of the customer and also keeping in view the restrictions imposed by the Bangladesh Bank. In case of goods and produces, sufficient margin should be retained for any possible shortage due to storage, shrinkage, fluctuation of rate, fall in prices and interest including other Bank charges.

In case of advances allowed against merchandise imported through Bank, deduct the amount of margin fixed from the landed cost of the goods. For allowing advances against goods in trade, locally purchased, deduct the amount of margin fixed from the invoice value or ex-factory prices.

Valuation of Commodity: Valuation of the commodity to be pledged to the Bank for sanction of advances shall in no case exceed:

i) The landed cost at the port of entry as assessed by the Customs Authority in the case of imported merchandise.

ii) The ex-mill/factory price in the case of domestically manufactured commodities. The whole-sale price fixed by the Government, if any, when no such wholesale price is fixed valuation of the miscellaneous commodities, will be based on the competitive market price to be ascertained keeping in view the interest of the Bank.

Calculation of Drawing Power:

If the Branch Manager is satisfied with the security offered, he will calculate the drawing power of the borrower on the basis of paid-up value & market value whichever is lower keeping prescribed margin and also complying with all other instructions in this respect.

a) The Drawing Power of a borrower in the context of an advance allowed to him against securities pledged or hypothecated by him to the Bank indicates the ceiling, up to which he can overdraw his accounts. Drawing Power is always calculated and would represent and amount arrived at after deducting the margin from the value of the securities; for example Drawing Power of a party would be Tk.60.00 if the value of his securities is Tk.100.00 and the margin is fixed at 40%.

b) Under no circumstances advance shall be allowed in excess of the drawing Power of the customer calculated in the manner described above despite the fact that the sanction limit is higher.

c) In case where Drawing Power of the Customer exceeds the limit sanctioned in their favour, advances shall be allowed up to the extent of their sanctioned limit only.

d) While reviewing the Drawing Power, if it is noticed that the Drawing Power of a customer has fallen short of the advance allowed to him take immediate steps to ensure that either the excess over Drawing Power is adjusted, or the stocks are replenished to the extent of the shortage in the account (the provisions of this sub-section would not apply to the cases where advance has been allowed against immovable properties).

Storage of Goods:

I. Pledge stocks should normally be stored in Bank’s own godown.

II. In case the godown where stock is placed belongs to the borrower, a letter from the borrower handing over physical possession shall be obtained as per the following pro-forma:

Delivery of Goods:

i) Goods are to be delivered to the parties against delivery orders, signed by the Manager/ln-charge of Advances department along with an officer of Advances Department.

ii) Before signing the delivery orders, the signature of the customers must invariably be verified in the application form.

iii) While signing the delivery orders, ensure that the customer has made adequate payment to the Bank for the goods to be delivered.

iv) After delivery of the goods, obtain without fail, signature of the persons authorized to take delivery of the goods on the back of the delivery order.

v) In delivering the goods early entries and defective goods shall be cleared first.

Sale of Stocks: In default of repayment of an advance called upon by the Bank, the Bank has the right to sell the stock pledged to it as security after giving reasonable notice to the borrower (vide section 176 of the contract Act). Such notice must be sent by registered letter, with acknowledgement due, whenever it becomes necessary to realize the security. In the event of the registered letter being refused, it must be kept unopened so that it can be produced in the court, if necessary, as evidence of notice having given

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

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

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

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

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

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

IBP (Inland Bills Purchased): Payment made through purchase of inland bills/cheques to meet urgent requirements of the customer falls under this type of credit facility. This temporary advance is adjustable from the proceeds of bills/cheques purchased for collection. It falls under the category “Commercial Lending”.

3.6 Sector wise allocations of Loans and Advances.

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

Sector wise allocations of Loans and Advances for the year 2006 are given below.

SL	Sectors	Sector wise Allocation of loans for the Year 2006.
1	Garments	5088406063
2	Trading	8723834055
3	Engineering:	1231035089
4	Contractor Finance	1518536356
5	Leasing Company	1476400000
6	Housing	1997365447
7	Food products and beverage	1476467731
8	Pharmaceuticals	288746834
9	Telecommunication	355476000
10	Transport	665963194
11	Textile	969620872
12	Information technology	307173271
13	Hospital and medical Services	595499991
14	Paper, Paper production and publications	258473672
15	Plastic and plastic Materials	152701514
16	Storage	54871222
17	Glass and glass products	204722105
18	Agriculture	117450846
19	OTHERS	1359395441
	Total	26842139703

Chapter 3

3.1 Observation and Findings:

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

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

3.2 Recommendations:

MBL should disburse their loans in various sector rather than specific scheme.
Loan sanctioning and disbursement procedure should be easy and flexible being consider the requirements of different classes of people.
Amount of loan can be raised in proportion with the existing demand of people in SME loan, CCS and Personal loan. SME loan can be popular among the small trader and lower income group people like MBL DPS.
MBL credit Policies can be revised being considered with the increase demand of telecom, transportation, Knit and packaging and plastic industry.
Sector wised loan in agro based industries and firms, lather technology can be convenient and flexible for the receiver.
Bottlenecks or barriers should be removed by taking advanced steps in mode of disbursement, charge documents and approval process.
Loan facility parameter should be expanded so that all the people can get loan according to their needs.
Pricing Policy & fixation of average cost of fund should be rationale.
Business Power for sanctioning loans and advances can be increased at branch level.

Conclusion:

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

As an internee student in Mercantile Bank Limited at Gulshan Branch, Dhaka I have truly enjoyed my internship from the learning and experience viewpoint. I am confident that 45 days internship program at Mercantile Bank Limited will definitely help me to realize career in the job market specially in banking sector.

During the course of my practical orientation I have tried to learn the practical banking to realize my theoretical knowledge, what I have gathered and going to acquire from various courses. It is great pleasure for me to have practical exposure of Mercantile Bank Limited, because without practical exposure it couldn’t be possible for me to compare the theory with practice.

Only the credit department has been covered in the internship program, it is not possible to go to the depth of each activities of branch because of time limitation. So objectives of the internship program have not been fulfilled with complete satisfaction. However, highest effort has been given to achieve the objectives of the internship program.

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

Bibliography

Mercantile Bank Ltd. Credit policy (revised in October 2005)

Mercantile Bank Ltd. Credit Manual

Mercantile Bank Ltd. Annual report 2006

Mercantile Bank Limited website (www.mblbd.com)

Business of Banking, Debnath R. M. 2004

Bangladesh Bank Credit policy

Various Instructions and circulars issued by Mercantile Bank Ltd.