“Credit Operation Process of Mercantile Bank Limited”
CHAPTER ONE
ORGANIZATION OVERVIEW
1.1 Background of Mercantile Bank Ltd
During the booming years of the banking industry of Bangladesh a group of highly successful local entrepreneurs conceived an idea of floating a commercial bank with different outlook. As per their views the idea was competence, excellence and consistent delivery of reliable service with superior value products. Consequently, Mercantile Bank Ltd. was created and commencement of business started on 2nd – June 1999. The founders are well-reputed tycoons of Bangladesh in the field of trade and commerce and their stake ranges from diversified business sectors of the country.
Mercantile Bank Ltd. has consistently turned over good returns on Assets and Capital. Until the year 2009, the bank has achieved an operating profit of Tk. 3847 million and its capital funds stood at Tk. 7859 million. Out of this, Tk. 1054 million represents retained earnings and Tk. 2844 million consists of paid up capital by shareholders. Even after the business environment and default culture, quantum of classified loan in the bank is very insignificant and stood at less than 1.76%. The bank’s current capital adequacy ratio of 10.88% is in the market.
Mercantile Bank Ltd. has already made significant progress within a very short period of its existence. The bank has been graded as a top class bank in the country through internationally accepted CAMEL (Capital, Asset, Management, Earnings and Liquidity) rating. The bank has already occupied an enviable position among its competitors after achieving success in all areas of business operation.
Mercantile Bank Ltd. has already made significant progress within a very short period of its existence. The bank has already occupied an enviable position among its competitors after achieving success in all areas of business operation. The bank offers all kinds of Commercial Corporate and Personal Banking services covering all segments of society within the framework of Banking Company Act and rules and regulations laid down by our central bank.
1.2 The Best Bank Award
For the four year in a row, Mercantile Bank Limited won the prestigious ICAB Award for being the best bank in Bangladesh and SAFA Merit Award for published accounts and reports. To be recognized by mandate so comprehensive and by a body of such experts as the Institute of Chart Accountants Bangladesh and South Asian Federation of Accountants is a matter of great honor and pride. Mercantile bank Limited dedicated this triumph to their patrons, customers, shareholders and employees. They believe that their customer’s loyalty and hard work is the factor that makes them “a bank with a difference” in the eyes of one and all.
1.3 Company Vision, Mission& Objectives
Vision
Every Company has their own vision. By fixing vision they can set their future growth. Mercantile Bank Ltd has its own vision to be leader in the banking industry.
To be the best Private Commercial Bank in Bangladesh in terms of efficiency, capital adequacy, asset quality, sound management and profitability having strong liquidity.
Mission
To build Mercantile Bank limited into an efficient, market driven, customer focused institution with good corporate governance structure. Continuous improvement in business policies, procedure and efficiency through integration of technology at all levels.
Objectives
To have a strong customer focus and to build a relationship based on integrity superior services and mutual benefit.
· To work as a team to serve the best interest of the group.
· To work for continuous business innovations and improvements.
· To value and respect people and make decisions based on merits.
· To provide recognition and rewards on performance.
· To have sustained growth, improved and wide spectrum of products and services.
Core Values:
For Customers-
To provide the most courteous and efficient service in every aspect of its business
To be innovative in the development of new banking products and service
For Employees–
By promoting well- being of the members of the staff.
For Shareholders–
By ensuring fair return on their investment through generating stable profit.
For Community–
By assuming the role as socially responsible corporate entity in a tangible manner through close adherence to national policies and objectives.
…………………….Upholding ethical values and best practices
1.4 Organization Structure
Mercantile Bank Limited is being managed by highly skilled professionals with long experience in banking. They constantly focus in understanding and anticipating customer needs and as the banking scenario undergoes changes so does the banks operations, to be in par with the market condition.
Now we would look into each of the four basic management activities Planning, Organizing, Staffing and Leading & Controlling that the bank practices, in order to stay on top of its competitors.
1.4.1 Planning
Mercantile Bank has done its planning within the purview of the corporate plan. The overall planning approach in Mercantile Bank is top-down. Management of Mercantile Bank Ltd can be categorized into two broader teams, one is the Top Management group and other one is the Mid Level Management team. The top level management team usually comprises of the Board of Director’s where the meetings are headed by the Bank’s Chairman.
Long terms goals are usually discussed in these high profile meetings, where the bank owners decides, for example, what should be the targeted profit for the next fiscal year.
1.4.2 Organizing
The term organizing for Banks is no different from any other business; it is the way through which the day to day activities of the bank are carried out for smooth operation. Mercantile Bank has two approaches when it comes to organizing its business, one is the Branch Based Approach and the other is the Department Based Approach.
In the Branch Based Approach, each individual branch is treated as a separate identity and is head by a branch manager. The branch manager is directly responsible for the performance of that particular branch, and is liable to the top management. Profit targets, deposit targets and others targets alike are all handed over to these individual branches
The Department Based Approach is similar to that of the branch based approach, where each department operates as a separate unit but sometimes collaborates in order operate
more efficiently or to solve a common problem. Such departments are also treated as a separate entity but are much more specialized in one particular area of business unlike a branch which has to be involved in multiple tasks. For example, the Human Resource Department is responsible for recruiting employees for the bank and also to look over the performance appraisal of individual employees. Example of few other departments at Mercantile Bank Ltd are: Human resource Department, Financial and Administration Department, Monitoring and Inspection Department, Marketing, Personal Relation Department, Merchant Banking and Investment banking, Treasury Division, International Division, General Services Division, Computer and Information Technology Department, Credit Division, Corporate Affairs Division, Card division.
Organogram of Mercantile Bank Ltd
1.4.3 Staffing
Hiring the right people for the right position is perhaps one the most important function of any organization and it is more so for banks since it operates in the service industry. This function of management is the responsibility of the Human Resource Department for Mercantile Bank Ltd. Staffing not only deals with recruitment but is also involved in giving training to employees, performance appraisal and many other related activities.
Recruitment at Mercantile Bank is of two basic types, one is the hiring of fresh new graduates and other is the recruitment of experienced employee. Every year new graduate students are recruited at the entry level as Management Trainee and as well as Trainee Officer, depending on individual qualification. For each of the this entry level post, applicants has to sit for several written assessment before moving on to a series of interview, from where only the brightest are chosen. On the other hand someone having previous banking experience might not have to sit for any written exam but is directly assessed by the top or mid level management through interviews.
1.4.4 Leading and Controlling
The current success of Mercantile bank ltd is certainly because of its expert team of management whether it be the Branch Manager or the Department Head, each has their equal shares in making this Bank a success. The top management level of Mercantile Bank comprises of very experienced individual who has climbed up the corporate ladder from within the bank itself or is someone who has been working at some other banks and is experienced.
The head of each branch belongs to the mid level management unlike the department heads who usually belongs to the group higher in the corporate ladders. An employee form the top management level is likely to be responsible for several small departments of the bank, until and unless the department requires very high skills.
The executives from the mid and the top level management is also responsible for the well being of all the employees working under them. For this appraisal function the manger of each branch has to fill out Annual Appraisal Report (AAR) each year to evaluate the performance of individual employee, based on which promotions, increment and bonuses are given out.
1.4.5 Business Activities
Mercantile Bank Limited provides a full range of products and services to its customers, some of which are mentioned below with a brief overview of the major business activities.
1.4.6 Consumer Finance
There are branches and finance centers under this division with a qualitative workforce of employees. Some of the services provided by this division are unsecured personal loans, credit cards, and vehicle related lease etc.
1.4.7 Personal Banking
There are branches with highly qualified workforce provide various kinds of loans, various types of accounts, cheques, card money etc.
1.4.8 Corporate Banking & Institutional Banking
There are some branches under this division. The services provided by this division are International Trade Management, Institutional Banking, Custody, and Cash Management.
1.4.9 Islamic Banking:
The Islamic Banking Division in consonance with the syndication Unit of the Head Office has successfully concluded syndication Finance to a client of our Islamic Banking Branch. This Islamic Product Syndication is first ever in the history of Islamic Banking in the country. The Bank is under correspondence with Bangladesh Bank regarding operation of Islamic Banking Branches through a Subsidiary. In Dhaka, there is a Islamic Banking Branch Mirpur-10.
1.4.10 Custodial Service
MBL equator fulfills its strategic commitment to provide custody and clearing services. Equator’s focuses are on the following:
· Commitment to quality
· Dedication to customer needs
· Sustained investment in people and systems
1.4.11 International Trade Management
This division is operational throughout the group and MBL’s core strength is trade finance and services. With an experience, Mercantile Bank has developed knowledge of trade finance, which is world class. Principle services to importers include imports letter of credit, import bills for collection and back-to-back letters of credit facilities. Services provide to exporters include export letters of credit, direct export bills, bonds, and guarantees.
1.4.12 Cash Management
Mercantile Bank recognizes the importance of cash management to corporate and financial institutional customers, and offers a comprehensive range of services and liquidity management.
1.4.13 Institutional Banking
Mercantile Bank Limited provides a wide range of services to institutional clients, commercial, merchant and central banks; brokers and dealers; insurance companies; funds and managers, and others. It provides relationship managers who are close to their customers and speak local language. This wide network of institutional banking facilities includes transaction, introduction, problem solving and renders advice and guidelines on local trading condition.
1.4.15 Treasury
Treasury operations had been consideration as an important avenue for income generation purpose within Head Office. In fact, in the past, income from treasury operation was quite sizable and significant to the total income generated by the bank. The treasury division publishes daily and weekly currency newsletters, which provide analyses of currency trends and related issues. Seminars and workshops are conducted for customers from time to time on foreign exchange related topics. Mercantile Bank is one of the first local banks in Bangladesh to integrate treasury dealings of local money market and foreign currency under one Treasury umbrella. The bank has handled significant volumes of treasury over the last several years.
1.4.16 Electronic Banking
Electronic Banking provides various types of support through a wide range of operating systems, sweeping transactions accessions with the provisions of reporting features or other special functions.
1.4.17 Foreign Exchange Business
Over the years, foreign trade operations of the bank played a pivotal role in the overall business development of the bank. The bank has established relationship with as many as 110 new foreign correspondents abroad thereby raising the total number of correspondents to 350.
1.4.18 Online Branch Banking
The bank has set up a Wide Area Network (WAN) across the country to provide online branch banking facility to its valued clients. Under this scheme, clients of any branch shall be able to do banking transaction at other branches of the bank. Under this system a client will be able to do following type of transactions:
· Cash withdrawal from his/her account at any branch of the bank.
· Cash deposit in his/her account at any branch of the bank irrespective of the location.
· Cash deposit in other’s account at any branch of the bank irrespective of the location.
· Transfer of money from his/her account with any branch of the bank.
1.4.19 SWIFT
Mercantile Bank Limited is one of the first few Bangladeshi banks, which have become member of SWIFT (Society for Worldwide Inter-bank Financial Telecommunication) in 1999. SWIFT is a member-owned co-operative, which provides a fast and accurate communication network for financial transactions such as Letters of Credit, Fund Transfer etc. By becoming a member of SWIFT, the bank has opened up possibilities for uninterrupted connectivity with over 5,700 user institutions in 150 countries around the world.
1.4.20 Information Technology in Banking Operation
Mercantile Bank Limited adopted automation in banking operation from the first day of its operation. The main objective of this automation is to provide efficient and prompt services to the bank’s clients. At present, all the branches of the bank are computerized. At branch level, the bank is using server-based multi-user software under UNIX operating system to provide best security of automation.
1.5 Corporate Profile of Mercantile Bank Limited:
| Board of Directors | |
| MD. Abdul Jalil, MP | Chairman |
| M. S. Ahsan | First Vice Chairperson |
| Golum Faruk Ahmed | Second Vice Chairperson |
| Alhaz Akram Hossain | Chairman, Executive Committee |
| Md. Anwarul Haque | Director |
| Mr.Monsuruzzaman | Director |
| Mr. Subrata Narayon | Director |
| Mrs.Bilkis Begum | Director |
| Tabibul Haque | Director |
| ASM Firoz Alam | Director |
| Mr. Amanullah | Director |
1.6 A Brief of Mercantile Bank Limited, Banani Branch:
Branch Code: 0106
Among the Sixty Three Branches of Mercantile Bank, Banani Branch is one of the most reputed and respected Branches in all aspects. From the very beginning, this branch is contributing a lot to the bank. A brief of Mercantile Bank Limited, Banani Branch is given below:
Manager (HOB): Abdullah Md. Zaki Hasan, Senior Vice-President
Manager (Operation): Md. Faiz Ahsan, First Vice President
Credit in Charge: AYM Abdullah Haroon, First Vice President
Foreign Exchange in Charge: Saiful Karim, First Assistant Vice President
General Banking in Charge: Sayeda Sultana, First Assistant Vice President
Total number of employees: 34
Mercantile Bank Banani Branch has three main departments, which are –
· General Banking Department
· Credit Department
· Foreign Exchange Department
CHAPTER TWO
INTRODUCTION
2.1 Origin of the Report
This report is an outcome of Internship Program, a part of MBA program of Department of Accounting & Information Systems, University of Dhaka. The topic of the report is “Credit Operations Process of Mercantile Bank Limited.” Actually this is a feedback of theoretical part of the MBA program. And this report is prepared to fulfill the finishing requirement of the MBA program.
As we know that the internship is an agreement between a University and an organization that offers an opportunity for a student to undertake a temporary work assignment, but as I am an employee of this bank that enables me to have realistic exposure to organizational conditions. My supervisorMr. Swapan Kumar Bala (Associate Professor), Department of Accounting & Information Systems authorized me to prepare the report.
2.2 Rationale of the Study:
This research report is an individual assignment as a part of the internship course under the MBA curriculum of Department of Accounting & Information Systems. The primary objective of the report is to study “Credit Operation Process of Mercantile Bank Limited” with particular reference to the Bank’s Banani Branch and recommend measures for further improvement. Over the last decade, the Credit policy has become more diverse as well as much larger. This research report is a practical study on Credit Operation Process of Mercantile Bank Limited.
2.3 Statement of the Problems:
v What are different types of Credit Policyof Mercantile bank Limited?
v What are the activities of the different departments of Mercantile Bank Limited (MBL)?
v What is the Credit Facilities of Mercantile Bank Ltd?
v What are the selection criteria to provide different loan?
v What are the conditions of different loans of MBL?
v What are the expectations of customers of Mercantile Bank Ltd?
v What are the disbursement and recovery procedures of different loans?
2.4 Scope of the Report
The report is basically divided into two parts:
· The Organization Part
· The Project Part
The organization part of the report focuses upon the organizational structure and the financial services offered by MBL. The study also concentrates upon the actual lending activities of the company, its exposure to the various sectors and its performance.
The project part of the report basically focuses on the Credit policy of Mercantile Bank Ltd. I have also tried to focus the different types of credit facilities, documentation and the procedure of the loan.
2.5 Delimitation of the Study
Although I have got co-operation from my fellow colleagues of Mercantile Bank Ltd. Branch and Head office, they could not manage enough time to deal with my report. On the way of my study, I have faced the following problems that may be termed as the limitations/shortcomings of the study.
Budgeted times for the Study
The first obstruct is time itself. Due to the time limit, the scope and dimension of the study has been curtailed. I could not spend sufficient time for my study because as I am a full time employee of the bank and as it is a very busy branch I could not make full concentration to make this report.
Data Insufficiency
It was very difficult to collect data as it was at AD Branch. But for better interpretation I had collect some information from the Head office, because of some divisional and confidential problem, I could not get enough information. So for better interpretation I could not get sufficient data.
Lack of Records
Sufficient books, publications, Facts and Figures are not available. These constraints narrowed the scope of the accurate analysis. If these limitations were not been there, the report would have been more useful and attractive.
Confidentiality
Secrecy or confidentiality is a crucial matter in this organization. As a new employee it was not possible for me in this short period to reach those secret topics. It will difficult to find out the gap between rules and regulations and real life practice.
Insufficient Library Facility:
Most of the commercial banks have own modern, rich and wealthy collection of huge and various types of banking related books, Journals, Magazines, Papers, Case Studies, Term Papers, and Assignments etc.
2.6 Objectives Of The study
The broad and specific objectives of the study are:
a. Broad Objectives: The broad objective of the report is to study the Credit Operation Process of Mercantile Bank Limited and this report was to use the theoretical concepts, gained in the classroom situations, in analyzing real life scenarios.
b. Specific Objectives: The specific objectives are:
· Observing and understanding the activities of the different departments of the host organization: Mercantile Bank Limited (MBL)
· To know the enterprise selection criteria to provide different loan
· To know the study’s and conditions of different loans
· To know the expectations of customers of Mercantile Bank Ltd.
· To know the disbursement and recovery procedures of different loans
· To know the financial statistics of Mercantile Bank Ltd.
· Prepare a Recommendation for developing an ideal platform for a proper Credit Operation Process
CHAPTER THREE
METHODOLOGY OF THE STUDY
3.1 Sources of data
In conducting the study, data and information have been collected from different sources. All these data were collected from the secondary sources and very few from primary sources. The sources of data include the following:
3.1.1 Primary Sources are as follows
· Personal observation
· Short interview of managers and related desk officers of the different (General Banking, Credit and Foreign Exchange) departments of the bank
· Desk work in different section/division
3.1.2 Secondary Sources are as follows
· Annual report of Mercantile Bank Limited
· Credit Manuals, Different Banking Circulars
· Consultation of related books and publications
· Vouchers, leaflets, loan files, of the bank
· Files, balance sheet, Employee Training Guide, Loan Documents and various documents of Mercantile Bank Limited
3.2 Data Analysis
The study includes both qualitative and quantitative analysis of Banking practices and monitoring tools.
There were certain limitations regarding the study that is summarized below:
· Deficiencies in data required for the study.
· Inaccurate or contradictory information.
· Field practice varies with the standard practice that also created problem.
· Time provided for conducting the study is another important constraint.
· Sometimes the concerned personnel cannot provide enough time due to rush banking hours.
· Another limitation was that the data gathered could not be verified for accuracy.
CHAPTER FOUR
CREDIT OPERATION OF MERCANTILE BANK LIMITED
4.1 Introduction
Lending is the principal function or the ‘Bread and Butter’ of a banking company. It applies most of its resources to loans and advances in favor of a broad spectrum of clientele ranging from housewives to mammoth size conglomerates. ‘Loans & Advances’ is the survival unit of the bank because until and unless the success of this department is attained, the survival is a question to every bank. . Banks are accepting deposits from the depositors in condition of providing profit to them as well as safe keeping their interest. Now the question may gradually arise how the bank will provide profit to the clients and the simple answer is – Loans & Advance.
Bank provides advances to the borrowers for the following reasons:
· To earn profit from the borrowers and give the depositors profit.
· To accelerate economic development by providing different industrial as well as agricultural advances.
· To create employment by providing industrial loans.
· To pay the employees as well as meeting the profit groups.
For banks, credit is continuous process. Recovery of one credit gives rise to another credit. In this process of revolving of funds, bank earns income in the form of profit. A bank can invest its fund in many ways. Bank makes loans and advances to traders, businessmen, and industrialists. Moreover nature of credit may differ in terms of security requirement, disbursement provision, terms and conditions etc.
The Loan and Advance department is responsible for the following jobs.
· Meeting the requirements of existing and potential customers
· Meeting the requirements of Head Office and Customers of General
· Credit to cooperate with other departments for smooth operation
· Preparing CIB and CL Statements
· Preparing Credit Proposal and Statement
· Administration of Retail Credit
There are different types of loan, which is provided by MBL. To cope up with changing situation they introduce their own credit policy. They provide loan for different income group and received tremendous response from the customer.
At Mercantile Bank Limited, Banani branch, the credit division is sub-divided into two sections:
1. Corporate Banking & Credit Operation and
2. Retail Banking & Credit Operation.
4.2 Work Flow of Corporate Banking & Credit Operation:
4.2.1 Sanction of a Credit Facility:
Step 1- Corporate Banking Unit provide “Pre-inspection report” to evaluate the feasibility of the project or genuine requirement of the customer. If the result is positive, a complete proposal is created.
Step 2- Corporate Banking Unit submit draft proposal/office note to Credit Risk management (CRM) unit of the branch.
Figure: Work Flow
Step 3- CRM unit scrutinizes the proposal from different views of risk and compliance to the existing rules and regulations of the bank.
Step 4- CRM unit places the proposal in front of branch credit review committee (BRC). Corporate Unit presents the proposal and defends the proposal as and when required.
Step 5- BRC gives their opinion about the proposals for getting approval from the respective authority. They can suggest corporate unit to submit a revised proposal to CRM after making necessary changes if it is required. (If changes are required, again the process is followed from step 1).
Step 6- If the proposal is beyond the branch delegation, it is sent to the head office.
4.2.2 Disbursement of Credit Facility:
Step 7- After getting approval, CRM will issue sanction advice favoring the customer.
Step 8- CAD will take necessary actions to complete the documentation formalities as per sanction terms and conditions.
Step 9- After completion of documentation, Credit Administration will provide the credit facility to the customer.
4.2.3 Monitoring and Recovering of Credit Facility:
Step 10- CRM will monitor and follow up the credit portfolio of the branch.
Step 11- If any A/C becomes NPL, Branch Credit Monitoring & Recovery unit will ensure recovery of bank dues.
4.2.4 Documentation:
The term Documentation means any written record, writing, instruction or direction that serves as important evidence in respect of a transaction. Documentation may be defined in other words as execution of documents in proper form and according to law.
4.2.5 Types of Documentation:
In documentation, each type of advances requires different types of documents. The documents vary depending upon type of security being accepted and nature of charge being created. There are 2 types of documents, i.e. Charge Documents and Legal Documents.
4.2.6 Charge Documents:
Charge documents also vary depending upon type of security being accepted and nature of charge being created. In practice, there are mainly the following 2 types of charge documents:
1. Common Charge Documents:
This document is required for all kinds of credit facilities. These are DP Note (Single, joint and several), Letter of Agreement/Arrangement, Letter of Authority, Letter of Revival, Supplementary Agreement and balance Confirmation Slip.
2. Other Charge Documents:
This depends on the type of security and nature of advance. Some of them commonly used are Letter of Installment, Letter of Continuity, and Letter of Undertaking.
4.2.7 Stamping:
All documents must be properly and duly stamped before or at the time of execution by the borrower. An unstamped or insufficiently stamp document is only scrap of paper in the eye of Law and hence can not be accepted as evidence in the court and can never form the basis on any suit in the court.
There are 3 kinds of stamps mainly used
- Adhesive Revenue Stamp
- Special Adhesive Stamp
- Non-Judicial Stamp.
Some of the different types of charge documents, its use and stamping are as under:
| Name of Charge Documnts | Nature of Loans | Type of Stamp | Value of stamp |
| Common Charge Documents | |||
| DP Note (Single) | All Types of Loan | Revenue Stamp | Tk.20/- |
| DP Note (Joint and Several) | All Types of Loan | Revenue Stamp | Tk.20/- |
| Balance Certificate | All Types of Loan | Revenue Stamp | Tk. 4/- |
| Letter of Agreement/ Arrangement | All Types of Loan | Special Adhesive Stamp | Tk.150/- |
| Letter of Revival | All Types of Loan | No stamp is Required | |
| Supplementary Agreement | All Types of Loan | No stamp is Required | |
| Personal Guarantee | All Types of Loan | Special Adhesive Stamp | Tk.150/- |
| Special Charge Documents | |||
| Letter of Installment | Term Loan | No stamp is Required | |
| Letter of Continuity | Continuous Loan | No stamp is Required | |
| Letter of Undertaking | Hire Purchase, CCS | No stamp is Required | |
Table: Charge Documents
4.2.8 CIB Report:
Bangladesh Bank has been collecting, collating and processing various types of Money and Banking statistics from scheduled banks and other financial institutions. Apart from the Govt. of Bangladesh and Bangladesh Bank, various national and international organizations are using these data for monetary and other economic policy purposes. The Credit Information Bureau (CIB) of Bangladesh Bank has undertaken the task of collecting the detailed credit information in its proper perspective so that these can be exchanged by the banks. Thus, all banks have to inform and report correct credit information to Bangladesh Bank. Mercantile Bank, Banani Branch also reports the CIB report to Bangladesh Bank through the Head Office. This CIB report helps the scheduled banks and other financial institutions in getting loan applicants’ information and expedites approval process.
The CIB form is segregated into the following 3 segment:
CIB – 1A : For Individual / Institution
CIB – 2A : Owner information if borrower is institution
CIB- 3A : Information of group / Related Business concern
4.3 Credit Risk Grading
Credit risk grading is an important tool for credit risk management as it helps to understand various dimensions of risk involved in the underlying credit transaction. The aggregation of such grading across the borrowers, activities and the lines of business can provide better assessment of the quality of credit portfolio of a bank or a branch. The credit risk grading system is vital to take decisions both at the pre-sanction stage as well as post-sanction stage. At the pre-sanction stage, credit grading helps the sanctioning authority to decide whether to lend or not to lend, what should be the loan price, what should be the extent of exposure, what should be the appropriate credit facility, what are the various facilities, what are the various risk mitigation tools to put a cap on the risk level. At the post-sanction stage, the bank can decide about the depth of the review or renewal, frequency of review, periodicity of the grading, and other precautions to be taken. This manual explains the credit risk grading framework which will help to determine borrower’s risk grade accurately and timely. It describes the elements of an effective internal process for grading credit risk. It also provides a comprehensive discussion of the objectives and general characteristics of the effective credit risk grading system.
FUNCTIONS OF CREDIT RISK GRADING
Well-managed credit risk grading systems promote bank safety and soundness by Facilitating informed decision-making. Grading systems measure credit risk and differentiate individual credits and groups of credits by the risk they pose. This allows bank management and examiners to monitor changes and trends in risk levels. The process also allows bank management to manage risk to optimize returns.
GRADING SHORT NAME NUMBER
Superior SUP 1
Good GD 2
Acceptable ACCPT 3
Marginal/Watch list MG/WL 4
Special Mention SM 5
Sub standard SS 6
Doubtful DF 7
Bad & Loss BL 8
CRG of Mercantile Bank Ltd:
Mercantile bank follows a strict Credit Risk Grading policy. They tend to be more reserved while assessing customer’s financials and grade accordingly. A example of CRG is given in Appendix A
4.4 Types of Loan:
Bank loans can be of two types depending on whether the credit offered to the customer is funded by bank or not.
If the bank finance the customer with the banks own fund are termed as funded loans. Funded loans are consisted of personal loans, SOD and other types of loans where bank forwards the money to customers.
On the other hand non funded loans are which the bank has no fund involve. For example Letter of Credit. Where the customer pays the entire amount which needs to be credited. The bank just offers a channel, using that channel as an intermediary secured transaction can be made.
4.5 Funded Loans:
Mercantile Bank Limited Banani Branch Offers Three Types of Funded Loans for its customers whether a corporate client or individual
List of loan services provided by MBL
| Continuous Loan | Term Loan | Demand Loan |
| Secure Over Draft FDR
Secure Over Draft Schemes Secure Over Draft General Secured Over Draft Financial obligation Cash Credit Hypothecation Cash Credit Pledge |
Corporate | Secure Over Draft Work Order
Letter of Trust Receipt Payment Against Document Inland Document Bills Purchase Foreign Document Bills Purchase Inland Bills Purchase |
| Loan General
Hire Purchase Lease Finance House building Commercial |
||
| Retail | ||
| Consumer Credit scheme
Advance against Salary scheme Any Purpose Loan Education Loan Travel Loan Marriage Loan CNG conversion Loan Hospitalization Loan. |
||
| Staff | ||
| Consumer Credit Scheme
House Building Loan Car Loan |
4.6 Continuous loan:
In this mode of loan, within a fixed amount and fixed period of time, one can receive and deposit money several time.
MBL provide different types of continuous loan:
· Secured Over Draft- financial obligation
· Cash credit- hypothecation
· Cash credit- pledge
· Secured Over Draft- General
· Secured Over Draft- FDR
· Secured Over Draft under Scheme
4.6.1 Secured Over Draft- Financial Obligation:
Mercantile Bank Limited gives loan against any type of instruments such as FDR, SS (Special Scheme) etc. It is not mandatory that the deposited instrument must be issued from the issuing bank. If the borrower does not have any instrument in any bank, then he/she can use third party for issuing the loan. If third party gives permission of taking loan by depositing his/her instrument only then bank will sanction loan. If the instrument is issued from another bank, loan issuing bank will send a letter for seeking permission for lien that as security. When bank gets positive replay, loan issuing bank will sanction loan. Client must have a SB/CD a/c in the bank. However, In Banani Branch, generally SOD is given only against instruments issued from MBL.
· Credit upper limit: Bank will sanction loan depending on the reliability of the client. But maximum amount is 80% of the instrument.
· Interest rate: 3.5% above from the instrument rate. Interest will be charged on quarterly outstanding.
· Payment period: The loan is to be repaid within a specific period of time.
· Security: Any type of instrument such as FDR, SS, etc.
· Procedure for application:
§ Fill up the application with required documents
§ Two passport size photographs, duly attested by an officer of the branch.
· Discretionary power: The branch can sanction this type of loan. But if the limit is higher than 80% or interest rate is lower than 3.5%, than it is beyond the mandated power of the authorizing branch.
· Disbursement of loan:
Before disbursing the loan, the following are to be collected:
§ D.P notes
§ Letter of continuity
§ FDR duly discharged by holder on revenue stamp under the words “Received payment” on the back of the FDR
§ Agreement for pledge of securities
§ Security delivery letter
§ Revival letter
§ Letter of authority to appropriate the proceeds of pledged FDR
§ Letter of authority to debit borrower’s account for incidental changes
§ Letter of acceptance of the terms of the loan.
· In case the pledged FDR’s stand in the third party’s name:
§ Double party D.P. note
§ D.P. note delivery letter
§ Letter of continuity
§ Agreement for pledge of securities
§ Security delivery letter
§ FDR duly discharged by holder on revenue stamp under the words “Received payment” on the back of the FDR
§ Letter of authority to appropriate the proceeds of pledged FDR
§ Letter of guarantee
§ Revival letter-1&2
§ Letter of authority to debit borrower’s account for incidental changes
§ Letter of acceptance of the terms of the loan.
4.6.2 Cash Credit-Hypothecation:
This type of loan is issued for businessperson. Bank will issue loan against the products of the shop. Party has the possession of those products but bank has the control over those products.
· Requirement of the clients:
§ Party has to submit monthly report of their product
§ Product should be insured
· The prospective borrower must have a CD a/c with the branch of the bank from where s/he wants to avail the loan
· Bank procedure: Bank will collect all required information from CAB (Credit information Bureau)
· Credit ceiling: Loan amount depends on the total product of the shop. Bank will sanction a marginal amount among the product.
· Interest: Interest may vary from 12.5% to 13% and it will be charged on quarterly outstanding
· Security: Bank kept collateral as building, land.
· Requirements for disbursement of loan:
· D.P. note
· Letter of arrangement
· Letter of disbursement
· Simple deposit of original title deed of the ownership of the shop or possession deed/ agreement or lease deed of agreement with personal guarantee of the landlord in case of rented premises.
· Guarantee bond on Tk. 150/- non-judicial stamp as per our approved format from the guarantor acceptable to the bank
· Acceptance of the terms and conditions of the loan.
· Letter of authority to debit the account with incidental and other changes
· Up to date trade license
· Mortgage deed
· Mortgage property
· Bia deed
4.6.3 Cash Credit-Pledge:
In CC-pledge, both the control and possession are under the bank. Part by part, the party will repay the loan and receive/ release their products.
· Requirement of the clients:
§ Party has to submit monthly report of their product
§ Product should be insured
§ The prospective borrower must have a CD a/c with the branch of the bank from where s/he wants to avail the loan
· Bank procedure: Bank will collect all required information from CIB (Credit Information Bureau)
· Credit ceiling: Loan amount depends on the total product of the shop. Bank will sanction a marginal amount among the product.
· Interest: Interest may vary from 12.5% to 13% and it will be charged on quarterly outstanding
· Security: Bank kept collateral as building, land.
· Requirements for disbursement of loan:
· D.P. note
· Letter of arrangement
· Letter of disbursement
· Simple deposit of original title deed of the ownership of the shop or possession deed/ agreement or lease deed of agreement with personal guarantee of the landlord in case of rented premises.
· Guarantee bond on Tk. 150/- non-judicial stamp as per our approved format from the guarantor acceptable to the bank.
· Acceptance of the terms and conditions of the loan.
· Letter of authority to debit the account with incidental and other changes.
· Up to date trade license.
· Mortgage deed.
· Mortgage property.
4.7 Retail Loan:
Here, the borrower will take the whole amount at a time and has to deposit/ repay loan within specified time.
MBL provides different types of term loan:
· Consumer Credit scheme
· Advance against Salary scheme
· Any Purpose Loan
· Education Loan
· Travel Loan
· Marriage Loan
· CNG conversion Loan
· Hospitalization Loan.
Consumer Credit Scheme (CCS)
Objectives
The objective of this loan is to provide essential Household durables to the fixed income group (Service holders) and other eligible borrowers under the scheme.
Items of Investment
i. Refrigerator / Deep Freeze
ii. Television / VCR / VCP / Dish Antenna
iii. Music Center
iv. Motor Car / Motor Cycle
v. Air –Cooler / Air – Conditioner
vi. Personal computer
vii. Washing Machine
viii. Household Furniture & Fixtures
ix. Sewing Machine
x. Kitchen appliances like Oven, Toaster, Pressure Cooker, Blender etc.
xi. Any other item not specified above but considered essential.
Eligibility
The criteria to become eligible for availing the facility under the scheme are given below:
I. The borrower must be confirmed official of any of the following organizations:
a) Government Organization.
b) Semi-Government Organization / Autonomous body.
c) Multinational Organizations.
d) Banks & Insurance Companies.
e) Reputed Commercial Organizations.
f) Professions.
Period of Investment: Maximum three years.
Client’s Equity
Prescribed margin as fixed by Head Office from time to time on the total value of the articles shall have to be deposited with the bank by the client as equity before disbursement of loan.
Mode of Disbursement
Client will procure the specified articles from dealer / agent / shops acceptable to Bank. All papers / Cash memos etc. related to the procurement of the goods will be in the name of bank ensuring ownership of the goods. Wherever applicable, the ownership shall be transferred of the client after full adjustment of Bank’s dues. The client shall have to bear all the expenses of license, Registration, Insurance etc. of the articles wherever necessary. The insurance will be with the Bank mortgage clause. The borrower shall pay the premiums by debt to his account. The client shall have to bear the cost of Repair & maintenance of the acquired articles.
Mode of Recovery
Dues shall be recoverable in equal monthly installments. The monthly installment shall be payable by the 8th of every month, but the first installment shall be payable by the 5th of the subsequent month of disbursement. In other way, deduction from the monthly salary of the client wherever applicable, by his employer. In this regard the concerned employee shall authorize irrevocably his employer to deduct the said amount from his monthly salary. The client can only revoke this authority with the concurrence of the bank.
Household Durable Loan
Necessity and needs are constantly changing phenomena in our efforts to improve the quality of life. That necessity cannot always wait for savings to accumulate. Mercantile Bank has taken care of customer’s necessity when it comes to financing of utility products. Household loan is sanctioned for household durables to purchase. The maximum loan limit sanctioned for this purpose is Tk.5 Lac. To be eligible the applicant should have a bank account in any bank with in Bangladesh and should have satisfactory transaction. Businessman can also set up their business with the loan. In that case, the applicant must have a business record of at least three years. If the applicant is a service holder then the applicant’s monthly income must be minimum Tk.10000 and if the applicant is self-employed then the applicant’s monthly income must be Tk.25000 at a minimum. But if the applicant has own house in Dhaka then the minimum monthly income would be Tk.15000. In case of service, the minimum employment period is one year. The age limit of the borrower must be between 21-60 years (at the time of repayment). Maximum Loan Period is four years. Down payment is 10%.
Required Documents
· Employer Certificate for Service Holders
· Photocopy of Trade License for Businessmen
· Photocopy of Tin Certificate, if any
· Bank Account Statement of last six months
· Photocopy of Passport, Telephone (T&T) Bill, if any .
Security
· Two Personal Guarantees
· Undated Cheques
Car Loan
There are minimum criteria to get the loan. If the applicant is a service holder then the applicant’s monthly income must be at least Tk.20000 and if the applicant is a business man then the income must be at least TK.40000. The age limit of the borrower must be between 25-60 years. The down payment of the loan must be 10%. Car Loan only sanctioned for the cars manufactured in Japan. The car for which the loan will be sanctioned must not be older than 2004 model Japanese Car. Bank generally does not invest for the car exceeding 20 laces. Exceptional cases may be considered if the bank is satisfied about the repayment capacity of the client as well as client’s social status. The loan is sanctioned for six years at a maximum. Interest on car loan is 16%.
Doctors Loan
As part of the global phenomenon medical profession is changing fast. With ever changing environment, groundbreaking products and equipments are coming to the market. Keeping that in mind and with a vision to support and promote medical service MBL has introduced Doctor’s Loan. The applicant at least minimum graduate in Allopathic medical science/ Dentistry. If the applicant doctor is employed then the monthly income of the borrower must be at least Tk.10000. In case of self employed (Doctor Practicing independently having chamber or clinics), the applicant’s monthly income must be at least Tk.25000. The age limit of the borrower must be between 25-65 years (at the time of repayment). If the eligible borrower is a general practicing Doctor then according to bank’s policy the loan limit is up to Tk. 5 lac. If the eligible borrower is a postgraduate Doctor (Specialist) then according to bank’s policy the loan limit is up to Tk. 10 lac. Down payment is 10%. The maximumLoan Period is five years.
Advance against Salary