Name

Mercantile Bank Limited

Date of incorporation

20^th May, 1999

Date of inauguration of operation

2^nd June, 1999

Registered Office

61, Dilkusha Commercial Area

Dhaka –1000, Bangladesh

Tel-02-9559333, 0171-1535960

Fax: 880-2-09561213

Telex: 642480  MBLMB BI

Logo

Mercantile Bank Limited

For the community:

– Strengthening the corporate values and taking environment and social

risks and reward into account.

MBL is always ready to maintain the highest quality of services by upgrading banking technology prudence in management and by applying high standard of business ethic enough its established commitment and heritage. This bank is committed to ensure its contribution to national economy by increasing its profitability through professional and disciplined growth strategy for its customer and by creating corporate culture in international banking arena

Figure: Management Hierarchy Of MB

Mercantile Bank has 36 existing branches and some other proposed branch all over Bangladesh to provide better services to their valuable customer. The objective of MBL is not only to earn profit but also keep the social commitment and to ensure its co-operation to the persons of all levels, to the businessmen, industrialists-specially who are engaged in establishing large scale industries by consortium and the agro-based export oriented medium and small scale industries by self inspiration. MBL as the largest private bank is committed to continue its endeavor by rapidly increasing the investment of honorable shareholders into asset.

Deposit

3104.63

8896.20

12234.70

15150.42

16285.19

22385.19

25727.43

Loans ,advances

871.46

3912.97

6707.42

8896.19

10775.95

17669.29

21857.05

Investment

70.18

450.32

882.47

1382.29

2107.26

3108.51

3517.68

Fixed assets

17.97

51.39

67.76

69.75

81.50

103.54

366.80

Total assets

341.45

9364.50

13085.86

16383.17

18324.73

24098.09

28890.48

Foreign exchange Business

Import

2096.20

9219.50

12268.00

15112.50

20380.80

28325.20

33271.90

Export

1011.00

6554.40

10457.50

11377.30

12250.60

17411.00

24108.57

Remittance

42.60

368.80

308.40

496.30

474.00

671.30

679.10

BIS Capital measures

Total risk Weight assets

905.50

3638.30

6170.50

8437.55

11788.09

15793.41

19693.04

Core capital(Tier-1)

252.22

348.98

527.19

594.09

1129.77

1442.35

1829.19

Supplementary capital (Tier-11)

8.84

40.98

69.25

90.46

105.46

175.46

216.66

Tier-1 capital ratio

27.85%

9.59%

8.54%

7.04%

9.58%

9.13%

9.2%

Tier-11 capital ratio

0.98%

1.13%

1.12%

1.07%

0.90%

1.11%

1.10%

Total capital ratio

28.83%

10.72%

9.665

8.11%

10.48%

10.24%

10.39%

Credit quality

Non performing loans (NPLs)

–

–

5.16

37.49

444.02

726.17

905.74

Provision for unclassified loans

8.68

39.04

66.94

88.14

103.14

173.14

214.34

Provision for classified loans

–

–

1.30

12.30

145.30

342.80

523.00

% of NPL to Total L and Ad

–

–

0.08%

0.42%

4.12%

4.11%

4.14%

Share information

Share price(BDT)

–

–

–

–

–

540.00

390.75

NO. of Shares outstanding(000)

2450

2450

2768.50

31997.65

6395.30

7994.125

9992.656

Earning per share(BDT) Basic diluted

2.81

35.50

70.59

84.24

57.88

31.28

38.71

2.81

35.50

70.59

84.24

57.88

31.28

38.71

Dividend per share (BDT)

Cash (BDT) stock

28.00

15.00

40.00

30.00

40.00

35.00

25.00

–

25.00

–

25.00

5.00

–

13:100

1:10

1:20

1:4

1:4

1:5

Dividend yield %

–

–

–

–

–

4.63%

6.40%

Dividend pay out ratio

–

79.89%

56.67%

47.48%

43.19%

63.94%

64.58%

Market capitalization

–

–

–

–

–

4316.83

3904.63

Book value per share (BDT)

106.56

159.17

215.44

214.08

193.16

202.38

204.74

Market value

Book value

Multiple

–

–

–

–

–

267*

1.91*

Price earning multiple

–

–

–

–

–

17.26*

10.09*

Operating performance ratio

Net interest margin

2.54%

2.64%

3.13%

3.16%

3.36%

3.24%

3.05%

Net non interest margin

(0.38%)

1.39%

1.67%

0.91%

0.73%

0.74%

0.97%

Earning Base in assets

97.55%

94.20%

96.35%

93.26%

91.59%

93.88%

90.40%

Operating efficiency ratio

82.45%

71.29%

68.15%

71.06%

71.09%

69.76%

72.15%

Credit deposit ratio

115.49%

96.25%

92.55%

89.20%

74.38%

89.30%

91.68%

Cost of funds

7.60%

7.99%

8.42%

8.32%

8.24%

8.10%

8.42%

Return on assets

.40%

1.52%

1.91%

1.74%

1.24%

1.47%

1.46%

Return on equity

5.27%

29.82%

43.58%

40.05%

22.49%

21.91%

21.12%

Equity multiple

13.07*

24.01*

21.94*

23.93*

14.84*

14.90*

14.12*

Other information

No of the Branches

4

10

14

15

20

25

28

No. of the employees

168

219

305

363

492

544

663

No. of the foreign correspondents

70

102

145

215

240

255

266

MBL keeps the deposit on the form of different accounts, like:  

§  Current Account

§  Saving Account

§ Term Deposit

§  Foreign Currency Account

§  Convertible Taka Account

§  Non-Resident Taka Account

TK. 10,001.00 – TK .1,00,000.00

TK. 5,00,001.00 and above

2005

2004

2003

679.10

671.30

474.00

Particulars

2005

2004

2003

2002

Amount

33,271.90

28325.20

20380.80

15112.50

No. of Letter of Credit

14852

13285

10986

10,076

export

2005

2004

2003

2002

24108.57

17411.00

15250.60

11377.30

Components

2005

2004

2003

2002

%

%

0.65

0.69

–

–

Other expenses

3.42

2.97

6.24

4.55

Total Expenses

2005

2004

2003

2002

2505.28

1895.91

1414.40

1131.06

Capital adequacy Ratio:

As per the guidelines of Bangladesh adopted BIS risk adjusted capital standards to measure capital adequacy. Capital adequacy ratios for four years are:

Limited Workforce:

Mercantile Bank Limited has limited human resources compared to its financial activities. There are not many people to perform most of the task. As a result many of the employees are burdened with extra workloads and work late hours without any overtime facilities. This might cause high employee turnover that will prove to be too costly to avoid.

Problem In Delivery:

Few of the products that mercantile bank are offered to its clients as if “personal Credit (PC)” is lying idle due to lack of proper marketing initiative from the management. These products can easily be made available in attractive ways to increase its client base as well as its deposit status.

Major portion of the Bank’s fund is used for this purpose and this is the major sources of Bank’s income. More than 50% of Banks fund are employed in granting advances and contribute more than 80% of the Banks income.

Advances can be various types:

Loans, cash credit and overdraft.

Bills discounted and purchased.

Defined Credit:

The word ‘Credit’ is derived from the latin word ‘Credo’ meaning ‘I believe’. The term credit may be defined broadly or narrowly. Speaking broadly, credit is finance made available by one party (lender, seller, or shareholders/owner) to another party ( borrower, buyer, corporate, or non-corporate firm).

Credit is also defined under this way-

“The right to receive payment or obligation to make payment on demand or at some future time on account of the immediate transfer of goods (securities).”

From the definition we can define credit the following way:

· Right to receive payment (Banker).

· Obligation to make payment (Borrower).

· Payable on demand or at some future time and

· Immediate transfer of goods.

MBL’s Loan and advances:

MBL is almost new financial institution in the Banking Sector. MBL’s loan and advances are broadly categorized by following four years:

Application of funds in 2005:

5.1General Policies &Guidelines of Credit:

Commercial Banks of Bangladesh follows some guidelines and policy regarding both types of credits and types of customers while doing business. Available and important guidelines can be summarized bellow.

Types of credits:Credit categories by Tenure:

Loans and advances may primarily be divided into two groups:

1. Fixed term loan:

These are the advances made by the Bank with fixed repayment schedules. The term 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. Continuing Credits:

These are the advances having no fixed repayment schedule, but have an expiry date at which is renewable on satisfactory performance.

5.2 Term Loan For Large & Medium Scale Industry:

This category of advances accommodate the medium and long term financing for capital machinery and equipment of new industries and BMRE of the existing units who are engaged in manufacturing of goods and services.

Term financing to tea gardens is also included in this category depending on the nature and size of investment requires.

5.3 Term Loans For Small & Cottage Industries:

These are the medium and long term loans allowed to small & cottage manufacturing industries. Small industry is presently defined as those establishments whose total investment in fixed capital such as land, building, machinery and equipment (excluding taxes and duties) does riot exceed Tk. 30 million (cottage industries also fall within this definition).

Bangladesh Bank sometimes provides interest subsidy at varying rates to the banks on loans extended under this category.

5.4 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 category of continuing credits.

5.5 Export Credit:

Credit facilities allowed to finance exports 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.

5.6 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 Loan against Imported Merchandise (LIM), Loan against Trust Receipt (LTR), Payment Against Documents (PAD), Secured Overdrafts (SOD), Cash Credit (CC), Loan (General), etc. for commercial purposes.

5.7 Loans Under Special Credit Scheme:

a) Consumers Credit Scheme

b) Rural Credit Scheme for poverty alleviation

c) Monthly Income Scheme

d) Monthly Saving Scheme

e) Education Saving Scheme

f) Students Micro Credit Program for higher education

g) Other such schemes as and when introduced by the Bank.

5.8 Other Credits:

Any loan that does not fall under any of the above categories is considered under the category “Others” It includes loan to transport equipments, construction works including housing (commercial/residential), work order finance, persona) loans, etc.

5.9 Types of  Credit Facilities:

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

Loan (General):

Short, medium & long term loans allowed to individual/firm/industries for a specific purpose and for a definite period and generally repayable by installments fall under this head. This type of lending is mainly allowed to accommodate financing under the categories of Large & Medium Scale Industry and Small & Cottage Industry. Very often term financing for Agriculture & Others are also included here.

Overdrafts and demand loans are granted mostly to private individuals & firms. So far as the operation of accounts is concerned, there is little difference between a Cash Credit and Overdraft as in both these cases banks place at the disposal of the borrowers a certain limit for certain period and interest is charged quarterly on the outstanding daily balance. The borrower enjoys the convenience of drawing as and when necessary and repaying the amounts thus overdrawn as and when he is in funds. On demand Loans interest is charged on daily balance periodically- usually on quarterly basis.

Before sanction of the loan MBL requires the following documents from the applicant firms (Proprietorship /Partnership/ ltd Co.)

• Certificate of  incorporation, memorandum, and article of association.
• Board resolution for applying credit facility and authorized persons tosign necessary documents.
• Update Trade licenses, enlistment certificates, VAT registration, and TIN certificate.
• Bank statements, liability statements, and photocopy of sanction letters.
• Stock report, list of machinery installed, statement of fixed assets, quotations.
• Balance sheet, Income statement, PNS of corporation.
• CIB undertaking with loan application form.

If the loan is sanction:

1. Common for all types of facilities:

· Balance Confirmation.

· DP note.

· Letter of arrangement

· Letter of authority

· Letter of guarantee

· Letter of Revival.

2. Letter of Disbursement

3. Installment letter

4. Letter of undertaking

5. Letter of Hypothecation

6. Supplementary agreement for Letter of Hypothecation

7. Hire purchase agreement ( In case of Hire purchase)

8.  For Lease Finance

· Lease Agreement

· Undertaking for Lease Finance

· Certificate of Lease Execution

  9.  Personal Guarantee of the owner.

Cash Credit (HYPO):

Credits allowed to individuals/firms for trading as well as wholesale purpose or to industries to meet the working capital requirements against hypothecation of goods as primary security fall under this type of lending. It is a continuing credit. It is allowed under the categories of “Commercial Lending” when the borrower is other than an industry and “Working Capital” when the client is an industry.

Cash Credit (PLEDGE):

Financial accommodations provided to individuals/firms for trading as well as wholesaling or to industries as working capital against pledge of goods as primary security fall under this head of advance. It is also a continuous credit and is allowed under the categories of ‘Commercial Lending” and ‘Working Capital.

SOD (General):

Advances allowed to individuals/firms against financial obligations (i.e., Lien on FDR/PSP/BSP/ Insurance Policy/Share etc.). This may/may not be a Continuous Credit.

SOD (Others):

Advances allowed against assignment of Work Order for execution of contractual works fall 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 “Others”.

Lease financing:

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 upon period of time against payment of rent. It is a term financing repayable in installment.

Before sanction of the loan MBL requires the following documents from the applicant firms (Proprietorship /Partnership/ ltd Co.)

• Certificate of  incorporation, memorandum, and article of association.
• Board resolution for applying credit facility and authorized persons to sign necessary documents.
• Update Trade licenses, enlistment certificates, VAT registration, and TIN certificate.
• Bank statements, liability statements, and photocopy of sanction letters.
• Stock report, list of machinery installed, statement of fixed assets, quotations.
• Balance sheet, Income statement, PNS of corporation.
• CIB undertaking with loan application form.

If the loan is sanction:

1. Common for all types of facilities:

2. Balance Confirmation.

3. DP note.

4. Letter of arrangement

5. Letter of authority

6. Letter of guarantee

7. Letter of Revival.

8. Letter of Disbursement

9. Installment letter

10.  Letter of undertaking

11.  Letter of Hypothecation

12.  Supplementary agreement for Letter of Hypothecation

13.  For Lease Finance

· Lease Agreement

· Undertaking for Lease Finance

· Certificate of Lease Execution

14.   Personal Guarantee of the owner

Hire Purchase:

Hire purchase is a type of installment credit under which the hire purchaser agrees to take the goods on hire at a stated rental, which is infusive of the repayment of principal as well as interest for adjustment of the loan within a specified period.

Initial selection on the basis of following issues:

1. MBL’s brief background of the customer KTC (know Your Customer): Branch will know their customers. They will corroborate customer information with personal interview, factory/office visit, and financial data analysis, and its performances on the basis of application submitted for credit in Bank’s prescribed format.

2. Length of the relationship of the client with the Bank.

3. Sources of present income.

4. Client’s investment in construction.

5. Credit report on the borrower.

6. Nature of security offered and its value if any.

Before sanction of the loan MBL requires the following documents from the applicant firms (Proprietorship /Partnership/ ltd Co.)

• Certificate of  incorporation, memorandum, and article of association.
• Board resolution for applying credit facility and authorized persons to sign necessary documents.
• Update Trade licenses, enlistment certificates, VAT registration, and TIN certificate.
• Bank statements, liability statements, and photocopy of sanction letters.
• Stock report, list of machinery installed, statement of fixed assets, quotations.
• Balance sheet, Income statement, PNS of corporation.
• CIB undertaking with loan application form.

If the loan is sanction:

• Common for all types of facilities:

1. Balance Confirmation.

2. DP note.

3. Letter of arrangement

4. Letter of authority

5. Letter of guarantee

6. Letter of Revival.

• Letter of Disbursement
• Installment letter
• Letter of undertaking
• Letter of Hypothecation
• Supplementary agreement for Letter of Hypothecation
• Hire purchase agreement ( In case of Hire purchase)

House Building Loans (General):

Loans allowed to individuals/enterprises for construction of house (residential or commercial) fall under this type of advance. The amount is repayable by monthly installments within a specified period. Such advances are known as loan (HBL-GEN).

Initial selection on the basis of following issues:

1. MBL’s brief background of the customer KTC (know Your Customer): Branch will know their customers. They will corroborate customer information with personal interview, factory/office visit, and financial data analysis, and its performances on the basis of application submitted for credit in Bank’s prescribed format.

2. Length of the relationship of the client with the Bank.

3. Sources of present income

4. Client’s investment in construction.

5. Credit report on the borrower.

6. Nature of security offered and its value if any

Inland Bills Purchased (IBP):

Payment made through purchase of inland bills/cheques to meet urgent requirement 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”.

Inland Documentary Bills Purchase (IDBP):

Here an advance payment is made to a customer by way of purchase of inland documentary bills. This temporary liability is adjustable from the proceeds of the bill on collection.

Consumers Credit scheme:

It is a special credit scheme of the bank to finance purchase of consumer durables to the fixed income group. The customers are allowed the loans on soft terms against personal guarantee and deposit of specified percentage of equity. The loan is repayable by monthly installments within a specified period.

Foreign Bills Purchase:

Payment made to a customer by way of purchasing of foreign currency cheques/drafts falls under this head. This temporary advance is adjustable from the proceeds of cheques/drafts etc.

Loan Against Imported Merchandise (LIM):

Advances allowed for retirement of shipping documents and release of goods imported through L/C, taking effective control over the goods by pledge in godowns under Bank’s lock & key, fall under this type of advance. This is also a temporary advance connected with import, which is known as post-import finance and falls under the category “Commercial Lending,”

Loan Against Trust Receipts (LTR):

Advances allowed for retirement of shipping documents and release of goods imported through L/C fall under this head. The goods are handed over to the importer under trust with the arrangement that sale proceeds should be deposited to liquidate the advance within a given period. This is also a temporary advance connected with import and known as post-import finance and falls under the category of “Commercial Lending.”

Payment Against Document (PAD):

Payment made by the Bank against lodgment of shipping documents of goods imported through L/C falls under this head. It is an interim advance connected with import and is generally liquidated against payments by the clien.

SOD (Export):

Advances allowed for purchasing foreign currency for payment against L/Cs (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 of “Commercial Lending.”

Export Cash Credit (ECC):

Financial accommodation allowed to a customer for export of goods falls under this head and is categorized as “Export Credit”. The advances must be liquidated out of export proceeds within 180 days.

Packing Credit (PC):

Advances allowed to a customer against specific L/C or to a firm contract for processing/packing of goods to be exported fall under this head and is categorized as “Packing Credit”. The advances must be adjusted from proceeds of the relevant exports within 180 days. It falls under the category of “Export Credit”.

Foreign Documentary Bills Purchase (FDBP):

Payment made to a customer through purchase/negotiation of a foreign documentary bill falls under this head. This temporary advance is adjustable from the proceeds of the shipping/export documents. It falls under the category of “Export Credit”.

FDBP (Local):

Payment made against documents representing sale of goods to local export oriented industries which are deemed as exports and are denominated in local currency/foreign currency falls under this head. This temporary liability is adjustable from proceeds of the bill.

CREDIT ANALYSIS PROCEDURE

6.0 Credit Analysis:

Credit analysis is an integral part of the lending process in The Mercantile Bank Limited. Credit analysis is of utmost importance for the lending process to be successful. Proper credit analysis helps avoid risks in the lending process and brings transparency.

The Mercantile Bank Limited uses a multiple of methods or techniques to assess the prospective borrower as well as the project in question. These techniques include analysis of CIB Report, appraisal of Project Feasibility, Lending Risk Analysis, and Financial Spreadsheet Analysis (“Y” score and “Z”-score). These methods are discussed in the following sections.

6.1 Evaluation of CIB Report:

Bangladesh Bank provides Credit Information Bureau (CIB) Report to banks and other financial institutions. This report is about borrowers having outstanding loan balance of Tk.1.00 lac and above with scheduled banks and non-bank financial institutions. It contains the following information:

• Debtor/borrower information (outstanding loan balance and loan classification status) Owner information
• Group/related business information
• Credit Exposure Matrix/financial information
• Third party guarantors information

Mercantile Bank uses CIB Report as part of its credit appraisal procedure. It serves as a useful tool to assess borrower’s credit standing and loan repayment behavior.

6.2 Analysis of Project Feasibility:

In order to obtain a credit, the prospective borrower has to apply through a request for credit limit form in the format provided by Mercantile Bank. This form, in effect, serves as a project feasibility report. Although, Mercantile Bank may ask for a separate project feasibility report, filling- up of this prescribed form is mandatory for a new project. It covers the following aspects of the project:

I. Identification of the Project and the Promoters:

• Name and brief introduction of the project
• Name, address, background, educational qualification, technical qualification (if any), and business experience of project promoters/sponsors
• Asset-liability position of promoters and of sister concerns
• Nature of the project: New or Balancing/ Modernization/ Replacement/ Expansion (BMRE).

ii. Project Organization and Management:

• Legal form of project organization
• Organizational structure and management set-up
• Authority distribution and reporting relationships
• Shareholding distribution among promoters/sponsors
• Memorandum of Association and Articles of Association of the project
• Manpower requirement: managerial and administrative personnel, sales and distribution workforce, and production workers and technicians.

iii.   Technical Aspects of the Project:

• Land and location of the project
• Building, structures, and fixture requirement, Machinery, equipment, and vehicles requirement
• Raw materials and other inputs requirement, Utilities, power, and fuel supply
• Approximate stages of project implementation/work schedule of the project
• Proposed products, production capacity, and production schedule
• Production procedure and technology to be used

iv.   Marketing Aspects of the Project:

• It covers Proposed product mix, Pricing strategy, Mode/Channels of distribution, Promotional strategy, Targeted market segments and customer profile, Market positioning and differentiating strategies, Existing and projected market demand-supply situation and demand gap, Schedule of sales, Local and global market outlook, Major competitors in the market etc.

v. Project costs and Financial Aspects of the Project:

• Detailed break-up of project costs: fixed, variable, and semi-variable
• Working capital needs ,Proposed sources of financing
• Proposed debt-equity structure of the project
• Proposed primary and collateral securities for loan with valuation,Proposed loan repayment schedule with desired moratorium period
• Projected income statement, balance sheet, and funds/cash flow statements for 3 years
• Break-even analysis and financial ratio analysis

vi.   Socio-economic Aspects of the Project:

• Employment generation
• Use of advanced technology
• Contribution to GDP
• Foreign exchange savings
• Import substitution and/or potential for export earnings
• Possible backward/forward linkage effect

6.3 Lending Risk Analysis:

Lending Risk Analysis (LRA) is basically a risk rating method to show the level of risk that the bank may not be able to fully recover a loan from a particular borrower. This lending risk is to be primarily calculated from two angles namely Business risk and Security risk.

All these risks are again to be arranged individually at four different levels of risks such as low, average, high and excessive levels of risks. For each level of risk (for different types of risk), a particular scoring has been assigned. All these scores are finally consolidated for arriving at a particular overall risk level among four such levels namely, Good, Acceptable, Marginal, and Poor overall risk levels, The details of different types of risks, risk levels, scoring and consolidating procedures are discussed in the following sections:

Business Risk:

Business Risk is concerned with whether the borrowing company would fail to generate sufficient cash out of business to repay the loan. Business Risk consists of the Industry Risk and the Company Risk.

Industry Risk:

Due to some external reasons a business may fail and the risk, which arises from external factors of the business, is called Industry Risk. It consists of Supply Risk and Sales Risk.

Supply Risk:

Supply Risk is the risk that the business suffers from external disruptions to the supply of inputs. Inputs include all the items that the firm needs to run its business, e.g., labor, power, machinery, factory equipment, raw materials, etc. The price, quality or quantity of supplies may be disrupted. Supply risk is assessed in the following steps:

• First, a cost breakdown is obtained.
• Second, the disruption risk of each item is assessed.
• Third, the significant risks of supply disruption are identified,
• Finally, the risk that the company will be affected by disruptions to its supplies is assessed.
• Sales Risk:

Sales Risk is the risk that the business suffers from external disruptions to sales. Sales may be disrupted by changes to market size, increase in competition, changes in regulations, or the loss of a single large customer. Sales risk is assessed in the following steps:

• First, industry turnover is taken into account.
• Second, the competitive pressure is assessed by analyzing two major competitors.
• Third, the ease of entry into the industry by new competitors is assessed.
• Fourth, the risk of regulatory changes affecting sales is considered.
• Fifth, the risk of a single large customer switching to a competitor is assessed.
• Finally, an overall assessment of sales risk is made.

Company Risk:

Company Risk is concerned with some internal factors of the business. It has two components and four sub-components as follows:

Company Position Risk:

Each and every company holds a position within its industry. This position has to be competitive. Due to weakness in the company’s position in its industry, a company may fail and this risk of failure is called company position risk. It is again sub-divided into Performance Risk and Resilience Risk.

Performance Risk:

Performance Risk is the risk that implies that the company’s position is so weak that it will be unable to repay the loan, even under expected external conditions. Assessment of performance risk involves validating the company’s performance expectations. Performance risk is assessed in the following steps:

• First, recent performance history of the company is analyzed.
• Second, the company’s competitive position is analyzed.
• Third, the company’s strategies are evaluated and its cash flow forecasts are analyzed.
• Finally, overall assessment of performance risk is made.

Resilience Risk:

Resilience Risk is the risk of failure of the company due to lack of resilience in the face of unexpected external conditions. The resilience of a company depends on its leverage, liquidity, and the strength of its connections. Resilience risk is assessed in the following steps:

• First, financial measures of leverage are analyzed.
• Second, the degree of readiness of the shareholders to lend is measured. Third, the company’s resilience to bankruptcy is evaluated.
• Fourth, significant findings from ratio analysis are taken into account.
• Fifth, variability of costs of the company and its overall resilience to lack of liquidity is assessed.
• Finally, the company’s resilience to adverse political changes is assessed.

Management Risk:

If the management of a company is unable to exploit its position effectively, the company may fail and this risk of failure is called management risk. It is again sub-divided into management competence risk and management integrity risk.

Management Competence Risk:

It is the risk of company failure because of lack of managerial expertise and professionalism. The competence of the managers depends on education, experience, and also the level of teamwork.

• Managerial competence is measured in the following steps:

First, the ability of the owners and board members is considered; second, the ability of the managers responsible for finance and operations is assessed. Finally, the strengths and weaknesses of other key personnel are judged and an overall assessment of management ability is made.

• To assess the level of managerial teamwork:

First, the organizational structure of the company is analyzed, second, the degree of collaboration and coordination among management team members is evaluated, Finally, an overall judgment of management competence of the company is made.

Management Integrity Risk:

It is the risk of failure of the company to repay its loan due to the lack of managerial ethics. Management integrity is a combination of honesty and trustworthiness. Management integrity is measured in the following steps:

• First, management honesty is assessed by evaluating the reliability of information supplied by management.
• Then, management reliability or dependability is assessed and an overall appraisal of management integrity is made.

Security Risk:

Security risk is the risk that the realized value of the security does not fully cover the exposure of a loan. Here, exposure means outstanding amount of the loan (principal and interest). There are two main components of security risk as described below:

Security Control Risk:

It is the risk that the bank fails to realize the security because of lack of bank’s control over the security offered by the borrowers. The risk of failing to realize the security depends on the difficulty with which the bank can obtain a favorable judgment and take possession.

To assess security control risk:

• First, an analysis is made about the ease with which the bank can obtain a favorable judgment regarding the securities offered.
• Then, the ease of taking possession of securities by the bank is taken into account.

Security Cover Risk:

Security Cover Risk is the risk that the realized security value is less than the exposure. Security Cover depends on the speed of realization and the liquidation value. To assess security cover risk:

• First, the bank estimates how long it would take to liquidate the security and assesses the risk that its estimate is too low.

• Second, the bank estimates the security value at liquidation and assesses the risk that its estimate is too low.
• Third, the calculation of security cover is done.
• Finally, the bank makes an overall appraisal of security cover risk.

Overall Lending Risk and Decision Making:

Overall lending risk is derived from the different types of risks that the bank has assessed so far and it selects a risk rating from the matrix fixed by head office to the branch (forms are attached in Appendix-14)

Risk Grading Matrix

Table-4: Lending Risk Grading Matrix

Select Overall Risk from Matrix

Table-5: Lending Risk Analysis Matrix

The interpretation is as follows:

If it is found from the matrix that the business and security risk is 1A, 16, 1C, or 10, then the loan proposal is considered to be in the Good Risk category.

• If it is found from the matrix that the business and security risk is 2A, 26, or 2C, then the loan proposal is considered to be in the Acceptable Risk category.
• If it is found from the matrix that the business and security risk is 20, 3A, or 38, then the loan proposal is considered to be in the Marginal Risk category.
• If it is found from the matrix that the business and security risk is 3C, 3D, 4A, 46, 4C, or 40, then the loan proposal is considered to be in the Poor Risk category.

6.4 Financial Spreadsheet Analysis:

This is a computer-based credit risk analysis technique. It uses a number of financial ratios to arrive at two different scores, namely: the ‘2-score, and the “V-score Then, these two scores are used to indicate levels of risks associated with lending to a particular business organization. Both these scores, in terms of their application, calculation methods, and interpretations, are discussed below:

“Z”-SCORE

The “Z”-score is generally applied to the large manufacturing companies. The formula to calculate the “Z-score is as follows:

Z = 1.2 X₁ + 1.4 X₂ + 3.3 X₃ + 0.6 X₄ + 0.999 X₅

Where:

The interpretations of “Z” –score are as follows:

• A score higher than 3 indicates a Low Risk.
• A score under 3 indicates further investigation is necessary.
• A score under 1.81 implies an inherent weakness and the probability of company failure within 2 years.
• A consistent downward trend requires investigation even when the score is satisfactory.

“Y” –SCORE

The “Y” –Score is applied to all trading companies and also small manufacturing companies. For determination of the total score, it is necessary to calculate different ratios. After calculation of ratios, the points are determined from the “Y” –score table. The 5 ratios are as follow:

“Y” –Score table is as Follows:

Table-5: “Y” Credit Score Table

The interpretations of “Y” –Score are as follow:

• A total score of less than 12 indicates an unusual degree of risk and a strong reliance security is suggested for the lender.
• The formula is very much dependent on liquidity ration. Low scores require a close review of the components of working capita, i.e., current assets less current liabilities. Inventory is likely to from a high percentage of current assets.
• Again, the trend is as important as the actual score.

Having obtained both “Y” –Score and “Z” –Score, the lender has to compare these two scores with the following interpretations:

• If result of the two scores appears contradictory, the component rations of the lower scores will have to be reviewed to identify the weak rations and explanation to be sought.
• If the “Z” –Score is satisfactory, and the “Y” –Score is not, then the Sales to Total Assets ratio is to be reviewed. If this ration and the Sales to Working Capital ration are high, then the company is probably a safe borrower.

CREDIT MANAGEMENT POLICIES IN MBL

7.0 Evaluation of Credit Policy in MBL

7.1 Evaluation of Lending Products & Strategies:

Evaluation of Lending Products:

Now is the period of innovation. There are 56 commercial banks operating in the country excluding other non banking financial institutions. In this competitive banking arena a bank must come up with new and easily accessible customer focused lending products. Mercantile Bank Limited offers a number of lending products to its customers. Mercantile Bank has been operating in the market for the last five years starting from 1999 and has developed a number of new and innovative loan products. The loan mix of the bank is very dynamic. The bank has introduced some innovative lending products in the market e.g., doctor’s loan. It has caused the bank attracting a large segment of the potential borrowers. The bank has also introduced credit card facility which pulls a large number of borrowers because of security. Mercantile Bank Limited is ahead of many other private commercial banks in terms of product diversity in credit.

Table 6: Comparison of Customer Focused Loan Products in Different Banks

Mercantile Bank is promised to incorporate new loan products in its loan portfolio. The bank has established real time online banking facility through its WAN (Wide Area Network) to bring all the branches under one network. The bank uses this online system for easy access of the customer to the loan products like personal credit and credit card.

Evaluation of Lending Principles:

Mercantile Bank follows credit principles starting with Know Your Customer (KYC) and ending with Spread. KYC is getting increasing emphasis in the banking arena because loan default rate is high in our country. Proper compliance with KYC can help the banks avoiding bad loans. The Mercantile Bank still maintains adequate safety in its loan portfolio which is reflected in its low default rate. The bank was able to establish confidence in the minds of the customers regarding maintaining adequate liquidity to meet up the borrowers’ requirement. At the same time, the bank was able to remain profitable in terms of interest income and also maintaining a higher spread. Also lending rate is being decreased under the policy’ guidelines of Bangladesh Bank and the bank has to adopt necessary strategy to maintain its profitability from the loan portfolio

.

Evaluation of Credit Strategy:

Strategy provides guidelines to Mercantile Bank to device a smooth lending procedure. As mentioned earlier, Mercantile Bank have a diverse and innovative loan products in the form of short term, mid term and long term loans. Size of the credit varies from fifty thousand taka for personal credit to several crore. Mercantile Bank has a preference for corporate customer and loan mix is mostly provided for working capital financing. Mercantile Bank also finances SME (Small and Medium Scale Enterprise), provides personal credit, export and import finance. Mercantile Bank is in constant search of profitable business sector for extending credit line.

Repayment Behavior/Recovery Position:

Mercantile Bank has a successful story in respect of loan recovery. Experiences inculcate that the repayment behavior of small entrepreneurs is often fair and impressive. In the year 2008 the bank had very low non-performing loans (45%), which was 116% in the previous year. Thus the Bank experiences a comparatively better recovery compared to that of other institutions engaged mostly in large loan and commercial financing.

Strategy for Future Growth:

In conformity with the aspiring objective of accelerating industrial growth and to attain a greater share of the country’s GDP, the Board of Directors of the Bank has placed particular emphasis on financing in a wide range of industries. Accordingly, all the branches have been instructed to stress upon financing in diverse range of industries in a way that the Bank not only attains the global target but also can make a true difference in this respect. Executives from the Head Office also pay regular visits to Branches to help scouting more projects.

7.2 EVALUATION OF CREDIT PRACTICES:

The lending process of Mercantile Bank Limited starts with a customer who has an account with the bank or is intended to open an account with the bank. The lending generally starts at the branch level. The branch manager plays an important role in the initiation of the lending process. The critical evaluation of the lending process has been done taking various components and phases of the lending process into consideration.

Borrower Selection:

Starting and developing a business in a developing country like Bangladesh is not an easy task. Entrepreneurs face many challenges, especially with the uncertainty that exists over access to finance, advice and information, and reliable markets. By offering technical assistance, business advice, support and extension services, lending institutions can make a great difference to their chances.

While selecting borrowers/entrepreneurs in general, Mercantile Bank places particular emphasis on the character and capacity of the entrepreneurs/sponsors. Then comes the question whether the project is viable in all respects. Mercantile Bank sets some criteria to judge the viability of the project. There are ways Mercantile Bank scouts prospective entrepreneurs:

• The management of the Bank sets a global target for the Bank for a particular year. Accordingly, the Head Office sets specific targets in respect of deposit, advance, export and import and profit for each individual branch. In order to achieve the set target, each branch emphasizes on expanding the loans and advances. This requires the branch to scouting prospective entrepreneurs in their locality.
• The management also set targets for each branch to scout entrepreneurs from particular sectors or entrepreneurs with particular characteristics. As for example, there can be targets for branches to scout a certain number of projects having fixed cost up to Tk.50.00 lac.
• The Managing Director, Deputy Managing Directors and other senior executives from the Head Office pay visit to branches at regular intervals and exchange views with the existing and prospective clients/entrepreneurs. Also there are times when the branch prearranges for meeting with the prospective entrepreneur(s) if required.
• The potential borrower of Mercantile Bank must have an account with the bank or intended to open an account with the bank before being entitled to enjoy credit facility by the bank. Borrower selection is the most important part of lending process, because the subsequent success largely depends on the right selection of the potential borrower.
• While selecting borrower the loan officers are instructed to take utmost care so that adverse selection is not made.

Although Mercantile Bank practices good attitude in selecting borrowers, there are some problems in this process which are discussed below:

• Although Bank takes protective measures against selecting wrong customers, in reality often adverse selection is made. The major problem the credit officers face in selecting borrowers is the availability of information about a particular borrower. Borrowers’ speculative behavior and non co-operation in providing data is also prevalent in Bangladesh.
• Bangladesh is a small country but there are 56 commercial banks operating here. Therefore the credit market is a borrower dominated market. Number of potential borrowers is insufficient as compared to the number of banks operating. Therefore an unhealthy competition has been occurred in capturing customers.
• Bank cannot keep its deposits idle because deposits are entitled for interest. That’s why bank is in constant search for potential borrowers to mobilize its deposits. Therefore sometimes adverse selection is made arising out of emergency need for rotating the bank’s deposit.

Branch Act:

• Branches play key roles in credit operation. Usually branch credit department targets the potential borrowers, generates the credit relationship and completes the credit analysis and prepares a well written credit proposal.
• Bank collects information through pre-designed forms filled in by the customer. These forms include request for credit limit form, present net worth statement and personal credit information form. If the information collected by the branch do not represent the real picture of the borrower, then all the subsequent lending activities will carry risks. Particularly credit analysis based on wrong information might prove very dangerous.
• Branch’s main purpose regarding a credit application is not to create obstacle for the customer but to depict the clear and real picture from an unbiased position.
• The success of a credit approval largely depends on how well and how quickly branch can prepare the credit proposal. Based on the proposal prepared on the basis of qualitative and quantitative analysis, the head office takes decision whether to sanction the loan or not.

Head Office Activities:

• Head Office Credit Committee and Board of Directors play key role in the final sanction of the lending process. If the amount of credit exceeds Head Office Credit Committee’s limit, Board approval is necessary.
• The time required for the approval of a particular credit proposal largely depends on the level coordination between branches and the Head Office Credit Committee. At the Head Office, every officer of the credit department is assigned to supervise few branches to facilitate better communication and smooth functioning of the lending process.
• Besides Head Office Credit Division, Monitoring and Inspection Division of Head Office overviews the whole credit process of The Mercantile Bank Limited and if any intervention is required at any stage, they play the required role.

Credit Analysis (Financial Spread Sheet Analysis):

• Credit analysis is one of the most important components in the credit process. Credit analysis acts as a bridge between the selection of borrower and the final approval of the loan. Financial spread sheet analysis consisting of balance sheet, income statement and cash flow statement proved very effective in judging the financial health of the borrowers. Further ‘(score and Z-score are calculated to measure the risks of lending in numerical scale.
• The bank relies heavily on information supplied by the loan applicant without adequate verification of it. This may well lead to inaccurate credit appraisal.
• In the absence of credit rating agencies in the country, exhaustive investigation is required for assessing the credit standing of the loan applicant. Mercantile Bank does not take proper care in this regard. Rather it is overly reliant on US report by Bangladesh Bank.
• Mercantile Bank places a heavy emphasis on debt service ratios while appraising projects. This, of course, makes good sense but due importance also should be given on profitability ratios because they are good indicators of a project’s debt service capability.
• One vital aspect of project appraisal is sensitivity analysis. It is important to see the project worth by changing the critical quantitative variables like sales price, raw material prices, production volume, sales volume, etc. But Mercantile Bank unfortunately neglects this vital aspect.
• A pre-specified feasibility rationale or criteria, with a margin for flexibility on case basis, facilitates judgment on project merit and client’s creditworthiness. Unfortunately, Mercantile Bank has not developed such criteria for credit evaluation. Rather it makes the credit appraisals using entirely their own judgments. This causes a lack of reasonable standardization in project appraisal.
• The problem of credit analysis done through financial spread sheet analysis is the validity of information. Sometimes it is observed that the company is apparently a weak performer but its financial statements show a different picture. In such a case financial spread sheet analysis generates faulty results. Therefore it is suggested that the quantitative credit analysis should be supplemented with subjective judgment.

Creation of Charge:

Charge creation is very important in the ending process in that it establishes the legal right on the property of the borrower so that the bank can get the repayment by selling the property in case of default.

Mercantile Bank Limited does not create charge through pledge which is a strong mode of charge creation. The security obtained through pledges much safer than hypothecation which is a weaker mode of creating charge.

Negligence in creating proper charge might seriously jeopardize the bank’s interest as far as the credit is concerned.

Loan Monitoring Techniques:

• Mercantile Bank employs several techniques for loan monitoring. So far Mercantile Bank’s loan monitoring has been done very effectively which is evident from its near zero default rate.
• Sometimes monitoring should be done through physical verification of the borrower’s work place, mortgaged property or hypothecated stocks.
• Mercantile Bank faces occasional problem in loan monitoring due to the shortage of manpower. Loan monitoring is a continuous task requiring reasonable number of manpower. For this Mercantile Bank has its Monitoring and Inspection Division. But more officers need to be poster there.

7.3 Flow Chart of Consumer Loan Processing:

Process Flow Chart of Consumer Loan Processing (sample)

1

2

3

4

5

6

7

7.4 Evaluation of Credit Policies:

The credit management at Mercantile Bank has some problems, which are described in the following section:

Lack of Well Documented Credit Policy:

• An integrated credit policy is essential for the smooth operation and efficient management of a bank’s lending activities. It serves as a guiding framework and facilitates better decision- making. Unfortunately, Mercantile Bank does not have a well defined and well documented credit policy covering all aspects of its credit operation. As a result, there are no standardized or streamlined lending practices to bring about better discipline, efficiency, and control in its lending operation.
• As the bank has no well documented credit policy of its own, most of the policy guidelines disseminated by the Head Office are merely copied from the write-ups of bankers working in other institutions. But what is good for other banks may not be appropriate for Mercantile Bank.
• The policy guidelines of Mercantile Bank are pretty much relevant for general lending operation with a heavy bias towards legal matters dictated by Bangladesh Bank. While this is very much required, the negligence towards strategic contents of policy matter regarding lending is striking.

Long-Winding Processing of Loan Application:

There is no doubt about the fact that any bank has to take a cautious approach while processing loan applications to guard against the possibility of future default. But efficiency in loan processing can cut down the time considerably. At Mercantile Bank, the average loan processing time is relatively long. This is particularly true for project loan, which usually takes over one month to complete the processing. At the branch level, this is due to the shortage of efficient loan officers and also computing machines. Bureaucratic structure and nature of credit committees at the Head Office level of Mercantile Bank is another contributing factor.

Centralization of Loan Disbursement Authority:

At Mercantile Bank, final approval for any type or amount of project loan must come from the Head Office. Even if a small project loan is applied for at a branch far away from Dhaka, it is the Head Office which gives the final approval. Such tight control is required for large project loans, but not justifiable for small amount of project loans. It also shows a lack of confidence the Head Office has on the ability and integrity of its branches.

Weaknesses in Loan Appraisal system:

There are several weak points in the existing loan appraisal system of Mercantile Bank. To start with, lack of credit rating agencies does hamper the bank to a great extent in assessing the borrower’s creditworthiness. The CIB report from Bangladesh Bank does help a bit, particularly with information on outstanding loan. But it does not help the bank to make a comprehensive judgment on the borrower’s credit standing.

A system has been developed to mark out the financial position of the organization that the bank is giving loan which is called CRG. But discrepancy is found in security cover risk: Security Control Risk, Security Cover Risk and in some business risk analysis.

Emphasis on Project Feasibility Report:

Another problem relates to the analysis by the bank of the financial statements, f and ratios as given in the project feasibility report. It is true that loan officers at Mercantile Bank do carry out extensive analysis of these figures, but the fact remains that they are projected and not actual figures. Therefore, the bank is at risk of arriving at an inflated assessment of project potential by not properly judging the realism of these projected figures and ratios.

Lack of Central Monitoring System:

To ensure timely repayment of loan installments, banks need to have a central and well-coordinated supervision and monitoring programs. But Mercantile Bank has not paid due attention to this aspect of loan administration. The low frequency of monitoring programs does not allow the bank to keep abreast of a project’s state of affairs in a timely manner.

Contribution of MBL to the National Economy

8.0 Introduction:

A laudable contribution by the banking sector growth, and the resulting competition, in the past one-decade is the diversion of Banking sector resources to the industrial sector. The quality of services offered to all beneficiaries and the contribution of the banking sector to the economy as a whole has seen a quantum leap after the advent of the private banks, there by opening up larger avenues for all investors, depositors as well as entrepreneurs.

The aim of MBL is to become a leading Private Bank of 3^rd generated for providing better service to the clients and contributing to national economy and improving the financial sector through its effective and innovative banking and financial product. However as the MBL has a vision and mission to do something different, for that it is trying to do some things different from other Banks. The impact of MBL’s loans and advances facility on the economy development of the country can be discussed under the following heads:

8.1 MBL’s Participation in the National Economy:

Financial sector is the back bone of the economy. Commercial Banks have contributed to give the efficiency of that sector. For that purpose commercial Banks invest their funds to make the sectors strong in the economy. MBL formulated its policy to give priority to small and medium organization while financing large-scale enterprises through the formation of a consortium of Banks. The Bank provided credit for trade and business, import, export, garments, fisheries, real estate and micro credit programs.

MBL is not exception of that motive. The following data table gives us a view of financial statement:

 Balance Sheet

As at June 30, 2009

( Amount in BDT)

8.2 REVIEW OF BANGLADESH ECONOMY:

Growth prospects are dimmed by the global economic slowdown, but inflation has eased with falling global commodity prices. The new Government should raise infrastructure investment and improve the enabling environment for private sector activity, in order to enhance prospects for rapid growth and job creation. This in turn will require improved implementation of the development expenditure program as well as strengthened revenue mobilization. Addressing power and gas shortages will be particularly important for enhancing longer-term growth prospects, especially in terms of encouraging private investment.

  Figure-3: Global Economic Growth

Imports rose by 25.6%, with imports of food, fuel, and fertilizer rising sharply. The higher trade deficit was offset by continued strength in workers’ remittances, leading to a small current account surplus of $.07 Billion or 9% of GDP. A smaller surplus in the financial and capital account lowered the overall all balance of payment surplus to just over 600 million surpluses in FY 2008 from about 1.5 billion in the previous year. Foreign exchange reserve rose by 1.1 billion to 6.1 billion at end-June 2008 (import cover of about 3 months), partly reflecting a rise in central bank liabilities

BANKING SECTOR

and market surveillance and the high costs of listing need to be addressed if market capitalization is to rise further in line with other South Asian markets.

ECONOMIC PROSPECTS:

Prospects for FY2009 and FY2010 will hinge critically on the way in which the democratically elected government (which assumed office in January 2009) continues and deepens the economic reforms initiated during the caretaker Government’s 2-year tenure. Prudent macroeconomic management, in particular prompt action to address the downside risks to growth from the global slowdown, will also be required. The Government will need to adopt measures to accelerate

ADP implementation, including addressing deficiencies in institutional capacities in key line ministries, raising revenues, and encouraging greater private participation in infrastructure investment. Economic prospects will also depend on the continued availability of adequate external assistance—despite the economic downturn—for supporting public spending on infrastructure, especially for rolling back growing power shortages.

Against this background, GDP growth is forecast to decline to 5.6% in the current fiscal year (FY2009), because of the effects of the global slowdown on exports and remittances and, as anxious consumers trim their spending, of lower domestic demand. GDP growth is forecast to slide further to 5.2% in FY2010 as the global economic slowdown persists, with continue moderation in external and domestic demand.

Figure-11: GDP Growth Rate

Agricultural output will rise briskly in the forecast period, if normal weather conditions prevail and if farmers can access credit and inputs. Industrial growth is expected to moderate in FY2009, as export production begins to slow in the second half of the fiscal year, reflecting cooling global demand. The export sector got off to a robust start in the first quarter, when total shipments surged by 42.4%. In the second quarter, though, they declined by 1.2%, resulting in still-robust, cumulative export growth for the first 7 months of 18.2% .

International buyers of Bangladesh products have also been encouraged by the large improvements in ports, customs, and safety and labor standards in the past couple of years. Nevertheless, slower growth in export earnings for the rest of FY2009 is foreseen because of the global slowdown and lower prices. Slower export growth will take down that of industry to 6.6% in the current fiscal year. Next year will see 6.0% industrial expansion as the slump in external and domestic demand continues. Services sector growth will also slow to 6.0%, down from the 6.7% in FY2008, because of slower activity in the export sector and an easing in consumer spending induced by moderation in incomes and remittance growth. Services sector growth will fall to 5.5% in FY2010 due to industry’s slowdown.

Agricultural growth is expected to edge up to 4.0% in FY2009 and further to 4.1% in FY2010, on the basis of improved crop harvests. Inflation slowed during the course of the fiscal year. The decline in food inflation was steeper than that of nonfood inflation by end-January.

The rapid decline in international commodity prices and good domestic crop harvests are pulling inflation lower. The cut in the domestic administered price of petroleum in October and December, after an increase in July, also eased inflation pressures, as has the modest monetary tightening in the second quarter of FY2009, and the further cut in domestic petroleum prices in January 2009. Inflation is projected at 7.0% for FY2009 and is expected to fall further to 6.5% in FY2010 (Figure 3.15.12).

However, Bangladesh Bank cut the repo rate in March 2009 (from 8.75% to 8.5%) to encourage banks to lower their lending rates. The external current account is expected to show a tiny surplus in FY2009 (0.2% of GDP) and a small deficit in FY2010 (0.5%)

Overseas workers’ remittances remain a source of strength for Bangladesh, with 27.0% growth in the year to February. Nearly two thirds of remittances originate in the Middle East, with another one third from the US and Europe. But a deceleration in remittance growth is inevitable as the downturn has now deepened, to 20% in FY2009 and to 15% in FY2010.

Similarly, export growth is projected to decelerate, to 14.0% and 13.0% over these two years. Import payments during the first half of FY2009 rose by 23.2% relative to the same period of FY2008. However, the opening of import letters of credit—a leading indicator for annual imports—declined by 2.2% in the first 7 months of FY2009, mainly because of the difficulties for international negotiating banks in supporting import activities in the face of liquidity shortages. With a further fall in international commodity prices, growth in import payments is expected to moderate and settle at 18.0% in FY2009 and 17.0%in FY2010.

Government revenues are showing signs of deceleration, with growth falling from 20.5% in the first quarter of FY2009 to 12.4% in the first 7 months of the fiscal year, compared with the corresponding periods of FY2008.

Although the Government has transferred some of the benefits of lower international petroleum prices to consumers through successive cuts in domestic prices, the sharp decline in international prices also allowed it to eliminate petroleum subsidies and permitted a small profit for

DEVELOPMENT CHALLENGES

Bangladesh needs to substantially raise investment, which has followed a declining trend in recent years, in order to enhance growth and job creation and thereby reduce poverty. Public investment must be raised, primarily by accelerating ADP implementation, but efforts to raise private sector participation in infrastructure investment should also be made.

Table-7: Economic Indicators

The new Government needs to pay attention to improving institutional capacities in its various agencies, both to implement reforms and strengthen development administration. Unless early remedial measures are adopted, power cuts and irregular electricity supplies will hamper domestic production and hold back medium-term growth prospects.

Figure-16: Supply Side Growth

In the longer term, the lacks of gas supplies will severely limit power generation and, therefore, new investment in manufacturing activities. Large and rapid investments in gas and power are essential to ensure their continued availability. As FDI flows in gas and power are unlikely to materialize soon because of the global financial market turmoil, the Government must mobilize its own resources and tap external donor assistance. Investments in other infrastructure, such as roads, ports, and urban infrastructure and services, are also essential.

Conclusion

Documentation

From the practical implementation of customer dealing procedure during the whole period of my practical orientation in Mercantile bank limited we have reached a firm and concrete conclusion in a very confident way. I believe that my realization will be in harmony with most of the banking thinkers. It is quite evident that to build up an effective and efficient banking system to the highest desire level computerized transaction is a must.

Success in the banking business largely depends on effective lending. Less the amount of loan losses, the more the income will be from Credit operations. The more the income from Credit operations the more will be the profit of the Mercantile Bank Limited and here lies the success of Credit Financing.

Though there are some drawbacks in implementing Credit facilities in Mercantile Bank Limited as per manual, it can be further developed in light of the recommendations being discussed above. Finally it can be argued that though the results achieved so far are not satisfactory, Credit Financing is a modern scientific technique for enhancing Mercantile Bank’s strength and there lies the opportunities to make it more effective in the future for our own benefit.