The Jews in Jerusalem introduced a kind of banking in the form of money lending before the birth of Christ. The word ‘bank’ was probably derived from the word ‘bench’ as during ancient time Jews used to do money -lending business sitting on long benches.
First modern banking was introduced in 1668 in Stockholm as ‘Savings Piss Bank’, which opened up a new era of banking activities throughout the European Mainland.
In the South Asian region, early banking system was introduced by the Afghan traders popularly known as Kabuliwalas. Muslim businessmen from Kabul, Afghanistan came to India and started money-lending business in exchange of interest sometime in 1312 A.D. They were known as ‘Kabuliawalas’.
The financial system of Bangladesh consists of Bangladesh Bank (BB) as the central bank, 4 nationalized commercial banks (NCB), and 5 government owned specialized banks, 30 domestic private banks, 10 foreign banks and 28 non-bank financial institutions. The financial system also embraces insurance companies, stock exchanges and co-operative banks .The structure of the banking system has changed substantially over the last few years. NCBs’ role has gone down. Their share in total assets went down from 54 percent in 1998 to 40 percent in 2006. On the other hand, PCBs’ share went up from 27 percent in 1998 to 43 percent in 2006. The change reflects adoption and implementation of new policies for the banking sector
Banks are become more important to the economy as a whole and to local communities. Certainly, banks can be identified by the functions they perform in the economy. Bank is a financial intermediary accepting deposits and granting loans offers the widest menu of services of any financial institution. Banks are the most important financial institution in the economy. They are the principal sources of credit (loan able funds) for millions of individuals and families for many units of the government.
Banks are also closely watched because of their power to create money in the form of easily spend able deposits by making loans and investment. Changing in the volume of money created by banks appears to be closely correlated with economic conditions, especially the growth of jobs and the presence of absence of inflation. The fact that banks creates money, which impacts the vitality of the economy. Bank provides individuals and business with loans that support consumption and Servicing.
Banking sector is expanding its hand in different events every day. At the same time the banking process is becoming faster, easier, and the banking area becoming wider. As the demand for better service increases day by day, they are coming with different innovative ideas and products. In order to survive in the competitive field of the banking sector, all banking organization are looking for better service opportunity to provide their fellow clients. As a result, it has become essential for every person to have some idea on the bank and banking procedure.
ORIGIN OF THE STUDY
As a part of the requirement of the MBA program of the Faculty of Business Administration of ASA University of Bangladesh. The topic of the study is “Financial Analysis of Mercantile Bank Limited : A Five Years Analysis”.
OBJECTIVE OF THE STUDY
To analyze the financial position and performance of the Mercantile Bank Ltd.
To focus on products, services and financial condition of MBL.
To expose strengths and weakness of MBL in comparison with competitors.
SCOPE OF THE STUDY
Mercantile Bank Ltd is one of the leading banks in Bangladesh. The scope of the study is limited. The Thesis Report covers the organizational structure, background, functions, financial position and performance of the branch as well as the bank. The scope of the study is just to acquaint with the operational scenario of Mercantile Bank Limited. For the bindings of security all the data could not be enclosed in this Thesis Report.
METHODOLOGY OF THE STUDY
In order to make the report more meaningful and presentable, two sources of data and information have been used widely.
SOURCES OF DATA / INFORMATION
Primary data collected by face to face communication with the Banks officials.
Observing banking activities of last five year
Annual Reports of Mercantile Bank Ltd.
Journals of the Bank.
Official Website of the Bank.
Different financial statements.
periodicals published by Bangladesh bank.
LIMITATIONS OF THE STUDY
The present study was not out of limitations. But it was a great opportunity for me to know the banking activities of Bangladesh specially Mercantile Bank. Some constraints are as follows:
- The main constraints of the dissertation are inadequate access to information, which has hampered the scope of analysis required for the dissertation.
- Every organization has their own secrecy that is not revealed to others. While collecting data they did not disclose much information for the sake of organizational confidentiality.
- The bank personnel and officials were very busy with their occupational activities. Hence it was little bit difficult for them to help within their high schedule.
- Due to time limitations many of the aspects could not be discussed in the dissertation.
- Lack of current information.
- Very limited published
HISTORICAL BACKGROUND OF MBL
Mercantile Bank Limited is adjudged as one of the leading bangs in Bangladesh. The bank is a blend of development and commercial bank. It has been established to promote banking activities in the country.
Mercantile bank ltd was incorporated on May 20, 1999 and it started its operation on June 02, 1999. It was established as banking company under the companies Act 1913. The bank is governed by the bank companies Act 1991.According to CAMEL rating, the was given the top ranking after applying all the ten creation that are required to judge a bank’s overall performance, informed banking sources said.
The Authorized Capital of the Bank is Tk. 1200 million and the Paid -up Capital is Tk. 799.41 million. Total employe more than 16,000 at the end of November 2012.
The first branch of MBL was opened at Dilkusha commercial area in Dhaka on the inauguration day of the bank. At the end of 2011, the number branches of the bank stood at 80, including 5 SME / krishi branches, of which 57 branches are located at major trade centers of the country and other 23 branches are at rural areas of country.
The Bank provides a broad range of financial services to its customers and corporate clients. The Board of Directors consists of eminent personalities from the realm of commerce and industries of the country.
The Bank is manned and managed by qualified and efficient professionals. The former Governor of the Central Bank of Bangladesh was the Chief Advisor of the Bank. He brings with him a wealth of experience of managing both public and private sector banks.
Vision of the bank
Would make finest corporate citizen
Mission of the bank
Will become most caring, focused for equitable growth based on diversified deployment of resources, and nevertheless would remain healthy and gainfully profitable Bank.
Objectives of MBL
to achieve positive Economic Value Added (EVA)each year.
to be market leader in product innovation.
to be one of the top three Financial Institutions in Bangladesh in terms of cost efficiency.
to be one of the top five Financial Institutions in terms of market share in all significant
market segments serve.
to achieve 20% return on share holders equity or more, on average.
Goals of MBL
The main goal of Mercantile Bank Limited is to become a leading private bank of the 3rd generation by providing better service to the clients along with other quality operations in the banking sector.
Management structure of MBL
The Chairman is the head of the Board of Directors. There is one Managing Director who is also the President mainly controls and supervises the major divisions of the bank. He directly supervises the branch “Control and Inspection Division”. One Deputy managing director reports to him. Four Executive Vice President (EVP) and one Senior Executive Vice President (SEVP) report to the Deputy Managing Director. Executive Vice President controls the credit, loan administration, international division, information technology and financial control and accounts division. Senior Executive Vice Presidents work under Executive Vice Presidents.
The organizational structure of MBL is quite horizontal where each person reports to only one person, which refers to a very good working environment.
ORGANIZATIONAL HIERACHY OF MBL
THEORETICAL FRAME WORK OF THE STUDY: HOW PERFORMANCES OF BANK ARE EVALUATED
Bank performance evaluation is traditionally based on the analysis of financial ratios. However, regardless of how many ratios are being used, a model that would fully satisfy the analysis of needs and bank operations’ efficiency evaluation has not been developed yet. For this reason, the financial ratio analysis is complemented with different quality evaluations, with features such as management quality, equity structure, competitive position and others to be included into the final evaluation.
There are various motives to support the efforts of searching for the best method of bank performance evaluation. Managing the financial system of a country requires the kind of methods which enable the financial institutions to recognize the management problems on time so that steps for the protection of citizens and the whole system can be undertaken, since the level of problems resulting from poor bank management threaten the whole financial system of the country. From an individual bank’s point of view, the interest of the bank for its efficient operation finds it important to be able to compare with the competitive banks and identify the causes of its efficiency. Bank performance evaluation is of great importance for individuals, due to their need to protect against banking with a risk-running bank or due to the speculative motives linked to the activities on the capital market.
Mercantile Bank Ltd. is committed to provide high quality services to its constituents through different financial products and profitable utilization of fund and contribute to the growth of GDP of the country by financing trade and commerce, helping industrialization, boosting export, creating employment opportunities for the educated youth and encouraging micro-credit leading to poverty alleviation and improving the quality of life of the people and thereby contributing to the overall socio-economic development of the country.
With a view to achieving the aforesaid objectives of the bank, Credit operation is of paramount importance as the greatest share of the total revenue of the bank is generated from it. The success of a bank, therefore, depends on how efficiently and judiciously it makes use of its available resources. In other words, prudent and efficient management of its credit portfolio is very essential for the success of a bank.
The Credit Policy of any banking institution is a combination of certain accepted, time tested standards and other dynamic factors dictated by the realities of changing situations in different market places.
The accepted standards relate to safety, liquidity and profitability of the advance whereas the dynamic factors relates to aspects such as the nature and extent of risk, interest or margin, credit spread and credit dispersal. In all business dealings, officers and employees must be guided by the principles of honesty, integrity and safe-guard the interest of the depositors and shareholders of the bank. They should strictly adhere to the Banking Laws, Rules and Regulations of the Govt. of Bangladesh / the instructions and guidelines issued by the Bangladesh Bank / Head Office from time to time which affect the business practices of the Bank. However, the key to safe, liquid, healthy and profitable credit operations lies in the quality of judgment used by the Executive’s / Officers making lending decisions and their knowledge of the borrower and the market place.
Highlights of MBL
(Taka in million)
|Paid up capital||4,968.09||4,072.21||2,158.42||1,798.08||1,498.90|
|Total Capital Fund||10,700.93||8,684.32||4,995.43||4,183.86||3,387.17|
|Capital Surplus / Deficit||605.66||120.06||226.86||120.41||483.51|
|Total Loans and Advances||79,728.02||66,377.70||48,295.55||43,419.36||31,477.86|
|Total Contingent Liabilities and Commitments||41,948.37||37,989.54||21,757.17||19,917.86||18,904.10|
|Credit Deposit (in %)||81.68||87.77||83.22||87.65||81.02|
|Percentage of Classified Loans Against Total Loans and Advances (in %)||2.61||1.78||2.59||2.96||2.80|
|Profit After Tax and Provision||1,755.73||1,425.34||807.52||615.88||540.50|
|Amount of Classified Loans During the Year||896.81||( 72.50 )||261.24||348.47||410.98|
|Provision Kept Against Classified Loans||718.16||617.53||629.70||578.20||563.85|
|Cost of Fund (in %)||9.63||7.94||8.81||9.19||8.75|
|Interest Earnings Assets||103,076.87||78,694.47||57,471.28||49,941.85||39,497.83|
|Non- Interest Earnings Assets||13,578.41||9,252.96||8,695.24||5,986.87||5,442.71|
|Return on Investment (ROI) (in %)||9.33||8.41||8.75||10.46||10.98|
|Return on Asset (ROA) (in %)||1.72||1.64||1.22||1.10||1.32|
|Income from Investment||1,671.29||919.45||696.66||502.33||764.48|
|Earning Per Share (tk)||3.53||2.87||30.67||28.53||30.5|
|Net Income Per Share (tk)||3.53||2.87||30.67||28.53||30.5|
|Price Earning Ratio (Approximate)||9.97Times||14 Times||11 Times||10 Times||12 Times|
Degree of Operating Leverage (DOL)
Operating leverage is the firm’s ability to use operating costs to magnify the effects of changes in the sales on its operating profit or profit before interest and taxes (EBIT).
Every company has fixed operating cost then, if the capacity or production or sale changes then EBIT will changes disproportionately then operating leverage will be created.
|Degree of Operating Leverage|
|% change in Sales||36.59%||27.78%||33.37%||20.07%|
|% change in EBIT||38.31%||22.89%||32.55%||21.98%|
|DOL=||(% change in EBIT) / (% change in Sales)|
So the degree of operating leverage (DOL) is defined as the percentage changes in operating profit (EBIT) associated with a given percentage changes in sales. Here in the year 2008 the percentage changes in operating profit EBIT is higher than percentage in sales which is 38.31%. In the year 2009 the sales changes more than EBIT that’s why it decreased. DOL riches up to 1.10 in 2011 which is good for the company.
Degree of Financial Leverage (DFL)
Financial leverage is created when a firm has fixed financial cost associated with its financing characteristics. That is, the potential use of fixed financial cost to magnify the effect of changes in earning before interest per share.
The degree of financial leverage is defined as the percentage changes in earning per share that results from a given percentage changes in earning before interest and tax. Here we got negative DFL, which is not indicate good position of the company in financial leverage.
CREDIT POLICY OF MBL(Types &Steps )
The basic principles of lending are described in this section. It must be clearly understood at the outset that these principles are not inflexible and are given as guidelines for protecting the Loans and Advances.
The following are the general principle to be considered for lending funds to customers on a basic consistent with the global operational objectives and business strategies of the bank:
a) The bank shall provide suitable credit services and products for the markets in which it operates.
b) Loans and advances shall normally be financed from customers deposit and not out of temporary funds or borrowing from other Banks.
c) Credit facility will be allowed in a manner which will in no way compromise with Banks standards of excellence.
d) All Credit extension must comply with the requirements of Bank’s Memorandum and Articles of Association, Banking Companies Act 1991 as amended from time to time / Bangladesh Bank’s instructions and other applicable rules and regulations.
e) A prudent banker should always adhere to the following principles of lending funds to his customer: e.g. (1) Background, character and capability of the borrowers, (2) Purpose of the facility, (3) Term of facility, (4) Safety, (5) Security, (6) Profitability, (7) Source of repayment, (8) Diversity.
It should be remembered that selection of the appropriate borrowers, proper follow-up and end-use supervision through constant follow-up and monitoring are the cornerstone for timely recovery. These guidelines will be updated annually.
Before selecting a customer / client and subsequent recommendation for financing, the Credit Officer / Relationship Manager must observe the following basics of lending:
Industry and Business Segment Focus:
As a general practice Mercantile Bank Limited will definitely concentrate its business in Trade Finance / Export – Import business and all types of Commercial Loan, Industrial / Project Finance / Syndication and structured Finance / SME Financing and other specialized programs except otherwise restricted by the Government or indicated as unethical and banned item. The Bank will give emphasis to diversify its business portfolio commensurate with economic and business trend, life cycle of the products, demand supply gap, social and national obligation etc. The Bank’s policies for financing in different major sectors are summarized as follows:
SINGLE BORROWER / GROUP LIMITS / SYNDICATION
The Bank may extend the maximum credit facilities (funded / non-funded) to a single client / enterprise / group as per guidelines of Bangladesh Bank BRPD circulars issued / to be issued from time to time on the following criteria:
a) Clients who falls under Grade 1 category as per Bank’s Risk Grading System.
b) Covered by adequate collateral security or Guarantee.
c) Established long term business / Banking relationship.
d) The total outstanding financing facilities by the Bank to any single client or enterprise or organization/group shall not at any point of time exceed 35% of the Bank’s total capital subject to the condition that the maximum outstanding against fund based financing facilities (funded facilities) do not exceed 15% of the total capital. Non-Funded Credit facilities e.g. letter of credit, guarantee, etc. can be provided to a single large borrower but under no circumstances, the total amount of the funded and non-funded facilities shall exceed 35% of the Bank’s Capital.
e) In case of export sector, single borrower exposure limit would be 50% of the Bank’s total capital. But funded facilities in case of export credit shall not exceed 15% of the total capital.
f) Loan sanctioned to any individual or enterprise or group amounting to 10% or more of the Bank’s capital shall be considered as large loan.
g) Total large loan portfolio of the Bank will not exceed the limit fixed by Bangladesh bank vide their BRPD circular # 05 dated April 09, 2005 or as advised by Bangladesh Bank from time to time.In line with basic principles of lending, the Bank always discourages to lend its maximum ceiling to a single client / group to minimize the risk. The Bank will prefer as a policy guideline to arrange syndicated loan / participate in the syndicated finance / consortium loan arrangement or in a club finance.
One Obligor / Group Concept
Group Relationship would be established as per Bangladesh Bank guidelines provided / to be provided from time to time.
a) The Bank Management will establish a specific industry sector exposure cap to avoid over concentration in any one-industry sector. Sector-wise allocation of Credit shall be made annually with the approval of the Executive Committee of the Board of Directors / Board of Directors as per appendix-1.1.
b) Diversification of Credit Portfolio will be encouraged so as to reduce the risk of dependence on a particular sector for balanced socio-economic development of the country.
c) Branches shall submit a report outlining trend and outstanding to the Head of Credit Administration Division on quarterly basis for onward submission to the Executive Committee of the Board of Directors / Board of Directors for information/ perusal/ guidance.
DISCOURAGED BUSINESS TYPES
The Bank will discourage lending to following areas of business:
- Military Equipment/Weapons Finance
- Tobacco sector
- Companies listed on CIB black list or known defaulters
- Highly Leveraged Transactions.
- Finance of Speculative Investments
- Logging, Mineral Extraction/Mining or other activity that is Ethically or Environmentally Sensitive
- Counterparties in countries subject to UN sanctions.
- Share Lending (Not more than 60% of share value of last 6 (six) months market average or maximum 35 lac whichever is lower or as per guidelines of Bangladesh Bank)
- Taking an Equity Stake in Borrowers (except under Islamic Banking Operation)
- Bridge Loans relying on equity/debt issuance as a source of repayment.
- Lending to Holding Companies.
STEPS IN CREDIT APPRAISAL SYSTEM
Every financial institution has to proposed projects before sanction the credit. The credit worthiness and performance of the clients are also evaluated before approval. It is done through a credit appraisal system. It is an important part for the institution that is lending fund to different projects or clients. The performance of the bank in terms of recovery rate as well as of earning percentage would be highly influenced by the presence and effective utilization of a sound and appropriate credit appraisal system. Credit appraisal system of the MBL has been discussed here.
MBL follows the following procedure for a standards credit appraisal-
LOAN APPLICATION FORM
The starting point o project appraisal is the well-documented loan applications from the sponsors (client) in the bank’s standard questionnaire form and duly signed by the prospective borrower. For any type of credit facilities relating to the working capital, trade finance, project finance and contract work, clients/ borrowers must filed an application form with the following information.
Loan application form of MBL asks the following information about the client-
- Name of the firm/company/individual.
- Business address.
- Permanent address.
- Constitution/status (sole proprietorship/partnership/public ltd. Co./private ltd. Co..
- Date of establishment and place of incorporation.
- Background and business experience.
- Particulars of assets- a. Land / Building b. Bank Deposit c. Stock / Shares
- Nature of business.
- Statement of liabilities with MBL and other banks.
- Financial statement for the last years explaining the following terms-
- Capital funds / Net worth.
- Balance sheet statistics.
- Annual Production
Credit officers prepare credit proposal after sufficient information from the client. After analyzing all of above factors the branch credit officers move the proposal to the head office credit committee or further analysis if the primary findings result came positive.
CREDIT RISK EVALUATION
A comprehensive and accurate appraisal of the risk in every credit proposal of the Bank is mandatory. No proposal can be put on place before approving authority unless there has been a complete analysis. In order to safeguard Bank’s interest over the entire period of the advance, a comprehensive view of the capital, capacity, integrity of the borrower, adequacy, nature of security, compliance with all regulatory /legal formalities, condition of all documentation and finally a continues and constant supervision on the account are called for. It is absolute responsibility of the Credit Officer / RM to ensure that all the necessary documents are collected before the proposal is placed for approval. Where Loans/Advances/Credit facilities are granted against the guarantee of the third party, that guarantor must be subject to the same credit assessment as made for the principal borrower.
While making lending decisions, particular attention shall be given to the analysis of credit proposals received from heavily leveraged companies and those dealing in non-essential consumer goods, taking special care about their debt servicing abilities.
Emphasis shall be given on the following several credit principles:
a) Present and future business potentiality for optimum deployment of Bank’s fund to increase return on assets
b) Preference for self liquidating QUALITY business
c) Avoiding marginal performers.
d) Risk depression is basic to sound credit principles and policies. Bank shall be careful about large and undue concentration of credit to industry, one obligor and common product line etc.
e) Managing the amount, size, nature and soundness of one-obligor exposures relative to the size of the borrower and Bank’s position among his other lenders.
f) Personal guarantee of the principal partners or the Directors of the Company shall be obtained
BASICS OF CREDIT RISK
The following risk areas shall be considered for analyzing a credit proposal.
Borrower Analysis (Management/Ownership/Corporate Structure Risk
The majority shareholders, management teams and group or affiliate companies shall be assessed. Any issues regarding lack of management depth, complicated ownership structures or inter-group transactions shall be addressed, and risks to be mitigated. The following questions may be asked to assess the Management Risk:
- Who is the borrower? Does any particular/special characteristic of borrower need particular attention? For example, if the borrower is a Trust, this calls for examination of Trust Deed.
- Are there adequate abilities and experience in senior management?
- Is there adequate depth and succession planning?
- Is there any conflict amongst owners/senior managers that could have serious implications?
- Is the Manager/Credit Officer satisfied about the character, ability, integrity and experience of the borrower?
Industry Analysis (Business and Industry Risk)
The key risk factors of the borrower’s industry shall be assessed. Any issues regarding the borrower’s position in the industry, overall industry concerns or competitive forces (demand supply gap) shall be addressed and the strengths and weaknesses of the borrower relative to its competition to be identified. For the above purpose the Credit Officers/RM may obtain / collect data from the statistical year book / economic trends of Bangladesh Bank / public report / newspaper/ journals etc. The following questions may be asked to assess the Business and Industry Risk:
- Are there any significant concentrations of sales (by customer, industry, country, region)?
- How does the borrower rate with its competitors in terms of market share?
- Can increased direct production costs be easily passed on to customers?
- Does the borrower deal in any specific product that may be subject to obsolescence?
- Is the purpose of borrowing consistent with the objectives of the Company?
- Is the purpose legal? Does it contravene any rules and laws of the country and any instruction issued by the Bangladesh Bank/Head Office?
Supplier/Buyer Analysis/Market Risk
Any customer or supplier concentration shall be addressed, as these could have a significant impact on the future viability of the borrower.
The sufficient market data is to be obtained to identify clients/borrowers’ market share in the industry/demand-supply gap in the market.
The product that is manufactured must be technologically viable i.e. whether the technology applied is updated. The product’s stage in its life cycle must be understood. Technical Aspects of the products must be addressed. The Credit Officer / RM must be satisfied with the mitigating factors of technical and technological risk, associated with the products.
Financial Analysis (Historical / Projected)
An analysis of a minimum of 3 years historical financial statements of the borrower should be presented. Where reliance is placed on a corporate guarantor, guarantor’s Financial statement should also be analyzed. The analysis should address the duality and sustainability of earnings, cash flow and the strength of the borrower’s balance sheet. Specifically, cash flow, leverage and profitability must be analyzed. In this regard the Credit Officer / RM must look into the status of chartered accountant audit firm.
Where term facilities (tenor > 1 year) are being proposed, a projection of the borrower’s future financial performance should be provided, indicating an analysis of the sufficiency of cash flow to service debt repayments. Loans shall not be granted if projected cash flow is insufficient to repay debts. In this regard the possibilities of cost overrun and sensibility analysis shall be done. The following questions may be asked to assess the Financial Risk:
- Does the borrower produce financial statements on time?
- Is working Capital Adequate?
- Has the customer actual title to stock?
- Have financial covenants been met?
- Has there been any major sale of shares by directors?
- Any significant change in asset conversion cycle? (Account Receivables/ payables Inventory e
Historical Analysis / Account Conduct
For existing borrowers, the historic performance in meeting repayment obligations (trade payments, cheaque, interest and principal payments, etc.) shall be assessed. In this regard the Credit Officer / RM may look into the account turnover like debt summation / credit summation / highest debit balance/ highest credit balance (or lowest debit balance), no. of debit entries/ no. of credit entries for last three years (year wise).
Interest Rate Risk
The interest rate must be fixed based on different risk factors associated with the type of business such as liquidity risk, commodity risk, equity risk, and loan period risk. Interest rate also arises from the movements of interest rate in the market. In assessing the pricing and profitability, the Credit Officer/RM must consider the income from ancillary business like foreign exchange business, group business, volume of business etc. Related questions to be addressed are:
- What is the rate of interest charged?
- Is the rate fixed in consideration to the risk factors?
- Will the rate charged be profitable to the Bank?
Foreign Exchange Risk
The foreign exchange transaction is associated with foreign currency fluctuation risk. Therefore the Credit Officer/RM must take care of for the Forex risk. The questions to be addressed are-
- Does the business involve foreign currency dealings?
- What are trends of foreign currency fluctuation?
Cost overrun Risk
This type of risk is generally involved in taking project finance decision. A high degree of cost overrun may cause the failure of the project. Therefore the credit officer must consider the cost components of the project and their chance of devaluation. The questions to be addressed are-
- Whether the construction cost may increase?
- Whether the imported machinery cost may increase for the fluctuation of the foreign currency.
- Are all types of cost components addressed during preparation of feasibility report?
- Does sensitivity analysis prove sufficient shock absorbing capability of the project?
The Credit Officer/RM must address to different risks associated with the proposal. The possible risk include but not limited to market risk, financial risk, foreign exchange risk, risk of cost overrun, margin sustainability and/or volatility, high debt load (leverage/gearing), overstocking or debtor issues, rapid growth, acquisition or expansion, new business line/product expansion: management changes or succession issues, customer or supplier concentrations, and lack of transparency or industry issues. Mitigating factors for risks identified in the credit assessment shall have to be described and understood.
The Bank must assess the critical risks of facilities given / to be given and ways / factors of mitigation of those risks. Some of the critical factors are:
- High debt
- Rapid growth
- Debtors issues
The amounts and tenors of financing proposed should be justified based on the projected repayment ability and loan purpose. Excessive tenor or amount relative to business needs increase the risk of fund diversion and may adversely impact the borrower’s repayment ability. Related questions to be addressed are:
Are facilities justified by the borrower’s business?
Are any capital / long term expenditure being financed by short time borrowing (either OD or TR)?
What is the amount required? Is it sufficient or excess for the purpose mentioned?
A current valuation of collateral must be made by Bank’s approved enlisted surveyors and the quality and priority of security being proposed shall be assessed properly.
Loan shall not be granted solely on security consideration. Adequacy and the extent of the insurance coverage shall be assessed. The Credit Officer/RM must look into the client’s interest / dependability on the collateral offered as security.
- Is security offered acceptable and adequate?
- Has all the security been perfected in accordance with the loan application?
- Have any valuation and inspection been undertaken since the last application?
- If you hold a guarantee, do you consider it has value?
- Has the credit rating of the Borrower deteriorated and have you considered the requirement for additional security?
- Can a valid charge be obtained on the security?
Name lending (Relationship Assessment) :
Credit proposals shall not be unduly influenced by an over reliance on the sponsoring principal’s reputation, reported independent means, or their perceived willingness to inject funds into various business enterprises in case of need. These situations shall be discouraged and treated with great caution. Rather, credit proposals and the granting of loans will be based on sound fundamentals supported by a thorough financial and risk analysis. Related questions to be addressed are:
- Has the borrower complied with the terms and conditions of the facility?
- Adverse feature include: any past dues / excesses / delays / cheque returns and or default in covenants and / or failure to meet interest when due.
- Does the account fluctuate with the seasonality of the business?
- Has the relationship strategy and earnings for the last twelve months been met?
ISSUE OF SANCTION LETTER
After analyzing the credit proposal and related documents if the result came then sanction letter sent by head office to the branch, indicates that properly authorized credit committee of the bank has approved the proposal. A copy of the sanction letter has been given to the customer for receiving his/her acceptance about all terms and condition approved by the bank.
All necessary documentation required meeting the terms and conditions of the facility in the manner in which it was approved are re-checked before final approval of the credit. It is to be ensured that all legal formalities have been complicated before disbursement of loan.
After approval the first installment transferred from head office general account to the applicant bank account which is held in the MBL. Then applicant can give the loan amount by cheque to his/her creditors.
Periodical review of all accounts should be made. The review may be made as frequent as necessary. Proper record should be kept in the loan file regarding their collection status. In cases of default this should be reported to the branch manager and to the head office as per exaction statement.
Legal process starts only when a loan is classified and considered non recoverable under normal interaction with the borrower. Decision for a legal action is made on case-to-case basis.
FUNTION OF AUTHORITY LEVEL IN THE CREDIT PROCESSING
In approval process the Bank segregates its Relationship Management / Marketing from the Approving Authority. The existing approval authorities are Head of Branch, Zonal Head, Head Office Credit Committee, Executive Committee of the Board of Directors and Board of Directors as per their delegation of business powers defined in later section. The recommending or approving executives shall take responsibility for and be held accountable for their recommendations or approval. Delegation of approval limits shall be as per policy guidelines that all proposals where facilities are up to 15% of the bank’s capital shall be approved at the CRM level, facilities up to 25% of the capital shall be approved by Managing Director & CEO subject to the limit approved by the Board of Directors. At present the Bank has business delegation powers approved by the Board of Directors in its 42nd meeting held on 25th April 2003. Credit proposals in excess of 25% of the Bank’s Capital to be approved by the Executive Committee of the Board of Directors or Board of Directors after recommendation of CRM, Corporate Banking and Managing Director & CEO.
The Branch Marketing Team comprising of Executives and Officers shall market the clients and then prepare credit appraisal memo as per the prescribed format and within the purview of the set rule/policy guideline of the Bank. In case it is within the delegated business power of the Head of Branch, the concerned Executive / Officer will place it to the Head of Branch who will make judgment (qualitative and quantitative judgment) and if found viable then he/she will approve the Loan otherwise he/she may reject it or forward it to the Zonal Head / Head of Corporate / Commercial Banking at Head Office. The concerned Executive / Officer at Zonal Office on receipt of the proposal will prepare a credit appraisal memo as per the prescribed format and within the purview of the set rule / policy guidelines and then place it to Zonal Head who will make Judgment (qualitative and quantitative) and if found viable then he will approve the facility, if it is within his business delegated power otherwise he may reject it or forward it to the Head of Corporate / Commercial Banking at Head Office along with his recommendations. The Proposal on receipt by the Head of Corporate / Commercial Banking will forward it to the Head of Credit who in turn distribute it to the respective Credit Officer at the Head Office for scrutiny, analysis and prepare a Office Note / Memo with due diligence along with their observations / results of analysis and to place it before the Head Office Credit Committee. In Head Office Credit Division, separate Credit Officers are designated for looking after the proposal of separate Branches. There also exist separate units for handling Garments related proposal / Export Finance, Project Loan, Syndication and Structured Finance. The Head Office Credit Committee depending upon the delegated business power shall either approve it (or reject it if not found viable) or place it to the Executive Committee of Directors / Board of Directors.
A classified Loan or Commitment is one, which is classified as Substandard, Doubtful or Loss as per policy of Loan classification set by Bangladesh Bank.
Position of Classified Loans and Advances and other assets shall be placed before the Board of Directors of the Bank and quarterly submitted to Bangladesh Bank.
The classification status must be reflected in the CIB reports on regular basis (monthly for Tk. 1.00 crore and above and quarterly for all the facilities outstanding of Tk. 50,000.00 to below Tk. 1.00 crore. Besides, statement for Tk. 10,000.00 to below Tk. 25,000.00 and Tk. 25,000.00 to below Tk. 50,000.00 has also to be reported.
RESCHEDULING AND DECLASSIFICATION
Rescheduling and declassification of loans, advances and other assets require prior approval of Head Office of the Bank and in some specific cases from Bangladesh Bank. During rescheduling / declassification of the Loan, the Bangladesh Bank’s sets rules must be followed meticulously.
MONITORING PROCESS OF CLASSIC LOAN
To minimize credit losses, monitoring procedures and systems should be in place, which will provide an early indication of the deteriorating financial health of a borrower. The credit monitoring process in Bank is vested on Monitoring, Recovery and Compliance Division. Head of Monitoring, Recovery and Compliance Division will report the exceptional list of assets on daily basis on the following categories:
Past due (which are not paid or renewed at maturity – Grade 5) principal or interest payments, past due trade bills, account excesses and breach of loan covenants;
Loan terms and conditions are monitored, financial statements are received on a regular basis and any covenant breaches or exception are to be referred to the CRM and the RM team for timely follow-up.
Timely corrective action is to be taken to address findings of any internal, external or regulatory inspection/audit.
All borrower relationships/loan facilities are reviewed and approved through the submission of a Credit Application at least annually.
Monitoring, Recovery and Compliance Division will keep regularly follow up and corrective action to be taken in a timely manner before the account deteriorates further.
EARLY ALERT PROCES
An Early Alert Account is one that has risks or potential weaknesses of a material nature requiring monitoring, supervision or close attention by the management.
If these weaknesses are left uncorrected, they may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date with a likely prospect of being downgraded to 5 Category or worse (Impaired status), within the next twelve months.
Early identification, prompt reporting and proactive management of Early Alert Accounts are prime credit responsibilities of all Credit Officers / RM and must be undertaken on a continuous basis. An Early Alert report shall be completed by the Credit Officer / RM and to be sent to the approving authority for any account that is showing signs of deterioration within seven days from the identification of weaknesses. The Risk Grade shall be updated as soon as possible and no delay to be made in referring problem accounts to the Monitoring, Recovery and Compliance Division for assistance in recovery.
Despite a prudent credit approval process, loans may still become troubled. Therefore, the Credit Officers must ensure the early identification and prompt reporting of deteriorating credit signs for swift action to protect the Bank’s interest. The symptoms of important early alert are by no means exhaustive and hence, if there are other concerns, such as a breach of loan covenants or adverse market rumors that warrant additional caution, an Early Alert report shall be raised.
Moreover, regular contact with customers is to be maintained to enhance the likelihood of developing strategies mutually acceptable to both the customer and the Bank. Representation from the Bank in such discussions shall include the local legal adviser when appropriate.
Classified Loans & Advances
Monthly Savings Scheme
The prime objective of this scheme is to encourage people to build up a habit of saving. Under this scheme, one can save a fixed amount of money every month and get a lucrative amount of money after five, eight or ten years.
Family Maintenance Deposit
Under this scheme, one can deposit certain amount of money for five years and in return he will receive benefits on monthly basis. Benefits start right from the first month of opening an account under the scheme and continue up to five years
Double Benefit Deposit Scheme
Under this scheme, depositor’s money will be doubled in a nine-year period.
Special Savings Scheme
Under this scheme, depositor’s money will be tripled in 15-year period.
Pension and Family Support Deposit
Pension and Family Support Deposit has been evolved especially for old age. Under this scheme one can get life long benefit if he deposits specific amount per month for a period of 10 or 15 years. The scheme can also be opened in the name of minors.
Consumers’ Credit Scheme
Consumers’ Credit is relatively new field of collateral-free finance of the Bank. People with limited income can avail of this credit facility to buy household goods including computer and other consumer durables.
This scheme has been designed to assist and encourage the genuine and capable entrepreneurs and professionals for acquiring capital machineries, medical equipments, computers and other items. Terms and conditions of this scheme have been made easier in order to help the potential entrepreneurs to
acquire equipments of production and services and repay gradually from earnings on the basis of ‘Pay as you earn’.
Small Loan Scheme
This scheme has been evolved especially for small shopkeepers who need credit facility for their business and cannot provide tangible securities.
Doctors’ Credit Scheme
Doctors’ Credit Scheme is designed to facilitate financing to fresh medical graduates and established physicians to acquire medical equipments and set up clinics and hospitals.
Rural Development Scheme
Rural Development Scheme has been evolved for the rural people of the country to make them self-employed through financing various income generating projects. This scheme is operated on group basis.
SME Financing Scheme
Small and Medium Enterprise (SME) Financing Scheme has been introduced to assist new or experienced entrepreneurs to invest in small and medium scale industries
Personal Loan Scheme
Personal Loan Scheme has been introduced to extend credit facilities to cater to the credit needs of low and middle-income group for any purpose. Government and semi-government officials, employees of autonomous bodies, banks and other financial organizations, multinational companies, reputed private organizations and teachers of recognized public and private schools, colleges and universities are eligible for the loan facilities. .
Car Loan Scheme
Car Loan Scheme has been introduced to enable middle-income people to purchase Cars/SUVs/Jeeps. Government and semi-government officials, employees of autonomous bodies, banks and other financial organizations, multinational companies, reputed private organizations, teachers of recognized public and private universities and businessmen are eligible for the loan facilities.
- The bank has launched SMS banking facility allowing its customers to make query regarding account balance, cheque payment and deposit status and also delivery requests for account statement.
- As a development partner in the economy Mercantile Bank has a key role to play in not only financial services but also disseminating knowledge. Recognizing the fact they concerned on human resource development by a busy schedule of training program all through the year.
- The Bank extends through services to its corporate clients that include trade financing services like traditional documentary credit, post import finance etc.
- The bank undertake export financing that covers back to back documentary credit, packing credit, bills discounting and collection of bills.
- The Bank offers term loans, working capital, import financing for capital machinery, raw material and other receivable financing, leasing and so forth under the segment of financing.
- Manuals for Prevention of Money Launderings have been established and transaction profile has been introduced. Training has been continuously given to all the categories of Executives and Officers for developing awareness and skill for identifying suspicious transactions and other activities relating to money laundering.
- The Balance Sheet risk is defined as potential charges in due to earning due to changes in rate of interest and exchange rates which are not trading nature and the Bank is completely maintaining the risk.
- The bank has a well-established computer DataCenter to provide full system support to bank’s operation in case of emergency in the information technology system. The Data centre is well-equipped to ensure its readiness for a seamless switchover in case of any emergency.
- Operational loss may arise from errors and fraud due to lack of internal control and compliance.
The following recommendations are formulated for the MBL Management.
- MBL doesn’t generate satisfactory returns from it services. In the year 2008, the gross profit margin ratio was 0.4447 which is high but decreased after 2008 and increased in the year 2011 but remained bellow the year 2008. So MBL should concentrate on its Gross Profit Margin by increasing Sales.
- MBL should properly concentrate on its Financial Leverage, because it fluctuates year by year.
- MBL investment in Agriculture and Rural Sector is low compared to other sectors. It should give more emphasis to promote agro-based industry.
- From the analysis of Sector Wise Loan Disbursement, I find that Garments sector is very much risky and return from this loan may not be good. So MBL should reduce loan in this sector.
- FDR interest rate is lower than other private banks. So to attract more customers for FDR, MBL should increase its interest rate.
- MBL should increase its ATM Booth in different locations of Dhaka city as well as out side of Dhaka where it is operat
Banking and related businesses are carried out by The Mercantile bank limited. The range of banking activities of the Bank comprises deposits taking, extending credit to corporate and retail business, small and medium enterprises, foreign trade business, trade financing, project financing, lease and hire purchase financing, issuance of local and international credit card, remittance service and so forth. Most of the products and services are based on online system approach and cutting edge techniques while a few are run in traditional manner. The bank also provides brokerage services and margin loan facilities in the capital market. It has already been licensed by the Security and Exchange Commission to perform brokerage services in the country under membership of Dhaka Stock Exchange.
Mercantile Bank approaches corporate social responsibility in two discerning dimensions. The first is development through sustenance, which they interpret as growing their business socially and environmentally responsible way, while simultaneously meeting the legitimate interests of their stakeholders. The second dimension is the involvement with the community. This indicates taking an active role and responsibility in helping local communities achieve their goal. They do this by way of a combination of financial donation and volunteer work.
The main philosophy of Mercantile Bank is to diminish interest and charge or pay fixed interest on loans or deposits and at the same time establish an egalitarian society based on the principle of social justice and equity Instead of predator mined interest on deposits, Mercantile Bank offers the proof it to the depositions as an agreed ratio. Where as, interest based conventional banks pay a fixed interest a savings and deposits and grant loans with interest for any purpose.
The evaluation of the MBL or any bank’s performance is a complex process involving interaction between the environment, internal operation and external activities. The ultimate objective of the management is to maximize the value of the bank’s equity share by attaining the optimal mix to risk and return. In this respect bank management needs to develop a comprehensive plan in order to identify objectives, goals, budgets and strategies that will be consistent with the maximization of the share values.
Success in the banking business largely depends on 1) Effective lending, 2) Good customer service, 3) A good management, 4) Good training programmer, 5) Effective implementation of plans.
From the analysis of different type of ratios, the overall performance in the year 2011 of the MBL is better than the year 2007 to 2010, though the performance of some ratios (Financial Leverage Ratio) are not better than the year 2007. So the management should keep concentration carefully on those ratios that are not satisfactory.