1.1 Background of the Report
Internship Program is a prerequisite for acquiring MBA degree. Before completion of the degree, a student must undergo the internship program. Internship program is a perfect blend of the theoretical and practical knowledge. Only curriculum activity is not enough for handling the real business situation, therefore it is an opportunity for the students to know about the field of business through the internship program. This program consists of three phases:
- Organization orientation to acquaint at the intern’s as with structure, function and performance of the organization.
- The project work pertaining to a particular problem or problems matching with the intern’s area of specification and organization’s requirement and
- The report writing to summarize the intern’s analysis, finding’s and achievements in proceeding two phases.
Economy of Bangladesh is in the group of world’s most underdeveloped economics. One of the reasons may be its underdeveloped banking system. Modern banking system plays a vital role for a nation’s economic development. Over the last few years the banking world has been undergoing a lot of changes due to deregulation, technological innovations, globalization etc. These changes also made revolutionary changes of a country’s economy. Present world is changing rapidly to face the challenge of competitive free market economy. It is well recognized that there is an urgent need for better-qualified management and better-trained staff in the dynamic global financial market. Bangladesh is no exception of this trend. Banking sector in Bangladesh is facing challenges from different angles though its prospect is bright in the future. Money and banking is the center around which all-economic science clusters.
As a student of MBA I have been deputed to Mercantile Bank Limited (MBL).
1.2 Objective of the Report
The primary objective of the study is to meet the partial requirements for the fulfillment of the course ‘practical orientation in banks’. The core objectives of the practical orientation program in banks are as follows –
- To fulfill the partial requirement of , MBA program.
- To gain practical exposures in different banking activities, this will be helpful for the courses of MBA program.
- To familiar with the working environment in bank.
- To apply theoretical knowledge in the practical field.
- To observe and analyze the performance of the specific branch and the bank as a whole.
- To be acquainted with day to day functioning of service oriented banking business.
- To study existing banker customer relationship
- To learn about foreign trade.
- To learn about loans and advances.
- To learn about general banking.
- To know about the function of administration.
In order to make the report more meaningful and presentable, two sources of data and information have been used widely.
The ‘Primary Sources’ are as follows –
- Face-to-face conversation with the respective offices the branch.
- Informal conversation with the clients.
- Practical work exposures on different desks of the branch covered.
- Relevant file study as provided by the officers concerned.
The ‘Secondary Sources’ of data and information’s are –
- Annual report (2005) of Mercantile Bank Limited.
- Periodicals published by Bangladesh Bank.
- Different publications regarding banking functions, foreign exchange operation and credit policies.
- The internet was also used as a theoretical source of information.
A proper procedure has been taken to complete this study. The procedure were as follows:
a. Observing the procedure of banking activities followed by each department.
b. Face to face discussion with the respective personnel.
c. Reading various files.
d. Desk work: During the practical orientation I worked in the following desk for a period of 2.5 months.
1.4 Job Rotation Schedule
The different departments of principal branch have been covered by me as per the ‘Job Rotation Schedule’ prepared by the Mercantile Bank LTD. (MBL) during my practical orientation period. The following shows the job rotation .
General Banking .
- Loans and Advances.
- Foreign Trade.
1.5 Plan of Presentation
The report is divided into five parts. Chapter one contains ‘Introduction’. Chapter two contains ‘Organizational overview’, which includes history of MBL, its management and function. Chapter three describes ‘General Banking’. Chapter four comprises with ‘Credit Department’. and ‘Observations and Conclusion’.
A good report ‘sells’ the results of the study, but it should not oversell. Every project has limitation.
I faced some usual constraints during the course of my Practical Orientation.
a. Time was inadequate
b. Inadequate data sources
MERCANTILE BANK LIMITED IN A NUTSHELL
2.1 Profile of the bank
Mercantile Bank Limited, a private commercial bank with Head Office at 61 Dilkusha C/A, Dhaka, Bangladesh started operation on 2nd June, 1999.The Bank has 14 branches spread all over the country.With assets of TK. 9364.50 million and more than 250 employees, the Bank has diversified activities in ratail banking,corporate banking and international trade .
Mercantile Bank limited (MBL), primarily is a public company limited by shares, incorporated in Bangladesh under company act 1994. It is also guided by the bank company act 1991 (and its subsequent amendment) and Bangladesh Bank Ordinance 1972, so as to enable the company for doing banking business.
- Synchronized and steady growth of the bank.
- Utilize all available resources to develop various plans, policies and procedures in each of the objective and goal areas.
- Implement plans policies and procedures.
- Draw upon the connections, advice etc. of the foreign partners.
- Utilize a team of professional employees.
- Search for a total customized solution of I.T. for the purpose of full automation step.
- Develop a realistic deposit mobilization plan.
- Develop appropriate lending risk assessment system.
- Develop capital plan.
- Develop a system to make good advances.
- Develop a recruitment, compensation training and orientation plan.
- Develop a plan for offering better customers service.
- Develop appropriate management structure, systems, procedures and approaches.
- Develop scientific MIS to monitor bank’s activities.
2.4 Business Objectives
- Build up a low cost fund base.
- Make sound loans and investments.
- Meet capital adequacy requirement at all the time.
- Ensure 100% recovery of all advances.
- Ensure a satisfied work force.
- Focus on fee-based income.
- Adopt a appropriate management technology.
- Install a scientific MIS to monitor bank’s activities.
All these were set during formation stage mainly for planning purpose. As you know planning is a continuous process. All these need to be updated and reset commensuration the need of the time.
The authorized capital of bank is BDT 1,200.00 million of 12,000,000 ordinary share of BDT 100 eachas of December 31, 2004. Total shareholders’ Paid-up capital at the end of December 31, 2004 stood at BDT. 799.4125 million 7994125 ordinary share of BDT 100 each as of December 31, 2004.
2.5.2 Capital adequacy
As per guidelines of Bangladesh Bank, the Bank adopted BIS(Bank for international Settlements risk adjusted capital standards to measure capital adequacy. On close of business on December 31, 2004 the capital adequacy ratio 9.13% as against accepted standard of 9.00%.
2.5.3 Share Market
Mercantile Bank Limited has gone into public floatation during the 1st quarter of 2004 and has been listed with both Dhaka Stock Exchange DSE ( 16 february 2004) and Chittagong Stock Exchange CSE ( 26 february 2004). Banks total issue is only 10%. Market prices of MBL share rose up to Tk. 574.25 average share price on last transaction day was Tk. 378.00 per share.
2.5.4 Foreign Exchange Business
Import Business: From the very beginning the bank has embarked on extensive foreign exchange business with a view to facilitating international trade transactions of the country. The bank has established 13,285 letters of credit amounting to Tk. 28325.20 million as of December 31, 2004. Items of imports financed by the bank included electronic equipments, sports goods, rice wheat, seeds, soyabean, palmolein, dyes, chemicals, accessories etc.
- Export Business: The total export business handled by the bank amounted to Tk. 17411.00 million as of December 31, 2004.as compared Tk.15250.60 million in 2003 Export items handled by the bank included jute goods, ready-made garments, handicrafts etc.
- Foreign Remittance : Foreign remittances handled by the stood at Tk. 671.30 million as of December 31, 2004. Countries from which inward foreign remittances were remittances were received included USA, UK, Canada, Denmark etc.
2.5.5 Operational Profit
The operational profit of the bank amounted to Tk. 821.76 million in December 31, 2004. as compared Tk.575.32 million in 2003 and after provision against unclassified loans, the net profit stood at Tk. 554.26 million as of December 31, 2004. Tk. 241.68 million has been set aside for our tax contribution to National Exchequer.
Total Income: The total income of the Bank was Tk. 1989.72 million during the year 2003 to Tk. 2717.67million in 2004. Interest income accounted for 78.04% of total income, exchange gains 9.87%, commission 7.99% and other income 4.10% of total income in 2004.
Components of Total Income
Figure in million Tk.
Net Interest Income : The bank posted net interest income of Tk. 611.82 million during 2004. Gross interest income of the Bank amounted to Tk. 964.59 million and interest expenses amounted to Tk. 2120.82 million and interest expenses 1509.00 during 2004.
Interest Income : Interest income increased tk. 1588.67million in 2003to Tk.2120.82 in 2004. Interest on Loans & Advances 82.79%, interest on call loans 9.43% and other interest income also contributed 0.84 of total interest income.
Components of Interest Income
Figure in million Tk
|Interest on Loans & Advances||1755.84||82.79|
|Interest on Deposits With other bank||159.81||7.54|
|Interest on Treasury Bills||183.41||8.65|
|Other Interest Income||21.76||01.02|
Interest Expenses: Interest expenses accounted for 79.59% of total expenses during 2004. Interest on FDR accounted for 55.53% of interest expenses, interest on deposits under schemes 21.92%, interest on call deposits 18.47% and other interest expenses 4.08% of total interest expenses.
Components of Interest Expenses
Figure in million Tk.
|Interest on Deposits Under Schemes||934.74||61.91|
|Interest on Fixed Deposits||546.63||36.23|
|Interest on call Deposits||38.54||2.55|
|Other interest Expenses||3.69||0.24|
Net Interest Margin
The net interest margin of the bank is 3.13% in 2004. It indicated a reasonable spread between interest income and interest expenses. The management has been able to achieve this position mainly by close supervision of the bank’s earning assets.
2.5.6. Branch Expansion
The bank commenced its business on June 02, 1999. The first branch was opened at Dilkusha Commercial area in Dhaka on the inauguration day of the bank. The 27th branch was opened at Choumuhunee, Noakhalee on October 2005. The bank hopes to open more branches in different parts of the country by December 2006.
2.5.7 Correspondent Relationship
The Bank has established correspondent relationship with a number of foreign banks namely Citibank N.A., Bank of Tokyo-Mitsubishi Ltd., Standard Chartered Bank, American Express Bank, HSBC, Commerzbank, Mashreq Bank, Commonwealth Bank of Australia, United Bank of India, Scotia Bank, Habib Bank, AG Zurich, UBAF,ING Bank, Dresdner Bank AG etc. The number of foreign correspondents established by the bank is 255 as of December 31, 2005. Efforts are being continued to further expand the correspondent relationship to facilitate bank’s growing foreign trade transactions.
2.5.8 Human Resources Development
In today’s competitive business environment, only the quality of human resources makes the difference. The bank’s commitment to attract the best persons to work for it and the adoption of the latest information technologies is reflected in the efforts of the bank in the development of its human resources. In the face of today’s global competition the bank envisages to develop highly motivated workforce and to equip them with latest skills and technologies. A good working environment promotes a high level of loyalty and commitment, devotion and dedication on the part of the employees.
The bank sent a number of officers to Bangladesh Institute of Bank Management and other training institutes for specialized training on various aspects of banking. The bank has set up Training Institute for providing training facilities to its executives/officers. The bank believes in professional excellence and considers its working force as its most valuable asset and the basis of its efficiency and strength.
The board of directors consists of eminent personalities from commerce and industry of the country. Mr. Md. Abdul Jalil, M.P. Chairman of the Board of Directors, is a businessman besides being an eminent personality of the country.
2.5.10 R & D: Investing into the future
Excellence in banking operation depends largely on a well-equipped and efficient research and development division. Such activities require the investment of substantial money and a set of highly qualified personnel with multidisciplinary background. Although it is not possible at this stage to undertake R & D activities similar to those of a bank in the developed countries. Mercantile bank has established a core research and planning division comprising skilled persons form the very inception of the bank.
2.5.11 Office Automation
Banking operations of the branches have been computerized to minimize cost and risks and to optimize benefits and increase overall efficiency for improved services. The bank is capable of generating the relevant financial statements at the end of the day. The bank has recently installed Reuters screen for smooth operation of foreign currency dealings. The bank has also hosted a web page of its own to take a place in the World Wide Web. The bank to provide better services to the customers has introduced on-line banking. The bank is going to introduce ATM and credit card soon.
2.5.12 Social Partnership
The Bank has setup Mercantile Bank Foundation for extending benevolent service to the society. The Bank contributes 1% of operating profit or Tk. 4 million, whichever higher to Mercantile Bank Foundation every year. The foundation has been established for following objectives:
- Mercantile Bank Prize to 8(eight) eminent personalities of the country for the outstanding contribution in the field of economics and economic research, Bengali Language and Literature, Science and Technology, Education And Culture Journalism, Sports, Research on liberation War and Industry and Commerce.
- Interest free education loan for the meritorious but poor Students.
- To conduct research Bengali Language and Literature.
- Book purchase and distribution policy to encourage writers and publishers of the country.
- Interest free loan education for the unemployed educated people.
- Donation for the handicapped artists, literature anddistressed people.
- Project for the development of shelter-less children.
The bank has launched a number of financial products and services since its inception. Among them monthly saving scheme, monthly benefit scheme, double benefit deposit scheme, special saving scheme, life long pension scheme, consumer credit scheme, small loan scheme and lease finance scheme have achieved wide acceptance among the people..
Commission free remittance: Mercantile Bank bank limited has abolished commission on pay orders, demand drafts & telegraphic transfers, which obviously maximizes customer benefit by saving cost.
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.
Double Benefit Deposit Scheme : Under this scheme, depositor’s money will be doubled in a six-year period and the scheme is one of the highest yielding deposit schemes in Bangladesh.
Special Saving Scheme: Under this scheme, depositor’s money will be more than tripled in a ten-year period and the main attraction of this scheme is that one can get his money back after one year and onward with attractive benefits.
Life Long Pension Scheme: Life Long Pension Scheme has been evolved especially for later age. Under this scheme one can get life long benefit if he deposits specific amount per month for a period of 10, 15, 20 or 25 years. The scheme can also be opened in the name of minors.
Consumer Credit Scheme: Consumer Credit is a 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 car, computer and other consumer durables.
Small Loan Scheme: This scheme has been evolved especially for small shopkeepers who need credit facility for their business and cannot provide tangible securities.
Lease Finance: This scheme has been designed to assist and encourage the genuine and capable entrepreneurs and professionals for acquiring capital machineries, medical equipments, computers and other items which may help them to be economically self-reliant. Terms and conditions of this scheme have been made easier than ever before in order to help the potential entrepreneurs to acquire equipments of production and services and repay the liability gradually form earnings on the basis of “Pay as you earn”.
Doctors’ Credit Scheme: Doctors’ credit scheme is designed to facilitate financing to new doctors, established doctors, 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 through the rural branches of the bank.
Women Entrepreneur Development Scheme: Women entrepreneur development scheme has been introduced to encourage women in doing business. Under this scheme, the bank finances the small and cottage industry projects sponsored by women.
Small Scale Credit Facility for Shop Owners: For small shop owners loan facility without security for want of which they could not get banking support and compelled to avail the informal source with unusually high rate of interest. Mercantile bank limited brought them under the umbrella of banking service.
Interest on Current Account: MBL started paying interest on deposits on current account. This is also a unique product of the bank.
Apart from the above the bank is always keen in developing the banking section, in general and the MBL, in particular with the help of its trained and efficient work force.
The main objective of the Mercantile Bank limited is to blend in its operation traditional commercial banking with modern international banking. With the new and varied demands of modern customers, the bank has been pursuing a policy of achieving harmony in transactions between the bank and its customer living up to the high standards of a free market economy.
The relationship between banker and customer begins with the opening of an account by the customer. Opening of an account binds the banker and customer into contractual relationship under the legal framework of the ‘Contract Act – 1872’. But selection of customer for opening an account is very crucial for a bank. In fact, fraud and forgery of all kinds start by opening account.
3.2 General Banking Department
During my internship I was place in local office of Mercantile Bank ltd. General banking of this branch consists of different sections, namely Account opening section, cheque book issue, dispatch section, remittance section, clearing and bills section, cash section.
General section is considered as the direct customer service center. It is the starting point of all the banking operation. It opens new accounts, remits funds, honor cheques, takes deposits, issues bank draft and pay order etc. General banking is also known as retail banking. Following are the major section in General banking.
- Account opening section
- Clearing section
- Remittance section
- FDR section
- Cash sectioN
3.2.1 Account Opening Section
According to the law and practice the banker – customer relation arises only from contract between the two. And opening of account is the contract that establishes the relationship between a banker and a customer. So this section plays a very important role in attracting customer and therefore should be handled with extra care.
According to the international code of conduct banks should maintain following steps regarding their customers:
- Banks will act fairly and reasonably in all their dealings with their customers.
- Banks will help customers understand how their accounts operate seek to give them a good understanding of banking services.
- Banks should maintain confidence in the security and integrity of banking and payment systems.
Individual or firm intended to open account in the branch applies for opening account in a prescribed form. The applicant himself duly fills in the form. The applicant is also required to fill the specimen signature sheet. Applicant must submit required documents with application form. Different kinds of document are needed for different kinds of account. For individual only introduction by another account holder of the bank is sufficient. But for firm and others, relevant documents must be submitted. Then the authorized officer scrutinizes the introduction and examines the documents submitted. If every thing appears satisfactory. Then he opens account.
188.8.131.52 Types of Account
The Mercantile Bank generally opens following types of account:
- Current Deposits Account
- Savings Deposits Account
- Short Term Deposit
- Fixed Deposit
- Bearer Certificate Deposit
- Monthly Term Deposit
3.3.1 Savings Deposits Account
Mercantile Bank ltd. Offers interest on every day’s balance in savings account @ 8.50% P.A.
Requirements for opening Savings Deposits Account
- Signature card
To open a saving account customer will have to fill up an application from supplied by the bank. The form contains following particulars:
- Name of the applicant
- Name of father/husband of the applicant
- Profession of the applicant
- Two Photographs
- Present address
- Permanent Address
- Introduction by any account holder or by a person acceptable to the bank.
- Verification by the concerned officer of the branch.
- Signature of the applicant.
After filling the form applicant will have to sign thrice on the specimen signature card. Most important thing is that these signatures must match with the signature on application form. These documents are then checked by the concerned officer and sent to the manager of the branch. Manager rechecks all the information and talk with the applicant to know more about him/her. When he is fully satisfied he put his signature on the form and verify the signature. If any special instructions are required manager write it down at the end of the specimen signature card.
The form and the specimen signature card then sent to the officer who put an account number on the form and on the card. After completion of the above mentioned formalities a new account is opened with the bank for the new customer. Account can be open in joint name by to or more parties but who will operate the account it should be mentioned in the application. To obtain a cheque book the new account holder must deposit at least Tk. 3000/= in the account. This amount may vary depending on nature of the relationship of the person with the bank.
3.3.2 Short Term Deposit Accounts (STD)
Short term deposit or STD account opening procedure is similar to that of the saving account. The rate of interest on this type of account is 6.5% per annum. The deposits held in STD A/C are payable on short notice.
Requirements for opening STD A/C
- Account opening agreement form.
- Specimen signature card.
- Approval of authority
3.3.3 Fixed Deposit Receipt Account
Fixed Deposit Receipt Account deposit is taken for some maturity period
Requirements for opening FDR A/C
- Account agreement form
- Amount and period of deposit must be mentioned clearly
- Specimen signature card
- Approval of the authority
Fixed deposit is the amount deposited by the customer for a fixed period of time. In Mercantile Bank ltd. This time period is minimum three months and maximum three years and above. The duration and the rate of interest on different time period FDR is shown in the table below:
|Duration||Rate of Interest|
Opening procedure of FDR Account
- Bank provides the interested customer a fixed deposit form.
- Customer fills the form, which contains name of the customer, amount of money, duration, rate of interest etc.
- After filling the form customer pay the money in cash or by cheque.
- After receiving the form from the customer the respected office look for the cash seal or transfer seal. If any of these are present and the form is properly singed the officer provides a specimen signature card to the customer.
- Customer signs thrice on the specimen signature card along with his/her full name.
- At the same time respected officer issue a fixed deposit receipt on the specific FDR block.
This block has two parts, one for customer and another for the bank, containing same information on both parts. These are:
- Name of the customer
- Amount of money deposited
- Date on which the money is deposited
- Due date – on which the FDR will be matured
- Duration for which FDR has been made
- Rate of interest to be paid
When all required information is written on the block it is signed by at least officers and the manager verifies the specimen signature and put his sign on it.
Before taking his/her part of the FDR block the customer must sign on the back of the part to be kept in the bank and the signature must match the signatures on the specimen signature card.
Customer will receive interest depending on the duration of the FDR and will not get any interest if (s) he encash it before three months. Suppose a customer have an FDR account for the duration of 12 months and (s) he wants to encash it 10th month. In this case the customer will receive interest for (6+3) or 9 months. But if the duration is 3 months and the FDR is encashed before the maturity period then no interest will be pain on.
An FDR is renewed automatically for three months if the customer does not come to cash if after the maturity period. It can also be renewed upon the direction of the customer.
3.3.4 Current Account
The local office of Mercantile Bank ltd. facilitates customers with different types of current account. There are current accounts for individuals, proprietorship firms, partnership firms, Joint Stock Company and corporate body.
Account opening form for these categories are different. Some terms and documents may differ but the overall process of account opening is similar to that of the saving account. Here I like to state what kinds of information to be furnished in the form and which documents customer should provide.
Requirement of CD account may vary upon individual, legal status of company and clubs, societies and associates.
184.108.40.206 Individual CD A/C
- Name of the Applicant
- Profession or Business of Applicant
- Address of the Applicant
- Photographs of the Applicant
- Introduction by an account holder of the branch or by a person acceptable to the branch
- Signature on the Application form
- Signature on the Specimen Signature card
- Verification of details and signatures by authorized officer.
220.127.116.11 Joint CD A/C
All the requirement of individual CD a/c must be fulfilled in addition with the joint account should be mentioned.
How the accounts will be operate.
18.104.22.168 Sole Proprietorship
- Account agreement form
- Trade license
- Specimen signature card
- Rubber-stamp impressi
- Partnership deed
- Specimen signature card
- Account agreement form
- Letter of Partnership
- Trade License
22.214.171.124 Limited Liability Company
- Registration certificate from register of joint stock companies
- Certificate of Incorporation
- Memorandum of Association
- Articles of Association
- Annual audit report
- Copy of Board Resolution containing
- Name of the persons authorized to operate the bank account on behalf of the company
- Specimen signature card
- Account agreement form
3.3.5 Bearer Certificate Deposit
This is transferable by mere delivery. This certificate doesn’t contain any information about the depositor. Opening of such account doesn’t require any kind of document.
3.4 Closing of an Account
A customer may close his/her account any time by submitting an application to the manager or to the Branch in charge. The account of the customer is then checked to see how much money is still in it. The customer is then asked to draw a final cheque for the credit amount in the account excluding account close charge and other incidental charges. The customer then surrenders remaining cheques to the respected officer who tear off these cheques. Vouchers are then issued debiting the particular account and crediting incidental charges account.
In case of joint account the application to close the account must be signed by the holders even though the account is operated by either of them. All the joint holders should also sign the last cheque for withdrawal of the available balance in the account.
3.5.1 Issuance of Cheque Book (For New Account)
When a new account is opened and the customer deposits the minimum required money in the account the account opening form is sent for issuance of a cheque book respected officer first draw a cheque book kept under his own disposal. She/he then sealed it with branch name. She/he enters the number of the chequebook in cheque issue register. She/he also writes down the name of the customer and the account number in the same register.
Account number is then writing down on the face of the chequebook and on very leaf of the chequebook including requisition slip. The name of the customer is also written down on the face of the chequebook and on the requisition slip. ‘Issued on’ along with the date of issuance is written down on the requisition slip. Number of chequebook and date of issuance is also written on the application form. Next, the customer is asked to sign in the chequebook issue register. Then the respected officer signs on the face of the requisition slip put his initial in the register and hand over the cheque to the customer.
3.5.2 Issuance of Cheque Book (Old Account)
All the procedure for issuing a new chequebook for old account is same as the procedure of new account. Only difference is that customer have to submit the requisition slip of the old chequebook with date, signature and his/her address. Computer posting is then given to the requisition slip to know the position of account and to know how many leaf/leaves still not used. The number of new chequebook is entered on the back of the old requisition slip and is signed by the officer.
If the cheque is handed over to any other person then the account holder an acknowledgement slip is issued by the bank addressing the account holder with details of the cheque book. This acknowledgement slip must be signed by the account holder and returned to the bank. Otherwise the bank will not honor any cheque from this chequebook.
At the end of the day all the requisition slips and application forms are sent to the computer section to give entry to these new cheques.
3.6 Remittance Section
Customers of a bank need to transfer his fund or money to anywhere within the country they can do it through the remittance section of the bank. Remittance section of general banking deals with only local remittances. During my internship I have observed local office branch deals with four types of local remittances. These are:
- Demand Draft (DD)
- Telegraphic Transfer (TT)
- Pay Order (PO)
- Mail Transfer (MT)
3.6.1 Demand Draft
This is an order to pay money, drawn by one office of a bank upon another office of the same bank for a sum of money in any place, which is outside of the clearing house area of issuing branch. It is a negotiable instrument. It can be crossed or not. For payment of DD bank checks the ‘Test Code’ first mentioned on the draft. If test code agrees, then the bank makes payment. The issuing bank sends an advice about the DD to the paying branch, for further confirmation. Demand Draft is an instrument containing an order by the issuing branch upon another branch known as drawee branch, to pay a certain sum of money to the payee or to his/her order on demand.
Demand Draft Issue
- Customer is supplied width DD/MT form.
- Customer fill up the form which includes the name of the drawer, name of the payee, amount of money to be sent, exchange, name of the drawee branch, signature and address of the drawer.
- The customer may pay in cash or by transferring the amount from his/her account (if any).
- After the money is paid and the form is sealed and signed accordingly it is given to the DD issuing desk.
- Upon receiving the form concerned officer issue a DD on a particular block.
- DD block has two parts, one for bank and another for customer.
- Bank’s part contains issuing date, drawer’s name, payee’s name, sum of the money and name of the drawee branch. Customer’s part contains issuing date, name of the payee, sum of the money and name of the drawee branch.
- After furnishing all the required information entry of the DD is given in the DD/MT issue register and at same time bank issue a DD confirmation slip addressing the drawee branch. This confirmation slip is entered into the DD advice issue register and a number is put on the confirmation slip from the same register. Later on the bank mail this slip to the drawee branch.
At least two officer sign the DD block and if the amount of the DD is Tk. 20000/ or more than the amount is sealed on the DD with a special red seal to protect it from material alteration. The number of DD is put on the DD form. Next the customer signs on the back of the DD and is supplied with his/her part of DD.
Duplicate DD issue
If the customer reports that original DD purchased by him/her is lost or stolen and produces legal documents then the bank may issue a duplicate DD.
Demand Draft Payment
When a DD is brought for payment, the branch check out the following matters:
- Whether the DD is drawn on them
- Whether it is crossed or not
- Whether it is properly signed by authorized officers of the issuing branch
- The branch then checks out whether the confirmation slip has arrived or not
- If the confirmation has not arrived, the DD is given entry in the Ex-advice register.
Afterwards, when the confirmation slip arrives it is given entry in the DD/MT advice register and the word ‘Ex’ is written down beside the amount. The date of receiving the confirmation slip is written down in the contra date column of the Ex-advice register.
Concerned officer write down the date on which the DD was paid, on the confirmation slip, sign it and write ‘E.P. on < date of receiving the confirmation slip >’ between two parallel lines.
When the confirmation slip arrives before the DD, it is entered into the DD/MT advice register and kept in a file. Later when the DD arrives the date is put on the confirmation slip and the above-mentioned procedure is applied.
When the situation of payment arises concerned officer check out whether it is crossed or not.
If it is crossed (s) he should just transfer the amount to the account mentioned in DD by crediting the account and debiting the issuing branch.
If it is to be paid over the counter, the officer must check whether the person carrying the DD is the payee or not.
If all the particulars are alright and the payee is genuine bank made the payment.
Stop Payment of Demand Draft
The issuing can issue instructions to the drawee bank to stop the payment of the DD issued by them only on written request of the drawer and should inform the drawee bank immediately. Once the drawee branch made the payment, no action can be taken against it.
3.6.2 Pay Order (PO)
It is like cash but not exactly cash. It is an instrument which is issued from a certain branch of a bank and must be enchased from the same branch. Unlike cheque, there is no possibility of dishonoring pay order because before issuing pay order bank takes out money of the pay order in advance. It is not a negotiable instruments because it can not be endorsed or crossed.
Payment order or PO gives payee the right to claim payment from the issuing branch. In other words it is an undertaking by the issuing bank to pay a certain sum of money to the payee or to order on demand.
Pay order (Issue)
Following procedure is maintained for the issuance of PO:
- Customer is supplied with PO form.
- After filling the form the customer pays the money in cash or by cheque.
- The concerned officer then issues PO on its specific block. This block has three parts, one for bank and other two for the customer. A/C Payee crossing is sealed on all pay orders issued by the bank.
- The officer then writes down the number of the PO block on the PO form.
- Two authorized officers sign the block.
- At the end customer is provided with the two parts of the block after signing on the back of the banks part.
Pay Order (Payment)
As the PO issued by the bank is crossed one it is not paid over the counter. On the contrary the amount is transferred to the payees’ account. To transfer the amount the payee must duly stamp the PO.
3.6.3 Telegraphic Transfer (TT)
In case of TT the issuing branch sends a telegraphic message to another branch to pay a certain some of money to a named payee account. Test code is furnished on the TT message for the protection of it. Generally for such kind of transfer, payee should have account with the paying bank, otherwise it is very difficult for the paying bank to recognize the exact payee.
At customer’s request branch transfers fund to another branch through telex and it is known as the TT, in short. TT facility is available only in that branch having telex facility. The procedure of issuing and paying TTs are stated below:
- Customer fills up the TT form and pays the amount along with commission in cash or by cheque.
- The respected officer issues a cost memo after receiving the TT form with payment seal, then sign it and at last give it to the customer.
- Next a TT confirmation slip is issued and its entry is given in the TT issues register.
- A test number is also put on the face of the slip. Two authorized officer signs this slip.
- Telex operator then transfers the message to the drawee branch mentioning the amount, name of the payee, and name of the issuing branch, date and test number.
- The confirmation slip is send by post.
- When a TT arrives through telex it is sent to the respected officer for the verification of the test number. If the test number is OK, the officer write down ‘Test Agreed’ on it and sign it. Otherwise a message is sent back to the issuing branch for the correction of the test number.
- After agreeing the test the branch issues a debit voucher and accredit voucher – debiting the issuing branch and crediting the payees account. Branch also issues a credit advice slip addressing the payee informing him/her about the arrival of the money.
- Later, when the confirmation slip arrives the contra date, on which the payment was made, is put on it and the officer sign it.
3.6.4 Mail Transfer (MT)
Where there is no telex machine or telephone line, then this method is used. It is the least used technique for transferring fund because it is time consuming and risky because mail may be missed.
When the transfer of fund from one branch to another takes place by mail but most of the time over telephone, it sis called MT. The process of TT and MT is almost identical, only difference is the media. Procedures of issuing and payment of an MT is discussed below:
- Custom is provided with the MT form
- Customer fills up the form, deposits the amount to be sent along with exchange and mail or telephone charge
- A cash memo is then issued in favor of the customer mentioning the amount paid by the customer, name of the drawee branch, name and account number of the payee and the date. The officer then signs it and gives it to the customer.
- An MT is then issued on a prescribed block, known as the MT block. Two authorized officers sign it and a test number is put on it.
- The number of MT is entered into the MT issue register along with other details, such as name of the drawee branch, name of the payee, date of issuance, amount and exchange, name of the drawer and test number.
- If it is to be sent by mail then the branch mail it by normal post or by courier, depending on drawer’s request
- If it is to be sent over telephone, the message is sent over telephone with test number as soon as possible and the following sentence is written on the MT block – “Message is conveyed over telephone”
- This block is then sent by the mail.
- When the branch receives an MT over phone or telex the test numbers checked.
- If the test is OK the MT is given entry in the DD/MT advice register.
- A credit voucher is issued on the same time debiting the issuing branch and crediting the payees’ account.
- Later on when the branch receives the MT block it checks in the MT advice register to see whether the payment is made or not. If it is paid on then contra date is put on the block and it is vouched.
- If it is not paid on before, then it is entered in the MT advice register and payment is made to the respective payee.
3.6.5 Test Code
It is the security number that is decoded by the paying bank so that the paying bank can be sure that the DD/TT/MM is not a forged one. Banks maintains secret code number for each of its branch, date, week, year and amount to be transferred. Only authorized officer access to these code numbers.
3.7 Cash Section
Cash is the most liquid asset and it should be dealt very carefully. So this department is really handed with intensive care. This department starts the day with cash in vault. All cash receipts and payments are made through this department.
Cash section is a very sensitive organ of the branch and handle with extra care. I was not authorized to deal in this section because of its sensitivity. But I was fortunate enough to know the procedures of this section. Operation of this section begins at the start of the banking hour. Cash officer beings his/her transaction with taking money from the vault, known as the opening cash balance. Vault is kept in a very secured room. Keys to the room are kept under control of cash officer and branch in charge. The amount of opening cash balance is entered into a register. After whole day’s transaction, the surplus money remains in the cash counter is put back in the vault and known as the closing balance. Money is received and paid in this section.
3.7.1 Cash Receipt
Depositors deposit money in their account through this section by deposit slip. This section also receives cash from customer for opening pay order, bank draft, telex transfer etc. In this bank’s all cash receipts are taken by this department.
- At first depositor fill up the deposit in slip. There are two types of deposit in slip in this branch. One for saving account and another for current account.
- After filling the required deposit in slip, depositor deposits the money.
- Officers at the cash counter receives the money, count it, enter the amount of money in the scroll register kept at the counter, seal the deposit in slip and sign on it with date.
- Then this slip is passed to another officer who enter the scroll number given by the cash counter in his/her register along with the amount of the money, sign the slip and keep the bank’s part of the slip. Other part is given to the depositor.
- In this branch, two different officers maintain two different scroll books for entering such entries. But cash counter maintains one scroll book.
- One officer maintains all deposits of saving account and other accounts maintained by another officer.
- All the end of the day entries of both of these registers are cross checked with the register kept at the cash counter to see whether the transactions are correct or not.
3.7.2 Cash Payment
This section accepts the cheques from the depositors for payment in cash. After receiving cheque, first the cheque is scrutinized whether it is a valid one. Cash officer judges the amount both in figure and the word, date of the cheque and signature etc. Then finally authorized officer compares the signature on the cheque with the specimen signature, and check whether the balance in the account is sufficient. If very things are satisfactory, then payment is made against the cheque. This department is also making payment against various debit vouchers for various miscellaneous expenses of the branch.
- When a person comes to the bank to cash a cheque, s/he first gives it to the computer desk to know the position of the check and posting of the cheque. If the account has sufficient fund the computer in charge will post it into the computer, will sign it and seal it.
- This cheque is then sent to the concerned officer. There are two officers who verify the cheques – one for savings and similar types of account and another for current and similar types of account
- After receiving the cheque respected officer first checks it very carefully for any kind of fraudulent activity. S/he also checks the date of the cheque, amount in word, amount in figure and signature of the drawer.
- If the instrument is free of all kind of error the respected officer will ask the bearer to sign on the back of it.
- S/he will then put his/her initial beside the bearers’ signature. S/he will also sign it on its fact, will write down the amount by red pen and will put on a scroll number from his/her scroll register.
- Then the cheque will be sent to the cash counter. At the cash counter bearer will be asked again to sign on the back of the instrument.
- The cash officer will then enter the scroll number in his/her register and will pay the money to the bearer.
- At the end of the day these scroll numbers of the registers will be compared to ensure the correctness of the entries.
3.8 FDR Section
This section deals with Fixed Deposit Receipt and Bearer Certificate Deposit. FDR is a important factors for the bank and volume of FDR determined the investment bases of the bank.
3.8.1 Kinds and Interest of FDR
Mercantile Bank provides the following maturity period and interest rate for the FDR
|Kinds of FDR||Interest Rate (%)|
3.8.2 Opening of FDR
Any individual firms or government/non-governments organizations can open FDR. Minor can open FDR A/C jointly with the guardian.
3.8.3 Liquidation of FDR
Only the account holder and the authorized person can liquid the FDR after maturity. In case of joint name, authentication from both is necessary. In case of ‘either or Survivor’ any one can liquid. In case of death the survivor can’t encash FDR even in there exit the either or survivor clause without the succession certificate from the court.
3.9 Clearing & Bills Section
Local offices branch of MBL receives different types of instruments, such as cheque, PO, DD etc from its customers for collection. It also pays on behalf of its customers for those instruments that come to it through clearinghouse. When instruments of MBL are sent for collection or received for payment through clearing house it is called Inter Bank Clearance or IBC. These are treated in a little different manner than instruments of other banks.
When the cheques are presented to a bank by the other banks for collection of fund and to credit that into the party’s account, the instrument must be cleared through Bangladesh Bank clearing house. A receiving officer, receiver check by a deposit slips over the counter.
3.9 Inward Clearing
When instruments are sent to the bank vie clearinghouse, it entered into the clearing in register. The officer checks the instruments thoroughly before it is sent to the computer section for posting. If any kind of error is found in any instrument it is dishonored and sent back with appropriate reason for doing so. Instruments are also dishonored for insufficiency of fund. The information is then sent back to the clearinghouse for taking appropriate action.
- The instruments drawn on Dutch-Bank are received from other banks in the clearinghouse.
- The amount and numbers of instrument received are entered in the house from the main schedule of respective banks.
- The instruments with schedules are arranged branch wise.
- The instrument sent to branches concerned for clearance and IBCA’s are collected from them for honored cheques.
- The instruments are sent to the respective departments and the schedules are filled.
3.9.2 Outward Clearing
After filling the deposit in slip bearer of the instrument deposits the instrument to the respected officer. Upon receiving the instrument the respected officer checks the essential features of the instrument and whether the deposit in slip is filled accordingly or not. Then (s) he crosses the instrument with a sea containing banks and branch’s name, signs the deposit in slip and provides the customer with counter foil of the slip. Then both the instrument and slip is sealed with ‘NIKASH’ seal and date seal containing the date of clearing. An endorsement seal is also sealed on the back of the instrument and the officer endorses it on behalf of MBL Foreign Exchange Branch.
It is then given entry in the clearing out register mentioning the name of the bank and branch of it, amount of money in deposit in slip, amount of money in the instrument, number of the instrument and date of then it. In case IBC only name of the bank is omitted. Then the officer separates the instrument from the deposit in slip. Deposit in slip is kept in the bank and the instrument is sent for clearing.
Non-IBC instruments are sent to the clearinghouse with two different forms. Both the forms contain almost similar information. Form F-52 contains clearing date, name of the bank and its branch, number of instrument on each branch, amount of each instrument and summation of the amounts. Other form F-54 had the name of different banks printed on it and requires the clearing date, total number of instruments to each bank and total amounts. IBC instruments are sent to the clearinghouse with one form, form F-54/A. These instruments are sent to the clearinghouse by messenger.
- The instruments are received duly signed vouchers.
- The clearing stamps are affixed on the instrument and it is endorsed with the checking of in charge.
- The particulars of the instruments and the vouchers are entered in the outward clearing register.
- The instruments with schedules received from branches and sent to the clearing house to deliver them to the respective bank.
- These sorts of things are submitted in the first houses or delivery house of Bangladesh Bank.
3.10 Short Collection (SC)
MBL has many branches, which are not member o clearing house. When instruments of these branches come to the branch for collection, a different procedure is followed known as short collection. When an instrument arrives for short collection following procedure is applied:
- The instrument is crossed with crossing seal.
- Sealed with SC seal on its face.
- Endorsed by the officer and ‘The account will be credited on realization’ is written on the back of it by the officer.
- The instrument is then sent to the drawee branch.
- Upon receiving the instrument the drawee branch debits the account and sends a debit TRV with LSC number.
- After receiving the LSC branch enters it in the LSC register and credits the party’s account issuing a credit voucher.
3.11 Dispatch Section
Dispatch section plays a great role in banking business. Because all documents coming in the branch or going out of the branch must pass this section. This section maintains all records of the documents send to other branches or banks and makes best effort to send these documents safely and correctly. This section also receives documents come through different medium, such as postal service, courier service, via messenger etc.
After receiving the document the officer inters them in a register kept in his/her desk and distribute them to the appropriate sections. When papers or documents are sent for official purpose the officer enters them in another register, write down the address on the envelope and send them through proper channel.
Dispatch section of local office branch performs another duty. It enters the transfer instruments in the scroll book and then sends those to the computer section.
3.12 Inward Bills for Collection
- All clearing cheques are not received on the counter. Some cheques are received from other source for collection. This cheques are received –
- From other branch of Mercantile Bank. These are settled by sending Inter Bank Credit Advice (IBCA).
- From another bank outside the clearing house. These are settled by debiting depositor’s account and sending DD, TT, MT in favor of the sender bank.
- These cheques are called IBA.
Necessary entry passed by this branch:
Respective A/C – Dr.
Head Office A/C (Local office) – Cr.
If cheques are returned
Other branch sends an IBDA to Local office branch
MBL General A/C (Local Office Branch) – Dr.
Respective A/C – Cr.
Like every other business activity banks are profit oriented and profit is the central point on which the entire business activity rotates. A bank invests its funds in many ways to earn income. The bulk of its income is derived from loans and advances. Since major part of bank’s income is derived from credit and since the money banks credited is customer’s fund, banks should follow a cautious policy and sound lending principles in the matter of lending.
Banks are the principal source of credit for borrowers. Banks provide loan able funds for millions of households, for most local units of government and for agricultural, commercial and industrial activates of a nation. Worldwide, banks grant more installments loans to consumers than any other financial institution. Bank credit is a catalyst for bringing about economic development. Without adequate finance there can be no growth or maintenance of a stable output. Bank lending is important to the economy, for it makes possible the financing of different sectors. At the same time, a bank will, therefore, distribute its funds among various assets in a manner as to derive sufficient income. But as liquidity and profitability are conflicting considerations. Mercantile Bank Ltd. as a bank, while employing the funds pays due regard to both profitability and liquidity.
4.2 Kinds of Advances
There are various kinds of borrowing facilities provided by banks to their clients. These facilities can be broadly classified into following categories:
The bank advances a lump sum for a certain period at an agreed rate of interest, in case of loan. Loan may be a demand loan or a term loan. The entire amount is paid on an occasion either in cash or by credit in his current account, which he can draw at any time. The interest is charged for the full amount sanctioned whether he withdraws the money from his account or not. The loan may be repaid in installments or at expiry of a certain period.
Overdraft is a temporary accommodation usually granted to an operating account subject to the limit sanctioned. This is a permanent arrangement and the customer need not to draw the sanctioned amount at once, but draw the amount as and when required. This interest is charged on the amount, which he withdraws, not on the sanctioned amount. OD is of two types practiced in Mercantile Bank Ltd. Foreign Exchange branch. These are as follows –
126.96.36.199 Secured Overdraft (Sod)
Branch sanctions SOD against different securities like FDR, Sanchaypatras and work orders.
188.8.131.52 Temporary Overdraft (TOD)
It is given to the valued customers only. It is not that much secured. Usually it forwards without any security or sometimes exercise lien against the instrument, deposited in the bank. The processes of extending SOD are as follows –
The party must have a current A/C with the branch if the ownership of the firm is proprietorship, then a trade license must be submitted and in case of a limited company, all the documents required to open a current A/C, should be submitted. The financial statements of the concerned firm should also be submitted. The party must maintain a good transaction with the branch and have a good turnover rate. The party will apply to the officer in charge of credit department of the branch for SOD arrangement.
The concerned officer of the branch will give him a credit application form and the party will have to fill up this form. In this form he discloses all the information about his concern, purpose of the loan, description of security, etc. The concerned officer will prepare a ‘Credit Proposal’, where he writes about the business concern, details of proprietors/directors of the concern, management structure, the existing credit facilities, the particulars about the facilities that asked for – such as margin limit, date of expiry, details of security, and any other relevant information. Then the proposal is sent to the Head Office, Credit Division for approval. The responsible department of the Credit Division will appraise the proposal and if it seems to a viable then the loan will be sanctioned.
After the loan is sanctioned, the branch will issue two copies of a sanction advice, where all the terms and conditions set by the bank is mentioned. The borrower is advised to write, ‘accepted’ on the original copy if he is satisfied with the terms and conditions of the bank and retain the duplicate one as record.
4.2.3 Cash Credit
By this arrangement, a banker allows his customer to borrow money up to a certain limit. CC is a favorite mode of borrowing by trades, industrialists, etc. for meeting their working capital requirements. It is operated like overdraft account. Depending on the needs of the business, the borrower can draw on his cash credit account at different time and when he gets money can adjust the liability. Mercantile Bank Ltd. charges interest on the daily balance of the account. Based on charging securities, there are two forms of cash credit.
184.108.40.206 Cash Credit (Hypothecation)
Hypothecation is a legal transaction whereby goods are made available to the lending banker as security for a debt without transferring either the property in the goods or possession. The banker has only equitable charge on stocks, which practically means nothing. It is given against registered mortgage of land and building, hypothecation of goods and personal guarantee of Directors.
220.127.116.11 Cash Credit (Pledge)
Pledge is the bailment of goods as security for payment of a debt or performance of a promise. Transfer of possession is the judicial sense. In case of pledge goods the bank acquire the possession of the goods or a right to hold goods until the repayment for credit with a special right to sell after due notice to the borrower in the event of non-repayment. It is not applicable in foreign exchange branch.
The processes of opening a CC a/c are as follows –
The interested party must have a current A/C and good transaction with the branch; applies for CC pledge or hypothecation arrangement; fills up the ‘Credit Application form’ as provided by the respective officer; the concerned officer prepares a ‘Credit Proposal’ detailing all relevant information; sends the credit proposal to the Head Office, Credit Division for necessary action, Head office, Credit Division examines the proposal and if finds it viable then sanctions it and sends it to the branch; the branch issues two copies of ‘Sanction Advice’, one for its own record and the other for the party to keep.
After getting the cash credit arrangement, the banker will issue a cheque book for withdrawing cash from the account. Whenever the CC account holder wants to withdraw cash from the account, the cash officer will scrutinize the amount of cheque in order to make sure that the total drawings does not exceed the sanctioned limit.
4.2.4 Loan (General)
It is given against personal guarantee, hypothecation of goods and land & building.
4.2.5 Staff Loan
Local office branch provides advances to the staff for purchasing house, building, sanchaypatras, and meeting up certain requirements like family medical, personal medical, wedding purposes. Bank provides this facility under installments; loan able amount varies on the basis of purpose.
4.2.6 Bills Portfolio
Local Office branch purchases demand bills of exchange that are called ‘Draft’ accompanied by documents of title to goods such as bill of landing, railway receipt, truck receipt. The purchase of bill of exchange drawn at an issuance, i.e. for a certain period maturing on a future date and not payable on demand or sight.
4.2.7 Term Loan
Mercantile Bank Ltd. is advancing both short and medium term credit to the commercial sector on the basis of their capital structure, constitution and liquidity consideration. It is given against land and building along with machinery, personal guarantee of Directors and hypothecation of raw materials.
4.2.8 Bills Purchased and Discount
Banks grant advances to their customers by discounting bill if exchange.
4.2.9 Loan Against Imported Merchandise (LIM)
Advances allowed for retirement of shipping documents and release of good imported through L/C taking effective control over the goods by pledge fall under this type of advance. When the importer failed to pay the amount payable the exporter against import, L/C, then MBL gives loan against imported merchandise to the importer. The importer will bear all the expense i.e. the godown charge, insurance fees, etc. and the ownership of the goods in retain to the bank. This is also a temporary advance connected with import, which is known as post import finance.
4.2.10 Payments against Documents (PAD)
The importers are to open letter of credit through any bank for importing goods. Most of the time, the banks are to extend credit to the importers, without violating the rules and circulars of Bangladesh bank, for buying required foreign exchange. This loan on receipts of the shipping documents from the negotiating bank is transferred and lodged to PAD. PAD is associated with import and import financing. This kind of loan is issued in favor or the exporter to fulfill the commitment of issuing bank of L/C to the exporter.
4.2.11 Loan against Trust Receipt (LTR)
Advance allowed for retirement of shipping documents and release of goods imported through L/C falls under this head. The goods are handed over to the importer under trust with arrangement that sale proceeds should be deposited to liquidate the advances within a given period. This is post import finance by MBL.
4.2.12 Inland Bill Purchased (IBP)
Payment made against documents representing sell of goods to local export oriented industries, which are deemed as exports and which are denominated in local currency/foreign currency falls under this head. The bill of exchange is held as the primary security. The client submits the usance bill and the bank discounts it. This temporary liability is adjustable from the proceeds of the bills.
IBP is one of the moods of advancing money by bank and it is a profitable way of deploying banks fund for short period. The party himself must draw genuine trade transaction and the bill and he is not the purchaser of the bill. ILC and mother L/C of export is needed to sanction the loan. The banks scrutinize the shipping document of ILC and asked the ILC opening bank for acceptance of the bill with maturity date. The bill will purchase up to 80% of the accepted value.
4.3 Credit Policy of Mercantile Bank Ltd. (MBL)
The credit policy of any banking institution is a combination of certain accepted time tested standards, and some other dynamic factors determined by the realities of varying and changing situations in the market place.
Credit policy lays down the MBL principles and broad parameters of the lending operations. The key is to a sound, healthy and profitable credit operation, however, lies in the quality of judgment and sense of proportion of the officers making lending decisions, and their knowledge of the borrowers and the market place.
MBL considers the loans that are sanctioned for more than one year as term loans. Under this facility an individual or enterprise is financed for various purpose.
4.4 Rate of Interest on Loan
|Lending Type||Rate of Interest (%)|
|Agriculture: Loan to Primary Producers||9.00|
|Term Loans to industry (Other than and cottage industry)||14.50|
|Working capital loan||13.50|
|Working Capital Financing||14.00|
|Term loan to small and cottage industries||14.00|
|Loans of NBFIs||13.00|
|a) Loans against FDR FDR + 2.5||FDR + 2.5|
|iii) Scheme for disadvantageous group|
|Micro Finance / MF Institutions 11.50||13.00|
The Heads of Branches shall exercise delegation for the high er slot, that is, 1.50% absolvable the Mid rate as are applicable for each sector of loans. Any rate below the higher slot of Mic Rate shall require head office approval
4.5 Securities against Advances
All securities are suitable for all types of advances. Each security has its own suitability. Specific security to be obtained by the local office branch while allowing advance are shown below against the types of advances:
|Types of Advances||Securities|
|Loans||Lien of various kinds of Sanchaypatras, Govt. Securities and shares quoted in the stock exchange, debentures, fixed deposit receipts, pledge of gold/gold ornaments, and hypothecation of vehicles. Collateral of immovable properties.|
|Overdraft||Sanchaypatra, Non-resident foreign currency deposit, shares debentures, Govt. promissory notes, fixed deposit receipts, life insurance policies, gold ornaments, and work order.|
|Cash Credits||Pledge or hypothecation of stock in trade, goods, produce and merchandise, machinery, land & building on which machinery are installed.|
|Inland bill purchased||Bill itself|
|Pad||Shipping documents for imports|
|Lim||Pledge of imported merchandise|
|Ltr||Trust receipt obtained in lieu of import documents|
|Export cash credit||Pledge or hypothecation of goods or export trusts receipts.|
|Foreign bill purchased||Shipping documents.|
4.6 General procedure for loans and advances
The following procedure is applicable for giving loans to the customer. These are
- Duly fill-up first information sheet
- Application for credit line
- Collecting CIB report from Bangladesh Bank
- Making credit proposal
- Project appraisal
- Head office approval
- Sanction letter
4.7 First Information Sheet
First information sheet is the prescribed form provided by the respective branch that contains MBL information of the borrower. It contains following particulars-
Name of the concern with its factory location, officer address and Tel No. Name o the main sponsors with their educational qualification. Business experience of the sponsors, details of past and present business, its achievement and failures, name of all the concerns wherein the sponsors have involvement. Income tax registration no with the amount of tax paid for the last three years. Details of unencumbered assets personally owned by the sponsors. Details of liabilities with other banks and financial institutions including securities held there against. Purpose of loan sought from MBL. Estimated cost of the Project & means of finance.
4.8 Application for Credit
After receiving the first information sheet from the borrower bank official verifies all the information carefully. He also checks the account maintains by the borrower with the bank. If the official become satisfied then he gives application for credit line form to the prospective borrower. The application for credit lines contain the following particulars:
Name, address, telephone, telex no. & cable address. Date & place established/incorporated, status/constitution. Name of major shareholders (in excess of 15%).
State relationship between shareholders. Name and net worth of directors/partners/owners with background & relationship with each other (Net worth statement of each person to be attached as per format). Capital structure & how the capital is deployed in business. Details of properties/assets of the applicant, with valuation against each type of property/assets and details of charges against them.
Names and addresses of subsidiaries/affiliates/allied concerns, stating relationship with applicant, nature of business and borrowings from banks against each nature & details of business. Latest audited/un-audited balance sheet and profit & loss statement attached will be submitted by management structure. Names & address of other bankers, sanctioned facilities & liabilities outstanding with details of securities there against. Type, extent and period of credit facilities required. Purpose of facility, repayment arrangement, sources of repayment, details of securities offered & any other relevant information.
After getting the application banks appraise the application in the following way:
- Getting credit information to determine the credit worthiness of the borrower through –
- Confidential report from other bank
- Personal investigation
- Credit information bureau report form Bangladesh Bank.
- Considering the following 5C’S –
- Character: The most valuable asset of a person, which is based on the integrity and reliability of the borrower.
- Capacity: Indicate the borrower capacity to employ the fund profitably.
- Capital: Refers to borrower’s own fund invested in the business.
- Collateral: Security offered by borrower.
- Condition: Refers to external factors.
4.9 Collecting CIB Report from Bangladesh Bank
After receiving the application for credit line, Mercantile Bank Ltd. sends a letter to Bangladesh Bank for obtaining a report from there. This report is called CIB (Credit Information Bureau) report. MBL ally branch seeks this report from the had office for all kinds of loans. The purpose of this report is to being informed that whether the borrower has taken loan from any other bank; if ‘yes’, then whether the party has any overdue amount or not.
4.10 Making Credit Proposal
Then bank branch prepare a loan proposal which contains terms and conditions of loan for approval of Head Office or Head of the concerned branch. Following documents are necessary for sending the credit proposal:
- Loan application
- Declaration of the borrower
- Photograph of the borrower duly attested
- Bio data of the borrower
- Limit sanction
- Credit report
- Legal opinion
- Memorandum of Article
- Trade license
- Copy of title deeds
- Tax clearance certificate
If the officer thinks that the project is feasible then he will prepare a proposal. Mercantile Bank Ltd. prepares the proposal in a specific form called credit proposal. It contains following relevant information.
- Date established, constitution
- Main sponsor/director with background
- Capital structure, address
- Account opening date, introduced by type of business, particulars of previous sanctions
- Existing vis-à-vis proposed credit limits
- Particulars of proposed/additional facilities
- Security (Existing & Proposed/Additional)
- Movement of accounts
- Components on the conduct of the account
- Details of deposit, liabilities of allied concerns, liabilities with other banks
- CIB report
- Stock position (Pls. Provide St. report)
- Rated capacity of the project (item wise)
- Production/purchase during the period
- Sales during the period
- Business received for the period (Last three years)
- Earning received for the period
- Associated lending/business risk (s).
After fulfilling the previous particulars, the officer places the Credit Proposal to the BCC (Brach Credit Committee). BCC is then find out the rights borrower by considering the following 5C’s. These are character, capital, capacity, collateral, condition (* economic).
4.11 Selection of Right Borrower
The borrower has to be creditworthy and competent enough to run the proposed industry. Following are the consideration –
- Preference given for educated/knowledgeable sponsors, who know about their business concern, have technically know-how and expertise in the field of proposed industry
- Who have own land and building for running the project
- Client with innovative ideas
- Client must have net worth more than 2.5 times of the equity required for investment in the project.
- Who have good dealings with the bankers/outside parties and has social contacts and standings
- Have an a/c with Mercantile Bank Ltd. (MBL) local officer branch.
4.12 Project Appraisal
It is the pre-investment analysis done by the officer before approval of the project. Project appraisal in the banking sector is needed for the following reasons:
- To justify the soundness of an investment
- To ensure repayment of bank finance
- To achieve organizational goals
- To recommend if the project is not designed properly.
MBL ally Head Office is engaged in appraising the following projects:
- Proposal for sanctioning a term loan.
- Proposal for sanctioning a working capital
- Proposal for sanctioning a term loan and working capital
- Proposal for renewal of advance limit
- Proposal for enhancement of advanced limit
- Proposal for enhanced renewal of advanced limit
- Proposal for extension of repayment period.
4.13 Techniques of Project Appraisal
An appraisal is a systematic exercise to establish that the proposed project is a viable preposition. The appraising officer checks the various details submitted by the promoter in first information sheet, application for credit line and credit proposal. Mercantile Bank Ltd. consider the following aspects in appraising a proposal.
- Technical viability
- Commercial viability
- Financial viability
- Economic viability
The Head Office (HO) mainly checks the technical, commercial and financial viability of the project. For others HO is dependent on branch’s information. But when the loan size is big, then the HO verifies the authenticity of information physically.
4.13.1 Technical Viability
It implies the assessment of various requirement of actual production process. It involves a critical study of following factors:
18.104.22.168 Location or site of the Project
Selection of the optimum location, therefore, revolves around the joint consideration and evaluation of the following factors –
- Raw materials supplies
- Transportation facilities
- Power, water and fuel supply
- Natural and climatic factors
22.214.171.124 Plant, Machinery and Equipment
The study should consider some important technological factors with regard to plant and equipment, viz.:
- Adequacy and suitability of the machinery and equipment and their specification\
- Plant layout
- Balancing of different sections of the plant
- Reputation of the machinery supplies etc.
126.96.36.199 Production Process
It includes details of finished products by using the raw materials.
188.8.131.52 Management and Organizational Viability
It is very much important for the success of a project. So it is necessary to evaluate the following:
- Overall background of the promoter, and their
- Academic qualification
- Business and industrial experience
- Business and industrial experience
- Past performance
4.13.2 Commercial Viability
This study indicates evaluation of a projects’ feasibility in terms of market. The market analysis contains:
- Analysis of past and present demand
- Analysis of past and present supply
- Analysis of demand and supply gap
- Determination of pricing per unit
- Estimates project’s share in the market
- Marketing channel for the product should be accessible to the entrepreneur.
4.13.3 Financial Viability
Analysis of financial viability is an essential part of project appraisal. The financial analysis focuses the following for judging this viability.
184.108.40.206 Cost of the Project and means of Finance
It is necessary to make a preliminary assessment of the project and the means of the financing it. If the cost of the project is too high that it is not possible to mobilize the resources of that magnitude through the available resources, the project is out of question.
220.127.116.11 Debt-equity Ration
It is the ration that shows the relationship between capital contributed by the creditors and that contributed by the owners. A low ration indicates greater long-term financial safety.
18.104.22.168 Comparison with similar Projects
If the proposed project is similar to other projects, financed earlier by MBL Bank, then it is only done.
22.214.171.124 Working Capital Assessment
If the borrower proposes for working capital, then the bank does the assessment. It is done for the raw material, raw material, work-in-process and finished goods. The tied-up period for imported raw material is generally 90 days, for local raw material 30 days, for work-in-process 7-10 days and for finished goods 3-7 days. Ultimately tied-up period depends on the nature of the goods.
126.96.36.199 Requirement of Fund
It includes allowable bank borrowing and proposed limit by the credit committee on the basis of 70% of RM, WIP & FG and imported raw materials. CC (H), LTR and in case of imported materials L/C the bank offers such facilities.
188.8.131.52 Earning Forecast
It includes capacity utilization (%), sales revenue, cost of goods sold, gross profit, total operating expenses and operating profit. It is done for 3 years only. For new projects, capacity utilization is 60%, 70%, 80% for year 1, 2, 3, respectively. Cost of goods sold is around 70% of sales revenue.
*184.108.40.206 Operating results
Mainly it deals with various ratios like gross profit to sales, operating profit to sales, debt-service coverage ration, internal rate of return, break even point, BEP (efficiency).
*220.127.116.11 Internal Rate of Return (IRR)
IRR is a discount factor where summation of cash inflow and cash outflow of a project equals to zero. In 1st year cash outflows for project implementation. So it sis always negative. In subsequent years cash inflows to the project to make it viable. Normally economic life of a project will operate at break even point. When it is more than zero project will be profitable. Otherwise project will incur loss. The standard IRR value is considered 20% to 35%. Respective officer does it by trial and error method.
18.104.22.168 Break Even Point
Break-even point of an enterprise/firm is a point where total revenue/sales proceeds/sale or output equals total cost. It indicated that level of output/sale proceeds at which the firm recovers all its costs. It neither earns profit nor incurs any loss. In other words, this is a point of zero profitability.
22.214.171.124 Sensitivity Analysis
It is normally done in two ways:
- Lowering capacity utilization by 10%
- Lowering selling price by 10%
This analysis is done to see that the project can absorb both the shocks and to determine the project is more sensitive to one over another. Here also both earning forecast and operating results are calculated in the aforesaid two cases.
126.96.36.199 Lending Risk Analysis (LRA)
Usually experienced bank officials do the critical and crucial job. LRA involves two types of risk aspects.
- Business risk and
- Security risk.
Business risk is again divided into two parts:
- Industry risk which involves supply risk and sales risk
- Company risk which involves performance risk, resilience risk, management competence risk and management integrity risk.
Again there are two elements of security risk
- Security control risk and
- Security cover risk.
188.8.131.52 Decision matrix form IRA
From the LRA sheet we can calculate the following numbers and plotting them into the matrix to get the decision. The calculated result criteria is as under –
|Low Risk||Average Risk||High Risk||Excessive Risk|
Based on raw materials supply and selling of finished products and also demand supply gap, bank officials determine the industry risk. And company risk is determined by repayment behavior of the sister concern and by the competent management security risk is determined by creating the charges, taking charge documents against registered mortgage of lands and others.
4.13.4 Economic Viability
The project should ensure benefit to the national economic and create sufficient opportunity in the following areas:
- Generation of employment
- Income distribution
- Development of small scale industries & ancillary business
- Improvement of quality of life and well-being
- Environmental issues
- Opportunity cost
4.14 Head Office Approval
Upon receipt of the credit line proposal from the branch the Head Office aging appraises the project. If it seems to be a viable one, the H.O. sends it to the Board of Directors for the approval of the loan. The Board of Directors considers the proposal and takes decision whether to approve the loan or not. If the BOD approves the loan , the H.O. sends the approval to the concerned branch.
The respective officer of Head Office appraises the project by preparing a summary named “Top Sheet” or ‘Executive Summary’. Then he sends it to the Head Office Credit Committee for the approval of the loan. The Head Office Credit Committee considers the proposal and takes decision whether to approve the loan or not. If the committee approves the loan, the HO sends the approval to the concerned branch with some conditions. These are like:
- Drawing will not exceeds the amount of bill receivables
- The tern over in the account during the tenure of the limit should not be less than four times of the credit limit.
- All other terms and conditions, as per policy and practice of the bank for such advance to safeguard the banker’s interest shall also be applicable for this sanction also
- Bank may charge/alter/cancel any clause (s) of the sanction without assigning any reason whatsoever and that shall be binding upon the client unconditionally
- Branch shall not exceed the sanctioned limit
- Required charge documents with duly stamped should be obtained
- Drawing shall be allowed only after completion of mortgage formalities and other security arrangement.
4.15 Sanction Letter
After getting the approval of the H.O. the branch issues sanction letter to the borrower. A sanction letter contains the following particulars amongst other details:
- Name of borrower
- Facility allowed
- Rate of interest
- Period of the loan and mode of adjustment
- Others terms and conditions
After getting the approval from the HO, the branch issues the sanction letter to the borrower. A sanction letter contains the following particulars amongst other details.
MIS System use in Mercantile Banking System
- All the branches are computerized.
- The Managing Committee of Mercantile Bank already making decision to connect itself into an inter network banking system within a few month. If there is proper networking between all the branches and departments, customers can deposit and draw or maintain their account in any branch of MBL.
- Mercantile Bank maintain customer and Ledger databases and share them with all branches so that they can response quickly to the clients.
- Management Support System there to help various executives in taking various decisions.
- Each branch decorated with Electronic Display Board, which is show that which table is performing what function and now whom is serving. The branches are decorated with proper Sound System facility, which will be helpful to communicate with the customer more easily. This system will decrease the confuseness of the customer, which ultimately will increase the efficacy of customer service.
- Inter department networking system should be provided, so that employee can do their job more effectively and in less time
- Transaction Process System must be there to facilitate the transaction process in least possible time.
- Internet WebPages can help employees in gathering knowledge and in sharing knowledge, problem etc.
- Customers are the hearts of the organization. They should provide more space in the office and if possible, they should have some entertainment facility. For example: A television with some dynamic channels like discovery, animal planet, national geography etc. As a result they will be more patient while the service has been processed.