Credit Management – A Study on Mercantile Bank Limited, Sheikh Mujib Road

Branch, Chittagong.

[This internship Report is submitted for the Partial Fulfillment of the program of Bachelor of
Business Administration (BBA) with major in Finance & Banking]

Prepared By:
ANIKA TABASSUM
ID NO.: B123294
Semester: Autumn 2016
Program: BBA

Internship Duration:
25th September to26th December 2016
Date of Submission: January 18th, 2017.

Department of Business Administration

Faculty of Business Studies
International Islamic University Chittagong
 Credit Management– A Study on Mercantile Bank Limited,Sheikh Mujib Road
Branch, Chittagong.

[ This internship Report is submitted for the Partial Fulfillment of the program of Bachelor of
Business Administration (BBA) with major in Finance & Banking]

Prepared By:
ANIKA TABASSUM
ID NO: B123294
Semester: Autumn 2016
Program: BBA

Supervised by:
Mrs. Israth Sultana
Assistant Professor
Department of Business Administration
International Islamic University Chittagong

…………………………………………
Signature of Supervisor

Department of Business Administration

Faculty of Business Studies
International Islamic University Chittagong
ACKNOWLEDGEMENT
Almighty Allah enabled me to successfully complete the internship report on “Credit Management
Practices: A study on Mercantile Bank Bangladesh Ltd, Sheikh Mujib Road Branch Chittagong”. A
large number of individuals have helped me directly or indirectly to Prepare this report. I am grateful
to them. Internship program is an integral part of BBA (Bachelor of Business Administration) course
of International Islamic University Chittagong (IIUC). Every BBA student was assigned to conduct
an internship program in the practical field directed by studied subject to learn something within the
pre stipulated time by observing the organization’s daily practices about the business factors.
Specially, I am grateful to my honorable Internship supervisor, Mrs. Israth Sultana, Assistant
Professor, Department of Business Administration, International Islamic University Chittagong. I am
deeply grateful to him for his dynamic guidance, cordial cooperation and time-to-time patience
assistance. Without his cooperation, this report may not be prepared.

I am also grateful to Mr. Mesbah Uddin Ahmed (Vice President & Head of branch) of Mercantile
Bank, Sheikh Mujib Road Branch, Chittagong for giving me an opportunity to do internship in this
bank. My special thank and gratitude to Mr. Mahbubul Alam (Credit management department) for
his ample help to provide me support, books and others articles throughout my study period in the
institution and who managed his valuable time for guiding me.

However, to my best, I have tried to make the report effective, informative and representative.
Finally my earnest and sincere apology goes to the readers for my conceptual and printing mistakes,
if there is any.
LETTER OF SUBMISSION

Date: 18.01.2017
To
The Coordinator
Internship and Dissertation committee
International Islamic University Chittagong

Subject: Submission of report on “Credit Management of Mercantile Bank Limited, Sheikh Mujib
Road Branch, Chittagong.”

Dear Sir,
I, Anika Tabassum, it is a great pleasure for me to submit my internship report on “Credit
Management of Mercantile Bank Limited, Sheikh Mujib Road Branch, Chittagong.”
This report is based on my Internship activities that correlated my academic studies with practical
organizational situation. From the Internship, the significant knowledge and skill I obtain in various
areas is a great achievement and significance for my future professional career. I have tried to give
my best efforts and attention during preparation of this report.

Therefore, I would like to request you to accept my report and forgive me for any kind of unwilling
mistakes and shortcomings, and I am ready to explain any query or clarification to you if you feel
necessary.

Thanking yours

___________________________

ANIKA TABASSUM
ID NO: B123294
Program: BBA
International Islamic University Chittagong

\
EXECUTIVE SUMMERY

Today, necessity of a Bank as a financial institution is undeniable. A country is financially rich when
it has modern financial institutions of its own. These institutions play a vital role in the field of
financial stability of a country. Banking sector is one of the stable financial institutions of a country.
Due to globalization and technological changes, banks are to give effective real time service to their
customers. For giving friendly service to the customers they need experienced and will-educated
working force.

The overall approach of the report is a descriptive one as it goes into the depth of credit management
practices of Mercantile Bank Limited. In this study primary data as well as secondary data has been
used. In case of primary data face to face interview, personal desk work and personal observation has
been considered. In secondary data internet, manuals of the bank have been considered. For
analyzing the data different charts, diagrams are used.

I have prepared this report with five chapters. In chapter one, I have introduced the report such as
introduction, objective, scope, Methodology of the study and limitations of the report. Then in
chapter Two, I have discussed the history, Vision, Mission, Goal, Products etc. of this bank.

In chapter three, I have discussed theoretical aspects of credit management of this bank. In chapter
Four, bank’s performance is evaluated, where the information is presented both theoretically and
graphically. The analysis is encompassed by total loan , loan income, modes of loan, recovery rate in
this bank.

In chapter Five, I tried to find out some good side of the bank as well as the problems also. On these
findings I have tried to make some recommendations for the branch which I think will make this
branch more competitive in banking sector.

TABLE OF CONTENTS
Chapter Particulars Page No.

1 Introduction
1.1 Background of the topic 02
1.2 Rational for study 02
1.3 Objective of the report 02
1.4 Methodology 03
1.5 Scope 03
1.6Limitation 03

2 Overview of Mercantile Bank

2.1 Background of MBL 05

2.2 Vision 05
2.3 Mission 05
2.4 Organogram of MBL 06
2.5 Features of MBL 07
2.6 Classification of bank product 08
2.7 Main departments of MBL 09
2.8 Financial products and services 09-12
3 Credit Management of MBL

3.1 Loan & Advances 14-17

3.2 Credit Risk 17

3.3 Credit risk management 17

3.4 Principle of credit risk management 18

3.5 Tools used in Credit risk management 18

3.6 Objectives of risk management 18

3.7Risk management process 19-20

4 Performance Analysis of MBL

4.1 Total loan 22
4.2 Loan products of MBL 23
4.3 Loan income 24
4.4 Default loan 25

4.5 Recovery rate 26

5 Findings, Recommendations &
Conclusion
Findings, Recommendations & 28
Conclusions
CHAPTER - 1
INTRODUCTION

A) Background of topic:
Credit management in a bank is a dynamic sector where a certain standard of long-range planning is
needed to allocate the fund in diverse field and to minimize the risk and maximizing the return on the
invested fund. The objective of the credit management is to maximize the performing asset and the
minimization of the non-performing asset as well as ensuring the optimal point of loan and advance
and their efficient management. The credit policy of Mercantile Bank Limited is a combination of
certain accepted, time tested standards and other dynamic factors dictated by the realities of changing
situations in different market places. MBL aims to become one of the leading banks in Bangladesh
1
by prudence, flair and providing quality of credit operations in the banking sectors. MBL intends to
meet the needs of their clients and enhance their profitability by providing best credit facilities. I
tried to make an overall analysis of credit activities of Mercantile Bank Limited.

B) Rational for Internship:

In today’s world only academic education does not make a student perfect to become competitive
with the outside world. Internship is a great opportunity to gain ideas, knowledge and experience
with applying academic knowledge. Through the internship program, a student gets the opportunity
to face with the real business world. It helps to build self-confidence, & interpersonal skills which is
important for entrance as a fresher in job market. It is also beneficial for both a student &
organization to upsurge relationship among them for further opportunities. The program covers a
period of 12 weeks of organizational experience.

As a mandatory part of my graduation, I took the opportunity to conduct my internship with one of
the renowned private commercial bank in our country, Mercantile Bank Limited. with the help of
Md. Mahbubul Alam(Assistant Officer) Credit Department, I have performed my internship report
on “Credit Risk Management of Mercantile Bank Limited”. My academic supervisor Mrs. Israth
Sultana, Assistant Professor, IIUC approved the topic & allowed me to prepare the report as part of
the fulfillment of internship requirement as well as gave me appropriate guidelines.

I got the privilege to work at MBL from September 25,2016 to December 26, 2016. In recent
banking sector, MBL has already created a positive image to the customers’ mind by providing best
banking service. This bank has introduced some modern banking scheme that has gotten high market
demand. As the bank is maintaining the pace with the competitive business world, its activities,
culture, philosophy and style would an intern student to be the best at any field of working life.

C) Objective of the report:

The main objective of the report is to know about Credit Management of Mercantile Bank Limited.
The specific objectives are as follows:
1. To know about the company profile of Mercantile Bank Limited.
2. To know the credit management practices of MBL.
3. To know the Performance analysis of credit management
4. To identify some problems regarding credit management
5. To recommend some suggestions to overcome such problems.

D) Methodology:

The study requires a systematic procedure from selection of the topic to final preparation. To perform
the study, the data sources are identified and collected, these are classified, analyzed, interpreted and
presented in a systematic manner and key points have been found out. The overall processes of
methodology are given below-

2
I used both primary and secondary data to complete my report.

D.1) Primary data:

 Direct observation
 Discussion with officials of MBL
 Discussion with customer
 Direct involvement in the credit management activities in MBL

D. 2) Secondary data:

 Website of Mercantile Bank Limited

 Annual report of Mercantile Bank Limited
 Office circular and other published papers and documents

E) Scope:

In this report I shared my real life experience. General banking division & credit department are
most important part for any bank. Here I will show you what types of worked I din in GB (General
banking division) & credit department. My report is based on credit risk management of MBL, so I
will covers the background and functions mostly on credit risk management system of the Mercantile
Bank Limited.

F) Limitations:
There were certain limitation had to face in order to prepare this report. Some limitations are
following:

 There was a little scope to work at credit division in the bank for an intern student.
 Limitation of time was one of the important factors that shortened the study.
 MBL does not have rich and wealthy collection of various types of books or journals related
to banking activities.
 Confidentiality of data was another important barrier that was faced during the conduct of
this study. Credit policy is an internal & confidential matter at a bank. Alike all other banking
institutions, MBL is also very conservative and strict in providing financial information.

3
CHAPTER - 2
OVERVIEW OF MERCANTILE
BANK

Background of MBL
Mercantile Bank Limited was incorporated in Bangladesh as a Public Limited Company with limited
liability under the Bank Companies Act, 1991 on May 20, 1999 and commenced commercial
operation on June 02, 1999. The Bank went for public issue of shares on in 2003 and its shares are
4
listed with Dhaka Stock Exchange and Chittagong Stock Exchange. The Bank has 84 branches
spread all over the country. MBL is a highly capitalized new generation Bank with an Authorized
Capital and paid-up Capital of Tk. 8000.00 million and Tk. 4968.90 million respectively. With assets
of TK. 116,655,283,665 and more than 1668 employees, the bank has diversified activities in retail
banking, corporate banking and international trade. There are 30 sponsors involved in creating
Mercantile Bank Limited; the sponsors of the bank have a long heritage of trade, commerce and
industry. They are highly regarded for their entrepreneurial competence. The sponsors happen to be
members of different professional groups among whom are also renowned banking professionals
having vast range of banking knowledge. There are also members who are associated with other
financial institutions insurance Companies, leasing companies etc.

MBL undertakes all types of banking transactions to support the development of trade and commerce
in the country. MBL’s services are also available for the entrepreneurs to set up new ventures and
industrial units. The bank gives special emphasis on Export, Import, Trade Finance, SME Finance,
Retail Credit and Finance to women Entrepreneurs. To provide clientele services in respect of
International Trade it has established wide correspondent banking relationship with local and foreign
banks covering major trade and financial centers at home and abroad. With the passage of time it has
expanded its number of branches and variety of services along with its core business of taking
deposits and granting loans. Rising trend of the bank’s profitability over the last 13 years is also
materialized. The MBL is committed to the delivery of the superior shareholders’ value.

Mission of MBL
“Will become most caring, focused for equitable growth based on diversified deployment of
resources, and nevertheless would remain healthy and gainfully profitable Bank”

Vision of MBL
“Would make finest corporate citizen” MBL dreams to become the “Bank of Choice” of the general
public that includes both the consumer and the corporate clients. It has created a cadre of young
professionals in banking profession which has helped boosting productivity in the bank.

ORGANOGRAM OF MBL

5
Features of Mercantile Bank Limited

There are so many reasons behind the better performance of Mercantile Bank Limited than any other
newly established banks:
 Mercantile Bank Limited has established a core Research & Planning Division comprising
skilled person from the very inception of the bank.

6
  Mercantile Bank Limited provides attractive interest rate than the other financial institutions.
 The bank provides loan to the customers @ lower interest with easy & flexible condition than
the other do.
 Letter of Credit (L/C) commissions and other charges are very lower than the other banks.

The bank will have an Authorized Capital of Tk. 3000 million and Paid-up Capital of Tk. 2158.41
million contributed by sponsors. The bank has 42 branches all over the country. With assets of Tk.
61697.97million and more than 1153 employees, the bank has diversified activities in retail banking,
corporate banking and international trade. The head office of the Bank is retail banking, corporate
banking and international trade. The head office of the Bank is situated at 61, Dilkusha Commercial
Area, Dhaka-1000.
The importance of the mobilization of savings for the economic development of our country can
hardly by over emphasized. The bank considers savings and deposits as lifeblood of the bank. More
the deposit greater is the strength of the Bank. Travelers’ cheque credits cards and other ancillary
services including payment of different bills from one counter will also be introduced to achieve the
ultimate goal of ONE-STOP service to the valued customers.
The Bank would cater to the credit needs of individuals as well as corporate clients. Initially it
emphasized on trade finance, which would be short-term and self-liquidating in nature. Considering
the importance of foreign trade in our national life, financing and handling of Export and Import
business and also handling of foreign remittance business would be given top-most priority.
Mercantile Bank Limited shall play a vital role in extending the consumer credits in line with its
policy of people-oriented banking.

CLASSIFICATION OF BANK PRODUCT

In chart given below we find different products / services generally made available by a bank:
Product

7
 Deposit Advance Inter Mercantile Banking Consultancy Miscellaneous

Time Demand - Tax Consultancy - Self-Custody

- Merchant Banking - Credit Cards
- Project Counseling - Travelers
- Investment Counseling - Cheque
- SaleOf Drafts
- Standing
L/C Foreign - Instructions
Currency

Fund Oriented Non-Fund Oriented

- Term Loans - Guarantees

- Clean Loans - Letter Of Credit
- Bills Discounting
- Pre-Shipment
- Post-Shipment
- Lines Of Credit
- Secured
- Unsecured
- Overdraft

8
MAIN DEPARTMENTS OF MBL (Sheikh Mujib Road Branch)

The main departments of Mercantile Bank, Sheikh Mujib Road Branch are in the below:

MBL

Foreign Advance Accounts Administration &

GB
Exch Establishment

Import

Export

Cash Deposit Remittance (local) & Clearing

Foreign

Financial Products and Services

Mercantile bank has launched a number of financial products and services since its inception. Among
them Monthly Saving Scheme, Monthly Benefit Scheme, Family Maintenance Deposit, Double
Amount Deposit Scheme, Special Saving Scheme, Pension and Family Support Scheme, Consumer
Credit Scheme, Small Loan Scheme and Lease Finance Scheme, Doctor’s Credit Scheme, Rural
Development Scheme have achieved wide acceptance among the people.

♦ Monthly Savings Scheme

The prime objective of this scheme is to encourage people to build up a habit of saving. In this
scheme one can save a fixed amount of money every month and get a lucrative lump sum amount of
money after five, eight and ten years.

9
Table 1: Monthly Savings Scheme
Tk. Tk. Tk. Tk.
Period Tk. 25000
500 1000 5000 10000
5 years 35,097 70,193 3,50,967 7,01,933 17,54,833
8 years 61,829 1,23,657 6,18,286 12,36,571 30,91,428
10 years 82,531 1,65,062 8,25,311 16,50,622 41,26,556

The objectives of monthly saving schemes are:

 Build up habit of savings.
 Attract small savers
 Ensure regular transaction

♦ Double Amount 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. The main objectives of this scheme is to give
maximum benefit and to help meeting specific needs like education, marriage etc

♦ Consumer Credit Scheme

Consumer credit is a relatively new field of security free finance of the Bank. People with limited
amount of income can avail of this facility to buy household goods including car, computer, and
other consumer durables.
 Help fixed-income people for buying house hold durables.
 Assist middle class for buying vehicle.

♦ Pension and Family Support Deposits

Pension and Family Support Deposit has been evolved especially for old age. Under this scheme one
can get lifelong 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.

♦ Small Loan Scheme

This scheme has been evolved especially for small shopkeepers who need credit facility for their
business and cannot provide tangible securities.

10
♦ Lease Finance
This scheme has been designed to assist and encourage the genuine and capable entrepreneurs and
professionals for acquiring capital machineries, medical equipments, computer and other items,
which may help them to be economically self-reliant. Terms and condition of this scheme have been
made easier than ever before in order to help the potential entrepreneurs to acquire equipment of
production and services and repay the liability gradually from earnings on the basis of ‘Pay as you
earn’.

♦ Rural Development Scheme

Rural development Scheme has been evolved for the rural people of the country to make the self-
employed through financing various income generating projects. This scheme is operated through the
rural branch of the Bank.
 Raise the standard of living of rural people.
 Initiative to break the vicious cycle of poverty.
 Enhance the purchasing power of rural people.

♦ 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 the onward with
attractive benefits.

♦ 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.

♦ Women Entrepreneur Development Program

Women entrepreneurs’ development scheme has been developed to encourage women in doing
business. Under this scheme, the bank finances the small and cottage industry projects sponsored by
women.

11
♦ 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 has been introduced to extend credit facilities to cater to the credit needs of low and
middle income group for any purposes. Government and semi-government officials, employees of
autonomous bodies, banks and other financial organizations, multinationals companies, reputed
private organizations and teachers of recognized private schools, colleges and universities are
eligible for the loan facilities.
.

♦ Mercantile Bank Foundation

The bank has set up Mercantile Bank Foundation for extending charitable and beneficial social
services to the society. The bank contributes 1% of operating revenue or BDT 4.00 million,
whichever is higher, to Mercantile Bank Foundation every year. The foundation has been established
with the following objectives:

 Mercantile Bank prize to 8 eminent personalities of the country for the outstanding
contribution in the fields 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 on Bengali language and literature.
 Book purchase and distribution policy to encourage writers and publishers in the country.
 Interest free loan to the unemployed educated people.
 Donation for handicapped artists, literature and distressed people
 Project for the development of shelter-less children.

12
CHAPTER - 3
CREDIT MANAGEMENT OF MBL

13
Loans & Advances:
Mercantile Bank Limited is a new generation Bank. It is committed to provide high quality financial
services/products to contribute to the growth of GDP of the country through stimulating trade &
commerce, accelerating the pace of industrialization, boosting up export, creating employment
opportunity for the educated youth, poverty alleviation, raising standard of living of limited income
group and over all sustainable socio-economic development of the country.
In achieving the aforesaid objectives of a Bank, Credit Management has paramount importance as
the greatest share of total revenue a Bank generates from it. Existence of the bank depends on
prudent management of its credit operation where maximum risk is centered in it and. In most of
cases, the failure of a commercial bank is usually associated with the problem in credit management
as well as the result of reduction in the value of assets. Therefore, credit management has not only
featured domination in the assets structure of the bank but also critically important to the success of
the bank.
The standards of credit relate to safety, liquidity and profitability whereas these dynamic factors are
also related to different aspects such as interest or margin, credit spread nature and extent of risk and
credit dispersal. In the MBL sk mujib Branch’s Credit Department, there are 4 (four) officials are
working continuously with great effort and teamwork and they have quite efficient skills and talent to
perform the jobs in this department. The Bangladesh Bank, Credit Division at Head Office of MBL
and the respective officers of branch in the section control this credit department. The officers
believe in teamwork and extreme hard working. In all business dealings, credit officers are guided by
the principles of honesty, integrity and safe-guard the interest of the depositors and credit customers
of the bank. Credit officers principally perform credit management task by providing loan (credit) to
customers and receiving loan back by charging interest along with installments with obeying rules
and regulations of the Bangladesh Bank and Head Office as well as maintaining the best business
practices in the Bank.

Mercantile Bank Limited provides different types of loan. Those loan products are given bellow:

• Retail Loans

1. Consumer credit scheme: Consumer’s credit scheme is one of the popular areas of collateral free
finance of the bank. People with limited income can avail the credit facility to buy household goods
including computer and other durables. Maximum loan limit is 1 lac.
2. Lease finance: This scheme has been designed to assist and encourage the genuine and capable
entrepreneurs and professionals for acquiring capital machineries, medical equipment, computers,
vehicle and other items.
3. Car loan: Car loan has been introduced to enable bank employees to purchase cars. MBL
maintain some condition in car loan. Such as, a car price is 20 lac. Here bank will provide 15 lac.

14
4. Home loan: To meet the growing need of housing for middle and lower income people, MBL has
introduced home loan scheme. Such loan will be available for purchase or construction of new
apartments for self residing purpose. Bank will take mortgage against home loan.

5. Doctor’s credit scheme: Doctor’s credit scheme is designed to facilitate financing to fresh
medical graduates and established physicians to acquire medical equipments and set up clinics and
hospitals.
6. Any purpose loan (personal loan scheme): Personal loan scheme has been introduced to extend
credit facilities to cater the needs of low and middle income group for any purpose. Maximum loan
limit is 15 lac. Bank will not take any mortgage against this loan.
7. Overseas employment loan scheme: This scheme is designed to facilitate the Bangladeshi youths
seeking employment aboard but who are unable to meet the expenses to reach the workplace from
their own sources. By availing loan under this scheme, the active youths of middle and lower class
can get overseas employment by avoiding borrowing from the mohajon at high cost or selling their
paternal properties.
8. Cottage loan: Women entrepreneurs’ 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.

9. Rural development scheme: This scheme is targeted 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.

• Corporate loans

A) Short term finance: Short-term loans are used to finance inventory, account receivables or other
current assets to finance the working capital requirement. The time period of short term loan is 1
month to 1 year. Forms of short-term loan are given below:
• Cash Credit (CC): Cash credit account is like a current account with a limit up to which
one can withdraw from the bank. Cash credit is normally sanctioned for a period of one year
where a regular limit is sanctioned against goods to meet day to day expenses of business.
• Secured overdraft (SOD): When overdraft is allowed against lien of FDR or other
financial instruments, it is termed as Secured Overdraft (SOD). Secured Overdraft (SOD)
facility to the borrower may be allowed generally in the following ways:
i. Overdraft against guarantee
ii. Overdraft against FDR in the name of borrower
iii. Overdraft against savings certificate
iv. Overdraft against DPS
• Bill discounted and purchased: Mercantile Bank gives advances to customers by
discounting or purchasing their bills of exchange. Such bills of exchange arise out of
commercial transactions both in inland trade and foreign trade.
15
B) Long term finance: Long-term loans are used to finance equipment, real estate and other fixed
assets. The forms of long-term loan are given below:

• Lease financing: Under lease financing we cover equipment/vehicle financing. It is a term

repayable through lease rental in the form of equal monthly installments. Ownership of the
leased out vehicle under the lease agreement covering comprehensive risks belongs to the
Bank.

• Hire purchase: This is also given to procure equipment/vehicle. Ownership of the

equipment/vehicle to be purchased under the hire purchased agreement covering .
comprehensive risks belongs to both the banker and customers. Hire purchase facility is
repayable by depositing equal monthly installments (including principal and interest amount).

• Term loan: This facility is used to meet the expenditure of civil construction and other
infrastructure development. Term Loan facility is repayable by depositing equal monthly
installments.

C) Real Estate finance: This form of credit facilities is allowed to individual’s /groups/ Developers
for construction of building and completion of finishing works to be used for commercial purposes.

D) Import Finance: Importers are given this sort of facility to import different commodity items,
capital machinery and any other permissible items. L/C related shipping document is kept as primary
security. Cash margin and counter guarantee are obtained from the customer to secure its position.
Two types of L/C facility are provided:
 Sight L/C- payment should be made just after receiving the documents
 Deferred L/C-the beneficiary allows the importer time to pay the documents

Loan against trust receipt: Loan against Trust Receipt (LTR) is a funded facility provided to
importer to retire L/C related shipping documents. Advance against a LTR obtained from the
customer is allowed when the documents covering an import shipment are given without payment.
The customer holds the goods or their sale proceeds in trust for the bank until the LTR is fully paid
off. Letter of Trust Receipt is kept as primary security, which creates the banker's lien on the goods.
LTR facility is adjusted from sale proceeds of Imported goods or cash from own sources of the
customer within the validity. Validity of the LTR A/C vary from 30 to 180 days depends on the
nature and amount of items imported or as per Bangladesh Bank guidelines.

E) Export finance: Mercantile Bank always gives priority to its export-oriented customers. Export
finance constitutes an important part of an exporter’s requirement of finance. Exporters require
16
finance at two different stages of their export operation. At each phase, exporter’s need different
types of finance:
 Back To Back L/C: The export letter of credit backs a second letter of credit which is used
to pay a supplier. When the exporter received a export letter of credit from the overseas buyer
for export of goods, but the concerned exporter are not the actual manufacturer/ producer of

the exportable goods. He is required to collect the goods/ raw materials from the actual
producer/ manufacturer. In such a situation the exporter request his bank to open a letter of
credit in favor of the actual producer against the export letter of credit he has obtained. In this
situation bank open a letter of credit in favor of the actual producer of the goods keeping the

export letter of credit as security. Since the letter of credit on the strength of and backed by
the export letter of, the second letter of credit called back to back letter of credit. Bank may
provide pre-shipment credit facilities up to 90% of export order including BTB LC. However

banks are generally not in favor of back-to-back letters of credit as a means of financing
export transactions due to risk they are exposed to.

3.1 Credit Risk

Credit risk is a risk due to uncertainty in counterparty’s ability to meet its obligation. There are many
types of counterparty’s obligations ranging from individuals to sovereign governments.

Risk is inherent in all aspects of commercial operation. However for banks and financial institution,
credit risk is an essential factor that needs to be managed. Credit risk is the possibility that a
borrower counter party will fail to meet its obligations in accordance with agreed terms.

Credit risk, therefore, arises from the banks dealing with or lending to corporate, individuals and
other banks or financial institutions.

3.2 Credit Risk Management

The goal of credit risk management is to maximize a bank’s risk adjusted rate of return by
maintaining credit risk exposure within acceptable parameters. Bank need to manage the credit risk
exposure inherent in the entire portfolio as well as the risk in individual credit or transactions. Bank
should consider the relationship between credit risk and other risk. The effective management of
credit risk is a critical component of a comprehensive approach to risk management and essential to
the long term success of any banking organization. Assessing credit risk an institution must consider
three issues:
17
  Default Probability
 Credit Exposure
 Recovery Rate

3.3 Principal of Credit Risk management

The management of credit risk is essential to a sound credit management process, the basic principles
a bank has to follow in its credit risk management are:

 Background, Character and ability of the borrowers

 Purpose of the facility
 Term of facility
 Safety and Security
 Profitability
 Source of repayment
 Diversity of loan portfolio

3.4 Tools used in Credit Risk Management

The quality of the credit portfolio of banks depends to large extent on the quality of its borrower.
To judge the quality of a borrower the bank s takes into consideration the following:

a) Character: It refers to the willingness of the customers to pay.

b) Capacity: The customer’s ability to meet credit obligations.
c) Capital: The customer’s financial reserves
d) Collateral: Adequate net worth to support for the loan
e) Conditions (economic) recent trends in borrower line of credit
f) Compliance (law & regulations)

3.5 Objectives of risk management:

The objectives of risk management are to identify and analyze risks and manage their consequences.
The banking sector has perhaps the most specific focus on the management of financial risks. The
guiding standard that is a key influence on central bank and banking regulation comes from the
Swiss-based bank for international settlements (BIS).and particularly its BCBS. The update of the
standards, known as Basel 3, introduces a new and more complex method of calculating regulatory
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capital requirements; its implementation requires that the bank adopt enhanced policies and
procedures of risk management in order to generate the necessary data for the calculation.
Risk management is a discipline at the core of every financial institution and encompasses all the
activities that affect its risk profile. it involves identification, measurement, monitoring and
controlling risks to ensure that-
a) The individual who take or manage risks clearly understand it.
b) The organization’s risks exposure is within the limits established by the highest authority of the
institution.
c) Risk taking decisions are explicit and clear.
d) Risk taking decisions are in line with the business strategy and objectives set by the highest
authority of the institution.
e) The expected payoff compensate for the risk taken and
f) Sufficient capital as a buffer is available to take risk.

3.5 Risk management process:

Identification:
This is the first and most important step of risk management process .In order to management risk
the organization must identify line of risks that is exposed. More precisely all material events should
be identified that can hinder the organization to achieve the expected result.

Assessment:
The success of any strategy mainly depends on 2 factors, i. e. effectiveness and timing. Providing the
fact that risk has positive relationship with the size and complexity of banking operations; as such all
risk cannot be managed. Here creates the requirement of prioritization. As far as the risk
management is concerned, such prioritization should be based 2 factors, i. e. frequency and impact.
In order to do that, upon risk identification the organization should develop methods that can assess
the frequency and impact these risks. Assessment process help the bank put more focus on risk the
trends to have significant impact and frequency.

Control:
This is the strategy building and implementation stage for managing risks. The control process
primarily aims to establish and communicate risk limits through standards and procedures that define

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responsibility and authority. As far as risk management process is concerned, organization at this
level is expected to develop the tool that best suited to the organization’s nature and structure.

Monitoring\Reporting:
This step primarily encompasses management information system (MIS), i. e. Monitoring and
reporting the level of risk the bank is exposed to along with assessment of strength or weakness of
implemented risk management tools such information helps the organization to specify the
subsequent direction of risk management.

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 CHAPTER-4

PERFORMANCE ANALYSIS OF
MBL

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4.1 Total loan of Mercantile Bank Limited (Sheikh Mujib Road
Branch) from 2011 to 2015.

(Amount in Core)
Year 2011 2012 2013 2014 2015
Loan 31.19 91.78 18.17 65.26 76.91
Growth 0 66.01% (405.12%) 72.16% 15.15%

Figure 1: Diagram of total loan of Mercantile Bank Limited, Sheikh Mujib Road
Branch for 2011 to 2015.

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Comment: The above diagram, it shows that the performance of this branch is fluctuating year by
year. In 2012 its investment increased in a remarkable way. But in 2013 the investment was not
grown. May be this happened due to the new establishment of the branch. But it is trying to increase
the loan.

4.2 Loan product of Mercantile Bank Ltd. (Sheikh Mujib Road

Branch)

This bank has launched a number of Loan products under different modes of loan which help
meeting demand of all types of customer.

Loan product of the branch Loan (Figure in core) Percentage Position

Cash credit 223,142,017 50% 1st
Car loan Staff 1,769,825 .39% 8th
Employee house building 2,366,714 .53% 6th
Personal loan 2,022,823 .45% 7th
Secured over draft 165,935,145 37.5% 2nd
Term loan 5,760,177 1.29% 4th
Time loan 4,136,540 . .93% 5th
Loan against trust receipt 39,649,661 8.91% 3rd

Total Investment 444,782,902 100%

Figure 2: Pie Chart of loan portfolio of Mercantile Bank Limited, Sheikh Mujib Road
Branch for 2011 to 2015.

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Comment: Total loan in this branch is tk. 444,782,902.The highest Loan position is in Cash credit.
(This is 50% of their total loan)

4.3 Loan income of Mercantile Bank Ltd. (Sheikh Mujib Road Branch,
Chittagong)

(Amount in core)
Year 2011 2012 2013 2014 2015
Income 4.37 12.62 2.63 9.46 11.15
Growth % 0 65.37% (379.85)% 72.19% 15.16%

Figure 3. Loan income of Mercantile Bank Limited, Sheikh Mujib Road Branch for 2011 to
2015.Every year loan icome is increasing. Such as in 2011 loan income was 4.37 in crore, but in
2015 loan income was 15.16 crore.

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Comment: Although this is a new branch, its income is growing day by day.

4.4 Bad loan or default loan of Mercantile Bank Ltd. (Sheikh Mujib
Road Branch)

Year 2011 2012 2013 2014 2015

Bad loan 7.98 8.52 125 146.53 154.24
Growth 0 6.34% 93.18% 14.69% 4.99%

Figure 4: Bad loan or default loan of Mercantile Bank Limited, Sheikh Mujib Road
Branch for 2011 to 2015.

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Comment: Default loan is increasing high in every year. Such as; in 2011 loan was 7.98 lac and in
2015 default loan was 154.24 lac.

4.5 Recovery Rate of Mercantile Bank LTD (SK. Mujib Road Branch).

Year 2011 2012 2013 2014 2015

Recovery 0 0.75 0 4.56 27.28
rate

Figure 5: Recovery rate of Mercantile Bank Limited of Sheikh Mujib Branch for 2011
to 2015.

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Comment: Recovery rate is increasing high in 2015. In 2015 recovery rate was 28. 27%.

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CHAPTER - 5
FINDINGS & RECOMMENDATIONS
AND CONCLUSION

5.1 Findings :

During crafting this report I have gone through different aspects of Credit policies and procedures of
Mercantile Bank Limited. By analyzing, I have identified the following findings as importantly:

• The trend of total loan of this branch was increasing in each year. But the growth rate was not
equal.
• In some modes its loan was very poor, like car loan staff, personal loan, employee house building
etc.

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• Political influence is one of the major problems in Bangladesh. Due to political intervention the
bank becomes obliged to provide loans in most of the cases, which are rarely recovered. Bank has to
face this inconvenience situation almost every year.
• CIB report is not readily available from Bangladesh Bank.
• Loan recovery process is very complex.
• Maximum people of our country have no proper knowledge about the activities of banking, which
hampers a lot in loan of Mercantile bank.
• It has low invest in SME Loan in comparing to the need of the country.

 
5.2 Recommendations:
• It should be given to borrower depending on his credit worthiness, past performance, Loan
relationship with his suppliers and buyers etc.
• It should invest in more diversified sectors and increase loan products.
• It should try to avoid giving loan to the political person who had bad reputation of loan repaying.
• Bangladesh Bank should be more active to provide CIB report.
• It should make easier loan recovery process.
• It should conduct promotional activities to make people aware of banking system and its
importance.
• Modes of loan like, car loan staff, personal loan, and employee house building loan should be
increasing,

5.3 Conclusion:
Mercantile Bank has established credit relationship with many reputed multinational companies,
semi-government organization as its customer group ranges from individuals, organizations and
small businesses covering all sectors of Corporate and Retail businesses. MBL has aim to contribute
in potential sectors like as agriculture, electronics, SME, healthcare etc. by providing not only credit
services but also taking essential steps to expand these sectors through participating actively in
economic development of the country.

Though MBL has been facing a number of problems regarding to credit service, it has been able to
achieve “AA” credit rating in last two consecutive years which indicates a banking entity with high
credit quality, higher safety and have superiority in customer service. In believing, MBL will make a

positive attempt to be more outward looking in their goals and emphasize on the domestic scenario
more closely and analyze any certain trends and strategies of their competitors.

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Reference:

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  Annual Reports of Mercantile Bank Ltd.-2015.
 Official Documents.
 Website of the bank.
 Operational manual.
 Different departmental circulars.

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