Internship report on

Mercantile Bank Limited’s corporate credit policy

Submitted to :

Dr. Mostofa Ali

Professor
Finance department
University of Chittagong

Submitted by :

Reshma Akther
ID : 17306143
Department of Banking & Insurance
University of Chittagong

Date of Submission :
 Letter of Transmittal

Date;

Dr Mostafa Ali

Professor

Finance Department

University of Chittagong

Subject: Submission of internship report

Dear Sir,

I am very glad to submit my internship report on “ Mercantile Bank Limited’s Corporate Credit
Policy” which is an essential requirement for the completion of MBA program. I have completed my
internship program in Mercantile Bank Limited at Agrabad Branch. All the information presented in
this report is done with outmost sincerity and honesty. I have tried my best to make this report
informative and credible.

Apart from the academic knowledge gained, this internship program and preparation of this report
have given me the opportunity to know about the overview of Corporate Loan policy of MBL. I
believe that, the experience I have acquired from this Internship Program will be a valuable asset in
my life.

However, there might be some mistakes due to some limitations. Therefore, I would be obliged if
you would kindly consider my limitations.

Sincerely Yours,

…………………………

Reshma Akther

ID: 17306143
 Acknowledgement
Firstly, I would like to express my sincere gratitude to Almighty, the most merciful for empowering
me to prepare the report within the scheduled time.

Next, I would like to thank my internship supervisor Mostafa Ali ,Professor , Finance Department
Chittagong University for her inspiring guidelines, valuable suggestion, constructive criticism and
constant help throughout the work and in preparation of this report.

My cordial thanks to the management and officials of Mercantile Bank Limited, Agrabad Branch
who have given me the opportunity to work with them and helped a lot by providing the
information and enabling me to prepare this report.
Executive summary
The report on mercantile bank limited’s corporate Credit Policy ," which was Prepared based on the
own experiences working in the credit department at MBL . The variety of services and products
offered by financial institutions is expanding quickly, and banks and other financial institutions are
currently facing intense competition. People take out "credit/loans" from banks because they need
money to support their lifestyles and keep up with modern society. Because of this, in order for
numerous companies to operate and fulfill the needs of the people with a range of goods and
services, they need credit facilities This report focuses on different credit facilities provided to the
Corporate Clients by Mercantile Bank Limited and the procedure of lending .

With the clear mission to provide efficient banking services and to contribute socio-economic
development of the country, Mercantile Bank Ltd emerged as a new commercial bank and
inaugurated its operation on 2nd June, 1999. The bank has 86 branches all over the country up to
2014. 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 major task for a bank is to survive in the competitive environment of credit service by
managing its assets and liabilities in an efficient way. And Mercantile Bank Limited manages the
assets and liabilities effectively. Consequently it is achieving success and prosperity. It operates in a
disciplined and prudent manner with a focus on driving productivity initiatives with delivering
sustainable improvements in business practices. from bank .
 Table of contents :

The Organization :
 Introduction
 Vision
 Product & services of NBL

Job Description :
 Nature of the job
 Aspect of job performance

The Project :
 Summary
 Description of the project
 Objective of the project
 Methodology
 Limitations

Lending guidelines :
 Fundamental of lending
 Analysis of portfolio management
 Industry & business segment focus
 Lending caps
 Discourage business types
 Loan facility parameter

Product & Pricing :

 Lending Sector
 Types of credit facility for corporate clients
 Funded credit facility
 Non funded credit facility
 Revision of rates
 Rules on margin
 Pricing policy
 Credit pricing

Credit risk assessment & grading :

 Credit risk assessment process
 KYC concept
  Credit risk grading

Credit approval authority :

 Credit approval authority
 Rules of sanctioning loan
Organizational Structure & Segregation of duties :
 Organizational structure

Process of workflow :

Loan recovery process :

Graphical presentation & analysis :

Findings :
 The organization

Introduction :
In Bangladesh, Mercantile Bank Limited is regarded as one of the top banks. This is a hybrid of a
commercial bank and development. It was founded to encourage banking operations throughout
the nation. It is dedicated to offering its clients high-quality services through a variety of financial
products and the profitable use of funds. It also hopes to increase the GDP of the nation by funding
trade and commerce, supporting industrialization, encouraging exports, opening up job

Vision :
With the help of this vision, they hope to offer everyone access to these banking services, making
Mercantile Bank Ltd. the first bank that comes to mind when someone asks about banks. Their goal,
like that of any commercial business, is to maximize shareholder value. In addition, they constantly
strive to offer their diverse clientele cutting-edge services. To that end, their strategic goals are as
follows.

 To increase shareholders’ value

 To achieve economic value addition
 To be market leader in product innovation
 To be one of the top three financial institutions in Bangladesh in terms of efficiency
 To be one of the top five financial institutions in Bangladesh in terms of market share
in all significant market segments it serves

Product/ Service Offerings of MBL:

The bank is continuously differentiating itself from other banks through its products and services.
Their service is only for their target customers to fulfill their needs so that their needs and demands
can be met accurately. The bank is proud to have exemplified the true concept as “Bungler Bank”.
Therefore it launched several financial products and services. These are as follows

a. Deposit Products:
 Current Deposit (CD) Accounts
 Savings Bank Deposit (SB) Account
 Fixed Deposit Receipt (FDR)
 Scheme Deposit
 Monthly Saving Scheme (MSS)
 Double benefit deposit scheme (DBDS)
 Family maintenance deposit scheme (FMDS)
 Quarterly benefit deposit scheme (QBDS)
 Special saving scheme (SSS)
 Education planning deposit scheme (EPDS)
  Super benefit deposit scheme (SBDS)

Loan & Advances:

Mercantile Bank Ltd. provides following types of loans to their clients

 Retail Loan:
 Consumer credit scheme
 Lease finance
 Car loan scheme
 Home loan scheme
 Doctors’ credit scheme
 Any purpose loan ( personal loan scheme)
 House furnishing loan
 Overseas employment loan scheme
 Cottage Loan
 Education Loan
 Rural Development scheme

b. Corporate Loan:

 Short Term Finance

 Long Term Finance
 Real Estate Finance
 Import Finance
 Construction Business
 Export Finance
 Structured Finance
 Loan Syndication

c. SME Financing:

 Chaka (Term Loan)

 Samriddhi (Continuous loan)
 Mousumi (Short term seasonal loan)
 Anannya (Women entrepreneur’s loan)

d.Agriculture Loan:

 Nabanno (Polli loan)

 Sakti (Solar energy loan/Bio gas)

MBL Card:
  Debit Card
 Credit card (Local card, international card, Duel currency card)
 MBL pre- paid card (Student card, hajj card, travel card)

f. E-banking Services:

Online Banking

Mobile financial services (My Cash)

g. NRB Banking

h. Locker Services
 Job Description

Nature of the Job:

I started working as an intern at Mercantile Bank Limited. Despite being relatively small in terms of
both size and volume of transactions, this branch conducts all banking operations in a methodical
manner. I was given an assignment in each of the bank's three departments: credit, foreign
exchange, and general banking. I thus had firsthand understanding of how a bank functions as a
whole. Working there made me realize how interconnected the three departments are.

First, I was hired by the bank to work at the Front Desk, which is under the General Banking
Division. Opening all kinds of Deposit Accounts is the responsibility of front desk. Giving clients
their balance statements is one of this division's everyday duties in addition to answering calls. I
was then given a job in the Division of Accounts. The accounts department is in charge of recording
and evaluating every transaction that occurs in the bank. Lists, coupons, and checks detailing every
transaction are received on a daily basis from several departments. After that, the appropriate
accounting officers review and record them appropriately.

My appointment to the Foreign Exchange Department (FED) came later. Three categories can be
used to categorize FED's operations. Import, Export, and Remittance are these. As a result, this
department handles the division's routine tasks, such as opening letters of credit (L/C), back-to-
back L/Cs, and moving money to foreign accounts. These factors make this the bank's busiest
department.

My last job was in the credit department. All loan account kinds fall under this area. Working there
has given me knowledge of the policies and procedures the bank adheres to while issuing,
overseeing, and collecting loans.

Different Aspects of Job Performance :

My experiences and observations from my internship at Mercantile Bank Ltd. are quite significant. I
learned what a genuine workplace is like. As a result, I enjoy discussing many facets of my work
performance.

 I've gained knowledge on how to maintain business relationships and interact with clients
appropriately.
 Learned how to collaborate with coworkers in an office setting, how to treat senior officers
with respect, and how to complete all tasks on time. For an employee,
 understanding the company culture is crucial because it holds great significance. Assuring
appropriate accountability is crucial, and MBL is ideal in that situation. Everyone is carrying
out their duties responsibly, and MBL has a very welcoming work atmosphere. Thus, for me,
it was a wonderful experience.
 gained practical expertise in granting, collecting, and overseeing various loan kinds.
 Additionally, I gained firsthand experience of how well all banking operations operate
overall. In addition, my performance has inspired me to overcome obstacles and use my
skills correctly. I feel more confident now
as a result of this.
 The Project
Mercantile Bank Ltd corporate credit policy

Summary:

Any banking institution's credit policy is based on a mix of established, tried-and-true guidelines
and other dynamic elements that are shaped by the realities of shifting conditions in various
markets.

While the dynamic factors relate to things like the type and degree of risk, interest or margin, credit
spread, and credit disposal, the established norms pertain to the advance's safety, liquidity, and
profitability. Officers and staff members are expected to uphold the values of integrity, honesty, and
protecting the interests of the bank's shareholders and depositors in all business interactions. They
must rigorously abide by the banking laws, rules, and regulations of the Bangladeshi government as
well as any guidelines that the Bangladesh Regarding the policies that the Bangladesh Bank/Head
Office occasionally issues, which have an impact on the Bank's business procedures. However, the
sound judgment and familiarity with the borrower and the market employed by the
executives/officers making lending decisions are the keys to safe, liquid, profitable, and healthy
credit operations. The bank's credit portfolio has been expanding annually at a steady rate.

Under no circumstances did the bank's asset quality ever suffer compromise. Since credit
operations generate the majority of the bank's revenue and the health of its asset portfolio
determines its continued existence, effective management is essential.

The bank currently has a large branch network covering both rural and urban sections of the
nation, and the task force is added to each new branch.

Description of the Project

Objective of the Project

In order to provide a detailed analysis of the credit management process, Mercantile Bank LTD.
published a study titled "Credit Policy for Corporate Clients." The main goal is to thoroughly
examine Mercantile Bank Ltd.'s lending policy for its business clientele.

Particular Goals:

Assess the credit risk management instruments to enhance their efficiency.

To learn more about Mercantile Bank Ltd.'s general credit policy and the actual circumstances
behind their recovery process, including whether or not they actually comply with legal
requirements.
To gain hands-on experience with various credit policies at Mercantile Bank Ltd. To determine the
strengths and weaknesses of the existing credit policy.

Methodology

Data Sources

To finish the report, both primary and secondary data were utilised. The information gathered from
Credit Department workers through many interviews serves as the major source of data. The most
crucial element for accurately supplying information is secondary data. The records and handbook
of Mercantile Bank Ltd.'s credit department serve as the secondary source of information.

Primary Data:

Direct discussions with the appropriate personnel and customers Firsthand observation

Secondary sources of information:

Mercantile Bank credit guidelines

MBL annual report data.

Limitations :

Given that financial data belongs to any business, the officials were unable to disclose all relevant
details about their bank's credit policy. Throughout the internship program, it is not feasible to
focus solely on the project portion because there are other obligations and tasks to complete. Since
I'm new, I don't have any prior experience with this issue, so many useful tips that might differ from
person to person have been written based on my personal observations. It took longer to finish the
project work on this specific topic. As I completed my report in less than a month and a half, I was
unable to give comprehensive information regarding loan facilities for business clients
 Lending Guidelines

Fundamentals of Lending:

The credit officer or relationship manager should take note of the following fundamentals of
lending before choosing a corporate customer and making a proposal for financing:

Analysis of Portfolio Management:

The process of allocating money between investment options in order to optimize returns and
reduce risks is known as portfolio management. Regarding this, the bank's policy is to distribute

business and funds among various industries while taking into account the following: A maximum
of 25% of investable funds should be concentrated in a single industry. The business and thrust
sectors' prospects

Historical growth and performance of the products

Economic trend Make sure to maximize returns while minimizing risks.

Industry and Business Segment Focus

Mercantile Bank Ltd. generally focuses on trade finance, export-import operations, commercial
loans of all kinds, industrial finance, project finance, syndication, structured finance, SME financing,
agricultural and rural financing, and other specialized programs, unless the government restricts
otherwise. The bank places a strong emphasis on diversifying its business portfolio to align with
many factors such as the order of the economic cycle, business trends, product life cycles, supply
and demand gaps, and social and national obligations.

Lending Caps

To prevent excessive concentration in a single industry sector, the bank management sets a cap on
the amount of exposure to that industry. The Board's executive committee approves the annual
sector-wise distribution of credit with growth, taking into account the cyclical element of each
sector's economic growth. Diversification of the credit portfolio is recommended to lower the
danger of reliance on a specific industry for the nation's balanced socioeconomic development. On
a quarterly basis, branches provide the head of the credit risk management division with a report
detailing the trends and outstanding loan portfolio of each sector for submission to the board of
directors for informational guideline. Discouraged Business Types:
The bank will discourage lending to following areas of business

 Military equipment or weapons finance

 Tobacco sector
 Companies listed on CIB black list or known defaulters
 Highly leveraged transactions
 Finance of speculative investments
 Logging, mineral extraction or other activity that is ethically or environmentally sensitive
Counter parties in countries subject to UN sanctions
 Taking an equity stake in borrowers
 Lending to holding companies

Loan Facility Parameters:

The loan facility parameters for the bank have been set as following

1. The bank in general approves or renews short periodic trade finance or working capital
facility for the period of one year from the date of approval, disbursement or last expiry
date.
2. The bank will extend short term loan for up to 12 months and medium term loan for above
one year up to five years period.
3. The bank will extend long term loan for maximum period of ten years including grace
period up to eighteen months ( depending on the nature of the project0 for project finance
but in case of need, in syndication or club financing, the bank may extend the period as per
agreement of the syndicated members.
4. In case of house building loan (commercial), the repayment period will be maximum of five
years for developers.
5. Besides above, the bank will extend credit facilities for special program like SME Financing,
Agriculture / Rural Credit, Women Entrepreneurship development Project, Refinance
Scheme for Solar Energy, Bio Gas and ETP, Green Finance etc to be set by the ban under the
policy guidelines of the specific scheme.
6. The rate of interest, commission, charges, fees etc would be as per the approved circular of
charges as per Bangladesh Bank guidelines and with the approval of competent authority.
7. The interest rate would be charged and to be paid out on quarterly basis except the special
schemes.
8. Repayment of term loan would be fixed preferably on monthly or quarterly basis
9. - customer
relationship subject to minimum requirement of Bangladesh Bank.
10. For import of capital machinery, margin for L/C would be preferably 5%- 30% or on the
basis of banker- customer relationship subject to minimum requirement of Bangladesh
Bank.
11. Security accepted against credit facilities will properly be valued and will be effective in
accordance with laws of the country. An appropriate margin of security will be taken to
reflect such factors as the disposal costs or potential price changes of the underlying assets.
12. Accepted securities are cash / cash equivalent like FDR, balance on CD ( Current Account),
STD account etc, land and building (in the form of registered mortgage with registered
IGPA), ownership of plant, machinery, stock of goods, assignments of bills / receivables,
 book debts, pledge of shares, guarantee / corporate guarantee etc.

Product and pricing

Lending Sectors: Loans and advances have primarily been divided into three major groups. Those
are as following

a) Term loan: these are the loans having fixed repayment schedules. The term loans may be
as follows

 Short term: up to and including twelve months

 Medium term: more than twelve months up to and including sixty months
 Long term: more than sixty months

b) Continuous loan: These are the credit facilities having no fixed repayment schedule, but
have a limit and an expiry date at which it is renewable based on satisfactory
performance of the customer.

c) Demand loan: These are the loans that become repayable on demand by the bank and on
fixed installment or repayment schedule are laid down. By any chance other liabilities are
turned to loans under forced circumstances (without any prior approval as regular loan)
those are treated as demand loan.

Loans are accommodated under the seven prime sectors which are as under

I. Agriculture:
Credit facilities to the customers of doing agro business fall under this category. It is
divided into major sub sectors
a) Loans to primary producers: This subsector of agricultural finance deals with lending
options available to businesses that raise livestock, fish, cultivate, or engage in forestry.
Agricultural loans do not include loans to traders or processors of agricultural products.
Loans to tea gardens for export are categorised as "Export Credit," but loans for producing
purposes are classified as agricultural loans. Industrial term lending also includes medium-
and long-term loans to tea gardens.
b) Loans to input dealers / distributers: It speaks about the funding that distributors and
dealers of inputs in the agriculture industry are permitted to have.
The agriculture sector may receive continuous credit lines in addition to short-, medium-,
and long-term loans. It could be classified as a product under a term loan, hire-purchase,
lease finance, cash credit, overdraft, etc. Regarding loans and advances to agriculture, each
bank department has its own set of policies.
II. Term loan to Large Scale Industry: This category of loans include the medium and
long term financing for establishment of project,
capital formation of new industries or for BMRE of the existing units who are engaged in
manufacturing of goods and services.
 III. Term loan to Small and Medium Industries: There are separate policy regarding
term loan to small and cottage industries which are prepared
by the respective division of the bank
IV. Working Capitals: Loans of any size—big, medium, or small—that are authorised to a
business entity to satisfy its working capital needs come under this category. Typically,
these consist of short-term periodic loans like OD/Time Loans, SOD (Gen), and Cash
Credit (Hypo).
V. Export Credit: All items that come under this category or that are approved for export
under a letter of credit are made possible by credit facilities. Under the headings
Packing Credit (PC), Foreign Documentary Bill Purchase (F), FDBP (L), etc., it is covered.
VI. Commercial Lending: This group includes short-term loans and ongoing credits that
are permitted for uses other than exports in the commercial sector. It covers finance for
imports for local trade, the establishment of services, etc. This does not include long-
term or medium-term loans. For business reasons, this type of advance is permitted in
the form of Loan against Trust Received (LTR), Secured Overdraft (SOD), Cash Credit
(Hypo), etc.
VII. Finance to Non-Banking Financial Institution: This group includes loans and
advances made in favour of leasing firms other than House Building Finance firms.
NBFIs are typically permitted to use working capital, term loans, etc.
VIII. Others: The category "Others" is used to classify any debt that does not fit into one of
the previously mentioned categories. This covers loans for the purchase of
transportation equipment, the completion of housing-related building projects, the
execution of work/supply orders, and loans under various loan plan, advance made in
response to financial obligations, etc.

Types of Credit Facilities for Corporate Clients: Depending on the various nature of financing all
the credit facilities are divided into two major groups. One is Funded Credit and another one is Non-
funded Credit
 Funded Credit Facilities: Funded credit facilities are any kind of credit arrangement that requires
the borrower to directly withdraw funds from the bank. The financed credit facilities that
Mercantile Bank Ltd. offers are as follows.

Cash Credit (Hypothecation): This is a continuous credit limit that can be used for trading,
manufacturing, assembly, and other value-adding units. It can also be used to acquire and keep up
stock of finished goods (FG), work-in-process (WIP), and raw materials (RM) for manufacturing,
assembly, and other value-adding units.

Feature:

 This is a continuous loan

 It is possible to draw and adjust continuously.
 The limit's validity might be as short as a year.
 It is regularly modified by crediting the account with the revenues from sales. Four times
the credit limit is the desired annual credit turnover for the account.
 Traded inventory is kept under lock and key by the customer.
 Pricing mode: Interest
 Hypothecation of stock in trade, or stock of RM, WIP, and FG, is the primary security.

Secured Over Draft (General) or Over Draft:

This ongoing credit limit is permitted for a variety of business uses, particularly service-oriented
businesses that don't keep inventory on hand or need to fulfil working capital requirements.

Moreover, the tool permitted the payment of duties, taxes, and VAT against import businesses.

Features:

 This is a continuous loan

 Continuous drawing and adjustment is possible
 Validity of the limit may be one year or less
 Pricing mode: Interest
 Primary security may not be available but in case of SOD (Gen) or OD against other
bank’s deposit, lien on underlying deposit

Time loan: This is a very specific purpose of short time. The facility is allowed to favoring the
customer usually for the following reasons:

 To meet emergency/ seasonal fund requirement in the business

 The facility is allowed in some forced circumstances such as encashment of bank
guarantee, against letter of credit and other commitment of the bank where customer fails
to pay
 This loan is also allowed as a post import facility against sight L/C (local)

Features:

 It is a short term demand loan. Maximum validity can be 180 days

 It is a single time disbursement loan with specific purpose and validity.
 Pricing mode: Interest
 Primary security is hypothecation of stock in trade, work in process, finished goods

LTR: “Loan against Trust Receipt” is what LTR stands for. Retirement of shipping papers is
permitted under this arrangement, allowing the importer to release the items imported on a letter
of credit by adjusting the liability for Payment against papers (PAD).

Features:

 This is also a demand loan

 Usually LTR amount is less than or equals the PAD liability
 Importer possesses the imported goods
 Usually has the tenure of 30, 60, 90, 120 or 180 days but subject to Bangladesh Bank
guidelines
 Drawing is allowed once only, no further drawing is allowed. Borrower has option to
adjust the loan within the period of LTR
 Pricing mode is Interest rate
 Primary security is hypothecation of imported goods
Rules on margin :

Credit Pricing :
Rate of interest, commission and charges etc are the price of the credit. As a general approach, pricing is
determined covering the cost of fund (CoF). The other major parameters that are taken into account for
pricing are level of risk, borrower’s credit rating, performance of the customer, period of loan and type of
security offered, national priority etc. The good borrower are usually offered low price against credit.

Revision of rates :
The management of the bank continuously monitors interest rate situation in the market and discuss the
same in the Asset Liability Management Committee (ALCO) meeting at least once in a month. As per
decision of the ALCO, the management of the bank obtains approval of the Board of Directors to revise rate
of interest, commission, charges etc. Schedule of interest, commission and charges are shown in the
following table
 Credit Risk Assessment, Credit Risk Grading

6.1. Credit Risk Assessment process of MBL:

For all credit proposals, a comprehensive credit and risk evaluation must be done. This is the
reason Mercantile Bank Ltd. does a proper credit risk assessment. As a result, the evaluation
findings are submitted in the authorized credit appraisal form that was created by this bank's
branches and zonal office and sent, together with a suggestion, to the corporate banking division.
Next, in order to approve a new credit facility or extend an existing one, the Relationship Managers
(RM) of the Corporate Banking Division evaluate potential new borrowers, current borrowers for
credit line enhancements or renewals, principals, and guarantors. That division sends it along with
their appropriate recommendation to the Credit Risk Management (CRM) Division following a
thorough investigation. The proposal is sent to the Credit Committee by CRM Division following
suggestion. In accordance with the credit committee's decision, the CRM Division submits the credit
proposal in accordance with standard format, together with any relevant observations and
recommendations, to management for approval before presenting it to the board for approval.
Credit Appraisal summarizes the results of Credit Officers/ RMs risks assessment and includes the
following details :

 Amount and type of loan(s) proposed

 Purpose of loan(s)
 Results


arrangements

KYC Concept:

In order to verify that new borrowers, principals, and guarantors are who they claim to be, credit
officers and risk managers (RM) must know their customers and perform due diligence on them
(KYC). Opening CD, SND, and SB accounts would be the initial step in establishing the banker-
customer relationship.

At the time of account opening, the following documents must be obtained: a proper introduction, a
photo of the account holders or signatories, a passport or national ID, a trade license, a
memorandum, the company's articles, a certificate of incorporation, a certificate of commencement
of business, a list of directors, board resolution papers in accordance with the bank's policy, and
any necessary paperwork pertaining to regulations. Details on the type of business, amount of
business, business pattern, etc. are determined. Any suspicious transaction must be promptly
investigated, brought to the attention of Bangladesh Bank or the head office as needed, and
necessary action taken in accordance with Bangladesh Bank's and the director of bank
management's periodic recommendations.

Credit Risk Grading:

The underlying credit-risk for a particular exposure is reflected in the credit risk grading (CRG),
which is a collective definition based on the pre-established scale. This rating serves as the main
summary indicator of the risks connected to a credit exposure and is represented by a number,
letter, or symbol. The foundational module for creating a credit risk management system is called
CRG.

The suggested Credit Risk Grade matrix, which takes into account an obligor's overall score, is
shown below.
Credit Approval Authority :

Decentralization of authority is something that Mercantile Bank Ltd. supports. To ensure the
delegated authority exerted by the executives may be evaluated realistically and qualitatively, the
bank has devised a mechanism to ensure that the system of delegation of powers is implemented
properly and that the intended benefits are realized for the bank. In order to provide the Board of
Directors with timely and organized input regarding the effectiveness and efficiency with which the
executives are using their assigned power, the bank has created a Management Information System
(MIS). When it comes to investing bank funds, the underlying idea is ‘Safety first, Business next’.

Credit Approval Authority is delegated to the following body/ Executive

i. The Board of Directors

ii. The Executive Committee of the Board
iii. Different tier of the management

General Principles for Credit Approval Authorities:

Authorized officials adhere to several guidelines when executing their powers, such as credit
limitations, CIB clearance, CRG restrictions, margin restrictions, and periodically enforced
repayment period stipulations. The general guidelines for credit approval agencies are as follows:

 The corporate/relationship management function no longer includes the credit approval

function.
 If the delegation of business power needs to function better, the Managing Director will
have the authority, in accordance with Bangladesh Bank's judicial guidelines, to designate
any executives who have that authority for credit approval of all cases from higher
authority to lower authority within the approved structure.
 Any cap that the executives approve should be within their authorized authority, as advised
by the CEO and Managing Director. It is not permissible to combine or pool the executives'
delegation abilities.
 Regardless of the size, any credit proposal that does not adhere to lending criteria should be
included in the applications, and a reason for permission must be sent to Head Office for
approval by the appropriate authority.
 All lending authority branches are required to report to the CEO, Managing Director, and
Heads of Internal Control and CRM.
 The maximum authority against each client is outlined in the delegation of business power
schedule. A client is defined as an individual, a properly registered proprietorship or
partnership firm, a duly registered private limited company, a duly registered public limited
company, a joint venture, a duly registered cooperative society, a trustee board overseeing
privately run health or education facilities, and a duly registered microfinance institution.
 The current limit and the planned amount of limit are combined to determine each
customer's sanctioning power against various credit facility kinds; the total amount of a
given facility cannot exceed the sanctioning authority granted to that particular type.
 Without head office clearance, a customer should not be granted credit facilities of a
different kind or type from those offered by branches. Nonetheless, L/C facilities that have
the potential to be liquidated, including LTR, HP, and Lease Finance, may be permitted in
corporate delegation.
 Without the approval of Head Office, a party shall not be granted credit facilities under
different names or from separate branches. A party can be any individual, business,
organization, or concern, as well as any of its sibling concerns.
 Customers for whom Head Office has already set a limit or rejected proposals will not be
accommodated by Head Office using any business power. The aforementioned credit facility
will be extended, nevertheless, if it is still within the updated business power or if the
concerned authority's business power has grown as a result of a change in position or title.
 The Board of Directors or the Executive Committee will exercise authority that is not
specifically assigned to them.
 Without any security, no clean advance can be approved (primary, collateral, guarantee).
Clean advances that require approval for any reason are presented to the Board or the
Board Executive Committee for review.
 The client to whom credit is extended must, to the greatest extent feasible, be located inside
the branch's operational zone, or the branch's command region.
 The sanctioning authority is prohibited from participating in the process of approving a
loan to any of their close relatives or to any business in which they have a financial stake.
These cases are forwarded to Head Office for review.
 According to the Bank Companies Act of 1991, no loan or advance is authorized to any bank
director, partner, proprietor, or family member who has a stake in the firm or corporation.
 Both the head office and the branch have a credit committee. In the event that the
committee and the relevant Executive cannot agree on anything, the Managing Director will
handle the subject in the best interests of the bank.
  The executive or officer to whom the above-mentioned regulations comprising the schedule
of powers have been issued always holds custody of them and they are considered as
completely confidential.

Rules of Sanctioning Loans:

The following is how sanction orders are sent under duplicate signature from Head Office to the
branches and from the branches to the parties:

 Executives not less than the rank of Assistant Vice President approve the restrictions at the
Head Office level.
 Executives or Branch-in-Charge approve the limits at the branch level.
 Prescribed limit of business powers cannot be exceeded under any circumstances.
 Valuation of goods, products, hypothecated to the bank to secure any advance cannot be
exceeded as well.
 Goods and produces against which advances are made should be readily marketable
 Loans & Advances allowed against FDRs/ Cash Collateral’s, PSPs etc are adjusted
immediately before the face value of the instruments and outstanding advance amount
becomes equal or on maturity whichever is earlier
 Money suit or court cases against any defaulting borrower are to be filed by the branches
after obtaining prior approval from Head Office.
 Branches maintain bank’s printed “Confidential Limits, Register” which will record serially
all the limits sanctioned.

Organization Structure and Segregation of Duties

Organization Structure :

To facilitate the adoption of policies, the proper organizational structure needs to be in place. The
division of the marketing and relationship management functions from the administrative, risk
management, and approval functions is a crucial component.

The CRM function houses the central credit approval mechanism. According to their delegation of
business authorities authorized by the Board of Directors, the Managing Director, CEO, Additional
Managing Director, Deputy Managing Director, Head of Credit at Head Office, and Head of Branches
approve credit applications.

Management Structure for credit marketing, approval, disbursement and monitoring at

Head Office level.
Management structure for credit marketing, approval, disbursement and monitoring at
Branch Level:
 Process of Workflow

The consumer submits a credit application, and the bank issues a formal sanction letter at the
conclusion of the credit approval process. A few fundamental rules must govern the bank's credit
approval procedure. They are listed below.

Proposal Origination:

The Relationship Manager of the branch, the Relationship Officer of the Corporate Banking Division
of Head Office, or the Relationship Office of the Credit Marketing Team must originate any credit
proposal and Pre-sanction Inspection Report, Call Report, or Visit Report.

Identification Number:

We would assign a unique identification number to each borrower. This number is assigned by the
branch initiating the credit proposal once it has obtained the facility's sanction letter from the
appropriate authorities, which is generated by the bank's IT system.

Time frame for Decision:

 At Branch Level :

Branch authorities, in accordance with their business delegation, are obligated to make a decision
within a maximum of 5–10 days following due diligence and the acquisition of all necessary
paperwork, including the customer's CIB report. After obtaining the entire proposal from the
customer, proposals outside of their business delegation are delivered to head office within seven
days. All proposals require paperwork, including the customer's CIB report.

 At Head Office Level:

A. Corporate Banking Division (CRB): This division takes decision for recommendation or
refusal within maximum of seven days
 B. CRM Division:
 Should the suggested facilities fall under the authorized delegation of managerial authority,
they will be disposed of seven to ten days following receipt of the proposal from the
Corporate Banking Division.
 If the planned facilities exceed the management's authorized delegation of business power,
disposal will take place between 14 and 21 days from now. The loan period for the project
will be between fourteen and thirty days. The duration of the loans under club financing or
syndication will be between thirty and sixty days.

The Head Office Credit Committee, Executive Committee of the Board of Directors takes decision
within maximum of

- Seven to ten days for simple type of facility

- Fifteen to thirty days for Project Loan

- Thirty to sixty days for loans under Syndication or Club Finance etc

 Sanction letter is issued within one to two days time from the date of receipt of formal
se of large loan, it must be reported to Bangladesh Bank.

Renewals and Status Verification:

If the time of revolving facility expires then borrower comes forward with a proposal along with
necessary paper and documents for renewal of their existing facility for a desired period. Even
borrower may offer additional stocks or security for that. In such case, the Head of Branch examines
all such proposals and if they are satisfied, the proposals are sent to sanctioning authority at Zonal
Office or Head Office. The Head Office processes the renewal proposal after verifying the following
factors

 Justification for renewal/ enhancement

 Reasons for non- payment or adjustment of the loan in time
 Security aspect in terms of outstanding loan
 Credit worthiness of the client

Revision of Credit Decision:

Any credit proposal that a management executive declines is referred to the next higher authority
for reconsideration or review of the decision. But the Managing Director shall be the final arbiter of
any appeal.

Compliance to Regulation:
Any credit approval or sanction is the subject to the banking regulation in force or must be imposed
by the regulatory body from time to time and to the changes in the bank’s policy. This is specifically
mentioned in the sanction letter issued to the customer.

Disbursement/ Drawdown:

Security documents are created in compliance with approved terms and are enforceable in court by
a qualified attorney or enlisted party. Legal counsel drafts the conventional loan facility documents.

Payments under loan facilities are made once Bangladesh Bank provides a clean CIB report and all
loan and security documentation is in order. The relevant portion of the Banking Companies Act
and Bangladesh Bank circulars serve as the guidelines for all requirements linked to large loans. All
conditions for credit approval must be met. Both the Head of Branch and the Credit In-Charge have
signed the checklist. To comply with the updated policy, the disbursement authority will be vested
in the manner described below.

Custodian Duties:

 Documents related to loans and security are kept at the appropriate Branch, Zonal Office, or
Head Office.
 The security that has been pledged or hypothecated is kept under appropriate insurance
coverage.
 Strict control is applied to the keeping of security papers, ideally in secured, fireproof
storage under shared supervision.
 A safe in, safe out registration is kept up to date to monitor their movements.

Loan Recovery process of Mercantile Bank LTD.

Credit Monitoring Policy:

The credit monitoring process begins as soon as the facility is disbursed. The following are the steps
in the process of monitoring:

Step-1: The loan's repayment is initiated by the client. The branch relationship officer begins on-
site loan monitoring at the same time. He or she writes an Early Alert Report and submits it to the
Monitoring, Recovery and Compliance Division, Head Office, if they discover any discrepancies with
the terms and conditions of the sanction or the financial stability of the borrower.
Step-2: The Monitoring, Recovery & Compliance Division concurrently keeps an off-site eye on the
loan and reports back to the Credit Risk Management Division with its findings. It can suggest
updating the risk assessment of the client. In the end, the Credit Risk Management Division made
the decision about the customer and instructed the Corporate Banking Division to take the
appropriate action.

Step-3 : In accordance with the Credit Risk Management Division's decision, the relationship officer
notifies the client on a regular basis about irregular payments and any contract violations via mail,
phone contact, or in-person visit.

Classification of Loans & Provisioning system:

To fortify credit control and enhance the bank's ability to collect loans and advances, Bangladesh
Bank implemented a loan classification system, which MBL fully abides with. Under this
arrangement, the bank will make provisions against possible loan loss if it suspends any interest
that is due. Bangladesh Bank standards are followed by the bank for loan classification and
provisioning system.

Non-Performing Loan (NPL) monitoring:

The account manager of the Monitoring Recovery & Compliance Division (MRCD) will create a
Classified Loan examine (CLR) every quarter to update the status of the action or recovery plan,
examine and evaluate the adequacy of provisions, and adjust the bank's strategy if necessary. Up to
15% of the bank's capital, the Chief Risk Officer (CRO) Head must authorize the CLR for non-
performing loans. Any amount above fifteen percent of the bank's capital will need the MD's
permission. The MD/CEO shall approve the CLRs for NPLs that represent more than 25% of capital,
and a copy should be provided to the board of directors.

NPL Provisioning and Write-off:

Mercantile Bank Ltd. complies with all Bangladesh Bank regulations on CIB reporting, provisioning,
write-off, and suspension of interest on bad and dubious debts. These specifications are the very
minimum; MBL upholds higher standards and adheres to a rigorous write-off policy. Provision
would be raised against the actual and predicted losses at the time they are estimated, regardless of
how long a loan is past due. Only the Board of Directors may approve the taking of provisions,
write-offs, or release of provisions, subject to an MRCD recommendation. Recommendations for
provisions, write-offs, or releases are made using the Request for Action (RFA) or CLR reporting
format.

Maintenance of Provision:

Mercantile Bank Ltd. maintains provision at the following rates in respect of classified Continuous,
Demand and Fixed Term Loans:

Sub-standard : 20%

Doubtful : 50%
Bad/Loss : 100%

Recoveries and Follow up of Non-performing Loans & Advances:

Any kind of loan or advance that the bank extends to its customers must be repaid, either on
demand, at the end of a predetermined length of time, or in accordance with the repayment plan
that was decided upon when the facilities were issued. If the loan is paid back in installments, the
borrower may have just overlooked something, but in other situations, the default may be
considerably more significant and provide the bank with the first indication that the borrower is
having financial difficulties. This is when the process for handling possible loan losses starts to
work. Because of this, the Head of Branch maintains a careful and continuous eye on all of their
advances and loans to make sure that prompt action is taken in each instance for account
adjustments or renewals, should the facility be continued. Each branch keeps a defined format diary
or card for this purpose, where the due date of the credit facility's expiration is noted. When the
deadline for repayment passes, the borrower receives formal notification demanding repayment or
the extension of the current facility, along with a reminder of the deadline. After that, the borrower
is subjected to stringent follow-up measures, including frequent reminders and personal calls.
Stated differently, every conceivable measure is implemented to retrieve the advance at its
expiration. To enable monitoring and additional follow-up, the borrower will be degraded to special
mention (Grade 5) if, despite strong persuasion, they fail to adjust the liability by the facility's
expiration date. Nonetheless, the branches never stop trying to get the advance back through the
judicial system, if needed. Head Office clearance is sought prior to filing a lawsuit against defaulting
borrowers.

Bad Debts Management:

Real condition of Bad debts of Mercantile Bank Ltd for last five years is shown below through a
graph here.
 BDT in Million
4500 4187
3858
4000
3500
3000
2500
2000 1829

1500
1000 847
591
500
0
2023 2022 2021 2020 2019

The aforementioned graph shows that MBL's bad debt load has climbed significantly virtually
annually. The quantity of bad debts peaked in 2020, but the following year saw a more than three-
fold increase, and the upward trend persisted. This could happen as a result of adjustments made to
the bank's internal or external audit processes, which could alter how the bad and loss account of
MBL is calculated. Political and social pressure to offer loans to clients could be another factor. The
bank authorities may have known that some of their clients would default on their loans before
approving them, yet they were compelled to give them anyhow. The quantity of bad debts has
significantly increased as a result. This suggests that there are issues with Mercantile Bank Ltd.'s
loan collection and credit approval processes. As a result, their bad debt management includes
shortcomings that need to be fixed right now.

Legal Action :

A legal proceeding takes a lot of time and is very long. Additionally, there's a chance for bad press,
therefore Mercantile Bank Ltd. needs to work to resolve defaulters' outstanding debt outside of
court. In the event that the bank must pursue legal action to recoup overdue loans and advances,
Head Office must first provide its approval. The Artha Rin Adalat (Amendment) Act 2003 was
already

passed by the government to expedite the procedure. Therefore, it is imperative that legal
proceedings be handled appropriately and promptly by the head of the branch and the MRCD at
Head Office.

Graphical Presentation and Analysis

Loans & Advances: The following graph will give an idea about the changes in amount in Loans &
Advance of Mercantile Bank Ltd in last five years.
 BDT in Million
350,000

300,000 285,918 284,470

266,767
248,984
250,000 236,890

200,000

150,000

100,000

50,000

-
2023 2022 2021 2020 2019

The graph indicates that, out of the previous five years, 2023 had the greatest total loans and
advances. By the end of 2023, it was around BDT 285,918 million as opposed to BDT 284,470
million. The bank had a notable increase in loans and advances in spite of adverse circumstances.
The reason for this is because the bank expanded its lending in a number of significant areas,
including trade and commerce, the apparel and steel sectors, plastic and related materials,
transportation, and pharmaceuticals. Additionally, through its SME Division, the bank expanded its
loan facilities to Small and Medium Enterprises (SME), continuing to support them. (See Appendix)

Findings and Recommendation

Findings :

I have reviewed many facets of Mercantile Bank Limited's credit policies and procedures while
composing this report. After analysis, I've determined that the following results are crucial.

 Political and Social Pressure on granting loans: The bank frequently comes under pressure
from various social and political figures to consider lending money to the applicant they
have suggested. Even so, there are situations in which the application may not meet the
requirements; for instance, the applicant may present collateral security that is
undervalued or does not match the requested loan amount, or the credit officer may be able
to predict the likelihood that the loan will default. Despite this, they continue to lend money
to this consumer due to persistent pressure from the relevant political figure, occasionally
even the bank director.
  Fund Diversion by the Borrower: Occasionally, a bank will lend money to a customer for
business purposes, which the customer may later spend for personal purposes. In these
situations, the bank has trouble receiving regular installments from that specific client
within the allotted time. The clients breach the terms of the credit policy by using the loan
money for other reasons. If the consumer doesn't pay the installment within the allotted
time, the bank will ultimately struggle to receive periodic payback.

Recommendation: For effective Credit policy for Corporate Clients there are some
recommendations which are as follows

 By using advanced measures in the mode of disbursement, charge documents, and approval
process, bottlenecks or barriers should be eliminated.
 Corporate Assigning Branch-level authority to sanction and approve loans and advances can
be expanded. That is to say, in order to shorten the time and simplify the loan sanctioning
process, the centralization of credit approval policy should be decentralized.
 To increase the expansion of corporate loans, the Bank should host more seminars,
workshops, and conferences abroad. It implies that in order to draw in more corporate
clients, they had to step up their advertising efforts.
 In order to ensure that every investment yields the intended results, the bank should give
far more thought to and revision to the industries in which it makes investments.
Additionally, you should work to resist the impulse to lend money to certain customers.
 The bank should create industry-specific integrated Credit Risk Grading systems. in order
for risk to be quantified for various business industries.
 The most important element in the skill development of risk managers is training. It is
recommended that Mercantile Bank Ltd. implement a consistent training and development
initiative to equip risk managers with comprehensive knowledge of risk issues and
assessment methodologies.
 Working as a team enables a bank to achieve its objectives precisely and methodically. Thus,
it is imperative that there be tight coordination between the relevant departments and
divisions.
 Every sponsored and unfunded credit institution should get insurance coverage right now.
so that the bank and the borrower can protect themselves from financial losses in the event
of unpredictability and damage such as fire, strike, riot, etc.