C-6 Credit and Advance

Chapter: Six Credit And Advance Department

Credit and Advance Department:

Mercantile Bank Ltd. is committed to provide high quality services to its

constituents through different financial products and profitable utilization of fund

and contribute to the growth of GDP of the country by financing trade and

commerce, helping industrialization, boosting export, creating employment

opportunities for the educated youth and encouraging micro-credit leading to

poverty alleviation and improving the quality of life of the people and thereby

contributing to the overall socio-economic development of the country.

Banks are the financial institution that collect fund from the surplus in the

form of deposit and deploy it to the creditor in the form of credit in order

to earn profit.

Bank Provide fund to the customers because of the following core reasons:

To earn interest from the borrowers.

To accelerate economic development by providing different

industrial as well as agricultural advances.

To serve the nation by creating employment and employment

opportunity.

Basic Principals followed by

Mercantile Bank

a) The bank shall provide suitable credit services and products for the markets in which it operates.

b) Loans and advances shall normally be financed from customers deposit and

not out of temporary funds or borrowing from other Banks. That’s why bank

officers are cautious about the repayment of the Loan and advances.

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LOANS AND ADVANCES Department:

6.1 Lending guidelines followed by

Mercantile Bank Ltd:


c) Credit facility are allowed in a manner which does not compromise with Banks

standards of excellence

d) All Credit extension must comply with the requirements of Bank’s Memorandum and Articles of Association, Banking Companies Act 1991 as amended from time to time / Bangladesh Bank’s instructions and other applicable rules and regulations.

b) e) A prudent banker should always adhere to the following principles of lending funds to his customer: e.g. (1) Background, character and capability of the borrowers, (2) Purpose of the facility, (3) Term of facility, (4) Safety, (5) Security, (6) Profitability, (7) Source of repayment, (8) Diversity

The most important step of lending process is to select the borrower. Due

to the asymmetric information and moral hazard, banks have to suffer a

lot due to the classified loans and advances, which weakens the financial

soundness of the Bank. If the selection of borrower is correct, is of good

character, have capital and capacity or of reliability, and is resourceful and

responsible; the bank can easily get the return from the lending. It makes

monitoring more easier. From this point of view, MBL follows the following

procedures:

A. Studying past track record: After getting an application for a

loan, an MBL Official studies the past track record of the

applicant. Generally the study includes:

Table: Procedure of studying the past record of the

applicant

1. Account balances and the past transactions

2. Credit report from other banks.

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6.2 SELECTION OF THE BORROWER:


3. Information of the Industry by studying market feasibility.

4. Financial statements (balance sheet, cash flow statement, and income

statement). If the borrower is a sole-proprietor, then the single entry

accounting treatment is converted to double entry system.

5. Report from Credit Information Bureau of Bangladesh Bank if the

amount is more that Tk. 10 lac.

B. Borrower analysis: Borrower analysis is done from the angle of 3-

C’s (character, capital, capacity) or 3-R’s (reliability, resourcefulness,

responsibility). It follows that the bank forms a rational judgment about

the integrity of the borrower, which should be undoubted. The human

skill, conceptual skill, operational skill is qualitatively analyzed.

C. Business analysis: Business analysis is done from two angles-terms

and conditions and collateral securities.

6.3.1 Credit Risk Grading Scale:

Credit risk grading is an important tool for credit risk management as it

helps the Banks & financial institutions to understand various dimensions

of risk involved in different credit transactions. The aggregation of such

grading across the borrowers, activities and the lines of business can

provide better assessment of the quality of credit portfolio of a bank or a

branch. The credit risk grading system is vital to take decisions both at the

pre-sanction stage as well as post-sanction stage.

6.3.1.1 FUNCTIONS OF CREDIT RISK GRADING

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6.3 CREDIT RISK ANALYSIS:


Well-managed credit risk grading systems promote bank safety and

soundness by facilitating informed decision-making. Grading systems

measure credit risk and differentiate individual credits and groups of

credits by the risk they pose. This allows bank management and

examiners to monitor changes and trends in risk levels. The process also

allows bank management to manage risk to optimize returns.

6.3.1.2 USE OF CREDIT RISK GRADING

The Credit Risk Grading matrix allows application of uniform

standards to credits to ensure a common standardized approach to

assess the quality of individual obligor, credit portfolio of a unit, line

of business, the branch or the Bank as a whole.

As evident, the CRG outputs would be relevant for individual credit

selection, wherein either a borrower or a particular exposure/facility

is rated. The other decisions would be related to pricing (credit-

spread) and specific features of the credit facility. These would

largely constitute obligor level analysis.

Risk grading would also be relevant for surveillance and monitoring,

internal MIS and assessing the aggregate risk profile of a Bank. It is

also relevant for portfolio level analysis.

In the following page the credit rating grade scale has been

provided.

CREDIT RISK GRADING SCORE SHEETCREDIT RISK GRADING SCORE SHEET

Reference No.:Reference No.: Date: Date: 12-Mar-04Borrower Group Name (if any)

Aggregate Score: 87

Branch: Industry/Sector Risk

Grading: GoodDate of Financials 31-Dec-03

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Completed by Approved by NIAZ HABIB

Number Grading Short Score1 Superior

SUP

Fully cash secured, secured by government

guarantee/international bank guarantee

2 Good GD 85+3 Acceptable ACCPT 75-844 Marginal/Watchlist MG/WL 65-745 Special Mention SM 55-646 Substandard SS 45-547 Doubtful DF 35-448 Bad/Loss BL <35

Criteria Weight Parameter Score

Actual Parameter

Score Obtained

A. Financial Risk 50%

1. Leverage: (15%)

Less than 0.25× 15 0.53 12

Debt Equity Ratio (×) - Times

0.26× to 0.35 x 14

Total Liabilities to Tangible Net worth

0.36× to 0.50 x 13

0.51× to 0.75 x 12 All calculations should be based on

0.76× to 1.25 x 11

annula financial statements of the

1.26× to 2.00 x 10

borrower (audited preferred)

2.01× to 2.50 x 8

2.51× to 2.75 x 7 More than 2.75× 0

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2. Liquidity: (15%)

Greater than 2.74× 15 54.00 15

Current Ratio (×) -Times

2.50× to 2.74 x 14

Current Assets to Current Liabilities

2.00× to 2.49 x 13

1.50× to 1.99 x 12 1.10× to 1.49 x 11 0.90× to 1.09 x 10 0.80× to 0.89 x 8 0.70× to 0.79 x 7 Less than 0.70× 0 3. Profitability: (15%)

Greater than 25% 15 78.00% 15

Operating Profit Margin (%)

20% to 24% 14

(Operating Profit/Sales) X 100

15% to 19% 13

10% to 14% 12 7% to 9% 10 4% to 6% 9 1% to 3% 7 Less than 1% 0 4. Coverage: (5%)

Interest Coverage Ratio (×) - Times

Earning before interest & tax

(EBIT)

More than 2.00× 5 10.00 5

Interest on debt More than 1.51× Less than 2.00×

4

More than 1.25× Less than 1.50×

3

More than 1.00× Less than 1.24×

2

Less than 1.00× 0 Total Score- Financial Risk

50 47

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B. Business/ Industry Risk 18%

1. Size of Business (in BDT crore)

> 60.00 5 75.00 5

30.00 – 59.99 4 The size of the borrower's business

10.00 – 29.99 3

measured by the most recent year's

5.00 - 9.99 2

total sales. Preferably audited numbers.

2.50 - 4.99 1

< 2.50 0 2. Age of Business

> 10 Years 3 10 2

> 5 - 10 Years 2 The number of years the borrower

2 - 5 Years 1

engaged in the primary line of business

< 2 Years 0

3. Business Outlook

Favorable 3 Favorable3

Critical assessments of medium term

Stable 2

prospects of industry, market share

Slightly Uncertain 1

and economic factors.

Cause for Concern 0

4. Industry Growth

Strong (10%+) 3 No Growth (<1%)

0

Good (>5% - 10%) 2 Moderate (1%-5%) 1 No Growth (<1%) 0

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5. Market Competition

Dominant Player 2 Dominant Player

2

Moderately Competitive 1 Highly Competitive 0 6. Entry/Exit Barriers

Difficult 2 Difficult 2

Average 1 Easy 0 Total Score- Business/Industry Risk

18 12

C. Management Risk 12%

1. Experience More than 10 years in the related line of business

5 More than 10 years in the

related line of business

5

Quality of management based on total

5–10 years in the related line of business

3

# of years of experience of the senior

1–5 years in the related line of business

2

Management in the Industry.

No experience 0

2. Second Line/ Succession

Ready Succession 4 Succession within 2-3 years

2

Succession within 1-2 years

3

Succession within 2-3 years

2

Succession in question 0 3. Team Work Very Good 3 Very Good 3 Moderate 2 Poor 1 Regular Conflict 0 Total Score- Management Risk

12 10

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D. Security Risk 10%

1. Security Coverage (Primary)

Fully Pledged facilities/substantially cash covered / Reg. Mortg. for HBL

4 Registered Hypothecation (1st Charge/1st

Pari passu Charge)

3

Registered Hypothecation (1st Charge/1st Pari passu Charge)

3

2nd charge/Inferior charge

2

Simple hypothecation/Negative lien on assets

1

No security 0 2. Collateral Coverage (Property Location)

Registered Mortgage on Municipal corporation/Prime Area property

4 Registered Mortgage on

Pourashava/Semi-Urban area

property

3

Registered Mortgage on Pourashava/Semi-Urban area property

3

Equitable Mortgage or No property but Plant and Machinery as collateral

2

Negative lien on collateral

1

No collateral 0 3. Support (Guarantee)

Personal Guarantee with high net worth or Strong Corporate Guarantee

2 Personal Guarantee with high net worth

or Strong Corporate Guarantee

2

Personal Guarantees or Corporate Guarantee with average financial strength

1

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No support/guarantee 0 Total Score- Security Risk

10 8

E. Relationship Risk 10%

1. Account Conduct

More than 3 years Accounts with faultless record

5 More than 3 years Accounts with faultless

record

5

Less than 3 years Accounts with faultless record

4

Accounts having satisfactory dealings with some late payments.

2

Frequent Past dues & Irregular dealings in account

0

2. Utilization of Limit

More than 60% 2 65.00% 2

(actual/projection)

40% - 60% 1

Less than 40% 0 3. Compliance of Covenants /

Full Compliance 2 Full Compliance 2

Conditions Some Non-Compliance 1 No Compliance 0 4. Personal Deposits

Personal accounts of the key business Sponsors/ Principals are maintained in the bank, with significant deposits

1 Personal accounts of the

key business Sponsors/

Principals are maintained in the bank, with

significant deposits

1

No depository relationship

0

Total Score- Relationship

10 10

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RiskGrand Total - All Risk

100 87

As a general practice Mercantile Bank Limited will definitely concentrate its business in Trade Finance / Export – Import business and all types of Commercial Loan, Industrial / Project Finance / Syndication and structured Finance / SME Financing and other specialized programs except otherwise restricted by the Government or indicated as unethical and banned items.

The Bank will give emphasis to diversify its business portfolio commensurate with economic and business trend, life cycle of the products, demand supply gap, social and national obligation etc. The Bank’s policies for financing in different major sectors are summarized as follows:

SL Sectors Policies1) Textile / Spinning/ Sweater/ Knitting/ Denims &

GarmentsTo expand

2) Cement To maintain3) Construction / Real estate / House building To expand4) Telecommunication To expand5) Communication Selective basis6) Information Technology (IT) Project To expand7) Aro-based Industry To expand8) Hospital / Clinic / School / College / University Selective basis9) Healthcare / Pharmaceuticals / Medicine Selective basis

10) Electrical / Electronic appliance To expand11) Finance to NBFI Selective basis12) Special Program : Consumer Credit Scheme, SME

Financing Scheme, Doctor’s Credit Scheme, Woman Entrepreneurs Development Project, Personal Loan Scheme, Small Loan Scheme, Lease Finance Scheme, Earnest Money Financing Scheme, Car Loan, HBL (General ) / Mortgage Loan, Employees House Building Scheme, ATM, VISA Credit Card, EEF, etc.

To expand

13) Plastic / Packaging Selective basis14) Leather Selective basis15) Steel and Engineering To expand16) Edible oil To expand17) Scrap Vessel Restricted way18) Paper / Pulp / Partex To expand19) Chemicals Restricted way

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6. 4 Industry and Business Segment of

Mercantile Bank Ltd


20) Others Based on merit

The Bank’s policy is to handle the specialized business sectors / segments by setting up separate units in Head Office Credit Division. In view of this, Bank has already set up the following units in Head office Credit Division:

Syndication and Structured Finance Project Finance Garments Sector SME Specialized Schemes such as Consumer Credit Scheme, Doctor’s Credit

Scheme, Woman Entrepreneurs Development Project, Personal Loan Scheme, Small Loan Scheme, Lease Finance Scheme, Earnest Money Financing Scheme, Employees House Building Scheme, Car Loan, HBL (General ) / Mortgage Loan, ATM, VISA Credit Card, EEF, etc.

The Policies for the above specialized segments / sectors have been / to be circulated to all concerns from time to time.

Types of Credit Facilities:

The Bank’s Policy is to introduce diversified / new types of Products / Product derivatives alongwith usual Banking Products. At present the Bank offers the following facilities:

1. Trade Finance:

a) Non-Funded: L/C, Acceptance, Bank Guarantee, etc.

b) Funded: LTR, PAD, IBP, FDBP, IDBP, Time Loan, Loan (General), etc.

2. Project Finance: (Large and Medium Industries / Small Industries including Agro-based Industries):

a) Non Funded: L/C for import of Machinery, Acceptance, Bank Guarantee, etc.

b) Funded: Time loan, Term loan for retirement of documents of imported machinery / Local machinery / other project fixed costs, Hire Purchase, Lease Finance, Loan (General), HBL (Commercial).

3.i) Working Capital (For Industrial Finance):

a) Non Funded: L/C for import of Raw Materials, Acceptance, Bank Guarantee, etc.

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6.5 Credit line of Mercantile Bank Limited:


b) Funded: Overdraft Cash Credit (Hypo), Cash Credit (Pledge), PAD, LTR,

Time Loan, IBP, etc.

3.ii) Working Capital (For Work Order):

a) Non Funded: Letter of Credit, Bank Guarantee, etc.

b) Funded: SOD (work order), SOD (General), etc.

4. Commercial Lending :

a) Non Funded: L/C for import of goods, Acceptance, Bank Guarantee, etc.

b) Funded: Cash Credit (Hypo), Cash Credit (Pledge), OD, PAD, LTR, Time Loan, IBP, etc.

5. Finance to NBFI:

a) Non Funded: L/C for import of machinery’s / equipment for their clients, Bank Guarantee, etc.

b) Funded: OD, Time Loan, Term Loan (Credit line), Call Loan, Zero Coupon Bond Purchase.

6. Specialized Scheme:

Consumer Credit Scheme, SME Financing Scheme, Doctor’s Credit Scheme, Woman Entrepreneurs Development Project, Personal Loan Scheme, Small Loan Scheme, Lease Finance Scheme, Earnest Money Financing Scheme, Employees House Building Scheme, Car Loan, HBL (General ) / Mortgage Loan, ATM, VISA Credit Card, EEF, etc.

7. Export Oriented Business:

a) Non Funded: Back to Back L/C, Acceptance, Bank Guarantee, Letter of Credit, etc.

b) Funded: Packing Credit, Overdraft, Hire purchase, Lease Finance, FDBP, IDBP etc.

8. Advance against Financial Obligation:

Funded: SOD (FO), SOD(SS), SOD(FDR), SOD(General)

6.5.1 Mercantile Bank Discouraged business types:

The Bank will discourage lending to following areas of business:

Military Equipment/Weapons Finance Tobacco sector Companies listed on CIB black list or known defaulters

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Highly Leveraged Transactions. Finance of Speculative Investments Logging, Mineral Extraction/Mining or other activity that is Ethically or

Environmentally Sensitive Counterparties in countries subject to UN sanctions. Share Lending (Not more than 60% of share value of last 6 (six) months

market average or maximum 35 lac whichever is lower or as per guidelines of Bangladesh Bank)

Taking an Equity Stake in Borrowers (except under Islamic Banking Operation) Bridge Loans relying on equity/debt issuance as a source of repayment. Lending to Holding Companies.

OVERDRAFT (OD): This type of facility is for short-term purposes only,

generally on an ‘In case of need’ basis. Bank’s lending in the form of

Overdraft is always allowed on the Current Account of the Customer,

which is operated upon by cheque. The Overdraft has a limit and expiry

date. The Overdraft is an arrangement make by the Bank for a specified

period, which enables the borrower to overdraw up to a certain amount

(called Limit) over his zero balance in the Account. The account

fluctuates between debit and credit within an agreed overdraft limit

anticipating the sales proceed or realization or trade credit or other

sources of funds. Interest in calculated and charged on the daily

outstanding debit balances on daily product basis. The borrower can

withdraw or deposit any number of times provided the amount

overdrawn does not at any time exceeds the agreed limit. The

securities may be in the form of Fixed Deposit Receipt, Government

Bonds, ICB Unit Certificates, Shares, Debentures, Immovable Properties,

Life Insurance Policies, and Goods/Merchandise etc.

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6.6 CREDIT PRODUCTS OF MBL:


SECURED OVERDRAFT (SOD): It is a continuous advance facility. By

this agreement the banker allows his customer to overdraft his current

account up to his credit limits sanctioned by the bank. This is a 100%

cash covered advance, so there is a little credit risk. The interest is

charged on the amount, which the borrower withdraws, not on the

sanctioned amount. MBL sanctions SOD against different security.

Based on different types of security, we can divide the following

category of the facility:

SOD (General): Advances allowed to the individuals/firms against

financial obligations i.e. lien of Fixed Deposit Receipt or Defense

Savings Certificate (P.S.P), ICB Unit Certificate etc.

SOD (Others): Advances allowed against assignment of work order

for execution of contractual works falls under this head. The advance

is generally allowed for a specific purpose. It is not a continuous loan.

SOD (Export): Advances allowed for purchasing foreign currency for

payment against L/Cs (Back-To-Back) where the exporter cannot

materialize before the date of import payment.

CASH CREDIT (CC): Cash Credit is a drawing account in the form of

Bank’s Credit extended to the Borrower. It is similar to that of Overdraft

except insofar as overdraft is allowed against a Current Account. But in

case of Cash Credit separate account is opened in the name of the

Borrower and chequebook is issued. Cash Credit is an operative

account subject to the limited sanctioned by the Bank for a specified

period. Interest is calculated and charged on the daily outstanding

debit balances on daily product basis. The borrower can withdraw or

deposit any number of times provides the amount overdrawn does not

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at any time exceeds the agreed limit. Cash Credit is generally allowed

to the Traders, Industrialists, and Business concerns for meeting their

working capital requirements. The Customer can withdraw or deposit

any number of times provided the amount overdrawn does not at any

time exceeds the agreed limit. Generally Pledge or Hypothecation of

Goods/Merchandise/Plant and Machinery etc secure the Cash Credit

Accounts. Generally the Cash Credit is allowed to the customer for a

period of one year and continues for years together subject to the

satisfactory performance in the account. The Cash Credit limit may be

increased or decreased depending upon the business requirements of

the borrower and time-to-time review of the account by the Bank. The

securities offered may be in the form of Fixed Deposit Receipt,

Government Bonds, ICB Unit Certificates, Shares, Debentures,

Immovable Properties, Life Insurance Policies, and Goods/Merchandise

etc. MBL charges interest on the daily balance in the account.

Depending on charging security there are two forms of cash credit:

Cash Credit (Hypothecation): It is the bank sanctions a short-term

arrangement by which a customer is allowed to borrow money up to a

certain limit for a certain time against hypothecation of borrower’s

merchandise stocks, book-debts or imported goods etc. Under the

condition the borrower is required to submit the stock fortnightly in

the bank specimen form. It is allowed for a maximum period of one

year.

Cash Credit (Pledge): It is also a continuous loan allowed against

pledge of goods as primary securities fall under this head of advance.

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LOAN AGAINST TRUST RECEIPT (LTR): This is post import finance

by MBL. The bank extends lending against Trust Receipt to its valued

clients in the form of releasing the Import documents without Payment.

After releasing the merchandise from the Customs Authority the client

holds the commodity or their sale proceeds in Trust for the Bank. The

client shall pay off the Bank’s due from the sales proceeds of the

imported merchandise within the stipulated time. Loan against Trust

Receipt is allowed for a period of 30, 60, or 90 days and the loan must

be adjusted within this period. The Head Office sanctions loan against

Trust Receipt. The Trust Receipt is a document, which creates the

Banker’s lien on the goods and practically amounts to hypothecation of

the proceeds of sale in discharge of the lien. Recently it is called

‘Import Loan (Hypo)’.

Charge Documents: The following charge document shall be obtained

before allowing the Loan:

1. Demand Promissory Note.

2. Trust Receipt.

3. Letter of Indemnity.

4. Letter of Arrangement.

5. Letter of Disbursement.

6. Letter of partnership along with Registered Partnership Deed

in case of Partnership Accounts.

7. Resolution along with Memorandum & Articles of Association

of company in case of accounts of Limited Company.

Incase of Corporation,

1. Resolution of the Board along with Charter.

2. Personal guarantee of Director in case of limited company.

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3. Insurance Policy covering the goods against all risks with

Bank Mortgage clause in obtained where trust receipt facility is

allowed against imported goods.

4. The Loan against Trust Receipt (LTR) sanction letter must

indicate the period, rate of interest, mode of repayment,

change documents etc.

Journal Entries:

Loan against Trust Receipt (LTR) Account M/S. (The Client).....................Dr.

MBL Nayabazar Account- ................................................................Cr.

PAYMENT AGAINST DOCUMENT (PAD): It is a forced loan, created

against Sight L/Cs. Banks open Letter of Credit in favor of the Importer

for importing Goods/Merchandise from abroad. The Negotiating Bank

negotiates the documents as per L/C terms and debit the NOSTRO

Account of the L/C opening Bank and the amount thus becomes an

advance on behalf of the Importer. On receipt of Documents from the

exporter’s Bank the same is lodged in the banks of the L/C opening

Bank and will respond to the Debit Advice originated by its Foreign

Correspondent to the debit of Payment against Document (PAD) and

advise the Importer for retirement. The importer retires the Import Bill

by adjusting the PAD outstanding and until the PAD is retired the

amount outstanding thereon is a Credit extended to the Importer. The

Letter of Credit Opening Bank is bound to honor its commitment to pay

against Import Bills if these are presented for payment as per Letter of

Credit (L/C) terms.

LOAN AGAINST IMPORTED MERCHANDISE (LIM): Advances allowed

for retirement of shipping documents and release of goods imported

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through L/C taking effective control over the goods by pledge fall under

this type of advance. When the importer failed to pay the amount

payable the exporter against import L/C, then MBL gives loan against

imported i.e. the warehouse charge, insurance fees, etc. and the

ownership of the goods is retain to the bank. This is also a temporary

advance connected with import, which is known as post import finance.

On receipt of Documents from the exporter’s Bank the same is lodged

in the payment against Document (PAB) if the Bill is drawn as per L/C

terms. In many cases the importer does not come forward to retire the

Documents in spite of repeated reminders, in that case the Bank is

forced to clear the consignment form the Customs Authority to avoid

high demurrage at he port which adds more to the burden of

commitment. Sometimes there may be arrangement of such facility

with the Bank. When the importer fails to retire the Documents or

requests the Bank for clearance of Goods, the outstanding under PAD

along with up-to-date interest is transferred to Loan against Imported

Merchandise (LIM) Account. The LIM is a loan account and the interest;

clearing charges such as custom duty, sales tax etc are debited in the

account. After clearance, consignments are taken delivery by the

importer on full payment of Bank’s liability. Normally, part delivery is

not allowed while on LIM account. When the party desires part delivery,

the LIM is converted into Cash Credit retaining proper margin and

executing charge documents. The delivery is affected thereafter on

obtaining pro rata payment. Recently, MBL has renamed this type of

loan as ‘Import Loan (Pledge)’.

LOAN AGAINST OTHER SECURITIES (LAOS): Loan Against Other

Securities is a 100% secured advance that is fully backed up by lien on

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FDR, ICB Unit Certificate and Defense Savings Certificates (PSP) etc. In

these days, MBL has divided this type of loans by:

Demand Loan (Hypo/Pledge)

Time Loan (12 months)

TERM LOANS: Term Loans include all lending or financial facilities,

which implicitly or explicitly will have an original or final maturity of

over twelve months or 360 days (one year) with a fixed amortization or

repayment schedule spread over a long period. Similarly non-funded

exposures such as deferred Payment Letter of Credit or Guarantee are

to be considered as Term Exposure where the parameters of Term

Loans apply. Term Loans with final repayment period of over one year

but up to five years are considered as Mid Term Loans and exceeding

five years are considered as Long Term Loans. The securities offered in

Term Loans are the mortgage of immovable properties, hypothecation

of building materials, equipment, work-in-progress, finished goods etc.

The Term Loans are normally provided against Project Financing

including BMRE, new industrial project etc. It is also called “Loan

against Secured Mortgage (LSM)”.

LETTER OF CREDIT (L/C): A letter of credit is a letter issued by a bank

(known as the opening or the issuing bank) at the instance of its

customer (known as the opener) addressed to a person (beneficiary)

undertaking that the bills drawn by the beneficiary will be duly honored

by it (opening bank) provided certain conditions mentioned in the letter

have been complied with.

The customer clauses contained in a L/C are the following:

i) A clause authorizing the beneficiary to draw bills of exchange up to

a certain on the opener.

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ii) List of shipping documents, which are to accompany the bills.

iii) Description of the goods to be shipped.

iv) An undertaking by the opening bank that bills drawn in accordance

with the conditions will be duly honored.

v) Instructions to the negotiating bank for obtaining reimbursement

of payments under the credit.

Parties to a letter of credit: The parties to a L/C are:

1. Importer/buyer

2. Opening bank/Issuing bank

3. Exporter/Seller/Beneficiary

4. Advising bank/Notifying bank

5. Negotiating bank

6. Confirming bank

7. Paying/Reimbursing bank

LETTER OF GUARANTEE (L/G): It is an irrevocable undertaking to

pay in case of a certain eventuality. It is also a non-funded facility

provided to the client. Bank on behalf of the client undertakes to pay

agreed sum of money at certain time if client fails in due performance.

The different types of guarantees that MBL offer are as follows:

Tender or bid bond guarantee: The tender guarantee assures the

tenderee that tenders shall uphold the conditions of his tender

during the period of the offer as binding and that he/she will also

sign the contract in the event of the order being granted.

Performance guarantee: A performance guarantee expires on

completion of the delivery or performance. Beneficiary finds that as

a guarantee, the contract will be fulfilled in every respect and can

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retain the guarantee as per provision for long time. Including a

clause stating that the supplier can claim under the guarantee, by

presenting an acceptance certificate signed by the buyer, can

counteract this.

Advanced payment guarantee (APG): The type of guarantee is

given against work order.

Security guarantee: This type of guarantee is given when security

is required.

The customer applies to the bank to issue a guarantee along with the

following information:

i) Beneficiary (name and address)

ii) Amount

iii) Expiry (with claim period)

iv) Delivery object

v) Information relating to a guarantee issued under a documentary

credit (in case of a foreign guarantee)

vi) Special conditions

vii) Handing over to principal/beneficiary/representative/third party.

After that, the bank official scrutinizes the application and takes the

guarantee margin, commission, and postage charge from the customer.

LOCAL/FOREIGN BILLS PURCHASED DOCUMENTARY

(LBPD/FBPD): When the Drawer of the Bill of Exchange or the Exporter

encloses the necessary documents relating to the title of Goods (like

Bill of Lading, Railway Receipts, Air way Bills, Truck Receipts, Postal

Receipts, Steamer Receipts etc.) and approaches his Bank to negotiate

the Bill which will be delivered to the Drawee of the Bill for realizing

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payment or against acceptance of Bill as the case may be the Bill is

called Documentary Bill. LBPD is provided to the client by discounting

the bill of exchange favoring the client. When the client submits Usance

bills, a margin (covering also the interest of the loan) amount is also

deducted from the face value of the bill and the rest is provided to

client. At the maturity of the bill the same has to the provided the

drawee for full proceed of the bill through which the loan is adjusted.

Separate bill discounted accounts is created. The bill of exchange is

held as the primary security. The payment made against documents

representing sell of goods to local export oriented industries, which are

deemed as exports and are denominated in local/foreign currency falls

under this head. This temporary liability is adjustable from the proceeds

of the bills. When the bank discounts the foreign bills, it is called

Foreign Bills purchased Documentary (FBPD). This type of facility

recourses on banks through acceptance and the residual on the client.

LOCAL/FOREIGN BILLS PURCHASED CLEAN (LBPC/FBPC): This

type of facility is very similar to the advance called LBPD/FBPD. Here, in

the absence of such Documents of the bills, the same is termed as

Clean Bill. Purchase of Foreign Currency Demand Draft, Cheque,

Cashier’s Cheque, and International Money order etc. are the examples

of Foreign Clean Bills. Sometimes the Banks purchase cheques drawn

by the Government, Semi-Government, Local Authority or any first class

Parties and extends credit to the customer until clearance of the

instrument this is called Inland/Local Clean Bills Purchased. In case of

Inland/Local Clean Bills Purchased the amount of cheque is credited to

the Party’s account by debiting Local Bills purchased (Clean). On

receipt of the proceeds of the Cheque the Local Bills Purchased (Clean)

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is reversed. Some procedure is followed in case of Foreign Bills

Purchased (Clean).

SYNDICATE/CONSORTIUM LOANS: Syndicate/Consortium Loans

mean joint finance by more than one Bank to the same Party against a

common security form the Borrower. All the participating Banks have a

pari passu charge on the security. The Terminology is commonly used

to describe a lending situation where, typically on the basis on a

mandate from the Borrower to a large group of Banks to participate in

the Lending process on agreed terms, conditions through a negotiated

deal with the Borrower on shared basis. When Syndications are formed

of a very few participating Banks, these are then known as “Club

Deals”. The Lead Manager (s) may obtain a Mandate from the intending

Borrower to raise the required quantum of Finance from the market.

Raising the required quantum of Finance may be on under-writing basis

that is a commitment to raise Funds; or on Best Efforts basis, which is

subject to the Manager’s ultimate success in raising the funds/credit

facilities from the market. The initial mandates are normally followed by

further negotiations on the broad-based terms and conditions including

security, pricing, covenants, defaults and the time frame.

FORWARD FOREIGN EXCHANGE CONTRACT: This facility is

provided to the client to hedge the foreign exchange risk of making any

payment in foreign currencies for a period of 90 to 360 days. The

pricing is made according to the market rate at the date of the

contract. Assuming that, the rate of the foreign currency might increase

in the near future, the importer, who has to make payment in foreign

currency might increase in the near future, the importer, who has to

make payment in foreign currency, may make a forward foreign

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exchange contract with the bank and purchase foreign currency in a

certain rate, which can be used for making the payment in the near

future, knowing that the market rate may also be decreased. It covers

the exchange risk for the importer against import L/C.

Flow Chart of credit approval process

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BRANCH MARKETING TEAM

HEAD OF BRANCH(APPROVAL / DECLINE)

AS PER DELEGATION

BOARD OF DIRECTORS

(APPROVAL / DECLINE)

EXECUTIVE COMMITTEE OFDIRECTORS


BEYOND CAPACITY

RECOMMENDED TO

ZONAL HEAD(APPROVAL DECLINE)

6.7 CREDIT APPROVAL PROCESS OF MBL:


Therefore, the steps in lending can be sum up as follows:

1. Entertainment of Application for limit of loan proposal by

respective branch.

2. Preliminary screening of credit proposal by Credit Department.

3. Feasibility study & Appraisal of loan proposal or Credit

investigation done by Credit Department.

4. Sanction of loans or advances by the Head Office Credit

Committee.

5. Documentation done by Credit Department.

6. Disbursement of loans or advances done by Credit Department

through Sales and Services Center (Branch)/Trade Services

Department.

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HEAD OF CORPORATECOMMERCIAL BANKING

HEAD OF CREDIT


DMD


MD & CEO


BEYOND CAPACITY

FORWARDE

BEYOND CAPACITY

BEYOND CAPACITY

BEYOND CAPACITY

BEYOND CAPACITYRECOMMENDED TO

AMD


BEYOND CAPACITY

RECOMMENDED


7. Supervision and follow up of loans and advances by Credit

Department.

6.6.1 RULES ON MARGIN :

1. Interest/margin on various loans and advances will be in accordance with instructions issued from time to time by Head Office, Board of Directors of the Bank and Bangladesh Bank. In case where minimum margin is specified, the percentage may be increased according to market conditions, saleability/durability/ bulk/storage position and inspection facility of the goods. Norms given below shall be followed strictly:

i. Hypothecation with collateral : Minimum 50%.

ii. Hypothecation without collateral: Minimum 60%.

iii. Pledge of F. D. R duly discharged: Minimum 5%.

iv. Sanchaya Patra, Unit certificate: Minimum 10%.

v. Documentary Bill: Minimum 10%.

vi. Life Insurance Policy: Minimum 50% of surrender value.

vii. Immovable property: Minimum 50%.

viii. Govt. Authorized Debenture: Minimum 25% of face value.

ix. Company Shares & Debentures approved by the Bank’s Board of Directors: Minimum 40% of market value or face value whichever is lower.

x. For Industrial Working Capital margin on raw material/ finished goods = Minimum 20%.

2. Sanction of advance/limit should be advised to the borrowers detailing properly the terms and conditions and written confirmation of acceptance of the same to be obtained from the party.

3. All formalities connected with the investigation into the credit worthiness of the parties, processing the proposals, compilation of credit reports and obtaining necessary documents should be observed meticulously.

4. Disbursement of loans presupposes observance of all norms and procedures as per rules and guidelines in this Delegation of Powers, Manuals and also conveyed through different circulars of Head Office and Bangladesh Bank from time to time. The disbursing officer shall ensure that all documentation of credit have been duly completed before disbursement of credit.

5. The Branch In-charge shall remain responsible for constant supervision and follow-up of the advances allowed under the discretionary powers and keep Head Office apprised of the disproportionate variations.

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6. Recommending and supervisory officials shall remain accountable for their

respective roles.7. Sanctioning officer will be accountable for non-recovery due to his injudicious

decision.6. All members of the Credit Committee (Management) shall also be

accountable collectively and individually for their injudicious decision.

To make the loan secured, charging sufficient security on the credit

facilities is very important. The banker cannot afford to take the risk of

non-recovery of the money lent. MBL charges the following two types of

security:

1. Primary security: These are the security taken by the ownership of

the items for which bank provides the facility.

2. Collateral security: Collateral securities refer to the securities

deposited by the third party to secure the advance for the borrower in

narrow sense. In wider sense, it denotes any type of security on which

the bank has personal right of action on the debtor in respect of the

advance.

Securities mean tangible securities, which are normally known as

‘collateral securities’. The tangible securities which are

pledged/hypothecated/assigned by the borrower to the bank and

additionally held by the bank to secure a loan is called collateral securities

or simply collateral’s.

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6.8SECURITIES:

6.9 SECURITIES AGAINST ADVANCES:


There are four main ways in which a banker may create a charge on the

borrower’s securities and acquire an interest in the property of a debtor as

collateral security.

Lien: Lien means the right of the banker to retain the goods of the

borrower until the debts are repaid. A banker’s lien is an informal

security and differs from the other forms of charge in that it is not the

subject of a formal or expressed contract. A banker can retain all

securities in his possession till all claims against the concerned persons

are satisfied.

Pledge: Pledge is the bailment of the goods as security for payment of a

debt or performance of a promise. When negotiable instruments and

goods, or the symbol of goods, such as bill of lading or dock warrants,

are delivered to a banker as security for a debt, the delivery is termed

as Pledge or Pawn. To constitute a pledge there must be an express or

implied contract between the banker and the borrower, but the

property (ownership) remains vested into he pledgor.

Hypothecation: It creates a charge on the securities offered by the

borrower but does not involve the actual passing of the control of the

securities into the possession of the bank. In case of hypothecation the

possession and the ownership of the goods both rest the borrower. The

borrower to the banker creates an equitable charge on the security.

The borrower to the banker creates an equitable charge on the

security. The borrower does this by executing a document known as

Agreement Of Hypothecation in favor of the lending bank.

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Mortgage: According to section (58) of the Transfer of Property Act,

1882 mortgage is the “transfer of an interest in specific immovable

property for the purpose of securing the payment of money advanced

or to be advanced by way of loan, existing or future debt or the

performance of an engagement which may give rise to a pecuniary

liability”. In this case the mortgagor dose not transfer the ownership of

the specific immovable property to the mortgage, only transfers same

of this rights as an owner. The banker usually exercises the equitable

mortgage. A mortgage is a conveyance of an interest of property for

the purpose of securing of debt but the term is usually reserved for a

conveyance of an interest on immovable property. A legal mortgage is

created by registered deed and gives the mortgage the right of sale in

case of default on the part of the mortgagor.

Registration of Charges:

In case of loans and advances to a limited company, fixed or floating

charges created on the assets of the company, are required to be

registered with Registrar of joint Stock Companies, submitting application

in the prescribed form within 21 days of the creation of the charge, that is

execution of charge documents.

Charges:

Charge in a transaction for value means that the creditor shall have right

to make the property on which charge is created available to him as

security for payment of a debt. by an order of a court of law.

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Fixed Charge: A charged is said to be fixed if it is made specifically

to cover definite and ascertained assets of a permanent nature like

land and building, heavy machinery etc.

Floating Charge: It is a charge on the property, which is constantly

changing such as stock of goods. The company can deal with assets

in normal course of business until the charge becomes fixed on

default or happening of an event.

Documentation can be described as the process or technique of obtaining

the relevant documents. In spite of the fact that banker lends credit to a

borrower after inquiring about the character, capacity and capital of the

borrower, he must obtain proper documents executed from the borrower

to protect him against willful defaults. Moreover, when money is lent

against some security of some assets, the document must be executed in

order to give the banker a legal and binding charge against those assets.

Documents contain the precise terms of granting loans and they serve as

important evidence in the law courts if the circumstances so desire. That’s

why all approval procedure and proper documentation shall be completed

prior to the disbursement of the facilities.

Charge documents as required by the different types of advances are

mentioned bellow:

Charge Document Loan Overdra

gt

Cash

Credi

t

Bills

Purchase

d

Demand promissory note

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6.10 DOCUMENTATION:


Letter of arrangement.

Letter of continuity

Letter of disbursement. Letter of partnership (partnership

farm)or Board of resolution (limited

companies).

Letter of pledge. Lien for packing credit Letter of hypothecation. Letter of lien and ownership/share

transfer form (in case of advance

against share).

Letter of Line (in case of advance

against F D R).

Letter of lien and transfer authority.

(in case of advance against P S P, B S

P)

Legal documents for mortgage of

property (As draft by legal adviser).

Copy of sanction letter mentioning

details of terms and condition duly

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acknowledge by the borrower.

Letter of Trust receipt.

Letter of hypothecation [In case of

cash credit (Hypothecation)]

Letter of pledge or Agreement of

pledge. [In cash of cash credit

(pledge)]

Letter of acceptance, where it calls for

acceptance by the drawee.

Securities Against Advances:

The following securities are to be obtained by the branches depending on

the nature of Advances allowing secured advances to the parties:

1. Pratirakshya Sanchaya Patra, Bangladesh Sanchaya Patra, ICB

unit certificate, Wage Earner Development Bond.

2. Fixed Deposit Receipt issue by any branch of Mercantile Bank

Limited.

3. Shares quoted in the Dhaka Stock Exchange Limited.

4. Pledge of goods and produce.

5. Hypothecation of goods, produce and machinery.

6. Immovable Property.

7. Fixed assets of a manufacturing unit.

8. Cheques, Drafts, pay Order, Railway Receipts, Steamer

Receipts, Burg Receipts of the Govt. or Corporations.

9. Shipping documents.

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6.11 SECURITIES AND CHARGE DOCUMENTS:


Securities Against Advances:

Al securities are not suitable for all types of advances. Each security has

its own suitability. Specific Securities to be obtained by the branches while

allowing advances are shown below against the types of advances:

Having completely and accurately prepared the necessary loan

documents, the credit officer issues a sanction letter in favor of the

borrower. When the borrower agrees with all the terms and conditions, the

Credit Department becomes ready to disburse the loan to the borrower by

creating a particular account such as, SOD, CC, LAOS, LIM etc. as the case

may be. These are all new accounts in the name of the borrower, given

cheque books to them for drawing money. After disbursement, the loan

needs to be monitored to ensure whether the terms and conditions of the

loan fulfilled by both bank and client or not.

6.11.1 CREDIT MONITORING, FOLLOW-UP AND

SUPERVISION:

Credit monitoring implies that the checking of the pattern of use of the

disbursed fund to ensure whether it is used for the right purpose or not.

Also credit officer monitors the accounts of the borrower’s day-to-day

transaction pattern, daily balance of the account etc. It includes a

reporting system and communication arrangement between the borrower

and the lending institution and within department, appraisal,

disbursement, recoveries, follow-up etc.

MBL Officer checks on the following points,

1. The borrower’s behavior of turnover

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6.11 CREDIT DISBURSEMENT:


2. The information regarding the profitability, liquidity, cash flow

situation and trend in sales in maintaining various ratios.

Credit officers of MBL supervise their borrower activities in two methods:

1. On site supervision: Credit officer visits the site that is factory-

building, office etc. (whether production procedure is going on as per

agreement).

2. Off-site supervision: Supervision activities of the borrower from

the office desk. Here officers analyze financial statements, stock

report, and other statements.

Borrower has to adjust his account as per terms and conditions of sanction

letters. He must pay the required amount with interest within schedule on

or before the expiry date of the loan. Reminder is given to the borrower;

he may ask for renewal of the loan or negotiate for rescheduling the

portfolio. In this case adjustment is deferred for the time being.

5.13.1 LOAN CLASSIFICATION:

Loan classification is the process by which the risk or loss potential

associated with the loan accounts of a bank on a particular date is

identified and quantified to measure accurately the level of reserves to be

maintained by the bank to provide for the probable loss on account those

risky loan.

All types of loans of bank are fall into following seven scales:

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6.12 LOAN ADJUSTMENT:


CLASS BORROWER’S DESCRIPTION

1. Good Growing industry (Growth 15% or above),

satisfactory payment record/account turnover, and

100% cash covered.

2. Acceptable Growing industry (Growth 10% to 15%),

satisfactory payment record/account turnover and

acceptable collateral.

3. Marginal/watch

List

Past due of loans for 30-60 days, but the

collaterals are satisfactory.

4. Special Mention Past due of loans for 60-90 days, but has a

satisfactory previous record.

5. Substandard Past due of loans for 90-180 days, but has

reasonable prospect of improvement.

6. Doubtful Past due of loans for 190-27 days, but special

collection efforts any result in partial recovery.

7. Bad/Loss Past due of loans for 270-360 days and very little

chance of recovery.

Classification Procedure:

The classification procedure is done as per the Central Bank’s instructions

in B C D circular No. 34 of 1989, B C D circular No. 20 of 1994. The loans

are classified on the basis of following criteria.

Classification Criteria:

1. Overdue (OV)

2. Required Payment (RP)

3. Limit Overdrawn (LD)

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4. Legal Action (LA)

5. Qualitative Judgment (QJ)

Legal Framework For Loan Recovery:

After being classified, if the borrower is disable to adjust the loan then the

bank can take the following legal actions by filing suit,-

1. Filing certificate cases under Public Demand Recovery Act-1913.

2. Filing money suitcases under Artha Rin Adalat- 1990.

3. Filing Bankruptcy cases under Bankruptcy Act- 1997.

4. Filing cases under Negotiable Instrument Act- 1881 section 138 to

141 for insufficient fund (in case of term loan).

After making all sorts of efforts and while the borrower is poised to

become a defaulter, the file of the borrower is for warded to the recovery

section for legal action. Question arises that when the file is forwarded for

recovery. However the timing comes after all the following procedures are

made.

Request or persuasion by letter, phone or orally

Final notice is given to the borrower

File forwarded to attorney for serving legal notice.

Legal Suit

The borrower can be sued for three purposes

The borrower can be sued for three purposes

Money suit-Claim for money

Title Suit-Claim for the title of the property kept as

security

Petition for winding up of an active company.

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6.13 RECOVERIES:


However MBL has not yet started taking legal action under the Bankruptcy

Act.

Approvals:

Credit Memo/Board Memo

Date wise records of Head office approvals

Minutes of Executive Committee/Board

Rush transactions/EOL

Waiver Memo/Reschedule/Compromise

Bangladesh Bank approvals for large loans

Correspondence:

Correspondence of Head Office/Branches/Borrowers/Bangladesh Bank

Call/Credit Reports And Other Reports:

Call Reports

Inspection/Stock/Valuation Report

Credit/CIB Reports

Copies of Insurance Policies/Stock Statement

Covenants/Conditions/Irregularity:

Memo Review

Overdraft monitoring

Irregularity Report to Branches

Audit and Relationship Manager’s Report and Compliance Report

Irregular transaction/Overdue Report

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5.16 DOCUMENTS STORED BY THE CREDIT

DEVISION:


Loan documentation deficiency

Miscellaneous

Financials:

Financial Report sheet

Balance sheet, Cash flow, Income Statement, Annual Report,

Company Brochures

Account profitability

Net Worth Statement

Portfolio Review/Obligor Risk Rating/LRA (Lending Risk Analysis)

Legal Documentation:

Request for Credit Line

Register of Joint Stock Companies searches/Search Solicitors

Accepted Sanction letter by the borrowers

Copies of Legal, Securities, Charge documents

Copies of legal opinions

Copy of Trade License/IRC and for companies:

i) Board’s Resolution to borrow,

ii) Memorandum and Articles of Association

Court Cases.

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C-6 Credit and Advance

Documents

Transcript of C-6 Credit and Advance