Chapter: Six Department

Credit And Advance LOANS AND ADVANCES

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

6.1 opportunity. Lending

guidelines

followed

by

Mercantile Bank Ltd:

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. Thats why bank officers are cautious about the repayment of the Loan and advances.

c)

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

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standards of excellence

Credit And Advance

d)

All Credit extension must comply with the requirements of Banks Memorandum and Articles of Association, Banking Companies Act 1991 as amended from time to time / Bangladesh Banks 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

6.2 SELECTION OF THE BORROWER:

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:

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Table:

Credit And Advance

Procedure of studying the past record of the

applicant
1. Account balances and the past transactions 2. Credit report from other banks. 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 3Cs (character, capital, capacity) or 3-Rs (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 CREDIT RISK ANALYSIS:

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.
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6.3.1.1 FUNCTIONS OF CREDIT RISK GRADING 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 (creditspread) 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.

86

CREDIT RISK GRADING SCORE SHEET Reference No.: Borrower Chapter: Six Group Name (if Department any) Branch: Industry/Sector Date of Financials 31-Dec-03 Completed by Approved by NIAZ HABIB Number Grading 1 Superior Date: Aggregate Score: Risk Grading: 12-Mar-04

Credit And Advance

87 Good

Short

Score Fully cash secured, secured by government guarantee/internation al bank guarantee 85+ 75-84 65-74 55-64 45-54 35-44 <35 Actual Parameter Score Obtained

2 3 4 5 6 7 8 Criteria Weight A. Financial Risk 50% 1. Leverage: (15%) Debt Equity Ratio () - Times Total Liabilities to Tangible Net worth

Good Acceptable Marginal/Watchlist Special Mention Substandard Doubtful Bad/Loss

SUP GD ACCPT MG/WL SM SS DF BL

Parameter

Score

Less than 0.25 0.26 to 0.35 x 0.36 to 0.50 x

15 14 13 12 11 10 8 7 0 15 14

0.53

12

0.51 to 0.75 x All calculations 0.76 to 1.25 x should be based on annula financial 1.26 to 2.00 x statements of the borrower (audited 2.01 to 2.50 x preferred) 2.51 to 2.75 x More than 2.75 2. Liquidity: (15%) Current Ratio () Greater than 2.74 2.50 to 2.74 x

87

54.00

15

Chapter: Six Department 6. 4 Industry

Credit And Advance and Business Segment of

Mercantile Bank Ltd

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 Banks policies for financing in different major sectors are summarized as follows: SL 1) 2) 3) 4) 5) 6) 7) 8) 9) 10) 11) 12) Sectors Textile / Spinning/ Sweater/ Knitting/ Denims & Garments Cement Construction / Real estate / House building Telecommunication Communication Information Technology (IT) Project Aro-based Industry Hospital / Clinic / School / College / University Healthcare / Pharmaceuticals / Medicine Electrical / Electronic appliance Finance to NBFI Special Program : Consumer Credit Scheme, SME Financing Scheme, Doctors 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. Plastic / Packaging Leather Steel and Engineering Edible oil Scrap Vessel Paper / Pulp / Partex Chemicals Others Policies To expand To maintain To expand To expand Selective basis To expand To expand Selective basis Selective basis To expand Selective basis To expand

13) 14) 15) 16) 17) 18) 19) 20)

Selective basis Selective basis To expand To expand Restricted way To expand Restricted way Based on merit

The Banks 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:

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Syndication and Structured Finance Project Finance Garments Sector SME

Credit And Advance

Specialized Schemes such as Consumer Credit Scheme, Doctors 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.

6.5 Credit line of Mercantile Bank Limited:

Types of Credit Facilities: The Banks 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, b) Funded: LTR, 2. a) b)

Acceptance, Bank Guarantee, etc.

PAD, IBP, FDBP, IDBP, Time Loan, Loan (General), etc.

Project Finance: (Large and Medium Industries / Small Industries including Agro-based Industries): Non Funded: L/C for import of Machinery, Acceptance, Bank Guarantee, etc. 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) b)

Non Funded: L/C for import of Raw Materials, Acceptance, Bank Guarantee, etc. Funded: Overdraft Cash Credit (Hypo), Cash Credit (Pledge), PAD, LTR, Time Loan, IBP, etc.

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

Credit And Advance

a) b) a) b)

Non Funded: Letter of Credit, Bank Guarantee, etc. Funded: SOD (work order), SOD (General), etc. 4. Commercial Lending :

Non Funded: L/C for import of goods, Acceptance, Bank Guarantee, etc. Funded: Cash Credit (Hypo), Cash Credit (Pledge), OD, PAD, LTR, Time Loan, IBP, etc.

5. Finance to NBFI:

a) b)

Non Funded: L/C for import of machinerys / equipment for their clients, Bank Guarantee, etc. Funded: OD, Time Loan, Term Loan (Credit line), Call Loan, Zero Coupon Bond Purchase.

6. Specialized Scheme: Consumer Credit Scheme, SME Financing Scheme, Doctors 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) b)

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

Credit And Advance

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.

6.6 CREDIT PRODUCTS OF MBL:

OVERDRAFT (OD): This type of facility is for short-term purposes only, generally on an In case of need basis. Banks 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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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 Banks 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 borrowers 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 Banks 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 Bankers 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 exporters 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 exporters 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 Banks 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) iii) iv) v)

Credit And Advance

List of shipping documents, which are to accompany the bills. Description of the goods to be shipped. An undertaking by the opening bank that bills drawn in accordance with the conditions will be duly honored. 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. 2. 3. 4. 5. 6. 7. Importer/buyer Opening bank/Issuing bank Exporter/Seller/Beneficiary Advising bank/Notifying bank Negotiating bank Confirming bank 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) ii) iii) iv) v) vi) vii) Beneficiary (name and address) Amount Expiry (with claim period) Delivery object Information relating to a guarantee issued under a documentary credit (in case of a foreign guarantee) Special conditions 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, Cashiers 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 Partys 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 Managers 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.

6.7 CREDIT APPROVAL PROCESS OF MBL:

Flow Chart of credit approval process

BRANCH MARKETING TEAM

BOARD OF DIRECTORS (APPROVAL / DECLINE)

HEAD OF BRANCH
(APPROVAL / DECLINE)

AS PER DELEGATION

BEYOND CAPACITY RECOMMENDED TO

ZONAL HEAD
(APPROVAL DECLINE)

EXECUTIVE COMMITTEE OF DIRECTORS (APPROVAL / DECLINE)

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Credit And Advance

HEAD OF CORPORATE
COMMERCIAL BANKING

BEYOND CAPACITY RECOMMENDED TO

BEYOND CAPACITY

FORWARDE

MD & CEO (APPROVAL / DECLINE) BEYOND CAPACITY RECOMMENDED

HEAD OF CREDIT (APPROVAL / DECLINE)

BEYOND CAPACITY

AMD (APPROVAL / DECLINE)

DMD (APPROVAL / DECLINE)

BEYOND CAPACITY

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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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. viii. Immovable property: Minimum 50%. Govt. Authorized Debenture: Minimum 25% of face value.

ix.Company Shares & Debentures approved by the Banks 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.

3.

4.

5.

6.

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. 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. 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. 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. Recommending and supervisory officials shall remain accountable for their respective roles.

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7. 6.

Credit And Advance

Sanctioning officer will be accountable for non-recovery due to his injudicious decision. All members of the Credit Committee (Management) shall also be accountable collectively 6.8SECURITIES: 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.

6.9 SECURITIES AGAINST ADVANCES:

Securities mean tangible securities, which are normally known as collateral securities. The tangible by the securities to which the bank are and pledged/hypothecated/assigned or simply collaterals. borrower

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

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There are four main ways in which a banker may create a charge on the borrowers 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 bankers 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. 6.10 DOCUMENTATION:

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. Thats 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:

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Charge Document Chapter: Six Demand promissory note Department

Letter of arrangement. Letter of continuity Letter of disbursement. Letter of partnership (partnership

Loan

Overdra gt

Cash Credi t

Bills Purchase d

Credit And Advance

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 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
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Chapter: Six Credit And Advance Department 6.11 SECURITIES AND CHARGE DOCUMENTS:

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. 2. 3. 4. 5. 6. 7. 8. 9. Pratirakshya Sanchaya Patra, Bangladesh Sanchaya Patra, ICB unit certificate, Wage Earner Development Bond. Fixed Deposit Receipt issue by any branch of Mercantile Bank Limited. Shares quoted in the Dhaka Stock Exchange Limited. Pledge of goods and produce. Hypothecation of goods, produce and machinery. Immovable Property. Fixed assets of a manufacturing unit. Cheques, Drafts, pay Order, Railway Receipts, Steamer Receipts, Burg Receipts of the Govt. or Corporations. Shipping 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:

6.11 CREDIT DISBURSEMENT:

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

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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 borrowers 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 borrowers behavior of turnover 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 factorybuilding, 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.

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Chapter: Six Department 6.12 LOAN ADJUSTMENT:

Credit And Advance

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: CLASS 1. Good BORROWERS DESCRIPTION Growing industry (Growth 15% 100% cash covered. Growing industry or above),

satisfactory payment record/account turnover, and 2. Acceptable (Growth 10% to 15%),

satisfactory payment record/account turnover and 3. Marginal/watch List 4. Special Mention 5. Substandard 6. Doubtful acceptable collateral. Past due of loans for 30-60 days, but the

collaterals are satisfactory. Past due of loans for 60-90 days, but has a satisfactory previous record. Past due of loans for 90-180 days, but has reasonable prospect of improvement. Past due of loans for 190-27 days, but special
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Credit And Advance

collection efforts any result in partial recovery. 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 Banks 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) 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).

6.13 RECOVERIES:

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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 Act. Petition for winding up of an active company. However MBL has not yet started taking legal action under the Bankruptcy

5.16 DOCUMENTS STORED BY THE CREDIT DEVISION:

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

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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 Managers Report and Compliance Report Irregular transaction/Overdue Report Loan documentation deficiency Miscellaneous

Financials: Financial Report sheet Balance sheet, Cash flow, Income Statement, Annual Report, Company Brochures Account profitability Net Worth Statement
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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) ii) Boards Resolution to borrow, Memorandum and Articles of Association

Court Cases.

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