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internship report on credit management


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Credit Management of Private Commercial Bank in Bangladesh: A Case Study of Mercantile Bank Limited

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internship report on credit management

  1. 1. INTERNSHIP REPORT ON Credit Management of Private Commercial Bank in Bangladesh: A Case Study of Mercantile Bank Limited (Submitted to the partial fulfillment for the degree of BBA in the department of accounting and information systems) Supervised By Dr. Md. Zakir Hossain AssociateProfessor Dept. of Accounting & Information Systems, Faculty of Business Administration, Islamic University, Kushtia SubmittedBy Md. Khaled Masud Roll no. 0904022 Session 2009-2010 Dept. of Accounting and Information Systems Islamic University, Kushtia Date of Submission 30th September 2015
  2. 2. KHALED TO
  3. 3. letter of transmittal 30th September, 2015 To Dr. Md. Zakir Hossain Associate Professor Dept. of Accounting & Information Systems Islamic University, Kushtia, Bangladesh. Subject: Submission of Internship report on Credit Management of Private Commercial Bank in Bangladesh: A Case Study of Mercantile Bank Limited. Dear Sir, This is my pleasure to submit my internship report on “Credit Management of Private Commercial Bank in Bangladesh: A Case Study of Mercantile Bank Limited” which I have assigned. I have tried my best to prepare this to be as informative and relevant as possible. While doing my internship, I have the opportunity to meet all employees in the Branch. Almost each of the people I came across had been very helpful. I considered your remarks and instructions very carefully while preparing this report. I tried the best to follow your schedule, format and discipline. Thank you for your kind consideration. Sincerely yours, Md. Khaled Masud BBA (Hon`s) Roll No. 0904022 Session: 2009-2010 Dept. of Accounting & Information Systems, Islamic University, Kushtia, Bangladesh.
  4. 4. CERTIFICATE OF SUPERVISOR This is certified that Md. Khaled Masud is a student of BBA, Session: 2009-2010 Roll no. 0904022. As a part of his BBA program, he has successfully completed her Internship Report entitled “Credit Management of Private Commercial Bank in Bangladesh: A Case Study of Mercantile Bank Limited.”. He has completed his work that I expected and he has done his job according to my instruction and guidance. He has tried his best to do well. I think this program will help his in future to build up his career. I wish his prosperity and best of his luck. ……………………. Dr. Md. Zakir Hossain Associate Professor Department of Accounting & Information Systems (AIS), Faculty of Business Administration Islamic University, Kushtia, Bangladesh.
  5. 5. DECLARATION I, Md. Khaled Masud, hereby declare that the report of Internship namely “Credit Management of Private Commercial Bank in Bangladesh: A Case Study of Mercantile Bank Limited.” is prepared by me after the completion of the internship in the Mercantile Bank Ltd, Kushtia Branch and a comprehensive study of the existing activities of MBL and its implementation. I also declare that the paper is only prepared for academic purpose, not for any award and this paper may not be used in actual market scenario. I certify that the declaration made above by the student is true. ------------------------------ Dr. Md. Zakir Hossain Associate Professor Dept. of Accounting & Information Systems, Faculty of Business Administration, Islamic University, Kushtia, Bangladesh.
  6. 6. ACKNOWLEDGEMENT I amgrateful to almighty Allah. The road was zigzagged and rough but the almighty Allah did not let me waver to complete the internship report on “Credit Management of Private Commercial Bank in Bangladesh: A Case Study of Mercantile Bank Limited”. I would like to convey my immense gratitude to those who have helped me in all the way to prepare my internship report. First of all, I would like to thank my honorable Supervisor Dr. Md. Zakir Hossain, Associate Professor, Department of Accounting & Information Systems, Islamic University, Kushtia, for his valuable criticisms, suggestion and guideline made the work reality. I would humbly confess that without his meticulous care, valuable suggestions, instructions and continuous encouragement this report would not be an inclusive one. I am thankful to my friend and fellow internship students whose are continuing internship program besides me who helped me to complete this report's been a great experience to work as an intern in an organization like Mercantile Bank Ltd I got full support from the all staffs of the Mercantile Bank Ltd Kushtia Branch. Specially, I express my gratitude towards Md. Ashraf-Bin-Azher, Human Resource Division of Mercantile Bank Ltd. gaveme the opportunity to do internship in Mercantile Bank Ltd. I alsogivethanks to Md. Ashraf- Bin-Azher. ………………….. Md. Khaled Masud Roll No. 0904022 Session: 2009-2010 BBA (Hon`s) Dept. of Accounting & Information Systems, Islamic University, Kushtia, Bangladesh.
  7. 7. Abstract This report unveil the credit management procedure of Mercantile Bank limited. It focuses on various part of credit management procedure. It contains the deposit position of the bank in last five years and its sources, distribution of deposit through loans and advances, sector wise loans and advances break up, investment of its fund in various productive sector, employment of deposit efficiency through loan deposit ratio, return on investment, earning per share, return on loans and advances non-performing loans and non-performing loan over total loan and advances. This report not only shows the actual figure of various term like deposit, loan, investment etc. but also shows it’s the growth rate and various graphical representation of data over the analysis period of five year to understand its credit management procedure. It also explain the reason behind various financial movement of the bank. It explain various problem related to the topic and also possible solution for the problem. Beside those analysis it will also inform about the bank`s general activities, historical background of the bank, management of the bank, coverage area, product and services and other basic information about the bank. So this is a report that tries to explore overall credit management activities of MBL
  8. 8. TABLE OF CONTENTS Serial No. Contents Page No. Chapter-one Introduction 1.1 Introduction 2 1.2 Statementof the problem 3 1.3 Rationale of the study 3 1.4 Objective of the report 4 1.5 Scope of the Study 4 1.6 Limitationof the study 5 Chapter-two Literature Review 1.1 Methodology 7 2.2 Literature Review:WorldPerspective 8 2.3 Literature Review:Indiansub-continent Perspective 14 Chapter- Three Conceptual Framework 3.1 Bank 19 3.2 Banking 19 3.3 Credit 19 3.4 creditManagement 20 3.5 Risk 20 3.6 RiskManagement 20 3.7 CreditRisk 21 3.8 ManagementCreditRisk 21 3.9 CreditAdministration 22 3.10 RatingReview 22 3.11 ProblemCredit 23 3.12 Managing ProblemCredits 23 3.13 Terms& ConceptUsedIn ThisStudy 24 Chapter-Four Organizational Overview 4.1 Historyof Mercantile BankLimited 25
  9. 9. 4.2 VisionandMission 29 4.3 Objectives 29 4.4 Core Values 30 4.5 Corporate Portfolio 30 4.6 Managementof MBL 31 4.7 Human Resource Managementof MBL 32 4.8 Corporate Informationata Glance 33 4.9 Hierarchyof PositioninMBL 34 4.10 Coverage of MBL 35 4.11 Productsand Servicesof MBL 36 Chapter-Five Analysis 5.1 Depositand DepositGrowth rate of MBL 40 5.2 Deposit Mixfor Mercantile Bank Limited 42 5.3 Loans and Advances 43 5.4 Sector wise loans and advances 45 5.5 Investmentof MBL 46 5.6 Loan DepositRatio 49 5.7 Capital AdequacyRatio 50 5.8 Return on Investment(ROI): 52 5.9 Earnings per Share 53 5.10 Return on Loans and Advances 53 5.11 Non-performingLoanof MBL 54 Chapter six Findings,RecommendationandConclusion 6.1 Findings 56 6.2 Conclusion 56 6.3 Recommendations 57
  10. 10. Chapter- One Introduction Serial no. particulars Page no 1.1 Introduction 2 1.2 Statement of the problem 3 1.3 Rationale of the study 3 1.4 Objective of the report 4 1.5 Scope of the Study 4 1.7 Limitation of the study 5
  11. 11. 1.1 Introduction In recent days, people are becoming more aware about the management of their resources. As the banks do business by lending their depositors' money, they are more responsible to manage their credit portfolio smoothly. Bank’s reputation is a critical factor for its success and therefore multinational banks must follow appropriate guidelines, policies and relevant manuals regarding credit extension and recovery. The usage of banking service for any type of financial activities is increasing day by day. People are taking loans to start different types of businesses as well as other purposes. It is now very important to know the internal credit processes of the banks. Credit management ina bank is adynamic sector where a certain standard of long-rangeplanning is needed to allocate the fund in diverse field and to minimize the risk and maximizing the return on the invested fund. The credit policy of Mercantile Bank Limited (MBL) is a combination of certain accepted, time tested standards and other dynamic factors dictated by the realities of changing situations in different market places. MBL aims to become one of the leading banks in Bangladesh by prudence, flair and providing quality of credit operations in the banking sectors. MBL intends to meet the needs of their clients and enhance their profitability by providing best credit facilities. I tried to make an overall analysis of credit activities of Mercantile Bank Limited.
  12. 12. 1.2 Statement of the problem Credit management evaluation is important for ensuring depositors` money and also the efficiency of the banking operation. MBL try their best manpower to ensure the highest return on investment of depositors` money and profitability of the bank. In my research report I tried my best to find out the credit management efficiency of the MBL based on the past few years annual report, half yearly report of 2015 and also cash flow statement and financial statement of the bank. This research also focusses on the probable best solution of the problem if any. 1.3 Rationale of the study In today’s world only academic education does not make a student perfect to become competitive with the outside world. Internship is a great opportunity to gain ideas, knowledge and experience with applying academic knowledge. Through the internship program, a student gets the opportunity to face with the real business world. It helps to build self-confidence, & interpersonal skills which is important for entrance as a fresher in job market. It is also beneficial for both a student & organization to upsurge relationship among them for further opportunities. As a mandatory part of my graduation, I took the opportunity to conduct my internship with one of the renowned private commercial bank in our country, Mercantile Bank Limited. In recent banking sector, MBL has already created a positive image to the customers’ mind by providing best banking service. This bank has introduced some modern banking scheme that has gotten high market demand. As the bank is maintaining the pace with the competitive business world, its activities, culture, philosophy and style would an intern student to be the best at any field of working life.
  13. 13. 1.4 Objective of the report Objective of the report is divided into two categories. There are: general and specific objectives.  To find out the overall activities of credit management system.  To represent the procedures that bank follows for lending to the customers.  To describe the detailed operational procedure of the different credit facilities.  How they recover the bad debts and get back the uncollected advances.  To get significant knowledge how effectively loan and sanction procedure are conducted on the basis of evaluation credit risk management. 1.5 Scope of the Study This report is only based on the credit management activities of MBL. This report includes the credit management procedures under credit department of MBL. This report include deposit serviceof MBL. Besides this report does not include the services of other private and public commercial banks and non-banking institutions. 1.7 Limitation of the study There were certain limitation had to face in order to prepare this report. Some limitations are as follows:  There was a little scope to work at credit division in the bank for an intern student.  Limitation of time was one of the important factors that shortened the study.
  14. 14.  MBL does not have rich and wealthy collection of various types of books or journals related to banking activities.  Confidentiality of data was another important barrier that was faced during the conduct of this study. Credit policy is an internal & confidential matter at a bank. Alike all other banking institutions, MBL is also very conservative and strict in providing financial information.
  15. 15. Chapter- Two Methodology and Literature Review Serial no. Particulars Page No. 2.1 Methodology 7 2.1 Literature Review: World Perspective 8 2.2 Literature Review: Indian sub- continent Perspective 14
  16. 16. 2.1 Methodology of the study Research methodology is a way to systematically solve the research problem. It may be understood as a science of studying how research is done scientifically. In it we study the various steps that are generally adopted by a researcher in studying his research problem along with the logic behind them. The study requires a systematic procedure from selection of the topic to final preparation. To perform the study, the data sources are identified and collected, these are classified, analyzed, interpreted and presented in a systematic manner and key points have been found out. The overall processes of methodology are given below- Period of selection: The study is based on 2010-1014 annual report of MBL. So the period of this report is 5 year. Sampling technique: Random sampling technique are used for selecting the bank and data. Types of sources of data: The information and data for this report have been collected from only secondary sources.Those sources are-  Website of Mercantile Bank Limited (  Annual report of Mercantile Bank Limited (  Office circular and other published papers and documents. Methods of collection of data: Here I emphasized on the online media of collection of data.
  17. 17. 2.2 Literature review: World Perspective The profit of a commercial bank depends primarily on the utilization of its fund. And the making of loan and advance is always profitable to a bank. As the bank mobilizes savings from the general people in the form of deposit, the most important task of it is to disburse the said deposit as loan or advance to the mass people for the development of commercial, industrial, who are in need of fund for investment. The studies related to the credit management of banks are limited. In this chapter an attempted has been made to focus on different studies in the banking sector. Crouhy, Gala, Marick (2001) Have summarized the core principles of enterprise wide Risk Management. As per the authors Risk Management culture should percolate from the Board Level to the lowest level employee. Firms will be required to make significant investment necessary to comply with the latest best practices in the new generation of Risk Regulation and Management. Corporate Governance regulation with the advent of Sarbanes-Oxley Act in US and several other legislations in various countries also provide the framework for sound Risk Management structures. Hitherto, Enterprise wide Risk Management existed only for name sake. Generally firms did not institute a truly integrated set of Risk measures, methodologies or Risk Management Architecture. The ensuing decades will usher in a new set of Risk Management tools encompassing all the activities of a Corporation. The integrated Risk Management infrastructure would cover areas like Corporate Compliance, Corporate Governance, capital Management etc. Areas like business risk, reputation risk and strategic risk also will be incorporated in the overall Risk Architecture more formally. As always it will be the Banks and the Financial Services firms which will lead the way in this evolutionary process. The compliance requirements of Basel II and III accords will also oblige Banks and Financial institutions to put in place robust Risk Management methodologies. The authors felt that it is generally felt that Risk Management concerns largely with activities within the firm. However, during the next decade Governments in different countries would desire to have innovatively drawn Risk Management systemfor the whole country. The authors draw reference to the suggestions of Nobel Laureate Robert Merton who suggested that a country with exposure to a few concentrated industries should be obliged to diversify its excessive exposures by arranging appropriate swaps with other countries with similar problems. Risk Management offers many other potential macro applications to improve the management
  18. 18. of their social security measures etc. They draw references to the spread of Risk Management Education worldwide. Carl Felsenfeld (2007) outlined the patterns of international Banking regulation and the sources of governing law. He reviewed the present practices and evolving changes in the field of control systems and regulatory environment. The book dealt a wide area of regulatory aspects of Banking in the United States, regulation of international Banking, international Bank services and international monetary exchange. The work attempted in depth analysis of all aspects of Bank Regulation and Supervision. Money Laundering has been of serious concern worldwide. Its risk has wide ramifications. Money Laundering has leads to the fall of Banks like BCCI in the past. In this context the book on Anti-Money laundering: International Practice and Policies by John Broome Published by Sweet and Maxwell (August 2005) reviews the developments in the area of Money Laundering. The author explains with reference to case studies the possible effects of Money Laundering. The book gives a comprehensive account of the existing rules and practices and suggests several improvements to make the control systems and oversight more failsafe. Hannan and Hanweck (1988) Felt that the insolvency for Banks become true when current losses exhaust capital completely. It also occurs when the return on assets (ROA) is less than the negative capital asset ratio. The probability of insolvency is explained in terms of an equation p, 1/(2(Z2 ). The help of Z-statistics is commonly employed by Academicians in computing probabilities. Daniele Nouy (1995) elaborates the Basel Core Principles for effective Banking Supervision, its innovativeness, content and the challenges of quality implementation. Core Principles are a set of supervisory guidelines aimed at providing a general framework for effective Banking supervision in all countries. They are innovative in the way that they were developed by a mixed drafting group and they were comprehensive in coverage, providing a checklist of the principal features of a well-designed supervisory system. The core Principles specify preconditions for effective banking supervision characteristics of an effective supervisory body, need for credit risk management and elaborates on Principle 22 dealing with supervisory powers. Dearth of skilled human resources, poor financial strength of supervisor and consequent inability to retain talented staff, inadequate autonomy and the need for greater understanding of modern risk management techniques are identified as the main difficulties in quality implementation. The critical elements of infrastructure, legal framework that supports sound banking supervision and a credit culture that supports lending practices are
  19. 19. the essence of a strong banking system. Widespread failures have occurred during a period of increased vulnerability that can be traced back to some regime change induced by policy or by external conditions. Patrick Honohan (2007) Explains the use of budgetary funds to help restructure a large failed Bank/Banking system and the various consequences associated with it. The article discusses how instruments can best be designed to restore Bank capital, liquidity and incentives. It considers how recapitalization can be modelled to ensure right incentives for new operators/managers to operate in a prudent manner ensuring good subsequent performance It discusses how Government’s budget and the interest of the tax payer can be protected and suggest that monetary policy should respond to the recapitalization rather determine its design. The author proposes the following four distinct policy tools to achieve four distinct goals-injecting assets, adjusting capital claims on the Banks, rebalancing the govt’s own debt management and managing monetary policy instruments to maintain stability. The author also assessed the effect of bank recapitalization for budget and debt management and implications for monetary policy and macro-economic environment in his article. Jacques de Larosiere (2008), Former Managing Director of the International Monetary Fund discusses the implications of the new Prudential Framework. He explains at length how the new Regulatory code could have some dangerous side effects. The increased capital requirements as decided by the Basel Committee on Banking Supervision in September 2010 will affect the amount of own funds would affect the profitability of the Banks. The consequences of such increased capital requirements would incentivize the Banks to transfer certain operations that are heavily taxed in terms of capital requirements to shadow banking to avoid the scope of regulation. The risks of such a practice might affect the financial stability. While the Central Banking authorities might contemplate registration and supervision of such shadow banking entities like the hedge funds and other pools, such a course might be more cumbersome than expected. The new regulation would result in the Banks to reduce activities with rather poor margins. For example they may reduce exposure to small and medium enterprises or increase credit costs or concentrate on more profitable but higher risk activities. He is also critical of the proposal of Basel to introduce an absolute leverage ratio that might push Banks to concentrate their assets in riskier operations. The author feels that the banking model which favors financial stability and economic growth might become the victim of the new prudential framework, and force Banks to search for assets with maximum returns despite the attendant risks. William Allen (1999) of Cass Business School, City University London strongly criticizes the Basel Committee on Banking Supervision announcement increasing the capital requirements as
  20. 20. part of BaselIII. The aims of increasing the capital are two-fold. Firstly the objective is to increase the amount of liquid assets heldby Banks and reduce their reliance on short term funding. It also aims at limiting the extent to which Banks can achieve maturity transformation. This focus on liability management, as per him will prove counterproductive, as has been proved historically by the recent financial crisis. As a strategy to meet the new Capital Accord Banks will be forced to amass largeamounts of liquid assets,inaddition to the amounts they willneed to repay special facilities provided by the Governments and Central Banks. The liquidity coverage ratio envisaged in the Accord also will require Banks to hold 100% liquid asset coverage against liquidity commitments, and this will seriously impair the profitability of the Banks. The eligible liquid assets for this purpose will be predominantly Govt. Securities. This might motivate Governments to rely on this cheaper credit and some Governments may resort to abuse of this credit, thus creating a moral hazard. If a Government loses its creditworthiness, this will become 0% for Basel II purposes thus putting the Banks to a sudden jerk as the Securities would become ineligible as liquid assets. The author goes on to explain the conflict of interest of the members of the Basel Committee as some times these members are influenced by the Governments and their recommendations might not be taken as independent judgment. Thus the author thinks that this regulation is seriously defective. He opines that this serious lacuna could be removed by enlarging the opportunities for liquid assets to be created out of the Bank’s claims on the private sector as well. As per him, Commercial Bills could be considered to be eligible for this purpose as they are self-liquidating transactions. As commercial Bills are accepted by Banks, it is less likely that they will be in default. The cardinal point in liquidity management to be remembered is that Commercial Banks cannot aim at zero risk. In that case they would need to their assets in currency and would have to charge their customers for accepting deposits. The solution is not to aim thoughtlessly at excessive liquidity, but in putting in place Robust Risk Management practices. Abel Mateus (2010) which appeared also in the IUP Journal of Banking & Insurance Law, Vol.VIII, Nos.1 & 2, 2010 made a thorough study of the Regulatory reform requirements in the modern context after the global meltdown. He starts by summarizing the basicprinciples that should be covered in the financialreforms. He reviews the progress achieved by the Financial Stability Board (FSB) and Basel Committee on Banking Supervision. He discusses the unresolved issues like the relationship between competition policy and financial stabilization policies. He throws particular light on the oft quoted ‘Too- Big-To-Fail’ (TBTF) concept. He outlines measures to improve the supervision of capital markets to protect consumers and Investors. The articles discusses at length the revision of Bank Capital Requirements and Accounting Procedures, revising the role of Credit Rating Agencies, the supervision and regulation of Hedge Funds, Commodity Funds and private Equity Funds. Complex issues of Derivatives Regulation, Mortgage Securitization etc. Have also been discussed and the author came out with suggested methods to address these difficult issues.
  21. 21. The LSE Report of the London School of Economics and Political Sciences is a very important document in analyzing the role of finance in the build-up to the recent crisis. The tax bail – bail- outs have been criticized and the gradual increase in the equity financing would shift the responsibility of any crisis towards the shareholders. As per Peter Boone and Simon Johnson, the global financial system is facing grave risks due to the bail-out policy of the Western Governments. As Regulatory bodies like the Central Banks are keen to increase the degree of oversight, the Banks would create new loopholes. The authors opine that in the absence of any international treaty for the regulation of global financial institutions, macro prudential measures and proper Risk Management systems are necessary for the management of financial system. As per Goodhart the cost of Bank failures can be very large which lends justification to impose tighter supervisory and regulatory measures. He argues that the proposals under the Basel III to increase the capital higher levels like 20-30% are very justified. This is strongly objected by Laurence Kotlikoff who feels such higher levels of capital would penalize the Shareholders and Depositors and goes against the very principle that Financial Institutions are agencies which should have the benefits of gearing. Bessone, Biagio (2012)feels that Banks are specialas they not only acceptand deploy largeamounts of uncollateralized public funds in a fiduciary capacity, but alsoleveragesuch funds through credit creation. Thus Banks have a fiduciary responsibility. Banks play a crucial role in deploying funds mobilized through deposits for financing economic activity and providing the lifelinefor the payments system. A wellregulated Banking System is very central to the country’s economy. The author examines the way Banking and other financial institutions interact with each other during different stages of economic development. As per the author the shareholders of the banks who are supposedly owners have only a minor stake and the considerable leveraging capacity of banks put them in control of very large volume of public funds, though their actual stake may be very limited say sometimes only ten per cent or even lower. The author feels that in the light of this leveraging capacity, the Banks should act as trustees. The author underlines the need for the Supervisors and Regulators of the country’s Banking system to discharge the onerous responsibility of ensuring that the Bank Managements fulfill this fiduciary relationship well, as in a developing economy there is far less tolerance for downside risks among depositors, many of whom place their life savings in the Banks. The author feels that diversification of ownership is desirable as the risk of concentration of ownership can lead to moral hazard problem and linkages of owners with businesses. When the ownership is diversified there is greater need for corporate governance and professional management in order to safeguard the depositors’ interest and ensure systemic stability. Hence the regulatory and supervisory framework has to ensure that banks follow prudent and transparent accounting practices and are managed in accordance with the best practices for risk management.
  22. 22. G.Dalai, D.Rutherberg, M.Sarnat and B.Z.Schreiber (2004) Risk is intrinsic to banking. However the management of risk has gained prominence in view of the growing sophistication of banking operations, derivatives trading, securities underwriting and corporate advisory business etc. Risks have also increased on account of the on-line electronic banking, provision of bill presentation and payment services etc. The major risks faced by financial institutions are of course credit risk, interest rate risk, foreign exchange risk and liquidity risk. Credit risk management requires that Banks develop loan assessment policies and administration of loan portfolio, fixing prudential per borrower, per group limits etc. The tendency for excessive dependence on collateral should also be looked into. The other weaknesses in Credit Risk Management are inadequate risk pricing, absence of loan review mechanism and post sanction surveillance. Interest rate risk arises due to changes in interest rates significantly impacting the net interest income, mismatches between the time when interest rates on asset and liability are reset etc. Management of interest rate risk involves employing methods like Value-at- Risk (VaR), a standard approach to assess potential loss that could crystallize on trading portfolio due to variations in market interest rates and prices. Foreign Exchange risk is due to running open positions. The risk of open positions of late has increased due to wide variations in exchange risks. The Board of Directors should law down strict intra-day and overnight positions to ensure that the Foreign Exchange risk is under control. Chief Risk Officer, Alden Toevs (2008) of Commonwealth Bank of Australia states that a major failure of risk management highlighted by the globalfinancialcrisis was the inability of financial institutions to view risk on a holistic basis. ‘The global financial crisis exposed, with chilling clarity, the dangers of thinking in silos, particularly where risk management is concerned’ says the author. The malady is due to the Banks focusing on individual risk exposures without taking into consideration the broader picture. As per the author the root of the problem is the failure of the Banks to consider risks on an enterprise-wide basis. The new relevance and urgency for implementing the Enterprise Risk Management (ERM) is due to the regulatory insistence with a number of proposals to ensure that institutions stay focused on the big picture. In a way the Three Pillar Approach frame work of the Basel II Accord is an effort to fulfill this requirement. The risk weighted approaches to Credit Risk on the basis of the asset quality, allocation of capital to Operational Risk and Market Risks nearly capture all the risks attendant to a Bank’s functioning.
  23. 23. 2.3 Literature review: Indian Subcontinent Perspective Rekha Arunkumar and Koteshwar (2010) feel that the Credit Risk is the oldest and biggest risk that Banks, by virtue of their very nature of business inherit. The pre-dominance of credit risk is the main component in the capital allocation. As per their estimate credit risk takes the major part of the Risk Management apparatus accounting for over 70 per cent of all Risks. As per them the Market Risk and Operational Risk are important, but more attention needs to be paid to the Credit Risk Management in Banks. Reserve Bank of India, Volume 3, 1967-81 gives very valuable account of the evolution of Central Banking in India. This third volume describes vividly the background against which the Reserve Bank of India came into being on April 1, 1935. Before the establishment of the Reserve Bank, the Central Banking functions were handled by the Imperial Bank of India. The Royal Commission on Indian Currency and Finance (Hilton Young Commission) 1926 recommended that there is conflict of interest in the Imperial Bank of India functioning as the controller of currency while also functioning as a Commercial Bank. After detailed analysis on the ownership, constitution and composition of the ownership, RBI was established by a Bill in the Legislative Assembly. It was in 1948 that the Reserve Bank of India was nationalized under the RBI(Transfer to Public Ownership) Act, 1948. The earlier volumes viz., Volume I and Volume II covered the developments in Central Banking up to 1967. Volume III covers the period 1967 to 1981. This is the most dynamic period in the history of Commercial Banking. The Government was very critical of the attitudes of the Private Banks for their failure to be socially responsible, which led the Govt. To impose social control on Banks. Mrs. Indira Gandhi nationalized 14 Banks during July 1969. Reserve Bank was given newer responsibilities in terms of the Developmental role. The RBI was assigned not only the role of maintaining monetary and fiscal stability but also the developmental role of establishing institutional framework to complement commercial banking to help agriculture, SSI and Export Sectors. RBI,despite the criticismof not enjoying adequate autonomy due to the interference of the Finance Ministry (with Govt. Ownership of most Banking Companies) has been able to commendably discharge the regulatory functions.
  24. 24. True it was during this period that the performance of the Indian Banks deteriorated with most Nationalized Banks wiping out their capital and their Balance Sheets showing huge negativities in terms of quality of assets etc. The period covered by the Volume III is the pre-liberalization and pre-reform period and the Reserve Bank had to compromise on its regulatory and supervisory role in view of the Govt. Control over Banks. Banking Law and Regulation 2005 published by Aspen Publishers looks at the regulatory practices relating to Banks and Financial Institutions. The book analyses the various provisions of the Gramm-Leach Baily Act, 1999, the Financial Institutions Recovery and Enforcement Act 2002, the Federal Deposit Insurance Corporation Improvement Act, and the Fair and Accurate Credit Transactions Act 2003. S.K.Bagchi (2006) observed that in the world of finance more specifically in Banking, Credit Risk is the most predominant risk in Banking and occupies roughly 90-95 per cent of risk segment. The remaining fraction is on account of Market Risk, Operations Risk etc. He feels that so much of concern on operational risk is misplaced. As per him, it may be just one to two per cent of Bank’s risk. For this small fraction, instituting an elaborate mechanism may be unwarranted. A well laid out Risk Management System should give its best attention to Credit Risk and Market Risk. In instituting the Risk Management apparatus, Banks seem to be giving equal priority to these three Risks viz., Credit Risk, Operational Risk and Market Risk. This may prove counter-productive. Securitization and Reconstruction of Financial Assets Enactment of Security Interest Act, 2002. (SARFAESI ACT). (42) Govt. Of India has taken the initiative of making the legislation to help Banks to provide better Risk Management for their asset portfolio. Risk Management of the Loan book has been posing a challenge to the Banks and Financial Institutions which are helpless in view of the protracted legal processes. The act enables Banks to realize their dues without intervention of Courts and Tribunals. As a part of the Risk Management strategies, Banks can set up Asset Management Companies (AMC) to acquire Non Performing Assets of Banks and Financial agencies by paying the consideration in the form of Debentures, Bonds etc. This relieves the Bank transferring the asset to concentrate on their loan book to secure that the quality of the portfolio does not deteriorate. The actcontains severe penalties on the debtors. The AMC is vested with the power of issuing notices to the Borrowers calling for repayment within 60 days. If the borrower fails to meet the commitment, the AMC can take possession of the secured assets and appoint any Agency to manage the secured assets. Borrowers are given the option of appealing to the Debt Tribunal, but only after paying 75% of the amount claimed by the AMC. There are strict provisions of penalties for offences or default by the securitization or reconstruction company. In caseof default in registration of transactions, the company officials would be fined up to.
  25. 25. Rs.5,000/- per day. Similarly non-compliance of the RBI directions also attract fine up to Rs.5 lakhs and additional fine of Rs.10,000/- per day. This has proved to be a very effective Risk Management Tool in the hands of the Banks. The Report of the Banking Commission 1972 RBI Mumbai. The Commission made several recommendations for making the Indian Banking system healthier. The commission observed that the systemof controls and supervisory oversight were lax and underlined the need for closure supervision of Banks to avoid Bank failures. However most of the recommendations of the Commission lost their relevance in view of the priorities of the Government which is more concerned with its political compulsions. The nationalization of Banks and the tight control on the Banks of the Govt. Left little scope for implementation of the recommendations of the Commission. If only the recommendations which are meant to restore tighter regulatory measures, strengthening of the internal control systems and professionalization of the Bank Boards were properly appreciated and implementation, Indian Banks would not have ended in the mess of erosion of capital, mounting burden of non-performing assets etc. A well-known study analyzing the performance of Commercial Banks in India was conducted by Vashist (1991). Avtar Krishna Vashist: Public Sector Banks in India – H,.K.Publishers & Distributors, New Delhi 1991. In order to find out relative performance of different Banks, composite weighted growth index, relative growth index and average growth index of Banks were constructed. The study revealed that Commercial Banks did well with respect to Branch expansion, deposit mobilization and deployment of credit to the Priority Sectors. But they showed poor performance in terms of profitability. After identifying the causes of the decline in profitability a number of suggestions were made to improve the performance of Commercial Banks in the Country. Dr.Atul Mehrotra, Dean, Vishwakarma Institute of Management emphasizes the need for promotion of Corporate Governance in Banks in these uncertain and risky times. This paper discussed at length Corporate Governance related aspects in Banks as also touches upon the principles for enhancing Corporate Governance in Banks as suggested by BCBS. The author felt that despite the RBI’s initiatives on the recommendations of the Consultative Group of Directors of Banks/Financial Institutions under the Chairmanship of Dr.A.S.Ganguly, member of the Board for Financial Supervision, there is more ground to be covered before Indian Banks are in a position to attain good Governance Standards. As per the author he Public Sector Banks with Government ownership control almost over 80 per cent of banking business in India. This complicates the role of the Reserve Bank of India as the regulator of the financial system. The role of the Government performing simultaneously multiple functions such as the manager, owner, quasi-regulator and sometimes even as super-
  26. 26. regulator presents difficulties inthe matter. Unless there is clarity in the role of the Government, and unless Boards of the banks are given the desired level of autonomy, it will be difficult to set up healthy governance standards in the Banks. As a part of the Review of literature, the Reports of various Committees and Commissions have been perused. Important among them are given below: The Report of the Committee on the Financial System 1991 Chairman Shri M.Narasimham (1991) by far is the most important document while discussing the Reform process in Indian Banking. The following recommendations made by the Committee which were largely implemented put the Indian Banking system on an even keel:
  27. 27. Chapter -3 Conceptual Framework SERIAL NO PARTICULARS PAGE NO. 3.1 Bank 19 3.2 Banking 19 3.3 Credit 19 3.4 credit Management 20 3.5 Risk 20 3.6 Risk Management 20 3.7 Credit Risk 21 3.8 Management Credit Risk 21 3.9 Credit Administration 22 3.10 Rating Review 22 3.11 Problem Credit 23 3.12 Managing Problem Credits 23 3.13 Terms & Concept UsedIn This Study 24
  28. 28. 3.1: Bank Bank is a financial institution that collects society’s surplus cash and gives a part of that as loan to investors for earning profit. So, bank is an intermediary that makes relationship between the owner of surplus savings and the investors of deficit capital. A bank is a financial intermediary that creates credit by lending money to a borrower, thereby creating a corresponding deposit on the bank's balance sheet. Lending activities can be performed either directly or indirectly through capital markets. Due to their importance in the financial system and influence on national economies, banks are highly regulated in most countries. 3.2: Banking Simply the activities of bank are referred as banking. It includes account opening, receiving deposit; DD, TT issuing & receiving; loan disbursement & collection etc. All activities of bank together are called banking. Source: Dr. R.M. Debnath- (1994) Business of Banking.1st Edition 3.3 Credit The word “Credit” is derived from Latin word “Credo” meaning ‘I believe’. It is usually defined as one’s ability to buy with a promise to pay. In general credit means the granting of a period of time by a creditor to a debtor at the expiration of which the latter must pay the debt. From banker point of view, credit is the confidence of the lender on the ability and willingness of the borrower to repay the debts at a future date. Source: M.A. Matin (2008)- Credit Operations and Risk Management in Commercial Banks. P.-2
  29. 29. 3.4: credit Management Credit management includes all activities related with bank credit i.e., volume, mixes, level, movements and the like. Credit management is usually regarded as assuring that customers pay on time, credit costs are kept low, and poor debts are managed in such a manner that payment is received without damaging the relationship with those customers. An approved credit management policy can offer assurances to a financing bank, which may facilitate financing. 3.5: Risk Risks are usually defined by the adverse impact on profitability of several distinct sources of uncertainty. While the types and degree of risks an organization may be exposed to depend upon a number of factors such as its size, complexity business activities, volume etc. it is believed that generally the banks face Credit, Market, Liquidity, Operational, Compliance / legal / regulatory and reputation risks. Risks are normally classified within 3 categories: a) Risks inherent to the external context b) Risks inherent to operative management c) Risks inherent to financial management. 3.6: Risk Management Risk Management is a discipline at the core of every financial institution and encompasses all the activities that affect its risk profile. Proper risk management and internal control help organizations understand the risks they are exposed to, put controls in place to counter threats, and effectively pursue their objectives. They are therefore an important aspect of an organization’s governance, management, and operations. Professional accountants can and
  30. 30. should play a leading role in helping their organizations achieve an integrated, organization-wide approach to risk management and internal control—which ultimately helps create, enhance, and protect stakeholder value. 3.7: Credit Risk Credit risk is one of the major risks faced by the Bank. This can be described as potential loss arising from the failure of a counter party to perform according to contractual arrangement with the Bank. The failure may arise due to unwillingness of the counter party or decline in economic condition etc. Bank's risk management has been designed to address all these issues. 3.8: Management Credit Risk The Credit Risk management includes borrower risk analysis, industry risk analysis, historical financial analysis, projected financial performance, the conduct of the account, and security of proposed loan. The management originates from relationship manager/account officer and approved by Credit Review Committee at Head Office. The Credit Committee under elevated authority approves the credit proposals. Executive Committee of the Board approves the proposals beyond the authority limit of the Management. The Board of Directors reviews the proposals approved by the Executive Committee. A credit risk management framework encompasses the scope of risks to be managed, the process/systems and procedures to manage risk and the roles and responsibilities of individuals involved in risk management. In broad sense credit risk management process includes:  Identification  Assessment  Control  Monitoring
  31. 31. 3.9: Credit Administration Ongoing administration of the credit portfolio is an essential part of the credit process. Credit administration function is basically a back office activity that support and control extension and maintenance of credit. A typical credit administration unit performs following functions:  Documentation  Credit Disbursement  Credit monitoring  Loan Repayment  Maintenance of Credit Files  Collateral and Security Documents. 3.10: Rating Review The rating review can be two-fold: a) Continuous monitoring by those who assigned the rating. The Relationship Managers (RMs) generally have aclosecontact with the borrower and are expected to keep an eye on the financial stability of the borrower. In the event of any deterioration the ratings are immediately revised /reviewed. b) Secondly the risk review functions of the bank or business lines also conduct periodical review of ratings at the time of risk review of credit portfolio. Risk ratings should be assigned at the inception of lending, and updated at least annually. Institutions should, however, review ratings as and when adverse events occur. A separate function independent of loan origination should review Risk ratings.
  32. 32. 3.11: Problem Credit Problem credit refers to those which the borrowers do not return as and when required in spite of repeated reminders and not able to show any acceptable reasons for such failure. Source: Dr. A.R. Khan(1996) -Bank Management: A Fund Emphasis. P.-191 4.12: Managing Problem Credits  The institution should establish a system that helps identify problem loan ahead of time when there may be more options available for remedial measures.  A bank’s credit risk policies should clearly set out how the bank will manage problem credits. Banks differ on the methods and organization they use to manage problem credits. When a bank has significant credit-related problems, it is important to segregate the workout function from the credit origination function.  A problem loan management process encompass following basic elements: a. Negotiation and follow-up b. Workout remedial strategies c. Review of collateral and security document d. Status Report and Review. Source: Dr. A.R. Khan-Bank Management: A Fund Emphasis.
  33. 33. 3.13: Terms & Concept Used In This Study Current assets Current assets include cash in hand and with bank, investment and other assets. Current liabilities Current liabilities include deposits and other accounts (other than fixed deposits and deposit pension scheme) bills payable and other liabilities. Total income Total income is considered as total income after provision for bad and doubtful debts. Equity Equity includes paid up capital quasi-equity, reserve fund and other reserves. Bad debts Bad debts are considered as fixed expenses being it is generally treated as administrative expenses which are fixed in future. Borrower In this study a borrower is a person who enjoys credit facilities fromthe bank in order to start or organize an enterprise especially one involving financial risk. Pledge In a pledge the costumer delivers the possession of the securities to the banker and the banker holds the possession of securities until the debt is discharged. According to section 172 of contract Act 1872, “Pledge is a bailment of goods as security for payment of a debt or performance of a promise.” Under section 148 of this Act, bailment is the delivery of a goods by one person to another for some purpose, under a contract that the good shall,when the purpose is accomplished, be returned or otherwise disposed of, according to the direction of the person delivering them” The person who delivers the goods as security is called is called the “pledger” and the person to whom the goods are so delivered is called the “Pledgee”. The ownership remains with the pledger. Customer
  34. 34. In this study customer means customers are the people who deal with Bank. A customer is a person who has some sort of accounts either savings or current or some similar relations with a Bank. Some definitions of Customer are given below: 1). To be a customer, one should regularly maintain banking practice. - Sir John Pagget.(1996) 2). Customer is a person who has a Bank Account, for whom bank is agreed to collect any commodities and even any bank that open an account in another bank, also be treated as a customer. - Uniform Commercial Board. Banker Any person carrying on the business of banking is a banker. Generally, a banker is a person, who operates banking activities. Some definitions of banker are given below. 1). A banker is a dealers in debts his own and other people. - Prof. Crowther (1999) 2). A banker includes a person, corporation, or company acting as banker. -Negotiable Instrument Act, 1881. Letter of Credit The contract between the importer and the exporter is given a legal shape by the banker (authorized dealer) who undertakes to make the payment for the imports on behalf of the importer. The banker undertakes the responsibility through “letter of credit” Which, for this purpose is a letter of commitment issued by the importers banker to his foreign Correspondent banker or branch, if any, in the exporter’s country undertaking to horror bills of exchange drawn by the named exporter in accordance with and upon fulfillment of the terms stipulated in the letter. From the importer’s side it is an import letter of credit (out ward) and from the exporters side it is an export letter of credit (inward), its opening being always arranged by the import. Ratio Ratio is a fraction whose number is the antecedent and denominator the consequent. It may also be defined as the relationship or proportion that one amount bears to another, the first number being numerator and the later denominator.
  35. 35. Net Profit Net profit is the profit, which arise after adding the operating income from the gross profit and deducting operating expenses from the gross profit. Consumers Credit Scheme Consumer Credit is arelatively new fieldof collateral-free financeof the Bank. People with limited income can avail credit to buy household goods including car computer and other consumer durables. Lease Finance This has been designed to assist and encourage the genuine and capable entrepreneurs and professionals for acquiring capital machinery, medical equipment, computers and other items which may help them to be economically self-reliant. Terms and conditions of this credit have been made easier than before in order to help the potential entrepreneurs to acquire equipment of production and services and repay the liability gradually from earnings on the basis of “Pay as you earn”. Source: E.F. Brigham & J.F. Houston (2000) - Fundamentals of Financial Management. 9th Edition. Net Worth Net worth is the wealth of the shareholders at book value. It is the difference between total assets and total liabilities.
  36. 36. Chapter – Four Organizational Overview Serial No. Particulars Page No. 4.1 History of Mercantile Bank Limited 28 4.2 Vision and Mission 30 4.3 Objectives 30 4.4 Core Values 31 4.5 Corporate Portfolio 31 4.6 Management of MBL 32 4.7 Human Resource Management of MBL 33 4.8 Corporate Information at a Glance 34 4.9 Hierarchy of Position in MBL 35 4.10 Coverage of MBL 36 4.11 Products and Services of MBL 37
  37. 37. 4.1 History of Mercantile Bank Limited Mercantile Bank Limited is a commercial bank headquartered in Dhaka, Bangladesh. It was established on 20 May 1999; and commenced commercial banking operation on 2 June 1999. Mercantile Bank Limited was incorporated in Bangladesh as a Public Limited Company with limited liability under the Bank Companies Act, 1991 on May 20, 1999 and commenced commercial operation on June 02, 1999. It was listed in Dhaka Stock Exchange and Chittagong Stock Exchange on February 16, 2004 and February 26, 2004 respectively. The Bank has 101 branches spread all over the country. MBL is a highly capitalized new generation Bank with an Authorized Capital and paid-up Capital of Tk. 12,000 million and Tk. 7391.6 million respectively. With assets of TK. 178,007,035,824(up to June 2015) and more than 1,900 employees, the bank has diversified activities in retail banking, corporate banking and international trade. Present scenario of MBL from the Dhaka stock market – Basic Information: Authorized Capital in BDT* (mn) 12,000.0 52 Week's Range 9.7 - 16 Paid-up Capital in BDT* (mn) 7,391.6 Nature Face Value 10.0 Market Lot 1 Total no. of Securities 739,156,701 Business Segment Bank (source There are 28 sponsors involved in creating Mercantile Bank Limited; the sponsors of the bank have a long heritage of trade, commerce and industry. They are highly regarded for their entrepreneurial competence. The sponsors happen to be members of different professional groups among whom are also renowned banking professionals having vast range of banking knowledge. There are also members who are associated with other financial institutions insurance Companies, leasing companies etc MBL has been able to establish itself as a leading third generation private commercial bank by dint of its prudent policy guidelines coupled with proper execution, wider range of banking products and excellent customer services. The core activities of the Bank are to provide all kinds of commercial banking services including deposits mobilization, providing loans,discounting bills,
  38. 38. foreign exchange business, off-shore banking, treasury function, card business and mobile banking. MBL caters card services to its customers by VISA dual prepaid card, VISA DualHajjCard, Credit Card and Debit card, and International/ Dual cards with various -to-date facilities. MBL is continuously expanding its ATM network and inking contract with the other banks with a view to making its card service more attractive and convenient to all. Except these, MBL is also providing other services through its (02) two subsidiary companies MBL has 2 (Two) subsidiaries namely Mercantile Bank Securities Limited (MBSL) and Mercantile Exchange House (UK) Limited. MBSL formed on 27 June 2010 to deal with stock dealing and broking. MBSL started its commercial operation on September 14, 2011 through obtaining stock dealer and broker license from concerned authorities. Mercantile Exchange House (UK) Limited, another subsidiary company of MBL incorporated as private limited company on December 01, 2010. It commenced its business operation at Birmingham in UK on December 06, 2011. Currently, it is operating with two branches; one in Birmingham and another in London with a view to providing faster, easier and safer remittance services to the Bangladeshi expatriate living and working in UK. MBL has broad network coverage across the country. It has 101 (One Hundred One) branches including 5 (Five) SME/Krishi branches as on June, 2015. The Bank has 2 (Two) Off-shore Banking Units (OBU) operating at Gulshan and Chittagong EPZ areas. MBL has 120 ATM booths and 20 CDMs (Cash Deposits Machine) as on December 2014 covering important locations across the country. Mercantile Bank Securities Limited (MBSL), a subsidiary company of MBL dealing with stock and broking has 7 (seven) branches across the country. Mercantile Exchange House (UK) Limited, another fully owned subsidiary company of MBL is facilitating inflow of remittance with 2 (two) branches in Birmingham and London, UK.
  39. 39. 4.2 Vision and Mission Vision The gist of our vision is “Would make finest corporate citizen.” Mission Mission of this bank to become most caring, focused for equitable growth based on diversified deployment of resources and nevertheless would remain healthy and gainfully profitable bank. There are also some other mission those are-  To be the most caring and customer friendly and service oriented bank.  To create a technology based most efficient banking environment for our customers.  To ensure ethics and transparency in all levels  To ensures sustainable growth and establish full value of the honorable shareholders and  Above all, to add effective contribution to the national economy 4.3 Objectives Strategic objectives  to increase shareholders' value  to achieve economic value addition  to be market leader in product innovation  to be one of the top three financial institutions in Bangladesh in terms of efficiency  to be one of the top five financial institutions in Bangladesh in terms of market share in all significant market segments we serve
  40. 40. 4.4 Core Values 1. Customer delight Customer satisfaction pervades all our activities. We appreciate that Customer’s satisfaction is critical for our success. 2. Innovation Spurring innovation for reinforcement of our business. Origination and materialization of change management for attainment of perfection and we believe change is always constant. 3. Ethical Values We continue to be responsible, ethical, sincere and transparent in our thoughts and actions. 4. Caring for Human Resources Realization of latent potentialities of employees, respecting individual worth and dignity to ensure smooth career progression as well as welfare orientation in Human Resources management policy and practices. 5. Commitment We always keep high on the agenda our commitment towards valued depositors as their trustworthy custodian and to maintain the same spirit for all other stakeholders. 6. Socially Responsible Constant endeavor to act and respond in a socially responsible manner keeping in mind society and our country. To care for our environment. 7. Shareholders Value Creation and Maximization of values for our shareholders. 4.5 Corporate Portfolio 1. Ensure customers satisfaction by meeting their demands with excellent customer services. 2. Enlarge customers freedom by designing need based banking products and services. 3. Manage credit risk by diversified loan portfolio with emphasis on SME and Agriculture financing. 4. Mitigate different risks through efficient risk management techniques.
  41. 41. 5. Strengthen internal control and compliance (ICC) system to establish a very systematic and effective compliant culture. 6. Combination of skilled human resources and state-of-art technology in providing banking services. 7. Focus on green banking by ensuring eco-friendly financing. 8. Corporate clients credit rating to remain compliant in terms of regulatory capital requirement 4.6 Management of MBL Management is the process of planning, organizing, leading and controlling the work of organization members and of using all available organizational resources to reach stated organizational goals. The strength of a bank depends of the strength of its management team. MBL is proud to have ateam of highly motivated, well-educated and experienced executives who have been contributing substantially to the continued progress of the bank. Managerial effectiveness has been measured in MBL in terms of come selected criteria such deposit mobilization, loans and advances made, loan recovery, profitability and productivity. It has been found that MBL is effective in respect of branch expansion, loan disbursement, loan recovery etc. With a short span of time, MBL has become one of the leading and most successful bank not only among the third generation banks but also it superseded many other banks and financial institutions belonging to second and even first generation banks for the point of view of its excellent business performance, extraordinary corporate culture and strong team work under the dynamic leadership of its management. Management is trying to support and assist well- motivated and experienced affairs to run the day to day affairs of the bank smoothly. For maintains quality management, it is required to train-up more official at head office and branch level in respect of sanctioning, disbursement and recovery of credit, project appraisals, customer services etc.
  42. 42. 4.7 Human Resources Management of MBL To suit the demand of time as well as to reach Banking Business to a large community, MBL the first pioneer in the country converted its mode of operation and started its pace as full-fledged Bank. To ensure the proper implementation of Banking Principles in its operation, the bank framed a strong audit committee consists of Economists and Bankers of the country. Md. ShahabuddinAlam Director Md. Anwarul Haque Director A. S. M. Feroz Alam Director M. Amanullah Director Mohd. Selim Director MorshedAlam, M.P Director Al-Haj Mosharref Hossain Director Dr. Md. Rahmat Ullah IndependentDirector M Ehsanul Haque Managing Director& CEO Al-Haj Akram Hossain (Humayun) Chairman M. S. Ahsan Vice Chairman Md. Abdul Hannan Vice Chairman A.K.M. ShaheedReza Director Dr. Mahmood Osman Imam IndependentDirector
  43. 43. 4.8 Corporate Information at a Glance Registered Name: Mercantile Bank Limited Head Office: 61, Dilkusha Commercial Area Dhaka-1000 Phone: +88-02-9559333, 9553892 Fax: +88-02-9561213 Swift: MBLBBDDH E-mail: Website: Date of incorporation: 20 May 1999 Authorized Capital: 12,000.0 (mn tk) Paid up capital: 739,156,701 tk Number of Branches: 101 Chairman: Al-Haj Akram Hossain (Humayun) Zonal Office Chittagong Zone Mishkat Arcade (Level-1) 21/1, Agrabad C/A, Chittagong Phone: 031-2529445, 716421, 723181, 721772 Fax: 88-031-2529445. Training Institute Swadesh Towerin 41/6 Purana Paltan Dhaka-1000 Phone: 7174016 Fax: 88-02-9571096 Javed Tariq, Principalg
  44. 44. 4.9 Hierarchy of Position in MBL Chairman,Advisor,Boardof Director ManagingDirector SeniourExecutiveVice President Executive Vice President Vice President SeniourAsst.Vice President AssistantVice Prisident SeniourPrincipal Officer Principal Officer Executive Officer Officer Trainee Officer JuniourOfficer AssistantOfficer Trainee AssistantOfficer
  45. 45. 4.10 Coverage of MBL Mercantile Bank limited now cover almost all the district of Bangladesh. Area that covered by MBL are disposed via picture.
  46. 46. 4.11 Products and Services of MBL A. DepositProducts: 1. Current Deposit (CD) Accounts 2. Savings Bank Deposit (SB) Accounts 3. Special Notice Deposit (SND) 4. Fixed Deposit Receipt (FDR) 5. Scheme Deposits. a) Monthly Saving Scheme (MSS) b) Double Benefit Deposit Scheme (DBDS) c) Family Maintenance Deposit Scheme (FMDS) d) Quarterly Benefit Deposit Scheme (QBDS) e) 1.5 Times Benefit Deposit Scheme (1.5TBDS) f) Advance Benefit Deposit Scheme (ABDS) g) Special Savings Scheme (SSS) h) Education Planning Deposit Scheme (EPDS)] i) Super Benefit Deposit Scheme (SBDS) 6. School Banking. B. Loans & Advances: 1. Retail Loans a) Consumer Credit Scheme b) Lease Finance c) Car Loan Scheme d) Home Loan Scheme e) Doctors’ Credit Scheme f) Any Purpose Loan (Personal Loan Scheme) g) House Furnishing Loan h) Overseas Employment Loan Scheme
  47. 47. i) Cottage Loan j) Education Loan 2. Corporate Loans a) Short Term Finance b) Long Term Finance c) Real Estate Finance d) Import Finance/Trade Finance e) Work Order Financing/Construction Business f) Export Finance g) Structured Finance h) Loan Syndication C. Agriculture Loan: 1. NABANNO (Krishi / Polli Loan) 2. SAKTI (ETP / Bio-Gas / Solar Energy Loan) D. MBL Card: 1. Debit Card 2. Credit Card (Local Card, International Card, Dual Currency Card) 3. MBL Pre-Paid Card (Student Card, Hajj Card, Travel card) E. Other Services: 1. Online Banking 2. Mobile Banking (MyCash) 3. SMS Banking 4. Locker Service 5. ATM Booth Services 6. Cash Deposit Machine (CDM) Service
  48. 48. Chapter-Five Analysis Content Page no. 5.1 Deposit andDeposit Growthrate of MBL 40 5.2 Deposit Mix for MercantileBank Limited 42 5.3 Loans and Advances 43 5.4 Sector wise loans and advances 45 5.5 Investment of MBL 46 5.6 Loan Deposit Ratio 49 5.7 Capital Adequacy Ratio 50 5.8 Returnon Investment (ROI): 52 5.9 Earnings per Share 53 5.10 Returnon Loans and Advances 53 5.11 Non-performing Loanof MBL 54
  49. 49. 5.1 Deposit and Deposit Growth rate of MBL Mercantile Bank Ltd. offers different attractive deposit account like Current Deposit (CD) Accounts, Savings Bank Deposit (SBD) Accounts, Special Notice Deposit (SND), Fixed Deposit Receipt (FDR), Scheme Deposits, and School Banking etc. Collection of deposit for the last five years and its growth rate are as follows- Table 5.1.1: Deposit growth rate of MBL from the year 2010 to 2014 Year Deposit (In Million Taka) Deposit Growth Rate ( %) 2009 58033.47 - 2010 75629.14 30.32% 2011 102262.02 35.22% 2012 132093.64 29.17% 2013 124566.50 -5.70% 2014 140475.84 12.77% Average Growth Rate _ 20.36% (Source: annual report of MBL 2010, 2011, 2012, 2013, 2014) The banks deposit was Tk 75629.14 million as on 31st December 2010. And the deposit increased up to 102262.02 as on 31st Dec 2011. So the bank increase its deposit by Tk 26632.88 million and the rate of the growth is 35.22%. It continues its growth and the deposit reached at Tk 132093.64 million and also the growth rate 29.17%. But in the year 2013 the deposit decreased by Tk 7527.14 million and the rate is -5.70%. The bank againcontinues its growth on deposit sector and reached a new deposit milestone 140475.84 that is the highest deposit for the this year the deposit increased by 15909.34 and the rate of growth in deposit sector was 12.77%.
  50. 50. CHART: 5.1.2 Graphical Representation of Deposit Position of MBL 2010-2014 Chart 5.1.3: Deposit growth Rate of MBL 75629.14 102262.02 132093.64 124566.5 140475.84 2010 2011 2012 2013 2014 DEPOSIT POSITION OF MBL DEPOSIT (BDT in Million) 30.32% 35.22% 29.17% -5.70% 12.77% 2010 2011 2012 2013 2014 Deposit Growth Rate Deposit Growth Rate
  51. 51. 5.2: Deposit Mix for Mercantile Bank Limited Mercantile Bank Ltd. offers different attractive deposit account to its customers with an attractive interest rate and other facilities. Maintaining the profitable deposit mix is one of the main objectives for the top-level managers. The deposit mix for MBL is as follows: Table: 5.2.1 Deposit Mix for Mercantile Bank Ltd As on December 31, 2010, 2011, 2012, 2013, 2014 SL. No. Types of Deposits Taka (in million) 2010 2011 2012 2013 2014 1 Deposits under scheme 28612.69 35319.71 43333.46 50214.55 55176.86 2 Fixed Deposits 25865.96 38875.50 46250.92 41945.69 46057.22 3 Savings Deposits 5238.95 4929.74 6869.66 8510.14 10534.22 4 Current deposits 4089.93 3440.81 4491.20 4105.43 5494.16 5 Short Notice Deposits 2822.01 2221.59 5087.39 7795.86 8850.41 6 Other Deposits 8999.60 16474.67 26061.01 11995.30 14362.97 7 Call Deposits - - - - - Total 75629.14 102262.02 132093.64 124566.50 140475.84 (Source: Annual Report 2010- 2014 of Mercantile Bank Limited.)
  52. 52. Chart: 5.2.2 Graphical Representation of Deposit Mix of MBL 2010-2014 5.3 Loans and Advances Table 5.3.1 Loans and Advances of MBL from the year 2010 to 2014 Deployment of loan and advances of MBL Year Loans and Advances (In Million Taka) Growth Rate ( %) 2009 48295.09 - 2010 66377.70 25.70% 2011 79,999.80 20.52% 2012 93610.87 17.01% 2013 97688.50 4.36% 2014 117060.03 19.83% Average Growth Rate _ 17.51% (Source:annual reportof MBL 2010, 2011, 2012, 2013, 2014) 28612.69 35319.71 43333.46 50214.55 55176.86 25865.96 38875.5 46250.92 41945.69 46057.22 5238.95 4929.74 6869.66 8510.14 10534.22 2822.01 3440.81 4491.2 4105.43 5494.16 2822.01 2221.59 5087.39 7795.86 8850.41 8999.6 16474.67 26061.01 11995.3 14362.97 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4 DEPOSIT MIX OF MBL Deposits under scheme Fixed Deposits Savings Deposits Current deposits Short Notice Deposits Other Deposits
  53. 53. It can be seen from the table and the graph that the Loans and Advances of MBL are increasing every year at a very high rate. In the year 2009 2010 2011 2012 2013 and 2014 the increasing rate is more compared to the other two years. The increasing trend reflects that the Advances will also keep increasing in the coming years. Chart-5.3.2: Graphical presentation of Loans and Advances of MBL Chart-5.3.3: Graphical presentation of Loans and Advances growth rate of MBL 66377.7 79,999.80 93610.87 97688.5 117060.03 2010 2011 2012 2013 2014 Loan and Avances (BDT in Million) Loan and Avances (BDT in Million) 25.70% 20.52% 17.01% 4.36% 19.83% 2010 2011 2012 2013 2014 Loan and Advances Growth Rate Loan and Advances Growth Rate
  54. 54. This growth rate indicate a higher rate of growth in in the earliest 3 year. Then the Growth rate increased little bit slowly. In the earliest year of 2010, 2011 & 2012 the rate of growth was 25.7%, 14.96 and 22.68% respectively. But in the year of 2013 tis growth rate slopes down and the rate is only 4.36%. The bank handled the situation professionally and come to the rate of 19.83% and it also increased its loan and advanced growth rate. 5.4 Sector Wise Loan and Advance MBL provide its loan and advance in various sector like garments, trade, SME, housing, textile, transportation agriculture and so on. It provide loan and advance in various sector to ensure proper use of its fund. Sector wise break up of loan and advances of MBL are as follows- Table 5.4.1: Sector wise loans and advances particulars 2010 (Tk in million) 2011 (Tk in million) 2012 (Tk in million) 2013 (Tk in million) 2014 (Tk in million) Garments 11211.47 12,338.91 13,788.59 12,437.02 16,599.22 Trading 14139 9,758.35 13,716.42 9,007.86 9,508.6 Engineering (Iron & Steel, Electrical Equipment etc.) 6250.73 8,357.68 11,086.52 13,140.26 15,585.99 Contractor finance 1212.56 1,262.83 1,119.76 833.42 806.78 Leasing company 1728.40 2,022.70 1,769.80 1,415.3 2,180.83 Housing 1279.71 1,329.11 1,363.32 5,040.61 5,910.44 Food, food product, beverage, edible oil etc. 3027.3 7,503.61 6,513.71 9,435.64 7,363.59 Pharmaceuticals 834.65 1,642.77 1,029.26 1,040.74 1,824.45 Tele-communication 214.75 226.49 563.08 516.76 461.05 Transport 874.45 1,106.45 1,325.81 2,367.38 3,054.88 Leather & leather products 1394.13 275.26 401.14 483.43 1,138.51 Jute industries 338.27 - 1,018.57 1,427.93 1,637.55 Textile 1549.54 2,255.94 2,81735 4,816.3 4,158.02 Information technology 714.93 792.36 558.13 407.7 188.75 Hospital & medical services 942.69 1,768.18 2,367.56 1,908.79 2,219.59
  55. 55. Paper, paper production & publications 821.80 849.60 1,853.45 2,307.03 2,473.34 Plastic & plastic materials 4.12 1,434.62 1,824.07 1,089.26 1,811.06 Storage 2038.9 710.92 798.78 622.69 630.11 Glass & glass product 3386.31 3.82 .086 4.18 3.53 Agriculture 197.48 679.80 1,421.17 2,217.9 1,785.79 SME Loan 1513.47 3,833.56 4,597.81 7,913.6 9,068.66 Credit Card 3029.36 243.30 299.52 301.18 264.72 Consumer Loan 1520.17 2,188.27 1,815.80 1,708.55 1,480.89 Loans to Brokerage House - - 4,073.93 4,508.53 4,878.98 Others 9663.37 19,415.19 17,487.21 12,736.2 22,024.58 Total 66377.70 79,999.80 93,610.87 97,688.50 117,060.02 (Source: annual report of MBL 2010, 2011, 2012, 2013, 2014) 5.5: Investment of Mercantile Bank Ltd: Mercantile Bank has diversified its investment portfolio through Lease Finance, Hire purchase and Capital Market Operations besides the investment in Treasury Bills and Bonds, Prize Bonds. The emphasis on high quality investment has ensured the bank to maximize its profit. Mercantile Bank Ltd. is also a member of the Dhaka Stock Exchange and the Chittagong Stock Exchange. A specialized unit of the bank, the investment division manages the Bank’s portfolio and actively participates in the screen based on line trading of both the stock exchanges. The Investment portfolio made up of Government Securities and Shares & Debentures of different listed companies stood at tk. 32,184.08 million for the year 2014. Here the growth rate is decreasing every year. The highest growth rate was in year 2012 which was 67.63%, and the lowest growth rate was in year 2013, which was -27.17% as the graph and table demonstrate this.
  56. 56. Table-5.5.1: Investment of Mercantile Bank Ltd. Year Investment (In million taka) Growth Growth Rate 2009 9,664.72 _ 2010 10,937.20 1272.48 13.17.% 2011 24,645.38 13708.18 125.34% 2012 41,314.19 16668.81 67.63% 2013 30,090.60 -11223.59 -27.17% 2014 32,184.08 2093.48 6.96% Average Growth Rate 37.19% (Source: Annual Report 2009 to 2014 of Mercantile Bank Ltd.) CHART 5.5.2: Graphical Representation OF Investment Growth 13.17 125.34 67.63 -27.17 6.67 2010 2011 2012 2013 2014 INVESTMENT GROWTH INVESTMENT GROWTH
  57. 57. CHART 5.5.3: Graphical Representation OF Investment Mix MBL investment mainly based on three basic sector government securities, government bond and other financial investment like investment in others bank shares, bonds of other banks and companies. MBL emphasized its investment mainly on the government bank. 85% of its investment on the government bond. MBL investment classified various types bond like 5 Years Treasury bond, 10 Years Treasury bond, 15 Years Treasury bond and 20 Years Treasury also invest like 91 days BB Bills, 182 days Treasury Bills etc. MBL remaining 15% investment divided into government securities and other used 7% its investment on government securities and the rest 8% on others MBL mainly a use its fund to invests mainly government bond and securities. 7% 85% 8% INVESTMENT Government Securities Government bonds Other investments
  58. 58. 5.6 Loan Deposit Ratio Table 5.5.1: Loan Deposit Ratio of MBL 2009-2014 Year Deposit (In Million Taka) Loans and Advances (In Million Taka) Loan Deposit Ratio 2009 58033.47 48295.09 83.22% 2010 75629.14 66377.70 87.77% 2011 102262.02 76305.02 74.62% 2012 132093.64 93610.87 70.87% 2013 124566.50 97688.50 78.42% 2014 140475.84 117060.03 73.33% (Source: Annual Report 2009 to 2014 of Mercantile Bank Ltd.) Chart 5.6.2: Loan Deposit Ratio of MBL 2009-2014 83.22 87.77 74.62 70.87 78.42 73.33 2009 2010 2011 2012 2013 2014 Loan Deposit Ratio Loan Deposit Ratio
  59. 59. Deposit and loan and advance ratio = Deposit and loan advance ratio for the year 2014 = = 83.22 MBL follows a standard for deposit and loan and advance ratio. From the above chart it shows a continuous standard used in different year for investing the deposit for loan and 2009 the ratio was 83.22%. That means the bank used its 83.22 % deposit for loan and advances. Banks have to keep a minimum level of deposit for the need of deposits needs. For this reason MBL use 83.22%, 87.77%, 74.62%, 70.87%, 78.42% and 73.33% of its deposit for the last 6 years 2009-2014 and keep the remaining money for the requirement of maintaining the minimum liquidity the bank perfectly used its deposit for loan and advances sector. 5.7 Capital Adequacy Ratio As per new risk based capital adequacy framework, MBL has adopted Basel II in the Bank. As per Basel II principles, Capital Adequacy Ratio (solo basis) of the Bank stood at 12.95% as on December, 2014 against minimum requirement of 10%. MBL is maintaining a strong capital base. Total eligible capital of the Bank stood at BDT 1,910.39 Core as on December 2014 which is well above the minimum requirement of BDT 1,474.84 Core as on the same date. Capital Adequacy Ratio was 12.95% as on December 2014 as compared to minimum requirement of 10% as per Basel II. Loan and advance ×100 Deposit 48295.09 × 100 58033.47
  60. 60. Table: 5.7.1: Capital adequacy ratio of MBL for the year 2014 Table: 5.7.2.: Capital adequacy ratio of MBL for the year 2013 & 2014
  61. 61. 5.8 Return on Investment (ROI) Return on Investment is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage. Return on Asset = Net Income/ Investment. Table 5.8.1: Return on Investment (ROI) YEAR Investment NET INCOME RETURN ON INVESTMENT (ROI) 2010 10,937.20 1,425.34 13.03% 2011 24,645.38 1,734.18 7.04% 2012 41,314.19 1,381.45 3.35% 2013 30,090.60 1,978.70 6.57% 2014 32,184.08 1,188.51 3.70% (Source:annual reportof MBL 2010, 2011, 2012, 2013, 2014) Chart 5.8.2 Graphical representation of ROI 13.03% 7.04% 3.35% 6.57% 3.70% 2010 2011 2012 2013 2014 RETURN ON INVESTMENT (ROI) RETURN ON INVESTMENT (ROI)
  62. 62. 5.9 Earnings per Share Since the inception and enlistment in Stock Exchange, the Bank has been making positive EPS. Earnings per share stood at BDT 1.61 as on December31, 2014 against BDT 2.68 as on December 31, 2013. Chart 5.9.1: Earning per share 5.10 Return on Loans and Advances Table 5.9.1: Return on Loan and Advances YEAR Return on Loans and Advances 2020 12.80% 2011 13.86% 2012 14.72% 2013 14.28% 2014 13.28% (Source: annual report of MBL 2010, 2011, 2012, 2013, 2014) 1.61 2.68 2.26 3.5 2014 2013 2012 2011 EARNING PER SHARE EARNING PER SHARE
  63. 63. 5.11 Non-performing Loan of MBL MBL have an increasing level of non-performing loan which is an alarming concern for the bank. Its nonperforming loan and also NPL to total loan and advance is increasing every year. Non- performing Loan and Advances of the last five years given below- Table 5.11.1: Non-performing Loan and Advances of MBL Year Loans and Advances (In Million Taka) Non-performing Loan NPL to total Loans and Advances 2009 48295.09 1252.05 - 2010 66377.70 1,187.81 1.78% 2011 79,999.80 2084.62 2.61% 2012 93610.87 4,090.92 4.37% 2013 97688.50 4,659.75 4.77% 2014 117060.03 5,965.63 5.10% (Source: Annual Report 2009 to 2014 of Mercantile Bank Ltd.) Chart 5.11.2: NPL to total Loans and Advances 1.78% 2.61% 4.37% 4.77% 5.10% 2010 2011 2012 2013 2014 NPL to total Loans and Advances NPL to total Loans and Advances
  64. 64. Chapter-Six Findings, Conclusion and Recommendations Serial No. Particulars Page No. 6.1 Findings 56 6.2 Conclusion 56 6.3 Recommendations 57
  65. 65. 6.1 Findings Bases onobservation and interpretation here have some positive and negative sidein MBL.Those are given below:  Bank Follow the overall credit assessment and risk grading process according to Bangladesh Bank at maximum case.  Loan and the advances are vital to finance the projects. An appropriate credit distribution system and monitoring will ultimately lead to the profit maximizing of banks. It is evident from that the size of MBL loans and advances are increasing over the years. It indicates mire earning for the bank. It shows a positive growth rate.  MBL has a positive growth rate in Net profit.  The bank never faced less than 70% of the loan deposit ratio during the lastfive years and tried to exceed 85% of the loan deposit ratio as per the instruction of Bangladesh Bank. Problems  Mercantile Bank limited excessively emphasised on the investment on government bond and securities.  The bank fail to maintain its deposit and investment growth rate and return on investment and loan deposit ratio in 2013.  Sometime the document verification is done after loan sanction.  The SME loan section is very poor because they focused on government bond and securities. 6.2 Conclusion Mercantile Bank Limited is one of the most potential Banks in the banking sector. It has a large portfolio with huge assets to meet up its liabilities and management of this bank is equipped with the export bankers and managers in all level of management. So it is not an easy job to find out the drawbacks. It has been observed that MBL started its banking services with a view to minimize the customer’s needs by offering different products and services which are easy and affordable for
  66. 66. all level of customers. To that extent, MBL always emphasizes its customer services, product development, resource management, branch networking and the contribution to the economic development of the country. The bank also provides social services as their social responsibility. The success of a bank depends on the quality of the services it offers. All the commercial banks, therefore, try to provide quality services with competitive interest rates. MBL is not an exception. Life line package has been developed with the same purpose. Although, the comparative analysis shows that MBL is in better position, but there are some obstacles it faces to sustain the position. However, the continuous improvement of the services will certainly place the bank in the best position in one decade. 6.3 Recommendations  MBL can diversify its investment through various corporate loan.  The Bank has to give emphasis the SME loan section.  The Loan and Advance section has to make strong and the employees have to be devoted to the Bank as to maintain the continuous growth rate.  The Bank has to construct a long term strong investment policy.  All the document verifications have to done before loan sanction  The bank provided the maximum amount of investment focusing commercial and industrial sectors in urban areas mainly on Dhaka Division and Chittagong Division basis. To help the country’s development regionally equal and take the bank as amiable to mass people countrywide.
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