Mercantile Bank Ltd. has performed well in the foreign trade.
Executive Summary
The foreign exchange market has played a vital role in the last decade or so in guiding the purchase and sale of goods, services and raw materials globally. The market directly affects each country’s bond, equities, private property, manufacturing and all assets that are available to foreign investors.
The risk that the amount of a commitment in a foreign exchange currency will vary between the time the commitment was entered into and the date at which the commitment is to be settled or brought to account in the local currency is the foreign exchange risk. The success of the trading business depends on the ability to manage effectively the various risks encountered in the trading environment, and the organization’s policies and processes require development over time to ensure that this is done in a controlled way.
The key risk areas of a financial institution can be broadly categorized into: Credit risk, Market risk and Operational risk. In view of the significance of the market risk and in order to aggregate all such risks at a single department and to bring expertise in such functions, the concept of Treasury has evolved.
The year of 1994 saw a significant shift in the country’s foreign exchange regulatory policies and the Bangladesh Taka (BDT) was declared convertible in the current account. Most restrictions related to current account activities were relaxed where commercial banks were given the responsibility to ascertain genuineness of the transactions and the central bank’s prior approval requirements in these regards were withdrawn. To adapt to the changed environment, many banks established dealing rooms and some centralized their foreign exchange and money market activities under a single functional area which is still in its >rudimentary stage.
The need for foreign exchange is high in Bangladesh. Because we had to import a lot more than we export. Other than export, the remittance by non-resident Bangladeshi’s and foreign aid is another source of foreign currency. In previous years we have seen frequent bouts of devaluation of our currency i.e. taka. This is mainly done to keep our exporters in business, although there are other reasons also. Now as the exchange rate has been declared floating, central bank has taken away its full control from the market. The demand and supply of foreign currency, in our case mostly the demand and supply of US$ will fix the exchange rate. In the floating regime the foreign exchange rate was pretty stable in the second part of the year 2003 and the first part of 2004. But now i.e. from the ending days of May ’04 the price shoot up a little.
Import is increasing in comparison to the growth of export. Export is increasing in slower pace than the import. The reason is that we are in a region where India and China, Myanmar is the neighboring country which has a huge export potential. On the other hand Remittance has increased in September. But the Foreign exchange reserve is marginally lower in September compare to August. This is due to the import payment.
Mercantile Bank emerged as a new commercial bank to provide efficient banking services with a view to accelerating socio-economic development of the country. The Bank was incorporated on May 20, 1999 in Bangladesh with its Registered Office situated at 61, Dilkusha Commercial Area, Dhaka 1000, Bangladesh and started banking operation on 2nd June 1999.
All policy formulations and subsequent executions are done in the Head Office. It comprises of nine major divisions namely Credit Division, International Division, Central Accounts Division, Human Resources Division, Information Technology Division, Marketing Division, Training Division, Research and Development Division, Audit and Compliance Division. Besides these main divisions, there are twenty braches all over the country to look after the Bank’s day–to-day operations.
Mercantile Bank has able to manage a sound liquidity position for its innovative deposit scheme. Mercantile Bank Ltd. has performed well in the foreign trade. The volume of trade is growing in both import and export business. The Bank is increasing its level of performance which is evident in the increase of asset utilization ratio, net profit, Asset Portfolio, Credit portfolio, investment portfolio. Bank has several schemes for the depositors. It also provides both funded and non funded facility to the investor like Term loan, Personal credit, letter of credit etc.
Mercantile Bank Limited showed its maturity in dealing with the matters of exchange rate and that’s why they haven’t incurred any loss through dealing. In Mercantile Bank Ltd. there is a dealing room where entry is restricted for other than related personnel. The dealing room is distinctively separated from the back office. To eliminate risk, in Mercantile bank Ltd. every dealer must record the deal immediately after it is concluded with the counterparty. This is done either by position blotter or deal slip. Dealers occasionally raise deal tickets that need to be sent across to the treasury back-office within shortest possible time. This is not the right way to minimize he risk associated with deal delay. In Mercantile Bank counter party limit is determined by the board of directors. In determining the limit board considers the credit worthiness and relationship of counter party. In Mercantile Bank Ltd. the stop loss order limit is fifteen percent. So this year whenever the amount of loss reaches to 15% of the profit of the year 2003, the stop loss order will come. So Mercantile Bank is conservative in the trading. In Mercantile Bank trigger is set at 90 percent of Stop Loss limit. When the loss becomes 90 percent of stop loss limit then the management is informed to take decision. In case of profit trigger the limit is decided on the market situation. Treasury department can be divided in three parts, front office, mid office and back office. Front make the deal and determine the rate. Back office makes the settlement and mid office supervise the job of both front and back office. MBL treasuries publish a rate sheet for retail FX transactions for various types of customer related transactions in various currencies. Buy and sell rates for all currencies for all types of transactions that are covered in the rate sheet is based on sufficient spreads taken from the bid/ offer of central bank’s quote on USD/BDT for the day as well as spreads on cross currencies available from Reuters. In MBL Dealing room tries to maintain a null outstanding limit everyday to avoid the risk of loss. MBl does not deal after hour or off the premises dealing. In addition to regular audits at specified intervals, a concurrent audit process put in place to ensure the treasury’s functioning in an appropriate manner on a day-to-day basis in MBL.
In observation we see that Mercantile Bank has a suitable position for its foreign exchange reserve, liquidity position and relationship with financial institution. But the bank can not operate with its full capacity for its conservative nature
1.0 Introduction
Background:
This report was done as part of the requirement for successful completion of the internship program. Exposure to the business world and acquiring practical work experience was the primary objective of this assignment. The attached with mercantile bank ltd. For internship. The report focuses on treasury division as i was attached with that division during the tenure of the internship. The topic for this report was decided upon after approval by faculty advisor associate professor of institution of business administration.
Foreign Exchange dealing is a technical job and has a great prospect in our country. Floating Exchange Rate has been introduced very recently and it has put the banking sector into a new era. Bangladesh Bank’s total control is not there but there is some risk factor involved in it. Mercantile Bank Ltd. wanted to find whether the process of their foreign exchange operation is good enough to avoid any unwanted risk and the prospect in foreign exchange dealing in their present standing.
Objective:
The basic objective of the report is to see whether the process of Foreign Exchange Operation in Mercantile Bank Ltd. is complying with the guideline issued by Bangladesh Bank and how Mercantile Bank Ltd. is handling the Foreign Exchange trading.
Broad Objective:
The broad objectives of the report are-
· To find whether the process of Foreign Exchange Operation is complying with the guideline issued by Bangladesh Bank
· To find whether the process is good enough to avoid the foreign exchange risk and how it is working.
· To find the prospect of Mercantile Bank Ltd. in foreign exchange dealing.
Specific Objectives:
The Specific objectives are –
· To analyze the overall situation of the foreign Exchange Market prevailing in Bangladesh before and after the exchange rate was declared floating.
· To acquire a general idea about the various divisions of a private bank and their functions and operations, in this case Mercantile Bank Ltd.
- To observe and analyze the foreign exchange operation from dealing room to back office.
- To observe whether the foreign exchange operation is complying with the guideline issued by Bangladesh Bank
- To find the standing of Mercantile Bank in Foreign Exchange Dealing.
Sources of data:
In this report both Primary and Secondary sources of data have been used. For both the Organization part and Project part, quantitative information from the Annual reports of MBL and qualitative information from other literature regarding the various divisions and their functions, operations were used. So, basically secondary data were utilized. For the project part, primary data were collected by holding informal interviews with the employees to learn about their response/reaction to the change that is occurring in the organization.
Scope of the study:
This report covers the organizational structure, background, basic functions of the various divisions and the performance of the bank. In case of the project part, the study area and observations are limited to Treasury division only.
Methodology:
The methodology of the report is given below,
· For the procedure of different banking operations, The observed the operations and worked with the Officers at the same time. The informally interviewed the MBL Officials for getting more information.
· For the analysis part, data have been collected from different statements and the annual reports of the bank.
Limitations of the Study:
The following limitations are apparent in the report—
- For the Organizational part, almost no financial information for the year 2004 were available, in some cases only un-audited information could be collected.
- As the floating exchange rate is introduced very recently the data of its impact was not that much available.
- The information regarding the dealing profit & loss were not disclosed officially and that’s why it was not possible to judge the performance of the dealing process of Mercantile Bank Ltd. with the help of material yardstick like profit.
Preview of the Report:
As it is internship report in the first part after this introduction chapter there is the Organisation Part. In this part how different units of Mercantile Bank Ltd. contributes and works has been described. Also the structure of the organization is shown and the chapter ended with a SWOT Analysis of Mercantile Bank Ltd. After the Organization Part then there is Project Part. In the project part first of all an introduction is given to describe the need for foreign exchange operation and the risk arising from the foreign exchange. Then there is a description of the foreign exchange scenario in Bangladesh. Then we will see how Mercantile Bank Ltd. performs its Foreign Exchange operation and how they minimize the risk. And finally there would be some sorts of observations to see the compliance with the Bangladesh Bank guideline.
2.0 ORGANIZATION PART
2.1 Introduction
The territories that now constitute Bangladesh were integral part of Mughal Empire and thereafter British India and then Pakistan. That is why we have the common historical background of banking and banking institutions as that of Pakistan and India. For the beginning of banking in the territory now comprised Bangladesh we must go back to the Calcutta Agency Houses. The important two houses were MS. Alexander and Co. and MS. Fergusson and Co. both the two were the predecessors of the early joint stock banks in the then India. The Bank of Hindustan was the earliest bank started under the direction of the British ruler in British India.
After the partition of British India into Pakistan and India, Bangladesh became integral part of Pakistan. Immediately after independence in 1947 an expert committee was appointed to study the issue of banking in the ten Pakistan. On the recommendation of the expert committee, the Reserve Bank of India continued its functions in Pakistan upto 30th September 1948 and thereafter the State Bank of Pakistan, having been established on 1st of July 1948, started functioning and assumed the full control of banking and currency. By the date of Bangladesh proclaimed independence, there were about fourteen scheduled banks with about 3042 branches all over the country. Some foreign banks were also functioning in Pakistan on that date. After the emergence of independent Bangladesh on 16th December 1971, the government of the peoples Republic of Bangladesh formally took over the charge of the administration of the territories now constitutes Bangladesh. In order to rehabilitate the war devastated banking system of Bangladesh, the government promulgated a law called Bangladesh Bank (Temporary) Order, 1971 (Acting President Order No. 2 of 1971). By this order the State Bank of Pakistan was declared as Bangladesh Bank and the offices, branches and the assets of the said State Bank were declared to be deemed as offices, branches and assets of Bangladesh Bank. It was also declared by the aforesaid Order that all currency notes and coins issued by the said State Bank and government of Pakistan and were in circulation in Bangladesh shall be deemed to have issued by the Bangladesh Bank. By the steps stated above, the banking system of Bangladesh started with a legal shape. Private sector banks started functioning during the year 1983-84 with the objective of government policy to make sure effective and meaningful participation of the private sector in the overall national economy. In this background of liberalization of economic policies in Bangladesh, Mercantile Bank emerged as a new commercial bank to provide efficient banking services with a view to accelerating socio-economic development of the country. The Bank was incorporated on May 20, 1999 in Bangladesh with its Registered Office situated at 61, Dilkusha Commercial Area, Dhaka 1000, Bangladesh and started banking operation on 2nd June 1999.
2.2 Divisions of MBL:
All policy formulations and subsequent executions are done in the Head Office. It comprises of nine major divisions namely Credit Division, International Division, Central Accounts Division, Human Resources Division, Information Technology Division, Marketing Division, Training Division, Research and Development Division, Audit and Compliance Division. Besides these main divisions, there are twenty braches all over the country to look after the Bank’s day–to-day operations. The structures and functions of each of the divisions of MBL are described below:
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2.2.1. Credit Division:
The primary objective of this division is to evaluate the credit worthiness and debt payment capability of present loan customers and loan applicants. It is also responsible for keeping track of the credit portfolio by obtaining regular information from the branches. It sets prices for credits and ensures affecting it at the branches. This department also monitors the various loan accounts of the branches and prepares various statements for Bangladesh Bank.
The Credit Risk Management Department is assisted by the Credit Administration Department, which is mainly concerned with the post-approval functions of the division. The aspects that are critically tracked and monitored by Credit Admin are
· Credit expiry
· Past dues
· Excess over limit
· Document deficiency
· Reporting
Credit Administration is involved in basically 2 broad functions:
Loan Monitoring:
The important aspects of this part are:
· Follow approval terms
· Proper loan disbursement
· Monitor interest payments and principal repayment
· Balance with general ledger
Documentation:
The important functions of this part are:
· Look at sanction terms and Fill up loan documentation checklist
· Ensure Proper loan documentation and Obtain client sign off
· Filing with the Registered Joint Stock Corporation ( RJSC)
· Registered mortgage deed execution
2.2.2 Human Resources Division:
The employees are Mercantile Bank’s most valuable resource. Having competent and professional employees is becoming increasingly important in today’s competitive world, and MBL has a significant competitive advantage in this respect. Many of its employees have worked here since the BCCI area and therefore have vast experience in their respective fields. Also the new employees are recruited with sound academic background and given proper training after recruitment to groom up for their responsibilities.They plan to inculcate a high performance culture where the employees will work with fun and pride.
2.2.3. Audit and Compliance Division:
The main function of this division is to provide legal assistance to the branches and to ensure strict adherence of rules and policies by all concerned officials of the bank through routine and surprise inspection and audit. The functions of this division are as follows:
- Implement rescheduling process of stuck-up loan to the branches for obtaining repayment schedule through strong persuasion and serve final notice etc. as the condition required.
- Monitor the individual cases with respect to their securities, value of securities, and finally review of possibility of recovery of bank’s stuck-up classified loan.
- Investigate suspicious or irregular matters being directed by higher management. Also conduct such inquiry being requested by affected branch-in-charges.
- Time to time follow-up of stuck-up advances of branches and keep the branches under constant pressure.
- Inspect all branches’ operations at least once in a year.
- Carry out surprise audit as felt necessary.
2.2.4. Central Accounts Division:
Finance and Accounts division task is to
- Maintain daily liquidity positions, treasury bills, call money, debentures, placement of funds etc.
- Monthly-accrued interest calculation of all interests bearing accounts, inter-branch calculation for Head Office, amortization of all fixed and other assets.
- Preparation of statement of accounts and profit and loss account for the bank.
- Weekly deposit and advance analysis and Cost of fund analysis.
- Maintenance of accounts, preparation of annual report of the bank, maintenance of provident fund accounts, maintenance of income and expenditure posting, maintenance of salaries and wages of the employees etc.
- Fulfilling reporting requirements of Bangladesh Bank.
2.2.5 Information Technology Division:
Previously, Mercantile Bank had a very low level of automation. There was hardly any PC in the whole Bank before 2001. But when the new management took over in 2001, they gave huge emphasis on computerizing the bank’s operations. After 2 years, almost all the operations in the bank are now automated. The Bank is also shifting to a new IT platform, which aims at maintaining, operating and strengthening the technology base of the bank to enable error free production of information that ensures ongoing efficiency and profitability of operation. A world class banking software called Flex Cube has been installed which will centralize operations and provide Online Banking, Internet Banking, Automated Teller Machine, Telephone Banking, Point of sale dispenser, Credit Card facility etc.
At present, the IT department serves the following functions:
· Development of software’s for bank’s operation according to need, their maintenance and purchase of new software.
· Maintenance of computer hardware and upgrading the PCs whenever required.
· Training of the staff so that they can perform properly in the automated environment.
· Preparing training materials.
· Troubleshooting with the new software.
2.2.6. International Division:
International Division is responsible for assisting the authorized branches to deal in foreign trades, that is, import and export businesses on account of the customers of the bank by giving approval for transactions and controlling them at various stages.
It deals with all correspondents of foreign banks having arrangement with the bank. Every year new agents are added. The larger the number of correspondents and the wider the coverage area, the richer will be the international connections of the bank.
The functions performed by this division are as follows:
- Correspondent banking relationship
- Supervision of foreign exchange transaction of other units
- Monitoring on compliance of Bangladesh Bank regulations
- Supervise sale / purchase of foreign currencies
- Reconciliation of Nostro Accounts
2.2.7. Marketing Division
The main function of this division is to build relationship with the potential customers and strengthen the relationship with the existing customer. The functions performed by this division are as follows
- To inform and explain the potential customer about the facilities provided by the bank.
- To search for new area of business and collect information about the potential sector.
- To prepare strategy for getting competitive advantage.
- To provide information to other division about the present market scenario.
- To keep close contact with the existing clients.
2.2.8. Training and Development
The main function of this division is to prepare the employee of the bank as competent and quality workforce. The function of this division is s follows
- Arrange training and orientation program for the fresh bankers.
- Provide specific training program for the employee to make them more professional.
2.2.9. Research and Development
Excellence in banking operation depends largely on a well-equipped and efficient Research and Development Division. Such activities require the investment of substantial money and a set of highly qualified personnel with multidisciplinary background. Although it is not possible at this stage to undertake R&D activities similar to those of the banks in the developed countries, Mercantile Bank has established a core Research and Planning Division comprising skilled persons from the very inception of the Bank
2.3 Performance
2.3.1 Capital
The Authorized Capital of the Bank is Tk.1200.00 million and the paid-up Capital of the Bank is Tk.639.53 million as of December 31, 2003.
2.3.2 Deposits
The Bank mobilized total deposits of Tk.16,287.46 million as of December 31,2003 as compared to Tk. 15,150.42 million in 2002. Competitive interest rates, deposit mobilization efforts of the Bank and confidence reposed by the customers in the Bank contributed to the notable growth in deposits. The Bank evolved a number of attractive deposit schemes to cater to the requirement of small and medium savers. This improved not only the quantum of deposits; it also imparted qualitative changes in the deposits structure.
2.3.3. Advances
The Bank has formulated its policy to give priority to small and medium businessmen while financing large-scale enterprises through consortium of banks. The total loans and advances of the Bank stood at Tk. 10,775.95 million as of December 31,2003 as compared to Tk. 8,896.19 million in 2002.
2.3.4. Consumer Credit Scheme
The Bank has introduced Consumer Credit Scheme to cater to the credit needs of the low and middle-income groups for household durables. Consumer Credit Scheme has attracted good response from the customers. An amount of Tk. 169.98 million which is 1.58% of the total credit portfolio was outstanding under the scheme as of December 31, 2003.
2.3.5. Import Business
From the very beginning the Bank has embarked on extensive foreign exchange business with a view to facilitating international trade transactions of the country. The Bank has established 10,986 Letters of Credit amounting to Tk. 20,380.80 million as of December 31,2003 as against 10,076 Letters of Credit amounting to Tk. 15,112.50 million in 2002. Items of imports financed by the Bank included electronic equipments, sports goods, rice, wheat, seeds, soyabean, palmolein, dyes, chemicals, accessories etc.
2.3.6. Export Business
The total export business handled by the Bank amounted to Tk. 15,250.60 million as of December 31,2003 as compared to Tk. 11,377.30 million in 2002. Exports items handled by the Bank included jute good, ready made garments, handicrafts etc. The Bank has sizeable exposure to Readymade Garments sector whose contribution in the total exports of the country was 75% in 2002-03. Readymade Garments has not only contributed to generation of employment of semi-skilled men and women folk, it has also led to emergence of forward looking entrprenuers in the country, absence of which was regarded as a constraint to development efforts.
2.3.7. Foreign Remittance
Foreign remittances handled by the Bank stood at Tk. 474.00 million as of December 31, 2003 as against Tk. 496.30 million in 2002. Countries from which inward foreign remittances were received included USA, UK, Canada, Denmark etc.
2.3.8. Operational Profit
The operational profit of the Bank amounted to Tk. 575.32 million in 2003 as against Tk. 461.24 million in 2002 and after provision against unclassified loans, the net profit stood at Tk. 427.32 million as of December 31,2003 as compared to Tk. 429.04 million in 2002. An amount of Tk. 211.41 million has been set aside for our tax contribution to National Exchequer.
2.3.9. Results of Operation
The Bank commenced business on 2nd June 1999. During this year of operation, the Bank made satisfactory progress.
2.3.10. Total Income
The total income of the Bank was Tk. 1989.72 million during the year 2003. Interest income accounted for 79.84% of total income, exchange gains 9.78%, commission 7.64% and other income 2.74% of total income as against 80.46%, 9.07%, 7.39% and 3.08% respectively in 2002.
Components of Total Income
(Figure in million Tk.)
| Components | Amount | % |
| Interest Income | 1588.67 | 79.84 |
| Exchange Gains | 194.54 | 9.78 |
| Commission | 151.91 | 7.64 |
| Other Income | 54.60 | 2.74 |
| Total | 1989.72 | 100.00% |
2.3.11. Net Interest Income
The Bank posted net interest income of Tk. 472.85 million during 2003 as compared to Tk. 358.08 million in 2002. Gross interest income of the Bank amounted to Tk. 1,588.67 million and interest expenses amounted to Tk. 1,115.82 million during 2003.
Interest Income
Interest income amounted to Tk. 1,588.67 million in 2003. Interest on loans and advances accounted for 76.85%, interest on deposits with other banks 14.21%, interest on Treasury Bills 8.85% and other interest income also contributed 0.09% of total interest income as against 79.50%, 15.93%, 4.36% and 0.21% respectively in 2002.
Components of Interest Income
(Figure in million Tk.)
| Components | Amount | % |
| Interest on Loans & Advances | 1220.92 | 76.85 |
| Interest on Deposits | 225.76 | 14.21 |
| Interest on Treasury Bills | 140.55 | 8.85 |
| Other Interest Income | 1.44 | 0.09 |
| Total | 1588.67 | 100.00% |
Interest Expenses
Interest expenses amounted to Tk.1, 115.82 million in 2003. Interest on deposits under schemes became the largest component of interest expenses and accounted 50.74% of total interest expenses in 2003 as compared to 36.30% in 2002. Interest on FDR accounted for 41.79% of Interest expenses, interest on call deposits 2.02%, interest on savings deposits 2.80%, and interest on short-term deposits 1.65% of total interest expenses.
Components of interest Expenses
(Figure in million Tk.)
| Components | Amount | % |
| Interest on Deposits Under Schemes | 566.17 | 50.74 |
| Interest on Fixed Deposits | 466.35 | 41.79 |
| Interest on Savings Deposits | 31.24 | 2.80 |
| Interest on Call Deposits | 22.51 | 2.02 |
| Interest on Short Term Deposits | 18.35 | 1.65 |
| Other Interest Expenses | 11.20 | 1.00 |
| Total | 1115.82 | 100.00% |
Net Interest Margin
The net interest margin of the Bank is 3.36% in 2003 as compared to 3.16% in 2002. This indicates a reasonable spread between interest income and interest expenses. The management has been able to achieve this position mainly by close supervision of the Bank’s earning assets.
Interest Rate Spread
Interest rate spread as the difference between average interest rate on interest-earning assets and average Interest rate on Interest-bearing liabilities is 1.85% in 2003 as compared to 1.99% in 2002. It shows the effectiveness of the Bank’s intermediation in borrowing and lending activities.
2.3.12. Non-Interest Income
The Management effectively leads the Bank to increase non-interest income as to mitigate any adverse interest rate movement. Non-interest income amounted to Tk.401.05 million in 2003 as against Tk. 311.11 million in 2002. Non-interest income is 20.16% of the total income in 2003 as compared to 19.54% in 2002. Exchange gains accounted for 48.51%, commission accounted for 37.88% and other non-interest income contributed to 13.61% and other interest income during the year as against 46.42%, 37.80% and 15.78% respectively in 2002.
Components of Non-Interest Income
(Figure in Million Tk.)
| Components | Amount | % |
| Exchange gains | 194.54 | 48.51 |
| Commission | 151.91 | 37.88 |
| Other non-interest income | 54.60 | 13.61 |
| Total | 401.05 | 100.00 |
2.3.12. Total Expenses
The total expenses of the Bank amounted to Tk.1414.40 million during 2003 as compared to Tk. 1131.06 million in 2002. Interest expenses accounted for 78.89% of total expenses, salaries and allowances 10.49%, rent rates, taxes etc. 2.93%, Stationery, Printing & Advertisement 1.31% and other expenses 6.38% of total expenses as against 81.61%, 9.21%, 3.07%, 1.43% and 4.68% respectively in 2002.
Components of Total Expenses
(Figure in million Tk.)
| Components | Amount | % |
| Interest Expenses | 1,115.82 | 78.89 |
| Salaries & Allowances | 148.40 | 10.49 |
| Rent, Rates, Taxes etc. | 41.45 | 2.93 |
| Stationery, Printing & Advertisement | 18.53 | 1.31 |
| Other Expenses | 90.20 | 6.38 |
| Total | 1414.40 | 100.00 |
Non-interest Expenses
Non-interest expenses amounted to Tk. 298.58 million, which is 21.11% of the total expenses in 2003 as compared to 18.39% in 2002. Salaries & allowances accounted for 49.70% Rent, Rates, Taxes etc. for 13.88%, Stationery, Printing and Advertisements for 6.21%, Postage, Telegram, Telephone for 4.21% and other expenses for 26.00% of total non-interest expenses as against to 50.09%, 16.70%, 7.79%, 5.50% and 19.92% respectively in 2002
Components on Non-Interest Expenses
(Figure in million Tk)
| Components | Amount | % |
| Salaries & Allowances | 148.40 | 49.70 |
| Rent, Rates, Taxes etc. | 41.45 | 13.88 |
| Stationery, Printing & Advertisement | 18.53 | 6.21 |
| Postage, Telegram, Telephone | 12.57 | 4.21 |
| Other Expenses | 77.63 | 26.00 |
| Total | 298.58 | 100.00 |
2.3.13. Asset Utilization Ratio
The asset utilization ratio is 10.86% in 2003 as compared to 9.71% in 2002. This measures how the total assets of the Bank are effectively utilized to generate net operating income.
2.3.14. Operating Efficiency Ratio
The operating efficiency ratio is 71.09% in 2003 as against 71.06% in 2002. This measures how much operating expenses are incurred to generate operating revenues.
2.3.15. Earnings Base in Assets
The Earnings Base in Assets of the Bank is 91.77% in 2003 as compared to 93.42% in 2002. Despite small reduction in Earnings Base in Assets, the ratio still indicates very efficient utilization of resources to earn revenues.
2.3.16. Net profit
The Bank posted net profit of Tk.427.32 million during January 1, 2003- December 31, 2003. This was possible due to wise guidance of the Board of Directors, prudent management and firm support from our customers.
Net Profit
(Figure in million Tk.)
| Particulars | Amount | |
| Interest Income | 1588.67 | |
| Interest Expenses | (1115.82) | |
| Net interest income | 472.85 | |
| Provision against unclassified Loans | (15.00) | |
| Provision for Bad Loans & Advances | (133.00) | |
| Non-Interest Income | 401.05 | |
| Non-Interest Expenses | (298.58) | |
| Net Non-Interest Income | 102.47 | |
| Net Profit | 427.32 | |
The Bank paid out 40% dividend to the shareholders, 35% cash and 5% bonus for the year 2002.
2.3.17. Asset Portfolio
The Bank’s total assets outstanding as of December 31, 2003 amounted to Tk. 18324.73 million as compared to Tk. 16383.17 million in 2002. Of the total assets outstanding in 2003, loans & advances constitute 58.80% of total assets, balances with other banks 14.70%, money at call and short notice 6.77%, investments 11.50% and other assets 8.23% as against 54.30%, 23.00%, 7.69%, 8.44% and 6.57% respectively in 2002.
Asset Portfolio
(Figure in million Tk.)
| Components | Amount | % |
| loans & Advance | 10775.95 | 58.80 |
| Balances with other banks | 2693.12 | 14.70 |
| Investments | 2107.26 | 11.50 |
| Other Assets | 1508.40 | 8.23 |
| Money at Call & Short Notice | 1240.00 | 6.77 |
| Total | 18324.73 | 100.00 |
2.3.18. Credit Portfolio
The Bank’s total credit outstanding as of December 31, 2003 stood at Tk. 10775.95 million as compared to Tk. 8896.19 million in 2002. The Bank mainly extended credit facilities to the private sector for trade as well as for working capital needs, Break-up of advances for the year 2003 is as follows:
Credit Portfolio
(Figure in million Tk.)
| Components | Amount | % |
| Trade & Commerce | 4099.20 | 38.04 |
| Jute, Cotton & Apparels(Garments) | 1821.60 | 16.90 |
| Large & Medium Scale Industries | 1719.10 | 15.95 |
| Construction | 580.40 | 5.39 |
| Transport & Communication | 175.80 | 1.63 |
| Consumer Goods | 168.98 | 1.58 |
| Small Scale & Cottage Industries | 67.70 | 0.63 |
| Other Credits | 2142.17 | 19.88 |
| Total | 10775.95 | 100.00 |
Non-performing Loans
The Bank has Tk. 444.02 million non-performing loans as of December 31, 2003 as against Tk. 37.36 million in 2002.
Provision against unclassified Advances
The Bank has made a provision of Tk. 15.00 million during 2003 as 1% unclassified loans as per Loan Classification Guidelines of Bangladesh Bank, the Central Bank of the country.
2.3.19. Investment Portfolio
In an effort to secure more stable and predictable earnings from its investments, the Bank focused its attention on investment in Government securities and in call money market other than equity products. This strategy also reflected the Bank’s intention to improve its capital adequacy ratio by securing assets with lower risks.
Investment Portfolio
(Figure in million Tk.)
| Components | Amount | % |
| FDR | 2,693.12 | 45.24 |
| Treasury Bills | 2,020.00 | 33.93 |
| Money at Call & Short Notice | 1,240.00 | 20.83 |
| Total | 5,953.12 | 100.00 |
2.3.20. Funding Structure
The Bank’s principal source of fund is deposits, which constituted 88.88% of total banking funds in 2003 as compared to 92.48% in 2002. The Bank’s paid-up capital accounted for 3.49% and other sources of fund contributed 7.63% as against 1.86% and 5.66% respectively in 2002.
Funding Structure
(Figure in million Tk.)
| Components | Amount | % |
| Deposits | 16287.46 | 88.88 |
| Paid-up Capital | 639.53 | 3.49 |
| Others | 1397.74 | 7.63 |
| Total | 18324.73 | 100.00 |
2.3.20. Deposit Mix
Deposit under Scheme surpassed FDR and became the largest component of the deposit resources in this year. Deposits under schemes amounted to Tk. 6306.94 million, which was 38.72% of total deposits as compared to 27.23% in 2002. Fixed deposit amounted to Tk. 5314.27 million, which was 32.63% of the total deposits in 2003 as compared to 42.20% in 2002 and Call deposits amounted to Tk. 800.00 million, which was 4.91% of the total deposit as against 9.97% in 2002. The other deposits which include current deposits, savings deposits, short term deposits, security deposit and bills payable amounted to Tk.3866.25 million which is 23.74% of the total deposit resources.
Deposit Mix
(Figure in million Tk.)
| Category | Amount | % |
| Deposits under Schemes | 6306.94 | 38.72 |
| FDR | 5314.27 | 32.63 |
| Call Deposits | 800.00 | 4.91 |
| Others | 3866.25 | 23.74 |
| Total | 16287.46 | 100.00 |
2.3.21. Capital Adequacy
Authorized Capital
The Authorized Capital of the Bank is Tk. 1200.00 million of 12,000,000 ordinary shares of Tk. 100 each.
Issued, Subscribed and paid-up Capital
The issued, subscribed and paid-up Capital of the Bank is Tk.639.53 million of 6,395,300 ordinary shares of Tk.100 each fully paid-up in cash in 2003. The Bank raised an additional capital of Tk. 319.76 million in 2003 through Initial Public Offerings (IPO). The shares of the Bank have been listed both in Dhaka Stock Exchange and Chittagong Stock Exchange. The shares of the Bank are being traded at prices higher than the book value.
BIS Capital Adequacy Ratios
In accordance with the instruction of Bangladesh Bank, Central Bank of the country, the Bank adopted BIS risk adjusted capital standards to measure capital adequacy. Banks in Bangladesh are required to maintain the capital adequacy ratio of minimum 9.00% of total risk weighted assets.
Capital Adequacy
(Figure in million Tk.)
Particulars Amount
Core Capital (Tier- I) 1129.77
Paid-up Capital 639.53
Share Premium Account 31.20
Statutory Reserve 281.03
Retained Earnings 132.33
Dividend Equalization Account 45.68
Supplementary Capital (Tier II Capital) 105.46
1% Provision against unclassified loans 103.14
Exchange Equalization Fund 2.32
Total Risk-Adjusted Capital 1235.23
Total Risk-Weighted Assets 11788.09
Capital Minimum Requirements Actual
Adequacy Ratio 9.00% 10.48%
Tier I 4.50% 9.58%
Tier II 0.90%
The Bank’s Capital Adequacy Ratio stood at 10.48% at the end of December, 2003 as against 8.11% in 2002.
2.3.22. Branch Expansion
The Bank commenced its business on June 02, 1999. The first branch was opened at Dilkusha commercial Area in Dhaka on the inauguration day of the Bank. The number of branches of the Bank stood at 20 (Twenty) at the end of 2003 covering major trade centre of the country. The Bank intends to open 10 more branches by the end of the year 2004.
2.3.23. Correspondent Relationship
The Bank has established correspondent relationship across the world with a number of foreign banks namely Citibank N.A., Bank of Tokyo Mitsubishi Ltd., Standard Chartered Bank, American Express Bank, HSBC, Comers bank, Mashreq Bank, Habid Bank AG Zurich, United Bank of India, ICICI Bank, Union Bank of India etc. The number of foreign correspondents established by the Bank is 240 as of December 31 2003. Efforts are being continued to further expand the correspondent relationship to facilitate Bank’s growing foreign trade transactions.
2.4. Management
The Board of Directors consists of eminent personalities from commerce and industry of the country. Mr. Md. Abdul Jalil. M.P., Chairman of the Board of Directors, is a businessman besides being an eminent personality of the country.
The Bank is manned and managed by highly qualified and efficient professionals. The Chief Executive Officer of the Bank is Mr. Shah Mohammad Nurul Alam who is rich in experience of managing private sector banks as Managing Director. Mr Lutfar Rahman Sarkar, Chief Advisor of the Bank, is the former Governor of the Central Bank of Bangladesh, He brings with him a wealth of experience of managing both the public and private sector banks.
.2.5. Financial Products and Services
The Bank has launched a number of financial products and services since its inception. Among them monthly Saving Scheme, Monthly Benefit Scheme, Double Benefit Deposit Scheme, Special Saving Scheme, Life Long Pension Scheme, Consumer Credit Scheme, Small Loan Scheme and Lease Finance Scheme have achieved wide acceptance among the people.
Monthly Savings Scheme
The prime objective of this scheme is to encourage people to build up a habit of saving. Under this scheme, one can save a fixed amount of money every month and get a lucrative amount of money after five, eight or ten years.
Monthly Benefit Scheme
Under this scheme, one has deposit a fixed amount of money for five or more years and in return he will receive benefits on monthly basis. Benefits start right from the first month of opening an account under the scheme and continue upto five more years.
Double Benefit Deposit Scheme
Under this scheme, depositor’s money will be doubled in a seven-year period and the scheme is one of the highest yielding deposit schemes in Bangladesh.
Life Long Pension Scheme
Life Long Pension Scheme has been evolved especially for later age. Under this scheme one can get life long benefit if he deposits specific amount per month for a period of 10, 15, 20, or 25 years, the scheme can also be opened in the name of minors.
Consumers Credit Scheme
Consumers’ Credit is relatively new field of collateral-free finance of the Bank. People with limited income can avail of this credit facility to buy household goods including car, computer and other consumer durables.
Small Loan Scheme
This scheme has been evolved especially for small shopkeepers who need credit facility for their business and cannot provide tangible securities.
Lease Finance
This scheme has been designed to assist and encourage the genuine and capable entrepreneurs and professionals for acquiring capital machineries, medical equipments, computers and other items which may help them to be economically self-reliant. Terms and conditions of this scheme have been made easier than ever before in order to help the potential entrepreneurs to acquire equipments of production and services and repay the liability gradually from earnings on the basis of “Pay as you earn”.
Doctors’ Credit Scheme
Doctors’ Credit Scheme is designed to facilitate financing to new doctors, established doctors, clinics and hospitals.
Rural Development Scheme
Rural Development Scheme has been evolved for the rural people of the country to make them self-employed through financing various income generating projects. This scheme is operated on group basis.
Women Entrepreneurs Development Scheme
Women Entrepreneurs Development Scheme has been introduced to encourage women in doing business. Under this scheme, the Bank finances the small and cottage industry projects sponsored by women.
SME Financing Scheme
Small and Medium Enterprise (SME) Financing Scheme has been introduced to assist new or experienced entrepreneurs to invest in small and medium scale industries.
Funded Facilities
The funded credit facilities are those which involve direct cash. In other words any type of credit facility which involves direct outflow of Bank’s fund on account of borrower is termed as funded credit facility. The following funded credit facilities are provided by Mercantile Bank Ltd. Limited:
Cash Credit
Cash credit is a continuous loan facility usually provided for working capital fund requirements purpose of the customer. Cash credit is generally given to traders, industrialists for meeting up their working capital requirements. Cash credit can be given on Hypothecation or pledge of goods but Mercantile Bank Ltd. only practices Cash Credit on Hypothecation.
Features of Cash Credit
- A certain limit of credit amount is set at the time of initiation of Cash Credit facility.
- An expiration date is set, which is not more than one year.
- The drawings are subject to drawing power.
- A service charge, which in effect an interest charge is normally made as a percentage of the value of purchases.
- The primary security of Cash Credit facility is stock of goods, which may be hypothecated to Mercantile Bank Ltd. Limited as collateral.
Over draft
Over draft facility is also a continuous loan arrangement on a customer’s current account permitting him/her to overdraw upto a certain approved limit for an agreed period. Here the withdrawal of deposits can be made any number of times at the convenience of the borrower, provided that the total overdrawn amount does not exceed the agreed limit.
Customer can return any amount at any time within the pre-fixed time of the facility. Turn over of an Over Draft facility is the most important phenomenon on which renewal of the facility depends. Over Draft facility is given to the businessmen for financing working capital requirement and high net worth individual to overcome temporary liquidity crisis.
Secured Over Draft
This is a type of over draft facility given to the borrowers keeping sufficient collateral from the customer in the most liquid form. This facility provides specific right to a client to overdraw within a pre fixed limit for a certain period of time. Secured Over Draft is normally granted against the security of tangible asset such as Lien of Fixed Deposit Receipt (FDR), Bonds, Sanchaya Patra but currently Secured Over Draft is given only against Fixed Deposit Receipt (FDR) because Bangladesh Bank has recently prohibited Secured Over Draft against Bonds and Sanchaya patra. Interest charged on the Secured Over Draft is calculated on the basis of the security liened.
Term Loan
Terms loans are given to finance the acquisition of capital assets. Loan agreements often contain restrictive covenant and loan is repayable in accordance to amortization schedule. Collateral is must for term loan.
Under term loan there are three categories:
- Short term loan- loans having maturity less than one year falls under this category.
- Midterm loan- this loan facility is extended for loans having maturity more than one year but less than three years.
- Long term loan- tenure of long term loans is more than three years.
Personal Credit
Mercantile Bank Ltd. Limited also offers personal credit facility to its customers for buying household appliances. No securities are kept for such type of credit facility but a guarantee from third party is required who ought to be a prominent person or government service holder. Anyone with continuous employment for a reasonable length of time in an organization is entitled to enjoy this facility. A quotation needs to be submitted on the office pad from where the goods will be purchased.
Limit of personal credit ranges from Tk. 50,000 t