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TITLE OF THE STUDY: Working Capital Financing by a Bank: Mercantile Bank Ltd.
SUBMITTED TO
M. Shahjahan Mina (Professor) Department of Finance University of Dhaka
SUBMITTED BY
Section A BBA 16th Batch Department of Finance University of Dhaka
ABOUT US
Sl No. 03 04
Id 16-175 16-260
Executive Summary
Working capital is just like a heart of a firm and if it is weak; the business cannot prosper and survive, although there is a large body (investment) of fixed assets. This genre of capital determines the funds available with a company for day to day operations. So working capital decisions constitute a major share of a firms management concern. Determination of source of finance of that capital captivates a bulk share of that concern. This study attempts to view Mercantile Bank Limited as a source of working capital financing. Throughout the study it is attempted to analyze the prime aspects of MBLs working capital financing facilities in a qualitative approach. The study is formally initiated with a brief yet comprehensive understanding of some major issues regarding working capital and the importance of suck kind of financing in a business arena. In the next step of the study the bank is formally introduced as a second generation bank that is also a financier of working capital for business firm. In the very next stance the working capital financing guidelines are introduced. The guidelines appeared to de well responsive to the present context. The study then puts focus on the financing tools the firm adopts to provide fund for working capital purposes. It was understood that the accommodated working capital through cash credit, overdraft, letter of credit , revolving credit, loan against trust receipt and factoring. Then it was understood that the firm manage the loanable fund from deposit and arrangement from other bank. The bank prefers manufacturing concerns for loan advancing. In the next move it was discussed that the bank employs separate approach for assessing loan application for existing and new clients. It was also discussed that the loan amount to be advanced to a certain client depends on the borrowers need, the amount sought, borrowers integrity and risk factor. The bank employs modern credit risk management policy and Bangladesh Banks credit manual to monitor loaned funds. The next move of the study involves the point that the bank allows land, building, inventory hypothecation, lien, third part guarantee as collateral. Then the interest aspect of the financing was discussed which reveals that interest rate varies depending on the customers integrity and the overall risk factor and the availability of fund too. It was then discovered in the study that banks existing clients get some additional advantage over the new applicants which includes interest rate concessions. The study then revels that the bank has an excellent recover rate of over 97%. The study formally ends with the indication of repayment schedule from where it was found out that loans are recovered generally through equal installments with adjustments for unpaid fraction in the last month.
need to finance these purchase, production, sales, and collection costs prior to receiving payment from customers. Figure 5.1 illustrates this short-term cash flow and financing cycle. Another way to view this function of working capital is providing liquidity. Adequate and appropriate working capital financing ensures that a firm has sufficient cash flow to pay its bills as it awaits the full collection of revenue.
When working capital is not sufficiently or appropriately financed, a firm can run out of cash and face bankruptcy. A profitable firm with competitive goods or services can still be forced into bankruptcy if it has not adequately financed its working capital needs and runs out of cash. Working capital is also needed to sustain a firms growth. As a business grows, it needs larger investments in inventory, accounts receivable, personnel, and other items to realize increased sales. New facilities and equipment are not the only assets required for growth; firms also must finance the working capital needed to support sales growth. A final use of working capital is to undertake activities to improve business operations and remain competitive, such as product development, ongoing product and process improvements, and cultivating new markets. With firms facing heightened competition, these improvements often need to be integrated into operations on a continuous basis. Consequently, they are more likely to be incurred as
small repeated costs than as large infrequent investments. This is especially true for small firms that cannot afford the cost and risks of large fixed investments in research and development projects.
Mission: Will become most caring, focused for equitable growth based on diversified deployment of resources, and nevertheless would remain healthy and gainfully profitable Bank.
Objectives: Strategic objectives to achieve positive Economic Value Added (EVA) each year. to be market leader in product innovation. to be one of the top three Financial Institutions in Bangladesh in terms of cost efficiency. to be one of the top five Financial Institutions in Bangladesh in terms of market share in all significant market segments we serve.
Financial objectives: Core values: For the customers Providing with caring services by being innovative in the development of new banking products and services. to achieve 20% return on shareholders' equity or more, on average.
For the employees Respecting worth and dignity of individual employees devoting their energies for the progress of the Bank.
For the community Strengthening the corporate values and taking environment and social risks and reward into account.
Overdraft- against guarantee Overdraft-against FDR in the name of borrower Overdraft- against FDR in the name of 3rd party Overdraft- against savings certificate Overdraft- against wage Earners Dev. Bond Overdraft- against DPS
d. Bill Discounted and Purchased: Mercantile Bank gives advances to customers by discounting or purchasing their bills of exchange. Such bills of exchange arise out of commercial transactions both in inland trade and foreign trade.
Loan limit Tk 0.50 lac to Tk 50.00 lac for SE customers. Tk 0.50 lac to Tk 500.00 lac for ME customers.
prerequisite: Nationality- Bangladeshi Age limit- From 21 years to 60 Years (last installment of the loan has to be deposited before the borrower reaches the age of 60). Note: Age bar may be relaxed/waved by the Managing Director & CEO of the Bank on acceptable grounds. Minimum income- Minimum income must be commensurate with the amount of loan requested.
Borrower's eligibility The entrepreneur: - must be literate. - is skilled in managing his/ her business preferably 2(two) years. - has good reputation. - 2 (two) years experience requirement may be relaxed if a SME customer fully covers the credit facility by providing collateral security and has prior employment/business experience in the related industry.
Incase of proprietorship concern, the borrower must be Banglaeshi by nationality. If the borrower is a Private Limited Company/partnership firm or a joint venture, it must be registered in Bangladesh and majority of shares owned by Bangladeshis. The applicant must be 100% privately owned, controlled and operated The principal place of business must be in Bangladesh. The project must be financially, economically and commercially viable.
If the collateral security seems to be comfortable, guarantors' requirement may be relaxed on the basis of banker customer relationship and credit worthiness of the customer case to case basis. Successful track record and good credit history will get advantage.
Security/Collateral
Registered mortgage with Irrevocable General Power of Attorney of the property /ownership of the space/possession right purchased. Hypothecation of machinery, equipments, vehicles, inventories, advance payments. Lien of cash collateral (FDR, Scheme Deposit) and competent authority approved other encashable financial instruments. In case of proprietorship concern, personal guarantee of the proprietor and spouse. In case of Private Ltd Co or partnership firm, personal guarantee of all directors/partners and their spouses to be obtained. In case of third party personal guarantee, guarantors must be subject to the same credit assessment as made for the principal borrower and acceptable to bank. Usual charges documents. Others as applicable in compliance with the policy of the Bank.
Documentation
o o o Valid trade license of the applicant along with 2 years old trade license preferable. Registered partnership deed (In case of partnership firm). Copy of Memorandum and articles of association, certificate of incorporation duly certified by RJSC and Board resolution, List of latest directors attested by MD/CEO in case of private limited company. Attested copy of passport/national voter ID/ citizenship certificate from ward commissioner/Up chairman of the proprietor / partners. Photograph of the proprietor/partners/a/c signatory attested by the applicant and verified by the relationship manager. Deposit a/c statements for latest 12 months. Statement of all loan accounts. Latest clean/standard CIB report. Net worth statements of all borrowers and guarantors. Rental/lease/possession deed as applicable. Drug/Homeopathic/Explosive/BSTI/Import/Export license as applicable Clearance certificate from Department of Environment if applicable Original title deed(s) of the property along with the related documents in original such as Bia-Deeds, Mutation, DCR, CS/RS/SA Khatian, up to date Khajna Receipt, NonEncumbrance Certificates etc. Others as applicable in compliance with the policy of the Bank.
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Insurance Interest rate The interest rate is subject to change based on the market conditions and policy of the Bank. Fire & Other insurance coverage as applicable
Penal interest rate 2 % higher over the prescribed rate on overdue amount or as per policy of the Bank.
Other fees & Charges As per policy and scheduled charges of our Bank.
Repayment method By depositing daily sales proceeds in the loan account. Full and final adjustment by depositing sales proceed or from own sources of the customer on or before the expiry. Every drawing to be adjusted by 90 days.
MBL SINGLE PAYMENT LOAN Seasonal products/crops as well as religious and cultural festivals create short-term additional business opportunity for Small and Medium Entrepreneurs of our country. As such, they require special business arrangements in addition to conduct day to day business activities to cope up with seasonal demand that increase sale and profit. In order to patronize SME customers for capturing this seasonal business opportunity, Mercantile Bank Ltd has introduced SINGLE PAYMENT LOAN facility. Customer segment Purpose Loan limit Tk 0.50 lac to Tk 50.00 lac. To meet up legitimate short-term working capital requirements of business entity. Any eligible SME Customers
Borrower's eligibility - The entrepreneur: - must be literate. - is skilled in managing his/ her business preferably 2(two) years. - has good reputation. In case of proprietorship concern, the borrower must be Banglaeshi by nationality. If the borrower is a Private Limited Company/partnership firm or a joint venture, it must be registered in Bangladesh and majority of shares owned by Bangladeshis.
The applicant must be 100% privately owned, controlled and operated The principal place of business must be in Bangladesh. The project must be financially, economically and commercially viable.
If the borrower is unable to provide collateral security but can arrange 02(two) personal guarantors [ 01(one) third party + 01(one) Family member and guarantors should be subject to the same credit assessment as made for the principal borrower and acceptable to the bank], he may avail certain amount of term loan. However, the loan amount is to be fixed as per Banks own policy. If the borrower is able to provide collateral security, guarantors requirement may be relaxed on the basis of banker customer relationship and case to case basis. Successful track record and good credit history will get advantage.
Security/Collateralo o o Valid trade license of the applicant along with 2 years old trade license preferable. Registered partnership deed (In case of partnership firm). Copy of Memorandum and articles of association, certificate of incorporation duly certified by RJSC and Board resolution, List of latest directors attested by MD/CEO in case of private limited company. Attested copy of passport/national voter ID/ citizenship certificate from ward commissioner/Up chairman of the proprietor / partners/directors. Photograph of the proprietor/partners/a/c signatory attested by the applicant and verified by the relationship manager. Deposit a/c statements for latest 12 months. Statement of all loan accounts. Latest clean/standard CIB report. Net worth statements of all borrowers and guarantors. Rental/lease/possession deed as applicable. Drug/Homeopathic/Explosive/BSTI/Import/Import license as applicable Clearance certificate from Department of Environment if applicable Original title deed(s) of the property along with the related documents in original such as Bia-Deeds, Mutation, DCR, CS/RS/SA Khatian, up to date Khajna Receipt, NonEncumbrance Certificates etc. Others as applicable in compliance with the policy of the Bank.
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Interest rate The interest rate is subject to change based on the market conditions and policy of the Bank.
Penal interest rate 1 % higher over the prescribed rate on overdue amount or as per policy of the Bank.
Other fees & Charges As per policy and scheduled charges of our Bank.
Repayment method Service interest on monthly basis. Entire outstanding loan amount will be repaid on or before the expiry date of the loan.
Term Loan:
Industrial / Manufacturing Project Other Term Loans 14.00% 14.00%
Other aspects of interest rate Interest on various lending categories will depend on the level of risk and type of security offered. Interest may be reviewed at least once in 6 month and more often when appropriate fixed interest rate should be discouraged. All rates should vary with cost of funds fluctuation based on a spread of profit. Effective yield can be enhanced to the extent the borrowers are required to maintain deposits to support borrowing activities. Yield should be further improved by commitment fee and Service charges where possible. All pricing of loans should however have relevance with the market condition and be approved by the Executive committee / Managing Director from time to time. Where repayment and interest servicing performance of a credit deteriorates it shall be identified at an early state and closely monitored in order to avoid loan losses.
Other charges
Except the interest rate the bank, in occasions, charges accidental fees like the following: Overdue charge (Time nonpayment): the bank charges punitive fees to a customer if he fails to pay due installment payment within a stipulated date. The rate of this punitive fee widely varies depending on the quantum of the payment and the period of time for which the amount remains unpaid. MBL, however, strongly demotivates such kind of deeds. Parcelcharge: The bank charges a fee for parcel transaction by a customer.
Calculation:
The effective interest rate is calculated as if compounded annually. The effective rate is calculated in the following way, where r is the effective annual rate, i the nominal rate, and n the number of compounding periods per year (for example, 12 for monthly compounding): For example, a nominal interest rate of 6% compounded monthly is equivalent to an effective interest rate of 6.17%. 6% compounded monthly is credited as 6%/12 = 0.005 every month. After one year, the initial capital is increased by the factor (1 + 0.005)12 1.0617. The yield depends on the frequency of compounding: Given a collection of pairs (time, cash flow) involved in a project, the internal rate of return follows from the net present value as a function of the rate of return. A rate of return for which this function is zero is an internal rate of return.
Effective Interest Rate (EIR) is a special kind of Internal Interest Rate (IIR):
Given the (period, cash flow) pairs (n,Cn ) where n is a positive integer, the total number of periods N, and the net present valueNPV , the internal rate of return is given by r in: NPV
For Example: Mercantile Banks Initial Expense/investment and Cash FlowsYear (n) 2009 2010 2011 2012 Cash flow (Cn) -123400 36200 54800 48100
NPV = 0 = - Initial Investment + => 0 = - 123400 + By manual Input: r = 5% ; the NPV= $2,331.99
r = 7%; the NPV = ($2,439.85)
+ +
Bibliography
www.mercantilebank.com www.en.wikipidia.com Financial management, I M Pandey (ninth Edition) www.researchexamples.com/finance/working-capital-management