CHAPTER-01

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1.1 Origin of the Report: In recent days the Small and Medium Enterprise (SME) Financing has become an important area for Commercial Banks in Bangladesh. To align its corporate policy with the regulation of Central Bank, banks have become more concerned about SME and opened windows to conduct business in this particular area. This study has been conducted to fulfill the requirements of sixth term MBM program and gain an insight about the present condition of small and medium enterprise in the economy of Bangladesh and their financing scenario in light of Bangladesh Bank regulation. 1.2 Background of the Study: After Liberation of Bangladesh, intensive efforts were undertaken to accelerate the rate of industrialization in the country. At the beginning, import substitution and subsequently export-led economic growth strategy was pursued for industrialization. In order to attain this objective, large amount of industrial credit was funneled to the industrial sector. But the whole exercise of industrialization came to a halt with the massive diversion of resources to other non-priority sectors. Policy makers, of late, have come to recognize the contribution of SME sector towards economic development in the country. Small and medium enterprises have been recognized as one of the most important means for providing better economic opportunities for the people of least developing countries like Bangladesh. A developing economy like that of ours suffers from many peculiar problems such as disproportionate pressure of population on agriculture due to lack of rural industrialization, unemployment and underemployment of human and materials resources, unbalanced regional development etc. The contribution of small and medium enterprises in the solution of these problems is beyond doubt, provided they are organized and run on scientific basis. Small and medium enterprises are particularly suitable for densely populated countries like Bangladesh where SME sector can provide employment with much lower investment per job provided.

Out of 11% employment of the civilian labor force provided by the manufacturing sector, about two thirds are estimated to be provided by the small and cottage industries sector.
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Again, development of small industries facilitates the effective mobilization of capital and

labor resources. They also help in raising standards of living of people in rural areas. Contribution of SME sector to GDP remained above 4% during the period from 1985-86 to 1999-00. Moreover, the present contribution of SME sector to GDP is approximately 5% and SME sector employs 25% of the total labor forces, thus this sector is the present available sector for creation of jobs (Saha, Sujit R. 2007).Research papers developed by Bakht, Zaid (1998) and Ahmad, Salahuddin et al. (1998) described that the policy environment within which SMEs in Bangladesh operate accompanies legal, regulatory and administrative constraints to employment creation bySMEs. The robustness of SME contributions to employment generation is a common phenomenon in most developing countries in that the magnitude varies between 70% to95% in Africa and 40% to 70% in the countries of the AsiaPacific region (Ahmed, M.U.1999).Liberalization of industrial and trade regimes along with globalization are likely to havehad significant effects on Bangladeshs SMEs (Ahmed, 2002; Bhattacharyaet 2000).Various recent studies (Ahmed, M.U. 2001, ADB 2001, USAID 2001) show that SME shave undergone significant structural changes in terms of product composition, degree of capitalization and market penetration in order to adjust to changes in technology, market demand and market access brought by globalization and market liberalization. The official data show that the share of private investment in Bangladeshs GDP in the late1990s, which may be considered as the post-reform era, has remained more of less constant at around 15% (Bhattacharya, 2002). This may be interpreted as an evidence of stagnant private sector activities in the country. The recent private sector survey estimates the contribution of the micro, small, and medium enterprises (MSMEs) is 20-25% of GDP (Daniels, 2003). While SMEs are characteristically highly diverse and heterogeneous, their traditional dominance is in a few industrial sub-sectors such as food, textiles and light engineering and wood, cane and bamboo products. According to SEDF sources quoted from ADB (2003), food and textile units including garments account for over 60% of the registered SMEs. Despite these contributions in the economy of the country, Banking sectors are not interested in financing the small and medium enterprises; rather there is a decline in the amount of advances by the Banking sector. There are approximately 52 Banks operating in our country and all are serving large enterprises rather than SMEs though only the small enterprises contribution is 5% in GDP of Bangladesh in 2007. Based on the above discussion the following objectives are set for the study:
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To review the role of SMEs in the economy as well as current status of SME sand their financing by Banks in Bangladesh. To review the present role of Regulatory Authorities in SME financing and developments in Bangladesh. 1.3 Objective of the study: Broad Objectives: This is an attempt to find out the operations of SME banking in Bangladesh and its overall impact on our economy. Specific Objectives:

Impact of SME banking in Bangladeshi economy. Its strength & weakness of the SME Banking Operations. To know the disbursement of SME loans and selection criteria. To Analyze micro and macro environment of the economy and importance of SME banking in the context of Bangladesh

1.4 Limitations of the Study: Since this research is only for academic purpose, there were some limitations in this study. These are mentioned below: 1. Discussion about the Small and Medium Enterprises is a vast subject, but only some selected areas are covered in the research paper. 2. The study is basically based on secondary data. 3. Time was enough but it was not possible to give full concentration in this regard due to continuous pressure from other courses.

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1.5 Methodology of the Study: The study was conducted mainly based on secondary information although some information relating to entrepreneurs have been collected primarily. The sources of data include Office Records, BIBM - Library, Different Research Paper regarding SMEs, Different Publications on SMEs of different banks and some websites. Sample banks of DNCBs, PCBs, and FCBs from the sample frame, was selected purposively considering the amount of loan size, interest rate, loan processing fees, period of loans, mode of finance and management. Policies relating to SME financing such as fiscal policy, monetary policy and internal policies of commercial banks was examined thoroughly with a view to find out the influence of existing policies on SME financing. Trend and pattern of bank financing to SME was analyzed by classifying the financing in terms of areas, rate of interest, types, category, and banks.

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CHAPTER-02

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2.1 History of Banking:

The first banks were probably the religious temples of the ancient world, and were probably established in the third millennium B.C. Banks probably predated the invention of money. Deposits initially consisted of grain and later other goods including cattle, agricultural implements, and eventually precious metals such as gold, in the form of easy-to-carry compressed plates. Temples and palaces were the safest places to store gold as they were constantly attended and well built. As sacred places, temples presented an extra deterrent to would-be thieves. There are extant records of loans from the 18th century BC in Babylon that were made by temple priests/monks to merchants. The name bank derives from the Italian word banco "desk/bench", used during the Renaissance by Florentine bankers, who used to make their transactions above a desk covered by a green tablecloth. However, there are traces of banking activity even in ancient times. In fact, the word traces its origins back to the Ancient Roman Empire, where moneylenders would set up their stalls in the middle of enclosed courtyards called Macella on a long bench called a bancu, from which the words banco and bankare derived. As a moneychanger, the merchant at the bancu did not so much invest money as merely convert the foreign currency into the only legal tender in Rome, that of the Imperial Mint. The earliest evidence of money-changing activity is depicted on a silver drachm coin from ancient Hellenic colony Trapezes on the Black Sea, modern Trabzon, and 350-325 BC, presented in the British Museum in London. The coin shows a banker's table (trapeza) laden with coins, a pun on the name of the city. In fact, even today in Modern Greek the word Trapeza means both a table and a bank. The first state deposit bank, Banco di San Giorgio (Bank of St. George), was founded in 1407 at Genoa, Italy.A banker is defined as a person who carries on the business of banking, which is specified as: Conducting current accounts for his customers. Paying cheques drawn on him, and Collecting cheques for his customers.
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2.2 Global Banking:

In the 1970s, a number of smaller crashes tied to the policies put in place following the depression, resulted in deregulation and privatization of government-owned enterprises in the 1980s, indicating that governments of industrial countries around the world found privatesector solutions to problems of economic growth and development prefer to state-operated, semi-socialist programs. This spurred a trend that was already prevalent in the business sector, large companies becoming global and dealing with customers, suppliers, manufacturing, and information centers all over the world. Global banking and capital market services proliferated during the 1980s and 1990s as a result of a great increase in demand from companies, governments, and financial institutions, but also because financial market conditions were buoyant and, on the whole, bullish. Interest rates in the United States declined from UCBL out 15% for two-year U.S. Treasury notes to UCBL out 5% during the 20-year period, and financial assets grew then at a rate approximately twice the rate of the world economy. Such growth rate would have been lower, in the last twenty years, were it not for the profound effects of the internationalization of financial markets especially U.S. Foreign investments, particularly from Japan, who not only provided the funds to corporations in the U.S., but also helped finance the federal government; thus, transforming the U.S. stock market by far into the largest in the world. Nevertheless, in recent years, the dominance of U.S. financial markets has been disappearing and there has been an increasing interest in foreign stocks. The extraordinary growth of foreign financial markets results from both large increases in the pool of savings in foreign countries, such as Japan, and, especially, the deregulation of foreign financial markets, which has enabled them to expand their activities. Thus, American corporations and banks have started seeking investment opportunities abroad, prompting the development in the U.S. of mutual funds specializing in trading in foreign stock markets. Such growing internationalization and opportunity in financial services has entirely changed the competitive landscape, as now many banks have demonstrated a preference for the universal banking model prevalent in Europe. Universal banks are free to engage in all
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forms of financial services, make investments in client companies, and function as much as possible as a one-stop supplier of both retail and wholesale financial services. Many such possible alignments could be accomplished only by large acquisitions, and there were many of them. By the end of 2000, a year in which a record level of financial services transactions with a market value of $10.5 trillion occurred, the top ten banks commanded a market share of more than 80% and the top five, 55%. Of the top ten banks ranked by market share, seven were large universal-type banks (three American and four European), and the remaining three were large U.S. investment banks who between them accounted for a 33% market share. This growth and opportunity also led to an unexpected outcome: entrance into the market of other financial intermediaries: nonblank. Large corporate players were beginning to find their way into the financial service community, offering competition to established banks. The main services offered included insurances, pension, mutual, money market and hedge funds, loans and credits and securities. Indeed, by the end of 2001 the market capitalization of the worlds 15 largest financial services providers included four nonbank. In recent years, the process of financial innovation has advanced enormously increasing the importance and profitability of nonblank finance. Such profitability priory restricted to the non-banking industry, has prompted the Office of the Comptroller of the Currency (OCC) to encourage banks to explore other financial instruments, diversifying banks' business as well as improving banking economic health. Hence, as the distinct financial instruments are being explored and adopted by the banking and non-banking industries, the distinction between different financial institutions is gradually vanishing.

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2.3 Overall Banking Sector:

Financial sector reforms to strengthen the regulatory and supervisory framework for banks made headway in 2006 although at a slower than expected pace. Overall health of the banking system showed improvement since 2002 as the gross Non-performing Loans (NPL) declined from 28 percent to 14 percent while net NPL (less Provision) reduced to 8 percent from 21 percent. This led significant improvement in the profitability ratios. Although the Private Commercial Banks (PCB) NPL ratio registered a record low of 6 percent, the four Nationalized Commercial Banks (NCB) position are still weak and showed very high NPL at 25 percent. The NCBs have large capital shortfalls with a risk-weighted capital asset ratio of just 0.5 percent (June 2006) as against the required 9 percent. For the PCBs risk-weighted capital asset ratio stood at 10 percent. Bangladesh Bank issued a good number of prudential guidelines during the year 2006 and the first quarter of 2007 which among others relate to (i) Rationalization of prudential norms for loan classification and provisioning, (ii) Policy for rescheduling of loans, (iii) Designing and enforcing an "integrated credit risk grading manual", (iv) Credit rating of the banks, and Revisions to the make-up of Tier-2capital. Besides, recent decision of the Government to corporative the remaining three NCBs along with the initiative to sale the Rupali Bank are bound to usher in changes in the banking sector competitiveness aspect. Bangladesh Bank has also taken up the task of implementing the Basel II capital accord. Further, the recent enactment of the Micro-credit Regulatory Authority Act (MRAA) for the regulation of the Micro Finance Institutions (MFI) has been a major development in the year 2006.Since 1998 CAMEL rating of banks gradually improved and in 2006 Bangladesh Bank updated this rating model by incorporating the market risk and the new model is known as CAMELS.

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2.4 The Banking System of Bangladesh: The banking system at independence consisted of two branch offices of the former State Bank of Pakistan and seventeen large commercial banks, two of which were controlled by Bangladeshi interests and three by foreigners other than West Pakistanis. There were fourteen smaller commercial banks. Virtually all banking services were concentrated in urban areas. The newly independent government immediately designated the Dhaka branch of the State Bank of Pakistan as the central bank and renamed it the Bangladesh Bank. The bank was responsible for regulating currency, controlling credit and monetary policy, and administering exchange control and the official foreign exchange reserves. The Bangladesh government initially nationalized the entire domestic banking system and proceeded to reorganize and rename the various banks. Foreign-owned banks were permitted to continue doing business in Bangladesh. The insurance business was also nationalized and became a source of potential investment funds. Cooperative credit systems and postal savings offices handled service to small individual and rural accounts. The new banking system succeeded in establishing reasonably efficient procedures for managing credit and foreign exchange. The primary function of the credit system throughout the 1970s was to finance trade and the public sector, which together Absorbed 75 percent of total advances.

The transformation of finance priorities has brought with it problems in administration. No sound project-appraisal system was in place to identify viable borrowers and projects. Lending institutions did not have adequate autonomy to choose borrowers and projects and were often instructed by the political authorities. In addition, the incentive system for the banks stressed disbursements rather than recoveries, and the accounting and debt collection systems were inadequate to deal with the problems of loan recovery. It became more common for borrowers to default on loans than to repay them; the lending system was simply disbursing grant assistance to private individuals who qualified for loans more for political than for economic reasons. The rate of recovery on agricultural loans was only 27 percent in FY 1986, and the rate on industrial loans was even worse. As a result of this poor showing, major donors applied pressure to induce the government and banks to take firmer action to strengthen.
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2.5 World Economy- An Overview: As we enter into the new millennium the process of trade liberalization and globalization have presented new challenges as well as greater opportunities. Economic boundaries of nations are being abolished and the world is gradually becoming a global village, in the beginning of the year 1999 the Euro currency started to replace the currency of eleven European Union countries. In the financial service sector profound changes have been taking place globally. E-commerce is becoming the predominant mode of transactions. We are witnessing revolutionary changes in the fields of cost control, retail channels, range and delivery of services, accessibility and reach. These changes have already triggered off reorganization, amalgamation, and takeover of financial institution globally.

2.6 Bangladesh Economy-An Overview:

The improved political environment in the country, after a delayed period of civil disobedience brought a much-awaited economic stability during the financial year (FY) 2002-2004. The macro economic development during the year was marked by a healthy GDP growth and moderate inflation. For the second year, running a bumper rice harvest maintained growth at above 5% and GDP growth during the FY 2004 was at 5.52%. GDP growth during the FY 2006 is 10.66%. On the other hand, the growth performance in industry was slow with manufacturing growth 3.3% being one of the lowest rates in the recent years. Several unfavorable factors contributed to this situation, which included disturbance in the supply of natural gas, which in the turn affected the power supply and production activities. Furthermore, labor disputes during the second quarter of the year badly affected the operation of Chittagong port. In the services sector, growth in transportation, storage, and communication contributed to about 13% to the total GDP but growth in trade sector was slow due to lower import growth. During the year some positive initiative were taken in the banking sector with improvements in the legal and regulatory environment to improve loan recovery but unfortunately the high quantum of non-performing assets and under capitalization continued to plague the entire banking sector thus causing a major threat to the macroeconomic stability. The size of classified loans increased significantly, which contributed to lower profitability of the banks. Reserve of gross foreign exchange of the BB stood lower at US$3033.88 million at the end of March 2005 compared to US$3179.41 million at the end of February. This was, however, higher than US$2653.50 million at the end of March 2004.
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The pressures on foreign exchange reserve continue due to low aid disbursement and sizeable private capital outflow, which amounted to around US$ 120 million. The official exchange rate was devaluated by 4.6% in seven steps in FY 2002 and in two steps during July-August 02 thus raising the cumulative rate of devaluation to 6.7%. The external account declined from over 5% of GDP to less than 3% (US$ 0.9 million) in FY 02 which was mainly a result of healthy export growth (14%) and a significant increase in remittances from abroad, which in turn was due to stable political environment and a higher rate of contraction in import of food grains and capital goods.
Investment rate in FY 04 showed some increase and the declining trend in private savings was substantially reserved. The national savings rate increased from 11.9% of GDP in FY 03 to 14.6% in FY 04. This was partly due to increased inward remittances, increase in nominal interest rates and lower rate of inflation. Some key indicator of the economy of Bangladesh regarding banking sector is given follows: 1. Total revenue collection: The government of Bangladesh collects total revenue Tk.18165.49 crore during the same period of the preceding year. 2. Outstanding borrowing of the government: At the end of February, 2005 the outstanding borrowing of the government stood at Tk.35031.91 crore, recording an increase of Tk.1543.47 crore or 4.61% over June, 2004 3. Exports: During July-February, 2004-05 total export of the country stood higher by US$622.86 million or 13.00% to US$5415.60 million compared to US$4792.74 million during the same period of the preceding year 4. Import payments: During July-January, 2004-05 total import payment increased by US$1233.70 million or 21.31% to US$7023.50 million compared to US$5789.80 million during the same period of the preceding year. 5. Fresh opening of import LCs:During July-February, 2004-05 fresh opening of import LCs increased by US$1834.58 million or 24.30 % to US$ 9382.84 million compared to US$7548.26 million during the same period of the preceding year.
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during July-

March, 2004-05 increased by Tk.2351.08 crore or 11.72 % to Tk.20294.60 crore compared to

6. Total remittances: During July-March, 2004-05 stood total remittances of the country higher by US$320.20 million or 12.79 percent to US$2823.03 million compared to US$2502.83 million during the same period of the preceding year.

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CHAPTER-03

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3.1 SMEs in Bangladesh

The Least Developed Countries (LDCs) in the east have started refocusing their attention on SMEs to enhance their role in bringing about structural changes in their economies. For Bangladesh SMEs have assumed special significance for poverty reduction programmers and potential contribution to the overall industrial and economic growth. This article uses two earlier studies carried out almost a decade apart and the author's own research to identify some of the constraints that have been hampering SME growth and to provide some pointers for the future. The economy of Bangladesh is at the crossroads. Rapid liberalization has put most existing industries under severe strain because of their inability to compete with consumer goods being freely imported after the withdrawal of quantitative restrictions and the drastic reduction of import tariffs. For the fiscal year 2004-2005, the erstwhile 4-tier duty structure of 7.5, 15, 22.5 and 30 percent has been cut down to 3 tiers, 7.5, 15 and 25 per cent, the weighted average being 16.44 percent. According to the budget speech of the Finance Minister, this would cause an estimated Bangladesh taka (BDT) 11 billion (USS 186 million) loss of revenue to the government; but there are no estimates yet about likely losses to the domestic trade and economy of the country from the flood of imported consumer and industrial products - cosmetics and toiletries, food and beverages, textiles and apparels, footwear and leather goods, chemicals and pharmaceuticals, light engineering products, machine tools, hand tools and so on. All these products (all under the SME category, and the rate at which the glittering multistoried shopping malls are springing up in Dhaka and other major cities of the country is perhaps a good indicator of the rate of displacement of domestic products by imported merchandise. Although some producers have been successful in improving their products and significantly increasing external market access, most are languishing. Both equity and growth being of concern to the Government, the priority is to accelerate GDP growth in a pro-poor manner from the present 5.5 percent to 8-10 per cent. Agriculture, besides being the mainstay of the economy, is also important for increasing employment and reducing poverty. The contribution of agriculture and fisheries to the GDP in 2003-04 was 22.83 per cent at 1995-96 constant prices (crop 12.98 per
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cent. livestock 2.90 per cent, forestry 1.84 percent, and fisheries 5.15 per cent) while they provided over 72 percent of the total employment. Correspondingly, the manufacturing contribution to GDP in 2003-04 was 16.25 per cent accounting for only 5.4 percent of the total employment. Whether to achieve the committed Millennium Development Goals (MOGs) of 2015 or the targets of the National Strategy for Economic Growth, Poverty Reduction and Social Development, commonly known as the Poverty Reduction Strategy Paper (PRSP), the development process of Bangladesh must strive to expand employment creation opportunities very rapidly.

The scope of additional absorption of labor in agriculture being somewhat limited, the best potential for this lies in the manufacturing sector. In spite of droughts, floods, cyclones and various other natural or management related disasters, the agricultural sector of the country has performed well and has enabled the country to be self-sufficient in food; the growth of the services sector has also been fairly robust. It is the manufacturing sector's contribution to the GDP that has remained nearly stagnant at around 15 per cent and its growth rate at 7.41 percent (estimated values of 2003-04 at 1995-96 constant prices) To achieve the desired 8-10 per cent GDP growth, the manufacturing sector has to be made highly vibrant, increasing both its growth rate and its contribution to the GDP by leaps and bounds. The most cost-effective route for this would be through development of SMEs.

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The Industrial Policy of Bangladesh 1999 describes small industries as those employing less than 50 persons and having a fixed capital investment of BDT 100 million ($1.69 million). Medium industries were defined as those employing between 50 and 99workers and requiring investment between BDT 100 and 300 million ($ 1.69-5.07 million). This policy is now under revision as Industrial Policy 2004, which is yet to be finalized and officially published. According to media reports, the definition of industry has been reportedly revised in terms of "replacement costs", taking the cost of factory set-up and land as fixed. An industry with a replacement cost of BDT 15 million ($254,000) is expected to be termed a small industry and one with a replacement cost of BDT 15-100 million ($ 0.25-1.69 million) as a medium industry. It may be noted that neither the existing nor the proposed definitions take into consideration other important factors, like technological requirements, technical complexities of production, degrees of skills required in workers and managers, degree of value addition and turnover, import requirements, need for working capital, and probable trade barriers to market access. As a matter of fact, the technological requirements, the methods and skills of production, and the quality of manpower needed for production and management are highly dynamic issues. To remain competitive in the globalized open market, to respond to the preferences of
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consumers and to conform to the technical standards and quality requirements of importing countries, and, of course, to comply with WTO rules and standards, producers must keep under constant review the necessity of acquiring, upgrading or innovating from time to time appropriate and cost-effective technological inputs. As there may be periodical needs for re-tooling, re-structuring and revamping the production factory, it may not be very easy to remain bound by rigid definitions. In the context of the industrial scenario of Bangladesh, barring a small number of large fertilizer factories, composite textile mills, modern chemical and pharmaceutical plants, etc., the bulk of the existing industries may be notionally called either medium or small industries by global standards. Industrial goods, according to economic or end-use classification, appear to have maximum weight age in consumer goods categories. A similar picture emerges from the weight age of general industrial production statistics at the 3-digit level of codes. Bangladesh is at present largely engaged in the manufacture of common consumer goods, requiring rather simple technologies that are predominantly labor-intensive and that do not require a very high degree of skills to produce. As has been stated earlier, most of these are not competitive in quality or cost, and they will impose tremendous strain on the patriotism of domestic consumers to keep on patronizing them for long by paying higher prices and deriving less quality satisfaction, while better and cheaper imported alternatives are freely available at hand. Campaigning may go on for buying Bangladeshi products, but it will be extremely difficult to dissuade people for long from buying mass consumption goods from India, Indonesia, which have already filled up the local supermarkets. The challenge at present is not to compete in top class brand products, which are also available in abundance in local markets, meant for those affluent consumers used to shopping in Milan, Zurich, London or New York. The challenge before Bangladesh today is how to make her existing SMEs compete with their equal-level rivals from abroad by modernizing themselves with up-to-date technologies and production processes. Along with that comes the question of how to develop the culture and practice of setting up new industries able to thrive in global competition right from the beginning Globalization, as one knows, has not only challenges but also enormous opportunities for those who have the capability of utilizing them. For them to the most important issue will be choice of correct technology.
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China. Thailand, Malaysia or

3.2 SMEs - Number and Success: No one knows for sure how many SMEs there are in Bangladesh today. It was around 1978 that the BSCIC (Bangladesh Small and Cottage Industries Corporation), under the Ministry of Industries, conducted a survey to find out the number of cottage and small industries of the country. inspire of the question about the validity and dependability of the survey, in absence of any other effort by the Bangladesh Bureau of Statistics (BBS) or any other agency, this initiative did provide a useful benchmark but it was never updated. The International Consultancy Group (ICG) of the UK, in collaboration with the Micro Industries Development Assistance and Services (MIDAS), conducted in 2003 the National Private Sector Survey of Enterprises in Bangladesh with funding from the Department of International Development (DFID) of the UK Government, the United States Agency for International Development (USAID), the Swiss Agency for Development and Cooperation (SDC) and the Swedish International Development Cooperation Agency (SIDA).

The survey results drew the conclusion that there were approximately 6 million micro, small and medium enterprises (MSMEs), which included enterprises with up to 100 workers employing a total of 31 million people, equivalent to 40 per cent of the population of the country of age 15 years and above. About three quarters or more of the household income in both urban and rural areas is provided by the MSMEs. The high level of income
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contribution was attributed to the fact that the enterprises worked ten hours per day, 28 days per month for eleven months a year. The survey also found that the industrial structure of SMEs consisted of primarily wholesale and retail trade and repairs (40 per cent), production and sale of agricultural goods (22 percent), services (15 percent), and manufacturing only (14 per cent). Thus the survey brought out very prominently the fact that the large untapped potential for expansion in manufacture and production could be exploited (or contributing more significantly to the national economy. Another vital finding of the survey under discussion was that SMEs contributed BDT 741 ($ 12.5) billion or nearly 25 per cent of the GDP (BDT 2,996 billion) in 2003. Those who tend to look down on micro and small industries may be shocked to note that enterprises employing 2-5 workers are credited for having contributed 51 percent share of the total SME contribution to the economy, followed by 26 percent by those having only one worker and 10 per cent by those having 6-10 workers . The SMEs to the GDP is also sectorial contribution of interesting. Manufacturing contributed the highest

proportion (38 per cent), followed by Agriculture (24 per cent) and, closely following, Wholesale and Retail Trade and Repairs (23 per cent) .

For LDCs like Bangladesh, SMEs are a highly cost-effective route to industrial development. The present size of the population in the 2-14 years age group is approximately 16 million. They willbe candidates for new jobs. Together with another 10 million inactive people still looking for employment, the total size of the new entrants to the job market may
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be said to be around 25 million.

What would it cost to provide employment to these 25million? In 1998 the Swiss Agency for International Development Cooperation (SDC) had conducted a study of small enterprises with the help of Bangladesh Unnyan Parishad (BUP). The study was conducted with 47 small enterprises of 19 categories in 40 thanes (police districts) under 10 districts. A summary of the findings of these studies may be seen in Annex-III. It showed that the average employment size per enterprise was 15, ranging from 5 in coir processing to 29 in food processing. The size of investment varied from industry to industry and enterprise to enterprise.

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The highest investment was found to be BDT 3.5 million ($60,000) for food processing and the lowest BDT 12,747 ($216) for coir processing. The average investment per enterprise in the sample was found to be BDT 1.1 million ($18,700). If you put these figures together (even though this was not a particularly scientific analysis), the investment per employment works out to BDT 73,694 ($1,250). At this rate, the total investment required to provide employment to 25 million new jobs would be BDT 1,842 ($31) billion for the small enterprises sector. To compare what it might cost to provide employment to 25 million new jobs in the large industry sector, one needs only look at some of Bangladesh's large fertilizer factories. Chittagong Urea Factory Limited (CUFL) is said to have cost BDT 14 billion ($237 million) to build, and it employs 982 people (all categories). The Jumuna Fertilizer Factory (JFF) cost BDT 12.60 billion ($213 million) costs and per employs 1,082 people. Thus CUFL and JFF respectively required BDT 14.26 and 11.63 million ($241,000 and 198,000) per person employed. those of SMEs. Investment person employed in large industries thus worked out respectively at 100 and 78 times

As for micro-enterprises promoted by the Grameen Bank and NGOs like BRAC, Proshika, Swanirvar Bangladesh, ASA, etc., for self-employment of the very poor (80 per cent of whom are women) the investment required per employment is BDT 5,000 ($85) or less. Thus no elaborate argument is needed to establish the case of promoting micro as well as small and medium enterprises as the most cost-effective and advisable means of providing employment and injecting dynamism into industrial growth, both for poverty alleviation and for contribution to the GDP.

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3.3 Why SMEs are Languishing: If the SME case is so good, why aren't the SMEs of Bangladesh doing better? Neither the Bangladesh Bureau of Statistics nor the Annual Economic Review of the Ministry of Finance shows industrial statistics segregating data for SMEs. The coverage is restricted to large and small industries, whatever might be the definitions of these two categories. There have been many analyses on why the industrial sector of Bangladesh has remained in hibernation. All the general impediments to private sector growth would apply equally to the growths of both large industries and small industries. In 1996, the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI) had conducted an empirical study to find out the constraints to industrial sector growth and investment as perceived by industrial entrepreneurs and businessmen of different classes.

A summary of this somewhat simplistic study was published informally under the title In Search of Enabling Environment, which listed 90 recommendations for removal of existing bottlenecks When asked to identify the three most urgent issues in order of priority, the respondents named the following:

Priority 1: Industrial credit Priority 2: Power supply

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Priority 3: Administrative reforms

Since the above study, many other important issues surfaced in relation to investment climate, economic freedom, competitive advantage, etc. While the macro-economic management of Bangladesh has been admirable, quite the same cannot be said about the general quality of governance, the openness of the economy, transparency in transactions, corruption and the cost of doing business, law and order conditions, and such other aspects. These factors call for new priorities. As a result, inspite of many incentives and promises, industrial investment in the country has been quite sluggish and the flow of Foreign Direct Investment (FDI) has remained low outside the EPZs. The Government has been aware of this as evident from the following extracts from its I-PRSP paper: "The Government is aware of the constraints hindering the growth of the private sector and would implement effective measures to remove the hurdles through effective and coordinated policies and actions. The key areas would be: infrastructure development (e.g. power, telecommunications, roads and ports), strengthened financial and capital markets, quality of the labor force, reduced costs of doing business by reforming institutional and regulatory framework, improved law and order conditions and better environment for foreign investment. Specific measures will be worked out in consultation with the private sector."Such promises are also included in the Industrial Policy. In a recent paper by the author, titled The Role of Private Sector in Bangladesh, the Following 25 issues were identified as impediments to growth of the private sector:

1. Lack of long-term capital availability through banking channels; 2. Lack of long-term capital in the capital market and bond market; 3. Dumping of products, largely by smuggling; 4. Inefficient support infrastructure: o In the utilities sector, specifically in power;
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o In port services, including land ports; o High transportation costs; o A largely inefficient, and very costly, telecommunications system; 5. Widespread tariff anomalies; 6. High customs' duties; 7. Complicated and cumbersome customs procedures, aggravated by extensive arbitrary Powers exercised by customs officers; 8. Low productivity and a highly politicized labor sector; 9. Inconsistency among different government policy statements; 10. An inefficient and corrupt judicial system; 11. Widespread corruption; 12. Political instability, leading to frequent strikes; 13. High interest rates in the banking sector; 14. A lack of credible statistics; 15. Lack of transparency and accountability in government decision making; 16. Lack of an appropriate education system to support an industrial economy; 17. Too many holidays; 18. A slow process of deregulation and privatization; 19. Lack of an industry-friendly social and political environment; 20. Lack of good governance; 21. Lack of regulatory bodies; 22. An uneven playing field between the private sector and the public sector; 23. Lack of local technology; 24. Lack of research and development; 25. Government control on public utilities.

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More specifically to the MSMEs, the National Private Sector Survey of Enterprises in Bangladesh 2003 of ICGMIDAS had identified enterprise constraints from open ended questions (Table 8). Under the same survey a list of possible constraints was read out to the proprietors of firms. The response showed nearly that a third of themconsidered electricity, road conditions and access to finance as serious problems. The ICGT/MIDAS Survey also found start-up problems faced by MSMEs and the Reasons for enterprise closure.

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3.4 What needs to be done? The long list of problems and constraints itself indicates what needs to be done to remove the constraints. It would be a good idea to extend assistance to the existing and prospective entrepreneurs in the SMEs sector, focusing on the thrust sectors identified by the government as likely to have both better growth prospects as well as some comparative or competitive advantage for Bangladesh. The Industrial Policy 1999 had identified the following 16 thrust sectors: Agro-based industries; Artificial flower making; Computer software and information technology; Electronics; Frozen foods; Floriculture; Gift items; Infrastructure; Jute goods; Jewellery and diamond cutting and polishing; Leather; Oil and gas Sericulture and the silk industry; Stuffed toys; Textiles; and Tourism. Software and ICT products; Agro-products and agro-processing products; Light engineering products (including auto-parts and bicycles); Leather goods; and High value-added readymade garment.
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The Export Policy promises the following supports to the above sectors of "High Priority"
Supply of investment credit at reduced rate on high priority basis

Moratorium on income tax; Various forms of cash assistance; Export credit on easy terms and reduced rate of interest; Subsidized rate for air transportation; Duty drawback and bond facilities;
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Assistance

for

establishment

of

related

industries,

including

infrastructure development for reducing the cost of production; Institutional and technical assistance for improving the quality of products and quality assurance; Assistance for marketing access; Assistance in search for external markets; and Cooperation in foreign investment.

The Export Policy 2003-2006 classified the following products as the "special development" sector: Pharmaceuticals; Cosmetics and toiletries; Luggage and fashion goods; Electronic products; C-R coil; Greeting cards and calendars; Stationery; Silk cloth; Handicrafts; and Herbal medicine

The following facilities have been promised for the special development sector Provision of project loan on priority basis at standard rate of interest Consideration of export credit on easy term with reduced rate of interest; Cash assistance; Subsidized air transportation; Duty drawback and bond facilities; Provision of electricity and gas connection on priority basis, including assistance for the establishment of facility industries for reduction of the cost of production; Technical assistance for improvement of quality;
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Assistance in marketing; Assistance in market search outside Bangladesh; and Assistance for securing foreign investment

The Export Policy, however, does not state whether the concurrence of the Ministries of Finance, Civil Aviation, Industries, Commerce and other related Ministries and Agencies have been secured so that these promises for the priority sectors and the special development sector will be actually provided when needed. The same applies to the facilities promised regarding use of foreign exchange facilities from Export Promotion Fund. Provision of finance for export, subsidized premium for insurance, bonded warehouse and duty drawback simplification, return of VAT for export assistance services, permission for sale of rejected goods, etc., are also among supports promised for boosting exports. Needless to mention, most of the indicated industries under the old or new Industrial Policy as well as high priority sectors and special development sectors under the Export Policy would be under the SME category. The promised assistance for SMEs in the industrial policy as well as in the Export Policy have yet to specifically address many technical matters, without which the capacity for production of competitive goods cannot be developed. While it will not be possible to itemize all the issues and their implications in this short article, we cannot omit mentioning some of the more important matters, such as:

Selection,

acquisition

and

application

of

the

appropriate

technology

for

production that would enable production of goods of competitive quality and competitive price, main training optimum productivity, while environmentally not injurious. It quality. Compliance with Quality Assurance and environmental friendliness standards, through adoption of TOM, ISO 9000, ISO 14000, etc., and necessary training for practicing these. Bangladeshi workmen are extremely good at acquiring production skills to high
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would

be important to determine the correct balance between labor-

intensive and capital-intensive processes for achieving the required productivity and

degrees of tolerance, and are capable of production by copying samples. But, due to

limitations in education, skill and technical knowledge, they are unable to produce goods from blueprints and drawings, adhering to the standard specifications. This deficiency has to be removed quickly by establishing appropriate training and skill development facilities.

Many countries developed their SMEs by copying products from other countries, but this is no longer possible under WTO rules for Intellectual Property Rights (IPR). quickly. It is therefore, essential that indigenous R&D capabilities are developed

Most manufacturing processes are today electronically controlled. Hence, adequate skill has to be developed for using and maintaining electronic components and control devices.

Institutional

facilities

are

needed

for

entrepreneurship

development,

including particularly capturing the high entrepreneurial ability of the women of Bangladesh. SMEs must have logical linkages between micro-enterprises below and large industries above them. Their notional hierarchical relationships should be well recognized and made use of. An efficient subcontracting culture has to be developed, and well-functioning regulatory regimes should be put in place so that the network among the subcontracting firms work efficiently. The culture of respecting the needs of these contracting parties, following JIT (Just In Time) systems has to be adequately developed and faithfully practiced.

Most potential investors in the SME sector today are not entrepreneurs in the real sense, inasmuch as they do not have an already developed capability to decide on viable investment avenues, develop project profiles and set up appropriate establishments for production, management and marketing. Free technical assistance will have to be provided to them for accessing information, and developing bankable project proposals in the sectors in which they might have knowledge, preference and perhaps some experience and expertise. Similar assistance will also he needed to meet the various compliance issues under WTO rules.

Most SMEs in Bangladesh today grew on their own initiative. Among them one highly successful sector did benefit from a relative freedom from overregulation and from assistance from government. Readymade garments (RMG) being the success story of Bangladesh
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enjoyed significant relaxation in government control, innovative assistance like provision for bonded warehouse facilities, transfer of many of the regulatory functions to the BGMEA and, to some extent, somewhat relaxed enforcement of the provisions of the Factories Act, Labor Laws, etc. But for a small number of brave and leading entrepreneurs of earlier days, most of the investors followed others more or less blindly and machinery procured for production has been mostly vendor driven. No special effort was made by them to impart technical training to the 1.8 million women workers with little education, and so their productivity has remained deplorably low. Initially the entrepreneurs had no skill of international marketing, when they were mostly dependent on Korean, Indian and Sri Lankan "buyers", who were nothing but self-appointed agents of western importers. Value addition to the industry except for knitwear has been low for lack of indigenous backward linkages with suppliers of fabrics andaccessories. Most significantly, the industry benefited from quotas for North American markets and GSP facilities in EU markets. The elaborate description, though well known to everybody in the industry, is narrated here to highlight the fact that, without the introduction of suitable machinery to ensure high quality, without the enhancement of productivity and skills of workers through training and retraining, without substantial improvement in finishing, packaging and transportation systems, and without learning to switch over to e-commerce, most RMG operators will start falling behind. This will affect their own income as well as the export earnings of the country, 80 per cent of which is contributed by the RMG sector. Besides job losses for a large proportion of the 1.8 million female workers and 2.0 million or so in the related services, there will be huge social impacts that need not be discussed here. Needless to say, diversification of the industrial production system will be needed not only to overcome the apprehended losses of jobs and incomes but also to enlarge the horizon, with the world as the market. SMEs can absorb an unlimited number of investors, each requiring relatively little capital to generate the maximum per unit production and employment, and thus hold the key to the future of the economy. Exports will help increase the purchasing power of the teeming millions of rural and urban poor, using goods from the SME sector. It is thus very clear why SME development should proceed hand in hand with micro enterprise development. It is interesting to observe that the conditions for small industry development that we find today, being at the threshold of total globalization, are very much the same as observed several-decades ago. inspire of the criticism and neglect of the SME sector on the grounds of inefficiency and
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non-optimal use of productive factors compared to larger industries, SMEs are beginning to be extolled for their greater dependence on labor-intensive production techniques, lower requirements of imported inputs and better geographical dispersion. It is also being recognized that small drops make an ocean, so much hope is being pinned on micro and small enterprises for toning up the rural economy, without which the national economy cannot be sustained. Out of many empirical studies done in this area, the work of Professors Sadrel Reza, Momtazuddin Ahmed and Wahiduddin Mahmud of Dhaka University, published under the title Small and Medium Scale Enterprises in Industrial Development, The Bangladesh Experience (Academic Publishers, Dhaka, 1992) strongly corroborates the present experience and the future outlook. (Note: The summary of the findings and policy recommendations of the said publication could be made available from APCTT on request.) In the context of promotion, development and sustainability, among many other things, four issues were highlighted by the authors: Financial support schemes; Technology and training; Marketing and infrastructure; and Rule of external development institutions (meaning donors).

All the above issues are very much within the grasp of the government and easily soluble within a reasonable time frame, except perhaps for technology and training. The horizon for technological development and skill development remains hazy. International cooperation in this regard, through schemes like TCDC (Technical Cooperation Developing Countries), have been most frustrating. Import of technology has not been very cheap; in any case, foreign countries are not expected to be able to develop and supply ready-made technologies and machineries for Bangladesh's needs, so there is no alternative to development of local R&D capabilities. SMEs cannot finance R&D costs and efforts and the only industrial research institution of the country in the public sector, BCSIR (Bangladesh Council of Scientific and Industrial Research) has been engaged in rather inconsequential pursuits. Government has to start taking effective action to develop R&D capacity within the country, maybe in cooperation with others within and outside the
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country. More particularly, a nexus ought to be built up quickly among research institutions, universities and the private sector. UNCTAD is believed to have been doing a lot of studies on the subject of technology needs for sustainable growth of SMEs. Their guidance may be also of help in this regard. Time and again, Bangladeshis have proved that they have the dormant capacity, and given the support they can capture the market. Today's potential entrepreneurs are highly educated and have good exposure to the world, and they can certainly perform better than earlier generation entrepreneurs. But they cannot solve problems that are not in their domain or are beyond their capacity. The tasks of funding R&D, generating social overhead capital, setting up viable institutions for upgrading education and skills of workers and managers, improving power and gas supply and making the transport and communication sectors better remain the responsibility of the government. Without reducing the cost of doing business by making the public services work more effectively, combating corruption and reducing harassment from the usual rent-seekers within the government and outside, maintaining a peaceful law and order situation and the like will all require concerted efforts to resolve. With globalization at the door, all energies have to be concentrated on developing and supporting micro, small and medium enterprises by removing all constraints.

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CHAPTER-04

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4.00 About Small & Medium Enterprise (SME) of a Bank in Bangladesh

4.1 Overview on SME Loan The most valuable natural resource of Bangladesh is its people. As a nation we struggled for our independence and now the attainment of economic uplift is the main goal. Micro lenders are working here in the financial field, providing very small amount and on the other hand regular commercial banks have been providing bigger amount of loans to larger industries and trading organizations. But the small and medium entrepreneurs were overlooked. This missing middle group is the small but striving entrepreneurs, who because of lack of fund cannot pursue their financial uplift, as they have no property to provide as equity to the commercial banks. With this end in view-BRAC Bank was opened to serve these small but hard working entrepreneurs with double bottom line vision. As a socially responsible bank, BRAC Bank wants to see the emancipation of grass-roots level to their economic height and also to make profit by serving the interest of missing middle groups. 50% of its total portfolio usually collected from urban areas, are channeled to support these entrepreneurs who in future will become the potential strength of our economy. Brac Bank is the market leader in giving loans to Small and Medium Entrepreneurs. They have been doing it for the last five years.

4.2 Definition of SME: SME is defined as any business entity having investment of up to BDT 100 million (excluding land and buildings) and has employed less than 100 people. This definition is adopted by the Bangladesh Ministry of Industry. The official Industrial Policy 2005 definition of the Government of Bangladesh for SMEs:

Small Enterprise means enterprises with fixed capital investment (excluding land and building) of less than Taka 15 million (approx. USD 250,000).
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Medium Enterprise cover enterprises with fixed capital investment (excluding land and buildings) between Taka 15 million and Taka 100 million (approx. USD 1.67 Million)

4.3 SMEs in Bangladesh: The recent result of the national private sector survey of enterprises in Bangladesh indicates that there is presence of nearly six million micro, small and medium enterprise in the country. About 90% of all enterprises have 10 or fewer workers. Over three-quarters of the enterprises are located in rural areas and the overwhelming majority of employment generated by the SMEs is also in rural areas.

4.4 SME contribution to the Economy: Small and medium-sized enterprises (SMEs), including micro enterprises, make a significant contribution to economic and industrial development in Bangladesh like any other economics. They form the backbone of the private sector, making up over 90 percent of enterprises, and account for 80% of the industrial employment and about 40% of industrial output. The survey mentioned above shows that these SMEs contributed BDT 741 billion to the GDP or up to 25% of GDP in 2003. The existence of 6 million SMEs reflects the fact that they are more suited to the conditions prevailing in the country than larger enterprises because they tend to be more attuned to the local resource base. In this regard, they display the following strengths in particular

SMEs Create Jobs. They play an important role in generating employment at reasonable rates of remuneration, especially for workers with limited skills and women who have few alternative sources of income. They therefore provide an important vehicle for the sustainable achievement of the poverty reduction objectives at the core of the present development agenda. In Bangladesh, SMEs employ around 31 million people.

SMEs promote an efficient allocation of resources. They tend to have a greater propensity for labor rather than capital intensity, which renders them especially
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appropriate for the typically labor abundant and capital scarce economics of

developing countries. To the extent that these enterprises operate in informal markets, the factor and product prices they face also provide a better reflection of social opportunity costs than the prices faced by large enterprise.

SME Support the building of systemic productive capacities. They help to absorb productive resources at all levels of the economy and contribute to the establishment of dynamic and resilient economic systems in which small and large firms are interlinked. They also tend to be more widely dispersed geographically than larger enterprises, support the development and diffusion of entrepreneurial spirit and skills, and help to reduce economic disparities between urban and rural areas.

SMEs can respond flexibly to changing conditions. Because of their relatively small size which precludes the emergence of various structural rigidities and overly complicated decision making processes, SMEs are potentially very well placed to respond rapidly and effectively to changing circumstances. Provided that they can gain access to the relevant information and have the necessary skills, they can rapidly adjust their output and the processes used in its manufacture.

4.5 Constraints: Some basic constraints for SME development are: Lack of methodologies and approaches for development and promotion. Lack of appropriate service delivery mechanisms and service providers Lack of market information and market linkage. Lack of sources of technology and equipment Shortage of Capital Low levels of education and technical skills Lack of GOB policy Poor quality of products and service. Lack of Sub sector focus Lack of business Development Services (BDS) Linked Management/ Accounting training course. According to the SME survey conducted by ICG, the two most pressing problems
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encountered by the SMEs are lack of money and not enough customers.

According to an IFC report commercial banks financing procedure does not differentiate SMEs, in general, which deters SME to bank financing. Recently, however, some banks are focusing on SMEs as promising target segment. While micro credit is well in its matured stage carried out by many NGOs and micro credit organizations like Grameen Bank, BRAC, ASA etc., large scale financing, on the other hand, is one the offer from all the commercial banks. Between these two extremes, there is a large gap faced by SMEs, often termed as the missing middle, of Bangladesh. This void is expected to widen in the forthcoming years as more and more micro-enterprise are graduating upward to SME segment. Of late, banks have started to recognize this market of SME and the huge future demand for money by them. This has created some movement to look for ways to address this market by all the financing institutions in the industry.

Due to increased attention of development partners like World Bank, ADB etc., Bangladesh Bank and other development organizations, Commercial Banks are under pressure in addressing SME entrepreneurs. In reality, banks have so far seemed to show little concern when it comes to financing smaller enterprises, as most SMEs are unable to offer
substantial collateral when they approach to a financing agency or bank.

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Why SME Loan?

The main focus of BRAC Bank is to develop human and economic position of a country. Its function is not limited only to providing and recovering of loan but also try to develop the economy of a country. So reasons for this program from the viewpoint of BBL:

Support Small Enterprise:

The small enterprise, which requires 2 to 30, lacks Tk. loan, but they have no easy access to the banks/financial institutions. For example: In case of Anonno loan, an amount of 3 to 8 lacs is provided without any kind of mortgage.

Economic Development
Economic development of a country largely depends on the small and medium seal enterprises. Such as, if we analyze the development history of Japan, the development of small & medium scale enterprises expedite the development of that country.

Employment Generation
The bank gearing employment opportunities by two ways: Firstly, by providing loan to the small enterprises expanding, these businesses require more workers. Secondly, Small & Medium Enterprise (SME) program requires educated and energetic people to provide support to entrepreneurs.

Profit Marking
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SME program is a new dimensional banking system in the banking world. Most of the CROs are providing door-to-door services to the entrepreneurs. Entrepreneurs are satisfied by the service of the bank and make profit.

Encourage Manufacturing
The focus of BRAC Bank is to encourage manufacturing by the entrepreneurs who produce by purchasing various types of materials. CRO try to educate them to produce material if possible because if they can produce in line of purchase profits will be high.

Spread the experience

Another reason of BRAC Bank is to spread the knowledge on the importance of SME banking regarding various businesses. The customer services officer share their knowledge from various businesses and tries to help the entrepreneurs who have shortage of the gathered knowledge. CROs who are the driving force of SME division of BRAC Bank also gather knowledge about various businesses and make stronger knowledge base.

SME Network coverage:

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SME Products

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4.6 Anonno Rin

AnonnoRin is a business loan designed to finance small scale trading, manufacturing and service ventures, especially to to help small and medium entrepreneurs to meet their shortterm cash flow shortages and bridge the fund-flow gaps. Eligibility: Entrepreneurs with minimum 2 years experience in the same line of business Business must be a going- concern with more than 1 year in operation Loan Limit:

From BDT 3 lac to BDT 9.5 lac.

Features Loan without mortgage Loan for Working Capital Finance and/or fixed assets purchase Easy repayment system of monthly installment or Single Installment For excellent borrowers who have paid or are paying in due times, we offer discounted rates Quick, quality banking throughout the country
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4.7ApurboRin

Apurbo is a loan facility for Small and Medium business. Apurbo loan has been designed and targeted for relatively bigger business units requiring loan above tk. 8 lacs to 30 lacs.

Eligibility: Entrepreneurs having a minimum of 3 years of some business activities A business which must be a going concern for 3 years

Loan Limit: Starting from BDT 8 lac to maximum of BDT 30 lac. Features: Simple loan processing for expanding your business Quick disbursement Disbursement in one or two installments Flexible monthly repayment plan

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4.8PathshalaRin

PathshalaRin is a loan designed to meet the needs of small and medium sized private educational institutions, such as kindergartens, schools and colleges etc. Eligibility: The educational institution must be in operation for minimum 3 years The educational institute must be a profit making concern Loan Limit: Minimum BDT 3 lac to maximum BDT 30 lac Features: Loan upto 9.5 lacs without Mortgage Loan for purchasing fixed assets Easy monthly installment Minimum documents Easy & faster processing Flexible interest rate based on security and loan amount

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4.9AroggoRin Aroggo is a loan allowed to various Health service Provider like private clinics, diagnostics centers and doctors' chambers. The product offers fixed assets purchase financing under equated Monthly Installments. Eligibility: Minimum 2(two) years in operation Health center must be located in the same address for at least 6 months Health center must be a profit making concern Doctors having 5 years of experience can avail the loan in his/her personal name Loan Limit: Minimum of 3 lac to maximum of 30 lac Features: Loan upto 9.5 lacs without Mortgage Minimum documents Easy loan processing Loan repayment schedule is spread up to 3 years Flexible interest rate based on security and loan amount

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4.10 Digoon Rin

This is a double loan on your deposit. Now you do not need to encash your savings rather you can take double amount of loan on your deposit for your business expansion.

Eligibility: Entrepreneur having minimum 2 years of business activities The business which must be a going concern for 2 years Cash security (BRAC Bank FDR) 50% of the loan amount. Loan Limit: Minimum of 5 lac to maximum of 30 lac BDT Features: Double amount of loan on your deposit Attractive return against the deposit Flexible repayment plan in monthly installment and single installments Quick disbursement

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4.11 Prothoma Rin

"PROTHOMA RIN" is a loan facility for small and medium sized business, which are operated by women entrepreneur. The product offers terminating loan facilities for the purpose of working capital finance and/or fixed assets purchase.

Eligibility: Entrepreneurs with minimum 2 years experience in the same line of business Minimum 1(One) year of continuous business history Loan Limit: From minimum BDT 3 lac up to maximum of BDT 9.5 lac Features: Loan without Mortgage Easy repayment system Minimum documents Easy & faster processing For excellent borrowers who have paid or are paying in due times, we offer discounted rates.
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4.12 Disbursement of WEC Loan: In the small span of operation, WEC has already satisfied the financial need of 1,343 Women Entrepreneur Cell (WEC) has excelled incredibly in the disbursement amount by BDT 39.17 crore and client base of 981 from 2006 to 2007.

Figure: 4.01 Disbursement of WEC Loan 5.13 BIZNESS Account Bizness Account is an interest bearing current account for sole proprietorship business Entrepreneur. Eligibility: Small and medium sized business entrepreneur of a sole proprietorship business Opening balance only BDT-10, 000.00 Features: 4% interest on daily balance Smart Business Card Cash withdrawal limit in ATM BDT 1,00,000 per day and any amount in POS 24 hour Access to ATMs/ POS Tk-50, 000 withdrawn facility (per day) from ATM & Tk-100, 000 from POS No Minimum Balance, No Ledger Fees, No hidden cost
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Phone Banking, Online Banking, SMS Banking, Internet Banking facility

4.14 Cash Secured Loan "Cash Secured Loan" is a loan facility for small and medium sized business. There are two types of loan facility in the product i.e. Secured Loan and Secured Overdraft. These facilities are fully secured by fixed deposit of BRAC Bank.

Eligibility 6 (Six) months experience in the same line of business. BRAC Bank FDR minimum 100% of loan amount Loan Limit: From minimum BDT 3 lac up to maximum of BDT30 lac Features: Loan against FDR Flexible interest rate based on FDR interest rate and loan value Loan for starting new business

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4.15 Bizness loan Bizness loan is an equated monthly loan facility for all types of business who have healthy bank transactions for the purpose of working capital finance and/or fixed assets purchase.

Eligibility: Healthy bank transactions Minimum 3 (three) years of continuous business history BRAC Bank FDR 50% of the loan amount for new loan and 30% of the loan amount for repeat loan Loan Limit: From minimum BDT 10 lac to maximum of BDT 50 lac Features: Loan against FDR value Monthly installment system up to 60 months Borrower having loan with other financial institute can also avail Bizness Loan Attractive rate of interest on FDR

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4.16 Proshar

"Proshar" is a loan facility for small & medium sized manufacturing business. The product offers loan facilities for working capital finance and/or fixed assets purchase.

Eligibility Entrepreneur must have minimum 2 years experience in the same line of business Minimum 2 (Two) years of continuous business history of the enterprise Loan Limit: From minimum BDT 3 lac up to maximum of BDT 30 lac Features Without Mortgage up to Taka 9.50 Lacs Easy Monthly Installment Favorable Interest Rate based on amount and security Easy & Faster Processing

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4.17 Trade Plus

Trade plus is a composite facility for small & medium sized import-oriented businesses to meet their trade finance requirements. Eligibility An import-oriented business having valid trade license, Import registration certificate, V.A.T. Registration certificate & T.I.N. Certificate. Features: Two types of Letter of Credit Facilities One Off LC and Revolving LC Two types of post import finance facility LATR & Revolving loan Overdraft facility for day to day working expenses Loan tenure of Letter of Credit 180 days Flexible repayment system Limit: LC (One-Off): BDT 3.00 Lac BDT 30.00 Lac LC (Revolving): BDT 5.00 Lac BDT 30.00 Lac LATR: BDT 3.00 Lac BDT 30.00 Lac Revolving Loan: BDT 5.00 Lac BDT 30.00 Lac Overdraft: BDT 5.00 Lac BDT 30.00 Lac

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4.18 Super Supply Loan Super Supply Loan is a loan facility for Suppliers of various large retailers, marketing companies, manufacturing companies and various corporate houses. This products main objective is to help various Suppliers to meet their financial requirements.

Eligibility Entrepreneur having 2 (two) years experience in the same line of business Operating the current business for last 1 (one) year Loan Limit: From minimum BDT 4 lac up to maximum of BDT 30 lac Features: Composite fatality of both Overdraft and Revolving limit Customer can withdraw revolving loan amount as desired Convenient repayment system of Revolving limit i.e. equal monthly installment and single installment

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4.19 Support Small Enterprise The small enterprise, which requires 2 to 30, lacks Tk. loan, but they have no easy access to the banks/financial institutions. For example: In case of Anonno loan, an amount of 3 to 8 lacs is provided without any kind of mortgage. a. Economic Development Economic development of a country largely depends on the small and medium seal enterprises. Such as, if we analyze the development history of Japan, the development of small & medium scale enterprises expedite the development of that country. b. Employment Generation The bank gearing employment opportunities by two ways: Firstly, by providing loan to the small enterprises expanding, these businesses require more workers. Secondly, Small & Medium Enterprise (SME) program requires educated and energetic people to provide support to entrepreneurs. c. Profit Marking SME program is a new dimensional banking system in the banking world. Most of the CROs are providing door-to-door services to the entrepreneurs. Entrepreneurs are satisfied by the service of the bank and make profit. d. Encourage Manufacturing The focus of BRAC Bank is to encourage manufacturing by the entrepreneurs who produce by purchasing various types of materials. CRO try to educate them to produce material if possible because if they can produce in line of purchase profits will be high.

e. Spread the experience Another reason of BRAC Bank is to spread the knowledge on the importance of SME banking regarding various businesses. The customer services officer share their knowledge from various businesses and tries to help the entrepreneurs who have shortage of the gathered knowledge. CROs who are the driving force of SME division of BRAC Bank also gather knowledge about various businesses and make stronger knowledge base.

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4.20 Total Loans and Advances Loans and advances increased by BDT 20,216 million or 62% to BDT 52,677 million at 31st December 2008.This is a result of continued growth in lending business and solid growth in banking industry reflecting a continued focus on customers and profitable growth. Below table shown the 5 years total loans and advances in BBL.

Loans and Advances(Taka in Million) from year 2004-2008 Year Amount

2004

5820

2005

11791

2006

19557

2007

32461

2008

52677 Loans and Advances(Taka in Million) from year 2004-2008

SME sector, the main concentrated area for the bank financing since its inception, comprises of 63% of the total loans and advances. Major portfolio of BRAC Bank belongs to commercial sector. Sector-wise credit portfolio is shown in the figure below:

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Figu re: Pie Chart of Sector wise Loan Portfolio

Chart of Division wise Loan Portfolio

Credit concentration is shown in the above pie-chart to elaborate the area of concentration of loans and advances. About 39% of total loan portfolio concentrated outside Dhaka.

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4.21 Operating Profit from SME Operations: BRAC Banks operating profit increases in every year at a double digit growth. In 2007 it was 1945 million but in 2008 it increases 63%, 3174 million. Below presented 8 years operating profit statistics in BBL.

Operating Profit (BDT in Million) 200 7 866 388 21 165 -26 32 499 194 5 Percentage 200 of Profit in 8 2008 174 6 267 29 207 206 57 663 317 5 55% 8% 1% 7% 6% 2% 21% 100%

Particulars SME Banking Retail Banking Commercial Banking Corporate Division Credit Card Probashi Banking Treasury Division Total

Operating Profit
O eain Poit ( D inM pr t g r f B T )
20 00 10 80 10 60 10 40

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10 20 10 00 80 0 60 0 40 0 20 0 0 -0 20
SE M B n in ak g R t il ea B n in ak g C m ec l o m r ia B n in ak g C r oae op r t D is n iv io Ce itC r r d ad Po a h r bs i B n in ak g Te s r r a uy D is n iv io

4.22 SME Operations SME Operations looks up the documents checking and disbursement of SME loans. There are two main groups it works in. Documentation Team & Disbursement Team Usual SME loan processing involves the following steps: 1. File receiving from SME Banking or Credit Division. 2. Document checking 3. CIB checking 4. Disbursement list preparation 5. Loan a/c opening and fund disbursement

4.23 The basic principles followed for SME documentation involves: a. Find out similarity between Sanction and Approval and proper

authorization b. Authenticity of the business and location validation c. Security documents submission as per and based on PPG d. Insurance papers and RMD report submission e. Link a/c opening form (Link A/C form required for other bank client)
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There are three types of Security documents taken for SME Loans: a. Charge documents (Demand Promissory Note, Letter of arrangement, Letter of Agreement, Letter of Hypothecation, and Letter of Guarantee etc) b. Collateral Documents: Registry mortgage (Land and Building), Financial Obligation (FDR, Deposit a/c) c. Charge creation to RJSC Before loan disbursement we need to know the credit history of the said client (i.e. whether he has taken any loan from any bank and its repayment behavior to assess the client.). CIB report is important to reveals the repayment behavior of the client. We can disburse loan to fresh borrower when CIB reply says Nil and to repeat borrowers when the reply says STD. Nil and STD is the acceptable CIB status for loan disbursement. If the documentation of the loan file is OK it goes to disbursement team for disbursement. The main activity of disbursement team is Owner, borrower and guarantor CIF creation, CIF verification, Loan a/c opening, Loan a/c verification, and Loan a/c debiting. As per the Bangladesh Banks credit policy, insurance documents are mandatory for every loan specifically fire insurance. To comply with the policy, BRAC Bank also asks for the insurance certificates. Insurance documents are required to secure debtors stocks, property (Hypothecated) against the loan & advance. Bank gets additional comforts if debtors property and stocks have covered with insurance. The file with document deficiency goes to SBO Support desk who are involved in the following activities: a. Recording: i. File receiving entry, ii. Documents deficiency entry, iii. Changes in PPG and any other changes made by circulars/letters. b. Informing: i. File receive acknowledgement,
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ii. Document deficiency communicated to Unit offices/ZMs/TMs.

c. Mediating: i. Solving deficient files upon receipt of proper documents and/or CIB report from Bangladesh Bank, ii. Communication between operations personnel and business personnel.

4.24 Security Documentation against Loan

A document is a written statement of facts and a proof or evidence of particular transaction between parties involved. While allowing any disbursements against credit facilities to borrowers, it should be ensured that prior to any disbursements; security documentation is fully and properly completed.

4.25 Purpose of Decorate Documentation and its Importance Documentation is necessary for the acknowledgement of a debt and its terms and conditions by the borrower and the creation of charge on the securities in favor of the bank by the borrower. Correct and proper documentation allows a bank to take legal measures against the default borrowers. If filing a suit with the courts against a default borrower becomes necessary, the court will first review all documents. If any of the documents is found to be defect or incomplete, the purpose of security documentation will be defeated and a court ruling in favor the bank
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cannot be expected. Proper care should, therefore, be taken while completing security documentation. 4.26 Type of Securities The following listed securities may be obtained from borrower against loan to enterprises, either individually or in a combination. It is really up to the bank what they would like to accept as security from the borrower as not all the securities stated below are suitable:

Mortgage of loan and other immovable property with power of attorney to sell Lien of Fixed Deposits receipts with banks and other non-banking financial institutions, lined, these have to confirm by the issuer. Lien of Pratirakshay sanchaypatra, Bangladesh sanchaypatra, ICB unit certificates and wage earner development bond, all considered Quasi or Near cash items Lien of shares quoted in the stock exchange (This is rarely accepted) Pledge of goods (Banks are akin to stay away from such securities now a days) Hypothecation of Goods, Book Debt & Receivables, Plant & Machineries Charge on fixed assets of a manufacturing enterprise Lien of cheque, Drafts and order Lien of work orders, payment to be routed through the bank and confirmed by the issuer. Shipping documents of imported goods

4.27 Land Related Securities Documentation Process Each SME unit offices are lilies with at least two local lawyers who will work on behalf of the bank. These always will be employed whenever a borrower and where the security will be landed and immovable property accept a loan sanction. Any one of the lawyers will be provided with photocopies of all the relevant land related documents and while handing over show the original documents to them, the lawyers will carry out checks of the originals and if satisfied returned to the borrower. The documents generally provided are:

Title Deeds or Deed of conveyance otherwise known as JomeerDalil which signifies ownership of a particular land.

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BayaDalil or Chain of Documents, which signifies that the conveyance of titles has been proper and legal. Mutation Certificate if Khatian which signifies that the title if the land has been duly registered in the Government/Sub-registrars records. Duplicate Carbon Receipt or DCR Latest Khajna or land rent receipt Purchase such as CS Khatian, SA Khatian and BS Khatian Mouja Map Municipal rent receipts if the land falls within a municipal area

The lawyer will then carry out a search at the Sub-registrar of lands office to check if the proffered land is actually registered in the name of the proposed mortgagor and whether the said land is free from any encumbrances. The Sub-registers office, which means that the land or immovable property can be mortgaged to the bank, then the lawyer will provide his own opinion on the acceptability of the property, whether it is legally held and explain the chain of ownership. If all is acceptable, the lawyer will draw up the Mortgage Deed that will be registered, the irrevocable power if attorney to sell the land and the Memorandum of Deposit of Title Deed. The lawyer will have the borrower or the Mortgagor, if different or 3 rd party, sign the documents in front of the Sub-registrar of land to register the mortgage, The CRO must ensure that the receipt for the original Mortgage deed must be signed off (Discharged) at the back of the receipt so that the bank may obtain the originals in the future. The borrower will bear all the charges and will pay directly at the Sub-Registrars office including the cost of the stamp paper required. The cost of the lawyer will also be realized from the borrower be an account payee cheque in favor of the lawyer and handed over to the lawyer straight away. The charges related to the creation of mortgages and other associated costs are incorporated in a separated sheet and are attached herewith. The CRO will have all other security documents, as sent by SME HO, signed by the borrower and hand carry all the security documents including all the original land documents and deliver those to the credit administration officer who will check the list of documents and receive those through a check list in writing. The credit administration officer once satisfied will prepare the disbursement memo to disburse the loan. 4.28 Mortgage
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I) Equitable Mortgage or Memorandum of Deposit of Title Deeds It is created by a simple deposit of title deeds supported by a Memorandum of Deposit of Title Deeds along with all the relevant land documents. All the searches and verification of documents as stated above must be carried out to validate the correct ownership of the property. This deed also provides the bank power to register the property in favor of the bank for further security, if needed. ii) Registered Mortgage It is created by an execution of a Mortgage Deed registered irrevocably in favor of the bank at the Sub-Registrar of lands office. This virtually gives the bank the right to posses and self if accompanied with a registered irrevocable power of attorney to sell the property executed by the owner of the property, in case of default. Basic Charge Documents i) Sanction Letter Once a loan is approved, the borrower is advised by a Sanction or offer letter which states the terms and condition s under which all credit facilities are offered and which forms an integral part of there security documentation. If the borrower accepts, then a contract between the bank and the borrower is formed and which both party are obligated to perform. Accordingly, all other charge documents and securities are drawn up and obtained. A standard sanction letter is attached herewith. All documents shall be stamped correctly and adequately before or at the time of execution. An un-stamped or insufficiently stamped document will not form basis of suit. Stamps are of 4 (Four) kinds. These are Judicial, Non-judicial, Adhesive and embossed impressed. Documents to be executed (Signed) by the borrowers concerned must be competent to do so in official capacity. Following precautions should be taken at the time of execution of the security documents:

The signature on the documents should be made in the presence of the CRO. The CRO should sign as witness on all charge documents. The document are to be filled in with permanent ink or typed If the document consist more than I page, the borrower should sign on each page
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If the signature of any third party is required to be obtained whose specimen signature is not available, then the main applicant should verity the specimen signature of the third party

No document or column in any document should remain blank As far as possible there should be no erasure, cancellation or alternation in the document. If, however, there is any correction, overwriting or alteration, then that must be authenticated by a full signature of the signatory.

After stamping and execution of documents, the question of registration comes up. However, not all documents are required to be registered. For the extension of any type of credit/loan facility, the following loan documents, which are considered basic, should be obtained from all borrowers:

Demand Promissory Note Letter of Continuity (This is not always taken if there is only loan disbursement) Letter of Arrangement General Loan Agreement Letter of Disbursement General Loan Agreement Letter of Disbursement; Basically a letter requesting disbursement of the loan Letter of Installment, in case the facility is to be repaid in installment

4.29 Other Basic Charge Documents i) Demand Promissory Note (DP Note) It is a written promise by a borrower to pay the whole amount of existing or future loans/credit facilities on demand. It also gives the banks power to ask the borrower to repay the loan amount with interest without any prior notice. Section 4 of the Negotiable Instrument Act 1881 defines a promissory note as an instrument in writing, signed by the maker, to pay a certain sum of money only to, or the order of, a certain person, or to the bearer of the instrument, following precautions are to be taken while preparing a promissory note. Type
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the amount of the credit facility/loan in words and in figures. Type the rate of interest for the loan, which the borrower will subject to verify the signature of the borrower. ii) Letter of Continuity This instrument is used in conjunction with the demand promissory note. This is to secure rights of recovery for existing and future credit facility, which are advanced in parts or on a recovery basis. Loan accounts may from time to time be reduced or even the balance in the said loan account may be in credit so this instrument, validates the said D.P Note, for making further drawings under the facility continuously possible. iii) Letter of Arrangement This is a right given by the borrower to the bank to cancel the facility at any time without having to assign any reason. This is also an acknowledgement by the borrower that the credit facility has been approved in his favor and the borrower has to execute all necessary documents to avail credit facility. iv) General Loan Agreement A loan agreement is an agreement of contract stating the general terms for the extension of a loan or credit facilities. The General loan agreement sets out the general standard terms and conditions governing the existing or future extension of loan or erudite facilities to the borrower.

v) Letter of Disbursement This is simple a letter requesting disbursement of the loan/credit facilities at the agreed rate of interest. 5.30 Other Security Documents i) Letter of Undertaking This is a Deed of agreement executed by the borrower agreeing to commit to carry out any or a particular obligation to avail of loan/credit facility.
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ii) Letter of Hypothecation of Goods & Stocks and Book Debt and Receivable These letters Hypothecation are actually two different sets of documents but because of their similarity, these are being explained together. These documents create an equitable or floating charge in favor of the bank over the goods and services and/ or book debts and receivables that are being financed where neither the ownership nor the possession is passed to the bank. Under this agreement, the borrower undertakes to keep the percent stock of goods and that, which may increase from time to time in good condition in future, in good condition. This hypothecation gives the bank the power to possess and sells the mentioned goods and stocks or claims the book debts directly from the debtors in order to settle the borrowers dues to the bank. iii) Letter of Hypothecation of Plant & Machinery Under this agreement, the Borrower undertakes to keep the present plant and machinery at the present location in good condition and which gives the bank the power to posses and sell the mentioned plant and machinery to meet the borrowers dues to the bank. In case of limited company, both private and public, these Letters of Hypothecation with schedules are usually registered with the Registrar of Joint Stock of Companies (RJSC) that provides more security to the banks.

iv) Letter of Lien A lien the right of one person to retain property in his hands belonging to another until certain legal demands against the owner of the property by the person in possession are satisfied. Thus a bank or a creditor who has in its possession a lien over the goods in respect of the money due by the borrower, as a general rule has the right to exercise certain powers to hold on to the security. In addition, if the bank has right to set off the value of the said goods or instrument in its possession, then the bank can sell the goods or encase the instrument to
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liquidate the dues by the borrower.

v) Right to Set Off This deed of agreement gives the bank the right to offset the value of the goods or financial instrument in its possession and which has been discharged by the owner of that asset, against dues owned by the borrower. vi) Letter of Disbursement This agreement gives the bank the right to possess goods and other assets in rented or leased premises of the borrower despite the fact that owner or the premises may be unable to realize dues from the borrower himself. vii) Personal Guarantees This is a guarantee of a person or third who is not the direct beneficiary of the loan/credit facility but is equally liable for the loan. The involvement of a 3 rd party creates additional pressure on the borrower to minimize the risk. The guarantor is the person who has to pay the entire outstanding loan and interest if the borrower fails to pay for any reason

4.30 Selection of Potential Enterprise for SME

Enterprise Selection Criteria:

The success of SME will largely depend on the selection of a business and man behind it. In terms of the business (Enterprise), the following attributes should be sought:

1. The business must be in operation for at least one year 2. The business should be environment friendly, no narcotics or tobacco business
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3. The business should be legally registered, i.e., valid trade license, income tax or VAT registration, wherever applicable. 4. The business should be in legal trade, i.e.; smuggling will not be allowed or socially unacceptable business will not be entertained. 5. The business must have a defined market with a clear potential growth 6. The business must be located ideally close to the market and the source of its raw materials/suppliers. It should have access to all the utilities, skilled manpowers that are required. 7. Any risk assessed by the management in turn will become a credit risk for the bank. So effort should make to understand the risk faced by the business.

Entrepreneur Selection Criteria In order to understand the capability of the management behind the business, the following should be assessed: 1. The entrepreneur should be physically able and in good health, preferably between the age of 25-50. If he/she is an elderly person closer to 50, it should be seen what the succession process will be and whether it is clearly defined or not. 2. The entrepreneur must have the necessary technical skill to run the business, i.e. academic background or vocational training, relevant work experience in another institution or years of experience in this line of business.
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3. The entrepreneur must have and acceptable social standing in the community (People should speak highly of him), he should possess a high level of integrity (Does not cheat anyone, generally helps people), and morally sound (Participates in community building) 4. The entrepreneur must possess a high level of enthusiasm and should demonstrate that he is in control of his business (Confidently replies to all Queries) and has the ability to take up new and fresh challenges to take the forward. 5. Suppliers or creditors should corroborate that he pays on time and is general in nature 6. Clear-cut indication of source of income and reasonable ability to save. business

Guarantor Selection Criteria Equally important is the selection of a guarantor. The same attribute applicable for an entepreneur is applicable to a guarantor. In addition he should posses the followings: 1. The guarantor must have the ability to repay the entire loan and is economically solvent (Check his net worth) 2. The guarantor should be aware about all the aspect of SEDF loan and his responsibility 3. Govt. and semi-govt. officials can be selected as a Guarantor such as schoolteacher, college teacher, doctor etc. 4. Police, BDR and Army persons, political leaders and workers, and Imam of mosque cannot be selected as a guarantor. 5. The guarantor should know the entrepreneur reasonable well and should preferably live in the same community 4.31 Terms and Conditions of SME Loan The SME department of BRAC Bank will provide small loans to potential borrower under the following terms and condition: The potential borrowers and enterprises have to fulfill the selection criteria The loan amount is between Tk. 2 lacs to 30 lacs. SME will impose loan processing fees for evaluation / processing a
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loan proposal as following;

Loan Amount 2 lacs to 2.99 lacs 3 lacs to 5 lacs 5.01 lacs to 15 lacs 15.01 lacs to 30 lacs

Loan Processing Fee Tk. 5000 Tk. 7500 Tk. 10,000 Tk. 15,000

Table: 4.2 Lone amount processing fee

Loan can be repaid in two ways: a) b) In equal monthly loan installment with monthly interest payment, or By one single payment at maturity, with interest repayable a quarter end

residual on maturity

months, 9 months.

Loan may have various validates, such as, 3 months, 4 months, 6 months, 12 months, 15 months, 18 months, 24 months, 30 months and 36

The borrower must open a bank account with the same bank and branch where the SME has its account Loan that approved will be disbursed to the client through that account by account payee cheque in the following manner: Borrower name, Account name, Banks name and Branchs name
The loan will be realized by 1st every months, starting from the very next months whatever

the date of disbursement, through account payee cheque in favor of BRAC Bank Limited A/C. With Banks named and branches name The borrower has to issue an account payable blank cheque in favor of BRAC Bank Limited before any loan disbursement along with all other security. The borrower will install a signboard in a visible place of business of manufacturing unit mentioned that financed by BRAC Bank Limited. The borrower has to give necessary and adequate collateral and other securities as per
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banks requirement and procedures.

 SME, BRAC Bank may provide 100% of the Net Required Working Capital but not exceeding 75% of the aggregate value of the Inventory and Account Receivables. Such loan may be given for periods not exceeding 18 months. Loan could also be considered for shorter periods including one time principal repayment facility, as stated in loan product sheet. In case of fixed asset Financing 50% of the acquisition cost of the fixed asset may be considered. While evaluating loans against fixed asset, adequate grace period may be considered depending on the cash generation after the installation of the fixed assets. Maximum period to be considered including grace period may be for 36 months.

4.32 Monitoring
Monitoring is a system by which a bank can keep track of its clients and their operations. So monitoring is an essential task for a CRO to know the borrowers activities after the loan disbursement. This also facilitates the build up of an information base for future reference. Importance of Monitoring Through monitoring a CRO can see whether the enterprise invested the sanctioned amount in the pre-specified area of his business, how well the business is running, the attitude of the entrepreneur, cash credit sales and purchase, inventory position, work in process and finished goods etc, This information will help the CRO/BRAC Bank to recover the loan accruing to the schedule and to take the necessary decisions for repeat loans. Moreover, monitoring will also help to reduce delinquency. Constant visit over the client /borrower ensures fidelity between the bank and the borrower and tends to foster a report between them.

Area of Monitoring: The purpose is to know the entire business condition and all aspects of the borrowers so that mishap can be avoided. a. Business Condition The most important task of the CRO to monitor the business frequently, it will help him to understand whether the business is running well or not, and accordingly advice the borrower, whenever necessary. The frequency of monitoring should be at least once month if all things
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are in order

a. Production The CRO will monitor the production activities of the business and if there is any problem in the production process, the CRO will try to help the entrepreneur to solve the problem. On the other hand the CRO can also stop the misuse of the loan other than for the purpose for which the loan was disbursed. c. Sales Monitoring sales proceed is another important task of the CRO it will help him to forecast the monthly sales revenue, credit sales etc. which will ensure the recovery of the monthly loan repayments from the enterprise as well as to take necessary steps for future loans. d. Investment It is very important to ensure that the entire loan has been invested in the manner invented. If the money is utilized in other areas, then it may not be possible to recover the loan. e. Management of raw materials In case of a manufacturing enterprise, management of raw materials is another important area for monitoring. If more money is blocked in raw materials then necessary, then the enterprise may face a fund crisis. On the other hand the production will suffer if there is not enough raw materials.

Monitoring System a. The CRO can consider the following things for monitoring The CRO will monitor each business at least once a month. He/she will make a monitoring plan/ schedule at beginning of the month During monitoring the CRO must use the prescribed monitoring from and preserve in the client file and forward a copy of the report to SME head office immediately. b. An SME branch will maintain the following files
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The file wills containPurchase Receipt, Delivery Memos, Quotations In addition, all other papers related to furniture and fixture procurement

c. Other fixed assets and refurbishment All fixed assets and refurbishment related papers such as purchase receipt, Delivery memos, Quotation, Guarantee and Warrantee papers, Servicing related papers and any other paper related to fixed assets are refurbishment will be in this file. d. Lease agreement file This file will contain all papers related to lease agreement between the SESDS office and owners of the leased premises. e. Individual client file Individual files are to be maintained for each borrower and will hold loan application, Loan Proposal, Copies of Loan Sanction Letter, Disbursement Memo, Monitoring Report, CIB application and Report, Credit report from other bank and all other correspondents including bank receipt.

f. Statement file All types of statement sent to SME head office will be kept in this file chronologically g. Office instruction file All kind of office instruction regarding administration should be kept in this file. h. Operating instruction and guideline files. All kind office instruction and guidelines related to operating should be kept in this file

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i. New forms introduction file All minutes of meeting, whenever held, should be kept in this file. j. Security documents and legal aspect file One set of security documents and lawyers opinions and suggestions regarding issue will be kept in this file. The original should be send to SME head office on a weekly basis

k. Survey form file After conducting survey, all survey will be kept in this file chronological. 4.33 SME Banking System

Every SME unit office will have a current account with a designate bank in the area of a unit office. This bank account will be opened and operated by SME head office. To meet petty expense such as stationary, entertainment and other incidental expense, all unit office will be allowed patty cash of Tk. 2000/= The cheque of this patty cash will be issued from SME head office in the beginning of the month. All vouchers relating to such expenses should be send to the accounts from SME head office

All the clients must open their account with the same bank account on the same day after receiving those from the borrowers, who should given a received as prescribed. Cheques should be deposited to the SME unit office bank account on the same day after receiving those from the borrowers, who should given a receipt as prescribed. Any loan installment credit should be transferred to the SME head office account in Gulshan, Dhaka on the same day as per agreement with bank. Every CRO should have an individual account in the same bank branch for their personal use and to receive their salaries and other benefits. Payment of lease rentals, utility bills and cheque drawn on the SME unit office bank account and issued by SME head office should pay other expenses (Large amount). If these bills are small amount, they should be paid from the patty cash and replenished later.

All the financial accounting entries will be passed at the SME head office and will maintain separately on the basis of the unit office.

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4.34 Economic Mapping Survey After starting a SME, unit office in a new area the CRO will conduct a survey of the business. The objective of the survey is to collect relevant information about the business, which will help to select potential business for SME loans. Mapping and Survey Method To conduct the economic mapping and survey properly, the following process should be followed:

The CRO will prepare a physical map of his working area showing main roads, businesses, markets, and industrial locations. In this map, the CRO will show different kinds of business in different colors. This map will show the approximate location of all kinds of business within the area and it will be kept on the display board at the SME unit office.

The CRO will drive his total working area into several clusters, if possible, after that he will conduct the survey cluster wise. After completing one cluster, the CRO will start surveying another cluster.

At the beginning of the survey, the CRO will screen out business that does not need loans over 2 lacs. After the survey, CRO will preserve the survey form cluster wise in a separate file. Based on the survey, the CRO will identify the potential businesses to pursue those for SME loans.

Therefore, CRO will approach the potential borrowers immediately to process loan application For initial assistance, CRO may approach

BRAC office Trade Associations and Chambers Local govt. office like UNO and Municipal office

Once potential borrower is formally approached, then all details should be incorporated in the client register as per the prescribed format.

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CHAPTER-05

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5.00 Banks Which Provide SME Banking In Bangladesh

5.1 Bank Al-falah

Name: Alfalah Quick Finance Category: SME Banking Description: Alfalah Quick Finance is a personal loan against National Saving Certificates, Prize Bonds, Alfalah GHP Principal Protected Fund & PKR/FCY deposit for meeting personal, family and household needs. It is one year revolving limit with quarterly mark-up payments. The amount of financing under AQF ranges from Rs. 50,000 to 2.5 Crore. AQF shall not exceed 90% of the encashment value of the security offered. In case of financing against Foreign Currency Deposit the maximum financing should not exceed 85% of the deposit encashment value. In case of Alfalah GHP Principal Protected Fund taken as a security the financing approved under AQF shall not exceed 70% of the face value of units held by the borrower.

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Bank Al-falah

Name: Alfalah Karobar Finance Category: SME Banking Description: o o

o

Validity of the AKF shall be initially for a period of one year. Quarterly mark-up shall be serviceable within 15 days of its becoming due. Turn-around-time for the approval of AKF would be 20 working days from the date of receipt of complete LAF along with its attachment.

o
o

Processing charges of Rs 2,000/- are recovered upfront with Loan Application Form. Clean-up requirement: At least 25% of the AKF approved limit shall be required to be cleaned-up for two days in six month

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5.2 City Bank Ltd

Name: City Muldhan Category: SME Banking Description:

- SME business in Bangladesh mostly requires active financial / banking support for their business to grow. To cater various such needs of different trade related business, very soon in July, 08 The City Bank is going introduce a complete tailor made package which surely will meet your specific financial needs and services. Features: - Loan amount ranging from Tk. 500,000 to Tk. 40, 00,000 - Competitive interest rate. - Flexible security arrangement. - Complete business solution. - Considerations of cash transactions besides bank statement. - Quick approval process.

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Name: City Sheba Category: SME Banking Description: - To facilitate different concerns engaged in service related industry, The City Bank is going to introduce a customized product naming City Bank Sheba. The product will positively satisfy different business related needs of the clients involved in different service sectors. Features: - Loan amount ranging from Tk. 500,000 to Tk. 40,00,000 - Competitive interest rate. - Flexible security arrangement - Quick approval process. - Considerations of cash transactions besides bank statement.

Name: City Shulov Category: SME Banking Description: - A unique product to facilitate concerns engaged in manufacturing business. The product will facilitate to meet up diversified needs to different manufacturing concerns. Features: - Loan amount ranging from Tk. 500,000 to Tk. 40, 00,000 - Competitive interest rate. - Flexible security arrangement - Quick approval process. - Considerations of cash transactions besides bank statement.

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5.3 Mutual Trust Bank Limited

Name: DIBOR Category: SME Banking Description: Interbank market is considered to be a risk free market, though in reality, the banks do carry counterparty risk. However, for practical purposes, interbank market carries lowest risk, not only to sovereign risk; hence the interest rates prevailing in interbank market constitute "benchmark" rates. The call money rate as indicated by the overnight Dhaka Interbank Offered Rate is most widely accepted benchmark rate for corporate debt paper, as also for bank credit extended on floating rate basis. Name: MTB Krishi Category: SME Banking Description: MTB Krishi is designed for direct lending in the agriculture sector. Only eligible farmers and agri SMEs may apply for the loan. Crops cultivation, fisheries, livestock & poultry are the priority sector of lending. Features and Benefits: - Loan amount up to BDT 3.00 crore - Loan tenure up to 5 years - Rate of interest 10% p.a (only in case of re-finance from BB) - Up to BDT 5.00 lac is collateral free - Easy repayment schedule - No service charge or hidden charge - Easy processing - Timely disbursement

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Name: MTB Mousumi Category: SME Banking Description: SME customers needs additional fund in some occasions, festivals and seasons. MTB Mousumi enables those SMEs which has seasonal type of business. Features and Benefits: - Loan amount up to BDT 10.00 lac - Loan period range 01 to 12 months - Attractive Rate of interest - Up to BDT 5.00 lac is collateral free - Easy repayment schedule - 1% service charge and no other hidden charge - Minimum 02 years of business experience - Easy processing Description: MTB Bhagyobati loan is only for the SMEs owned by the women entrepreneurs. Features and Benefits: - Loan amount range BDT 1.00 lac to BDT 50.00 lac - Loan tenure up to 3 years - Rate of interest 10% p.a (only in case of re-finance from BB) - Up to BDT 5.00 lac is collateral free - Easy repayment schedule - No service charge or hidden charge - Easy processing - At least one year of business experienc

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5.4 Dhaka Bank Limited

Name: SME Category: SME Banking Description INTEREST & EXPERIENCE IN SME FINANCING - DHAKA BANK LIMITED Since inception, the Dhaka Bank has held socio-economic development in high esteem and was among the first to recognize the potentials of SMEs. Dhaka Banks Involvement Recognizing the SME segments value additions and employment generation capabilities quite early, the Bank has pioneered SME financing in Bangladesh in 2003, focusing on stimulating the manufacturing sector and actively promoting trading and service businesses. Story of a successful Branch in SME Financing: The Bank started branch operations at Belkuchi, Sirajgonj in April 2003. Prior to the Banks intervention, the weaving community did not have the financial strength to stock their products till EidulFitr when the annual sale takes place. Traders were taking advantage to the situation by buying up entire productions at low prices and liquidating stocks just before Eid. With financial services from Dhaka Bank Limited, the weavers have converted to power looms, significantly increased profitability and reduced the involvement of middlemen. We are now working on institutionalizing the learnings and applying them in other areas across Bangladesh, particularly in textiles, light engineering and other manufacturing clusters. Already we have identified several clusters and are working on improving access to finance within these clusters. Experience & Learnings: In our opinion, the single largest problem of the lower end of the SME sector is that they are unable to fully understand their needs. Even if these needs are understood, they are seldom met with the right product mix. Small business owners are unable to provide banks with required information of the right type and quality. This has created a gap between the borrower and the banks and has served to limit the outreach of SME financial products. In order to overcome this obstacle, Dhaka Bank SME Unit provides comprehensive support to prospective clients in evaluating their business and preparing the required documents in acceptable formats. In this regard, the Dhaka Bank SME Unit has been working in close collaboration with the USAID, the South Asia Enterprise Development Facility (SEDF) an International Finance Corporation (IFC) managed multidonor facility and the World Bank.

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5.5 AB Bank Limited

Name: SME Banking Category: SME Banking Description: Considering the volume, role and contribution of the SMEs, in the last two decades AB Bank has been patronizing this sector by extending credit facilities of different types and tenor. As of now 54% of the banks total loan portfolio is segmented to the SMEs which deserve all out attention in our plans, projections and forecasting. As such the bank has emphasized on the following issues: * To provide the best services to the SME sector * To increase the SME portfolio of ABBL significantly * To improve the quality of ABBLs portfolio SME Sectors in which AB Bank has participated so far:

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* Agro machinery * Poultry * Animal Feed * Dairy Product * Fruit Preservation * Hotel & Restaurants * Garments Accessories * Leather products * Plastic product

* Furniture: Wooden & Metal * Ink * Paint * Printing & Packaging * Wire & Cable * Aluminum * Cement and Lime Plaster * Clinics and Hospitals * Engineering & Scientific Instrument

5.6 Standard Chartered Bank

Name: SME Banking Category: SME Banking Description: The constant economic growth in Bangladesh means ample opportunities for you to grow your dream business. However, countless obstacles, intense business environment and steep competition require you to have the very best banking partner. This is where Standard Chartered Bank's SME Banking comes into play with its wide range of business responsive products, services and superior customer service.

5.7 Bank Asia Limited

Name: SME Banking Category: SME Banking Description: Interest rate may be revised by Corporate Office/ competent authority from time to time and charges & commissions may be relaxed by Corporate Office depending on customers performance with our Bank or other Bank.

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5.8 International Finance Invest and Commerce Bank Ltd

Name: SME Banking Category: SME Banking Description: The growth of Small and Medium enterprises (SMEs) in terms of size and number has multiple effects on the national economy, specifically on employment generation, GDP growth, and poverty alleviation in Bangladesh. At present, Small & Medium Enterprise sector is playing a vital role in creation of new generation entrepreneurs and 'Entrepreneurs Culture' in the country. Experience shows that borrowers of small enterprise sector prefers collateral free loan since normally they cannot offer high value security to cover the exposure.

To facilitate SME sector of the country, IFIC Bank provides collateral free credit facilities to the small & medium entrepreneurs across the country whose access to traditional credit facilities are very limited. We are offering 15 different products for selected target groups, such as - Easy Commercial Loan, Retailers Loan, Muldhan Loan, Women Entrepreneurs Loan (Protyasha), Transport Loan, Working Capital Loan, Project Loan, letter of Contractor's Loan, Bidder's Loan, Working Capital Loan, Project Loan, Letter of Guarantee, Letter of Credit Loan against Imported Merchandize (LIM), Loan against Trust Receipt etc.

CHAPTER-5
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CHAPTER-06

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6.00 SME Related Documents (In our country we see that BRAC BANK SME service is more familiar then another one; here I collect the information from BRAC BANK Ltd.)
6.1 Security Compliance Checklist- SBO:

S. N .
A) 1 2 3 B) 1 2 3 4 5 C) 1 2 3 4 5 6 7 8

Particulars

CRO Rem k

SBO Rem k

CO Remk

POST DATED CHEQUE: Post datedcheque is attached Irrevocable Letter of Authority is attached Cheque application and acknowledgement letter are attached HYPOTHECATION DOCUMENTS: Rent Deed is present Possession Deed is present Lease Agreement is present, if applicable Last 3 months rent receipts are present Original Title deed along with MDTD are present MORTGAGE DOCUMENTS: Original purchase deed is present Bia deed is present, if applicable Certified copy of title deed along with drawing receipt Non-encumbrance Certificate with search fee paid receipt is present Original DCR is present Certified Mutation Khatian is present S.A, C.S, R.S, B.S, Khatian(s), if necessary Up to date rent paid/ municipal tax paid receipt(s)etc is submitted

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6.2 Documents related Problem:

a.

Common loan related papers/Documents: Req. sign & seal of CRO and / or ZM on approval sheet. Req. Photo of the applicant and guarantors duly attested by the CRO.

b. Sanction Letter: Req. fresh sanction letter. Req. rectified Sanction letter because mismatched with approval / TL. Req. seal and sign of the CRO, ZM and borrower on Sanction Letter. Req. application for validity extension of SL.

c. Charge Documents: Demand Promissory note: GLA: Req. rectified GLA because mismatched with SL. Req. seal & sign of the client on GLA. Req. sign of witness on GLA. Req. rectified DP note because mismatched with SL. Req. Seal & sign of the client on DP note.

Letter of Undertaking: Req. rectified LU because mismatched with SL. Req. seal and sign of client on LU. Req. signature of witness.

Letter of Arrangement: Req. rectified LA because mismatched with SL. Req. seal and sign of client on LA. Req. sign of witness on LA.

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Letter of Installment: Req. rectified LI because mismatched with SL. Req. seal and sign of client on LI.

Letter of Disbursement: Req. rectified LD because mismatched with SL. Req. Seal and sign of client on LD.

Hypothecation documents: Req. rectified HD because mismatched with SL. Req. seal and sign of client on HD.

Guarantee Documents: Req. rectified personal guarantee duly signed.

Trade License: Req. Trade license. Req. up to date Trade license. Req. attestation of CRO on TL.

Post-Dated Cheque on Master Cheque: Required PDC. Req. correspondent banks PDC. Req. signature and seal of client on PDC. Req. acknowledgement letter Req. PDC. Submission letter.

Rental Deed/ possession deed/Lease agreement/rent receipt Req. rent deed/possession deed/Lease agreement Req. halafNama- name of the owner, tenant and business address are mismatched with trade license Req. halafnama- validity of deed expired.

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Req. sign of both owner and tenant on every page of deed. In case of rent receipt last 3 months rent receipts are required separately.

Notarized Partnership Deed (In case of Partnership Firm) Req. notarized partnership deed. Req. rectified notarized PD.

Loan Processing Fees: Req. RFC. Req. sticker Cost Tk. 10/Required Vat tk. 30/-

RMD Report: Req. RMD report. RMD report is adverse req. TM approval.

Equitable Mortgage: Req. sign of all landowners on MDTD. Req. rectified MDTD. Req. original title deed.

Registered Mortgage: Req. certified copy of RDM & RIGPA. Req. Drawing Receipt duly signed by the land owner. Req. UP To date Khajna Receipt. Req. DCR & mutation Khatian Req. CS, SA, RS & BS khatian Req. NEC & search receipt Req. Bia deed Req. Original Title deed Req. Legal Opinion Req. Valuation certificate of land.

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CIB related problems: 01.CIB Inquiry has not yet found. 02.CIB report has not yet come. 03.Borrower and owner name are differ between CIB and Sanction letter. Insurance related problem: 01. Insurance format has not yet come. 02.Req. rectified insurance format against perfect loan amount. 03.Req. more insurance premium. Closing related problem: 01 Req. Application 02. Req. Repayment summaries with ZM confirmation. 03. Req. all deposit slips with money receipt 04. Req. specific deposit slip-maximum 3. 05.req. additional amt and DS (Debit balance shown) 06. Sent to Fin Admin- cheque deposited - date 07.Entry mismatch sent to repayment- date.

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CHAPTER-07

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07.Loan Sanction Activities On SME Banking

7.1 Loan Sanction:

Select potential enterprise: For SME loan, in this step the CRO conduct a survey and identify potential enterprise. Then they communicate with entrepreneurs and discuss the SME program.

Loan Presentation: The function of CRO is to prepare loan presentation based on the information collected and provided by the entrepreneur about their business, land property (Where mortgage is necessary)

Collect confidential information: Another important function of a CRO is to collect confidential information about the client from various sources. The sources of information are suppliers regarding the clients payment, customers regarding the delivery of goods of services according to order, various banks where the client has account that shows the banks transactions nature of the client.

Open clients accounts in the respective bank: When CRO decided to provide loan to the client then he/she help the client to open an bank account where BRAC bank has a STD a/c. BRAC bank will disburse the loan through this account. On the other hand the client will repay by this account. Although there is some exception occurs by the special permission of the authority to repay by a different bank account.

Filled up CIB form: CRO give a CIB (Credit Information Bureau) form to the client and the client fill and sign in it. In some case if the client is illiterate then the CRO fill the form on behalf of the client. Then CRO send the filled and signed form to the SME, head office.

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Sending CIB to Bangladesh Bank: The SME, head offices collect all information and send the CIB form to Bangladesh Bank for clearance. Bangladesh Bank return this CIB form within 10-12 days with reference no.

Report from Bangladesh Bank: In the CIB report Bangladesh Bank use any of the following reference no:
a) NIL:If the client has no loan facility in any bank or any financial institution then BB

(Bangladesh Bank) use NIL in the report

b) UC (Unclassified): If the client has any loan facility in any bank or financial institution

and if the installment due 0 to 5.99 then BB use UC in the report

c) SS (Substandard): If the client has any loan facility in any bank or financial institution

and if the installment is due 6 to 11.99 then BB use SS in the report

d) DF (Doubtful): If the client has any loan facility in any bank or financial institution and

if the installment is due 12 to 17.99 then BB use DF in the report

e) BL (Bad lose): If the client has any loan facility in any bank or financial institution and if

the installment due 18 or above then BB use BL in the report. This report indicates that the client is defaulter and the bank should not provide loan the client.

Loan decision considering CIB report: Considering CIB report, BRAC bank decide whether it will provide loan to the client or not. If the bank decides to provide loan then SME department keep all information and send all papers to respective unit office to apply with all necessary charge documents.

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7.3 Loan Sanction The respective unit office sanction loan to the client if it is 2 to 5 lacs and sends the sanction letter including all necessary charge documents to Asset Operations Department for the disbursement of loan.If the amount higher than 5 lacs then the respective unit office sends the proposal to SME, head office for sanction. The head of SME sanctioned the loan and send the sanction letter including all documents to Asset Operations Department for disbursement and inform the respective unit office regarding sanction of the loan. 7.4 Disbursement of SME loan Pre Disbursement Manual Activities

Prepare loan file: Receiving all documents, Loan Administration Division prepare a loan file with all documents received from the unit office. Charge documents checking: The loan administration division checks all charge documents. Following charge documents are checked:

Money receipt (Risk fund). Sanction letter. Demand promising note (With stamp of Tk 20/=) Letter of arrangement (With stamp of Tk 150/=) General loan agreement (With stamp of Tk 150/=) Letter of undertaken (With stamp of Tk 150/=) Letter of stocks and goods (With stamp of Tk 150/=) Letter of hypothecation book debt and receivable (With stamp of Tk 150/=) Letter of disbursement Photocopy of trade license (attested by CRO) Insurance (Original copy) Blank claque with signature (one cheque for full amount and others same as no of installment on Favor of BRAC bank, no date, no amount) Two guarantors (one must be Spouse/parents) If the loan provide for purchase of fixed assets or machineries and if the loan amount is over Tk 50,000/= then the stamp of a certain amount is require)

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Documents deficiency and problem resolving: If there is any error found then it informed to the respective CRO. If the application form is not filled properly then the file send to the CRO to fill the application properly. If any document error found then the loan administration division asked the CRO to send the require documents and the file stored to the loan administration division.

Prepare disbursement list: The loan administration division lists all new sanctioned clients details and send a request to the treasury through internal mail.

Disbursement of the amount: Sending the list to the treasury of BRAC bank for disburse the amount, the treasury disburse the amount to the client through the mother account of the clients bank. BRAC bank disburse amount through any of the following banks corporate branch nearer the BRAC bank head office and the corporate branch of the respective bank send the amount to the client account in the respective branch. These banks are:

BRAC Bank Limited The City Bank Limited Janata Bank Bangladesh Krishi Bank Pubali Bank Agrani Bank

Message sent to the unit office: Completing the disbursement, loan administration division sent a SMS to the respective CRO informing the disbursement of the sectioned loan.

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7.5 MBS entries for loan disbursement

Initial ID generation After sending the list to the treasury, the loan administration division generates an initial ID against the borrower. Entering required information, the banking software MBS automatically provide a ID no for the borrower.

Loan account opening According to the ID, the loan administration division opens a loan account in MBS against the borrower. Entering all required information, the MBS automatically give an account no. For the borrower.

Cost center assign The loan administration division enter the following information in MBS:

Security details set-up Guarantor details set-up Loan other details set-up

Risk fund collection The loan administration division opens a different account risk fund of the client. This is known as loan processing fees. Receiving the risk fund, the loan administration division prints voucher and posting the voucher in the MBS. The amount of risk fund is not refundable.

Activision of the loan Loan administration division do the following tasks to activate the loan

Loan sanction details set-up Repayment schedule set-up and printing Loan activation Disbursement and CC wise voucher print Disbursement voucher posting

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7.6 Post Disbursement Manual Activities Repayment schedule sent to unit office

Completing the disbursement of the sanctioned amount the loan administration division prepare a repayment schedule in MBS and send it to the unit office. CRO from the unit office collect it and reached to the respective client. The client repays the loan according to this schedule. Loan details MBS entry

The loan administration division enters details information regarding the loan in MBS. Each officer has an ID no in MBS and if there is any error found then the respective officer would be responsible for it. So everybody remains alert at the time of MBS entry.

Document stamp cancellation

The loan administration division cancels all document stamps. In future if any client found defaulter and the bank file sued against him then stamps of these document help to get the judgment favor of the bank. But if these stamps are not canceled then the judgment may not on favor the bank. Send the loan file to archive

completing all activities, loan administration division sends the loan file to the archive for future requirement. In future if any document of the loan account requires then the bank can collect the file from archive and get the necessary document. If the clients take repeat loan then it is not require applying all documents because his all documents stored to the bank.

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7.7 SME Loan Recovery Procedures The repayment process starts immediately after one month of the loan taken. Suppose if a loan is taken in July 7, 2007 then the repayment process will be started from August 7, 2007 and the borrower will pay his/her first installment in that date. Before that date, the borrowers will be informed about the number of installments and amount of each installment. He can deposit the installment by himself or by the Customer relationship officer (CRO). Again they can deposit the installments either in any branch of Brac Bank or in any correspondence bank (where Brac Bank has no branch). If the borrower cannot pay the installment in the stipulated date, interest will be charged for each day before they pay that installment. Again interest will be reduced if the borrower pays the installment before the date of repayment. Interest will be charged and added to the principal amount for every month or every 3 three months depending on the policy for each loan disbursement. How ever, after the borrower repays the loan installments there are number of steps done in the repayment procedure of SME loan. These steps are: Receive SMS/Fax for installment deposits

When the borrower repays any installment of the loan then he/she informs it to the unit office/CRO. Then the unit office/CRO sends an SMS through mobile phone or a Fax to the loan administration division informing the repayment. A loan administration division collects these SMS /Fax and takes a paper print of these SMS.

Entry the installment information to MBS

Loan administration division entries the repayment installment information to the banking software MBS.

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Print Vouchers

Completing the entry, the loan administration division takes paper print of all vouchers in a prescribed yellow paper.

Check SMS/Fax and solve problems (If any)

The loan administration is responsible for all entry in MBS. If there is any error found in future then the respective officer who is entering this information in MBS will be liable for it. User ID will easily identify it. So they are always aware of to ensure the correct entry. Completing the entry of information, they print a hard copy and check it with the SMS/Fax. If there is any error found then it is solved and ensures the correct information entry.

Repayment voucher check and posting

If it confirmed that all entering information is correct and there is no error, then the responsible officer of the loan administration division posts it to MBS. If one time posted, it is not rectifiable without permission of the higher authority. So the loan administration is always aware of regarding the recovery procedures of SME loan.

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CHAPTER-08

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8.00 Closing procedures of SME loan &

8.1 Closing procedures of SME loan:

SWOT Analysis:

a. Pre-closing manual activities

Receive SMS/Fax requesting for closing: The borrower repays the loan as per repayment schedule. When the repayment is being complete the borrower request the unit office/CRO to close his loan account. The unit office/CRO sends an SMS/Fax the loan administration division requesting to close the loan account of the respective borrower. Print the SMS/Fax: Receiving the request from the respective unit office/CRO, the loan administration division takes a paper print and necessary steps to close the account Bring the loan file from archive: The loan account file of the respective borrower brought from the archive. Crosschecked the documents of file with MBS record. Obtained approval from the concern authority: it is require the permission of concerned authority to close the loan. If concerned authority approves the closing of the loan account then next initiatives are taken. Checking in MBS:The loan administration division checks the loan status in MBS. If there is any difference found with the SMS/Fax from unit office and MBS thendeposits sleeps are rechecked. Then the loan administration division calculates the total balance of the loan account (Ledger balance + buffer interest +Excise duty) SMS sent to concerned CRO:Loan administration division sent an SMS to the concerned CRO informing the current balance of the requested loan account. Receive and print closing SMS/Fax checking & freezing:The concerned CRO send a final SMS to loan administration division informing that the respective borrower cleared all his liabilities regarding the loan. The loan administration division takes paper print of the SMS, check it and finally close the loan account.

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b. MBS Entries for Loan Closing Pre closing data entry: Completing the manual activities, the loan administration division enters some information to MBS for future requirement and complete following tasks: o Interest/provision charging & print voucher o Charges collection & print voucher o Final repayment entry & print voucher o Final repayment entry checking o Repayment voucher posting c. Activate account closing in MBS: Completing above mentioned tasks, the loan administration division finally close the requested loan account in MBS. d. Post Closing Manual Activities

8.2 Re-Checking With Deposit Slip: Completing MBS activities, the loan administration re-check all deposit sleeps of the loan account. If there is any error found then immediately resolves it otherwise the file sends to the archive for future requirements. The client may take repeat loan in future and then information from this file will help to approve and disburse loan that will minimize risk. If the client asks to return security then the loan administration releases security completing following tasks: o Documents photocopy before security release o Closing certificate issuing and security release

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8.3 SWOT analysis: Is an important tool for evaluating the companys Strengths, Weaknesses, Opportunities and Threats? It helps the organization to identify how to evaluate its performance and scan the macro environment, which in turn would help organization to navigate in the turbulent ocean of competition.

Strengths

Company reputation: BRAC bank has already established a favorable reputation in the banking industry of the country particularly among the new comers. Within a period of 6 years, BBL has already established a firm footing in the banking sector having tremendous growth in the profits and deposits. All these have leaded them to earn a reputation in the banking field Sponsors: BBL has been founded by a group of eminent entrepreneurs of the country having adequate financial strength. The sponsor directors belong to prominent resources persons of the country. The Board of Directors headed by its Chairman Mr. F H Abed. Therefore, BBL has a strong financial strength and it built upon a strong foundation. Top Management: The top management of the bank is also major strength for the BBL has contributed heavily towards the growth and development of the bank. The top management officials have all worked in reputed banks and their years of banking experience, skills, expertise will continue to contribute towards further expansion of the bank. At BBL, the top management is the driving force and the think tank of the organization where policies are crafted and often cascaded down.

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Facilities and equipment: BBL has adequate physical facilities and equipments to provide better services to the customers. The bank has computerized and online banking operations under the software called MBS banking operations. Counting machines in the teller counters have been installed for speedy service ant the cash counters. Computerized statements for the customers as well as for the internal use of the banks are also available. Impressive branches: This creates a positive image in the minds of the potential customers and many people get attracted to the bank. This is also an indirect marketing campaign for the bank for attracting customers. 26 Branches of the bank are impressive and are compatible to foreign banks. Interactive corporate culture: BBL has an interactive corporate culture. Unlike other local organization, BBLs work environment is very friendly, interactive and informal. There are no hidden barriers or boundaries while interacting between he superior or the subordinate. The environment is also lively and since the nature of the banking job itself is monotonous and routine, BBLs likely work environment boosts up the spirit and motivation of the employees. Teamwork at mid level and lower level: At BBLs mid level and lower level management, there are often team works. Many jobs are performed in groups of two or three in order to reduce the burden of the workload and enhance the process of completion of the job. People are eager to help each other and people in general are devoted to work.

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Weaknesses Advertising and promotion of SME loan: This is a major set back for BBL and one of its weakest areas. BBLs adverting and promotional activities are satisfactory but it SME loan is not advertised well. It does not expose its SME product to general public and are not in lime light. BBL does not have neon sign or any advertisement for SME loan in the city. As a result people are not aware of the existence of this bank. NGO name (BRAC): BRAC is one of the largest NGO of the world and it is operating its activities in Bangladesh. BRAC bank is not a NGO bank but many people of them country consider it as a NGO bank like Grameen Bank which is not correct.

Low remuneration package: The remuneration package for the entry and the mid level management is considerably low. The compensation package for BBL entry-level positions is even lower than the contemporary banks. Under the existing low payment structure, it will be very difficult to attract and retain higher educated employees in BBL. Specially CROs are not satisfied with compensation package provided to them.

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Opportunities

Diversification: BBL can pursue a diversification strategy in expanding its current line of business. The management can consider options of starting merchant banking or diversify in to leasing and insurance. By expanding their business portfolio, BBL can reduce their business risk. Product line proliferation: In this competitive environment BBL must expand its product line to enhance its sustainable competitive advantage. As a part of its product line proliferation, BBL can introduce the following products. ATM: This is the fastest growing modern banking concept. BBL should grab this opportunity and take preparation for launching ATM. Since BBL is a local bank, they can form an alliance with other contemporary banks in launching the ATM.

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Threats Multinational banks: The emergence of multinational banks and their rapid expansion poses a potential threat to the new growing private banks. Due to the booming energy sector, more foreign banks are expected to arrive in Bangladesh. Moreover, the already existing foreign bank such as Standard Chartered is now pursuing an aggressive branch expansion strategy. This bank is establishing more branches countrywide and already launched is SME operation. Since the foreign banks have tremendous financial strength, it will pose a threat to local banks. Upcoming banks: The upcoming private local banks can also pose a threat to the existing private commercial banks like BBL. It is expected that in the next few years more local private banks may emerge. If that happens the intensity of competition will rise further and banks will have to develop strategies to compete against an on slaughter of foreign banks Contemporary banks: The contemporary banks of BBL such as Dhaka bank, prime bank, and Dutch Bangla are its major rivals. Prime bank and other banks are carrying out aggressive campaign to attract lucrative clients as well as big time depositors. Default culture: This is a major problem in Bangladesh. As BBL is a new organization, the problem of nonperforming loans or default loans is very minimum or insignificant. However, as the bank becomes older this problem arises and the whole community suffers from this chronic diseases. BBL has to remain vigilant about this problem so that proactive strategies are taken to minimize this problem if not elimination.

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8.4 Comparative Analysis of SME Credit Scheme

Loan Documents needed for SME Financing by Banks Criteria for loan selection are similar among financing institutions. Most frequently requested documents by financing institutions as a part of the loan application process include. Personal guarantee Business Plan Appraisal of asset to be financed Purchase agreement Cash Flow Projection Personal financing statement Formal application for financing Business financial statement Tin certificate Citizenship certificate Bank solvency certificate Vat certificate Export license

8.5 About the Sample Banks Dhaka Bank Ltd The Bank started branch operations at BelkuchiSirajgonj in April 2003.Pirior to the banks intervention, the weaving community did not have the financial strength to stock their products

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till EidulFitr when the annual sale takes place. Traders were taking advantage to the situation by buying up entire production at low prices and liquidating stocks just before Eid with financial services from Dhaka Bank Limited the weavers have converted to power looms, significantly increased profitability and reduced the involvement of middlemen. Already they have identified several clusters and are working on improving access to finance within these clusters. Dutch-Bangla Bank Ltd Dutch-Bangla Bank Limited (the Bank) scheduled commercial bank. The bank was establish under the bank companies Act 1991 and incorporated as a public limited company under the companies Act 1994 in Bangladesh with the primary objective to carry on all kinds of banking business in Bangladesh. The bank is listed with Dhaka Stock Exchange Limited and Chittagong Stock Exchange limited. DBBL a Bangladesh European Private Joint Venture scheduled commercial bank commenced formal operation from june 3,1996. The bank commenced its banking business with one branch on 4 July 1996. The bank opened SME windows in 2001. Prime Bank Ltd As per decision of the Board of Directors of Prime Bank ltd, in its 78th meeting held on 17.11.1999. Small & Medium Enterprise (SME) Cell has already been established at Head Office under the Credit Division. Now the bank can replicate quality anywhere in the world. So the competitive differentiation comes from swiftness to market and innovation. And in this regard small companies right down to the individual can beat big bureaucratic companies ten out of ten times. Mercantile Bank ltd Mercantile Bank is a third generation commercial bank. It has opened SME windows 1999 to encourage the small business activities. Eastern Bank Ltd

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Small and Medium Enterprises (SME) in Bangladesh contributed 25% of gross domestic product (GDP) and 80% of the industrial jobs of the country in 2004. According to ADB, the countrys estimated 6 million SMEs and micro enterprises firms of less than 100 employees of a significant role in generating growth and jobs. This is a sector that has its own distinct needs and requires specialized focus. Eastern Bank Ltd (EBL) has launched SME banking in early 2005 with this view in mind.

Eastern Bank Ltd Services in SME Provide SMEs with easy access to financing. Deliver products that ensure superior returns to our customer. Orient customers with industry trends regulatory issues etc for their success. Value long-term relationship banking.

BRAC Bank Ltd The BRAC Bank Ltd started its operation in 2001. The SME portfolio includes ProthomaRin Exclusively designed for women. AnonnoRin This is small-scale loan. ApurboRin In order to help our SME. Supplier Finance.

Criterion for Sample Selection The banks for comparative analysis have been chosen in the basis of the following criterion: Loan size 1. Prime Bank Ltd- Taka 1 Lac to Taka 75.00 Lacs 2. Dhaka Bank Ltd- Taka 0.50 Lac to Taka 50.00 Lacs 3. Eastern Bank Ltd- Taka 1 Lac to Taka 300.00 Lacs 4. Mercantile Bank Ltd- Taka 0.50 Lac to Taka 2.00 Lacs

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5. Dutch-Bangla Bank Ltd- Taka 3 Lac to Taka 50.00 Lacs 6. BRAC Bank Ltd- Taka 3 Lac to Taka 30.00 Lacs Among the banks EBL offers the highest loan amount to the customers where as the BRAC bank offers the lowest loan to its customers.

Rate of Interest 1. Prime Bank Ltd-13% to 15% p.a. 2. Dhaka Bank Ltd- 12% to 13% p.a. 3. Eastern Bank Ltd- 14% to 15% p.a. 4. Mercantile Bank Ltd- 15% p.a. 5. Dutch-Bangla Bank Ltd- 13% to 15% p.a. 6. BRAC Bank Ltd- 18% to 24% p.a. In terms of interest rate the Dhaka Bank Ltd offers the lowest rate of interest to its customers. The highest rate is changed by BRAC Bank Ltd. The Mercantile Bank Ltd have the only bank that offers fixed rate for any loan customers.

Loan Processing Fees 1. Prime Bank Ltd-.50% of the loan amount. 2. Dhaka Bank Ltd .00% of the loan amount. 3. Eastern Bank Ltd- not available 4. Mercantile Bank Ltd- not available 5. Dutch-Bangla Bank Ltd- not available 6. BRAC Bank Ltd- .50% of the loan amount. All the banks do not provide data about loan processing fees to their customers. The Prime Bank and BRAC Bank Limited only charges .50% as loan processing fees. Period of Loan

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1. Prime Bank Ltd- 1 to 5 years 2. Dhaka Bank Ltd- 1 to 3 years 3. Eastern Bank Ltd- up to 1 years. 4. Mercantile Bank Ltd- up to 2 years. 5. Dutch-Bangla Bank Ltd- 1.5 to 5 years 6. BRAC Bank Ltd- 1 to 3 years Among the banks the highest loan maturity date is offered by DBBL & Mercantile Bank Limited offers the lowest maturity period. 8.6 Mode of Finance 1. Prime Bank Ltd- Term loan and working capital loan 2. Dhaka Bank Ltd- Term loan and working capital loan 3. Eastern Bank Ltd- Only working capital loan. 4. Mercantile Bank Ltd- Only term loan. 5. Dutch-Bangla Bank Ltd- Only term loan. 6. BRAC Bank Ltd- Only term loan.

All Banks providing SME financing facilities do not provide long-term loan to its customers. Among the banks Prime & Dhaka Bank limited both provides term loan and working capital loan to their customers. Other bank either provides term loan or working capital loan to its customers. 8.7 Management Overall the Management of the banks engaged in SME banking is efficient and have diverse knowledge of banking sector. BRAC Bank has initiated to provide training of staffs for well managing the SME customers.

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8.8 Portfolio size of Different Banks in SME Sector (TK in crore)

Serial No 1 2 3 4 5 6

Name of the Bank BRAC Bank Ltd Eastern Bank Ltd Prime Bank Ltd Dutch-Bangla Bank Ltd Mercantile Bank Ltd Dhaka Bank Ltd Total

Portfolio Size 950.00 300.00 108.44 16.38 6.63 5.72 1387.17

Table: 8.3 Portfolio size of Different Banks in SME Sector (TK in crore) Source: Annual Reports of Prime Bank Ltd, Dhaka Bank Ltd, Eastern Bank Ltd, Mercantile Bank Ltd, Dutch-Bangla Bank Ltd, and BRAC Bank Ltd.

Figure: 8.6 Portfolio size of six different banks in SME sector.

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0.5%
0.5

7.8

21.6%

21.6

1.2% 0.4%

1.2 0.4

68.5%
68.5

Brac Bank Estern Bank

Dhaka Bank M ercantile Bank Ltd.

Dutch Bangla Bank Prime Bank Ltd.

In the next page the following points are analyzed in the tabular from for the better understanding. Comparative analysis of SME credit scheme of six different banks(policy part) for year the 2007. Comparative analysis of SME credit scheme of six different banks(Example Of loan) for year the 2007. Comparative analysis of SME credit scheme of six different banks (performance part) for year the 2007.

8.9 COMPARATIVE ANALYSIS OF SME SCHEME OF DIFFERENT BANKS (Policy Part) Year 2007
Particulars Prime Bank Ltd Loan Size TK 1.00 Lac TO TK 75.00 LACs Dhaka Bank Ltd TK 0.50 Lac to TK 50.00 LACs Eastern Bank Ltd TK 1.00 Lac TO TK 300.00 LACs Rate of Interest 13.00% interest15.00%P.a 12.00%13.00% p.a 14.00%15.00% p.a 15.00% p.a. 13.00%14.00% p.a 18.00%24.00% p.a. Mercantile Bank Ltd TK 0.50 Lac to TK 2.00 LACs Duch-Bangla Bank Ltd TK 3.00 LACs to TK 50.00 LACs BRAC Bank Ltd TK 3.00 LACs to TK 30.00 LACs

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Loan Processing Fee

0.50% of the Loan amount (once for the whole period)

1.00% of the Loan amount (once for the whole period)

0.50% of the Loan amount (once for the whole period)

Risk Fund

1.00%2.00% p.a. of the Loan amount

..

1.00% of the Loan amount (once for the whole period)

Supervision Fee

1.00%2.00% p.a. of the Loan amount

1.00% of the Loan amount (once for the whole period)

..

..

Utilization Fee

0.75%p.a. (Semiannually Charged)

1.50% p.a. (Quarterly Charged) 01 year to 03 year Term Loan as well as working capital Loan 03 years

..

..

..

Period of Loan Mode of Finance

01 year to 05 year Term Loan as well as working capital Loan

Up to 01 year Only working capital Loan 02 years

Up to 02 years Only term loan

1.5 year to 05 year Only term loan

01 year to 03 year Only term loan

Past Experience of the owner Security a)Primary

02 years

02 years

02 years

02 years

Personal Guarantee

Personal Guarantee Up to TK 5.00 LACs

Personal Guarantee Collateral Security

Personal Guarantee ..

Personal Guarantee Collateral Security

Personal Guarantee Up to TK 8.00 LACs

b)Secondary

Collateral Security

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provision depends on case- to- case basis.

Collateral Free (CasetoCase)Above TK 5.00 LACs Collateral Mandatory

Mandatory

Mandatory (Forced Sale value 1.25 times of loan amount)

without collateral security & above TK 8.00 LACs with collateral security

8.10 COMPARATIVE ANALYSIS OF SME SCHEME OF DIFFERENT BANKS (EXAMPLE OF LOAN) Year2007
Example of Loan Prime Bank Ltd Dhaka Bank Ltd Eastern Bank Ltd Mercantile Bank Ltd DuchBangla Bank Ltd BRAC Bank Ltd

Principal Amount Period of Loan No. Of Installment Installment Size Total Installment Payment Loan Processing Fee Risk Fund

TK 1.00 LACs

TK 1.00 LACs

TK 1.00 LACs

TK 1.00 LACs

TK 1.00 LACs 01 year

TK 1.00 LACs

01 year

01 year

01 year

01 year

01 year

12

12

12

12

12

12

TK 8,978.00

TK 8,931.00

TK 9,025.00

TK 9,025.00

TK 8,978.00

TK 9,168.00

TK1,07,736.00

TK1,07,172.00

TK 1,08,300.00

TK 1,08,300.00

TK 1,07,736.00

TK 1,10,016.00

TK 500.00

TK1,000.00

..

..

TK 500.00

..

TK 2,000.00

TK1,000.00

..

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Supervision Fee Utilization Fee Total Payment

..

TK 2,000.00

..

TK1,000.00

..

750.00

TK 1,500.00

..

..

TK 1,08,986.00

TK 1,13,672.00

TK 1,08,300.00

TK 1,10,300.00

TK 1,07,736.00

TK1,10,516.00

Table: 8.5 Primary Sources (Data are collected from Banks through personal communication. 8.11 COMPARATIVE ANALYSIS OF SME SCHEME OF DIFFERENT BANKS (PERFORMANCE PART)
Performance Prime Bank Ltd Year Of Operation Disbursement(Up to 31.03.07) Rate Of Recovery 2001 108.44 Crore 100% 100% 2001 5.72 Crore 2001 300.59 Crore 97% 79% 1999 6.63 Crore Dhaka Bank Ltd Eastern Bank Ltd Mercantile Bank Ltd DuchBangla Bank Ltd 2001 16.38 Crore 99% 98% (Actual 92%) No. Of Manpower at H/O Level 02 03 02 03 03 24 2001 950.00 Crore BRAC Bank Ltd

Table: 8.6 Primary Sources (Data are collected from Banks through personal communication. 8.12Analysis of loan repayment behavior SME loan in fact, a small loan ranging from 2 lacks to 30 lacks given to small or medium enterprises not for initiating the business but for the purpose of working capital management or for purchasing any long term asset. Any sound organization after one year of their starting of business can apply for this loan. It almost a rare case for Brac Bank that an SME borrower will default to repay the loan he/she has taken even the loan is given without taking any collateral.

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There are several reasons for which the SME loan borrowers hardly default. These reasons may like:

The loan amount is not as large as it would be difficult to repay it. Mediocre entrepreneurs hardly default to repay loans. They are very conscious about their reputation in the market. As the loan is taken for meeting up of working capital, it can be easy to repay after the sales revenue is collected from respective customers.

However, from the observation of 37 SME loan borrowers personal and repayment information we find the following results:

Average age of SME borrowers is 39 Average education of most of the SME borrowers is Class IX or X. Average Experience (As a promoter of the business) is 11 years (along with some extreme values. Average Experience (As an employee of the same business) is 8 years Monthly income and expenditure of the Entrepreneur is around TK. 30000 and TK. 23000 respectively. Average personal and family assets are around TK. 150000 and TK. 240000 respectively Almost all of the borrowers are 55% retailer and 45% whole seller Average number of employees they have is 3 Average Amount of loan taken by them is around TK. 379729.7 Average time period of loan they take to repay is 26 months Average amount of loan suppose to be paid is 275314.47 Average amount of loan currently repaid is TK. 286847.62 per person. Average amount of loan due for recovery is TK. 6679.62 per person

Gathered 8 variables to analyze the relationship of each variable with recovery rate. These variables are: Age of the borrowers Education of the borrowers

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Experience of the borrowers related to their business. Amount of loan taken by the borrowers Term of loan Income of the borrowers Personal Asset of the borrowers Nature of business

Analyze the relationship sequentially: 8.13 Relationship of recovery rate with age of the borrowers The relationship of recovery rate with the age of the customers can be described from the following charts:

Age group 21-25 26-30 31-35 36-40 41-45 46-50 51+

Frequency 1 4 9 9 7 4 3

Recovery rate(%) 80% 96% 100% 98% 98% 96% 100%

Table: 8.7 Relationship of recovery rate with the age of the customers

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R eco very R ate B as ed o n A ge gro up

120% 100% 80% 60% 40% 20% 0% 21-25 26-30 31-35 36-40 41-45 46-50 51+ A ge Gr oup 96% 80% 100% 100%

98%

98%

96%

Figure: 8.7 Relationship of recovery rate with the age of the customers

From the above chart see that recovery rate increases as the age of the borrowers increases. Here the recovery rate is lowest at the age group of 21-25 for the lacking of experience and knowledge in the related business. They cant make the proper use of funds. And thats why their business fails. At the age of 31-35 recoveries rate is 100%. At that age group people like to behave professionally and control everything with strict discipline. They are highly concerned about their career, which brings success to their business. So at that time recovery rate is the highest. Again at the age of 50 and above recovery rate is also 100% because of their huge experience and success in business.

8.14 Relationship of recovery rate with education of the borrowers

Education Alphabetic-5 6 to 10 11 to 15

Frequency 8 20 9

Recovery rate(%) 97% 98% 96%

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Table: 8.8 Relationship of recovery rate with education of the borrowers

Recovery Rate based on Education
99% 98% 97% 96% 95% 94% Alphabetic-5 6 to 1 0 1 to 1 1 5

97%

98% 96%

Education

Figure: 8.8 Relationship of recovery rate with education of the borrowers

From the above chart see that Small and medium businesses are not highly affected with the educational background of the borrowers. Thats why recovery rate also is not much affected with the education of the borrower. There should be some other variables affecting it as well.

8.15 Relationship of recovery rate with experience of the borrower

Experience(year) 1 to 5 6 to 10 11 to 15 16-20 20 above

Frequency 13 9 5 6 4

Recovery rate(%) 94% 100% 100% 100% 99%

Table: 8.9 Relationship of recovery rate with experience of the borrower

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R e co v e ry ra te b a se d o n e x p e rie n c e
20 above 16-20 11 to 15 6 to 10 1 to 5 90% 92% 94% 94% 96% 98% 100% 102% 99% 100% 100% 100%

R el ated exper i ence

Figure: 8.9 Relationship of recovery rate with experience of the borrower

From the above graph see that recovery rate is highly affected with the experience of the borrowers in the business he is engaged with. In fact, it is all out true that a business and its success are greatly affected by the experience the entrepreneur have on the same line of business. At the initial periods of the business lack of experience can cause the business to fail which ultimately results in the default of loan repayments. So Brac Bank is always concerned about the related experience of the entrepreneur. They dont give SME loan to anybody having no experience or for initiating any business. And here also we see that recovery rate is lowest at the experience of 1 to 5 years.

8.16 Relationship of recovery rate with amount of loan taken

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Amount of Loan 200,000 250,000 300,000 350,000 400,000 450,000 500,000 850,000

Frequency 4 1 12 2 6 1 10 1

Recovery rate(%) 95% 100% 97% 100% 100% 94% 97% 100%

Table: 8.10 Relationship of recovery rate with amount of loan taken

Recovery rate based on Amount of loan
102% 100% 98% 96% 94% 92% 90% 200,000 250,000 300,000 350,000 400,000 450,000 500,000 850,000 95% 94% 97% 97%

100%

100%

100%

100%

Amount of loan

Figure: 8.10 Relationship of recovery rate with amount of loan taken

From the above chart see that its tough to make a relationship with both the recovery rate amount of loan taken by the borrowers. But still it can be said that loan amount ranging from 250000 to 400000 have a good recovery rate on an average. Thats why maximum amount or size of SME loan the authority like to disburse is 300000.

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8.17 Relationship of recovery rate with term of loan

Term Of Loan(Month) 15 18 21 24 27 36 48

Frequency 3 3 10 11 1 5 4

Recovery rate(%) 98% 100% 100% 98% 94% 94% 91%

Table: 8.11 Relationship of recovery rate with term of loan

Recovery Rate based on Term of Loan 48 27 21 15 86% 88% 90% 92% 94% Term of Loan 96% 98% 98% 100% 102% 91% 94% 94% 98% 100% 100%

Figure: 8.11 Relationship of recovery rate with term of loan

The above graph shows that, as the loan duration increases the rate of recovery decreases. This may be the inherent reason of why the authority of BRAC Bank likes to disburse loan at a shorter term of 18 to 24 months.

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8.18 Relationship of recovery rate with income of the borrower

Income group 1000-10000 10001-20000 20001-30000 30001-40000 40001-50000 50000 above

Frequency 5 15 8 1 3 5

Recovery rate(%) 94% 98% 96% 100% 100% 100%

Table: 8.12 Relationship of recovery rate with income of the borrower

Recovery Rate based on Income group
50000 above 40001-50000 30001-40000 20001-30000 10001-20000 1000-10000 90% 92% 94% 94% 96% 98% 100% 102% 96% 98% 100% 100% 100%

Income Group

Figure: 8.12 Relationship of recovery rate with income of the borrower

In fact, income of a borrower can be a vital factor to repay his loan. And the above graph is a replica of this truth. Here see that people with higher income group like 30000 to 50000 or above have the highest recovery rate. Entrepreneurs having a good skill, knowledge and experience in business can make success in their business, which ultimately increases their income as well. So their recovery rate is good than those groups of people who have lower income.
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8.19 Relationship of recovery rate with the personal asset of the borrower

Personal asset 100000-500000 500001-1000000 1000001-1500000 1500001-2000000 2000000 above

Frequency 9 14 5 3 7

Recovery rate(%) 94% 98% 99% 100% 97%

Table: 8.13 Relationship of recovery personal asset of the borrower

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Re cove ry rate bas e d on Pe rs onal as s e ts

2000000 above 1500001-2000000 1000001- 1500000 500001- 1000000 100000-500000 91% 92% 93% 94% 94% 95% 96% 97% 98% 99% 100% 101% 98% 99% 97% 100%

P ersonal assets

Figure: 8.13 Relationship of recovery personal asset of the borrower Entrepreneurs who have sufficient personal assets and mortgage them for taking the loan have the record of higher recovery rate. They dont have the tendency to make a default in paying the installments. BRAC Bank likes to pay SME loans after collecting title deeds of those personal or family assets. People who dont have much personal asset must show that they have sufficient family asset. Here from the above chart we see that entrepreneurs having lowest personal asset have the lowest recovery rate of 94%. 8.20 Relationship of recovery rate with the Nature of business
Nature of business Whole sale Retail Frequency 13 21 Recovery rate(%) 98% 92%

Table: 8.14 Relationship of recovery rate with the Nature of business

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Re co ve r y r ate b as e d o n n atu r e o f Bu s in e s s

Retail

92%

W hole s ale 88% 90% 92% 94% 96%

98% 98% 100%

Nature of Bus ines s

Figure: 8.14 Relationship of recovery rate with the Nature of business

From the above chart see that entrepreneurs having retail business have a less recovery rate than the entrepreneurs having wholesale business. This may happen because wholesale business transactions happen at a large scale. So they can convert their stocks as well as accounts receivables into cash very quickly before the occurrence of any misfortune. On the other hand, retail business transactions happen at a small lot. So they cannot make swift conversion of their current asset in to cash.

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CHAPTER-09

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Findings and Conclusion

9.1 Findings

As we know, in our country bank is the fastest growing sectors in Bangladesh. Now every bank has SME division. SME banking has made the performance of banks. It enlightened is core product to offer to the small and mediocre business entrepreneurs. In fact no businessman could think ever before that they could take loan so easily, without any collateral and without going to bank. But now Banks has made this improbable process so successfully through SME banking. However from the analysis of SME loan of banks we can make the following findings: Age have a significant impact on the recovery of SME loan. Young entrepreneurs have a lower rate of recovery. On the other hand as middle aged and experienced entrepreneurs are very loyal with their loan repayment they can make proper and timely repayment of their loans. And thats why most of the SME loan borrowers age rages from 30 to 40. Education does not have any direct relationship with the recovery rate. In fact, Most of the entrepreneurs of retail and whole business (small or medium in size) are not highly educated. Most of them studied up to class 9 or 10. Sometimes there are some entrepreneurs who have only alphabetic knowledge or who can give their signature only. But still they are running their business so well for many years. In this case experience makes them successful in their business. So, education does have much impact on these small and medium enterprises and also on the recovery rate of SME loans. Experience is the most significant variable which has a great impact on any kind of business and recovery rate as well. Experienced entrepreneurs run their business so tactfully, identify the exact time what is their pick time of sales and when they need fund. They take the loan in the pick season when they have excess demand but short of capital. Then they ensures the best use of the loan and finally they reach to success and make the dully installments. So their recovery rate is good and thats why banks look always for experienced entrepreneurs.

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Number of installments (term of loan) and amount of loan taken do affect recovery rate slightly. But trends show that banks prefer to disburse loan of an amount of 300000 and at a term of 18 to 24 months. Another variable affecting recovery rate very much is the income of the borrowers. The higher the existing income of the borrowers, the lower the rate of default. Higher income groups make the best use of the loan they have taken and get success. On the other hand lower income group may misuse the loan and ultimately may default in paying installments. Personal or family asset might have some impact while sanctioning the loan as well as when recovering the loan installments. Suppose if a borrower fails to pay one of his installments, bank can find his personal assets as back up for the recovery of the installments. Retail business and whole sale business both types of businesses get loans from banks but whole sellers have a higher recovery rate as their business transactions occur at lot size and their collection is much quick.

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9.2 Conclusion
Small and medium enterprises (SMEs) act as a vital player for the economic growth, poverty alleviation and rapid industrialization of the developing countries like Bangladesh. Financial intermediaries, especially banks have a very important role to play to develop our SME sectors through launching SME Banking. SME banking is one of the latest innovations in our banking sector and now most of the banks provide SME financing. Although government of Bangladesh has taken some initiative to ensure the growth of SME but those steps are not enough at all. But government show sits positive attitude towards this sector. Bangladesh government should continue to give more focuses on some areas, such as arrangement of finance, provide infrastructure facilities, frame appropriate legal framework, establish national quality policy etc. From the sequence of this analysis it seems that for the economic development of Bangladesh SME can play a vital role. Finally it can scan say that SME loan is a loan given especially to entrepreneurs who are experienced small or medium businessmen, more or less middle aged, at least moderate income generated and who have reasonable personal or family asset. Thats why their recovery rate is so high that is 97%. And their default rate is so small compared to other loan categories. Sometimes borrowers go for early settlements of their loans.

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Ahmed Iftekhar Uddin. Crisis of Credit Management, Ruprekha Publisher, Mirpur, Dhaka. Bangladesh Bank related websites (www.bangladeshbank.org) Books, Publications and Journals of BRAC Bank Limited. BRAC Bank related websites(www.bracbank.com) Kotler, Philip (The millennium Edition) Marketing Management Prospectus of BRAC Bank Limited published in July 2009. Rose, Peter S. Commercial Bank Management, International Edition 1999, Irwin McGraw-Hill. Valuable discussion of supervisors during the period of thesis. Another web (www.wikipedia.com;www.google.com) BIBM Reading Materials http://www.bangladesh-bank.org Chowdhury, L. R., A Text Book On Bankers Advances, 2nd Edition, Dhaka, Fair Corporation, 2002.

Choudhury, Toufic Ahmed, Reading Materials on Principles and Practices of Banking, 2007.

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