Investment in SMEs of Eastern Bank limited: Problems and Prospects

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Investment in SMEs of Eastern Bank limited: Problems and Prospects

Chapter 1

INTRODUCTION

1.1 ORIGIN OF THE REPORT

As a part of the BBA program requirement, I was assigned for doing my internship in Eastern Bank Limited (EBL) for the period of 12 weeks starting from August 04, 2010 to November 04, 2010 as an intern by the Internship Placement Office, Bachelor of Business Administration, University of Dhaka. The Human Resources Department of EBL assigned me at the Principal SME center, Dhaka and my organizational supervisor was Mr. Md. Khurshed Alam, Head of Business, Eastern Bank Limited. My project was to get overall knowledge and to find the prospects and problems of SME (Small & Medium Enterprise) financing activities of EBL. My faculty supervisor Dr. H. M. Mosarof Hossain, Associate Professor, department of Finance, Bachelor of Business Administration, University of Dhaka, also approved the project and authorized me to prepare this report.

1.2 OBJECTIVES

The broad objective of this report is to study and assess the SME products of Eastern Bank Limited and hence to get acquainted with the practical aspects of a job. In addition, the specific objectives are

1. To be acquainted with Eastern Bank Limited as an organization.

2. To be familiar with the different SME products offered by the bank.

3. To know about the SME Banking in Eastern Bank Limited.

4. To find out the prospects of EBL in SME financing.

5. To determine the internal and external problems of EBL in SME financing.

6. To compare the performance among the EBL SME loan products.

1.3 SCOPE OF THE REPORT

The study would focus on the following areas.

§ SME Financing Policy of Eastern Bank Limited.

§ SME Financing Procedures in Eastern Bank Limited.

§ Analysis of EBL SME products.

Each of the above areas would be critically analyzed in order to determine, from a Bankers point of view, what issues are preventing SMEs to access the institutional credit facilities.

1.5 METHODOLOGY AND VARIABLES

Primarily, for general concept development about the bank short interviews and discussion sessions were taken. For the other information secondary sources like books, publications and annual reports of the Eastern Bank Limited were collected.

In addition, to learn about SME Banking activities, policy, and procedures, the Credit Manual and Credit Policy and different circulars, Product Program Guide (PPG) of Eastern Bank limited were thoroughly analyzed. Different SME Product features of the Bank were analyzed. For overall scenario of SME financing various publications was reviewed and several discussion meeting were conducted with persons related to SME financing.

1.5.1 SOURCES OF INFORMATION

Information collected to furnish this report is both from primary and secondary in nature. The Primary sources are

§ Relevant file study as provided by the concerned officer.

§ Practical desk work

§ Face to face conversation with the officers.

The secondary sources are

§ Different Circulars issued by Eastern Bank Limited and Bangladesh Bank.

§ Different ‘procedure Manual’, published by Eastern Bank Limited

§ Annual Reports of Eastern Bank Limited

§ Periodicals published by Eastern Bank Limited

Publications obtained from different libraries and from Internet.

The whole report was prepared through the following five steps:

Step 1 ? planning for the content of the report

Step 2 ? structuring the concepts

Step 3 ? data collection through primary and secondary sources

Step 4 ? analysis and interpretation of data

Step 5 ? draw conclusions

1.6 LIMITATIONS OF THE REPORT

The major limitations faced during the preparation of this report are as follows –

§ Banks policy does not permit to disclose various data and information related to Credit portfolio.

§ Non-availability of data and information those are more recent on different activities of Eastern Bank Limited, Especially data of 2010.

§ Different internal information of EBL SME was found but this cannot be compared with other banks’ same information.

Chapter 2

PROFILE OF EASTERN BANK LIMITED

2.1 EBL AT A GLANCE

Eastern Bank Ltd is a private-owned commercial bank of Bangladesh. Eastern Bank Limited (EBL) is one of the modern, fully online and technologically superior private commercial Banks in Bangladesh. Eastern Bank markets a wide range of depository, loan & card products. Eastern Bank Limited provides commercial banking products and services to the corporate, mid-market, and retail segment in Bangladesh and internationally. Its deposit products include savings deposit, EBL SB insurance account, deposit–retail, EBL campus account, EBL interesting account, EBL confidence, salary account deposits, monthly deposit plan, bearer certificate of deposits, bills payable and fixed deposits comprising short term deposits, term deposits, and non resident foreign currency deposits. The company’s loan portfolio comprise EBL Jibandhara loan, EBL Utshab loan, EBL home loan, EBL fast cash, EBL fast loan, EBL executive loan, EBL auto loan, EBL travel Loan, EBL personal loan, and education finance pack, as well as letters of credit, cash credits, overdrafts, and purchased and discounted bills. It also provides financial products and services, including corporate deposit accounts, syndicated financing, trustee and agency services, term loan, project finance, export-import financing, working capital and other finance, bonds and guarantees, investment and business counseling, infrastructure finance, and cash management services, as well as treasury, syndication, securities, and custody services. In addition, the company makes investments, placements, and borrowing in money and capital markets; and deals with foreign exchange business, as well as provides Internet banking, corporate banking, and Hajj remittance services, such as handling foreign demand drafts and foreign telegraphic transfers in Saudi Arabian and local currency. As of October 31, 2010, it had 39 branches, 60 owned automated teller machines (ATMs), and 218 shared Q-cash ATMs. Eastern Bank Limited was founded in 1992 and is headquarter in Dhaka, Bangladesh. Through a network of branches & SME centers countrywide. Eastern Bank has its presence in major cities/towns of the country including Dhaka, Chittagong, Sylhet, Khulna and Rajshahi. Tracing its origin back to 1992, EBL is serving the individual and corporate clientele alike with remarkable success offering innovative banking services since then.

2.2 HISTORY OF THE BANK

The declaration of the Government’s bold are far-sighted to allow banks in the private sectors to play its due role in the economy of Bangladesh, it has started the process of creating new and dynamic financial institutions. One such institution is the Eastern Bank Limited (EBL). The emergence of Eastern Bank Limited in the private sector is an important event in the banking era of Bangladesh. Eastern Bank Limited came into existence as a public limited company incorporated in Bangladesh on August 8, 1992 with the primary objectives to carry on all kinds of banking business in and outside of Bangladesh and to give effect to the Bank of Credit and Commerce International (Overseas) Limited (Reconstruction) Scheme, 1992, framed by Bangladesh Bank with a view to safeguard the interest of the depositors of erstwhile OCCI. Under the Scheme, EBL has taken over the entire business assets, cash and liabilities of erstwhile BCCI in Bangladesh, with effect from 16th August, 1992 as they stood after the reduction or adjustment in accordance with the provisions of the Bank of Credit and Commerce International (Overseas) Limited (Reconstruction) Scheme, 1992. EBL commenced its business as scheduled bank with effect from August 16, 1992 with four branches-Principal Branch, Dhaka; Motijheel Branch, Dhaka; Agrabad Branch, Chittagong and Khulna Branch, with a motto to grow as a leader in the banking arena of Bangladesh through better counseling and effect service to clients and thus to revitalize the economy of the country. EBL resumed its operational activities initially with an authorized capital of Tk. 1000 million. Into 10 million shares of Tk. 100 each and paid up capital of Tk. 310 million. During 1994, the paid up capital has increased to Tk. 600 million but the authorized capital remains unchanged at Tk. 1000 million. The first Board of Directors of EBL constituted by the Govt. of Bangladesh, consisted of 7 directors from various business and professions. Mr. Nurul Hussain Khan was the chairman of the bank.

EBL is the successor of BCCI. In the 1991 when BCCI has collapsed internationally, the operation of this bank has been closed sine die in Bangladesh. After a long time discussions with BCCI employees and taking into consideration the depositors and customers interest, Bangladesh Bank has given permission to form a bank named Eastern Bank Limited by taking all assets and liabilities of erstwhile BCCI. This is the brief history of EBL.

2.3 VISION OF THE BANK

The vision statement of EBL is:

“To become the bank of choice by transforming the way we do business and developing a truly unique financial institution that delivers superior growth and financial performance and be the most recognizable brand in the financial services in Bangladesh.”

EBL dreams to become the bank to choice of the general public including both the consumer and the corporate clients. It has adopted a new logo that looks very dynamic in its attractive colors that reflect all the changes that are taking place in EBL.

2.4 MISSION OF EBL

The mission statement of EBL is:

“We will deliver service excellence to all our customers, both internal and external.

We will ensure to maximize shareholders’ value.

We will constantly challenge our systems, procedures and training to maintain a cohesive and professional team in order to achieve service excellence.

We will create an enabling environment and embrace a team based culture where people will excel.”

2.5 VALUES OF EBL

Values carried out by EBL are:

We passionately drive customer delight.

SERVICE EXCELLENCE We use customer satisfaction to accelerate growth.

We believe in change to bring in timely solution.

We share the business plan.

OPENNESS We encourage two way communications.

We recognize achievements, celebrate results.

We care for each other.

TRUST We share learning/ knowledge.

We empower our people.

We know our roadmap.

COMMITMENT We believe in ‘continuous improvement’.

We do not wait to be told.

We say what we believe in.

INTEGRITY We respect every relationship.

We do not abuse information power.

We are tax-abiding citizen.

RESPONSIBLE We promote protection of the environment for our children.

CORPORATE CITIZEN We conform to all laws, rules, norms, sentiments and values of the land.

2.6 STRATEGIC PRIORITIES

EBL has some strategic priorities which it believes to be maintained in operating the bank. These are

· Further improvement of asset quality.

· Further change in deposit mix to increase pie of low cost deposits.

· To become cost efficient organization.

· Moderate growth in conventional products.

· Pursue inorganic growth through merger and acquisition.

· Increase off-balance sheet business through product innovation.

· Careful penetration in the capital market.

· Increase intrinsic value of the company by strengthening internal controls through installation of clearly laid down policies, procedures and processes.

· Diversify corporate business to take advantage of PPP.

· Increased and focused Corporate Social Responsibility (CSR).

· Increase shareholders’ value.

· Strengthen risk management.

· Improve quality of human capital by strengthening their competencies.

· Create world class IT infrastructure to deliver superior service to our customers.

2.7 BUSINESS REVIEW OF EBL

Eastern Bank Limited (EBL) is a commercial bank with 39 online branches across major cities in Bangladesh and 950 full time employees on year end 2009. It offers full range of commercial banking products and services to the corporate, mid-market and retail segment, the bank has comprehensive range of financial products including corporate deposit accounts, syndicated financing, trustee and agency services, term loam, project finance, working capital and other finance, bonds and guarantees, investment and business counseling, infrastructure finance, cash management services etc.

Unlike conventional branch banking, credit proposals as well as business operations are processed centrally at EBL. Besides Main Operation, EBL has an offshore Banking Unit (OBU) set up in 2004 which gives loans (on and off-balance sheet exposure) and takes deposits only in freely convertible foreign currencies to and from nonresident person/institution, fully foreign owned EPZ companies. EBL organogram follows:

Figure 1: Organogram of EBL

2.7.1 Corporate Banking:

Under the umbrella of Corporate Banking, there are nine relationship units, six in Dhaka and three in Chittagong. The relationship units contribute to loan share both in Loans and advances (measuring around 77% of total loans as of 31.12.09) as well as fee based income by providing comprehensive financial solutions in the form of Trade Finance, Working Capital, Project Finance etc. It also contributes a considerable EBL deposit book which was 39 % in 2009.

Readymade garments and textiles comprise nearly one-fourth of Corporate Banking’s portfolio. Major sectors financed by EBL are RMG, Textiles, Ship Breaking, Commodity, Telecommunications, and Pharmaceuticals etc.

The focus of EBL in the year 2009 was to diversify its asset portfolio by entering into new industries. As apart of its diversification, EBL started to enhance its footing into new sectors such as aviation, healthcare, power, glassware and agribusiness (processed food, poultry etc).

There are three specialized units:

2.7.1.1 Structured Finance Unit:

SFU is dedicated to providing best structured solutions meeting the needs of the clients, quality agency and trustee services, and maintaining a sustainable relationship with all the parties involved. Today, SFU is not only providing term loan involving local lenders but also arranging Preference Share Subscription, USD Term Loan, and Offshore Finance etc. Following are some highlights of the success of SFU:

§ In 2009, SFU won a bid worth USD 114.8 million of syndicating Bangladesh Biman Boeing pre-delivery financing arrangement beating competition from local and foreign banks.

§ Working as a lead arranger, SFU closed the deal of BDT 775 million Term Loan for Regent Power Limited (a concern of Habib Group) which was backed by IPFF, a World Bank funding facility for infrastructure projects.

§ SFU has been working as an Agent for ADB Agribusiness Project and actively working with Asian Development Bank, Ministry of Finance and Local NGOs – ASA, BRAC and TMSS.

2.7.1.2 Investment Banking Unit:

Recent global financial crisis failed to jolt the capital market of Bangladesh; rather market capitalization of DSE has gone up by more than 80% in 2009 due to the active IPO market, increased institutional investors’ participation, and surge of Mutual Fund industry and sustained of the corporate entities in general.

EBL has identified the huge business potential in the capital market frontier in the late 2007 which had driven the set up of investment banking in early 2008. Since establishment, Investment Banking is successfully operating to develop new business to serve the undeserved market potential. Subsequently, investment banking has passed a very successful year of 2009 due to following developments.

§ Sponsoring Mutual Fund: Investment Banking developed the idea to sponsor EBL 1^st Mutual Fund (MF) of BDT 100 crore, the first MF in Bangladesh sponsored by a commercial bank, which was listed in the DSE in August 2009. EBL being the sole sponsor holds 20% of the fund that had NAV of BDT 11.87 as on December 31, 2009 against each unit of BDT 10.00.

§ Own Portfolio Performance: EBL has been actively managing an investment portfolio since February 13, 2009. Up to the end of December, the effective return from the secondary investment portfolio was 95.89% taking into realized and unrealized return into account. Over the same period, broad market return was 64.41% as measured by the DGEN’s change.

§ Underwriting and Placement Participation: EBL was the largest underwriter of Grameenphone Ltd’s IPO. EBL underwrote BDT 63.50 crore of Grameenphone issue. EBL also participated in the private placement offer of Grameenphone Ltd investing in 3.64 lacs share of GP Ltd an amount of BDT 2.62 crore. EBL has also made arrangements to underwrite the IPO of RAK Ceramics Ltd. to the tune of BDT 5.00 crore.

2.7.1.3 Cash Management Unit:

EBL Cash Management Unit aims at introducing efficient tools for maintain liquidity of clients and maximizing their return. EBL has introduced a range of Cash Management solutions that has enabled businesses to mange their cash flows efficiently and effectively by optimizing liquidity, reducing default risk and lowering operating cost.

Following are some mentionable deals made by Cash Management Unit during the year 2009:

§ EBL pioneered in providing the Hajj Remittance Service to the private Hajj Agencies through prepaid Hajj Card.

§ Collection agreement with one of the largest enterprises in the Power Sector viz. Bangladesh Power Development Board.

§ Collection agreement with Meghna Petroleum limited, one of the largest Oil Marketing Companies of Bangladesh.

§ EBL has successfully initiated a depository relationship with Bangladesh Telecom Regulatory Commission (BTRC) through collection of their security deposit.

§ EBL was the first local bank in Bangladesh to start a depository relationship with American Life Insurance Company.

§ Countrywide Payments and Collection solution for telecom industries, local corporate houses and other institutional clients.

2.7.2 Consumer Banking:

EBL consumer Banking (CNB) has sustained its growth in deposit base and has attracted low cost deposit fund in 2009 despite the adverse situation due to the Global Economic Crisis. EMI Consumer Loan portfolio has also increased significantly during the year. In 2009, CNB deposit grew by 23% while total Consumer Loan portfolio (including credit cards) increased by 21%.

EBL branch network is further expanded to 39 with the introduction of 5 new branches (Satmasjid Road, Banasree, Sirajuddowla Road, Choumuhani and Savar branch). EBL own ATM network is extended to 60 with 24 new ATMs in important locations around the country.

Carrying forward the legacy, EBL introduced three different and very customer friendly products in 2009. “EBL Travel Card” was launched keeping in mind the growing traveling population of Bangladesh. This Visa prepaid USD card helped the travelers from the hassle of purchasing and carrying cash while in the move. Keeping in mind the regulatory requirements and the need of the remitters, EBL rebranded its non-resident business outlook and launched a set of service propositions under the brand name “EBL Matribhumi”. EBL Matribhumi is service concept where the maximum financial security and convenience in banking is ensured. In 2009, EBL received approval for launching mobile phone based remittance distribution service titled “EBL Smart Remit”.

2.7.3 SME Banking:

Small and Medium Enterprises (SMEs) are the “engines of growth” in almost all the emerging economies in the globe. The National Private Sector Enterprise Survey which was conducted in 2003 estimates that about 6 million micro and small and medium enterprises are doing business in Bangladesh and are employing more than 31 million people nationwide. Furthermore, the data reveals that micro and SME sector has employed 25% of the total workforce.

EBL SME Banking began journey in June 2006. As of now it has 28 SME Centers located in the premier business of the country. EBL opened 12 new SME Centers up to September 2010. EBL SME Banking has experienced a structural shift in 2009 by separating the SE Business and ME Business completely, under two business heads and thus making it more focused and accountable. This structure has enabled the department to streamline its operation in every sector, starting from business booking to overall monitoring of the assets to ensure healthy portfolio.

In January 2009, the management has approved a new SME definition in which the ticket size for the Medium Enterprises bookings have been increased from BDT 50 million to BDT 100 million and the maximum ticket size for the Small Segment have been increased from BDT 5.00 million to 7.00 million. The growth rate of EBL SME Banking has always been on an upward trend: overall presence in the bank’s balance sheet (loan portfolio) is also increasing from 7.80% in 2007, 9.25% in 2008 and about 11% at the end of 2009. The deposits grew by 36% from 2008.

2.8 REVIEW OF OPERATIONS

2.8.1 Trade Services (TSD):

EBL Trade Services has maintained its transactional growth with remarkable accuracy and without significant increase in headcount. Due to spill over effects of global recession, foreign trade business has declined. Although Trade Service has managed to maintain an increasing trend in the number of LC, LG and Export Bills in 2009, (28,181 in 2009 vs. 27,120 in 2008) trade business volume has decreased (BDT 90,236.65 million in 2009 vs. BDT 98,258.65 million in 2008).

EBL had extraordinary yields in 2009 from mutually beneficial relations with IFC under Global Trade Finance Program (GFTP) and with ADB under Trade Finance Facilitation Program (TFFP). Excellent utilization of IFC Line by EBL has contributed to the increase of the Guarantee Line from USD 10 million to USD 30 million in 2009. Similarly ADB has increased TFFP line from USD 10 million to USD 15 million upon highly satisfactory utilization by EBL.

2.8.2 International Department

In order to facilitate Foreign Exchange (FX), Foreign Trade and Other Foreign Currency (FCY) business and transactions, EBL maintains Correspondent Banking relationship with number of banks at home and abroad. Standard Settlement Instruction (SSI) including Drawing and Telegraphic Transfer (TT) arrangements have been enhanced and ensured in all major currencies (USD, GBP, EURO, ACU Dollar, SGD, JPY, AUD, CAD, CHF and Saudi Arabian Riyal). SSIs have been rationalized to 26 numbers as of December 31, 2009. Business lines have been enhanced with IFC to USD 30.00 million and ADB to USD 15 million along with other business correspondents.

2.8.3 Service Delivery

Service Delivery, as part of centralized operations, was established in 2006 at Dhaka and Chittagong with an objective to provide dedicated services to branches and business units (Consumer, SME, Corporate, Treasury and Investment Banking). In 2009, with broad objective of business support, Risk Management and optimum utilization of Human resources, the SD has opened its Sylhet unit to ensure faster processing for Sylhet zone branches locally. So now ‘Service Delivery’ is ensured through three wings at Dhaka, Chittagong and Sylhet. This unit is now grouped six functional units to perform as a focused group to bring in specialization, service excellence, improvement in services and compliances, and risk mitigation service deliveries. They are Account Services, Item Processing, Cash Management Operations, Non resident Business Operations, Internet Banking Operations and Treasury & Investment Banking support unit.

2.9 INFORMATION TECHNOLOGY (IT)

EBL has initiated its Core Banking System up gradation to the latest Oracle’s FLEXCUBE UBS version. This will enhance the customer service capabilities; further improve cost per transaction, and better manage risks with latest control tools. Some additional module set will allow EBL to introduce all latest channels for customer transaction. An upgrade of payment card solution is also planned for ecommerce, EMV issuing and acquiring capabilities. The preparatory work towards integrated BASEL II compliance through automated tools is being done.

Technology innovation is one of the most effective ways to achieve cost savings by automating manual processes. More importantly, management of technology enables new revenue opportunities by providing better and timely information about internal processes and client data.

2.10 HUMAN RESOURCES

In an increasingly competitive business environment, the Bank is ever more mindful of the importance of its people as a key success factor. Eastern Bank therefore aims to create a work environment that enables staff to realize their full capabilities and build for themselves a fulfilling career. The Bank has sought to enhance the effectiveness of its recruitment and orientation process. It also further developed its training curriculum and method in support of the Bank’s philosophy of enabling people to continually develop themselves to their fullest potential. Staffs were encouraged to continually learn and take on new challenges. Managers were provided with further training to ensure they support their staff through effective communication, coaching and constructive feedback. Moreover, the Bank has also enhanced and implanted effective performance management practices. This is to ensure that in planning, all employees and managers concentrate on most important business issues, and in executing the plan, on monitoring and evaluating the progress. Moreover, they are encouraged to continually take on more challenges at both the individual and business unit levels.

2.11 RISK MANAGEMENT PRACTICES AT EBL

2.11.1 Credit Risk Management:

The bank is exposed to credit risk in its lending operations. Credit risk is the risk of loss that may occur from the failure of any counterparty to make required payments in accordance with terms and practices. The bank has adopted a framework for credit risk management, setting up of an independent Credit Risk Management (CRM) team to establish better control and check in accordance with the predetermined specific principles, and to reduce conflicts of interests in the business units. The Head of Credit Risk Management (HoCRM) has clear responsibility for management of credit risk. Policies/ instructions in this respect are approved by the Board of Directors or authorities acting on their delegation. Besides, subjective appraisal of credit application, bank use a numerical grading system for quantifying the risk associated with a borrower, which is not a decision making tool but a general indicator to compare risk perception about the borrower.

The grading is based on Credit Risk Grading Matrix (CRGM) that analyses a borrower against quantitative and qualitative measures. Retail and small loans are managed under separate Product Program Guidelines, approved by the Board of Directors.

Credit exposure of Eastern Bank is measured and monitored by quarterly MIS on portfolio, which is submitted to MD & CEO. Bank complies with related norms on exposure stipulated by Bangladesh Bank and its self-made sector wise and product wise exposure capping. Bank can automatically generate daily reports on borrower wise limits, utilizations, overdue, repayment, etc.

2.11.2 Market Risk Management:

Market risk is the possibility of loss arising from changes in the value of a financial instrument as a result of changes in market variables such as interest rates, exchange rates, credit spread and other asset prices. The market risk in the bank is managed in accordance with regulatory guidelines, governing lows and financial and economic environment.

Structural interest rate risk arises from the re-pricing characteristics of banking assets and liabilities. Interest rate risk is the risk of potentially variability in earnings and capital value resulting from changes in market interest rate. Asset Liability Committee (ALCO) is mainly responsible for establishing guidelines for the management of assets and liabilities, monitoring and minimizing interest rate risk at an acceptable level. These guidelines and actions are taken in adherence to the policies issued by Bangladesh Bank from time to time.

Liquidity risk is defined as the risk that the bank either does not have sufficient financial resources available to meet all its obligations and commitments as they fall due, or can access them only at excessive cost. It is the policy of the bank to maintain adequate liquidity at all times. Liquidity risk management is governed by Asset Liability Committee (ALCO) and responsible for both statutory and prudential liquidity. Since liquidity have inverse relationship with profitability, prudential management of liquidity is important. Asset deposit ratio of the bank as on 31 December 2009 was 96.91% and the bank maintained statutory liquidity in 2009 in all cases.

2.11.3 Operational Risk Management:

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people or systems, or from external events. Operational risk includes legal risk but excludes strategic and reputational risk. Operational risk is inherent in bank’s business activities. According to BASEL II Bangladesh Bank guideline, the bank follows ‘Basic Indicator Approach’ for computation of regulatory capital against operational risks. Following table shows amount of regulatory capital required for operational risk:

Table 1: Regulatory Capital Requirement

2.12 REVIEW OF FINANCIALS

2.12.1 Summary financials

Eastern Bank Limited has made 24.93 percent growth in Operating profit (profit before provisions and tax) during 2009 to BDT 2,980.16 million primarily due to 39.56 percent increase in Net Interest Income of NII (BDT 2,164.91 million vs. BDT 1,551.21 million in 2008) and 14.51 percent increase of other revenue (BDT 2,465.25 million compared to BDT 2,152.79 million in 2008) offset in part by 25.14 percent increase of operating expenses (BDT 1,649.99 million vs. BDT 1,318.46 million in 2008). Profit after tax increased by 82.33 percent to BDT 1,454.54 million compared to BDT 797.77 million in 2008 mainly due to decrease of loan loss provision by 38.52 percent (BDT 279.46 million vs. BDT 454.54 million in 2008). Therefore, Earning per Share (EPS) in 2009 jumped accordingly to BDT 58.53 compared to BDT 34.53 (resated) in 2008. Loans grew by 20.19 percent in 2009 (2009 end: BDT 47,667.99 million vs. 2008 end: BDT 39,662.16 million) and Deposit increased by 18.32 percent in 2009 (2009 end: BDT 49,189.54 million vs. 2008 end: BDT 41,572.77 million).

2.12.2 Results of Operation

Our operating results in 2009 showed a balanced growth in every earning component. Growth of NII during the said period was 39.56 percent compared to 18.21 percent growth in 2008. This was largely attributable to the fact that, Cost of fund (Deposit and borrowing) has decreased by 79 basis points to 8.15 percent (calculated based on daily average balances) during 2009 whereas yield on loans and placements has decreased by only 29 basis points to 13.53 percent compared to those of 2008. Growth of other revenue by 14.51 percent (BDT 2,465.25 million in 2009 vs. BDT 2,152.79 million in 2008) has also played important role in attaining 24.93 percent growth in operating profit during 2009. Following table compares key operating financials of the period mentioned.

Table 2: Key operating financials (Figures are in million BDT)

2.12.3 Key Ratios

Since our profit after tax has increased by 82.33 percent during 2009, all the ratios (including ROE and ROA) whose numerator is the PAT have jumped. Following table summarizes some of the major financial ratios:

Table 3: Major financial ratios

1. ROE: Profit after tax/Average of the year open and end equity, ROA: Profit after tax/Average of the year open and end assets.

2. Operating expense/Total operating income.

3. NPL or classified loans at year end 2009/Total/loans.

4. Gross loans without netting provision or interest suspense/Total deposit at year end 2009.

2.12.4 Financial Standing

Loan portfolio of the Bank increased by 20.19 percent to BDT 47,667.99 million whereas Deposits grew by 18.32 percent to BDT 49,189.54 million as on December 31,2009. In absolute numbers, Loans grew by BDT 8,005.83 million whereas Deposits grew by BDT 7,616.77 million in 2009. Borrowing increased by BDT 3,886.59 million or 78.55 percent whereas placement decreased by BDT 370 million or 52.86 percent over those of 2008.

Investment increased by 65.38 percent to BDT 8,806.31 million as on December 31, 2009. Fixed Assets increased by 44.77 percent reaching BDT 1,804.05 million as on year end 2009 mainly due to purchase of land costing BDT 52.36 million and booking land revaluation gain of BDT 508.66 million. Shareholders’ Equity increased by 78.10 percent and reached BDT 8,429.15 million as on year end 2009. Finally, the Balance Sheet size of EBL i.e. Total Assets increased significantly by 27.97 percent and reached to BDT 69,870.74 million as on December 31, 2009.

2.12.5 Net Interest Income and Spread

Net interest income has increased by 39.56 percent during 2009 to BDT 2,164.91 million compared to BDT 1,551.21 million in 2008 mainly due to volume and rate effects as mentioned below.

§ Average loans and placements have increased by BDT 8,024.79 million or 21.33 percent in 2009 over that of 2008 causing interest income to rise by BDT 1,067.55 million in 2009 compared to 2008.

§ Yield on average loans and placement during 2009 has decreased by 29 basis points to 13.53 percent over 13.82 percent during 2008 casing interest income to fall by BDT 94.00 million.

§ Average deposits and borrowings have increased by BDT 5,742.21 million or 13.96 percent in 2009 over that of 2008 causing interest expense to rise by BDT 519.35 million in 2009 compared to 2008.

§ Cost of fund on average deposit and borrowing has decreased by 79 basis points to 8.15 percent over 8.94 percent during 2008 casing interest expense to fall by BDT 374.86 million.

2.12.6 Non-interest/operating expenses

Operating expenses have increased by 25.14 percent to BDT 1,649.99 million in 2009 compared to BDT 1,218.46 million in 2008 as sets forth in the following table:

Table 4: Operating expenses

Employee expenses have increased by 21.81 percent in 2009 over that of 2008 mainly due to increase of headcount from 763 to 878 during the year and routine increment of salary and benefits during the year. Depreciation on fixed assets have increased by 51.00 percent to BDT 120.07 million in 2009 whereas repair and maintenance expense have increased by 61.44 percent to BDT 100.62 million in 2009 was mainly due to increase of depreciation on various electronic and networking equipments and machinery and maintenance charges for newly opened branches, centers, ATMs etc.

Chapter 3

SME & SME BANKING IN EBL

3.1 DEFINITION OF SME

Business process codification was first done on May 16, 2006. It is designed with definition given by Prudential Guidelines of Bangladesh Bank for SE financing on May 30, 2007. In the said memorandum, Small and Medium Enterprise was segregated by yearly sales turnover, asset size and total manpower. Threshold limit for allowing credit facility to Medium Enterprises was set for Tk. 6.00 crore.

Recently, BB has issued a new circular related to the definition of SME on May 26, 2008. The circular has increased the asset size for Small Enterprises (for manufacturing and service concerns whereas trading concerns remain as it is) and also aligned the manpower size for all types of Small Enterprises. The circular has given new definition of ME which was absent in Prudential Guidelines.

New definition given by BB is as follows:

Table 5: SME definition given by BB

Proposed new definition by EBL:

Table 6: Definition of Small Enterprise by EBL

Table 7: Definition of Medium Enterprise by EBL

EBL need to bring amendment to the existing definition for the following reasons:

§ To be line with Bangladesh Bank.

§ To grow their book by bringing the missing middle those one neither addressed by corporate banking nor by SME banking.

§ To enlarge the scope of doing business of the Bank.

§ Small loan amount set by BB.

§ Medium loan amount is set by EBL.

Justification for enhancement of credit limit for medium enterprise from Tk. 6.00 crore to Tk.10.00 crore (based on BB circular ACSPD No-8, dated May 26, 2008):

1. Manufacturing Concern:

§ Asset size for manufacturing concern as set by Bangladesh Bank is Tk. 20.00 crore (excluding value of land and building).

§ Assume 30% of the asset is occupied by Fixed Asset (Plant & Machinery, Furniture & Fixture, Advance against shop), i.e. Tk. 6.00 crore.

§ If EBL finances 70% of the Fixed Asset, total amount comes at Tk. 4.20 crore (Tk. 6.00 crore×70%).

§ They have proposed total loan Amount for Tk. 4.00 crore (33% of client’s equity).

§ Again, assume total sales turnover of the concern is Tk. 50.00 crore (as per EBL’s new definition). Total asset turnover comes at 2.5 times.

§ Considering gross margin 10%, cost of goods sold comes at Tk. 45.00 crore.

§ Considering 120 days cash conversion cycle (it varies from business to business), working capital requirement comes at Tk. 15.00 crore.

§ EBL is proposing total limit (funded and non-funded) up to Tk. 10.00 crore only.

2. Service and Trading concern:

§ Asset size for trading and service as set by BB is Tk. 10.00 crore (excluding value of land and building).

§ Assume 5% of the asset is occupied by Fixed Asset (Furniture & Fixture, Advance against shop), Current Asset comes at Tk 9.50 crore (Tk. 10.00 crore × 95%).

§ Again, assume total sales turnover of the concern is Tk. 50.00 crore (as per EBL’s new definition). Total asset turnover comes at 5 times.

§ Considering gross margin 3%, cost of goods sold comes at Tk. 48.00 crore.

§ Considering 90 days cash conversion cycle (it varies from business to business), total limit requirement comes at Tk. 12.13 crore.

§ Total fixed asset requirement Tk. 50.00 lac (EBL does not consider fixed asset financing for trading and service concerns).

§ EBL is proposing total limit (funded and non-funded) up to Tk. 10.00 crore only.

Moreover, the sector wise segmentation of SME follows some criteria and EBL has made the following changes:

Table 8: SME Criteria

Exceptions:

As per the proposed definition, there will be few clients, who will fall under Corporate Banking in few parameters and under Medium Segment in few parameters. For such clients, the business segment can be decided by Head of SME Banking and Head/Area Head of Corporate Banking in consultation with the Managing Director. Normal rule, out of 4 (four) criteria, if any client complies with 3 (three) criteria of Medium Segment, that entity will be treated as Medium segment client and vice-versa.

Following Enterprise/ companies will not be treated as SME, they will be considered as corporate clients.

§ All public limited companies

§ Govt. and semi govt. bodies

§ All chambers

§ All NGO’s

§ Educational institutions of Dhaka & Chittagong

§ All infrastructure project

§ Utility companies (PSTN, ISP’s, and Cable Service Providers)

§ Gas and Energy companies

§ International/ Transitional/ Multinational Organization

§ EPZ companies

§ Insurance Companies

§ Large Hospitals

§ Shopping Chains

§ Donor Driven Project

§ Airlines

§ Associations

§ Charities

§ Large buying houses

§ Large hotels

§ Apartments service associations

3.2 CREDIT ASSESSMENT & RISK GRADING

3.2.1 Credit Assessment

A thorough credit and risk assessment should be conducted prior to the granting of loans, and at least annually thereafter for all facilities. The results of this assessment should be presented in a Credit Application that originates from the relationship manager/account officer (“RM”), and is approved by Credit Risk Management (CRM). The RM should be the owner of the customer relationship, and must be held responsible to ensure the accuracy of the entire credit application submitted for approval. RMs must be familiar with the bank’s Lending Guidelines and should conduct due diligence on new borrowers, principals, and guarantors.

It is essential that RMs know their customers and conduct due diligence on new borrowers, principals, and guarantors to ensure such parties are in fact who they represent themselves to be. Bank should have established Know Your Customer (KYC) and Money Laundering guidelines which should be adhered to at all times.

Credit Applications should summaries the results of the RMs risk assessment and include, as a minimum, the following details:

• Amount and type of loan(s) proposed.

• Purpose of loans.

• Loan Structure (Tenor, Covenants, Repayment Schedule, Interest)

• Security Arrangements

In addition, the following risk areas should be addressed:

• Borrower Analysis

The majority shareholders, management team and group or affiliate companies should be assessed. Any issues regarding lack of management depth, complicated ownership structures or intergroup transactions should be addressed, and risks mitigated.

• Industry Analysis

The key risk factors of the borrower’s industry should be assessed. Any issues regarding the borrower’s position in the industry, overall industry concerns or competitive forces should be addressed and the strengths and weaknesses of the borrower relative to its competition should be identified.

• Supplier/Buyer Analysis

Any customer or supplier concentration should be addressed, as these could have a significant impact on the future viability of the borrower.

• Historical Financial Analysis

An analysis of a minimum of 3 years historical financial statements of the borrower should be presented. Where reliance is placed on a corporate guarantor, guarantor financial statements should also be analyzed. The analysis should address the quality and sustainability of earnings, cash flow and the strength of the borrower’s balance sheet. Specifically, cash flow, leverage and profitability must be analyzed.

• Projected Financial Performance

Where term facilities (tenor > 1 year) are being proposed, a projection of the borrower’s future financial performance should be provided, indicating an analysis of the sufficiency of cash flow to service debt repayments. Loans should not be granted if projected cash flow is insufficient to repay debts.

• Account Conduct

For existing borrowers, the historic performance in meeting repayment obligations (trade payments, cheques, interest and principal payments, etc) should be assessed.

• Adherence to Lending Guidelines

Credit Applications should clearly state whether or not the proposed application is in compliance with the bank’s Lending Guidelines. The Bank’s Head of Credit or Managing Director/CEO should approve Credit Applications that do not adhere to the bank’s Lending Guidelines.

• Mitigating Factors

Mitigating factors for risks identified in the credit assessment should be identified. Possible risks include, but are not limited to: margin sustainability and/or volatility, high debt load (leverage/gearing), overstocking or debtor issues; rapid growth, acquisition or expansion; new business line/product expansion; management changes or succession issues; customer or supplier concentrations; and lack of transparency or industry issues.

• Loan Structure

The amounts and tenors of financing proposed should be justified based on the projected repayment ability and loan purpose. Excessive tenor or amount relative to business needs increases the risk of fund diversion and may adversely impact the borrower’s repayment ability.

• Security

A current valuation of collateral should be obtained and the quality and priority of security being proposed should be assessed. Loans should not be granted based solely on security. Adequacy and the extent of the insurance coverage should be assessed.

• Name Lending

Credit proposals should not be unduly influenced by an over reliance on the sponsoring principal’s reputation, reported indep