“An Analysis of SME Banking Operations of AB Bank Limited:
Introductory Part
1.0 Introduction:
Credit is one of the most important functions of a bank and the best of bank strength depends considerably on the quality of its credit and proportion they bear to the total deposit. The credit department from where a bank collects maximum profit as a profit maximization organization and also a service provider.
Small and Medium-sized Enterprises (SME’s) are commonly recognized as one of the leading groups of economic activities globally, create enormous impacts on social issues.
It plays an important role in employment creation, resource utilization and income generation, development of forward and backward industrial linkage and meeting local needs. Bangladesh is an underdeveloped country and there is scarcity of enough employment and a healthy economic condition. Government of Bangladesh earmarked and identified SME as the thrust sector in economic division and the reason behind that SME’s worldwide recognized as engines of economic growth as well as significant economic and social contribution. Bangladesh followed a development strategy in which private Investment was controlled through a host of regulations involving investment sanctioning, credit disbursement, import licensing, foreign exchange allocation, Now-a-days our findings is what are the conditions of SME’s, what are the outcomes, opportunity and how to develop the SME division in our country. Government and financial institutions should give unique concentration on this sector in order to build a sound economical environment.
1.1 Origin of the Study
As a part of the Internship Program of Bachelor of Business Administration program requirement, I chose to do my internship in AB Bank Limited ( ABBL) for the period of 90 [ Ninety Days] In ABBL I was assigned to the different concerned department. My organizational supervisor was Miss. Samsun Nahar Jaly, In charge of Credit Administration and Monitoring Department. My Project is ‘SME Banking in Bangladesh: A study on AB Bank Limited’ which was assigned by the organizational supervisor of the said bank. My faculty also approved the project and authorized me to prepare this report.
1.2 Scope of the Study:
Scope of the study is quite clear. Since Asset Operations Department is dealing with all types of loan activities in the bank, opportunities are there to learn other aspects of SME matters.
- Concept of SME and its impact in overall economy of Bangladesh
- Entrepreneurship development situation through SME banking
- Importance of SME banking in the context of Bangladesh
- Virtual banking concept through SME banking
1.3 Objectives of the Study:
- To describe SME loan products of AB Bank Limited;
- To understand the enterprise selection criteria to provide SME loan by the Bank.
- To describe disbursement and recovery procedures of SME loans by AB Bank, New Elephant Road Branch.
- To identify the problems related to the SME banking operations of AB Bank Limited, New Elephant Road Branch
- To make some suggestions to solve the problems.
1.4 Methodology:
The report is the yield of the knowledge I have gained from the twelve weeks intern periods. It has done by gathering qualitative and quantitative information, whereas the quantitative information taken from both the primary and secondary sources. Majority information was collected from secondary sources.
1.4.1Source of Date:
To prepare this report, data has been collected from the following sources.
1. The Primary sources.
2. The Secondary Sources.
1. Primary Sources:
a) Customers
b) Officers
2. Secondary Sources:
a) Annual Report (2005-2009)
b) Website of respective bank
1.4.2 Sample Size:
a) Officers 5
1.4.3 Sampling Methods:
Convenience sampling.
1.4.4 Data Collection Method:
A questioner has been developed to collect data from existing customer of SME loan holder and also taken interview with the officer of CAM & SME Department in said bank.
1.5 Limitations:
- Though the officers and employees of the organization were so much helpful and cooperative but they were too much busy in their works that they had very little time of giving me detailed information.
- Also, Information at the bank is confidential & critical. For this reason different proxy figures have been used, while analyzing many issues related to this topic.
Organization Part
2.1 Organizational Profile of AB Bank Ltd:
AB Bank Limited, the first private sector bank under Joint Venture with Dubai Bank Limited, UAE incorporated in Bangladesh on 31st December 1981 and started its operation with effect from April 12, 1982.During the last 25 years, AB Bank Limited has opened 71 Branches spread over the country. As of December 31, 2006; the Authorized Capital and the Equity (Paid up Capital and Reserve) of the Bank are BDT 2000 million and BDT 2582.76 million respectively. Since, beginning, the bank acquired confidence and trust of the public and business houses by rendering high quality services in different areas banking operations, professional competence and employment of the state of art technology. Now ABBL has started operation for SME financing which has created attraction among the clients
2.2 Organization at a Glance
| Name of the organization | AB Bank Limited |
| Form of organization | Public limited company |
| Nature of business | Private commercial bank |
| Date of incorporation | December 31, 1981 |
| Commencement of business | February 27, 1982 |
| Number of branches | 71 |
| Total assets | Tk. 47,989,337,222 |
| Total liability | Tk. 45,406,574,310 |
| Total shareholder’s equity | Tk. 2,582,762,912 |
| Net profit after taxation | Tk. 532,186,349 |
| Earning per share | Tk. 93.08 |
| Chairman | M. Wahidul Haque |
| President and Managing Director | Kaiser A. Chowdhury |
| Registered office | BCIC Bhaban, 30-31, Dilkusha C/ADhaka 1000, Bangladesh.
Tel: +88-02-9560312 Fax: +88-02-9564122, 23 |
| SWIFT | ABBLBDDH |
| E-mail and Web | E-mail: info@abbank.com.bdWeb: www.abbank.com.bd |
| Technology used | Mysis |
2.3 Vision:
“To be the trendsetter for innovative banking with excellence & perfection”
2.4 Mission:
“To be the best performing bank in the country”
2.5 Organization Goals:
- To employ funds for profitable purposes in various fields with special emphasis on small-scale industries.
- To undertake project promotion to identify profitable areas investment. To search for newer avenues for investment and develop new products to suit such needs.
- To establish linkage with other institutions which are engaged in financing micro enterprises.
- To attained budgetary targets fixed in each area of business. Keeping ahead of other competitors in productivity and profitability.
To exceed customer expectations through innovative financial products and services and establish a strong presence to recognize shareholders’ expectations and optimize their rewards through dedicated work force.
2.6 Functions of AB Bank:
The objectives are:
a) To mobilized resources form within the country for suitable and profitable investment.
b) To create new entrepreneur in the field of trade, commerce and industry by creating their financial need and providing guidance and advice towards right direction of investment.
c) To help formation of capital, broaden the investment base and develop the capital market.
d) To contribute in the field of industrialization of the country and growth of National Economy.
e) To establish, maintain, carry on, transact, undertake and conduct all types of banking, financial all investment and trust business in Bangladesh and abroad.
f) To contract or negotiate all kinds of loan, private or public, from any sources, local or foreign, and take all such steps as may be required to complete such deal
2.7 Business Activities of AB Bank:
2.7.1 Retail Banking:
Consumer credit is a concept, which has conceived in the minds of many a banker and has been through about to bring the unexplored area of the consumers who belong to the middle class to enjoy the benefits of Banking finance. The group consists of the people who are employed individuals, self-employed persons and even businessmen. The AB Bank arranges credit facilities for these individuals who have a limited income and helps them to buy a car or any electric items, like- TV, fridge, etc. or spend for house renovation or expenses for marriages and enjoy a minimum comfortable living standard
2.7.2 Corporate Banking:
At AB Bank we provide complete range of solutions to meet Corporate Customers’ requirement. Our Corporate Banking solutions include a broad spectrum of products and services backed by proven, modern technologies. Corporate Lending
Our specialist teams offer a comprehensive service providing finance to large and medium-sized businesses based in Bangladesh. For more information as to how we might best meet your corporate debt needs, please contact us at our Corporate Head Office.
Structured Finance we have a specialist Structured Finance Team who arrange and underwrite finance solutions including Debt and Equity Syndication for financial sponsors, management teams and corporate. Also we provide corporate advisory services. We aim to provide tailored financing solutions with a dedicated team who can rapidly respond to client needs.
Following are some of the products and financial tools of Corporate Banking:
- Project Finance
- Working Capital Finance
- Trade Finance
- Cash Management
- Syndicated Finance, both onshore & off-shore
- Equity Finance, both onshore & off-shore
- Corporate Advisory Services
Large Loan and Project finance
In order to cater the demand of client AB Bank has segmented its portfolio in terms of loan size. As per this segmentation any loan over Tk. 10.00 Crore falls under the purview of Large Loan Unit.
In AB Bank, there is also a separate Project Finance unit who evaluate the business. The unit is entrusted to handle the portfolio in a focused manner. AB Bank is always in fore front to support establishment of new projects of diverse nature which will help to broaden the manufacturing arena vis-à-vis to generate to employment.
2.7.3 Merchant Banking Wing (MBW):
Bankers to the Issue AB Bank Limited are the first Private Sector Joint Venture Bank in Bangladesh, which is now fully owned by the Bangladeshis. Since our inception in 1982, the banks have been participating in different industrial and national development activities in addition to normal Trade Finance and SME development. In addition to the 70 Branches within the country ABBL has a branch in Mumbai, India. Beside that the banks have a wholly owned Finance Company in Hong Kong in the name and style of “AB International Finance Limited” and representative offices London and Yangon.
To expand its horizon, ABBL launched its Merchant Banking operations in the year 2003. As a full fledged merchant banker, the bank provides the following services:
Portfolio Management
Issue Management
Underwriting
Corporate Advisory
Bankers of the Issue
Private Placement
The Merchant Banking Wing (MBW) of ABBL has made notable progress and is presently equipped to serve customers’ needs by offering a comprehensive range of financial solutions
2.8 Organizations Structure:
2.8.1 Organ gram:
2.8.2 NERB Organ Gram:
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S.P. Officer
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S. P. Officer
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P. Officer
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S. Officer
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P. Officer
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S. P. Officer
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(CCS)
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Officer
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Officer
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Officer
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P. Officer
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Trainee
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Officer
2.8.4 Performance of AB Bank:
Profit:
In a highly competitive market bank has to face challenging market condition and globalization effects. So it will be difficult for the bank incase of earning profit or maintain the growth rate stable or up is very tough. Nevertheless, AB Bank Limited has been able to maintain or keep its profitability high for its quality service, innovation of product or services and proper utilization of fund and efficient implementation of policies and strategies. Net Income after tax and provision stood at Tk 53.18 crore in 2007 which was Tk 119.03 crore in 2006.
Figure 1.1: Profit [Figures in Core]
2.9 Financial Performance of NER Branch
| [Figures in lac] | ||||||||||||
| Particulars | For the year ended of | |||||||||||
| 2005 | 2006 | 2007 | 2008 | 2009 | ||||||||
| 1 | Deposit | 56.47 | 77.02 | 112.35 | 153.35 | 168.98 | ||||||
| 2 | No. of Deposit A/c. | 3079 | 2983 | 2794 | 2874 | 2592 | ||||||
| 3 | Credit / Advance | 20.91 | 68.43 | 93.34 | 132.85 | 141.52 | ||||||
| 4 | No. of LDOs A/Cs | |||||||||||
| 5 | Classified Loan Total | 2.54 | 10.85 | 1.61 | 1.19 | 9.03 | ||||||
| 6 | Recovery | |||||||||||
| 7 | Import Business (BDT) | 3.91 | 68.70 | 95.20 | 125.18 | 179.92 | ||||||
| 8 | Export Business (BDT) | – | – | 0.51 | 14.21 | 10.45 | ||||||
| 9 | Inward Remittance (FEX) | 0.05 | 0.09 | 0.08 | 0.17 | 0.26 | ||||||
| 10 | Guarantee | 3.01 | 1.65 | 3.05 | 4.00 | 12.69 | ||||||
| 11 | Total Income | 5.59 | 8.76 | 14.42 | 2084 | 23.45 | ||||||
| 12 | Total Expenditure | 4.30 | 5.32 | 10.01 | 1079.14 | 16.75 | ||||||
| 13 | Profit / Loss | 1.29 | 3.44 | 4.41 | 4.86 | 6.70 | ||||||
2.10 SWOT Analysis:
| S |
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| W |
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| O | · Automation of transaction processes and online branch banking |
- SME Banking facilities launching by bank
- Transaction facility through internet
- Government approval for new branches which was adjourned
- Introduction of new products and services
- Increasing trend in international business
T
- Increased competition for market share in the industry
- Frequent changes of banking rules by the Central Bank
- Market pressure for lowering of lending rate
- National and global political unrest
Project Part
3.1 SME Banking in ABBL:
SME Loan Products
Preamble
Small & Medium Enterprise has emerged as the cornerstone of economic development of Bangladesh in terms of job creation, income generation, development of forward & backward industrial linkage and meeting local needs. SMEs provide over 87% of the total industrial employment and contribute about 90% of the total export earnings. Thus SMEs occupy a unique position in Bangladesh.
The full potential has not yet been realized due to lack of necessary support. Besides, rapid trade liberalization & globalization, unofficial imports and non-tariff barriers in overseas markets has aggravated the situation. The constraints to the development of SMEs also include lack of access to finance, poor power supply & infrastructure, marketing, product standard, lack of sufficient export incentive etc.
Definition of SME:
SMEs are defined differently by different authorities. ‘Bangladesh Bank’ and ‘Ministry of Industries’ consider SMEs under the following criteria:
Definition of SME (Bangladesh Bank):
| Small Enterprises |
Medium Enterprises |
||||
| Total Asset | |||||
(Taka in lac)No. of Employees Total Asset*
(Taka in lac)No. of EmployeesService Concern :0.50 to 30.00Less than 30 30.00 to 100.00Less than 50 Trading Concern:0.50 to 50.00Less than 20 50.00 to 200.00Less than 50 Manufacturing Concern:0.50 to 100.00Less than 60 100.00 to 500.00Less than 100 * Note: At cost excluding land & building.
Definition of SME (Ministry of Industries):
| Small Enterprises |
Medium Enterprises |
||||
| Total Asset* | |||||
(Taka in lac)No. of Employees Total Asset*
(Taka in lac)No. of EmployeesTrading & Other Concern:Not definedUp to 24 Not defined25 to 100 Manufacturing Concern:Up to 150.00Not defined 150.00 to 1000.00Not defined * Note: At cost excluding land & building.
Definition of SME at AB Bank:
| Small Enterprises | ||||
| Turnover | Total Asset | No. of Employees | Loan Size | |
| Service/Others Concern : | Up to 500.00 lac | Up to 100.00 lac | Up to 30 | Up to 50.00 lac |
| Trading Concern: | 500.00 lac | 100.00 lac | Up to 30 | Up to 50.00 lac |
| Manufacturing Concern: | 500.00 lac | 200.00 lac | Up to 75 | Up to 50.00 lac |
| Medium Enterprises | |||||
| Turnover | Total Asset | No. of Employees | Loan Size | ||
| Service/Others Concern : | 1500.00 lac | Up to 500.00 lac | Up to 100 | Up to 500.00 lac | |
| Trading Concern: | 2500.00 lac | Up to 500.00 lac | Up to 100 | Up to 500.00 lac | |
| Manufacturing Concern: | 2000.00 lac | 1000.00 lac | Up to 500 | Up to 500.00 lac | |
Note:
Total Asset (Ministry of Finance and Bangladesh) means excluding land and building.
Total Assets (AB Bank) means Total Current Asset + Total Fixed Asset.
Total Loan will not exceed above amount as per CIB report (Other Bank’s limit shall be also consider).
If total exposure exceeds SME limit considering one obligor concept, client will be treated as Corporate.
Any MNC or Public Limited Company will be considered as Corporate Client.
Determination Criteria:
By Sales Turnover
By Exposure
By Investment
No. of Employee
In the changed scenario of increasing competition in the large loan sector and curtailment of single obligor exposure limit by the Bangladesh Bank, it has become necessary to shift dependence from large corporate to the medium and small enterprises. This is also in conformity with bank’s policy to explore potentials in the SME sector which comprises the largest chunk of the national economy.
Presently we are serving the SME clients by our regular Loan Products namely (i.) Overdraft (ii.) Specific Time Loan (iii.) Revolving Time Loan (iv.) Term Loan (v.) LC for import (vi.) Trust Receipt – Post import finance and (vii.) Guarantee.
Within the frame work of the SME sector, it has been felt that bank should have separate schemes for small & medium enterprises loan to be introduced to provide an impetus to the growth of SME Loan portfolio as tapping customers from large enterprises is limited or even non existent. Necessity of such a scheme can be substantiated by the following reasons/rationales:
Rationale:
There is a significant demand for such products in the market and to fill up a segment gap of our portfolio.
Maximize the return from each customer by cross selling the new products to existing customers.
Provide the range of lending products to meet customers’ needs so as to strengthen the banking relationship through the asset products.
Increasing & Diversification of the asset portfolio.
Empirically proven lower default rate of the small & medium size borrowers.
Increasing borrower base.
Increasing image of the bank.
3.2 The Schemes:
Substantiated by the above factors, the following loan schemes under the category of Small & Medium Enterprise (SME) are proposed to be introduced:
| Product Name | Basic Terms |
Purpose |
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| A. | Gati | A loan facility for meeting regular as well as additional requirements of businesses; i.e. it will be part of working capital of the business. | |
| Maximum Loan Amount : | Maximum Tk.50.00 lac | ||
| § Limit will be determined by the stock and/or volume of sales. | |||
§ Maximum 80% of the stock value to be financed. Interest Rate :15.00% p.a. to 17.00% p.a. Service Charge :1.00% Tenor:Maximum 3 (three) Years. Repayment :Through EMI/Lump sum (No Moratorium). Security and/or Collateral :i. Hypothecation of stock and/or receivables
ii. Registered Mortgage of land & buildings and/or Tripartite agreement for shop and/or business premises and/or any other collateral
| Product Name | Basic Terms |
Purpose |
|||
| B. | Proshar | It is long term finance for infrastructure development /capacity building etc.; i.e. Term Loan for expansion & BMRE. | |||
| Maximum Loan Amount : | Maximum 50.00 lac | ||||
| § Loan amount will be maximum 80% of the proposed additional investment/expenditure | |||||
| Interest Rate : | 15.00% p.a. to 17.00% p.a. | ||||
| Service Charge : | 1.00% | ||||
| Tenor : | Maximum 3 (three) Years. | ||||
| Repayment : | Through EMI | ||||
(Moratorium period : Maximum 6 months) Security and/or Collateral :(i.) Hypothecation of Stock and/or receivables and/or machineries and/or furniture and fixture etc.
(ii.) Registered Mortgage of land & building and/or Tripartite agreement for shop or business premises or any other Collateral. Product NameBasic Terms
Purpose
C.Digun Double amount of loan against value of the savings instrument (ABBL FDR, DDS) to meet any type of business requirement. Loan Amount :Tk.10.00 lac to Tk.50.00 lac Interest Rate :8.00% above the instrument interest rate p.a. subject to minimum Loan Interest rate of 17.00% p.a. Service Charge:1.00% Tenor:Maximum 3 (three)Years Repayment :Through EMI/Lump sum. Security and/or Collateral:(i.) Hypothecation of stock and /or receivables
(ii.) Lien of savings instrument (ABBL FDR, DDS) covering minimum 50% of loan size.
(iii.) PG of the spouse of the borrower.
(iv.) 1 (one) 3rd party guarantee Condition:Deposit Instrument will not be released before adjustment of the loan.
| Product Name | Basic Terms |
Purpose |
|
| D. | Sathi | Term loan for CNG Refueling conversion/Light Engineering/project finance (Package Deal including Non-funded) | |
| Loan Amount : | Maximum Tk.500.00 lac | ||
| · Loan Amount will be maximum 90% of the value of the imported and/or locally procured machineries. | |||
| Interest Rate : | 15.00% p.a. to 17.00% p.a. | ||
| Service Charge: | 1.00% | ||
| Tenor : | Maximum 3(three) Years | ||
| Moratorium Period: | Maximum 6 months | ||
| Repayment : | Through EMI | ||
| Security and/or Collateral: | (i.) Hypothecation of Machineries and/or stock and/or Receivables. |
(ii.) Registered Mortgage of Project land & building; additional land (if required)
(iii.) PG of the spouse of the proprietor / PG of the Directors.
| Product Name | Basic Terms |
Purpose |
||
| E. | Chhoto Puji | Mortgage free Term Loan for working capital/fixed investment requirement. | ||
| Loan Amount : | Up to Tk.10.00 lac | Tk.10.00 lacè Urban Br. | ||
| Tk.05.00 lacè Rural Br. | ||||
| § Limit will be determined by the stock and/or receivables or volume of sales. | ||||
§ Maximum 80% of the stock and/or stock value to be financed. Interest Rate :17.00% p.a. Service Charge :2.00% Tenor :Maximum 3 (three) Years Repayment :Through EMI Security and/or Collateral:§ Hypothecation of stocks and/or Receivables and/or Machineries/equipments etc. and/or furniture, fixtures and other moveable assets.
§ Possession rights of the shop/business premises. or
§ Assignment of advance / security deposits.(if the shop is on rental basis)
§ Personal Guarantee of the spouse and/or other able family member(s) of the borrower.
§ Third Party guarantee from a person acceptable to the Bank. Condition:§ Letter of Comfort from the local trade body/Union Parishad to be taken. (Format to be vetted by Legal Advisor)
| Product Name | Basic Terms |
Purpose |
|
| F. | Uddog | Loan for New entrepreneur/business. (For working capital as well as fixed capital investment.) | |
| Maximum Loan Amount : | Maximum Tk.50.00 lac | ||
| Interest Rate : | 15.00% p.a. to 17.00% p.a. | ||
| Service Charge: | 2.00% Maximum. | ||
| Tenor: | Maximum 3 (three) Years | ||
| Repayment : | Through EMI | ||
| Security and/or Collateral : | (i.) Hypothecation of stocks and/or receivables. | ||
(ii.) Registered Mortgage of land and building and/or any other Collateral
(iii.) PG of the spouse of the borrower and/or able family member(s).
| Product Name | Basic Terms |
Purpose |
||
| G. | Awparajita | A loan facility for meeting working capital requirement as well as fixed investment in businesses for women entrepreneurs. | ||
| Maximum Loan Amount : | Maximum Tk.50.00 lac | |||
| § Limit will be determined by the stock and/or volume of sales. | ||||
§ Loan amount will be maximum 80% of the proposed additional investment/expenditure Interest Rate :14.00% p.a. to 16.00% p.a. Service Charge :1.00% Tenor:Maximum 3 (three) Years (No Moratorium Period) Repayment :Through EMI/Lump sum. Security and/or Collateral :i. Hypothecation of stock and/or book debts
ii. Registered Mortgage of properties/ Tripartite agreement for shop or business premises.
iii. PG of the spouse of the borrower
| Special Condition for All the Above Products : | |
| Deposit Condition: | The client will build a deposit from cash flow (the amount and nature will be decided by the Relationship Manager or Relationship Executive after discussion with the client) of the business. |
| Early Settlement: | |
(Incase of EMI based loan)Winding Up fee of 1.00% to be realized on the outstanding Term Loan amount in case of settlement of the same earlier than maturity. Special Note For All the above products : Existing Client:Clients/Guarantor having mortgage of properties under existing credit facilities may suffice on case to case basis. Loan for Ltd. Company:For Credit facility favoring a Limited Companies, Personal Guarantee of all the Directors to be obtained.
3.3 Loan Approval Process:
The approval process reinforces the segregation of Relationship Management/Marketing from the approving Authority. All credit proposals will be initiated at the Branch level and will be forwarded to Head of SME. The following process flowchart will be followed for approving of SME credit facilities.
Process flowchart for SME Credit Approval
3.5 Limit Loading and Disbursement Process:
Approved credit limit will be loaded in the system by concerned credit officer of Head Office CRM. Branch will communicate with the customer to get the sanction letter as well as other charge documents signed. Branch will also collect other necessary documents from customer’s end. After completion of documentation formalities Branch CAM will forward SCC along with loan documentation checklist to Head Office CAM for activating the limit, which authorize branch to disburse fund.
Limit Loading & disbursement process
Security documents are prepared in accordance with approval terms and are legally enforceable. Standard loan facility documentation that has been reviewed by legal counsel should be used in all cases. Exceptions should be referred to legal counsel for advice based on authorization from Head of CAM.
Disbursements under loan facilities (both Funded & Non-funded) are only to be made when all security documentation are in place.
3.5 Loan Disbursement:
| 2006 | 2007 | 2008 | 2009 | 2010 | |
| SME | 28.13 | 32.28 | 56.94 | 60.50 | 61.12 |
| Large | 56.23 | 64.56 | 114.58 | 145.32 | 150.68 |
| CCS | 5.97 | 5.63 | 6.02 | 6.89 | 7.02 |
| Total | 90.33 | 102.47 | 177.54 | 212.71 | 218.82 |
Source: Credit Department, NER branch.
Loan Disbursement
3.6 Profession exposure of Customer:
3.7 Sector wise Loan Distribution:
There are three sectors in which AB Bank has participated. It’s shown below:
In this graph we can see that 70% loan disbursement in SME sector, 20% lone disbursement in manufacturing sector and only 10% SME loan disbursement in Agriculture sector.
3.8 Loan Purpose wise exposure:
Considering the volume, role and contribution of the SME in the last two decades AB Bank has been patronizing this sector by extending credit facilities of different types and tenor
The following sector in which AB Bank has participated so far:
Figure: 1.5 Purpose of SME Loan
The portfolio of loan also shows us a picture of the contribution of the bank to the economy of the country. Basically in domestic and foreign banks are quite reluctant to give loans to the agricultural sector. Most of the agro loans are provided by the nationalized banks. The largest portion of SME loans goes to Trading. The other is manufacturing.
3.9 Interest Income from SME Division:
This is one of the major sources of bank’s earnings. This also reflects the quality of loans since good loans make good earnings. Every customer thinks, if a local bank and a foreign bank offer the same rate, then he goes for the foreign bank for better services. ABBL’s policy is to keep lending rate at market level but keep the deposit interest rate low. By this way they maximize the spread and enjoy more profit.
Figure: 1.6 Incomes from SME Loan in NER branch
Loan Recovery Behavior
4.1 Analysis of Loan Recovery Behavior:
Any sound organization after one year of their starting of business can apply for this loan. It almost a rare case for AB Bank that an SME borrower will default to repay the loan he/she has taken even the loan is given without taking any collateral. 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 customer.
From the observation of 15 SME loan borrowers’ personal and repayment information we find the following results:
1. Average age of SME borrowers is 38.
2. Average education of most of the SME borrowers is Class IX or X.
3. Average Experience (As a promoter of the business) is 11 years.
6. Average personal and family assets are around TK. 150000 and TK. 240000 respectively
7. Almost all of the borrowers are 10% Agriculture, 20% manufacturing and 70% trading.
9. Average Amount of loan taken by them is around TK. 35 Lac.
10. Average time period of loan they take to repay is 1-Year.
11. Average amount of loan suppose to be paid is around 26 Lac.
We have gathered 5 variables to analyze the relationship of each variable with recovery rate. These variables are:
1. Age of the borrowers
2. Experience of the borrowers related to their business.
3. Amount of loan taken by the borrowers.
4. Personal Asset of the borrowers
5. Nature of business
We can analyze the relationship sequentially:
4.2 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 | Recovery rate (%) |
| 21-25 | 79% |
| 26-30 | 96% |
| 31-35 | 100% |
| 36-40 | 98% |
| 41-45 | 94% |
| 46-50 | 95% |
| 50+ | 100% |
From the above chart we can 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 can’t make the proper use of funds. And that’s why their business fails. At the age of 31-35 recovery 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.
4.3 Relationship of recovery rate with experience of the borrowers:
| Experience(year) | Recovery rate(%) |
| 1 to 5 | 81% |
| 6 to 10 | 98% |
| 11 to 15 | 91% |
| 16-20 | 100% |
| 20 above | 99% |
Figure in Lac
From the above graph we 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 AB Bank is always concerned about the related experience of the entrepreneur. And here also we see that recovery rate is lowest at the experience of 1 to 5 years.
4.4 Relationship of Recovery rate with personal asset:
| Personal asset | Recovery rate(%) |
| 100000-500000 | 94% |
| 500001-1000000 | 98% |
| 1000001-1500000 | 99% |
| 1500001-2000000 | 100% |
| 2000000 above | 97% |
Entrepreneurs who have sufficient personal assets and mortgage them for taking the loan have the record of higher recovery rate. They don’t have the tendency to make a default in paying the installments. AB Bank likes to pay SME loans after collecting title deeds of those personal or family assets. People who don’t 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%.
4.5 Relationship of Recovery Rate with nature of Business:
| Nature of business | Recovery rate(%) |
| Agriculture | 82% |
| Trading | 83% |
| Manufacturing | 93% |
From the above chart we see that entrepreneurs having Agro base business have a less recovery rate, this may happen because of having Bird flue and other difficulties. On the other hand, Import base trading rises default rate because of their dollar fluctuation has increased. So, on this sector recovery rate falls. On the other hand Manufact