Comparative Analysis Of SME Financing In Bangladesh

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1.1:  Historical Background of BASIC Bank Limited
 
The BASIC Bank Limited (Bangladesh Small Industries and Commerce Bank Limited) establishes as a banking company under the companies Act 1913 launched its operation in 1989. It was incorporated under the Act on the 2^nd of August, 1988.The Bank started its operation from the 21^st of January, 1989 .It is governed by the Banking Companies Act 1913.The Bank was established as the policy makers of the country felt the urgency for a bank in the private sector for financing Small Scale Industries (SSIs). At the outset, the Bank started as a joint venture enterprise of the BCC Foundation with 70 percent shares and the Government of Bangladesh (GOB) with the remaining 30 percent shares. The BCCI, the Government of Bangladesh took over 100 percent ownership of BASIC on 4^th June 1992.Thus there is state-owned. However, the Bank is not nationalized; it operates like a private bank as before. Basic Bank is unique in its objectives. It is blend of development and commercial banks. The Memorandum and Articles of Association of the Bank stipulate that 50 percent of loan able funds shall be invested in small and cottage industries sector. Coping with the competitive and rapidly changing financial market of the country, BASIC Bank Limited maintains close connection with its clients, the regulatory, the shareholders (Government of Bangladesh), other banks and financial institutions.
 
1.2: A Bird’s Eye View
                                                                                                                                                               Year 2009 was a fairly stable year for the Bank in the face of severe competition in the Banking industries and changing govt. and national economic scenario. Though the operating profit is little bit less than previous year, the Board of Directors were satisfied with the overall performance of the Bank, particularly for maintaining quality of assets and improving stability and capital position.
 
 

• Offer term loans to small scale enterprise.
• Engaged in full-fledged commercial banking service.
• Finances in micro credit program for the poor for generation of employment and income through linkage with Non-Government Organizations. Presently bank has a linkage with 22 numbers of Non-Government Organization.

• BASIC Bank Limited dedicated their service to the nation through active financial participation in all segments of economy, small industries, trade, commerce and service sector etc.
• The Banks main manifest to progress as an institution par excellence to customer satisfaction.
• Govt. Banking has change rapidly and BSIC as worked hard to adapt to these changes.
• To pay a vital role in human development and employment generation.
• To undertake project promotion to identify profitable areas of investment.
• To search for newer avenues for investment and develop new products to suit such needs.
• To establish linkage with other institution which are engaged in financing micro enterprise?
• BASIC keeping pace with the changing environment.
• To corporate and collaborate with institutions entrusted with the responsibility of promoting and aiding SSI sector.
• Deep commitment to the society and growth of national economy.

• Steady and sustainable growth.
• Investment in a cautious way.
• Adoption of new banking technology.
• To employ funds for profitable   purposes in various fields with special emphasis on small scale industries.
• To undertake project promotion on identify profitable areas of 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 cooperate and collaborate with institutions entrusted with the responsibility of promoting and aiding SSI sector.

1.7: Organizational Structure
To achieve its organizational goals, the Bank conducts its operations in accordance with the major policy guidelines laid down by the Board of Directors, the highest policy making body. The management looks after the day-to-day operation of the Bank.
Board of Directors
As stated earlier the government holds 100 percent ownership of the Bank. The Government of Bangladesh appoints all the Directors of the Board. The former Member of Parliament is the Chairman of the Bank. Other Directors of the Bank are high Government and central Bank executives.
The Managing Director is an ex-officio member of the Board of Directors. There are at present 10 Directors including the Managing Director.
 
Management 
The Managing Director is the head of management. The two General Managers and Departmental Heads in the Head office assist him. BASIC is different in respect hierarchical structure from other banks in that it is much more vertically integrated as far as reporting to the Chief executive is concerned. The Branch In-Charge of the Bank report direct to the Managing Director and, for functional purposes, to the Heads of Departments. Consequently, quick decision making in disposal of assess is ensured.

Figure: Organizational Structure
 
1.8: Resource & Capabilities
BASIC Bank Limited  is well prepared to and capable  of meeting the demand for a broad range of banking services. It has got adequate resources, both human and physical, to provide the customers with the best possible services.
 
Physical & Technical Resources
A great deal of investment for developing the physical resource base of the Bank has been made. The Bank  has its presence in all the major industrial and commercial hubs of Bangladesh in order to cater to the needs of industry and trade. At present, there are twenty-seven conveniently located branches throughout Bangladesh. There are ten branches in the capital city of Dhaka, six in Chittagong and one each in  Narayanganj, Narsingdi, Rajshahi, Saidpur, Bogra, Khulna, Jessore, Sylhet, Moulvibazar, Comilla, Barisal and Sirajganj
.
Human Resources
BASIC has a well-diversified pool of human resource, which is composed of personnel with high academic background. Also, there is a positive demographic characteristic. Most employees are comparatively young in age yet mature in experience. As at end 2008 the total employee strength was 735. The Bank follows a strict   recruitment policy in order to ensure that only the best people are recruited. The Bank, so far, has recruited four batches of entry-level management staff, all of  whom have got excellent academic background.
 

1. Training: Intensive training program, on a regular basis, is being imparted to employees of both management and non-management levels to meet the challenges in the banking industry and to help employees to adapt the changes and new working conditions. Human resource is the main driving force and quality human resources are the key sources for the success of today's banking business. Keeping this view in mind and recognizing the importance of training for professional excellence BASIC Bank Ltd. has established its own training institute in 2005 with modern facilities. During the year 2008, a total of 602 employees of the Bank were provided with training in various fields. Out of them 11 employees participated in training courses held abroad. In 2007 total 122 employees of various stages were given promotion which is almost 17.00 percent of total employees of the bank.

1. Recruitment of new officers: The Bank follows a strict recruitment policy in order to ensure that only the best people are recruited. The Bank, so far, has recruited four batches of entry-level management staff, all of whom have excellent academic background. BASIC Bank Limited is unique in its objectives. It is a blend of development and commercial banks. The Memorandum and Articles of Association of the Bank stipulate that 50 percent of loan able funds shall be invested in small and cottage industries sector.

1. Mobilization of fund:  The main sources of fund for the bank are:
2.  

1. Deposit: Deposit is the mainstay of the Bank's sources of funds. Following usual

• Govt. banking has changed rapidly and BASIC as worked hard to adapt to these changes.
• The bank’s main manifest during force for the banks progress as an institution par excellence to customer satisfaction.
• Fully computerized accounts maintenance.
• Well decorated and air conditioned facilities.
• To pay a vital role in human development and employment generation.
• A fully operational computer network which is currently being implemented .The work of Local Area Network (LAN) and Wide Area Network (WAN) installation having reliable and secured communication between the branches and the Head Office is in progress to facilitate Any Branch Banking and ATM Services.
• Money counting & Money checking machine making cash transactions easy, security and prompt.
• The bank look forward with excitement and a commitment to bring greater benefits to customers.
• Eighteen out of twenty seven branches are authorized dealers of foreign exchange. This facilities speedy disposal of transaction of export and import trades.
• A group of professional bankers to render personalized services.
• BASIC dedicated their service to the nation through active financial participation in all segments of economy, small Industries, trade, commerce and service sector etc.
• BASIC keeping pace with the changing environment.
• Deep commitment to the society and the growth of national economy.

 

 
At the end of the year 2009, total assets of the Bank stood at Taka 45,308.31 million against Taka 46,651.53 million in previous year registering a decrease by 2.87%. This decrease of assets caused for withdrawal of deposit of BTRC Taka 3,897.24 million over the year. The deposit of BTRC reduced to Taka 2,121.54 million at the end of 2009 from Taka 6,018.78 million at the end of previous year.
 

 
As expected, loans and advances comprised the largest share in the assets portfolio of the Bank constituting 64.03%. Investment and Balances with other banks and financial institutions were the second and the third largest constituents being 13.87% and 12.92% of the assets portfolio respectively. Money at call and short notice were 0.39% of total assets. Times to time the rate of liabilities are increases. But now the rate exists in a downward mode. The bank started its journey with paid-up capital of Taka 80.00 million in 1989 and the same had increased to Taka 1,455.30 million in 2009. The bank has decided to issue 7 bonus shares for every 20 shares and the paid-up capital of the bank would thus be raised to Taka 1,964.65 million if the proposed bonus share is approved. Due to Bangladesh Bank restriction no cash dividend has been proposed this year. However, the bank has so far paid cash dividend of Taka 537.99 million to the government.
                                                                                                
Cash Flow Statement
Cash flow statement, also known as statement of cash flows or funds flow statement, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. Essentially, the cash flow statement is concerned with the flow of cash in and cash out of the business. The statement captures both the current operating results and the accompanying changes in the balance sheet. As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills.
 

• Debt Equity Ratio
• Interest coverage ratio

 
 
 
 
 
 

Interest Coverage Ratio
 
 A ratio used to determine how easily a company can pay interest on outstanding debt. The interest coverage ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) of one period by the company's interest expenses of the same period.
 
Interest Coverage Ratio = Income before interest & taxes/ Interest expenses
 

			Bank's loans and advances comprised of industrial loans, micro credit, commercial loans and bills portfolio increased by Taka 29261.53 million in 2009 compared to Taka 27269.13 million in 2008.

 

Fig : classified loan to total loan trend of BASIC Bank
 
 
Deposit
Deposit constitutes the core of BASIC Bank’s fund mobilization. Total deposit of the Bank at the end of 2009 stood at Taka 34,501.70 million (75.50% of Total liabilities) compared to Taka 38,368.23 million (82.24% of Total liabilities) in 2008. Total amount of deposit declined by 10.07%. The decline of deposit was mainly due to withdrawal of deposit of BTRC. The deposit of BRTC at the end of 2009 was Taka 2,121.54 million which was Taka 6,018.78 million at the end of 2008 registering a decline of Taka 3,897.24 million. During 2009, the fixed term deposit was Taka 30,489.73 million against Taka 34,539.71 million in 2008. Savings bank deposit increased to Taka 1165.84 million in 2009 compared to Taka 955.51 million in 2008. Deposit in current and other accounts including bills payable was Taka 8,846.12 million compared to Taka 2,873.01 million in 2008.
 

			From the above graph we see that the Bank consolidate its deposits day by day in a increasing fashion. So, we can say that it is financially a strong Bank.

1. Pillar-I: Minimum Capital Requirement: Bank shall maintain minimum capital against potential risks (Credit Risks, Market Risks, and Operational Risks) which will be at least 10% of total risk weighted assets. At present all banks operating in Bangladesh is instructed to follow Standardized approach for Credit Risk and Market Risk and Basic Indicator Approach for Operating Risk. Capital Adequacy Assessment and Maintenance shall be submitted to Bangladesh Bank on Quarterly basis.

1. Pillar-II: Supervisory Review: The banks shall have a process for assessing overall capital adequacy in relation to their risk profile and a strategy for maintaining their capital at an adequate level. Adequate capital shall be more than or equal to 10% of risk

1. Pillar-III: Market Discipline: Purpose of Market discipline is to establish more transparent and disciplined financial market so that stakeholders can assess the position of a bank regarding holding of assets and to identify the risks relating to that assets and capital adequacy to meet the probable loss of assets. Banks shall develop an approved market disclosure policy and publish the same at least once in a year along with annual financial statements and also through website.

• A service concern with total assets at cost excluding land and building from Tk. 50,000 to Tk. 50 lac and number of employees less than 25 persons,
• A trading concern with total assets at cost excluding land and building from Tk. 50,000 to Tk .50 lac and number of employee at 25, or
• A manufacturing concern with total assets at cost excluding land and building from Tk. 50,000 to Tk. 1.5 crore and number of employees less than 50 persons.

• A service concern with total assets at cost excluding land and building from Tk. 50 lac to Tk. 10 crore and number of employees less than 50,
• A trading concern with total asset excluding land and building worth Tk. 50 lac to Tk. 10 crore and number of employees less than 50, or
• A manufacturing concern with total asset excluding land and building worth Tk. 1.5 crore to Tk. 20 crore and number of employees less than 150 persons (Chowdhury, S.K.S, 2007).

• have begun spontaneously from just one idea or new product and may continue to be an incubator for innovative ideas and products
• have an owner/manager with little formal business experience or few generic business skills
• have begun because the founder/owner has a particular technical expertise
• comprise the founder/owner and up to four employees (often with an unpaid family member providing administrative support)
• have the owner as the only person in a managerial position, and no board or formal governance arrangements
• operate on trust, rather than on systems and contracts
• have a tight family-like culture where the values of the owner are strongly shared by the staff and workplace practices are flexible and suited to individual employees' needs
• focus on a small range of products or services sold mainly on the local domestic market
• have all personal assets, including the owner's home, committed as security for the business
• acknowledge the owner's time as one of its scarcest and most valuable assets
• operate flexibly, on a "reasonable person" basis, rather than on an informed and strict observance of regulations
• have a vision and outlook that is bounded by the horizons, skills and experience of the founder/owner, the pressures of day-to-day management and tight resource constraints (i.e. a tactical rather than a strategic approach)
• Endeavour to operate independently of other businesses and institutions and to favour self-help over seeking advice
• not be aware of the regulations to which it is expected to adhere
• in provincial areas, be a key part of the social fabric of the community

• SMEs enhance competition and entrepreneurship, and hence have external benefits on economy-wide efficiency, innovation and aggregate productivity growth. Thus direct government support of SMEs will help countries exploit the social benefits from greater competition and entrepreneurship.

• SMEs are generally more productive than large firms, but financial market and other institutional failures impede SME development. Thus, pending financial and institutional improvements, direct government financial support to SMEs can boost economic growth and development.

• SME expansion boosts employment more than large firm growth because SMEs are more labour intensive. From this perspective, subsidizing SMEs may represent a poverty alleviation tool.

• Accelerate the pace of SME development in accordance with its growth potential in the APEC region;
• Maximize SMEs’ efficiency along the region’s key economic sectors – primary, industrial, trade and services; and
• Achieve socio-economic goals through micro, small and medium sized enterprises (MSMEs) as a source of growth and employment especially in the rural sector of the developing economies of APEC.

• Bangladesh has 6 Million Micro, Small & Medium Enterprises with less than 100 workers, out of which around 27000 are SMEs.

• Micro, Small & Medium Enterprises provide more than 75% of the income of the households.

• This sector contributes nearly 25% of the GDP, 40% of gross manufacturing output, 80-85% of industrial jobs & constitutes around 25% of the total labor force.

• 51% of total SME production are contributed by enterprises those employ 2 to 5 workers, 26% having only one worker & 1o% by those having 6 to 10 workers.

• Agriculture/Agricultural Security/Agro-Products/Cash Crops
• Handicrafts
• Jute Goods
• Leather & leather goods
• Pottery
• Automobiles/Vehicles
• Ceramics/Tableware/Household/Furniture
• Dairy, Meat, Cattle, Fish and Poultry Industry 
• Domestic Appliances/Home Electronics 
• Electronics/Hi-Tech
• Emerging Industries
• Energy Sector
• Engineering Sector/Steel and Metals Industry 
• Information Technology
• Minerals, Hydrocarbons and Resources
• Pharmaceutical Industry/Healthcare 
• Plastics/Rubber Industry
• Retail 
• Science and Technology/Research and Development/Innovation
• Shipbuilding/Maritime Sector
• Cottage Industries
• Telecom Sector/Internet/ WiMAX
• Textiles/Ready Made Garments/Accessories/Footwear/Sports Goods
• Tourism, Travel, Hospitality and Leisure
• Transport, Construction, Civil Engineering, Logistics, Housing and Infrastructure

• lack of modern technology
• lack of adequate investments
• irregular/inadequate supply of power
• high rate of interest on bank loans
• inadequate availability of raw materials
• absence of clear-cut government policies
• fierce competition
• lack of skilled technicians and workers
• lack of research and development facilities.

• Any precise quantitative estimate of the importance of SMEs in Bangladesh economy is  precluded by non-availability of comprehensive statistical information about these industries at the national level.
• The latest BSCIC estimates suggest that there are currently 55,916 small industries and 511,612 cottage industries excluding handlooms. Including handlooms, the number of cottage units shoots upto 600,000 units indicating numerical superabundance of the SCIs in Bangladesh. Quoting informal Planning Commission estimates, the SMDF puts the number of medium enterprises (undefined) to be around 20,000 and that of SCIs to be between 100,000 to 150,000.
• This wide variation in the BSCIC and Planning Commission estimates of the numerical, size of the SMEs might be due to at least two reasons: (a) different set of definitions of the SMEs and (b) different coverage of SME families. This strongly suggests the need for adopting and using an uniform set of definitions for SMEs by all Government agencies to help formulation of pro-active SME promotion policies. Whatever the correct magnitude, the SMEs are undoubtedly quite predominant in the industrial structure of Bangladesh comprising over 90% of all industrial units.
• This numerical predominance of the SMEs in Bangladesh industrial sector becomes visible in all available sources of statistics on them

• The various categories of SMEs are reported to contribute between 80 to 85 per cent of industrial employment and 23 per cent of total civilian employment
• The most commonly quoted figure by different sources (ADB, World Bank, Planning Commission and BIDS) relating to value added contributions of the SMEs is seen to vary between 45 to 50 per cent of the total manufacturing value added.
• the SMEs have undergone significant structural changes in terms of product composition, degree of capitalization and market perpetration in order to adjust to changes in technology, market demand and market access brought by globalization and market liberalization.

1. Within the aggregate limit of loans and advances as mentioned in (1) above, 50% of lending will be to small industry sector.
2. No term loans will be approved for the commercial sector. Exceptions will be rare and will require approval of the Head Office Credit Committee.
3. All lending will be adequately secured with acceptable security and margin requirements as lay down by the Head Office Credit Committee.
4. The Bank will not incur any uncovered foreign exchange risk (currency exposure) in the lending of funds.
5. The Bank will not incur any risk of exposure in respect of unmatched rates of interest on funding of loans and advances beyond 15% of outstanding loans and advances.
6. End- use of working capital facilities will be closely monitored to ensure that the funds are used for the purpose for which they were advanced.

1. The aggregate outstanding loans and advances (excluding loans and advances covered by specific counter- finance arrangements) will be dispersed according to the following guidelines (subject to item 2 above whereby 50% of lending being to small industry section):
   1. Short term commercial lending. This category includes working capital hotel and tourism.
   2. Facilities to Shipping and transport (facilities for the purchase and construction of ships / vessels and other modes of transport both by land and air).
2. Spreads over cost of funds on loans and advances and commissions and fees on other transactions should be commensurate with the rating of the borrower, quality of risk and the prevailing market conditions.
3. No credit shall be extended to a Customer Entity that exceeds in total commitment more than 10% of the Bank’s capital and free reserves.
4. Exception will require approval of the Board of Directors.

• Secured Overdraft (SOD): BASIC sanctions SOD against different securities like FDR, Sanchaypatra and Work Orders.

• Temporary Overdraft (TOD): It is given to the valued customers only. It is not that much secured. Usually it forwards without any security or sometimes exercise lien against the instrument, deposited in the bank. It is given by the branch manager discretionary power.

• Cash Credit (Hypothecation): Hypothecation is a legal transaction whereby goods are made available to the lending banker as security for a debt without transferring either the property in the goods or possession. The banker has only equitable charge on stocks, which practically means nothing. It is given against registered mortgage of land and building, hypothecation of goods and personal guarantee of directors.

• Cash Credit (Pledge): Pledge is the bailment of goods as security for payment of a debt or performance of a promise. Transfer of possession in the judicial sense. In case of pledge goods the bank acquires the possession of the goods or a right to hold goods until the repayment for credit with a special right to sell after due notice to the borrower in the event of non-repayment.

1. Interest Expense or Cost of Fund: The interest to be given to the depositor and to central banks for borrowing

• The project should be technically sound and environment-friendly.
• Technology transfer in case of borrowed know-how ought to be ensured.
• Building should be well planned and well constructed.

• Market prospect and potential for the product has to be fully assured at competitive prices.
•  Marketing channel for the product should be accessible to the entrepreneur.

• There should be reasonable debt equity ratio as determined by the Bank on individual case basis.
• Debt service coverage ratio should be at least 2.5 times at the optimum level of production.
• IRR should preferably be not less than 20 percent.

• The project should ensure benefit to the national economy and create sufficient employment opportunity and be environment friendly.

 
4.6 Selection of Borrower
Selection of borrower is a very significant part of a credit decision. The borrower should be diagnosed prudently. Degree of risk has an inverse relationship with the selection of borrower. Selection of right borrower reduces the risk of non-repayment of the loan. To the contrary, degree of risk of non-repayment increases with the selection of wrong borrower. In our country, the huge volume of non-performing loan is mainly the result of failure in selecting right borrower. So, if it is found that, line of business is prospective and profitable but the potential borrower is not right one, the proposal should not be entertained. There are some parameters for selection of a borrower. Some ‘C’s commonly expresses the parameters. And thus the criteria for selection of a borrower are popularly known as 4 C's such as:
 
       i. Character:          Market reputation, morality, family background, and promptness in                                                  repayment
       ii. Capacity:          Ability to manage the business, ability to employ the fund in the right way,                              ability to overcome unforeseen problems
      iii. Capital:            Equity strength, assets & properties
      iv. Collateral:        The easy marketability of the property given as security
      v. Condition:          Over all business condition
 
If the borrower's found satisfactory in terms of all C’s only then it is suggested to entertain the   borrower.
 
 
Figure: Flow-chart of Credit Management system of BASIC Bank Ltd
 
4.7:  Procedure of providing SME Loan
BASIC was established to provide term loan (including working capital loan) and other financial assistance (including all kinds of banking facilities) to accelerate the pace of development to small industry of Bangladesh. It is mandated in the Memorandum & Articles of Association of Bank to advance a minimum of 50% of the loan able fund to the small industry sector. As a broad policy objective in respect of small industry financing the Bank undertakes the following tasks:

• Extend financial assistance to small industries in private sector.
• Extend financial assistance to micro-enterprises and collaborate with other institutions engaged in financing and developing such enterprises.
• The financial assistance shall include short-term working capital loan, medium term and long-term capital finance to viable new SSI projects and BMRE of SSI.
• Undertake project promotion to identify profitable area of investment.
• Cooperate and collaborate with institutions entrusted with the responsibilities of promoting and aiding SSI sector.

• Primary Securities – Cash or cash equivalent that is easily liquidated or convertible into cash. Example–FDR, Sanchaypatra, DP Notes, etc.

• Secondary Securities – These securities are tangible securities that can be realized from sale proceeds or transfer of property. Example– immovable properties.

4.10: Risk Management Approach of BASIC Bank

Risk is inherent in all the core business areas of a bank. Managing risks properly is one of the main pillars of banking business. To ensure sustainable growth and performance, proper and sound risk management practice is of vital importance. As a commercial bank BASIC Bank Ltd. attaches full importance to manage the risk involved in its business. The risk management of the bank covers a wide spectrum of risk issues but the 6 (Six) core risk areas of banking are; Credit Risk, Foreign Exchange Risk, Internal Control and Compliance Risk, Money Laundering Risk, Asset Liability Management Risk and Information & Communication Technology Risk. The principal objective of risk management is to safeguard the bank's capital, financial resources, profitability and market reputation. To this effect, the bank took the following steps under the guidelines of Bangladesh Bank.
 

 
 
4.11:  Particular Covenants

1. The borrower shall complete and implement the project and operate its undertaking with due diligence and efficiency and in-conformity with sound engineering and financial practices and within the time limit prescribed.
2. The borrower shall maintain books, accounts and records adequate to identify the goods and services financed out of the proceeds of loan
3. The borrower shall enable authorized representatives of BASIC to inspect the site, works and construction included in the project, and any other properties or equipment owned by the borrower; to examine or audit any books
4. The borrower shall furnish to BASIC such information at such times in such form and such detail as BASIC shall reasonably request, concerning the expenditures of the proceeds of the loan, the progress of the project
5. The borrower shall promptly inform BASIC of any events of conditions which delay the completion of the project or which are likely to interfere with the accomplishment of the purpose of the loan or maintenance of the service thereof or which are likely to have a substantial adverse effect on the business.
6. The borrower shall appoint and keep appointed a Chartered Accountant acceptable to BASIC as its Auditor.
7. The borrower will keep proper books of accounts and will not radically change its accounting system without prior written notice to BASIC.
8. The borrower undertakes to employ technicians acceptable to BASIC to operate the project and from time to time consult such other technical advisers as may be reasonably by BASIC.
9. If during the subsistence of the loan, the borrower shall propose expansion of the project by adding to its manufacturing capacity or shall propose to manufacture items beyond the proposed range of products, it shall inform BASIC of such plans.
10. Except with the previous written consent of BASIC the borrower shall not incur, guarantee or assume any debt, or issue any loan capital, or create any mortgage or charge or other encumbrance on its properties.
11. Except as approved by BASIC, the borrower shall not export from Bangladesh the goods financed under this agreement and shall take reasonable precautions to prevent the export of such goods by others.
12. Without the previous consent of BASIC, the borrower shall not declare or distribute or appropriate any dividends or profits without first meeting installment of loans, interest, commission etc.

5.1: Portfolio of SME Loan

 

 

 
 
From the table we can see that BRAC bank has the highest investment in the SME sector  followed by Eastern Bank Limited in second position. While the Prime bank Ltd., Dhaka Bank Ltd., Mercantile Bank Ltd. and Dutch-Bangla Bank Limited are third, fourth and sixth respectively. But Basic Bank doesn’t maintain such kind of portfolio size. They are considered   bank- customer relationship for giving loan to their customers.
 
 
Table: Comparative analysis of SME loan of different bank:
 

 

 
Classified (non-performing) loans and advances was 4.83% at the end of the year under review which was 4.59% in 2008. In absolute term classified loans and advances stood at Taka 1,412.34 million in 2009 from Taka 1,251.21 million in 2008. Additional provision made in 2009 was Taka 231.70 million against classified and unclassified loans and advances and off-balance sheet exposure. Total cumulative provision made for loans and advances amounted to Taka 1,048.86 million as on December 31, 2009. During the year 2009 no loan was written off. However, an amount of Taka 0.07 million was recovered against written-off loans. Here also BRAC Bank is the market leader & pioneer because the rate of non-performing loan is also highest than others. Mercantile again showing the low performance in this side.
 
5.6: Competitive benefits of SME Loans
 

1.  In SME loan, default rate is much lower representing around 98 % recovery than corporate lending (big loans). This is because of the fact that, in SME risk is distributed among a big number of customers with small amount of loan (usually TK. 3lac -8 lac).

1.  Effective rate of return is higher due to refinance @5% from Bangladesh Bank, 1% service charge, 1% risk fund and 15% rate of interest. Interest rate still remains higher in SME as Bangladesh Bank has kept this sector out of recent interest rate cut policy. As for example, SME loan of TK. 500 crore will yield revenue of TK. 20 crore (approx) more over the same amount of corporate loans.

1. SME is advantageous for capital adequacy of the bank demonstrating lower risk weight on assets than corporate financing. (SME 75%, other than SME (unrated) 125%)

1. SME loan is most suitable in Bangladesh to create employment opportunity boosting rural economy and to increase income level of the people.

• BASIC Bank is considered as specialized bank by Bangladesh Bank, in fact it is an excellent blend of development Banking & commercial Banking.
• SME financing Policy is being updated by the Board of Directors of the Bank with any change being made by Ministry of Industry in its industrial policy. Recently , the following change is being enacted in the existing credit policy of BASIC Bank

• Any industry whose project cost excluding land and building is below Taka 150.00 lac is considered as small scale industry
• Any industry whose project cost excluding land and building is above Taka 150.00 lac and below 1000.00 lac  is considered as Medium scale industry

• The interest rate offered by BASIC is as follows-

• Industrial Term loan(SME)                    :      Interest rate is 12.50% – 13.00%
• Industrial working Capital Loan(SME)   :      Interest rate is 13.00%
• Commercial Loan (SME)                       :      Interest rate is 13.00%

• Every project has been considered as equally risky or no risk premium is being added with the prime rate. Interest rate should be adjusted viewing the risk exposure of the project.
• The Debt-equity composition should be determined after due consideration of debt servicing capacity of the project, security coverage of term loan, etc emphasizing the borrower’s involvement in capital structure, minimum debt- equity is 51:49 is practiced in this bank. This approach is effective for the protection of over invoicing or over valuation.
• The core strength of BASIC is its strong & reliable client base. Here in appraisal foremost importance is attached to the capability, earnestness, and financial conduct – past, present & expected future. KYC (Know Your Customer) is the motto of the bank.
• BASIC is practicing the concept of “Project based lending rather traditional security based lending approach”. Consequently, innovative projects gets both domestic & export market preferences.
• Total loan processing time can be reduced but policy guidelines by Bangladesh Bank require involvement of different top layers of the bank. Most of the cases, the delayed loan sanction is due to non- cooperation by the borrowers.
• Small Scale industry in our country is not structured in any way. Most of entrepreneurs don’t have any financial statement of their business. It is difficult & time consuming to assess the financial strength of the client in a robust manner.
• Documentation is being practiced carefully to avoid legal complication that may arise any facility provided by BASIC.
• Compliance culture in BASIC Bank is very good. This is another core area of BASIC that’s why the amount of default loan is significantly low.
• BASIC follows the credit risk policy guidelines as instructed by Bangladesh Bank in different circulars at different times. 
• BASIC is facing increasing growth in industrial & commercial loans. Industrial loan volume is very high as the bank contributing towards project financing. Commercial loan volume growth is steady. Micro credit is in static condition.

• BASIC should disburse their SME loans in various sector rather than only scheme.
• SME Loan sanctioning and disbursement procedure should be easy and flexible being considered the requirements of different classes of people.
• Amount of loan can be raised in proportion with the existing demand of people in SME loan, SME loan can be popular among the small trader and lower income group people
• credit Policies can be revised being considered with the increase demand of telecom, transportation, Knit and packaging and plastic industry.
• Bottlenecks or barriers should be removed by taking advanced steps in mode of disbursement, charge documents and approval process.
• Loan facility parameter should be expanded so that all the people can get loan according to their needs.
• Business Power for sanctioning loans and advances can be increased at branch level.
• In rural areas, BASIC Bank should provide the SME Loan to alginate the poverty and also increase the self relevance. It will act as a promotion policy.
• The Bank should have more conference in overseas, work shop, symposium, and seminar for more expansion of SME loan.
• More SME service center need to be added to fully take the advantage of the huge potential customer segments.
• The sectors where the bank is investing should need much concern and need a revision so that investments are not resulting in desired outcome.
• Initiating effective drive to arrest classified loan and to bring down the existing classified loan substantially to a minimum percent.

• Annual report of  BASIC in 2009.2008,2007 & 2006.
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• Annual report of  Mercantile in 2009
• Annual report of  BRAC Bank in 2009
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• Annual report of Prime bank limited, Dhaka bank limited, Eastern bank limited in 2009
• www.bangladeshbank.com
• www.google.com
• Fundamentals of Banking, S.S. Publications, A.R. Khan
• Banking Law & Practice, M.L.Tanan
• Investment & portfolio management , Frank k. Reilly & Keith C. Brown.
• Intermediate Financial Management 5^th edition, Eugene F. Brigham & Louis C. Gapenski
• Financial Statement analysis, Leopold A. Bernstein
• Prothom Alo newspaper.
• Mention Acts, Bangladesh Bank