Prospective product for Bangladesh Shilpa Bank
Previous & Current Trends In Investment And Bsb
While Industrial Development Banks like Bangladesh Shilpa Bank (BSB) and Bangladesh Shilpa Rin Sangstha (BSRS) are typically industrial finance institutions, other commercial banks of the country are also involved in industrial financing in addition to commercial lending. This is a comparatively recent trend. Prior to independence, commercial banks used to shy away from industrial finance because these are of long-term nature. Commercial banks obtain short-term deposits, facilitating short term finance. This concept prompted Development Banks to provide long term loan to industrial units for developing infrastructure and procuring machinaries. Commercial banks used to provide short-term ‘working capital’ to the same industrial units, without syndicating with development bank. Such segmented and non-syndicated finance created problems. Industries used to suffer from short of finance due to non-co-ordination of banks and also face the consequence of differing views of financiers and dual supervision (or no supervision-one bank thinking that the other one is keeping watch!). For the last one decade or so, this problem has been solved as some commercial banks eyed on industrial long term finance with prudence. By intelligently allocating funds for long term finance, mismatch of funds has been taken care of. Initially, commercially banks lacked the expertise of appraisal of long-term loans. Now, quite a few commercial banks excell in such appraisal, facilitating their capturing a good share of industrial finance in the market.
Co-operation is for sharing risk while dealing with high risk and competition is for sharing profit instead of keeping away from profit. Syndication is for mutual benefit of entrepreneurs as well as banks. Without syndication, entrepreneurs could not venture for long-term large investments. During the last 4/5 years, Bangladeshi commercial banks have been able to approve and operate about a dozen syndicated term loans, each exceeding Tk 100 crore. Syndication has widened the horizon of financing large industrial, commercial and even service sectors. Concentration of investment is high in the textile and garment sectors. During the last couple of years, banks invested mentionable funds in the health sector. Gradually, we are witnessing wide diversification of investment portfolio in our banks.
PERFORMANCE OF BSB
Primarily a bank’s consideration in the development of an investment product is the high probability with low risk of generating surplus in the investment process. This is the rationale of banks’ all investment services. Products or services may, however, be categorized according to area of investment, nature of production or even size of investment. Banks dealing with development of special areas with generally long-term finance are known as development banks. Bangladesh Shilpa Bank (BSB) is a development banks in the fields of industrialization of Bangladesh.
Term loans provided by the financial system in Bangladesh amount to only about US$250-300 million per year, equivalent to about 1.5 percent of GDP, while private and public investment amounts to about 16 percent of GDP. A major constraint to the provision of term loans is the lack of a well developed long-term savings market. NCBs fund their term loans mainly with their deposits creating a maturity mismatch. Also, as a public development finance institutions – Bangladesh Shilpa Bank (BSB) which have reduced their lending to insignificant levels since the 1990s depend fully on Government and Multilateral Funds for their operations, which the latter are no longer providing.
For unsatisfactory Intermediation of Bangladesh Shilpa Bank as a Development Financing Institution (DFI) Performance of its highly unsatisfactory given that:
(i) about 80 percent of the loan portfolio of BSB is non- performing,
(ii) collection ratios are very low, and
(iii) it depend fully on government funds for financing new projects as most donors have ceased to provide any credit lines and it have failed to mobilize alternative resources, domestically and overseas.
After 1975, the principal donors to Bangladesh promoted the idea of curbing the public sector and channeling resources to the private sector. Sizeable lines of credit were extended to the private sector through the two industrial DFIs, the Bangladesh Shilpa Bank (BSB) and the Bangladesh Shilpa Rin Sanstha. Donor lending accelerated in the late 1970s, and the DFIs began to channel credits rather indiscriminately, without careful scrutiny of borrowers’ entrepreneurial experience, collateral position, or the market worth of the projects. To obtain new credit lines, the DFIs speed disbursements to the point where loan portfolios became seriously compromised. Apparently, the donors did not conduct in-depth evaluations of DFI performance during this period (Sobhan, 1991).
BSB’s ratio of loan recovery to total due credit declined from 7.6 percent in 1992-93 to 2 percent in 1997-98, while the ratio of overdue to outstanding credit increased from nearly 52 percent in 1992-93 to almost 62 percent in 1997-98.
The Government of Bangladesh several times attempted to address the loan default problems of Bangladesh Shilpa Bank (BSB) to foreclose on the assets of defaulting enterprises without court process. However, this measure also became ineffective potential bidders were prevented by the debtors from even inspecting the properties. A situation of lawlessness, when law enforcing agencies fail to maintain ruling of liaison between the debtors and the powerful politicians, can only explain ineffectiveness of government directives.
Loan recovery is a crucial index to measure the success of a lending organization. Like previous years, this year too like previous year, the Bank has strengthened its recovery drive for realizing loans and dues from its borrowers and significant success was achieved.
Total recovery target of loans during FY 2005-06 was Tk 1200 million against which actual cash recovery was Tk 1158.85 million constituting 97 per cent of the target.
WHY BSB CHOOSE SYNDICATED LOAN PRODUCT
Bi-lateral lending is however rarely profitable as stand-alone business for financial institutions yet borrowers are demonstrating their need for this product in increasing numbers. How can these irreconcilable themes be reconciled? Using the syndicated loan market and its associated derivatives, lending institutions have managed to make headway in increasing their returns whilst still offering borrowers some of the finest terms and conditions ever seen. The availability, speed of reaction and flexibility of the syndicated loan market will ensure that it continues to be one of the primary sources for issuers looking to gain access to the capital markets.
Proper Syndication Loan Procedure examines the needs of both borrowers and lenders involved in the design, origination, arrangement, distribution and management of syndicated loans and link the process of executing a successful deal to the optimal design of a syndication unit. For the following reason Bangladesh Shilpa Bank can go syndicated loan market.
ð The entry of institutional investors into the corporate loan market has helped improve the transparency and liquidity of the secondary loan market, at the expense of increased overall loan borrowing costs. As the corporate loan market is gradually evolving from a relationship-driven, private credit market with only informed lenders to a price-driven, hybrid capital market involving both informed and less informed lenders, corporate borrowers now have to pay a higher interest rate to raise their required funds. While this may be seen as a downside to the structural changes occurring in the loan market, such changes make the loan market more capable of accommodating relatively riskier borrowers (highly leveraged loans) while exposing commercial banks to a wider business range.
ð As the large investment is increasing day to day, borrower needs fund without minimum transaction hassle with minimum funding cost. Government also restricted the funding limit of the financial institutions. In this situation loan syndication seems a better solution for both the borrower and loan provider. Bangladesh Shilpa Bank has lots of possible role and opportunity to take this market actively.
ð Most important issue is the risk associated with big projects. These types of risks can be minimized by evaluating properly and monitoring regularly the projects and with the borrowers. Loan syndication made it easy to gather experts and share their views regarding the projects with minimum cost. It enables funding with market rate of term loan. And along with the economic move, the demand for large project financing will raise. BSB human can contribute their expertise in this process.
ð Most prospective and large investment sectors in Bangladesh are Power, Telecom, Textile Industries, Steel Mills, Cement, Sugar Mills, Private Container Terminal, Gas Evaporation Project, Infrastructure Development Projects, School & Hospital through foreign joint venture, Information & Communication Technology etc. These type of projects require large fund. This large fund can only be arranged by syndication of financial institutions and specialized investment bank. So BSB can grab this opportunity to reduce its risk factor related with lending to borrower.
ð After phasing out of Multi Fiber Agreement (MFA) our country is realizing more intensely the importance of backward linkage industry to support and sustain our garments sector in the face of emerging harsh competition because through this phase out garments industry will loose their protected market to other competitors of the region. Garments sector contributes 36% of the total export-earnings of the country. For establishment of backward linkage industry a bulk investment of 2000 crore is required which is the context of Bangladesh is not feasible to attain only at the private initiative. Without Government direct patronization it is not possible to expedite the process of expansion of backward linkage industries and in this respect the importance of Foreign Direct Investment cannot be over emphasized.
ð Investment banks are relatively new entrants into the commercial lending business and lend to less profitable, more leveraged firms than do commercial banks. Investment banks extend longer-term loans than do commercial banks and are less likely to provide loan-commitment contracts. These results support the view that investment banks are more focused on transactions than on relationship lending. Investment banks establish higher spreads on loans, other things equal, than do commercial banks, but this premium declines significantly if a commercial bank joins the investment bank as a co-arranger.
ð The presence of a dual market maker is found to increase liquidity in the secondary market for syndicated bank loans. That is, the bid-ask spread in the syndicated bank loan market is narrower when the lead arranger can use the equity market information it obtains as an equity market maker to trade in the syndicated bank loan market. Thus, the information obtained in the equity market can be used to generate trading opportunities in the loan market and vice versa. We therefore find support for a liquidity enhancement effect in both the equity and syndicated bank loan market in the presence of dual market makers.
ATTITUDES OF BSB TOWARDS SYNDICATED LOAN
Recently BSB want to enter in the syndicated loan market. Now BSB, eight to ten syndicated loan projects are processing or in the pipe line to approval. It is goods news for our economy that as a development financial institution Bangladesh Shilpa Bank enters in the syndicated loan market which will enhances or creates more flow in the economy for proper industrialization by sound project financing process.