SME Banking in Bangladesh: A Case of The CITY Bank Ltd.

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Prospect of SME Banking in Bangladesh: A Case of The CITY Bank Ltd.

1.2 Objective of the Report

The objective of the report is to study and evaluate the prospects of SME sector in Bangladesh. and also familiarize students with the real business situation, to compare them with the business theories & at last stage make a report on assign task.

1.3 Scope of the Study

I have limited the study to the following parameters:

· The total concept of SME loan

· CBL special focus on SME loan to promote small entrepreneurs all over the country

· Characteristic of SME loan as a sophisticated area of finance.

· Recent performance level of the CBL SME loans in the country.

1.4 Methodology

The study uses both primary data and secondary data. The report is divided into two parts. One is the Organization Part and the other is the Project Part. The parts are virtually separate from one another.

1.4.1 Primary Sources

For general concept development about the bank short interviews and discussion sessions were taken as primary source. More over a market survey was conducted with a specific questioner. To identify the implementation, supervision, monitoring and repayment practice- interview with the employee and extensive study of the existing file was and practical case observation was done.

1.4.2 Secondary Sources

The information for the Organization part of the report was collected from secondary sources like books, published reports and website of CBL. For gathering concept of SME loan products of CBL, the Product Program Guidelines (PPGs) were thoroughly analyzed.

1.5 Limitations

Despite my earnest efforts, there were some limitations that hindered the progress of this report.

· Bank’s policy does not permit to disclose various data and information related to Credit portfolio.

· The sample size of the survey conducted was 100 only due to time considerations. However, the diversified nature of the respondents will hopefully make up for this lacking.

· Most recent data and information were not available. Therefore the timeframe for the report had to be limited to December 2008

2.1 World Economy- An Overview

As we enter into the new millennium the process of trade liberalization and globalization have presented new challenges as well as greater opportunities. Economic boundaries of nations are being abolished and the world is gradually becoming a global village. In the financial service sector profound changes have been taking place globally. E-commerce is becoming the predominant mode of transactions. We are witnessing revolutionary changes in the fields of cost control, retail channels, range and delivery of services, accessibility and reach. These changes have already triggered off reorganization, amalgamation, and takeover of financial institution globally.

The prospect of a faster pace of monetary tightening contributed to a sharp drop in equity prices around the world. Equity markets rebounded strongly, boosted by signs of still robust growth in the US as well as announcements of mergers, share buybacks and dividend increases. Japan outperformed most other equity markets throughout this period. Upward revisions in policy rates had a surprisingly muted impact on the prices of emerging market assets. Emerging markets benefited from record inflows of foreign portfolio investment in 2008. As concerns about slowing US growth eased, emerging markets bounced back strongly from their late October lows. By late November, equity and bond prices had returned to their end-September highs and had generally reached record levels by early July, 2009. Equity markets have, however, weakened overseas thereafter mainly on account of renewed firmness in global crude oil prices. Corporate credit default swap rates and bond spreads remained more or less unchanged in October although they have widened significantly since November. While long-term interest rates rose in many markets in September and October, they retreated slightly in November, and at the end of December it was still unclear whether the recent rise in yields would prove as ephemeral as previous increases. The increase in longer-term yields mainly reflected upward revisions to interest rate expectations over the near term. Further, the potential for rising energy costs to add to inflationary pressures was a key focus of investors’ attention. The rise in implied volatility also reflected growing uncertainty about the economic outlook. During December 27-30, 2008 yields on 10-year US Treasuries fell briefly below those on two-year notes for the first time since December 2000, inverting in intra-day trading and signaling expectations that interest rates could fall in future that is generally associated with weak growth. This inversion came as analysts were finally anticipating an end to the current tightening cycle and a lower long-term risk premium than in the past. In January 2009, however, the spread has turned positive again. The US dollar appreciated by 3.5% in trade-weighted terms during 2008 and a similar trend continued in January 2009.

Of the major central banks, the US Federal Reserve has raised its policy rate by 25 basis points each on thirteen occasions from 1.0% in June 2006 to 4.25% by December 2008 while recently providing indications of nearing the end of the cycle of measured rise in the policy rate. The Bank of England has kept its rate unchanged at 4.50% since August 2008 in response to slowing domestic growth. The European Central Bank (ECB) has raised its policy rate by 25 basis points in response to rising inflationary expectations, after holding it unchanged at 2.0% since June 2006. Monetary policy has been tightened in several economies in emerging Asia, primarily in response to higher fuel prices and to the measured pace of policy tightening in the US. Bank Indonesia raised its policy rate by 50 basis points to 12.75% on December 6, 2008 which was the tenth successive increase during the year. In Thailand, the 14-day repurchase rate was increased for the seventh time since January 2008 from 2.00% to 4.25% on January 18, 2009. Monetary authorities in Singapore and Hong Kong raised their policy rates by 187 basis points and 200 basis points, respectively, during the year up to December. In Malaysia, the policy rate was hiked to 3.0% in end-November, 2008. In emerging market economies in general, the direction of policy change has been towards either tightening or withdrawal of the accommodative stance.

Economic growth in developing Asia and the Pacific surprised on the upside in 2008. In September last year, the Asian Development Outlook (ADO) 2008 Update forecast aggregate regional growth of 6.6%. The ADO 2006’s estimate of growth is now 7.4%, well above the average rate of growth in the region since 2000. If purchasing power parity weights, rather than weights based on market exchange rates, are used to aggregate over countries, regional growth in 2005 is estimated to have been even faster, at 8.0%. With the release of revised gross domestic product estimates for 2004 in a number of countries, growth in 2004 has now been raised to 7.8%, from 7.4% in the ADO 2005 Update.

On the basis of a broadly favorable outlook for the international economy, the continuing trend toward improved economic management and performance, and apparent resilience to high oil prices, the ADO 2008 revises up its aggregate growth projection for 2008, and, to a lesser extent, for 2009. Aggregate regional growth of 7.2% is now expected in 2008, easing to 7.0% in 2009. But risks remain, and could yet unsettle a generally positive outlook. These risks include the possibility of a disorderly unraveling of global payments imbalances (which are still widening), heightened protectionist trade pressures, yet higher oil prices, and the possibility of an antigen shift of the avian flu virus into the human population.

2.2 Bangladesh Economy-An over view

The improved political environment in the country, after a delayed period of civil disobedience brought a much-awaited economic stability during the financial year (FY) 2005-2008.

The macro economic development during the year was marked by a healthy GDP growth and moderate inflation. For the second year running bumper rice harvest maintained growth at above 5% and GDP growth during the FY 2007 was at 5.52%. On the other hand, the growth performance in industry was slow with manufacturing growth 3.3% being one of the lowest rates in the recent years. Several unfavorable factors contributed to this situation which included disturbance in the supply of natural gas which in the turn affected the power supply and production activities. Furthermore, labor disputes during the second quarter of the year badly affected the operation of Chittagong port. In the services sector, growth in transportation, storage and communication contributed to about 13% to the total GDP but growth in trade sector was slow due to lower import growth.

During the year some positive initiative were taken in the banking sector with improvements in the legal and regulatory environment to improve loan recovery but unfortunately the high quantum of non performing assets and under capitalization continued to plague the entire banking sector thus causing a major threat to the macro economic stability. The size of classified loans increased significantly which contributed to lower profitability of the banks.

Reserve of gross foreign exchangeof the BB stood lower at US$3033.88 million at the end of March, 2008 compared to US$3179.41 million at the end of February. This was, however, higher than US$ 2653.50 million at the end of March, 2008. The pressure on foreign exchange reserve continues due to low aid disbursement and sizeable private capital outflow, which amounted to around US$ 120 million. The official exchange rate was devaluated by 4.6% in seven steps in FY 2007 and in two steps during July-August 07 thus raising the cumulative rate of devaluation to 6.7%. The external account declined from over 5% of GDP to less than 3% ( US$ 0.9 million) in FY 06 which was mainly a result of healthy export growth (14%) and a significant increase in remittances from abroad, which in turn was due to stable political environment and a higher rate of contraction in import of food grains and capital goods.

Investment rate in FY 07 showed some increase and the declining trend in private savings was substantially reserved. The national savings rate increased from 11.9% of GDP in FY 05 to 14.6% in FY 07. This was partly due to increased inward remittances, increase in nominal interest rates and lower rate of inflation.

Some key indicators of the economy of Bangladesh are given follows:

· Total revenue collection : The government of Bangladesh collect total revenue during July-March,2007-08 increased by Tk.2351.08 cror or 11.72 % to Tk.20294.60 crore compared to Tk.18165.49 crore during the same period of the preceding year

· Outstanding borrowing of the government: At the end of February,2008 the outstanding borrowing of the government stood at Tk.35031.91 crore, recording an increase of Tk.1543.47 crore or 4.61% over June,2008

· Exports: During July-February, 2007-08 total export of the country stood higher by US$622.86 million or 13.00% to US$5415.60 million compared to US$4792.74 million during the same period of the preceding year

· Import payments: During July-January, 2007-08 total import payment increased by US$1233.70 million or 21.31% to US$7023.50 million compared to US$5789.80 million during the same period of the preceding year.

· Fresh opening of import LCs: During July-February, 2007-08 fresh opening of import LC’s increased by US$1834.58 million or 24.30 % to US$ 9382.84 million compared to US$7548.26 million during the same period of the preceding year

· Total remittances: During July-March,2007-08 stood total remittances of the country higher by US$320.20 million or 12.79 % to US$2823.03 million compared to US$2502.83 million during the same period of the preceding year

· Gross foreign exchange reserves: Reserve of gross foreign exchangeof the BB stood lower at US$3033.88 million at the end of March, 2008 compared to US$3179.41 million at the end of February. This was, however, higher than US$2653.50 million at the end of March, 2007.

· Gross foreign exchange balances: Balances of gross foreign exchangeheld abroad by commercial banks stood higher at US$397.16 million at the end of March, 2008 compared to US$364.67 million at the end of February, 2008 and US$312.61 million at the end of March, 2007.

· The rate of inflation: The inflation rate increased to 6.38 % in February, 2008 from 5.52 % of January, 2008.

2.3 Banking Sector in Bangladesh

The Bangladesh banking sector relative to the size of its economy is comparatively larger than many economies of similar level of development and per capita income. The total size of the sector at 26.54% of GDP dominates the financial system, which is proportionately large for a country with a per capita income of only about US$ 370. The non-bank financial sector, including capital market institutions is only 3.22% of GDP, which is much smaller than the banking sector. The market capitalization of the Dhaka Stock Exchange was US$1,025 million or 2.19% of GDP as at mid-June 2004. In contrast, the size of the total financial sector in India, including banks and non-banks as well as the capital market is 150% (March 2004) of its GDP, with commercial banks accounting for 58.3% of GDP.

Access to banking services for the population has improved during the last three decades. While population per branch was 57,700 in 1972, it was 19,800 in 1991. In 2001 it again rose to 21,300, due to winding up of a number of branches and growth in population. Compared to India’s 15,000 persons per branch in 2000, Bangladesh is not far behind in this regard. This indicates that access to the banking system in the country is not a significant problem.

The finance sector remains predominantly bank-based, accounting for 96% of the sector’s resources. While there are sound banks, based on IAS, the banking sub-sector as a whole is technically insolvent. Consolidated data reported tend to have significantly understated provisions. Adjusting partly for the understatements, the financials of the banking sub-sector are characterized by about 32% NPL ratio, US$720 million shortfall in provisions, US$1,106 million shortfall in provisions and capital combined, and losses of US$685 million after adjusting for the shortfall in provisions in mid 2005. The adjustments would possibly be larger if provisioning as followed by major international auditors were applied. National Commercialized Banks (NCBs) also have disproportionately large and unexplained “Other Assets” that include, in particular, jute and other subsidized credits, suspense accounts and various receivables. To what extent these questionable assets have been provisioned remains unclear.

The banking sector of Bangladesh comprises four categories of scheduled banks. As of June 2007, 49 scheduled banks are operating in Bangladesh with a network of 6318 branches. The structure of the banking system in Bangladesh is categorized in the following table.

Table 1: Structure of the Banking System in Bangladesh (March 2008 )
Type of Bank No. No. of Branches % of Total Asset % of Total Deposit
NCB 4 3388 40.14 39.78
NSB 5 1334 7.13 7.22
PCB 30 1557 42.67 47.18
FCB 10 39 9.46 5.82
Total 49 6318 100 100
Source: Bangladesh Bank

In addition, one national co-operative bank, one Ansar-VDP Bank, one Karmasangsthan Bank and one Grameen Bank and some non-scheduled banks are also in operation. In order to enhance the overall efficiency of NCBs, decisions have been taken to rationalize bank branches, and up to June 2007, 91 new branches were established and 9 existing branches were closed under the ‘branch rationalization program’.

Banks and other financial institutions have been playing a key role in activating the financial sector that in turn infuses dynamism to the economy. Banks are engaged in upgrading the socio-economic status of the country by investing money to productive sectors. However, in the context of globalization and operation of market economy these institutions are facing immense competition with regard to speedy transaction of financial intermediation and as such they are to provide their service as efficiently and effectively as possible. Given this scenario, importance has been attached to the development of the financial market through banking sector.

In order to uphold the rule of banking sector in financial market development the Government has taken a range of measures which include further deployment of bank branches and evaluation of their performance, classification of loans following the international standards assessment of capital adequacy, determination of quality of assets and earning of impressive profit.

3.1 Historical Background of The City Bank Ltd

City Bank Limited started its journey on the 4th of July 2001

Today The City Bank considered as third generation bank extending full range of banking facilities by providing efficient, friendly and modern fully automated on-line service on a profitable basis. Since its inception, it has introduced fully integrated online banking service to provide all kinds of banking facilities from any of its conveniently located branches.

3.2 The Vision

The vision of City Bank Ltd building profitable and socially responsible financial institution focused on Markets and Businesses with Growth Potential, thereby Assisting CBL stakeholders build a “just, enlightened, healthy, democratic and poverty free Bangladesh”. The City Banks visions thus aligned with those of City Bank.

3.3 Capital Structure and Equity Partners

City Bank has started with an initial capital of amount BDT 250 million, while the authorized capital is BDT 1,000 million. Over time the bank has increased it capital base because of its steady growth and within three years of operations, it has doubled its capital base to BDT 500 million. The Bank has planned to go public by the last quarter of this year (2009) and raise it’s paid up capital to BDT 1000 million.

3.4 Branches and Networks

The expansion of City Bank is growing very fast. Now, in total there are33 operating branches and more branches will open up in the coming year. To provide a strong network across the country City Bank has 160 unit offices for SME purpose. Market Research Executive (MRE) a position has been created to capture the stronger market share, which will work closely with the Direct Sales Executive. City Bank will open up three Sales Booths in the major area of the city and Kiosk in the shopping malls, which will cater the needs of the customers where branches are not in close areas. These will serve in terms of opening and closing accounts and selling products. In addition, city Bank has also set up three ATM machines in three main areas of the city, keeping a target in mind that within the mid of next year the Bank will set up some more ATM machines.

3.5 Highlights of Long Term Planning

Table 2: Highlights of Long Term Planning
Particulars Actual (2008) Projected (2010)
Num. Of Branch 33 60
No. Of Booth 100
Unit Office 287 450
Staff 1200 4100
Profit Before Tax 21(crore) 232(crore)
ATM 7 50
PO’s 50 500

City Bank has a centralized banking structure through online banking system that resembles the ABN?AMRO Model. CBL consisted of four major divisions namely-

· Small and Medium Enterprise (SME) Division,

· Retail Banking,

· Corporate Banking

· Treasury Division.

Other important division are Credit Administration, Loan Administration, Trade Fin, IT, HRM, CCU, Internal Control etc, which work to support the major business divisions.

4.1 SME Division

The biggest operational division of City Bank is the SME (Small & Medium Enterprise) Division. SME is directly related to business of the bank. City Bank extends loans to potential small and medium trading, manufacturing and service enterprises. This loan is able to provide quick and quality banking services to targeted business at any places of the country. Potential women entrepreneurs will also get the facilities of SME loan; this initiation is to play a role in the socio-economic development of the country by expansion of business as well as creation of employment. City Bank was titled to be the fastest growing bank in 2007 & 2008, and it had a profit of 14 crore taka. The profitability of the bank came mostly from the SME sector. SME division is enriched with more than 700 staffs and it has almost 300 unit offices all over the country.

4.1.1 Structure of SME division

· Field Level: In the field level there are three types of designated City Bank staff operates. They are Loan Officer, Relationship Manager(RM) and Business Development Manager (BDM)

o Loan Officer: There are about 200 Loan Officers working all over the country in 100 unit offices. Loan Officers are assigned to spot potential entrepreneurs through out the country and motivate them to take loan from City Bank. Each Loan Officer falls under their assigned territory and they have to perform their job within that. They are under direct supervision of the Relationship Manager (RM). Loan Officers goes to people identifies their need and according their need, suggest them to avail loan from City Bank. Loan Officers are responsible for evaluating the trustworthiness of the client whether they are capable to repay the loan or not. To provide loan and ensuring loan repayment are the two main tasks done by the Loan Officer.

o Relationship Manager (RM): There are 36 Relationship Manager. These RM controls the Loan Officer. They visit the spot that the Loan Officer already located. Each and every enterprise will be visited by RM. RM has the authority to sanction loan highest up to taka 3 lakh.

o BDM (Business Development Manager): There are 4 BDM. They supervise the RM.

o QAO (Quality Assurance Officer): There are 12 Quality Assurance Officer. They perform the job of monitoring. They supervise the RM and BDM.

o Head Office Level:

o Credit:

§ The Credit limit varies depending on the rank.

§ RM has the authority to sanction up to highest 3 lakh.

§ BDM has the authority to sanction up to highest 5 lakh

§ If the credit limit exceed taka 10 lakh it goes to Credit Committee

§ If the credit limit exceeds taka 20 lakh it goes to the Board.

o Loan Admin – The posting is done in the system in the Loan Admin. Then Loan Admin sends requisition to Fin Admin.

o Fin Admin: Fin Admin take care of the other expenses.

o Recovery: Recovery Dept. prepares an overdue report and informs the BDM Recovery dept. keeps track of the money. Legal notices are given to the defaulters.

o MIS: MIS dept. keeps the total record of loan from its sanction to repayment.

4.2 Retail Banking

Retail Banking is known as general banking where the individual customers get services time to time from the local branches of the larger commercial banks. In City Bank Retail section has been divided into two parts –

· Distribution – Serve the acquired customers

· Sales – Business acquisition.

They both are interdependent and work closely with each other. Retail offers different types of competitive banking products to the customers. The retail division of the City Bank also offers some special types of deposits and loan scheme for the customer attention.

4.2.1 Retail Deposit Products

· Current Account.

· Saving Account (Maximize and Normal Saving Account).

· Deposit Premium Scheme (DPS).

· Short Term Deposit (STD).

· Normal FDR.

· Abiram (A hybrid of Fixed Deposit with pays internal on a monthly interval).

4.2.2 Retail Loan Products

· Salary Loan

· Credit Card Loan

· Life Style Loan

· Unsecured Personal Loan

· Secured Over Draft

· Teachers Loan

· High Flyer Loan

· Premium Term Deposit (PTD)

· Shahaj Loan (For Bank Staff only)

· Ashadharon (For Bank Staff only)

4.3 Corporate Division

Like Retail, corporate department has also two different wings – Corporate Banking division & Cash Management.

4.3.1 Corporate Banking Division

Corporate Banking is a specialized area of City Bank, which addresses the diverse financial needs of Corporate Clients.

This division exists to provide banking services and financial partnership with local and foreign business houses (Public and Private Limited Companies), NGO’s, trading houses, joint ventures and various government bodies/corporations etc. As the financial partner of choice for the corporate sector, City Bank wants to be distinguished by its:

· Quality of service

· Value of innovative solutions

· Level of trust with clients

· Customer knowledge

Corporate clients can access a wide range of financial services offered by corporate banking division including:

· Debt Capital

· Equity Capital

· Ongoing relation support

· Financial Markets

Products: City Bank provides a comprehensive range of innovative corporate financial solutions tailored to suit each company’s needs. This range includes both funded and non-funded facilities. Following are some of the products that CBL offers to its clients:

· Corporate Finance

o Loan Syndication

o Project Finance: Short and Medium term

· Finance/Credit Extension

· Overdrafts

· Demand Finance

· Working Capital Finance

· Receivable Discounting

· Pre and Post Export Financing

· Short-term loan: revolving loans, LATR etc.

· Trade

o Letter of credit: Sight, Unsance etc.

o Guarantee: Performance, Security, Advance Payment etc.

· Lease financing

· Target Market:

o Pharmaceuticals, Toiletries, Chemicals and Pesticides

o Power Generation, oil exploration, Industrial and household gases (Liquid, Petroleum Gases etc.)

o Edible oil, Bulk Trading –Essential Commodities, Industrial Raw Materials, Agricultural Inputs, Cement.

o Garments, Textiles and related backward linkages industries including spinning, Knitting, Yarn, Garment accessories etc.

o Food Processing and Beverage Industries.

o Cable and Cable wire, Information Technology.

o Leasing Companies/Non Banking Financial Institutions.

o Health service Industry, Non Governmental Organizations.

o Importers/dealers of machinery, Industrial, Electrical equipment

o Education Institutions, Bone china, Ceramics, Melamine, plastic products.

o Manufacturing and Trading of Consumer Durables, Telecommunication, and Contractor Finance.

o Ship Breaking, Re-rolling Corrugated Iron (CI) Sheet Mfg and related business.

o Air Lines, Shipping Lines, Freight Forwarders, Testing Inspection agencies, Footwear and Leather.

o Tobacco products and Tea.

· Target Customers Group:

o Leading Domestic Corporate and Trading Houses.

o Local medium and large corporate.

o MNCs’

o NGOs’

o Educational Institutions.

4.3.2 Transaction Sales & Services (TRS)

The major responsibility of City Bank’s TRS Division is to support their Corporate Customer with the combined network covers Dhaka, Chittagong, Sylhet & Savar presently. TRS offer the no cost on line banking facility through 13 branches CityBank. They offer cash deposit and withdrawals, cheque deposits, and money transfer facility, account enquiries, give cheque book requisition and Account Statement with their following type of account:

· Current Account

· Short Deposit Account (STD)

· Fixed Deposit

· Savings Account (for corporate employees)

· Convertible Account

· FC Account

TRS division also has Priority Service System for their Corporate Customer, which manages their business finance and cash resources very conveniently. Priority Service Banking includes the following special services:

· Pick-up & Delivery Services

· Auto fax Report

· Corporate Help Line

· Inward Remittance Information

· Express Payment

4.4 Treasury

Treasury division at CBL deals with the fund position. This division calculates and projects the fund requirement to meet day-to-day operation. It has also two wings, one is front office and the other is back office. Front office deals with directly to the money market of the country. Their main job is to lend money to other financial institution on call or short-term basis, if the bank has additional money idle. Or if the bank falls short in liquidity, this division borrows money from other financial institution on the same basis. On the other hand the back office keeps records of the fund position of the bank.


· Managing mandatory liquidity.

· Maximizing return from fund management.

· Matching Asset and Liability.

· Generating profit from Intermediary functions.

4.4.2 Business Segregation

· Money Market: Money Market is a network of financial institutions linked by telecommunication network to facilitate lending and borrowing of fund for short-term (less than a year).

· Foreign Exchange Market: It is the organizational framework within which, financial institutions and individual’s trade or exchange foreign currencies.

4.4.3 Functions

Money Market:

o Maintenance of Statutory Reserve

o Meeting Branch/ Division fund requirements

o Call Loan taking and placing

o Term taking and placement

o Market analysis

· Foreign Exchange Market:

o Circulation of exchange and interest rate on FX. Deposits

o Maintenance of daily exchange position within the limit

o Nostro funding

o Forward quote

5.1 Performance at a Glance

Table 3: Performance of CBL
Particulars 2007 2006 2005
Paid up capital 500,000 500,000 405,020
Total Capital including general provisions 988891 650,294 424,327
Capital Surplus/deficit 40753 73,684 157,178
Total Assets 16876009 10,015,936 4,542,043
Total Deposits 13409010 8,168,979 3,497,303
Total Loan & Advances 11719312 5,819,792 2,870,107
Credit Deposit Ratio 87.94% 71.24% 82.07%
Classified loans against total loans and advances (%) 2.25% 1.97% 1.06%
Profit after taxes & provisions 192680 99,303 30,281
Amount of classified loans during current year 265179 114,414 30,542
Provision kept against classified loans 134061 84,432 8,183
Provisions surplus/deficit 26862 40,841 173
Cost of fund 7.58 7.23% 7.50%
Interest earning assets 16278383 9,735,349 4,475,543
Non interest earning assets 597626 280,587 66,501
Return on Investment (ROI) 8.54 8.57% 3.73%
Return on Assets (ROA) 1.14 0.99% 0.67%
Incomes from investments 292067 166,967 94,790
Earnings per share 38.54 23.16 12.09

5.2 Balance Sheet Performance

During the year, CBL has expanded their business rapidly and undertook significant operations in trade finance business (i.e. 750% growth in the year 2006 over last year) along with the same upward trend in SME, commercial and retail lending activities. Propelled by strong growth in both loans and deposits, the Bank’s operating income increased substantially in 2007.

CBL has a 164% growth rate on its deposits in the financial year 2007 comparing to its previous year’s (2006) and the same time it also has a 201% growth arte over its loans and advances. Though the advance to deposit ratio i.e. 71.24% comparatively comedown in 2006 from 2005, it again picked up in 2006 (87%). These upward trends in both deposit and loans, helps the bank to increase its assets by 168% over its previous year’s (2005) assets. CBL has also enjoyed higher growth rate on its fixed and other assets.

5.2.1 Profitability

In the year 2007 the bank has earned an operating profit of BDT 586 million compared to BDT 320 million in the previous year with a stunning growth rate of 183%. This was possible, as CBL has earned a 165% growth on its interest income where as its interest expense growth was 93% from the year 2005. This difference has basically occurred because the cost of fund did not increase to extent of increase in return on loan.

The growth rate of operating expenses has also gone up by 103%, but this trend is acceptable because the bank has earned growth rate of over 100% in all aspects. More over a growth of amount 193% in its profit after tax supports the rationality of such hike in operating expenses earned. All this upward trends help CBL to increase the Earnings Per Share by almost 165% (from 23.16 to 38.54.

5.2.2 Other Performance Indicator

· Capital Adequacy: Capital adequacy focuses on the total risk weighted capital intended to protect the depositors from the potential shocks of losses that a bank might incur. In the year 2007 CBL has maintained capital adequacy ratio of 10.15% against standard of minimum 9.00% set by Bangladesh Bank. This keeps more options to absorb default loan amount.

· Asset Quality: The asset composition of CBL shows a high proportion of loans and advances (87%) in total assets. A high proportion of loans and advances indicate vulnerability of assets to credit risk, since the portion of non-performing assets is significant in our country. But the classified loans against total loans and advances of CBL are only 2.25%. Though this ratio gone up from the year 2006, but compare to 103% increase in loans and advances this upward trend is still in acceptable level.

· Management Soundness: Management Soundness is very difficult to measure, because it requires a qualitative measurement rather than quantitative measurement. Nevertheless ratios such as total expenditure to total income are generally used to measure management soundness. In this regard CBL’s total expenditure to total income ratio is 53%, which shows that more than half of its total income need to be spent for meeting operating expenses.

· Liquidity: At present CBL’s liquidity ratio is 24% out of Bangladesh Bank’s minimum requirement 20%. So the bank may feel comfort but the liquidity statement shows that for short period usually 1-3 months CBL has liquidity gap or in other words, for short period, the bank has a short fall to meet its liquidity

6.1 Macro Environment Analysis

It is very important to carry out a macro environment scanning for the banking industry in order to identify and analyze the external factor that affected the growth and development of the banking sector in Bangladesh. A through analysis of the macro environment in which the banks operate will allow the banks to develop pro-active strategies and navigate the organization in the turbulent ocean of competition.

The financial institutions are always heavily influenced by the macro economic conditions both globally, regionally or locally. The key macro economic indicators like GDP growth rate, inflation, industrial growth rate, expansion of trade and commerce and other factors affects the operations and the pricing strategy of the bank. City Bank Limited (CBL), since its inception has achieved a steady growth rate. However, the present economic downturn or recession is affecting CBL’s operations. The country is now under a deep recession having a major decline in industrial growth rate, galloping inflationary pressure, and decline in international trade with export targets for the fiscal year yet to be achieved and other factors will eventually affect CBL and other banks pricing strategies. Many banks will have to revise the interest rate structure for its various services in order to cope with economic slowdown. However, SME results for CBL is quite satisfactory as they have surprised their stipulated targets despite the economic sluggishness going on in the country.

6.1.1 Demographic Environment

Demography is the study of human populations in terms of size, density, location, age, gender, race, occupation and other statistics. The demographic environment is of major interest to marketers because it involves people and people make up markets. In terms of SME requirements customer is the main part of bank. If there is no client there is no business. Some key factors of demographic environment are urbanization, education, living standard etc. For example-In terms of urbanization, lots of new business and enterprises are growing rapidly in the city or town. So more banks can be aggressive for providing loans in newly developing areas. For having new banks in the city, the standard of living will increase for the people. Education is another major factor for developing a nation. Without literacy standard of living could not come for individuals. So each and every factor is interrelated to each other.

6.1.2 Economic Environment

Factors that affect consumer buying power and spending patterns SME is very careful regarding economic issues in the country. Customer relation office is always keen to check purchasing materials and leading lifestyle of the client. Because if the economic condition of a client become bad then he/she might not repay the loan. On the other hand if war occurs between the two countries then price of the products will increase and people will loss purchasing power. In this way, organization might affect economically.

On the other hand, A steady growth rate with continues market oriented reforms will contribute positively by expanding the volume of business and profitability of the bank. In an economy, a steady growth means there will be more investment, savings, and consumption in the economy. As a result, bank also gets more deposit and more projects for credit disbursement.

6.1.3 Social Environment

As banks are service oriented organizations, they always have to consider the attitude of the customer. Customer now want a speedy service accompanied by attractive and well decorated impressive branches with customer friendly officers providing tailor made services to the customers. SME of Bank impressive office has already earned a reputation for the bank and has attracted lots of potential customers around the country. In order to match with the customer needs, banks are also increasing varieties of products such as single short products, different short and medium term products and other services. One of the key factors of a social environment is social class growth. It carry out attitudes of various classes of people, such as upper class, middle class, lower class upper lower class, upper lower class, etc. The customer relation officer of Bank deals with them regarding their social classes.

6.1.4 Political Environment

The political environment consists of law, government agencies and pressure groups that influence and limit various organizations and individuals in a given society. SME of bank have to abide national laws like festivals, holidays. On the other hand, hartals, strikes, barriers can affect the economic condition of SME. Under the latest World Bank recommendation the banking division of the ministry of finance is being abolished a; step further in providing autonomy to Bangladesh Bank. The emergence of SME of contemporary banks and the arrival of the foreign banks are all due to the on going reforms in the financial sector of Bangladesh. CBL is restricted to provide loans for the political leaders.

6.1.5 Technological Environment

SME division has a strong network in the whole country. The main head office is in the capital city from which it operates with all the unit offices by means of mobile telephone. In the near future, SME might handed over the palmtop computer to all customer services offices to provide accurate and quick service to the clients.

6.1.6 Ecological Environment

Sometimes ecological environment can turnout the business of the clients. Foods, disasters can affect the business after having the City bank loans or fire can burn out the whole business. To protect from these disasters City bank do the insurance policy with the joint names of the client. So that client can get feedback from the insurance policy to run again his business. If client do not get support from the insurance company then City bank give time or generate the client repayment schedule

6.2 Micro Environment Analysis

Marketing management job is to attract and build relationship with customers by creating customer value and satisfaction. It depends on other factors in the organization microenvironment- suppliers, customers, competitors, various publics which make up the organization’s value delivery system.

The company needs to study its customer marketer closely in terms of Small and Medium Enterprise and their customers group is specified. Their target group is only Small and Medium Enterprise client. On the other hand corporate clients are different to have the loan. Each market type has special characteristics that call for careful study by the marketer.

In terms of SME, most clients are carrying out trading business rather than manufacturing business. Few clients are attached with service business like pharmaceutical, hospital, homeopath etc. In the trading business clients want loans to meet their working capital requirement. On the other hand, clients want 10-15 for purchasing fixed assets. In our country mostly 35-40 years old clients are carrying out loans regarding the type of their business. The clients who interested to take the loan of SME then they have maintained at least one year running business. It is a policy of a bank because in the mean while client can understand his business and can set a future plan.

The educational qualification of our clients is very poor. Clients are under-graduate but carry out good business. SME support their clients who are carrying out good business and also give suggestions and guidelines to develop their business. If any client has maintained loans with other banks then SME is restricted to provide loans for those clients.

It has been found out that in our country most clients need small loans to develop their own business. The world is being globalized and modernized. So by think of it client take risks to enhance and develop their business and bank is a good helping hand to help them.

In our country, clients want more time to repay the loan. Bank gives adequate time for the client to repay the loan whether they can get benefit from it. Clients are very happy to repay the loan by equal monthly installment. Clients know the right time to repay the loan at the right place. But in the pick season, most client wants short fund requirement to carry out good business. Regarding interest rates, clients are not talk about more because clients get the loan at the right time from the bank. Clients are also happy by the issuance of security preferences because they do not have to provide any collateral security for hypothecation or unsecured loans.

SME unit of bank networks has every where in Bangladesh. So clients can have the SME loans wherever his business exists in the country. The purpose of this loan is the economic development in our country, which might divert the clients mind after having the loans for expansion. Many clients have ambition to expand from trading to manufacturing business to generate more profit.

When a Loan officer of a bank would visit a business, the client must provide the proper and right information and show the right documents for justifying a good client. If any officer of a bank feel bad smell in the business then the Loan officer reject that client without concerning the management. So clients should be feel comfortable to provide proper information to have the loan.

Regarding the service by the Loan officer, almost all clients are satisfied by get these quick facilities from them. Though it is pioneer division of this bank, so client should be fully satisfied by having this facility.

6.3 Industry Analysis: SME facility of Bank .

6.3.1 Threat of New Entrant

In every industry, there is a threat of new entry, which varies according to industry. Similarly, the banking sector of Bangladesh also faces the threat of new entrants. However, the threat comes from two directions. The first threat comes from the arrival of the multinational banks and their branch expansion particularly due to the booming energy sector. Another threat comes from the emergence of new private commercial banks. The countries traditional banks are facing the treat of further competition and better quality service. Similarly, the potential banks that may emerge in the next few years will further enhance the intensity of competition and may pose further threat to the existing banks. At the same time, arrival of the foreign banks is posing threat and pressure on the existing banks. Already Standard Chartered Bank and Hong king Shanghai’s Banking Corporation (HSBC) has started to provide small loans to clients and they are also going to start door to door services to clients.

6.3.2 Growth in the Industry

The rivalry among the competitors and the growth in the industry depends upon the intensity of competition. If the industry has a high intensity of competition then the industry will have a high growth rate, as all the firms will try to beat the others in order to grab the market share. Similarly, the banking sector of Bangladesh is growing considerably and at the same time competition is increasing.

6.3.3 Competitors

· Identifying the banks competitors: In terms of world bank advice, most of the private banks are now ready to provide small or micro credit loan facility to the clients because small loans are less risky than the corporate loan.

· Determining the competitor’s objectives: In our country, to provide big loans or long term loans are risky because Bangladesh Bank is carrying out lots of defaulter’s list. So most of the banks are now interested to provide small or micro credit lending in terms of small and medium enterprise business. The objective of the competitors is to capture in the market by providing small loans regarding and manufacturing business. But everyone’s common objective is economic development of this country.

· Identify the competitors’ strategy: Standard chartered bank already sent marketing troops surrounding the cities for providing loans and deposits. City Bank is going to start retail service business for capturing the market. So competitor’s analysis is important factor to carry out in the long run business for any organizations. Among these banks, many of them have lower interest rates but lots of hidden costs and services.

7.1 Demand Creation

The SME division of CBL basically provides micro credit loans to small and medium enterprises. Because of its unique nature, the demand for SME loans is different in nature to the demand for corporate or retail loans. A huge portion of the target market has traditionally been neglected by the banking sector and hence, is ignorant about banking activities. Thus, awareness building has been, and still is, a vital activity of the demand management process of SME loans. The process flow of demand creation is as follows:

The Loan Officers play a vital role in all the stages of demand creation apart from market identification and product development. They provide door-to-door services for the clients and at the same time are always in search for potential new clients. Because clients are ignorant about banking products that may satisfy their needs, the Loan Officers identify their needs, evaluate their requirements and determine which products are most suitable for them.

The major security of the SME products is building relationship between clients and banks. Demand basically comes from two groups: new customers and repeat customers. Because banks are facing new marketing realities like changing demographics, slow growth economy, more sophisticated competitors etc., CBL cannot afford to lose clients. The key to customer retention is superior value and satisfaction. As CBL recognizes this fact, repeat borrowers of SME products enjoy lots of extra benefits.

7.2 Market Segmentation

The market consists of many types of customers, products and needs and the marketer has to determine which segments offer the best opportunity for achieving company objectives. CBL segments the market for banking products into three categories based on the nature of the consumer:

Table 4: Market Segmentation of CBL
Segment Target Market
Corporate Enterprises with loan requirement of Taka 50 lacs or more
Small & Medium Enterprise Enterprises with loan requirement of Taka 2-40 lacs
Retail Individuals with loan requirements for consumer purposes

By segmenting its consumers into these categories, CBL is trying to serve niche markets where there is ample opportunity for growth.

Within SME, the market is further segmented on the basis of the nature of the business as follows:

7.3 Target Customers

To succeed in today’s competitive marketplace, organizations must be able to hold on to its customers by delivering greater value. In order to do this, an organization must be able to identify the customers who would be benefited from their products. City Bank has targeted the small and medium enterprises that have small loan requirements as the target consumers of their SME products. However, CBL does not finance business startups. The business has to be at least two years old to avail the SME loan facilities offered by CBL. Most of such businesses are sole proprietorships. There are some partnerships as well, but limited companies are rarely seen in this category. The survey that I had conducted brought up the following results as common characteristics of the respondents:

· The mean age of the resp