“SME Loan Activities & Reconciliation Process of BRAC Bank Limited”
Organization Profile
Preface
BRAC Bank Limited, with institutional shareholdings by BRAC, International Finance Corporation (IFC) and Shore cap International, has been the fastest growing Bank in 2004 and 2005. The Bank operates under a “double bottom line” agenda where profit and social responsibility go hand in hand as it strives towards a poverty-free, enlightened Bangladesh.
A fully operational Commercial Bank, BRAC Bank Limited focuses on pursuing unexplored market niches in the Small and Medium Enterprise Business, which has remained largely untapped within the country. In the last five years of operation, the Bank has disbursed over BDT 32,188.26 million in loans to nearly 67047 small and medium entrepreneurs in 2009. The management of the Bank believes that this sector of the economy can contribute the most to the rapid generation of employment in Bangladesh. The Bank’s footprint has grown to 69 branches, 429 SME unit offices and 179 ATM booths, 30 cash deposit machines, 1558 POS terminals, 19 utility services bill payment booths, 1900 remittance delivery points across the country. In the years ahead BRAC Bank Limited TED expects to introduce many more services and products as well as add a wider network of SME unit offices.
Shareholder Structure:
| Name of Shareholder | % of Shareholding |
| BRAC | 31.74% |
| International Finance Corporation | 9.50% |
| ShoreCap International Limited | 8.75% |
| Non-Resident Bangladeshi | 0.47% |
| Mutual Funds | 2.42% |
| Institutions and General Public | 47.11% |
| Others | 0.06% |
Fig: Shareholder Structure
Background of the Organization
BRAC Bank Limited is a scheduled commercial bank in Bangladesh. It established in Bangladesh under the Banking Companies Act, 1991 and incorporated as private Limited company on 20 May 1999 under the Companies Act, 1994. The primary objective of the Bank is to provide all kinds of banking business. At the very beginning the Bank faced some legal obligation because the High Court of Bangladesh suspended activity of the Bank and it could fail to start its operations till 03 June 2001. Eventually, the judgment of the High Court was set aside and dismissed by the Appellate Division of the Supreme Court on 04 June 2001 and the Bank has started its operations from July 04, 2001. The Chairman of the Bank is Sir Mr. Fazle Hasan Abed. Now the Managing Director of the bank is Mr. Imran Rahman. The bank has made a reasonable progress due to its visionary management people and its appropriate policy and implementation.
Corporate Vision
“Building a profitable and socially responsible financial institution focused on Markets and Business with growth potential, thereby assisting BRAC and stakeholders build a “just, enlightened, healthy, democratic and poverty free Bangladesh”.
Corporate Mission
§ Sustained growth in ‘small & Medium Enterprise’ sector.
§ Continuous low cost deposit growth with controlled growth in Retained Assets.
§ Corporate Assets to be funded through self-liability mobilization. Growth in Assets through Syndications and Investment in faster growing sectors.
§ Continuous endeavor to increase fee based income.
§ Keep our Debt Charges at 2% to maintain a steady profitable growth.
§ Achieve efficient synergies between the bank’s Branches, SME Unit Offices and BRAC field offices for delivery of Remittance and Bank’s other products and services.
§ Manage various lines of business in a fully controlled environment with no compromise on service quality.
§ Keep a diverse, far flung team fully motivated and driven towards materializing the bank’s vision into reality.
Corporate Values
The Bank’s Strength emanates from its owner – BRAC. This means, it will hold the following values and will be guided by them as it does its jobs.
Value the fact that we are a member of the BRAC family.
§ Creating an honest, open and enabling environment.
§ Have a strong customer focus and build relationships based on integrity, superior service and mutual benefit.
§ Strive for profit & sound growth.
§ Work as a team to serve the best interest of our owners.
§ Relentless in pursuit of business innovation and improvement.
§ Value and respect people and make decisions based on merit.
§ Base recognition and reward on performance.
§ Responsible, trustworthy and law-abiding in all that we do.
Organizational Goals
- To employ funds for profitable purposes in various fields with special emphasis on small and medium scale.
- 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 institutions which are engaged in financing micro enterprises.
- To cooperate and collaborate with institutions entrusted with the responsibility of promoting and aiding small and medium scale industries.
Objectives of the Bank
The objective of BRAC Bank Limited is specific and targeted to its vision and to position itself in the mindset of the people as a bank with difference. The objective of BRAC Bank Limited is as follows:
§ Building a strong customer focus and relationship based on integrity, superior service.
§ To creating an honest, open and enabling environment
§ To value and respect people and make decisions based on merit
§ To strive for profit & sound growth
§ To value the fact that they are the members of the BRAC family – committed to the creation of employment opportunities across Bangladesh.
§ To work as a team to serve the best interest of our owners
§ To relentless in pursuit of business innovation and improvement
§ To base recognition and reward on performance
§ To responsible, trustworthy and law-abiding in all that we do
§ To mobilize the savings and channeling it out as loan or advance as the company approve.
§ To establish, maintain, carry on, transact and undertake all kinds of investment and financial business including underwriting, managing and distributing the issue of stocks, debentures, and other securities.
§ To finance the international trade both in import and export.
§ To develop the standard of living of the Limited income group by providing Consumer Credit.
§ To finance the industry, trade and commerce in both the conventional way and by offering customer friendly credit service.
§ To encourage the new entrepreneurs for investment and thus to develop the country’s industry sector and contribute to the economic development.
Bank’s Culture
Bank has adopted trust as a corporate value which is acronym for team work, respect for all people, unquestionable integrity, excellence in everything BRAC Bank Limited of SME do, Sense of urgency in getting things done and total commitment.
All employees are expected to conduct themselves in accordance with the rules and regulations of the bank.
Bribes & Inducements
It is not acceptable to offer or receive any form of bribe or inducement, or direct anyone else to do on behalf of the bank. The following activities are strictly prohibited:
- Payment or other benefits which violate the country’s law or the bank’s policies.
- Payment or other benefits for procurement of business.
- Payment or other benefits to public officials or politicians to induce them to exercise their discretion in the bank’s favour.
Management of Brac Bank Limited
Boards of directors are the sole authority to take decision about the affairs of the business. Now there are 5 directors in the management of the bank. All the directors have good academic background and have huge experience in business. Mr. Fazle Hasan Abed is the chairperson of the bank. The board of directors holds meetings on a regular basis.
Departments of Brac bank Limited
If the jobs are not organized considering their interrelationship and are not allocated in a particular department it would be very difficult to control the system effectively. If the departmentalization is not fitted for the particular works there would be haphazard situation and the performance of a particular department would not be measured. BRAC BANK Limited has does this work very well. Departments are as follows:
- Human Resources Department
- Financial Administration Department
- Central Support, operation help desk and reconciliation
- Credit Division
- SME Division
- Internal Control & Compliance Department
- Marketing & Product Development
- Impaired Asset Management
- Remittance Operation Department
- Treasury Front
- Treasury Back
- General Infrastructure Service
- Information Technology Department
- Customer Service Delivery
- Cards Division
- Call Center
- Cash Management
- Secured Remittance department
- Women Entrepreneur Cell
- Payment Service
Regular events of Brac Bank Limited
Coffee Meeting: Coffee meeting is an informal meeting of all the heads of the departments including the MD and COO. It usually takes place once a week on Sunday morning. Every department’s issues and updates are generally discussed in this meeting.
MANCOM: MANCOM is Management Committee. It consists mostly of Heads of various departments as well as Managing Director & CEO and Deputy Managing Director & COO. The members give an overview of the performance of their departments, their growth, their issues and their future plans. The meeting usually takes place on the 10th of every month.
Board meeting: The board meeting takes place on third Monday of every month.
Town Hall Meeting: The Town Hall meeting takes place once in every quarter of the year. The MD gives a presentation regarding the bank’s progress in that quarter, in the presence of all the members of the BRAC bank family.
Members of the EMT: EMT is Extended Management Team. The team consists of members who are basically the second tier managers of the bank.
Function of EMT: The main responsibilities of EMTs are to help the MANCOM with different issues regarding the smooth operations of the Bank.
Business Units
There are five different business units generating business BRAC BANK Limited:
- Small & Medium Enterprise (SME)
- Corporate Banking
- Retail Banking
- Treasury
- Remittance Services
- All the units are being operated in a centralized manner to minimize costs and risks.
Performance of brac Bank Limited
BRAC BANK Limited will be the most successful private sector commercial bank in our country, though it started its operation few years back. It has achieved the trust of the general people and made reasonable contribution to the economy of the country by helping the people investing allowing credit facility.
Financial goals and achievements:
| Financial Goals and Achievements | ||||||
| Goals | Achievements | |||||
| Financial Indicator | 2008 | 2007 | 2006 | 2005 | 2004 | |
| ROE | Over 20% | 22.88% | 23.83% | 23.05% | 28.07% | 20.14% |
| ROA | Over 2% | 1.64% | 1.62% | 1.43% | 1.43% | 1.36% |
| Growth in Operating Profit | Over 60% | 63.14% | 85.24% | 81.03% | 80.88% | 467.26% |
| Growth in Profit after Tax | Over 35% | 60.03% | 79.29% | 107.35% | 41.94% | 600.00% |
| Growth in Total Assets | Over 50% | 56.18% | 54.55% | 77.83% | 68.51% | 120.50% |
| Capital Adequacy Ratio | Over 12% | 12.76% | 12.28% | 13.53% | 9.39% | 10.15% |
Operating Profit:
BRAC Bank’s operating profit increases in every year at a double digit growth. In 2007 it was 1945 million but in 2008 it increases 63%, 3174 million. Below presented 8 years operating profit statistics in BBL.
| Operating Profit (BDT in Million) | |||
| Particulars | 2007 | 2008 | Percentage of Profit in 2008 |
| SME Banking | 866 | 1746 | 55% |
| Retail Banking | 388 | 267 | 8% |
| Commercial Banking | 21 | 29 | 1% |
| Corporate Division | 165 | 207 | 7% |
| Credit Card | -26 | 206 | 6% |
| Probashi Banking | 32 | 57 | 2% |
| Treasury Division | 499 | 663 | 21% |
| Total | 1945 | 3175 | 100% |
SME Loan Activities Of Brac Bank Limited.
Definition of SME
The most valuable natural resource of Bangladesh is its people. As a nation we struggled for our independence and now the attainment of economic uplift is the main goal. Micro lenders are working here in the financial field, providing very small amount and on the other hand regular commercial banks have been providing bigger amount of loans to larger industries and trading organizations. But the small and medium entrepreneurs were overlooked. This missing middle group is the small but striving entrepreneurs, who because of lack of fund cannot pursue their financial uplift, as they have no property to provide as equity to the commercial banks. With this end in view-BRAC Bank was opened to serve these small but hard working entrepreneurs with double bottom line vision. As a socially responsible bank, BRAC Bank wants to see the emancipation of grass-roots level to their economic height and also to make profit by serving the interest of missing middle groups. 50% of its total portfolio usually collected from urban areas, are channeled to support these entrepreneurs who in future will become the potential strength of our economy. BRAC Bank is the market leader in giving loans to Small and Medium Entrepreneurs.
SME is an additional and specialized horizon of the bank which serves the bank’s special focus in promoting broad based participation by catering to the small and medium entrepreneur. The network of SME has already been established through out Bangladesh.
SME plays a vital role for our economy and BRAC Bank Limited is providing loans to the SME entrepreneur. Keeping in view the total assets (at cost) and/or total number of employees of a concern, the Ministry of Finance and Planning and Bangladesh Bank has given the following definition of Small and Medium Enterprise (SME).
| Enterprise | Sector | Total Assets (at cost) | And/or total no. of employees |
| Small Enterprise
(other than Public Limited Company) |
Service
Concern |
Tk. 50000-Tk. 50 lacs
(excluding land & building) |
Not more than 25 persons |
| Trade Concern | Tk. 50000-Tk. 50 lacs
(excluding land & building) |
Not more than 25 persons | |
| Manufacturing
Concern |
Tk. 50000-Tk. 1.50 crores
(excluding land & building) |
Not more than 50 persons | |
| Medium Enterprise
(other than Public Limited Company) |
Service
Concern |
Tk. 50 lacs-Tk. 10 crores
(excluding land & building) |
Not more than 50 persons |
| Trade Concern | Tk. 50 lacs-Tk. 10 crores
(excluding land & building) |
Not more than 50 persons | |
| Manufacturing
Concern |
Tk. 1.50 crores -Tk. 20 crores
(excluding land & building) |
Not more than 150 persons |
Ministry of Industries has declared the following sectors as the booster sectors for SME:
- Electrical and Electronics
- Software Developing
- Agro-processing/Agri-business/Plantation Agriculture/Tissue Culture
- Leather products
- Knit Wear and Ready made garments
- Plastic and other synthetics
- Education
- Medicine/Perfume/Personal cleanliness
- Designer and Fashion wear
Reasons of SME Banking
The main focus of BRAC Bank is to develop human and economic position of the country. Its function is not limited only to providing and recovering of loan. But also try to develop economy of a country. So reasons for this program from the viewpoint of BRAC Bank Ltd. are:
1. Support Small and Medium Enterprise: To support small and medium enterprise, which requires not more than BDT 30 lacs. But in the market, small and medium entrepreneurs do not have easy access to get loans from the commercial banks/ financial institutions. But BRAC Bank Ltd. Provides loans ranges between BDT 3 to 8 lacs without any kind of mortgage.
2. Economic Development: Economic development of a country largely depends on the small and medium sized enterprises. Such as, if we analyze the development history of Japan, the development of small & medium size enterprises expedite the development of that country.
3. Employment Generation: To create employment opportunities in the market. The bank gearing employment opportunities by two ways: Firstly, by providing loan to the small enterprises. Expanding, these businesses require more workers. Secondly, small and medium enterprise (SME) program requires educated and energetic people to provide support to entrepreneurs.
4. Profit Making: SME program is a new dimensional banking system in the banking world. Most of the CROs are providing door-to-door services to the entrepreneurs. Entrepreneurs are satisfied by the service of the bank and making profit with guidance of the bank.
5. Encourage Manufacturing: The focus of BRAC Bank Ltd. is to encourage manufacturing by the entrepreneurs who produce by purchasing various types of materials. CRO’s try to educate them to produce material if possible because if they can produce in line of purchase profits will be high.
6. Spread the Experience: Another reason of BRAC Bank Ltd. is to spread the knowledge on the importance of SME banking regarding various businesses. The customer service officer shares their knowledge from various businesses and tries to help the entrepreneurs who have shortage of the gathered knowledge. CRO’s who are the driving force of SME division of BRAC Bank Ltd. also gather knowledge about various businesses and make stronger knowledge base.
Products of SME Banking
- Anonno: A collateral free business loan to one year going concern i.e. small and medium sized trading, manufacturing, service, agriculture, non-farm activities, agro-based industries etc. all over Bangladesh.
- Apurbo: A mortgage backed business loan to small and medium sized trading, manufacturing, service, agriculture, non-farm activities, agro-based industries etc. all over Bangladesh.
- Aroggo: The main objective of this loan is to finance private clinics and diagnostic centers. Through this loan, health centers will get the opportunity to upgrade their medical facilities or expand business. This will contribute to the overall enhancement of health facilities available in Bangladesh.
- Pathshala: This credit facility is for small & medium sized private educational institutions, like kindergartens and schools which are spread all over Bangladesh.
- Digoon Rin: This product’s main objective is to help various Small and Medium sized Entrepreneurs to meet their short-term cash flow shortage or bridge the fund-flow gap. To avail this facility the enterprise has to give 50% cash security (Fixed deposit of BRAC Bank) of the loan amount i.e. double of the Fixed Deposit amount can be availed as Digoon RIN.
- Supplier Finance: A loan facility for the enlisted Suppliers of various large retailers, marketing companies, distributors, exporters etc. This product’s main objective is to help various Suppliers to meet their short-term cash flow shortages or bridge the fund-flow gaps.
- Prothoma Rin: An asset product offered to women entrepreneurs to expand their businesses. This product’s main objective is to help women entrepreneurs to meet their short-term cash flow shortages or bridge the fund-flow gaps.
- Cash Secured Loan: Cash secured loan is a loan facility for small and medium sized trading, manufacturing, service, agriculture, non-farm activities, agro-based industries etc. spread all over Bangladesh through the branches or unit offices across the country.
- Proshar: Proshar is a loan facility for Small and medium sized manufacturing industries located in the surrounding areas of unit offices across the country. It is primarily meant for working capital finance/ fixed asset purchase for the business.
- Bizness Loan: This loan facility caters cash flow requirement of medium sized enterprises located around the unit offices which are at proximity of the BRAC Bank Branches. To avail this loan facility healthy banking track record is required and medium sized entrepreneurs can avail this loan facility against 30% to 50% cash security.
- Trade Plus: This product offers both funded & non funded loan facility to import oriented Small & Medium Entrepreneurs and constantly supports them to smoothly operate their import activities.
- Super Supply Loan: Super Supply Loan is a loan facility for small & medium sized suppliers located throughout the country. This loan facility offers 25% overdraft & 75% revolving loan of the sanctioned loan mount.
§ Bizness Account: It is special interest bearing current account. The account holder will have numerous facilities including a smart BiZness card.
SME Loan Disbursement Procedure
For SME loan operation,
BRAC BANK LIMITED Ltd has in total 429 unit offices, 167 zonal office, 14 territory and 1800 Customer Relationship Officers. These CROs work for the Bank to converge clients for getting the SME loan. SME Loan process flow is shown below-
Disbursement Amount & Client Base of SME Banking:
BRAC Bank’s SME banking is continuing its journey of serving the SMEs, as can be observed from the tremendous growth in client base and from the disbursement amount.
| Disbursement Amount of SME Banking in million BDT (Cumulative) | Number of SME loan disbursement (Cumulative) | |||
| Year | Amount | Year | No of loan | |
| 2004 | 5566.43 | 2004 | 14482 | |
| 2005 | 10671.18 | 2005 | 30130 | |
| 2006 | 21829.33 | 2006 | 59998 | |
| 2007 | 42981.05 | 2007 | 113009 | |
| 2008 | 79729.4 | 2008 | 192752 | |
Security Documentation against Loan
A document is a written statement of facts and a proof or evidence of particular transaction between parties involved. While allowing any disbursements against credit facilities to borrowers, it should be ensured that prior to any disbursements; security documentation is fully and properly completed.
3.5.1 Purpose of Decorate Documentation and its Importance:
Documentation is necessary for the acknowledgement of a debt and its terms and conditions by the borrower and the creation of charge on the securities in favor of the bank by the borrower. Correct and proper documentation allows a bank to take legal measures against the default borrowers.
If filing a suit with the courts against a default borrower becomes necessary, the court will first review all documents. If any of the documents is found to be defect or incomplete, the purpose of security documentation will be defeated and a court ruling in favor the bank cannot be expected. Proper care should, therefore, be taken while completing security documentation.
3.5.2 Type of Securities:
The following listed securities may be obtained from borrower against loan to enterprises, either individually or in a combination.
It is really up to the bank what they would like to accept as security from the borrower as not all the securities stated below are suitable:
§ Mortgage of loan and other immovable property with power of attorney to sell
§ Lien of Fixed Deposits receipts with banks and other non-banking financial institutions, lined, these have to confirm by the issuer.
§ Lien of Pratirakshay sanchay patra, Bangladesh sanchay patra, ICB unit certificates and wage earner development bond, all considered Quasi or Near cash items
§ Lien of shares quoted in the stock exchange (This is rarely accepted)
§ Pledge of goods (Banks are akin to stay away from such securities now a days)
§ Hypothecation of Goods, Book Debt & Receivables, Plant & Machineries
§ Charge on fixed assets of a manufacturing enterprise
§ Lien of cheque, Drafts and order
§ Lien of work orders, payment to be routed through the bank and confirmed by the issuer.
§ Shipping documents of imported goods
Land Related Securities Documentation Process:
Each SME unit offices are lilies with at least two local lawyers who will work on behalf of the bank. These always will be employed whenever a borrower and where the security will be landed and immovable property accept a loan sanction. Any one of the lawyers will be provided with photocopies of all the relevant land related documents and while handing over show the original documents to them, the lawyers will carry out checks of the originals and if satisfied returned to the borrower. The documents generally provided are:
§ Title Deeds or Deed of conveyance otherwise known as ‘Jomeer Dalil’, which signifies ownership of a particular land.
§ Baya Dalil or Chain of Documents, which signifies that the conveyance of titles has been proper and legal.
§ Mutation Certificate if Khatian which signifies that the title if the land has been duly registered in the Government/Sub-registrar’s records.
§ Duplicate Carbon Receipt or DCR
§ Latest Khajna or land rent receipt
§ Purchase such as CS Khatian, SA Khatian and BS Khatian
§ Mouja Map
§ Municipal rent receipts if the land falls within a municipal area
The lawyer will then carry out a search at the Sub-registrar of land’s office to check if the proffered land is actually registered in the name of the proposed mortgagor and whether the said land is free from any encumbrances. The Sub-register’s office, which means that the land or immovable property can be mortgaged to the bank, then the lawyer, will provide his own opinion on the acceptability of the property, whether it is legally held and explain the chain of ownership. If all is acceptable, the lawyer will draw up the Mortgage Deed that will be registered, the irrevocable power if attorney to sell the land and the Memorandum of Deposit of Title Deed. The lawyer will have the borrower or the Mortgagor, if different or 3rd party, sign the documents in front of the Sub-registrar of land to register the mortgage, The CRO must ensure that the receipt for the original Mortgage deed must be signed off (Discharged) at the back of the receipt so that the bank may obtain the originals in the future. The borrower will bear all the charges and will pay directly at the Sub-Registrar’s office including the cost of the stamp paper required. The cost of the lawyer will also be realized from the borrower be an account payee cheque in favor of the lawyer and handed over to the lawyer straight away.
The charges related to the creation of mortgages and other associated costs are incorporated in a separated sheet and are attached herewith. The CRO will have all other security documents, as sent by SME HO, signed by the borrower and hand carry all the security documents including all the original land documents and deliver those to the credit administration officer who will check the list of documents and receive those through a check list in writing. The credit administration officer once satisfied will prepare the disbursement memo to disburse the loan.
Mortgage:
I) Equitable Mortgage or Memorandum of Deposit of Title Deeds
It is created by a simple deposit of title deeds supported by a Memorandum of Deposit of Title Deeds along with all the relevant land documents. All the searches and verification of documents as stated above must be carried out to validate the correct ownership of the property. This deed also provides the bank power to register the property in favor of the bank for further security, if needed.
ii) Registered Mortgage
It is created by an execution of a Mortgage Deed registered irrevocably in favor of the bank at the Sub-Registrar of land’s office. This virtually gives the bank the right to posses and self if accompanied with a registered irrevocable power of attorney to sell the property executed by the owner of the property, in case of default.
Basic Charge Documents:
i) Sanction Letter
Once a loan is approved, the borrower is advised by a ‘Sanction or offer letter’ which states the terms and condition s under which all credit facilities are offered and which forms an integral part of there security documentation. If the borrower accepts, then a contract between the bank and the borrower is formed and which both party are obligated to perform. Accordingly, all other charge documents and securities are drawn up and obtained. A standard sanction letter is attached herewith. All documents shall be stamped correctly and adequately before or at the time of execution. An un-stamped or insufficiently stamped document will not form basis of suit. Stamps are of 4 (Four) kinds. These are Judicial, Non-judicial, Adhesive and embossed impressed. Documents to be executed (Signed) by the borrowers concerned must be competent to do so in official capacity.
Following precautions should be taken at the time of execution of the security documents:
§ The signature on the documents should be made in the presence of the CRO. The CRO should sign as witness on all charge documents.
§ The document are to be filled in with permanent ink or typed
§ If the document consist more than I page, the borrower should sign on each page
§ If the signature of any third party is required to be obtained whose specimen signature is not available, then the main applicant should verity the specimen signature of the third party
§ No document or column in any document should remain blank
§ As far as possible there should be no erasure, cancellation or alternation in the document. If, however, there is any correction, overwriting or alteration, then that must be authenticated by a full signature of the signatory.
After stamping and execution of documents, the question of registration comes up. However, not all documents are required to be registered. For the extension of any type of credit/loan facility, the following loan documents, which are considered basic, should be obtained from all borrowers:
- Demand Promissory Note
- Letter of Continuity (This is not always taken if there is only loan disbursement)
- Letter of Arrangement
- General Loan Agreement
- Letter of Disbursement
- General Loan Agreement
- Letter of Disbursement; Basically a letter requesting disbursement of the loan
- Letter of Installment, in case the facility is to be repaid in installment
Other Basic Charge Documents:
i) Demand Promissory Note (DP Note):
It is a written promise by a borrower to pay the whole amount of existing or future loans/credit facilities on demand. It also gives the banks power to ask the borrower to repay the loan amount with interest without any prior notice. Section 4 of the Negotiable Instrument Act 1881 defines a promissory note as an instrument in writing, signed by the maker, to pay a certain sum of money only to, or the order of, a certain person, or to the bearer of the instrument, following precautions are to be taken while preparing a promissory note. Type the amount of the credit facility/loan in words and in figures. Type the rate of interest for the loan, which the borrower will subject to verify the signature of the borrower.
ii) Letter of Continuity:
This instrument is used in conjunction with the demand promissory note. This is to secure rights of recovery for existing and future credit facility, which are advanced in parts or on a recovery basis. Loan accounts may from time to time be reduced or even the balance in the said loan account may be in credit so this instrument, validates the said D.P Note, for making further drawings under the facility continuously possible.
iii) Letter of Arrangement:
This is a right given by the borrower to the bank to cancel the facility at any time without having to assign any reason. This is also an acknowledgement by the borrower that the credit facility has been approved in his favor and the borrower has to execute all necessary documents to avail credit facility.
iv) General Loan Agreement:
A loan agreement is an agreement of contract stating the general terms for the extension of a loan or credit facilities. The General Loan Agreement sets out the general standard terms and conditions governing the existing or future extension of loan or erudite facilities to the borrower.
v) Letter of Disbursement:
This is simple a letter requesting disbursement of the loan/credit facilities at the agreed rate of interest.
Other Security Documents:
i) Letter of Undertaking:
This is a Deed of agreement executed by the borrower agreeing to commit to carry out any or a particular obligation to avail of loan/credit facility.
ii) Letter of Hypothecation of Goods & Stocks and Book Debt and Receivable:
These letters Hypothecation are actually two different sets of documents but because of their similarity, these are being explained together. These documents create an equitable or floating charge in favor of the bank over the goods and services and/ or book debts and receivables that are being financed where neither the ownership nor the possession is passed to the bank. Under this agreement, the borrower undertakes to keep the percent stock of goods and that, which may increase from time to time in good condition in future, in good condition. This hypothecation gives the bank the power to possesses and sell the mentioned goods and stocks or claims the book debts directly from the debtors in order to settle the borrower’s dues to the bank.
iii) Letter of Hypothecation of Plant & Machinery:
Under this agreement, the Borrower undertakes to keep the present plant and machinery at the present location in good condition and which gives the bank the power to posses and sell the mentioned plant and machinery to meet the borrower’s dues to the bank. In case of Limited company, both private and public, these Letters of Hypothecation with schedules are usually registered with the Registrar of Joint Stock of Companies (RJSC) that provides more security to the banks.
iv) Letter of Lien:
A lien the right of one person to retain property in his hands belonging to another until certain legal demands against the owner of the property by the person in possession are satisfied. Thus a bank or a creditor who has in its possession a lien over the goods in respect of the money due by the borrower, as a general rule has the right to exercise certain powers to hold on to the security. In addition, if the bank has right to set off the value of the said goods or instrument in its possession, then the bank can sell the goods or encase the instrument to liquidate the dues by the borrower.
v) Right to Set Off:
This deed of agreement gives the bank the right to offset the value of the goods or financial instrument in its possession and which has been discharged by the owner of that asset, against dues owned by the borrower.
vi) Letter of Disbursement:
This agreement gives the bank the right to possess goods and other assets in rented or leased premises of the borrower despite the fact that owner or the premises may be unable to realize dues from the borrower himself.
vii) Personal Guarantees:
This is a guarantee of a person or third who is not the direct beneficiary of the loan/credit facility but is equally liable for the loan. The involvement of a 3rd party creates additional pressure on the borrower to minimize the risk. The guarantor is the person who has to pay the entire outstanding loan and interest if the borrower fails to pay for any reason.
Selection of Potential Enterprise foe SME
3.7.1 Enterprise Selection Criteria:
The success of SME will largely depend on the selection of a business and man behind it. In terms of the business (Enterprise), the following attributes should be sought:
- The business must be in operation for at least one year
- The business should be environment friendly, no narcotics or tobacco business
- The business should be legally registered, i.e., valid trade license, income tax or VAT registration, wherever applicable.
- The business should be in legal trade, i.e.; smuggling will not be allowed or socially unacceptable business will not be entertained.
- The business must have a defined market with a clear potential growth
- The business must be located ideally close to the market and the source of its raw materials/suppliers. It should have access to all the utilities, skilled manpower’s that are required.
- Any risk assessed by the management in turn will become a credit risk for the bank. So effort should make to understand the risk faced by the business.
Entrepreneur Selection Criteria:
In order to understand the capability of the management behind the business, the following should be assessed:
1. The entrepreneur should be physically able and in good health, preferably between the age of 25-50. If he/she is an elderly person closer to 50, it should be seen what the succession process will be and whether it is clearly defined or not.
2. The entrepreneur must have the necessary technical skill to run the business, i.e. academic background or vocational training, relevant work experience in another institution or years of experience in this line of business.
3. The entrepreneur must have and acceptable social standing in the community (People should speak highly of him), he should possess a high level of integrity (Does not cheat anyone, generally helps people), and morally sound (Participates in community building)
4. The entrepreneur must possess a high level of enthusiasm and should demonstrate that he is in control of his business (Confidently replies to all queries) and has the ability to take up new and fresh challenges to take the business forward.
5. Suppliers or creditors should corroborate that he pays on time and is general in nature
6. Clear-cut indication of source of income and reasonable ability to save.
3.6.2 Guarantor Selection Criteria:
Equally important is the selection of a guarantor. The same attribute applicable for an entrepreneur is applicable to a guarantor. In addition he should posses the followings:
1. The guarantor must have the ability to repay the entire loan and is economically solvent (Check his net worth)
2. The guarantor should be aware about all the aspect of SEDF loan and his responsibility
3. Govt. and semi-govt. officials can be selected as a Guarantor such as schoolteacher, college teacher, doctor etc.
4. Police, BDR and Army persons, political leaders and workers, and Imam of mosque cannot be selected as a guarantor.
5. The guarantor should know the entrepreneur reasonable well and should preferably live in the same community
Terms and Condition of SME
The SME department of BRAC Bank Limited will provide small loans to potential borrower under the following terms and condition:
§ The potential borrowers and enterprises have to fulfill the selection criteria
§ The loan amount is between Tk. 2 lacs to 30 lacs.
§ SME will impose loan processing fees for evaluation / processing a loan proposal as following;
| Loan Amount | Loan Processing Fee |
| 2 lacs to 2.99 lacs | Tk. 5000 |
| 3 lacs to 5 lacs | Tk. 7500 |
| 5.01 lacs to 15 lacs | Tk. 10,000 |
| 15.01 lacs to 30 lacs | Tk. 15,000 |
§ Loan can be repaid in two ways:
a) In equal monthly loan installment with monthly interest payment, or
b) By one single payment at maturity, with interest repayable a quarter end residual on maturity
§ Loan may have various validates, such as, 3 months, 4 months, 6 months, 9 months, 12 months, 15 months, 18 months, 24 months, 30 months and 36 months.
§ The borrower must open a bank account with the same bank and branch where the SME has its account
§ Loan that approved will be disbursed to the client through that account by account payee cheque in the following manner: Borrower name, Account name, Banks name and Branch’s name
§ The loan will be realized by 1st every months, starting from the very next months whatever the date of disbursement, through account payee cheque in favor of BRAC Bank Limited Limited A/C. With Bank’s named and branches name
§ The borrower has to issue an account payable blank cheque in favor of BRAC Bank Limited before any loan disbursement along with all other security.
§ The borrower will install a signboard in a visible place of business of manufacturing unit mentioned that financed by BRAC Bank Limited.
§ The borrower has to give necessary and adequate collateral and other securities as per bank’s requirement and procedures.
§ SME, BRAC Bank Limited may provide 100% of the Net Required Working Capital but not exceeding 75% of the aggregate value of the Inventory and Account Receivables. Such loan may be given for periods not exceeding 18 months. Loan could also be considered for shorter periods including one time principal repayment facility, as stated in loan product sheet.
§ In case of fixed asset Financing 50% of the acquisition cost of the fixed asset may be considered. While evaluating loans against fixed asset, adequate grace period may be considered depending on the cash generation after the installation of the fixed assets. Maximum period to be considered including grace period may be for 36 months.
Risk Issues in SME Banking of BBL
There are various types of risk in SME banking, through our observation, discussion and scrutinizing the documents we have found different risk factor in SME loan in BRAC Bank Ltd.
- Unsecured loan:
Most of the SME loans are not backed by any collateral so these loans are very risky. In BRAC bank 90.46%-Annono, SME loans are unsecured so it’s a significant risk for the bank because there is a huge chance of default.
- Fund divert :
Fund divert is the major risk in SME loan, sometimes entrepreneur applies for a loan by showing their existing business and after loan approval they are transferred or diverted the major portion of loan amount to invest in other business or using for personal consumption. As we know the interest rate in SME is quite high and if the entrepreneur diverted the fund then most of the time he/she is unable to pay the monthly instalment.
- Assessment Problem:
Due to lack of experience and proper knowledge, CRO/officer wrongly assess the client or business as a result sometimes Clients gets loan more than actual requirement, which causes to misuse the funds and reasons for overdue. Some CRO are promoted as a ZM or Audit & Compliance officer so there is a chance for wrong assessment because the loan files are sends from their past unit office.
- Environmental (Natural Climate):
Due to some environmental factor i.e. Cydor, aila Floods, etc., Clients are unable to pay the loan or sometimes they are affected severely so that they are incapable of running the business and as a result Bank incurs the loss. For example in Cydor the total affected portfolio was 18 Crore for BRAC Bank.
- Collection Procedure:
BRAC Bank is providing SME loan through out the country and have unit office in almost every Upizilla but they have not in every place only 56 branches. So they are disbursing and collecting loans through other correspondence bank like. Sonali, Janata, Agrani, Rupali, Pubali, City, National bank ltd. Sometimes CRO collecting loan installment from the clients directly and did not deposited on the right time or did not pay but send a fake SMS to the head office.
- Aggressive marketing strategies:
BRAC bank uses aggressive marketing strategies, for quick disbursement they approved up to 0.7 million in field level (ZM) and no centralized bank in Bangladesh approve this amount in the field level. The average monthly growth of SME loan is 1.7% which is the highest among the banks those are engage in SME business. In BBL above 90% SME products are unsecured.
Current policies for Risk Management -BBL
- Training:
BRAC bank has more than 2000 CRO and they are responsible for collection and primary assessment of business enterprises. BBL gives continues training to the CRO to enhance their knowledge regarding assessment, also providing different marketing tactics for meet up the demand and quick collection. Arrange different training for ZM, TM and Audit officer for mitigate different risk issues.
- Monitoring:
Proper monitoring is an essential part for mitigating risk. BBL ensuring monitoring each and every part of SME, CROs are directly guiding and monitoring by ZM and TM. Zonal manager are monitoring by TM and head office. It’s the most important part of the risk management process of SME Banking. In the next part of the report there are some detail information’s about monitoring process of monitoring are provided.
- SME Service Center and ROC:
For mitigating the collection, disbursement and closing problem BBL started ROC and SSC operation. Currently BBL has 30 SSC and 4 ROC by end of 2009 they want to reach 100 SSC and 6 ROC. Presently SSC are taking the deposit but the disbursements are given through other correspondence banks advised by ROC/head office, but BBL has a plan to disburse through SSC.
- Management Information System:
SME business department maintain a sophisticated MIS which covers lots of things and generate different reports like monthly OD list, disbursement, collection and performance of individual or unit level. If any deviation found then promptly take necessary steps like escalating monitoring, take administrative action or issues warning letter to mitigate the problem.
- Recovery unit:
BRAC bank has an independent and efficient recovery team; those are responsible for collection from the OD clients. An exclusive commission system is designed for OD collection which encourages recovery officers to collect as many as possible.
- Impaired Asset Management:
A dedicated department is established by BRAC bank comprises of an efficient lawyer plan and experienced persons those who are responsible for bad loan or write off loan collection. The performance of this department is increases day by day.
Monitoring
Monitoring is a system by which a bank can keep track of its clients and their operations. So monitoring is an essential task for a CRO to know the borrowers activities after the loan disbursement. This also facilitates the build up of an information base for future reference.
Importance of Monitoring:
Through monitoring a CRO can see whether the enterprise invested the sanctioned amount in the pre-specified area of his business, how well the business is running, the attitude of the entrepreneur, cash credit sales and purchase, inventory position, work in process and finished goods etc, This information will help the CRO/BRAC Bank Limited to recover the loan accruing to the schedule and to take the necessary decisions for repeat loans. Moreover, monitoring will also help to reduce delinquency. Constant visit over the client /borrower ensures fidelity between the bank and the borrower and tends to foster a report between them.
Area of Monitoring:
The purpose is to know the entire business condition and all aspects of the borrowers so that mishap can be avoided.
a) Business Condition:
The most important task of the CRO to monitor the business frequently, it will help him to understand whether the business is running well or not, and accordingly advice the borrower, whenever necessary. The frequency of monitoring should be at least once month if all things are in order.
b) Production:
The CRO will monitor the production activities of the business and if there is any problem in the production process, the CRO will try to help the entrepreneur to solve the problem. On the other hand the CRO can also stop the misuse of the loan other than for the purpose for which the loan was disbursed.