Credit is one of the most important functions of a bank and the best of bank strength depends considerably on the quality of its credit and proportion they bear to the total deposit. The credit department from where a bank collects maximum profit as a profit maximization organization and also a service provider.
“An Analysis of SME Banking Operations of AB Bank Limited: Introductory Part 1.0 Introduction: Credit is one of the most important functions of a bank and the best of bank strength depends considerably on the quality of its credit and proportion they bear to the total deposit. The credit department from where a bank collects maximum profit as a profit maximization organization and also a service provider. Small and Medium-sized Enterprises (SME’s) are commonly recognized as one of the leading groups of economic activities globally, create enormous impacts on social issues. It plays an important role in employment creation, resource utilization and income generation, development of forward and backward industrial linkage and meeting local needs. Bangladesh is an underdeveloped country and there is scarcity of enough employment and a healthy economic condition. Government of Bangladesh earmarked and identified SME as the thrust sector in economic division and the reason behind that SME’s worldwide recognized as engines of economic growth as well as significant economic and social contribution.
Transcript
“An Analysis of SME Banking Operations of AB Bank Limited:
Introductory Part1.0 Introduction:
Credit is one of the most important functions of a bank and the best of bank strength depends
considerably on the quality of its credit and proportion they bear to the total deposit. The
credit department from where a bank collects maximum profit as a profit maximization
organization and also a service provider.
Small and Medium-sized Enterprises (SME’s) are commonly recognized as one of the
leading groups of economic activities globally, create enormous impacts on social issues.
It plays an important role in employment creation, resource utilization and income
generation, development of forward and backward industrial linkage and meeting local needs.
Bangladesh is an underdeveloped country and there is scarcity of enough employment and a
healthy economic condition. Government of Bangladesh earmarked and identified SME as
the thrust sector in economic division and the reason behind that SME’s worldwide
recognized as engines of economic growth as well as significant economic and social
contribution. Bangladesh followed a development strategy in which private Investment was
controlled through a host of regulations involving investment sanctioning, credit
disbursement, import licensing, foreign exchange allocation, Now-a-days our findings is what
are the conditions of SME’s, what are the outcomes, opportunity and how to develop the
SME division in our country. Government and financial institutions should give unique
concentration on this sector in order to build a sound economical environment.
1.1 Origin of the Study
As a part of the Internship Program of Bachelor of Business Administration program
requirement, I chose to do my internship in AB Bank Limited ( ABBL) for the period of 90
[ Ninety Days] In ABBL I was assigned to the different concerned department. My
organizational supervisor was Miss. Samsun Nahar Jaly, In charge of Credit Administration
and Monitoring Department. My Project is ‘SME Banking in Bangladesh: A study on AB
Bank Limited’ which was assigned by the organizational supervisor of the said bank. My
faculty also approved the project and authorized me to prepare this report.
1.2 Scope of the Study:
Scope of the study is quite clear. Since Asset Operations Department is dealing with all types of loan activities in the bank, opportunities are there to learn other aspects of SME matters.
Concept of SME and its impact in overall economy of Bangladesh
Entrepreneurship development situation through SME banking
Importance of SME banking in the context of Bangladesh
Virtual banking concept through SME banking
1.3 Objectives of the Study:
To describe SME loan products of AB Bank Limited;
To understand the enterprise selection criteria to provide SME loan by the Bank.
To describe disbursement and recovery procedures of SME loans by AB Bank, New
Elephant Road Branch.
To identify the problems related to the SME banking operations of AB Bank
Limited, New Elephant Road Branch
To make some suggestions to solve the problems.
1.4 Methodology:The report is the yield of the knowledge I have gained from the twelve weeks intern periods.
It has done by gathering qualitative and quantitative information, whereas the quantitative
information taken from both the primary and secondary sources. Majority information was
collected from secondary sources.
1.4.1Source of Date:
To prepare this report, data has been collected from the following sources.
1. The Primary sources.2. The Secondary Sources.
1. Primary Sources:
a) Customers
b) Officers
2. Secondary Sources:
a) Annual Report (2005-2009)
b) Website of respective bank
1.4.2 Sample Size: a) Officers 5
b) Customers 20
1.4.3 Sampling Methods:Convenience sampling.
1.4.4 Data Collection Method:
A questioner has been developed to collect data from existing customer of SME loan
holder and also taken interview with the officer of CAM & SME Department in said bank.
1.5 Limitations:
Though the officers and employees of the organization were so much helpful and
cooperative but they were too much busy in their works that they had very little time
of giving me detailed information.
Also, Information at the bank is confidential & critical. For this reason different proxy
figures have been used, while analyzing many issues related to this topic.
Organization Part2.1 Organizational Profile of AB Bank Ltd:
AB Bank Limited, the first private sector bank under Joint Venture with Dubai Bank Limited,
UAE incorporated in Bangladesh on 31st December 1981 and started its operation with effect
from April 12, 1982.During the last 25 years, AB Bank Limited has opened 71 Branches
spread over the country. As of December 31, 2006; the Authorized Capital and the Equity
(Paid up Capital and Reserve) of the Bank are BDT 2000 million and BDT 2582.76 million
respectively. Since, beginning, the bank acquired confidence and trust of the public and
business houses by rendering high quality services in different areas banking operations,
professional competence and employment of the state of art technology. Now ABBL has
started operation for SME financing which has created attraction among the clients
2.2 Organization at a Glance
Name of the organization AB Bank LimitedForm of organization Public limited companyNature of business Private commercial bankDate of incorporation December 31, 1981Commencement of business February 27, 1982Number of branches 71Total assets Tk. 47,989,337,222Total liability Tk. 45,406,574,310Total shareholder’s equity Tk. 2,582,762,912Net profit after taxation Tk. 532,186,349Earning per share Tk. 93.08Chairman M. Wahidul HaquePresident and Managing Director Kaiser A. ChowdhuryRegistered office BCIC Bhaban, 30-31, Dilkusha C/A
10 Guarantee 3.01 1.65 3.05 4.00 12.6911 Total Income 5.59 8.76 14.42 2084 23.4512 Total Expenditure 4.30 5.32 10.01 1079.14 16.7513 Profit / Loss 1.29 3.44 4.41 4.86 6.70
2.10 SWOT Analysis:
S
Company reputation and goodwill.
Transaction facility through Internet
Large number of branches around the country
On-line banking facility around he country
Experienced and efficient management team
Quality products and services
Better infrastructural facilities
W
Poor recruitment and Human Resource development process
Tangible goods are not in good condition
Lack of professionalism in service quality compared to competitors
Lack of ATM service to close approach of customers
No marketing campaign for different product and services
Burden of uncompetitive aged human resource
O
Automation of transaction processes and online branch banking
SME Banking facilities launching by bank
Transaction facility through internet
Government approval for new branches which was adjourned
Introduction of new products and services
Increasing trend in international business
T
Increased competition for market share in the industry
Frequent changes of banking rules by the Central Bank
Market pressure for lowering of lending rate
National and global political unrest
Project Part 3.1 SME Banking in ABBL:
SME Loan Products
Preamble
Small & Medium Enterprise has emerged as the cornerstone of economic development of
Bangladesh in terms of job creation, income generation, development of forward & backward
industrial linkage and meeting local needs. SMEs provide over 87% of the total industrial
employment and contribute about 90% of the total export earnings. Thus SMEs occupy a
unique position in Bangladesh.
The full potential has not yet been realized due to lack of necessary support. Besides, rapid
trade liberalization & globalization, unofficial imports and non-tariff barriers in overseas
markets has aggravated the situation. The constraints to the development of SMEs also
include lack of access to finance, poor power supply & infrastructure, marketing, product
standard, lack of sufficient export incentive etc.
Definition of SME:
SMEs are defined differently by different authorities. ‘Bangladesh Bank’ and ‘Ministry of
Industries’ consider SMEs under the following criteria:
Definition of SME (Bangladesh Bank):Small Enterprises Medium EnterprisesTotal Asset(Taka in lac)
No. of Employees
Total Asset*(Taka in lac)
No. of Employees
Service Concern : 0.50 to 30.00 Less than 30
30.00 to 100.00
Less than 50
Trading Concern: 0.50 to 50.00 Less than 20
50.00 to 200.00
Less than 50
Manufacturing Concern:
0.50 to 100.00
Less than 60
100.00 to 500.00
Less than 100
* Note: At cost excluding land & building.
Definition of SME (Ministry of Industries):Small Enterprises Medium EnterprisesTotal No. of Total Asset* No. of
Asset*(Taka in lac)
Employees (Taka in lac) Employees
Trading & Other Concern:
Not defined
Up to 24 Not defined 25 to 100
Manufacturing Concern: Up to 150.00
Not defined 150.00 to 1000.00
Not defined
* Note: At cost excluding land & building.
Definition of SME at AB Bank:Small Enterprises
Turnover Total AssetNo. of Employees
Loan Size
Service/Others Concern :
Up to 500.00 lac Up to 100.00 lac Up to 30 Up to 50.00 lac
Trading Concern: 500.00 lac 100.00 lac Up to 30 Up to 50.00 lac
Manufacturing Concern: 500.00 lac 200.00 lac Up to 75 Up to 50.00 lac
Medium Enterprises
Turnover Total AssetNo. of Employees Loan Size
Service/Others Concern :
1500.00 lac Up to 500.00 lac Up to 100 Up to 500.00 lac
Trading Concern: 2500.00 lac Up to 500.00 lac Up to 100 Up to 500.00 lac
Manufacturing Concern: 2000.00 lac 1000.00 lac Up to 500 Up to 500.00 lac
Note:
Total Asset (Ministry of Finance and Bangladesh) means excluding land and building.
Total Assets (AB Bank) means Total Current Asset + Total Fixed Asset.
Total Loan will not exceed above amount as per CIB report (Other Bank’s limit shall
be also consider).
If total exposure exceeds SME limit considering one obligor concept, client will be
treated as Corporate.
Any MNC or Public Limited Company will be considered as Corporate Client.
Determination Criteria:
By Sales Turnover
By Exposure
By Investment
No. of Employee
In the changed scenario of increasing competition in the large loan sector and
curtailment of single obligor exposure limit by the Bangladesh Bank, it has become necessary
to shift dependence from large corporate to the medium and small enterprises. This is also in
conformity with bank’s policy to explore potentials in the SME sector which comprises the
largest chunk of the national economy.
Presently we are serving the SME clients by our regular Loan Products namely ( i.)
Overdraft (ii.) Specific Time Loan (iii.) Revolving Time Loan (iv.) Term Loan (v.) LC for
import (vi.) Trust Receipt – Post import finance and (vii.) Guarantee.
Within the frame work of the SME sector, it has been felt that bank should have
separate schemes for small & medium enterprises loan to be introduced to provide an impetus
to the growth of SME Loan portfolio as tapping customers from large enterprises is limited or
even non existent. Necessity of such a scheme can be substantiated by the following
reasons/rationales:
Rationale:
There is a significant demand for such products in the market and to fill up a segment
gap of our portfolio.
Maximize the return from each customer by cross selling the new products to existing
customers.
Provide the range of lending products to meet customers’ needs so as to strengthen the
banking relationship through the asset products.
Increasing & Diversification of the asset portfolio.
Empirically proven lower default rate of the small & medium size borrowers.
Increasing borrower base.
Increasing image of the bank.
3.2 The Schemes:
Substantiated by the above factors, the following loan schemes under the category of Small & Medium Enterprise (SME) are proposed to be introduced:
Product Name Basic Terms PurposeA. Gati A loan facility for meeting regular as well as
additional requirements of businesses; i.e. it will be part of working capital of the business.
Maximum Loan Amount : Maximum Tk.50.00 lac
Limit will be determined by the stock and/or volume of sales.
Maximum 80% of the stock value to be financed.
Interest Rate : 15.00% p.a. to 17.00% p.a.
Service Charge :
1.00%
Tenor: Maximum 3 (three) Years.
Repayment : Through EMI/Lump sum (No Moratorium).
Security and/or Collateral :
i. Hypothecation of stock and/or receivables
ii. Registered Mortgage of land & buildings and/or Tripartite agreement for shop and/or business premises and/or any other collateral
Product Name Basic Terms Purpose B. Proshar It is long term finance for infrastructure
development /capacity building etc.; i.e. Term Loan for expansion & BMRE.
Maximum Loan Amount : Maximum 50.00 lac
Loan amount will be maximum 80% of the proposed additional investment/expenditure
Interest Rate : 15.00% p.a. to 17.00% p.a.
Service Charge :
1.00%
Tenor : Maximum 3 (three) Years.
Repayment : Through EMI (Moratorium period : Maximum 6 months)
Security and/or Collateral :
(i.) Hypothecation of Stock and/or receivables and/or machineries and/or furniture and fixture etc.
(ii.) Registered Mortgage of land & building and/or Tripartite agreement for shop or business premises or any other Collateral.
Product Name Basic Terms PurposeC. Digun Double amount of loan against value of the
savings instrument (ABBL FDR, DDS) to meet any type of business requirement.
Loan Amount : Tk.10.00 lac to Tk.50.00 lac
Interest Rate : 8.00% above the instrument interest rate p.a. subject to minimum Loan Interest rate of 17.00% p.a.
Service Charge:
1.00%
Tenor: Maximum 3 (three)Years
Repayment : Through EMI/Lump sum.
Security and/or Collateral:
(i.) Hypothecation of stock and /or receivables
(ii.) Lien of savings instrument (ABBL FDR, DDS) covering minimum 50% of loan size.
(iii.) PG of the spouse of the borrower.(iv.) 1 (one) 3rd party guarantee
Condition: Deposit Instrument will not be released before adjustment of the loan.
Product Name Basic Terms Purpose D.
Sathi Term loan for CNG Refueling conversion/Light Engineering/project finance (Package Deal including Non-funded)
Loan Amount : Maximum Tk.500.00 lac Loan Amount will be maximum 90% of the
value of the imported and/or locally procured machineries.
Interest Rate : 15.00% p.a. to 17.00% p.a.
Service Charge: 1.00%
Tenor : Maximum 3(three) Years
Moratorium Period:
Maximum 6 months
Repayment : Through EMI
Security and/or Collateral:
(i.) Hypothecation of Machineries and/or stock and/or Receivables.
(ii.) Registered Mortgage of Project land & building; additional land (if required)
(iii.) PG of the spouse of the proprietor / PG of the Directors.
Product Name Basic Terms PurposeE. Chhoto Puji Mortgage free Term Loan for working
capital/fixed investment requirement.
Loan Amount : Up to Tk.10.00 lac
Tk.10.00 lac Urban Br.
Tk.05.00 lac Rural Br.
Limit will be determined by the stock and/or receivables or volume of sales.
Maximum 80% of the stock and/or stock value to be financed.
Interest Rate : 17.00% p.a.
Service Charge :
2.00%
Tenor : Maximum 3 (three) Years
Repayment : Through EMI
Security and/or Collateral:
Hypothecation of stocks and/or Receivables and/or Machineries/equipments etc. and/or furniture, fixtures and other moveable assets.
Possession rights of the shop/business premises. or
Assignment of advance / security deposits.(if the shop is on rental basis)
Personal Guarantee of the spouse and/or other able family member(s) of the borrower.
Third Party guarantee from a person acceptable to the Bank.
Condition: Letter of Comfort from the local trade body/Union Parishad to be taken. (Format to be vetted by Legal Advisor)
Product Name Basic Terms PurposeF. Uddog Loan for New entrepreneur/business. (For
working capital as well as fixed capital investment.)
Maximum Loan Amount : Maximum Tk.50.00 lac
Interest Rate : 15.00% p.a. to 17.00% p.a.
Service Charge:
2.00% Maximum.
Tenor: Maximum 3 (three) Years
Repayment : Through EMI
Security and/or Collateral :
(i.) Hypothecation of stocks and/or receivables.
(ii.) Registered Mortgage of land and building and/or any other Collateral
(iii.) PG of the spouse of the borrower and/or able family member(s).
Product Name Basic Terms PurposeG. Awparajita A loan facility for meeting working capital
requirement as well as fixed investment in businesses for women entrepreneurs.
Maximum Loan Amount : Maximum Tk.50.00 lac
Limit will be determined by the stock and/or volume of sales.
Loan amount will be maximum 80% of the proposed additional investment/expenditure
Interest Rate : 14.00% p.a. to 16.00% p.a.Service Charge :
1.00%
Tenor: Maximum 3 (three) Years (No Moratorium Period)
Repayment : Through EMI/Lump sum.
Security and/or Collateral :
i. Hypothecation of stock and/or book debtsii. Registered Mortgage of properties/
Tripartite agreement for shop or business premises.
iii. PG of the spouse of the borrower
Special Condition for All the Above Products :Deposit Condition: The client will build a deposit from cash flow (the amount and
nature will be decided by the Relationship Manager or Relationship Executive after discussion with the client) of the business.
Early Settlement: (Incase of EMI based loan)
Winding Up fee of 1.00% to be realized on the outstanding Term Loan amount in case of settlement of the same earlier than maturity.
Special Note For All the above products :Existing Client: Clients/Guarantor having mortgage of properties under
existing credit facilities may suffice on case to case basis.
Loan for Ltd. Company:
For Credit facility favoring a Limited Companies, Personal Guarantee of all the Directors to be obtained.
3.3 Loan Approval Process:
The approval process reinforces the segregation of Relationship Management/Marketing
from the approving Authority. All credit proposals will be initiated at the Branch level and
will be forwarded to Head of SME. The following process flowchart will be followed for
approving of SME credit facilities.
Process flowchart for SME Credit Approval
3.5 Limit Loading and Disbursement Process:
Approved credit limit will be loaded in the system by concerned credit officer of Head Office
CRM. Branch will communicate with the customer to get the sanction letter as well as other
charge documents signed. Branch will also collect other necessary documents from
customer’s end. After completion of documentation formalities Branch CAM will forward
SCC along with loan documentation checklist to Head Office CAM for activating the limit,
which authorize branch to disburse fund.
Limit Loading & disbursement process
Security documents are prepared in accordance with approval terms and are legally enforceable. Standard loan facility documentation that has been reviewed by legal counsel should be used in all cases. Exceptions should be referred to legal counsel for advice based on authorization from Head of CAM.
Disbursements under loan facilities (both Funded & Non-funded) are only to be made when all security documentation are in place.3.5 Loan Disbursement:
2006 2007 2008 2009 2010
SME 28.13 32.28 56.94 60.50 61.12
Large 56.23 64.56 114.58 145.32 150.68
CCS 5.97 5.63 6.02 6.89 7.02
Total 90.33 102.47 177.54 212.71 218.82Source: Credit Department, NER branch.
Loan Disbursement
3.6 Profession exposure of Customer:
3.7 Sector wise Loan Distribution:There are three sectors in which AB Bank has participated. It’s shown below:
220%
310%
170%
In this graph we can see that 70% loan disbursement in SME sector, 20% lone disbursement in manufacturing sector and only 10% SME loan disbursement in Agriculture sector. 3.8 Loan Purpose wise exposure:Considering the volume, role and contribution of the SME in the last two decades AB Bank
has been patronizing this sector by extending credit facilities of different types and tenor
The following sector in which AB Bank has participated so far:
Figure: 1.5 Purpose of SME Loan
0
5
10
15
20
25
30
Setoralcontribution
The portfolio of loan also shows us a picture of the contribution of the bank to the economy
of the country. Basically in domestic and foreign banks are quite reluctant to give loans to the
agricultural sector. Most of the agro loans are provided by the nationalized banks. The largest
portion of SME loans goes to Trading. The other is manufacturing.
3.9 Interest Income from SME Division:This is one of the major sources of bank’s earnings. This also reflects the quality of loans
since good loans make good earnings. Every customer thinks, if a local bank and a foreign
bank offer the same rate, then he goes for the foreign bank for better services. ABBL’s policy
is to keep lending rate at market level but keep the deposit interest rate low. By this way they
maximize the spread and enjoy more profit.
Figure: 1.6 Incomes from SME Loan in NER branch
Loan Recovery Behavior
4.1 Analysis of Loan Recovery Behavior:
Any sound organization after one year of their starting of business can apply for this loan. It
almost a rare case for AB Bank that an SME borrower will default to repay the loan he/she
has taken even the loan is given without taking any collateral. There are several reasons for
which the SME loan borrowers hardly default. These reasons may like: The loan amount is
not as large as it would be difficult to repay it. Mediocre entrepreneurs hardly default to repay
loans. They are very conscious about their reputation in the market. As the loan is taken for
meeting up of working capital, it can be easy to repay after the sales revenue is collected from
respective customer.
From the observation of 15 SME loan borrowers’ personal and repayment information we
find the following results:
1. Average age of SME borrowers is 38.
2. Average education of most of the SME borrowers is Class IX or X.
3. Average Experience (As a promoter of the business) is 11 years.
6. Average personal and family assets are around TK. 150000 and TK. 240000 respectively
7. Almost all of the borrowers are 10% Agriculture, 20% manufacturing and 70% trading.
9. Average Amount of loan taken by them is around TK. 35 Lac.
10. Average time period of loan they take to repay is 1-Year.
11. Average amount of loan suppose to be paid is around 26 Lac.
We have gathered 5 variables to analyze the relationship of each variable with recovery rate.
These variables are:
1. Age of the borrowers
2. Experience of the borrowers related to their business.
3. Amount of loan taken by the borrowers.
4. Personal Asset of the borrowers
5. Nature of business
We can analyze the relationship sequentially:
4.2 Relationship of Recovery Rate with age of the Borrowers:
The relationship of recovery rate with the age of the customers can be described from the
following charts:
Age group Recovery rate (%)21-25 79%26-30 96%31-35 100%36-40 98%41-45 94%46-50 95%50+ 100%
Recovery rate Based on Age Group
0%
20%
40%
60%
80%
100%
120%
21-25 26-30 31-35 36-40 41-45 46-50 51+
Age Group
From the above chart we can see that recovery rate increases as the age of the borrowers
increases. Here the recovery rate is lowest at the age group of 21-25 for the lacking of
experience and knowledge in the related business. They can’t make the proper use of funds.
And that’s why their business fails. At the age of 31-35 recovery rate is 100%. At that age
group people like to behave professionally and control everything with strict discipline. They
are highly concerned about their career which brings success to their business. So at that time
recovery rate is the highest. Again at the age of 50 and above recovery rate is also 100%
because of their huge experience and success in business.
4.3 Relationship of recovery rate with experience of the borrowers:
Figure in Lac
Experience(year) Recovery rate(%)
1 to 5 81%
6 to 10 98%
11 to 15 91%
16-20 100%
20 above 99%
Recovery rate Based on Experience
60%
70%
80%
90%
100%
110%
1 to 5 6 to 10 11 to 15 16 to 20 20above
Experience
From the above graph we see that recovery rate is highly affected with the experience of the
borrowers in the business he is engaged with. In fact, it is all out true that a business and its
success are greatly affected by the experience the entrepreneur have on the same line of
business. At the initial periods of the business lack of experience can cause the business to
fail which ultimately results in the default of loan repayments. So AB Bank is always
concerned about the related experience of the entrepreneur. And here also we see that
recovery rate is lowest at the experience of 1 to 5 years.
4.4 Relationship of Recovery rate with personal asset:
