Investment in SMEs of Eastern Bank limited: Problems and Prospects by lawjuris

Investment in SMEs of Eastern Bank limited: Problems and Prospects

CHAPTER 1 INTRODUCTION

Investment in SMEs of Eastern Bank limited: Problems and Prospects 1.1 ORIGIN OF THE REPORT As a part of the BBA program requirement, I was assigned for doing my internship in Eastern Bank Limited (EBL) for the period of 12 weeks starting from August 04, 2010 to November 04, 2010 as an intern by the Internship Placement Office, Bachelor of Business Administration, University of Dhaka. The Human Resources Department of EBL assigned me at the Principal SME center, Dhaka and my organizational supervisor was Mr. Md. Khurshed Alam, Head of Business, Eastern Bank Limited. My project was to get overall knowledge and to find the prospects and problems of SME (Small & Medium Enterprise) financing activities of EBL. My faculty supervisor Dr. H. M. Mosarof Hossain, Associate Professor, department of Finance, Bachelor of Business Administration, University of Dhaka, also approved the project and authorized me to prepare this report. 1.2 OBJECTIVES The broad objective of this report is to study and assess the SME products of Eastern Bank Limited and hence to get acquainted with the practical aspects of a job. In addition, the specific objectives are 1. To be acquainted with Eastern Bank Limited as an organization. 2. To be familiar with the different SME products offered by the bank. 3. To know about the SME Banking in Eastern Bank Limited. 4. To find out the prospects of EBL in SME financing. 5. To determine the internal and external problems of EBL in SME financing. 6. To compare the performance among the EBL SME loan products. 1.3 SCOPE OF THE REPORT The study would focus on the following areas.  SME Financing Policy of Eastern Bank Limited.  SME Financing Procedures in Eastern Bank Limited.  Analysis of EBL SME products. Each of the above areas would be critically analyzed in order to determine, from a Bankers point of view, what issues are preventing SMEs to access the institutional credit facilities.

1.5 METHODOLOGY AND VARIABLES

Investment in SMEs of Eastern Bank limited: Problems and Prospects Primarily, for general concept development about the bank short interviews and discussion sessions were taken. For the other information secondary sources like books, publications and annual reports of the Eastern Bank Limited were collected. In addition, to learn about SME Banking activities, policy, and procedures, the Credit Manual and Credit Policy and different circulars, Product Program Guide (PPG) of Eastern Bank limited were thoroughly analyzed. Different SME Product features of the Bank were analyzed. For overall scenario of SME financing various publications was reviewed and several discussion meeting were conducted with persons related to SME financing. 1.5.1 SOURCES OF INFORMATION Information collected to furnish this report is both from primary and secondary in nature. The Primary sources are 

Relevant file study as provided by the concerned officer.



Practical desk work



Face to face conversation with the officers.

The secondary sources are 

Different Circulars issued by Eastern Bank Limited and Bangladesh Bank.



Different ‘procedure Manual’, published by Eastern Bank Limited



Annual Reports of Eastern Bank Limited



Periodicals published by Eastern Bank Limited

Publications obtained from different libraries and from Internet.

The whole report was prepared through the following five steps: Step 1 → planning for the content of the report Step 2 → structuring the concepts Step 3 → data collection through primary and secondary sources Step 4 → analysis and interpretation of data Step 5 → draw conclusions

Investment in SMEs of Eastern Bank limited: Problems and Prospects 1.6 LIMITATIONS OF THE REPORT The major limitations faced during the preparation of this report are as follows –  Banks policy does not permit to disclose various data and information related to Credit portfolio.  Non-availability of data and information those are more recent on different activities of Eastern Bank Limited, Especially data of 2010.  Different internal information of EBL SME was found but this cannot be compared with other banks’ same information.

Investment in SMEs of Eastern Bank limited: Problems and Prospects

CHAPTER 2 PROFILE OF EASTERN BANK LIMITED

Investment in SMEs of Eastern Bank limited: Problems and Prospects 2.1 EBL AT A GLANCE Eastern Bank Ltd is a private-owned commercial bank of Bangladesh. Eastern Bank Limited (EBL) is one of the modern, fully online and technologically superior private commercial Banks in Bangladesh. Eastern Bank markets a wide range of depository, loan & card products. Eastern Bank Limited provides commercial banking products and services to the corporate, mid-market, and retail segment in Bangladesh and internationally. Its deposit products include savings deposit, EBL SB insurance account, deposit–retail, EBL campus account, EBL interesting account, EBL confidence, salary account deposits, monthly deposit plan, bearer certificate of deposits, bills payable and fixed deposits comprising short term deposits, term deposits, and non resident foreign currency deposits. The company’s loan portfolio comprise EBL Jibandhara loan, EBL Utshab loan, EBL home loan, EBL fast cash, EBL fast loan, EBL executive loan, EBL auto loan, EBL travel Loan, EBL personal loan, and education finance pack, as well as letters of credit, cash credits, overdrafts, and purchased and discounted bills. It also provides financial products and services, including corporate deposit accounts, syndicated financing, trustee and agency services, term loan, project finance, export-import financing, working capital and other finance, bonds and guarantees, investment and business counseling, infrastructure finance, and cash management services, as well as treasury, syndication, securities, and custody services. In addition, the company makes investments, placements, and borrowing in money and capital markets; and deals with foreign exchange business, as well as provides Internet banking, corporate banking, and Hajj remittance services, such as handling foreign demand drafts and foreign telegraphic transfers in Saudi Arabian and local currency. As of October 31, 2010, it had 39 branches, 60 owned automated teller machines (ATMs), and 218 shared Q-cash ATMs. Eastern Bank Limited was founded in 1992 and is headquarter in Dhaka, Bangladesh. Through a network of branches & SME centers countrywide. Eastern Bank has its presence in major cities/towns of the country including Dhaka, Chittagong, Sylhet, Khulna and Rajshahi. Tracing its origin back to 1992, EBL is serving the individual and corporate clientele alike with remarkable success offering innovative banking services since then. 2.2 HISTORY OF THE BANK The declaration of the Government’s bold are far-sighted to allow banks in the private sectors to play its due role in the economy of Bangladesh, it has started the process of 6

Investment in SMEs of Eastern Bank limited: Problems and Prospects creating new and dynamic financial institutions. One such institution is the Eastern Bank Limited (EBL). The emergence of Eastern Bank Limited in the private sector is an important event in the banking era of Bangladesh. Eastern Bank Limited came into existence as a public limited company incorporated in Bangladesh on August 8, 1992 with the primary objectives to carry on all kinds of banking business in and outside of Bangladesh and to give effect to the Bank of Credit and Commerce International (Overseas) Limited (Reconstruction) Scheme, 1992, framed by Bangladesh Bank with a view to safeguard the interest of the depositors of erstwhile OCCI. Under the Scheme, EBL has taken over the entire business assets, cash and liabilities of erstwhile BCCI in Bangladesh, with effect from 16th August, 1992 as they stood after the reduction or adjustment in accordance with the provisions of the Bank of Credit and Commerce International (Overseas) Limited (Reconstruction) Scheme, 1992. EBL commenced its business as scheduled bank with effect from August 16, 1992 with four branchesPrincipal Branch, Dhaka; Motijheel Branch, Dhaka; Agrabad Branch, Chittagong and Khulna Branch, with a motto to grow as a leader in the banking arena of Bangladesh through better counseling and effect service to clients and thus to revitalize the economy of the country. EBL resumed its operational activities initially with an authorized capital of Tk. 1000 million. Into 10 million shares of Tk. 100 each and paid up capital of Tk. 310 million. During 1994, the paid up capital has increased to Tk. 600 million but the authorized capital remains unchanged at Tk. 1000 million. The first Board of Directors of EBL constituted by the Govt. of Bangladesh, consisted of 7 directors from various business and professions. Mr. Nurul Hussain Khan was the chairman of the bank. EBL is the successor of BCCI. In the 1991 when BCCI has collapsed internationally, the operation of this bank has been closed sine die in Bangladesh. After a long time discussions with BCCI employees and taking into consideration the depositors and customers interest, Bangladesh Bank has given permission to form a bank named Eastern Bank Limited by taking all assets and liabilities of erstwhile BCCI. This is the brief history of EBL. 2.3 VISION OF THE BANK The vision statement of EBL is: â&#x20AC;&#x153;To become the bank of choice by transforming the way we do business and developing a truly unique 7

Investment in SMEs of Eastern Bank limited: Problems and Prospects financial institution that delivers superior growth and financial performance and be the most recognizable brand in the financial services in Bangladesh.” EBL dreams to become the bank to choice of the general public including both the consumer and the corporate clients. It has adopted a new logo that looks very dynamic in its attractive colors that reflect all the changes that are taking place in EBL. 2.4 MISSION OF EBL The mission statement of EBL is: “We will deliver service excellence to all our customers, both internal and external. We will ensure to maximize shareholders’ value. We will constantly challenge our systems, procedures and training to maintain a cohesive and professional team in order to achieve service excellence. We will create an enabling environment and embrace a team based culture where people will excel.”

Investment in SMEs of Eastern Bank limited: Problems and Prospects 2.5 VALUES OF EBL Values carried out by EBL are: We passionately drive customer delight. SERVICE EXCELLENCE We use customer satisfaction to accelerate growth. We believe in change to bring in timely solution. OPENNESS

We share the business plan. We encourage two way communications. We recognize achievements, celebrate results.

TRUST

We care for each other. We share learning/ knowledge. We empower our people.

COMMITMENT

We know our roadmap. We believe in ‘continuous improvement’. We do not wait to be told.

INTEGRITY

We say what we believe in. We respect every relationship. We do not abuse information power.

We are tax-abiding citizen. RESPONSIBLE We promote protection of the environment for our children. CORPORATE CITIZEN We conform to all laws, rules, norms, sentiments and values of the land. 2.6 STRATEGIC PRIORITIES EBL has some strategic priorities which it believes to be maintained in operating the bank. These are • Further improvement of asset quality. • Further change in deposit mix to increase pie of low cost deposits. • To become cost efficient organization. • Moderate growth in conventional products. • Pursue inorganic growth through merger and acquisition. • Increase off-balance sheet business through product innovation. • Careful penetration in the capital market. • Increase intrinsic value of the company by strengthening internal controls through installation of clearly laid down policies, procedures and processes. • Diversify corporate business to take advantage of PPP. 9

Investment in SMEs of Eastern Bank limited: Problems and Prospects • Increased and focused Corporate Social Responsibility (CSR). • Increase shareholders’ value. • Strengthen risk management. • Improve quality of human capital by strengthening their competencies. • Create world class IT infrastructure to deliver superior service to our customers. 2.7 BUSINESS REVIEW OF EBL Eastern Bank Limited (EBL) is a commercial bank with 39 online branches across major cities in Bangladesh and 950 full time employees on year end 2009. It offers full range of commercial banking products and services to the corporate, mid-market and retail segment, the bank has comprehensive range of financial products including corporate deposit accounts, syndicated financing, trustee and agency services, term loam, project finance, working capital and other finance, bonds and guarantees, investment and business counseling, infrastructure finance, cash management services etc. Unlike conventional branch banking, credit proposals as well as business operations are processed centrally at EBL. Besides Main Operation, EBL has an offshore Banking Unit (OBU) set up in 2004 which gives loans (on and off-balance sheet exposure) and takes deposits only in freely convertible foreign currencies to and from nonresident person/institution, fully foreign owned EPZ companies. EBL organogram follows: Figure 1: Organogram of EBL 2.7.1 Corporate Banking: Under the umbrella of Corporate Banking, there are nine relationship units, six in Dhaka and three in Chittagong. The relationship units contribute to loan share both in Loans and advances (measuring around 77% of total loans as of 31.12.09) as well as fee based income by providing comprehensive financial solutions in the form of Trade Finance, Working Capital, Project Finance etc. It also contributes a considerable EBL deposit book which was 39 % in 2009. Readymade garments and textiles comprise nearly one-fourth of Corporate Banking’s portfolio. Major sectors financed by EBL are RMG, Textiles, Ship Breaking, Commodity, Telecommunications, and Pharmaceuticals etc.

Investment in SMEs of Eastern Bank limited: Problems and Prospects The focus of EBL in the year 2009 was to diversify its asset portfolio by entering into new industries. As apart of its diversification, EBL started to enhance its footing into new sectors such as aviation, healthcare, power, glassware and agribusiness (processed food, poultry etc). There are three specialized units: 2.7.1.1 Structured Finance Unit: SFU is dedicated to providing best structured solutions meeting the needs of the clients, quality agency and trustee services, and maintaining a sustainable relationship with all the parties involved. Today, SFU is not only providing term loan involving local lenders but also arranging Preference Share Subscription, USD Term Loan, and Offshore Finance etc. Following are some highlights of the success of SFU: 

In 2009, SFU won a bid worth USD 114.8 million of syndicating Bangladesh Biman Boeing pre-delivery financing arrangement beating competition from local and foreign banks.



Working as a lead arranger, SFU closed the deal of BDT 775 million Term Loan for Regent Power Limited (a concern of Habib Group) which was backed by IPFF, a World Bank funding facility for infrastructure projects.



SFU has been working as an Agent for ADB Agribusiness Project and actively working with Asian Development Bank, Ministry of Finance and Local NGOs – ASA, BRAC and TMSS.

2.7.1.2 Investment Banking Unit: Recent global financial crisis failed to jolt the capital market of Bangladesh; rather market capitalization of DSE has gone up by more than 80% in 2009 due to the active IPO market, increased institutional investors’ participation, and surge of Mutual Fund industry and sustained of the corporate entities in general. EBL has identified the huge business potential in the capital market frontier in the late 2007 which had driven the set up of investment banking in early 2008. Since establishment, Investment Banking is successfully operating to develop new business to serve the undeserved market potential. Subsequently, investment banking has passed a very successful year of 2009 due to following developments. 

Sponsoring Mutual Fund: Investment Banking developed the idea to

sponsor EBL 1st Mutual Fund (MF) of BDT 100 crore, the first MF in Bangladesh sponsored by a commercial bank, which was listed in the DSE in 11

Investment in SMEs of Eastern Bank limited: Problems and Prospects August 2009. EBL being the sole sponsor holds 20% of the fund that had NAV of BDT 11.87 as on December 31, 2009 against each unit of BDT 10.00. 

Own Portfolio Performance: EBL has been actively managing an

investment portfolio since February 13, 2009. Up to the end of December, the effective return from the secondary investment portfolio was 95.89% taking into realized and unrealized return into account. Over the same period, broad market return was 64.41% as measured by the DGEN’s change. 

Underwriting and Placement Participation: EBL was the largest

underwriter of Grameenphone Ltd’s IPO. EBL underwrote BDT 63.50 crore of Grameenphone issue. EBL also participated in the private placement offer of Grameenphone Ltd investing in 3.64 lacs share of GP Ltd an amount of BDT 2.62 crore. EBL has also made arrangements to underwrite the IPO of RAK Ceramics Ltd. to the tune of BDT 5.00 crore. 2.7.1.3 Cash Management Unit: EBL Cash Management Unit aims at introducing efficient tools for maintain liquidity of clients and maximizing their return. EBL has introduced a range of Cash Management solutions that has enabled businesses to mange their cash flows efficiently and effectively by optimizing liquidity, reducing default risk and lowering operating cost. Following are some mentionable deals made by Cash Management Unit during the year 2009: 

EBL pioneered in providing the Hajj Remittance Service to the private

Hajj Agencies through prepaid Hajj Card. 

Collection agreement with one of the largest enterprises in the Power

Sector viz. Bangladesh Power Development Board. 

Collection agreement with Meghna Petroleum limited, one of the

largest Oil Marketing Companies of Bangladesh. 

EBL has successfully initiated a depository relationship with

Bangladesh Telecom Regulatory Commission (BTRC) through collection of their security deposit. 

EBL was the first local bank in Bangladesh to start a depository

relationship with American Life Insurance Company.

Investment in SMEs of Eastern Bank limited: Problems and Prospects 

Countrywide Payments and Collection solution for telecom industries,

local corporate houses and other institutional clients. 2.7.2 Consumer Banking: EBL consumer Banking (CNB) has sustained its growth in deposit base and has attracted low cost deposit fund in 2009 despite the adverse situation due to the Global Economic Crisis. EMI Consumer Loan portfolio has also increased significantly during the year. In 2009, CNB deposit grew by 23% while total Consumer Loan portfolio (including credit cards) increased by 21%. EBL branch network is further expanded to 39 with the introduction of 5 new branches (Satmasjid Road, Banasree, Sirajuddowla Road, Choumuhani and Savar branch). EBL own ATM network is extended to 60 with 24 new ATMs in important locations around the country. Carrying forward the legacy, EBL introduced three different and very customer friendly products in 2009. “EBL Travel Card” was launched keeping in mind the growing traveling population of Bangladesh. This Visa prepaid USD card helped the travelers from the hassle of purchasing and carrying cash while in the move. Keeping in mind the regulatory requirements and the need of the remitters, EBL rebranded its non-resident business outlook and launched a set of service propositions under the brand name “EBL Matribhumi”. EBL Matribhumi is service concept where the maximum financial security and convenience in banking is ensured. In 2009, EBL received approval for launching mobile phone based remittance distribution service titled “EBL Smart Remit”.

2.7.3 SME Banking: Small and Medium Enterprises (SMEs) are the “engines of growth” in almost all the emerging economies in the globe. The National Private Sector Enterprise Survey which was conducted in 2003 estimates that about 6 million micro and small and medium enterprises are doing business in Bangladesh and are employing more than 31 million people nationwide. Furthermore, the data reveals that micro and SME sector has employed 25% of the total workforce. EBL SME Banking began journey in June 2006. As of now it has 28 SME Centers located in the premier business of the country. EBL opened 12 new SME Centers up to September 2010. EBL SME Banking has experienced a structural shift in 2009 by 13

Investment in SMEs of Eastern Bank limited: Problems and Prospects separating the SE Business and ME Business completely, under two business heads and thus making it more focused and accountable. This structure has enabled the department to streamline its operation in every sector, starting from business booking to overall monitoring of the assets to ensure healthy portfolio. In January 2009, the management has approved a new SME definition in which the ticket size for the Medium Enterprises bookings have been increased from BDT 50 million to BDT 100 million and the maximum ticket size for the Small Segment have been increased from BDT 5.00 million to 7.00 million. The growth rate of EBL SME Banking has always been on an upward trend: overall presence in the bankâ&#x20AC;&#x2122;s balance sheet (loan portfolio) is also increasing from 7.80% in 2007, 9.25% in 2008 and about 11% at the end of 2009. The deposits grew by 36% from 2008. 2.8 REVIEW OF OPERATIONS 2.8.1 Trade Services (TSD): EBL Trade Services has maintained its transactional growth with remarkable accuracy and without significant increase in headcount. Due to spill over effects of global recession, foreign trade business has declined. Although Trade Service has managed to maintain an increasing trend in the number of LC, LG and Export Bills in 2009, (28,181 in 2009 vs. 27,120 in 2008) trade business volume has decreased (BDT 90,236.65 million in 2009 vs. BDT 98,258.65 million in 2008). EBL had extraordinary yields in 2009 from mutually beneficial relations with IFC under Global Trade Finance Program (GFTP) and with ADB under Trade Finance Facilitation Program (TFFP). Excellent utilization of IFC Line by EBL has contributed to the increase of the Guarantee Line from USD 10 million to USD 30 million in 2009. Similarly ADB has increased TFFP line from USD 10 million to USD 15 million upon highly satisfactory utilization by EBL. 2.8.2 International Department In order to facilitate Foreign Exchange (FX), Foreign Trade and Other Foreign Currency (FCY) business and transactions, EBL maintains Correspondent Banking relationship with number of banks at home and abroad. Standard Settlement Instruction (SSI) including Drawing and Telegraphic Transfer (TT) arrangements have been enhanced and ensured in all major currencies (USD, GBP, EURO, ACU Dollar, SGD, JPY, AUD, CAD, CHF and Saudi Arabian Riyal). SSIs have been rationalized to 26 14

Investment in SMEs of Eastern Bank limited: Problems and Prospects numbers as of December 31, 2009. Business lines have been enhanced with IFC to USD 30.00 million and ADB to USD 15 million along with other business correspondents. 2.8.3 Service Delivery Service Delivery, as part of centralized operations, was established in 2006 at Dhaka and Chittagong with an objective to provide dedicated services to branches and business units (Consumer, SME, Corporate, Treasury and Investment Banking). In 2009, with broad objective of business support, Risk Management and optimum utilization of Human resources, the SD has opened its Sylhet unit to ensure faster processing for Sylhet zone branches locally. So now ‘Service Delivery’ is ensured through three wings at Dhaka, Chittagong and Sylhet. This unit is now grouped six functional units to perform as a focused group to bring in specialization, service excellence, improvement in services and compliances, and risk mitigation service deliveries. They are Account Services, Item Processing, Cash Management Operations, Non resident Business Operations, Internet Banking Operations and Treasury & Investment Banking support unit. 2.9

INFORMATION TECHNOLOGY (IT)

EBL has initiated its Core Banking System up gradation to the latest Oracle’s FLEXCUBE UBS version. This will enhance the customer service capabilities; further improve cost per transaction, and better manage risks with latest control tools. Some additional module set will allow EBL to introduce all latest channels for customer transaction. An upgrade of payment card solution is also planned for ecommerce, EMV issuing and acquiring capabilities. The preparatory work towards integrated BASEL II compliance through automated tools is being done. Technology innovation is one of the most effective ways to achieve cost savings by automating manual processes. More importantly, management of technology enables new revenue opportunities by providing better and timely information about internal processes and client data. 2.10 HUMAN RESOURCES In an increasingly competitive business environment, the Bank is ever more mindful of the importance of its people as a key success factor. Eastern Bank therefore aims to create a work environment that enables staff to realize their full capabilities and build for themselves a fulfilling career. The Bank has sought to enhance the effectiveness of its recruitment and orientation process. It also further developed its 15

Investment in SMEs of Eastern Bank limited: Problems and Prospects training curriculum and method in support of the Bankâ&#x20AC;&#x2122;s philosophy of enabling people to continually develop themselves to their fullest potential. Staffs were encouraged to continually learn and take on new challenges. Managers were provided with further training to ensure they support their staff through effective communication, coaching and constructive feedback. Moreover, the Bank has also enhanced and implanted effective performance management practices. This is to ensure that in planning, all employees and managers concentrate on most important business issues, and in executing the plan, on monitoring and evaluating the progress. Moreover, they are encouraged to continually take on more challenges at both the individual and business unit levels.

2.11 RISK MANAGEMENT PRACTICES AT EBL 2.11.1 Credit Risk Management: The bank is exposed to credit risk in its lending operations. Credit risk is the risk of loss that may occur from the failure of any counterparty to make required payments in accordance with terms and practices. The bank has adopted a framework for credit risk management, setting up of an independent Credit Risk Management (CRM) team to establish better control and check in accordance with the predetermined specific principles, and to reduce conflicts of interests in the business units. The Head of Credit Risk Management (HoCRM) has clear responsibility for management of credit risk. Policies/ instructions in this respect are approved by the Board of Directors or authorities acting on their delegation. Besides, subjective appraisal of credit application, bank use a numerical grading system for quantifying the risk associated with a borrower, which is not a decision making tool but a general indicator to compare risk perception about the borrower. The grading is based on Credit Risk Grading Matrix (CRGM) that analyses a borrower against quantitative and qualitative measures. Retail and small loans are managed under separate Product Program Guidelines, approved by the Board of Directors. Credit exposure of Eastern Bank is measured and monitored by quarterly MIS on portfolio, which is submitted to MD & CEO. Bank complies with related norms on exposure stipulated by Bangladesh Bank and its self-made sector wise and product wise exposure capping. Bank can automatically generate daily reports on borrower wise limits, utilizations, overdue, repayment, etc. 16

Investment in SMEs of Eastern Bank limited: Problems and Prospects 2.11.2 Market Risk Management: Market risk is the possibility of loss arising from changes in the value of a financial instrument as a result of changes in market variables such as interest rates, exchange rates, credit spread and other asset prices. The market risk in the bank is managed in accordance with regulatory guidelines, governing lows and financial and economic environment. Structural interest rate risk arises from the re-pricing characteristics of banking assets and liabilities. Interest rate risk is the risk of potentially variability in earnings and capital value resulting from changes in market interest rate. Asset Liability Committee (ALCO) is mainly responsible for establishing guidelines for the management of assets and liabilities, monitoring and minimizing interest rate risk at an acceptable level. These guidelines and actions are taken in adherence to the policies issued by Bangladesh Bank from time to time. Liquidity risk is defined as the risk that the bank either does not have sufficient financial resources available to meet all its obligations and commitments as they fall due, or can access them only at excessive cost. It is the policy of the bank to maintain adequate liquidity at all times. Liquidity risk management is governed by Asset Liability Committee (ALCO) and responsible for both statutory and prudential liquidity. Since liquidity have inverse relationship with profitability, prudential management of liquidity is important. Asset deposit ratio of the bank as on 31 December 2009 was 96.91% and the bank maintained statutory liquidity in 2009 in all cases. 2.11.3 Operational Risk Management: Operational risk is the risk of loss resulting from inadequate or failed internal processes, people or systems, or from external events. Operational risk includes legal risk but excludes strategic and reputational risk. Operational risk is inherent in bankâ&#x20AC;&#x2122;s business activities. According to BASEL II Bangladesh Bank guideline, the bank follows â&#x20AC;&#x2DC;Basic Indicator Approachâ&#x20AC;&#x2122; for computation of regulatory capital against operational risks. Following table shows amount of regulatory capital required for operational risk: Table 1: Regulatory Capital Requirement Particulars Average of last three years

Amount (million BDT) 3,712.89 17

Investment in SMEs of Eastern Bank limited: Problems and Prospects gross income (GI) Capital charge @ 15% on average GI

556.93

Investment in SMEs of Eastern Bank limited: Problems and Prospects 2.12 REVIEW OF FINANCIALS 2.12.1 Summary financials Eastern Bank Limited has made 24.93 percent growth in Operating profit (profit before provisions and tax) during 2009 to BDT 2,980.16 million primarily due to 39.56 percent increase in Net Interest Income of NII (BDT 2,164.91 million vs. BDT 1,551.21 million in 2008) and 14.51 percent increase of other revenue (BDT 2,465.25 million compared to BDT 2,152.79 million in 2008) offset in party by 25.14 percent increase of operating expenses (BDT 1,649.99 million vs. BDT 1,318.46 million in 2008). Profit after tax increased by 82.33 percent to BDT 1,454.54 million compared to BDT 797.77 million in 2008 mainly due to decrease of loan loss prevision by 38.52 percent (BDT 279.46 million vs. BDT 454.54 million in 2008). Therefore, Earning per Share (EPS) in 2009 jumped accordingly to BDT 58.53 compared to BDT 34.53 (resated) in 2008. Loans grew by 20.19 percent in 2009 (2009 end: BDT 47,667.99 million vs. 2008 end: BDT 39,662.16 million) and Deposit increased by 18.32 percent in 2009 (2009 end: BDT 49,189.54 million vs. 2008 end: BDT 41,572.77 million). 2.12.2 Results of Operation Our operating results in 2009 showed a balanced growth in every earning component. Growth of NII during the said period was 39.56 percent compared to 18.21 percent growth in 2008. This was largely attributable to the fact that, Cost of fund (Deposit and borrowing) has decreased by 79 basis points to 8.15 percent (calculated based on daily average balances) during 2009 whereas yield on loans and placements has decreased by only 29 basis points to 13.53 percent compared to those of 2008. Growth of other revenue by 14.51 percent (BDT 2,465.25 million in 2009 vs. BDT 2,152.79 million in 2008) has also played important role in attaining 24.93 percent growth in operating profit during 2009. Following table compares key operating financials of the period mentioned.

Table 2: Key operating financials

(Figures are in million BDT)

Year 2009 6,216.21 4,051.31 2,164.91 1,107.30 748.56 609.39

Interest income interest expense Net interest income (NII) Income from investments Commission, exchange and brokerage Other operating income

Year 2008 5,233.66 3,682.45 1,551.21 862.90 770.93 518.96

% Change 18.77% 10.00% 39.56% 28.32% -2.90% 17.42%

Investment in SMEs of Eastern Bank limited: Problems and Prospects Total other revenue Total operating income Total operating expense Profit before provision and tax/Operating profit Provision for loans and contingent assets: Specific provision General provision Total provisions Profit before tax for the year (PBT) Tax provision Profit after tax (PAT)

2,465.25 4,630.15 1,649.99 2,980.16

2,152.79 3,704.00 1,318.46 2,385.54

14.51% 25.00% 25.14% 24.93%

130.96 148.50 279.46 2,700.70 1,246.16 1,454.54

241.42 213.12 454.54 1,931.00 1,133.23 797.77

-45.75% -30.32% -38.52% 39.86% 9.97% 82.33%

2.12.3 Key Ratios Since our profit after tax has increased by 82.33 percent during 2009, all the ratios (including ROE and ROA) whose numerator is the PAT have jumped. Following table summarizes some of the major financial ratios: Table 3: Major financial ratios Year 2009 22.10% 2.34% 35.54% 16.84% 2.46% 58.53% 96.91% 189.95%

Return on average equity (ROE) Return on average assets (ROA) Cost to income ratio Capital adequacy ratio (Basel 1) NPL ratio EPS (BDT) Credit to deposit ratio Price to book value ratio

Year 2008 18.64% 1.68% 35.60% 12.71% 3.30% 34.53% 95.40% 172.69%

1. ROE: Profit after tax/Average of the year open and end equity, ROA: Profit after tax/Average of the year open and end assets. 2. Operating expense/Total operating income. 3. NPL or classified loans at year end 2009/Total/loans. 4. Gross loans without netting provision or interest suspense/Total deposit at year end 2009. 2.12.4 Financial Standing Loan portfolio of the Bank increased by 20.19 percent to BDT 47,667.99 million whereas Deposits grew by 18.32 percent to BDT 49,189.54 million as on December 31,2009. In absolute numbers, Loans grew by BDT 8,005.83 million whereas Deposits grew by BDT 7,616.77 million in 2009. Borrowing increased by BDT 3,886.59 million or 78.55 percent whereas placement decreased by BDT 370 million or 52.86 percent over those of 2008. Investment increased by 65.38 percent to BDT 8,806.31 million as on December 31, 2009. Fixed Assets increased by 44.77 percent reaching BDT 1,804.05 million as on 20

Investment in SMEs of Eastern Bank limited: Problems and Prospects year end 2009 mainly due to purchase of land costing BDT 52.36 million and booking land revaluation gain of BDT 508.66 million. Shareholders’ Equity increased by 78.10 percent and reached BDT 8,429.15 million as on year end 2009. Finally, the Balance Sheet size of EBL i.e. Total Assets increased significantly by 27.97 percent and reached to BDT 69,870.74 million as on December 31, 2009. 2.12.5 Net Interest Income and Spread Net interest income has increased by 39.56 percent during 2009 to BDT 2,164.91 million compared to BDT 1,551.21 million in 2008 mainly due to volume and rate effects as mentioned below.  Average loans and placements have increased by BDT 8,024.79 million or 21.33 percent in 2009 over that of 2008 causing interest income to rise by BDT 1,067.55 million in 2009 compared to 2008.  Yield on average loans and placement during 2009 has decreased by 29 basis points to 13.53 percent over 13.82 percent during 2008 casing interest income to fall by BDT 94.00 million.  Average deposits and borrowings have increased by BDT 5,742.21 million or 13.96 percent in 2009 over that of 2008 causing interest expense to rise by BDT 519.35 million in 2009 compared to 2008.  Cost of fund on average deposit and borrowing has decreased by 79 basis points to 8.15 percent over 8.94 percent during 2008 casing interest expense to fall by BDT 374.86 million. 2.12.6 Non-interest/operating expenses Operating expenses have increased by 25.14 percent to BDT 1,649.99 million in 2009 compared to BDT 1,218.46 million in 2008 as sets forth in the following table: Table 4: Operating expenses 2009 2008 % Change Employee expense 743.05 610.01 21.81 Directors’ fees and expenses 0.96 0.99 -3.77 Other administrative expense 657.27 542.74 21.10 Legal and professional expense 21.66 20.22 7.17 Depreciation, repair and maintenance 220.70 141.84 55.59 Audit fees 0.21 0.27 -23.84 Charges on loan losses (write off) 6.14 2.39 157.06 Total operating/Non interest 1,649.99 1,318.46 25.14 expenses Employee expenses have increased by 21.81 percent in 2009 over that of 2008 mainly due to increase of headcount from 763 to 878 during the year and routine increment of salary and benefits during the year. Depreciation on fixed assets have increased by 51.00 percent to BDT 120.07 million in 2009 whereas repair and maintenance expense have increased by 61.44 percent to BDT 100.62 million in 2009 was mainly due to 21

Investment in SMEs of Eastern Bank limited: Problems and Prospects increase of depreciation on various electronic and networking equipments and machinery and maintenance charges for newly opened branches, centers, ATMs etc.

Investment in SMEs of Eastern Bank limited: Problems and Prospects

CHAPTER 3 SME & SME BANKING IN EBL

Investment in SMEs of Eastern Bank limited: Problems and Prospects 3.1 DEFINITION OF SME Business process codification was first done on May 16, 2006. It is designed with definition given by Prudential Guidelines of Bangladesh Bank for SE financing on May 30, 2007. In the said memorandum, Small and Medium Enterprise was segregated by yearly sales turnover, asset size and total manpower. Threshold limit for allowing credit facility to Medium Enterprises was set for Tk. 6.00 crore. Recently, BB has issued a new circular related to the definition of SME on May 26, 2008. The circular has increased the asset size for Small Enterprises (for manufacturing and service concerns whereas trading concerns remain as it is) and also aligned the manpower size for all types of Small Enterprises. The circular has given new definition of ME which was absent in Prudential Guidelines. New definition given by BB is as follows: Table 5: SME definition given by BB Small Segment

Medium Segment

Sector

Asset size other than land and building

Manpower

Asset size other than land and building

Manpower

Manufacturing

BDT 50,000 to BDT 15,000,000

BDT 15,000,000 to BDT 200,000,000

150

Trading and Services

BDT 50,000 to BDT 5,000,000

BDT 5,000,000 to BDT 100,000,000

Proposed new definition by EBL: Table 6: Definition of Small Enterprise by EBL Nature of Value of assets Manpower Yearly Sales enterprise (excluding land & Turnover building) Manufacturing Trading/ Service

Nature of enterprise Manufacturing

BDT 50,000 to BDT 15,000,000 BDT 50,000 to BDT 5,000,000

50 25

BDT 500,000 to BDT 200,000,000

Table 7: Definition of Medium Enterprise by EBL Value of assets Manpower Yearly Sales (excluding land & Turnover building) BDT 15,000,000 to BDT 200,000,000

Maximum Loan Amount

150

BDT 1,000,000 to BDT 500,000,000

BDT 7,500, 000

Maximum Loan Amount BDT 100,000, 000

Investment in SMEs of Eastern Bank limited: Problems and Prospects Trading/ Service

BDT 5,000,000 to BDT 100,000,000

EBL need to bring amendment to the existing definition for the following reasons:  To be line with Bangladesh Bank. 

To grow their book by bringing the missing middle those one neither addressed by corporate banking nor by SME banking.



To enlarge the scope of doing business of the Bank.



Small loan amount set by BB.



Medium loan amount is set by EBL.

Justification for enhancement of credit limit for medium enterprise from Tk. 6.00 crore to Tk.10.00 crore (based on BB circular ACSPD No-8, dated May 26, 2008): 1. Manufacturing Concern: 

Asset size for manufacturing concern as set by Bangladesh Bank is Tk. 20.00

crore (excluding value of land and building). 

Assume 30% of the asset is occupied by Fixed Asset (Plant & Machinery,

Furniture & Fixture, Advance against shop), i.e. Tk. 6.00 crore. 

If EBL finances 70% of the Fixed Asset, total amount comes at Tk. 4.20 crore

(Tk. 6.00 crore×70%). 

They have proposed total loan Amount for Tk. 4.00 crore (33% of client’s

equity). 

Again, assume total sales turnover of the concern is Tk. 50.00 crore (as per

EBL’s new definition). Total asset turnover comes at 2.5 times. 

Considering gross margin 10%, cost of goods sold comes at Tk. 45.00 crore.



Considering 120 days cash conversion cycle (it varies from business to

business), working capital requirement comes at Tk. 15.00 crore. 

EBL is proposing total limit (funded and non-funded) up to Tk. 10.00 crore

only. 2. Service and Trading concern:  Asset size for trading and service as set by BB is Tk. 10.00 crore (excluding value of land and building).  Assume 5% of the asset is occupied by Fixed Asset (Furniture & Fixture, Advance against shop), Current Asset comes at Tk 9.50 crore (Tk. 10.00 crore × 95%). 25

Investment in SMEs of Eastern Bank limited: Problems and Prospects 

Again, assume total sales turnover of the concern is Tk. 50.00 crore (as per

EBL’s new definition). Total asset turnover comes at 5 times. 

Considering gross margin 3%, cost of goods sold comes at Tk. 48.00 crore.



Considering 90 days cash conversion cycle (it varies from business to business),

total limit requirement comes at Tk. 12.13 crore. 

Total fixed asset requirement Tk. 50.00 lac (EBL does not consider fixed asset

financing for trading and service concerns). 

EBL is proposing total limit (funded and non-funded) up to Tk. 10.00 crore

only. Moreover, the sector wise segmentation of SME follows some criteria and EBL has made the following changes: Table 8: SME Criteria

Investment in SMEs of Eastern Bank limited: Problems and Prospects No Particulars . 1 Educational Institutions

Travel Agency, Mobile set, SIM/scratch card business, whole seller of rod and cement, whole seller of plain sheet, Fuel and CNG station Private Service Telephone Networks (PSTN), ISP, Cable service providers Diagnostics and shopping chains

Existing Criteria Dhaka and Chittagon g (where student body is less than 2000) Sales Turnover

Proposed Criteria All private school, college and university having student size less than 5000 All are SME

Remarks

Corporate Banking

Will be defined by sales turnover

All Corporate

As per sales turnover definition

There are PSTN where investment is huge but there are ISPs where investment and sales turnover is not much Since capital and sales turnover varies from organization to organization

Usually government bodies are treated as corporate and many schools, colleges and universities do operate in small scale and must be treated as SME. These businesses usually do not have defined structure and process. Business structure and capital are convenient to SME.

Exceptions: As per the proposed definition, there will be few clients, who will fall under Corporate Banking in few parameters and under Medium Segment in few parameters. For such clients, the business segment can be decided by Head of SME Banking and Head/Area Head of Corporate Banking in consultation with the Managing Director. Normal rule, out of 4 (four) criteria, if any client complies with 3 (three) criteria of Medium Segment, that entity will be treated as Medium segment client and vice-versa. Following Enterprise/ companies will not be treated as SME, they will be considered as corporate clients. 

All public limited companies



Govt. and semi govt. bodies



All chambers



All NGO’s



Educational institutions of Dhaka & Chittagong



All infrastructure project 27

Investment in SMEs of Eastern Bank limited: Problems and Prospects 

Utility companies (PSTN, ISP’s, and Cable Service Providers)



Gas and Energy companies



International/ Transitional/ Multinational Organization



EPZ companies



Insurance Companies



Large Hospitals



Shopping Chains



Donor Driven Project



Airlines



Associations



Charities



Large buying houses



Large hotels



Apartments service associations

3.2 CREDIT ASSESSMENT & RISK GRADING 3.2.1 Credit Assessment A thorough credit and risk assessment should be conducted prior to the granting of loans, and at least annually thereafter for all facilities. The results of this assessment should be presented in a Credit Application that originates from the relationship manager/account officer (“RM”), and is approved by Credit Risk Management (CRM). The RM should be the owner of the customer relationship, and must be held responsible to ensure the accuracy of the entire credit application submitted for approval. RMs must be familiar with the bank’s Lending Guidelines and should conduct due diligence on new borrowers, principals, and guarantors. It is essential that RMs know their customers and conduct due diligence on new borrowers, principals, and guarantors to ensure such parties are in fact who they represent themselves to be. Bank should have established Know Your Customer (KYC) and Money Laundering guidelines which should be adhered to at all times. Credit Applications should summaries the results of the RMs risk assessment and include, as a minimum, the following details: •

Amount and type of loan(s) proposed. 28

Investment in SMEs of Eastern Bank limited: Problems and Prospects •

Purpose of loans.

•

Loan Structure (Tenor, Covenants, Repayment Schedule, Interest)

•

Security Arrangements

In addition, the following risk areas should be addressed: • Borrower Analysis The majority shareholders, management team and group or affiliate companies should be assessed. Any issues regarding lack of management depth, complicated ownership structures or intergroup transactions should be addressed, and risks mitigated. • Industry Analysis The key risk factors of the borrower’s industry should be assessed. Any issues regarding the borrower’s position in the industry, overall industry concerns or competitive forces should be addressed and the strengths and weaknesses of the borrower relative to its competition should be identified. • Supplier/Buyer Analysis Any customer or supplier concentration should be addressed, as these could have a significant impact on the future viability of the borrower. • Historical Financial Analysis An analysis of a minimum of 3 years historical financial statements of the borrower should be presented. Where reliance is placed on a corporate guarantor, guarantor financial statements should also be analyzed. The analysis should address the quality and sustainability of earnings, cash flow and the strength of the borrower’s balance sheet. Specifically, cash flow, leverage and profitability must be analyzed. • Projected Financial Performance Where term facilities (tenor > 1 year) are being proposed, a projection of the borrower’s future financial performance should be provided, indicating an analysis of the sufficiency of cash flow to service debt repayments. Loans should not be granted if projected cash flow is insufficient to repay debts.

Investment in SMEs of Eastern Bank limited: Problems and Prospects • Account Conduct For existing borrowers, the historic performance in meeting repayment obligations (trade payments, cheques, interest and principal payments, etc) should be assessed. • Adherence to Lending Guidelines Credit Applications should clearly state whether or not the proposed application is in compliance with the bank’s Lending Guidelines. The Bank’s Head of Credit or Managing Director/CEO should approve Credit Applications that do not adhere to the bank’s Lending Guidelines.

• Mitigating Factors Mitigating factors for risks identified in the credit assessment should be identified. Possible risks include, but are not limited to: margin sustainability and/or volatility, high debt load (leverage/gearing), overstocking or debtor issues; rapid growth, acquisition or expansion; new business line/product expansion; management changes or succession issues; customer or supplier concentrations; and lack of transparency or industry issues. • Loan Structure The amounts and tenors of financing proposed should be justified based on the projected repayment ability and loan purpose. Excessive tenor or amount relative to business needs increases the risk of fund diversion and may adversely impact the borrower’s repayment ability. • Security A current valuation of collateral should be obtained and the quality and priority of security being proposed should be assessed. Loans should not be granted based solely on security. Adequacy and the extent of the insurance coverage should be assessed. • Name Lending

Investment in SMEs of Eastern Bank limited: Problems and Prospects Credit proposals should not be unduly influenced by an over reliance on the sponsoring principalâ&#x20AC;&#x2122;s reputation, reported independent means, or their perceived willingness to inject funds into various business enterprises in case of need. These situations should be discouraged and treated with great caution. Rather, credit proposals and the granting of loans should be based on sound fundamentals, supported by a thorough financial and risk analysis. 3.2.2 Risk Grading Credit risk grading is a management tool to assess each borrowing clients of the bank against a set of predetermined standards. It provides a method to monitor risk of default based on historical, current and future anticipated information and characteristics of a borrower or the environment where a borrow operates. Risk grading is designed to enable all action plans on preventive basis and also determine the associated asset pricing, credit cost, portfolio management and loan loss reserves requirement. In sum, it is the bedrock for managing credit risk in a bank. Credit Risk Grading Process: The following standard to be maintained for Small Enterprise loans: a) Processing and approval of SE (Small Enterprise) loans shall follow the Product Program Guide (PPG) as well as related instruction duly approved by the management/ Board of Directors. b) Risk Grading Matrix will not be applicable for SE Loans. c) Downgrading and further Risk Grading will be determined on the basis of overdue criteria. d) Credit Administration Department must ensure the Risk Grading in the system for each and every client under this guideline. e) Any up-gradation must be determined on the basis of recovering of the overdue installment. Following rules will be observed while grading the portfolio: â&#x20AC;˘

No scoring id required for credits in the category Small Enterprise loan as those are supported by specific PPG. Upgrading can be considered thereafter for specific product, based on performance and improvement in financial indicators or collateral/securities. 31

Investment in SMEs of Eastern Bank limited: Problems and Prospects •

The risk grading of any client can be assigned at a better level on strong quantitative grounds. Nevertheless, there are to be approved under specific PPG.

•

In case of review of classified accounts for rescheduling purpose, EBL as well as BB guideline will be meticulously followed in this regard.

•

For any accounts require downgrading/upgrading to/from classified category (SS, DF, BL), approval of Managing Director is required.

•

CRM can also change risk grading in their normal course of portfolio review or whenever such a situation warrants. Nevertheless, discussions with the business units to be hold prior to doing so. In case of disagreement by the business units, they have the right to appeal to DMD or MD about whose discussion will be final.

The product wise risk grading to be set under the following risk grading parameters: Table 9: Risk Grading Risk Rating Superior

Good

Short Name

Grade

SUP

Definition • Facilities are fully secured by EBL deposit or cash margin. • Credit facilities are fully covered by government guarantee. • Credit facilities are fully covered by a top tier international bank/financial institution • All security documentation should be in place. • Credit facilities are fully covered by the guarantee or pledged deposit of acceptable local bank, government security. • Strong repayment capacity of the borrower and leverage. • Ample liquidity, strong earnings and substantial cash flow, well balanced asset and liability structures. • Well established, strong market share. • Proven track record to weather major market disturbances/competition. • All security documentation should be in place.

Investment in SMEs of Eastern Bank limited: Problems and Prospects Satisfactory

SAT

Acceptable

ACCP

• Credit facilities at least 75% covered by cash or EBL FD or the guarantee or pledged deposit of local bank government security. • Consistent earnings and cash flow. • Good growth in asset and liabilities. • Adequate liquidity and earnings. • Repayment capacity of the borrower is strong. • Good management with second tier support and identified succession lines. • Can formulate and execute long term strategy. • Ability to weather occasional market disturbances. • May be diversified in one or two industries • All security documentation should be in place. • Credit facilities at least 50% covered by cash or EBL FD or the guarantee or pledged deposit of local bank government security. • If examined separately financial indicators may demonstrate some weaknesses but overall good financial condition. • Sufficient liquidity, consistent earning and cash flow. • Balanced growth in assets and liabilities. • Credit in this grade would normally be secured by acceptable collateral (1st charge over inventory/ receivables/ equipment/ property). • Acceptable management with sufficient industry experience and ready succession. • May face difficulties in major market disturbances. • Usually follows short term strategies. • May share market niches. • Full exposure covered by acceptable collateral [hypothecation of stocks, machinery, car ,land and building] along with at least 30% covered by cash/ EBL FDR and/ loan value is 70% of the registered mortgaged collateral value supported by hypothecation of stock or other assets. • All security documentation is in place.

Investment in SMEs of Eastern Bank limited: Problems and Prospects Fair

Watch

Marginal

• Bankable credits as it meets minimum underwriting standards. • Strained financial features to some extent facing occasional cash flow crisis, inconsistent earnings and inadequate balance sheet structure. • Ability to avail multi banking facility is somewhat limited. • Family based management with a reasonable succession line. • No collateral other than hypothecation of inventory, receivable and machinery. • Overdue (principal or interest) up to 29 days. • Requires greater attention than credit rated “Fair.” • Warning signs in account conduct is getting. Prominent, though not going to stagnant situation delays experienced in settling past dues. • Strained liquidity, declining margin and insufficient cash flow for debt servicing. • Industry where the obligor operates is characterized with weak revenue and excess capacity. • Primarily one man show. Departure of key person will expose the entity to unwarranted risks • Vulnerable to moderate market disturbances. • Overdue (principal or interest) for 30 days and above but not exceeding 59 days. • Alarming client and requires greater attention than credit related to “WATCH”. • Overdue (principal or interest) for 60 days and above but not exceeding 89 days. • Fund diversion, strained liquidity, declining margin and insufficient cash flow for debt servicing. • Borrower incurs a loss, loan payments routinely fall past due, account conduct is poor, or other untoward factors are present.

Prudential guidelines for interest suspense and provisioning against Small Enterprise (SE) Loans: The Bank will follow Prudential Guidelines for SE financing for fixing the Risk Grading from Special Mention to Bad/Loss. If any changes adopt by BB, this changes must be

Investment in SMEs of Eastern Bank limited: Problems and Prospects enforced with immediate effect. Interest application and provision to be maintained as per the said Prudential Guidelines, detail is as under:

Table 10: Provision for classified loan Risk Rating

Short Name

Grade

Determinant

Treatment of Income

Provision to be made

Special Mention

Where markup or interest or principal is overdue (past due) by 90 days or more from the due date.

Unrealized markup or interest to be put in suspense account and not to be credited to income account except when realized in cash.

Where markup or interest or principal is overdue (past due) by 180 days or more from the due date.

Unrealized markup or interest to be put in suspense account and not to be credited to income account except when realized in cash.

Provision at the rate of 5% of the difference resulting from the outstanding balance of loan account less the amount of interest suspense. Provision at the rate of 20% of the difference resulting from the outstanding balance of loan account less the amount of interest suspense.

Substandard

Investment in SMEs of Eastern Bank limited: Problems and Prospects Doubtful

Bad/Loss

Where markup or interest or principal is overdue (past due) by 12 months or more from the due date.

Unrealized markup or interest to be put in suspense account and not to be credited to income account except when realized in cash.

Where markup or interest or principal is overdue (past due) by 18 months or more from the due date.

Unrealized markup or interest to be put in suspense account and not to be credited to income account except when realized in cash.

Provision at the rate of 50% of the difference resulting from the outstanding balance of loan account less the amount of interest suspense. Provision at the rate of 100% of the difference resulting from the outstanding balance of loan account less the amount of interest suspense.

3.3 HANDLING CLASSIFIED SE LOANS There are structured ways of handing the classified SE Loans (Having risk grading substandard to bad/loss). Early alert process and follow ups of overdue SE Loans are followed. Process of monitoring to be followed by the Relationship Team as under: Table 11: Monitoring Classified SE Loans Past Due Range Strategy/ Action 1 - 14 days  Follow up and persuasion over phone. 15 – 44 days  1st remainder letter. 36

Investment in SMEs of Eastern Bank limited: Problems and Prospects 45 – 59 days 60 – 89 days

90 – 179 days Above 180 days/ Classified account

3.4

     

2nd remainder letter. LO/RM/BDM visits the client. 3rd and final remainder letter shall be issued. Group visit (RM, BDM, and LO). Letters to guarantors, employer, references. Warning of legal action by next 15 days.

 Final reminder and serve legal notice within 101 - 120 days.  Monthly review to CRM.  File to be transferred to Special Asset Management (SAM) unit.  Court case to be initiated.  Letter to different banks and association and neighbor businessmen to be issued.  Action to be taken under NI Act as well as Civil Court Act.

SME OFFICERS HIERARCHY IN EBL Figure 2: SME Hierarchy

3.5 SME LOAN APPROVAL PROCESS The approval process segregates the work of Relationship managers marketing from the approving authority. The responsibility for preparing the Credit Application rests with the Relationship Manager (RM) within SME banking department. Credit Applications are recommended for approval by the RM team and forwarded to the approval team within Credit Risk Management (CRM) department and approved by individual executives. The recommending or approving executives take responsibility for and are held accountable for their recommendations or approval. Approving SME proposals The RM first sends the credit applications to the SME center in Head office Dhaka. The SME center then checks the documents and make sure they are well within the lending guidelines of the bank. They also provide additional condition for sanction as appropriate. After reviewing they send the proposal to the CRM department. The 37

Investment in SMEs of Eastern Bank limited: Problems and Prospects respective credit officers review the proposal and get the approval from the approving authority. The routing process of credit proposals and its approvals can be summarized as follows: Recommendation by RM Central SME center (Reviewed by SME officials) Recommendation by RM CRM (Analyzed by officers of CRM) Approved by HOCRM/DMD/MD

Figure 3: SE Loan Approval Process 3.6 DISBURSEMENT After the approval of a loan proposal, legal charge documents are prepared as per Bank’s Credit policy. Then the prepared charge documents are scrutinized and checked by loan administration department. If all the documents found ok as per policy then the loan amount is credited to the client’s Current Account by Credit Admin Department. 3.7 LOAN MONITORING To minimize Loan losses, monitoring procedures and systems are in place that provides an early indication of the deteriorating financial health of a borrower. At a minimum, systems are in place to report the following exceptions to relevant executives in CRM and RM team: 

Overdue principal or interest payments, overdue trade bills, account

excesses, and breach of loan covenants; 

Loan terms and conditions are monitored, financial statements are

received on a regular basis, and any covenant breaches or exceptions are referred to CRM and the RM team for timely follow-up. 38

Investment in SMEs of Eastern Bank limited: Problems and Prospects ď&#x201A;§

Timely corrective action is taken to address findings of any internal,

external or regulator inspections/ audit. ď&#x201A;§

All borrower relationships/ Loan facilities are reviewed and approved

through the submission of a Credit Application at least annually. EBL has an excellent IT backbone which produces the above information for central/head office as well as for SME Center to review.

Investment in SMEs of Eastern Bank limited: Problems and Prospects

CHAPTER 4 SME PRODUCTS OF EBL

Investment in SMEs of Eastern Bank limited: Problems and Prospects 4.1 LOAN PRODUCTS 4.1.1 EBL AGRIM EBL AGRIM is a terminating very short term loan facility (Payment on maturity) for working capital and any other legitimate business purpose. Bank would finance against net cash flow of the section economic entity derived from cash flow of any creditworthy business. The product will allow the Bank to capture short term benefit from the existing market opportunity. Table 12: EBL AGRIM Product Features: To help the Small & Medium Entrepreneurs to meet extra finance required during any events. Availability All EBL branches and SME Centers through the SME Relationship Managers/Loan Officers. Target Customers Small & Medium Enterprises as defined by EBL & Bangladesh Bank, Target customers are RMG (manufacturer and trading), Footwear, limitation Jewelry & Cosmetics, Electronics item (TV, Freeze, Fan) etc. Loan Amount Minimum BDT 200,000 Maximum BDT 950,000 Interest Rate 19% p.a. calculated on monthly declining balance method (Interest Rate can be changed by ALCO from time to time based on market situation). Processing Fee 1% of loan amount, charged upon disbursement exclusive of VAT. Disbursement Period Disbursement will be completed 30 days before the event Loan Tenor The loan tenor amount will be allowed for 1 month to 6 months period depending upon the nature of business. i.e. for manufacturing maximum 6 months, for trading maximum 3 months. Partial Payment/ Partial/Early settlement fee waived. Early Payment Disbursement Mode Credit to customer’s CASA account with EBL in full/ or Pay Order given to the supplier/ vendor. Repayment Full amount will be repaid maximum 21 days after the event (Eid or Puja). Interest should be realized on monthly basis. System will auto debit the CASA account. Installment Failure Penal interest of 4% p.a. on the overdue amount. Charge Stamp Charges All relevant stamp charges will be on borrower’s account and will be debited from the account at the time of disbursement Collateral/ Security • In case of proprietorship concern two personal guarantees to be obtained [criteria mentioned in the section 3 of PRG]. Purpose

Investment in SMEs of Eastern Bank limited: Problems and Prospects • In case of Private Ltd. Co. or partnership company PG of all the directors/ partners to be obtained. • One UDC [Undated cheque] for the full amount of the loan including full interest. • Fire & flood insurance is mandatory on inventory & other associated assets of the business as it covers at least 110% of EBL financing amount. For waiver of flood insurance clause, unit to provide strong justification in the CM. • Simple hypothecation on fixed or floating asset and on the purchase fixed assets of the business. 4.1.2 EBL UDDOG There are around 106,000 bankable small and medium enterprises (SMEs) in Bangladesh according to a market survey. Based on the estimate there is a total funding requirements of BDT 200 Billion. A lot of banks are financing for their working capital, fixed asset purchase and other business purposes through complicated or less friendly credit analysis methods by taking land and/ or building as primary collateral. EBL as specified in its Small Enterprise Financing Policy, would like to offer simply structured process based, yet risk mitigating product to the SMEs. EBL “UDDOG” has been designed based on the above objectives to achieve. EBL UDDOG is a terminating loan facility (EMI based) for working capital, fixed asset purchases of any other business purpose. Bank would finance against net cash flow of the socio economic entity derived from cash flow of any creditworthy business and secure the lending against lest of EBL fixed deposit amounting 50% of total volume. The product will allow the Bank to capture the existing market opportunity. Purpose Availability Target customer Loan amount Interest rate Processing Fee Repayment tenor Disbursement mode

Table 13: EBL UDDOG Product Features Any legal business purpose All EBL branches and SME centers through direct sales by SME Relationship managers/loan officers. small & medium enterprises as defined by EBL minimum BDT 600.000/- maximum 5,000,000/18% p.a. calculated on monthly declining balance method (Interest rates can be changed by ALCO from time to time based on market situation) 1% of loan amount, charged upon disbursement, exclusive of vat Minimum 12 months, maximum 60 months (as per clients payment capacity calculated as per cash flow method) To client’s casa account with EBL in full. 42

Investment in SMEs of Eastern Bank limited: Problems and Prospects Repayment Partial pre payment/early payment Installment failure charge EMI cheque bounce charge Stamp charges Takeover from other bank Collateral/ Security

• 5th/10th/15th/20th/25th of the month • system will auto debit the casa account Allowed after 06 months. Min 15% of the loan outstanding to be pre paid fee: 1% of the pre paid/early payment amount. penal interest of 4% p.a. on the overdue amount BDT 500 exclusive of vat All relevant stamp charges will be on borrower’s account and will be debite3d from the account at the time of disbursement In case of takeover from other bank after loan approval the loan amount will be given in form of p.o. (pay order) to the other bank to settle the outstanding as well as closing charge • In case of proprietorship concern two personal guarantees to be obtained criteria mentioned in the section 3 of PPG. • In case of private ltd. Co. or. Partnership company pg of all the directors/partners to be obtained. • PDC (post dated cheque) for 3 three installment and 01 one UDC undated cheque for the full amount of the loan including full interest. • Fire & flood insurance is mandatory on inventory & other associated assets of the business as it covers at least 110% of EBL. Financing amount. For waiver of flood insurance clause, unit to provide strong justification in the CM. • Simple hypothecation on fixed or floating asset and on the purchase fixed assets of the business. • Lien on fixed deposit 50% of loan amount for new borrower of SME banking. FDR tenor must be in line with loan maturity. In case of FDR tenor is lesser than the loan maturity, auto-renew instruction to be obtained from the client. Any prior encashment of FDR, no interest will be given on it. • In case of pay order issued for taking over other institutional liability, copy of p.o. deposit slip with mentioning loan A/C number duly verified by SME unit except LO will be acceptable as no liability certificate.

4.1.3 EBL ASHA ASHA is an EMI based unsecured terminating loan facility, offered to small enterprise for any legitimate business purpose. Presently, EBL is planning to penetrate the current market share of some lending banks in SME Banking segment. Under this plan, EBL will consider only those clients as eligible for enjoying tending facility from SME Banking division of leading banks. 43

Investment in SMEs of Eastern Bank limited: Problems and Prospects EBL is increasing its interest rate from 18% to 20% and tenor from 2 years to 3 years. The main purpose of these changes is to earn more profit in long run as well as to increase the market share by convincing the potential customers with longer repayment facility. Purpose

Availability Target Customers

Loan Amount Interest Rate

Processing Fee Repayment Tenor Partial Payment/Early Payment Disbursement Mode Repayment

Installment Failure Charge EMI Cheque Bounce Charge Collateral/Security

Table 14: EBL ASHA Product Features Any legitimate business purpose which will have .......of indirect contribution to business revenue growth of cost reduction. Borrower must declare specific business purpose of the loan. All EBL branches and SME Centers through the SME Relationship Managers/Loan Officers. Small Enterprises as defined by “Bangladesh Bank Prudential Regulations for Small Enterprises Financing and existing SME borrower of leading banks. Minimum BDT 200,000 Maximum BDT 1,000,000 20% p.a. calculated on monthly declining balance method (Interest Rate can be changed by ALCO from time to time based on market situation). 1% of loan amount, charged upon disbursement inclusive of VAT. Minimum 03 months and maximum 36 months for the first loan. Allowed after 3 months

Credit to customer’s CASA account with EBL in full. • 10th/ 20th/ 30th of the month or someday from the next month of disbursement. • Through post dated cheques (PDC). After the cheque is cleared, system will auto debit installment from customer’s CASA account. (PDC to be dated 2 days earlier than the repayment date) Penal interest of 4% p.a. on the overdue amount. BDT 500 inclusive of VAT. • 2(two) Personal Guarantee • Post Dated Cheques for each installment and one undated cheque for 110% of the sanctioned loan amount (mandatory) • Simple Hypothecation on Business fixed and/or floating assets. 44

Investment in SMEs of Eastern Bank limited: Problems and Prospects • •

Hypothecation of goods and commodities Hypothecation of book debts and receivables.

4.1.4 EBL PUJI PUJI is a terminating loan facility (EMI based) for working capital finance to small enterprises against surplus cash flow derived from patrimony situation of any creditworthy business secured by collateral (registered mortgage on land & building) security. Purpose Availability Target Customers Loan Amount Loan to Price Ratio Interest Rate

Processing Fee Repayment Tenor Grace Period Partial Pre payment/Early Payment Grace Period Disbursement Mode Repayment

Installment Failure Charge Stamp Charges

Table 15: EBL PUJI Product Features Working capital finance (stocks, receivables, overhead expense excise duties, bill payments, advance payments) All EBL branches and SME Centers through direct sales by SME Relationship Managers/ Loan Officers. Small Enterprises as defined by “Bangladesh Bank Prudential Regulations for Small Enterprises Financing” Minimum BDT 500,000/- Maximum BDT 5,000,000/100% of working capital need 17% p.a. calculated on monthly declining balance method (Interest rates can be changed by ALCO from time to time base on market situation) 1% of loan amount, charged upon disbursement, inclusive of VAT Minimum 12 months. Maximum 36 months. (As per cents payment capacity calculated from cash flow and DBR) Maximum one month Payment of interest only during grace period. Allowed after 6 months. Min. 30% of the loan outstanding to be pre paid but only once in the entire loan tenure. Fee 1% of the pre paid/early payment amount. Maximum one month Payment of interest only during grace period. To client’s CASA account with EBL in full. • 10th/ 20th/ 30th/ day of the month • Through post dated cheques (PDC) of the strongest bank account. After the cheque is cleared, system will auto debit installment from customer’s CASA account. (PDC to be dated 8th/ 18th/ 28th day of month) • In case of EBL account as the strongest account, no PDC will be taken and system will auto debit the CASA account. Penal interest of 4% p.a. on the overdue amount All relevant stamp charges will be on borrower’s account and 45

Investment in SMEs of Eastern Bank limited: Problems and Prospects Collateral/ Security

Mortgage Valuation

Property

will be debited from the account at the time of disbursement • Personal guarantee • Post dated cheques for each installment and one undated cheque for the full amount of the loan including full interest (mandatory) • Registered mortgage on land or building, title duly vetted by bank’s approved lawyer/agency • Simple hypothecation on business fixed or floating asset • Insurance on stocks with required risk coverage Valuation must be done by bank’s approved professional value and value must be at per with the loan amount. However, valuation done jointly by BDM and loan officers on government housing plots is acceptable.

4.1.5 EBL BANIJYO The role of small and medium enterprises (SMEs) to economic growth of a country is well, recognized. Across the globe it is strongly perceived that SMEs do play a vital role in the industrial development of a country. There are about 177000 enterprises working under the umbrella of micro, small and medium enterprises in the country. Growth of economy of a state is heavily dependent on the development of SMEs and developing countries have showed the success part toward the rest of the world. All developing countries are closely eyeing on the development of SMEs and financial institutions are also focusing on the opportunities of worthy business. Bangladesh SME is mainly based on trading of different items ranging from industrial raw materials to finished goods. SME’s have large stake in importing industrial raw material, mobile set, electronic items, and commodities. EBL BANIJYO is a composite package offered to the customer who has settled track record in the same line of business with good reputation. It is the thirst of the make to have LC facility in less margin with post import finance manager SME has the mindset to settle down their business and to earn high state and usually are adobe by the regulation, if they are well informed. Huge potential SME trade market is antacid though it is pregnant with potentially. EBL takes the drive to explore the market to get the maximum benefit out of it. 46

Investment in SMEs of Eastern Bank limited: Problems and Prospects Purpose Availability

Table 16: EBL BANIJYA Product Features Import of any legitimate marketable products All EBL branches are SME Centers through direct sales by

Target Customers

SME Relationship Manager/ Loan Officers. Small & Medium Enterprises as defined by EBL. More specifically small inverter of easily marketable products like mobile accessories, toys, apparels, shoe, batteries cosmetics, stationeries, food items (BSTI approved), Textile accessories, chemicals etc. Perishable item to be imported with 100% margin as the

Terms of BB’S

longevity is too short. Not manufactory

Prudential Regulations of SE finance Generic Products Maximum Limit

Pricing

Sight Letter of Credit & Post Import Loan • SLC/ULC: BDT 20M •

Import loans: BDT 20M

•

4-5% of limit will be allowed for exchanges rate

fluctuation • 0.50% commission for first quarter for SLC/ULC. 0.25% for subsequent quarter. •

15% interest rate per annum for import loan. It may

Processing Fee

be revised as per 88 or EBL guidelines from time to time. 0.25% or minimum BDT5000.00 of limit amount, charged

Facility tenor

upon disbursement, exclusive of VAT • SLC/ULC Maximum 1 year with 30 to 180 days revolving. •

Margin

Import loans Maximum 1 year with maximum 180

days revolving as per cash cycle. Usually 40%/50% margin in the form of EBL FDR at the time of opening the LC. It may flexible as per banker client

Disbursement of Import loan

relationship. • Maximum 100% of the document value will be disbursed in the form of import loan when margin at the time of opening LC is in the form of cash •

Maximum 100% of the value will be disbursed in the

form of import loan when 40% margin at the time of 47

Investment in SMEs of Eastern Bank limited: Problems and Prospects opening LC is in the form of FDR. •

Client may retire the document by making 100%

payment of document value and may not enjoy the Adjustment of Import

import loan. • Entire import loan will be adjusted along with

loan

accrued up to date interest on or before maturity from the sales proceeds/ own sources of the client. •

Client may partially adjust the loan by encasing the

FDR and the rest from own sources. •

Client may settle down the entire import loan

facility from cash and release the FDR when margin is in the form of FDR. •

We will Ancash the FDR if client fails to adjust the

import loan at maturity and collect the residual amount Stamp Charges for

from the client. All relevant stamp charges will be on borrower’s account

documentation

and will be debited from the account at the time of loading

Original IRC

the limit Original IRC is preferred to be kept with EBL. If client has other bank, copy of IRC along with NOC of that particular bank must be enclosed with the charge documents. In case of LC against indent, indenter’s IRC and BB

Bill of entry

permission must be updated. • Client must give an undertaking that there is no overdue Bill of entry with any banks in Bangladesh •

Moreover if client has opened any LC from any bank

earlier, client must submit a certificate from the previous Bank(s) regarding confirmation of no overdue Bill of entry. •

If IRC is kept with other bank, that bank also has to

give a certificate that there is no over due bill of entry FDR Tenor

under this IRC. Tenor of the FDR must be of at least 3 months. If outstanding is remained FDR will be automatically renewed along with interest. 48

Investment in SMEs of Eastern Bank limited: Problems and Prospects Facility withheld

No facility will be executed to the following cases: •

IRC not updated

•

Trade license/TIN/VAT not updated

•

Membership of any association (Business or trade

body) is not updated •

Fails to submit Bill of entry in due time (Before

getting the status of over due) • Collateral/ Security

If any Import loan is over due or any dispute in the

LC • 40% margin in the form of cash or EBL FDR at the time of opening the LC •

Registered

charge

must

created

inventory/Machinery/Equipment. It can be 1st/2nd or 3rd charge (in case of limited company) •

Simple hypothecation of inventory/ Machinery/

Equipment in cash of proprietorship firm. •

Personal Guarantee of all the Proprietor/ directors/

partners of the obligor •

All necessary charge document prescribed by bank.

•

A UDC equivalent to 110% of the limit loan amount

with memorandum of cheque deposit. •

Fire/ Flood insurance of the stock/ machinery/

equipment covering 110% of the import loan/ Acceptance. 4.1.6 EBL MUKTI In Bangladesh, the number of woman entrepreneurs is increasing. Many women are now involving in starting new business and also performing good. As an individual new business person, some they need loan for their business purpose. In this case, Bangladesh Bank is extending its hand to spur the business growth of women entrepreneurs and mandated banks to provide loans to them. Banks also get refinance facility from BB. EBL MUKTI is an EMI based product launched for the women entrepreneurs. Product Features: 49

Investment in SMEs of Eastern Bank limited: Problems and Prospects 

Credit facility up to BDT 300,000 (three lac) in any legitimate business



No requirement of land/building mortgage



Yearly interest rate is 10%, which is the lowest in the country



Repayable in 18 months 

Facility is only for Women Entrepreneurs

Eligibility: 

Any legitimate business with at least two years of operation



Business Cash Flow to support repayment

4.1.7 EBL UDDOM It is a newly launched product in EBL SME. It is basically a combination of SME Loan and Overdraft facility. Clients can avail a facility to repay a part of the loan in EMI basis and remaining part as per the client’s suitable time. Loan Ceiling

Table 17: EBL UDDOM Product Features BDT 10 lac to 50 lac (Fresh BDT 30.00 lac &

Interest Rate Processing Fees Tenor

Repeat BDT 50.00 lac) 16% per annum 1% (Excluding VAT) Minimum 12 months

Collateral/Security

Maximum 48 months Personal Guarantee 50% FDR of loan amount and 40% for

Repayment OD

repeat loan EMI and swing in OD account OD will be auto renewal subject provide some up dated documents like TIN, TL,

DBR Calculation

insurance & stock report All existing EMIs + EMI and monthly

interest expenses of OD of the proposed EBL Loan DBR = Average Net Monthly CashFlow from socio economic entity [Minimum 12 months][All existing EMI shall be added back to average net monthly Age of Borrow Lengths of Business

cash flow to avoid duplication] Minimum 22 years & Maximum 60 years Minimum 2 years 50

Investment in SMEs of Eastern Bank limited: Problems and Prospects Repayment Date Bank Reflection

5/20/15/20/25 At least 60% reflected above BDT 15.00 lac to BDT 50.00 lac and below BDT 15.00 lac

DBR Ratio

bank reflection is 30% 65%

Investment in SMEs of Eastern Bank limited: Problems and Prospects 4.2 DEPOSIT PRODUCTS 4.2.1 EBL SHUBIDHA “EBL SHUBIDHA” is daily interest bearing and half-yearly interest paying Current Account, link with Short Term Deposit account. Eligibility

Availability Minimum Amount Interest Rate Rate change

Table 18: EBL SUBIDHA Product Features • Must have valid Trade license/partnership deed/documents for limited liability company issued by proper authority to conduct the business. • Photo, ID • Other documents as per Account opening requirements specified by Bangladesh Bank. • No individual can open this account. All EBL branches Opening TK 1 Lac (Taka One Lac) only

Interest Calculation

Interest Payment Tax Deduction Excise Duty & VAT Ledger Fee waiver

Debit Card

On Line Facility

Others terms & conditions

@ 5% P.A. Interest rate will be reset periodically upon review by EBL’s Asset Liability Committee and will be subject to change as per deposit rate sheet Interest will be calculated on daily basis. Customer will require BDT 1000K as minimum day end balance in this account to entitle the interest. No interest will be allowed for the day when any day end credit balance is less than BDT 100K Interest will be credited to the link Short Term deposit Account on half yearly basis. Interest is tax deductible and will be deducted at source as per GOB rules Will be deducted as per NBR rules Ledger fee waiver will be applicable if monthly average balance is BDT 100,000.00 or more. In all other cases BDT 300 will be charged as ledger fees on half yearly basis but no ledger fee from the CD A/C. • Debit Card facility will be provided to any of the signatories (proprietorship/partnership as per mode of account operation) of the account. • Debit Card issuing charge will be BDT 575 (including VAT) per year. There will be no online charge for deposit/ withdrawal for an amount up to BDT 10.00 lac from account opening Branch to other Branches of other cities. Above BDT 10.00 lac, deposit/withdrawal charge will be realized as per schedule of charges of SME Banking. However, there will be no online charge for any transaction in the same city. • Day end balance of CD account will be automatically transferred to the STD account by SWEEP-OUT facility 52

Investment in SMEs of Eastern Bank limited: Problems and Prospects •

• Nomination & Death of account holder

• • • •

•

at free of cost SWEEP-IN facility will be tagged in CD account so that system can automatically credit fund in CD account from the STD account in case of need. Cheque book will be issued only against the CD account. Regular statement of the Current Account to be sent to the customers on monthly basis and link STD Account on half yearly basis at free of charge. Only one person can be nominated by the account holder for each account Nomination will be cancelled if the nominee dies in the life time of the account holder. The account holder in such cases will advise in writing a new nominee. The account holder, with written instruction, may change the nominee any time. In the event of account holder’s death, his/her nominee will not be allowed to continue the account and the available proceeds of the account (after all the deductions, if any), will be credited in the name of the Nominee or to the account of Nominee with EBL. In case where there is no nominee the Succession Certificate from the appropriate court will be required for releasing the balance amount after the death of the account holder.

Investment in SMEs of Eastern Bank limited: Problems and Prospects 4.3 CONVENTIONAL CREDIT FACILITIES OF EBL Table 19: Conventional credit facilities of EBL NAME

DESCRIPTION

PAD

Payment against document

LTR

Loan Against Trust Receipt

CC (HYPO)

Cash Credit against hypothecation of inventory debts

CC (PLEDGE)

Cash Credit against pledge of inventory and book debts

ACCEPTANCE

Acceptance against ULC Own Acceptance Purchase

OAP LBPD

Local Bill Purchased Documentary

FBPD

Foreign Bill Purchased Documentary

LAFBD (CLEAN)

Loan Against Foreign Bill Clean

LAFBD

Loan Against Foreign Bill Documentary

SLC

Sight Letter of

PURPOSE

RISK FACTOR

• Advance Recourse on against Sight L/C title to import • Forced Loan document • To finance • Recourse on import L/Cs Sales • Clean Finance • To finance • Recourse on inventory pledged • Other business inventory operations • Ever green • General purpose To finance pledged • Recourse on inventory pledged inventory • Ever green To finance assets thru Recourse on Bank’s Acceptance Sales • To refinance Bank’s • No recourse Acceptance • Clean finance • Forced Loan • Ever green • To • Resource on purchase/discount Banks against loan usance through L/C acceptance • Upfront interest to • Residual on be realize client • To purchase/ • Resource on discount/ negotiate Banks export documents acceptance against Sight/ • Residual on Usance Export L/C client • Upfront interest to be realize (difference in FX rate) To finance export • Clean finance contract • Performance risk To finance export • Recourse on documents against export Export contract document Sight/Usance • Payment risk For importation Recourse on 54

TENOR/VALID ITY 21 Days per Bangladesh Bank 180 days

12 months

12 months 12 months 180 days

45/ 180 days

120 days 45/180 days

12 months

Investment in SMEs of Eastern Bank limited: Problems and Prospects Credit ULC LG

SOD

Usance Letter of Credit • Letter of Guarantee • BB/ PG/ APG/ RB/Pay Secured overdraft

Overdraft against other collateral

IMPORT LOAN (HYPO)

Import loan against Hypothecation inventory and book debts Import loan against imported merchandise pledged and hypothecation of Book debts Demand loan against hypothecation of inventory and book debts Demand loan against pledged inventory procured locally and hypothecation of book debts Time Loan against other security/ collateral/ support

IMPORT LOAN (PLEDGE)

DEMAND LOAN (Hypo)

DEMAND LOAN (Pledge)

Time Loan

TERM LOAN

Term loan against fixed assets

Packing Credit against Export L/C & Export Order

title to import document For importation Recourse on 12 months sales For contractual • Performance • Specific Period obligations risk • Open ended • Ever Green General Purpose

• 100% cash covered • No credit risk • Ever Green General purpose • High credit risk • Recourse on sales • Ever green To finance import L/C Recourse on or against contract sales

12 months

To finance imported • Recourse on merchandise under pledge pledge inventory • High monitoring risk • To finance inventory Recourse on procured locally Sales • To finance Duty/ Tax

180 days

To finance inventory • Recourse on procured locally under pledge pledge inventory • High monitoring risk To finance fixed/ other • Recourse on assets sales • Collateralize by fixed/ other assets To finance fixed • Recourse on assets fixed assets • High risk • To finance export • Performance L/C risk • Pre-shipment • Lien on

180 days

12 months

180 days

180 Days

12 months

• Over 12 months • Max 7 years • 180 days

Investment in SMEs of Eastern Bank limited: Problems and Prospects BCP (Foreign)

Bankers Cheque Purchase (Foreign)

BCP (Local)

Bankers Cheque Purchase (Local)

Fwd FX

Forward Contract

finance • To purchase/ discount foreign currency drafts/ pay order • Upfront interest to be realized (diff. in FX rate)

Export L/C • Resource on Banks acceptance • Residual on client

• To purchase/ • Resource on discount foreign Banks currency drafts/ pay acceptance order • Residual on • Upfront interest to client be realized Cover exchange risk Performance against Letter of risk Credits

• 30 days

180/ 360 days

Investment in SMEs of Eastern Bank limited: Problems and Prospects

CHAPTER 5 PROBLEMS AND PROSPECTS OF SME

Investment in SMEs of Eastern Bank limited: Problems and Prospects 5.1 SME FINANCING IN BANGLADESH A survey of the small and micro enterprises operating in the Dhaka metropolitan area showed that enterprises which required between USD 4,000 to USD 200,000 financing have no access to any form of financial services as well as overall professional services including marketing, accounting and professional support services. The main source of financing for SMEs in Bangladesh is loans from members of the family and friends. These loans often take time to mobilize and are therefore not helpful in times of emergency. When SMEs turn to the private banks, they mainly do it to obtain loans to cover their working capital needs. But only a small portion of them actually obtains loans from the banks. Trade credit is the second most important source for working capital to many small entrepreneurs. After the success in the microfinance sector, several small entrepreneurs came up with larger scale business. Then SME sector flourished.

5.2 GOVERNMENT ROLES TOWARDS SME Industrial development has been attempted in the past under widely divergent policy regimes. The early phase of industrialization was characterized by an import substitution strategy and a strong regulatory role of the Government. Later the governments have turned, although not always wholeheartedly, to market oriented deregulation. Significant achievements in population control, food production, infrastructure development and stabilization of the macro-economy have not been accompanied by sufficiently faster economic growth and the employment generation needed to alleviate poverty by enhancing the role of the private, i.e. SME sector. The Government has recognized in the Industrial Policy document adopted in 1999, that the industrial policy should be updated to achieve the objective of accelerating industrial growth and to gain a greater industry share of the GDP. Support of small and medium enterprises is part of this policy. The World Bank states in its Bangladesh Country Strategy document that the Governmentâ&#x20AC;&#x2122;s first priority must be to raise investment by giving the private sector 58

Investment in SMEs of Eastern Bank limited: Problems and Prospects the reform confidence necessary to invest in export oriented manufacturing activities and by urgently and substantially improving implementation of public investment in infrastructure and human resource development. The Government’s second priority should be to make the deregulation of the private sector much more effective, while third priority should be to enter into long term arrangements with domestic and overseas investors. The World Bank emphasizes completion of the long delayed privatization program.

5.3 EMPLOYMENT CREATION There are a huge number of business fall under the SME definition, e.g. presses, bicycle rickshaw assembly, cartwheels, electrical goods, engineering workshops, footwear, plastic products, plastic spectacle frames, print shops., specialized silk weaving, tailoring shops owned by women, building maternal supply, food preparation, small grocery stores, waste paper collection, etc. In the context of Bangladesh, a portion of readymade garments manufacturing enterprises also falls under SME sector. A typical SME in Bangladesh requires on average investment of only Taka 36,000 compared to Taka 1,338,000 required by a large-scale industry in generating one unit of employment. In spite of their employment generating role SMEs in Bangladesh, as in the rest of South Asia, do not realize their potential as significant contributors to sustainable growth and job creation – both of which are particularly needed in this region to offset deep persistent poverty levels. Global trade liberalization, perhaps above all other forces, is reshaping the economies, bringing new possibilities, but also presenting new challenges. This applies to Bangladesh SMEs as well.

5.4. CONSTRAINTS TO SME GROWTH The lack of growth of SMEs in Bangladesh can be attributed to several factors, including:  Persistent low levels of national income that have precluded construction of efficient physical infrastructure needed to grow competitive businesses. 

Historical governance structures that have allowed the few well-connected to

harvest and keep the majority of economic resources, and restricted access for the majority; 59

Investment in SMEs of Eastern Bank limited: Problems and Prospects 

Fairly long histories of government ownership/control of most productive,

non-farm resources that is only now being transferred partially to private sector. 

Evolving but still highly fragmented policy/regulatory frameworks that have

yet to create the low-level barriers to business entry, operations, and trade that support SME growth; 

Underdevelopment of core market support institutions that supply essential

public and private services, including many governments, financial and educational services. 

Unduly restricted access for private SMEs to credit services of banks, due in

large part to government-dominated financial sectors and politically motivated credit policies, whether lending targets or directed subsidies; 

Immature Business Development Services (BDS) such as information training,

and consulting services. This is due to general constraints to private sector development, to government dominance of the marketplace. In some places it is also due to large donor’s flows of interest than loans from the banks. Moneylenders are also included in the list of sources of funds for SMEs, but are only used tin emergency situations. Finally, supplier credit for capital items, other business owners, venture capital companies etc, are other sources of SME financing. The reasons generally provided by the SMEs why purchase of fixed assets are not financed by banks are: 

The enterprises lack good collateral securities.



Informal loans are faster and more convenient,



Interest rates charged by relatives and friends are lower.

For many SMEs applying for formal credit is an innovative act. Proper documentation can take considerable time and effort when an entrepreneur is not familiar with such procedures. The credit market in Bangladesh can be divided based on funding requirement and access to finance. Currently, micro-finance entities are helping activities requiring up to USD 4,000, and the formal commercial banking system is financing credit greater than USD 200,000.

Investment in SMEs of Eastern Bank limited: Problems and Prospects 5.5 REVIEW OF SME IN EBL Year end 2009 Loans and Advances

Deposits

Figure 4: SME, Corporate & Consumer Banking 2009

Year end 2008 Loans and Advances

Deposits

Figure 5: SME, Corporate & Consumer Banking 2008 In the portfolia, the percentage of SME loans and advances is increased from 9.19% in 2008 to 10.58% in 2009. Again, the deposits also increased by 0.78 % over the year. This is an positive sign for SME. 5.6 PROBLEMS OF EBL IN SME FINANCING: The problems which may hinder the SME business of EBL are: 1.

Competition from other banks: Many other banks are now

providing SME loan. They are also making separate SME sales and service centers to satisfy the businessmen. For example, BRAC Bank Limited, a major competitor, has 429 SME unit offices across the country and 60 online SME sales and service centers. Therefore, EBL is facing stiff competition in SME banking. 2.

Employee Turnover: The employee turnover is high in SME sector.

Because, almost all other banks are involving in SME banking and they need experienced people to be competitive. So, retaining employees is becoming a major challenge for EBL. 3.

Training New LOs: Every month new Loan Officers are joining in EBL.

But they are not being well-trained. They are basically learning from other LOs who may not have enough time to teach them. So, the learning process is somewhat delayed. If the new LOs are provided knowledge about consumer behavior, they can perform better. 4.

Target to the LOs: LOs are given target on monthly basis and it should

be. But the problem is that the LOs can provide loans to wrong businessmen to 61

Investment in SMEs of Eastern Bank limited: Problems and Prospects fulfill their targets even though they are not the only one to approve and disburse loans. Manipulation may occur to give loans. 5. Compliances: There should be compliances in giving loans. Some times business people need loan urgently. But due to rigid approval and disbursement processes, he/she may not get loan in due time and incur loss in business. 6. No of SMA Accounts: This is a very alarming sign that the number of SMA accounts per month in SE is increasing over the years. Over the six months from October 2009 to March, it is increased about 47%. Figure 9: SMA accounts trend

7. Disbursement vs. Achievement: Most of the time average disbursement target per LO is not achieved. Hence, management can give a close look at this to enhance the performances of LOs so that target achievement may turn to be a suitable return source. Figure 10: Disbursement vs. Achievement 8. Disbursement Mode: After approval and proper documentation the loan amount is disbursed to customer's current account in respective branch of EBL. Client must have an account with to get the loan from the Bank. But in other bank, e.g. BRAC, there is no such condition. Borrowers with having account with other bank can get loan from BRAC Bank. As a result BRAC provides their SME loans to areas where it has no branch banking operation.

5.6

PROSPECTS OF EBL IN SME FINANCING

EBL can be said to have a great prospects in SME banking because of the following reasons: 62

Investment in SMEs of Eastern Bank limited: Problems and Prospects 1. Marketing: EBL marketing team is very strong in promoting their products. Since, in a competitive market,

advertising plays a great role, EBL is getting

better response because of its ad in different places. They put their advertisement in the billboard of many roadside conspicuous places. EBL also gives ad in the between the news of different television channels. Moreover, they get many phone calls from the newspaper ads. Finally, brochures for different products help the clients to get brief information. All of the above mentioned advertising mediums make EBL competitive in the market for SME financing. 2. Super brand Award 2009/2011: EBL got the Super brand Award Bangladesh 2009/2011. This is also creating a positive image in the mind of the clients to be involved in banking with EBL. Because of this award, clients now believe that EBL is giving best services. 3. SME Centers: At the end of 2009, EBL had 23 structured SME centers through out the country. There is about 25% growth in the number of SME centers. 4. Modern Banking: This is another reason why people may prefer EBL. Nowadays, the world is moving towards the digit world and Bangladesh Government is also dreaming to turned it be digital within some years. Since, EBL is providing mobile banking, online banking facilities, its customer base is increasing over the year. 5. Repeat Clients: There were 45 repeat customers per month on an average which indicates that the clients were satisfied with the service provided by EBL.

6. Disbursement: Although the disbursement was not smooth, there is an increasing trend in the disbursement per month. (Figures are in â&#x20AC;&#x153;000â&#x20AC;?) Figure 6: Disbursement Trend

Investment in SMEs of Eastern Bank limited: Problems and Prospects 7.

Income Generation: The total income (interest income & fees income) is

increasing. It shows that EBL is doing well in generating returns from its investment in SME. (Figures are in “000”) Figure 7: Income Trend (Interest & Fees)

8. Gap between Received and Approved Loans: There is always a gap between received and approved loans and recently, this gap is widening. This may be for the CRM to be due diligent in approving loans and rescuing the bank from bad loans. (Figures are in “000”) Figure 8: Comparison between received and approved loans 9.

Purpose of Loan: EBL provides the ASHA loan for any legitimate

business purpose which will have direct or indirect contribution to business revenue growth or cost reduction. Borrower must declare specific business purpose of the loan. But other Banks which involve in SME financing give loan only for working capital requirement and fixed asset purchase. In this respect, EBL’s financing is more flexible than the competitors.

5.8

PRODUCT WISE ANALYSIS

5.8.1 Product wise Outstanding Growth Table 20: Product wise Outstanding Balance on Balance on Growth in Name of December- December2009 Product 2008 2009 (in million) (in million) (in million) ASHA AGRIM

783.33

836.43 64

53.10

% of Growth in 2009 6.78% -75.19%

Investment in SMEs of Eastern Bank limited: Problems and Prospects 1.35

0.34

(1.02)

MUKTI

3.85

63.27

59.42

15.43%

PUJI

21.76

13.75

(8.01)

-36.82%

UDDOG

1,591.06

1,913.70

322.64

20.28%

Total

2,401.35

2,827.49

426.13

17.75%

Among various SME products offered by EBL, the balance of AGRIM and PUJI is decreased in 2009 in comparison with 2008. But the other products ASHA, MUKTI, PUJI have positive change over the years. 5.8.2 Product wise Number of Accounts The below pie charts depict the percentage of number of accounts in different EBL SME products in the month of February and March of 2010. From the charts, it is very clear that the number of clients of ASHA and UDDOG are much higher than the other products. Figure 10: Product wise number of accounts Sep. & October, 2010

Investment in SMEs of Eastern Bank limited: Problems and Prospects

CHAPTER 6 FINDINGS, RECOMMENDATION &CONCLUSION

Investment in SMEs of Eastern Bank limited: Problems and Prospects SMEs are expected to boost efficiency and growth and lead economic development because they can contribute higher profit margin. SME sector is said to be the â&#x20AC;&#x153;Engine of Job Creationâ&#x20AC;?. SMEs play an important role in promoting growth and development, including for the poor and has social dimension in economic development. There is no doubt that operating with SME is no doubt is becoming a challenge for banks and other non-bank financial institutions. Therefore strategic fit of different SME products can bring the desired return. In Bangladesh, Small and Medium Enterprises did not get the same access to banks and financial institutions as big companies did. This is the key to do business with SME. In that case BRAC Bank took the challenge and started SME banking in 2001and became the pioneer in SME Banking. Now, BRAC bank is the market leader in SME financing with 59 SME Service Centers and 429 Unit offices countrywide. On the other hand EBL has started its SME Banking from 2006 and it has now 23 SME sales and service centers, i.e., it has much less market access in comparison with BRAC Bank. The conclusion can be made: 1.

The percentage of SME loans and advances is increased from 9.19% in

2008 to 10.58% in 2009. 2.

The deposits from SME also increased by 0.78 % over the year.

The marketing team of EBL is very strong in promoting their products.

There is a growth of about 25% in the number of SME centers.

The repeat client of EBL per month is 45.

Although the disbursement was not smooth, there is an increasing trend in

the disbursement per month. 7.

EBL provides the ASHA loan for any legitimate business purpose which

will have direct or indirect contribution to business revenue growth or cost reduction. Although there is huge competition coming from other banks and other adverse situations exist, EBL is doing better than many other banks.

Investment in SMEs of Eastern Bank limited: Problems and Prospects

BIBLIOGRAPHY

Investment in SMEs of Eastern Bank limited: Problems and Prospects 1. “Annual Report”, 2009, Eastern Bank Limited. 2. “Annual Report”, 2009, BRAC Bank Limited. 3. “Problems and Prospects of Small Business Development in Bangladesh”, Super Admin, Academic Publishers, 2006. 4. “Revisiting SME Financing in Bangladesh”, Mohammad Moniruzzaman Siddiquee, K. M. Zahidul Islam, Masud Ibn Rahman, Daffodil International University Journal of Business and Economics, Vol. 1, No. 1, July 2006 5. Constraints to SME Development in Bangladesh, Job Opportunities and Business Support (JOBS) Program, Nazmul Hossain Retrieved from World Wide Web: http://scholar.google.com/url?sa=U&q=http://128.8.56.108irisdata/docs/bd1.pdf 6. EBL Official website: www.ebl-bd.com 7. “Industrial Policy of Bangladesh 2002”, Government of Bangladesh. 8. “Annual Report 2008-09”, Small and Medium Enterprise Foundation