PROJECT FINANCE PRACTICE AT EASTERN BANK LIMITED

PROJECT FINANCE PRACTICE AT EASTERN BANK LIMITED

CHAPTER 1 INTRODUCTION 1.1

ORIGIN OF THE REPORT

This report was originated from the requirement of MBA Internship Program, which requires twelve weeks attachment period in an organization, based on the experience and expertise gained during the course of time. This is also a prerequisite of the completion of MBA degree and is mainly designed to introduce a fresh graduate with real life corporate culture. This program gives the chance to replenish the theoretical knowledge that is acquired from class lectures, books, journals etc. in the practical settings. In this case, the host organization was the Eastern Bank Limited and the division was the Corporate Banking Division, Unit-5, Head Office, Dhaka for 12 weeks starting from March 12, 2006 to June 04, 2006.

1.2

BACKGROUND OF THE STUDY

Project financing is an important factor for industrialization of an economy. It helps the entrepreneurs to increase capital equipment and such. It also bears high risks to be defaulted. The continuing crisis of accumulation of non-performing and default bank loans has emerged as one of the most serious constraint in the path of economic development of Bangladesh. Currently banking remains the main intermediary vehicle in harnessing capital for accelerating the growth of the productive sectors in Bangladesh in the absence of a healthy capital market. In such a situation, Eastern Bank Ltd. has been performing a great job in dealing Project Finance for so many years successfully. EBL provides term loan and working capital to develop projects. The complex issues of this job have actually persuaded me to choose this topic.

1.3

OBJECTIVE

The main objective of this report is to put on the experience gathered during the attachment period. However, the specific objectives were: • To have an overview of the host organization i.e., EBL • To know about current practice of Project Financing at EBL • To compare the previous and current practice of Project Financing

• • 1.4

To find out the improvements and loopholes in the current practice To recommend any possible solution of the associated problem SCOPE OF THE STUDY

There are so many steps followed in a typical project finance deal, so many department are involved like Credit Risk Management (CRM) Department for assessing the risk and fixing the loan limit, Credit Administration for all necessary documentation and regulatory affairs, Asset Team for booking new clients and assessing the needs of old ones, Project Finance Unit for technical and financial feasibility study etc. it would not be feasible to incorporate the whole process of project financing in an internship report. So, this report covers mainly the activities of recently established Project Finance Unit.

1.5

METHODOLOGY

Source of information: Both primary and secondary sources of information will be used in this report. As for the primary source, information will be gathered through interviews of Premier Bank officials. The secondary source consists of mainly bank manuals, annual reports and circulars of Bangladesh Bank and Premier Bank, and reference books on Project Management and Financial Institutions.

Analysis technique: All statistical analysis was done by using MS Excel.

Data tabulation, reporting and findings: After collecting information MS Excel was used to analyze information. Graphical tools were used to get clear picture of the situation. Different problem and prospects were sorted and recommendation was made to improve the situation.

1.6

LIMITATION

The main limitation of this report is that it would not depict a comprehensive picture of the project finance practice. Also, the bank officials, for security reasons, declined the request for providing any statistical figures of project loans apart from what is given in the annual reports.

So, the report does not contain detailed quantitative analysis.

1.7

REPORT PREVIEW

This report is mainly divided into three parts: first part (chapter 2) contains an overview of the host organization, second part (chapter 3, 4 and 5) contains a short literature review of project finance, project finance practice at EBL and case study of a project, and the final sections (chapter 6) contains conclusion and recommendation about the practice.

CHAPTER 2

EASTERN BANK LIMITED: AN OVERVIEW 2.1

HISTORICAL PROFILE OF EBL

Eastern Bank Limited, the leading private sector bank in Bangladesh offering full range of Personal, Corporate, International Trade, Foreign Exchange, Lease Finance and Capital Market services, was incorporated as a public limited company and a scheduled bank on 16 August 1992 to commence business. EBL has also taken over the business, assets, liabilities and losses of erstwhile Bank of Credit and Commerce International (Overseas) Limited (BCCI), branches in Bangladesh with effect from August 16, 1992 as they stood after reduction or adjustments in accordance with the provisions of the Bank of Credit and Commerce International (Overseas) Limited (Reconstruction) Scheme, 1992 formulated by Bangladesh Bank. The bank is listed in the Dhaka Stock Exchange Limited (DSEL) and Chittagong Stock Exchange Limited (CSEL).

EBL started business with four branches-Principal Branch, Motijheel Branch, Agrabad Branch and Khulna Branch and had authorized capital of TK.1000 million with 10 million shares of TK. 100 each and of paid up capital of TK.310 million. The paid up capital increased to TK. 600 million in 1994. The first Board of Directors constituted of 7 directors of Bangladesh Government. Mr. Nurul Hossain Khan was the chairman and Mr. Ghiyasuddin Ahmed was Managing Director.

In 1993, EBL started its expansion of branches. The bank got its Authorized Dealership License from Bangladesh Bank on 7th July 1993. Six new branches opened in 1994 and three in 1995.

The very next year they inaugurated two more branches. Their number of branches reached to twenty-one (21) as they open five more branches in 1997. Since then they only opened one more branch that was in 2001. Still now they are operating with 22 branches.

2.2

THE SUCCESS STORY

EBL started its journey from a meager information technology platform. The branches were operating in a standalone/decentralized environment using local software where limitations were in abundance. It was limited from the delivery channels perspective for providing the customers with maximum benefits in terms of banking products and services. The most private banks in Bangladesh generally have been less competitive with their MNC bank counter parts. The sense of customer support and service at these private banks, literally, were not up to the par with what the customers came to expect from these MNC banks. So, for obvious reasons privates started loosing businesses to these MNC banks.

But EBL has overcome all this hindrances by pioneering the proper implementation of world class banking software ‘Flexcube’ in Bangladesh. No other private banks in Bangladesh could

implement foreign banking software with success in the past. The concerned IT resources worked relentlessly over the months played a significant role behind the successful implementation of Flexcube banking software in EBL branches. EBL management consisting of dynamic bankers from foreign banks working environment could assess the benefits out of Information Technology (IT) in utilizing it to the maximum through their experience. Their guideline and streamlined decision making has played a pivotal role in the implementation process of Flexcube software in the branches.

Eastern Bank Limited has been proved to become the preferred choice in banking for friendly and personalized services, cutting edge technology, tailored solutions for business needs, global reach in trade and commerce and high yield on investments, assuring Excellence in Banking Services. At present, the bank has 22 branches throughout the country with 500 employees. The existing Board of Directors has 12 members. Mr. M. Ghaziul Haque is the Chairman of Board and Mr. K Mahmood Sattar is the Managing Director.

2.3

VISION AND MISSION OF EBL

Vision Statement To become the bank of choice by transforming the way we do business and developing a truly unique financial institution that delivers superior growth and financial performance and be the most recognizable brand in the financial services in Bangladesh.

Mission Statement • We will deliver service excellence to all our customers, both internal and external. • 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. We will ensure to maximize shareholder's value.

2.4

CORE BUSINESS COMPETENCE

Eastern Bank is local emerging bank with clear focus on consumer and commercial banking, strongly supported by wholesale business. Their business mix gives them a competitive edge in their chosen markets and client segments. They aim to become the bank of choice and maximize the value for the clients, while maximizing value for the shareholders as the ultimate proof of, and condition for, success.

Starting from this base, their strategy for growing and strengthening the business is built on five key elements:

• • • • •

Creating value for clients by offering high-quality financial solutions which best meets the current needs and long- term goals of the clients as well as business.

Focusing on consumer, commercial and wholesale clients in Bangladesh and Non Resident Bangladeshis around the world.

Leveraging advantage in products and people to benefit all the clients.

Sharing expertise and operational excellence across the company.

Creating 'Fuel for growth' by allocating capital and talent

The EBL management claims that the clients are the prime beneficiaries of the relationship based approach of different business units. Through this client-led strategy they create values for a comprehensive spectrum of clients. In terms of individual clients, these ranges from mass retail consumer segment to the very high net worth private clients segments, while on the corporate clients’ side, they range from a large number of small businesses to a smaller number of large local and joint venture corporate.

2.5

FUNCTIONAL DIVISIONS OF EBL

Previously the bank was operated in a Geographical Matrix manner where the business of the bank was concentrated in he twenty-two branches. Now it is done as a Business Matrix i.e. the operation has been shifted from branch banking to centralized banking where the head office is at the center of each and every activity.

Currently the bank is operated through five front office wings: • Corporate • Consumer • Treasury • SME • Cards Division These front office wings are operated through the help of back office support divisions like Trade Service, Service Delivery (Operation, FCU, IBD), Credit Admin, and Risk Management.

Also there are other divisions like Finance Division, Human Resource Division, Information Technology Division and so on to lead the bank from the front.

Let us have a short overview of the aforesaid divisions.

2.5.1 CORPORATE BANKING DIVISION Corporate Banking is an integrated specialized area of the Bank which addresses the diverse financial needs of Corporate Customers. Local and Foreign Business Houses (Public and Private Limited Companies), NGO's , Associations , Not for profit Organizations , Sole Proprietorship Concerns and Various Government Bodies/Corporations etc are considered to be our Corporate Customers .

The entire corporate division is divided into three broad areas: Area-1 that comprises of Dhaka, Area-2 that comprises Chittagong and Area-3 that comprises of Outstation Branches i.e. the branches in areas other than Dhaka and Chittagong. There are five units in Area-1, while Area-2 has three units. Also there are Small Business Unit (SBU) in Dhaka and Agrabad (Chittagong).

All the units are operated from the Corporate Banking Division at Head Office. In general this division’s functions are: • • • • • • •

Targeting corporate clients and building business relationship with them Evaluating financial strength of the clients and structuring of facilities for corporate customers Designing customized service for the clients Making possible recommendations for further financial expansion Arrange loan syndications Coordinates activities of support unit Credit Administration unit which prepares security documentation, security registration, and CIB related issues.

Coordinates activities of operating departments in obtaining Central Bank approvals where necessary.

2.5.2 CONSUMER BANKING DIVISION Consumer Banking Division deals with the day to day financial needs of individual customers.

The twenty-two branches of EBL, which are now termed as the “Sales & Service Centers” principally focus on retail banking based on relationship with individual customers. The new IT platform of EBL has enabled its Consumer Banking to offer world class and comprehensive range of financial products and services. This division’s principal functions are: • New Product Development • Brand Management • Maintenance of CASA and HP Accounts • Providing Consumer Loan • Providing Locker Services 2.5.3 SME DIVISION Small and Medium Enterprises (SME) in Bangladesh contributed 25% of gross domestic product (GDP) and 80% of the industrial jobs of the country in 2004. According to ADB, the country's estimated 6 million SMEs and micro enterprises firms of less than 100 employees have a significant role in generating growth and jobs. This is a sector that has its own distinct needs and requires specialized focus. Eastern Bank Ltd. (EBL) has launched SME Banking in early 2005 with this view in mind. Functions of this division include: • Provide SMEs with easy access to financing.

• Deliver products that ensure superior returns to customers.

• • 2.5.4

Orient customers with industry trends, regulatory issues and so on for their success.

Value long term relationship.

TREASURY DIVISION

Treasury unit is a Core banking unit with its leading-edge technology and steadily growing volume of activity in the markets, EBL's treasury unit and currency dealing desks have consolidated its position as a well-known and well established counterpart in the newly transformed Free Floating rate, dealing daily with a wide circle of both bank and non-bank customers all over Bangladesh. Our everyday business evolves around participation in Money Market & Foreign Exchange Market in a substantial volume.

2.5.5 CREDIT RISK MANAGEMENT DIVISION This division is responsible for evaluating the credit worthiness and debt payment capability of present loan customers and loan applicants. The department also monitors the risk worthiness regularly. The branches send all proposals from the prospective borrowers to the corporate division, which in turn analyze the financial statements and prepare credit memorandum, application for limit, account profitability and other necessary papers and send them to the Credit Risk Management division for approval. The department keeps track of credit portfolio by obtaining regular information from the branches. It sets price for credits and ensures its implementation at the branches. This department also monitors the various loan accounts of the branches and prepares various statements for Bangladesh Bank.

2.5.6 BRAND MANAGEMENT DIVISION The Brand Management division is a secondary unit of consumer division and is responsible for all activities related to managing the organization’s brand and building brand equity. It designs the logo, greeting cards and official stationary and prepares promotional plan and budget.

2.5.7 FINANCE DIVISION Finance division of the bank is responsible for: • Budgeting and Cost Monitoring • Planning and monitoring the bank’s liquidity • Corporate Tax management • Monthly-accrued interest calculation of all interest bearing accounts • Amortization of all fixed and other assets, • Central bank & other statutory reporting, • Management reporting (MIS), • Preparation of various financial statements • Weekly deposit and advance analysis of the bank,

• • • • •

Cost of fund analysis, Maintenance of accounts, Preparation of annual report of the bank, Maintenance of provident fund accounts, Maintenance of income and expenditure posting

2.5.8 HUMAN RESOURCES DEPARTMENT At present around 500 people are employed in EBL. All aspects of the employees are looked after by the Human Resources Department. HR Department is responsible for recruitment and development of staff members. The mission statement of HR division is that: “We will inculcate a high performance culture where we will work with fun and pride.”

2.5.9 SPECIAL ASSET MANAGEMENT DIVISION Special Asset Management Division (SAMD) is responsible for management of all accounts, which are classified in the bank’s loan portfolio. The classifications are Sub-standard, Doubtful and Bad & Loss. SAMD’s responsibility covers the areas of monitoring and controlling the classified accounts, actively following up with the borrowers for recovery, negotiating and restructuring/ rescheduling debts wherever feasible.

2.5.10 OPERATIONS The Operations division consists of Service Delivery, Trade Service, Treasury Support division and IT division. These subdivisions provide support to the front office functionalities in a smooth and sophisticated manner.

2.5.11 CREDIT ADMINISTRATION DIVISION Credit Administration Division deals with Credit Administration, Loan Monitoring and Documentation. Credit Administration entails post-approval functions of the division, which are monitoring credit expiry, dues, excess over limit, document deficiency and reporting the deficiencies. Loan monitoring part entails follow-up on approval terms, proper disbursement, monitor interest payments, monitor principal repayment and maintaining balance with general ledger. Documentation function entails ensuring that proper loan documents are present, filing with the Registered Joint Stock Corporation (RJSC) and executing registered mortgage deed.

2.6

EBL BANKING BENEFITS

Flexcube banking software automated in all branches of EBL has the adaptability for incorporating the delivery channels like, Internet Banking, Tele-Banking, ATM/POS, Home

Banking, Wireless Access Protocol, Call Centre are all superb services which a customer can avail in due course.

EBL’s repertoire of hardware is highly sophisticated as no other banks in Bangladesh has availed this in recent times. The combination of hardware will help consolidate the backbone for the plethora of services provided to the customers by the Bank for the years to come. Moreover, EBL, country wise bade farewell to the lackluster range of hardware which were in use over the years.

• Anywhere 24 hours X 7 days banking • Internet banking, Tele banking and ATM/POS • One Stop Shop for all your banking need • Significantly reduced time in banking transactions • Sophisticated Customer Information at the fingertips and can be provided anytime • Online Inter-branch Transfer • Any Branch Pay Order System • Digital Signature/Photo image while transacting • Display Customers Balance, Transactions, Statements online • Automatic Sweep in & out • Locker Service Availability • EBL 5 to 9 Extended Service • Bill payment • Utility Services Bill • Tuition Fees • Mobile Phone Bills • Versatile Products availability • Fast Cash • Fast Loan • Auto Loan • Consumer Loans • High Performance Account • Savings Insurance Account • Monthly Income Plan • Monthly Deposit Plan

2.7

PERFORMANCE OF EBL

2.7.1 BUSINESS IN BRIEF Against the backdrop of rising funding cost mainly due to turbulent interest rate structure and dearth of FX followed by gradual erosion of Taka value against USD, EBL restored to enhance income from fees and commission based service. Aligned with this strategy, EBL successfully established NRB unit to facilitate inward remittance flow as well as Structured Finance Unit to enhance fees and commission earnings in 2005.

The financial results in 2005 were the outcome of the aforementioned events. On the revenue side, ‘Fees, Commission and FX income’ increased by Tk. 237 million or 69.25% over that of 2004 of which trade service commission registered the highest increase of Tk. 97 million followed by fees and charges of Tk. 77 million and FX income of Tk. 63 million.

In 2005 the bank focused on establishing a formal SME unit as well as investing in consumer banking business. This is in line with our strategy of having a diversified assets and liabilities portfolio. By the year 2005, the Consumer Banking Unit was firmly established with many attractive and innovative lifestyle products like Jibandhara Loan, Auto Loan, VISA Debit Cards, Fast Cash and so on. SME banking has also taken a formal shape and the portfolio has started building up with a huge market and profit potentials.

2.7.2 LOAN PORTFOLIO EBL’s loan portfolio, its composition and growth in 2005 was constrained by competitive market conditions. Clients have been conservative in their financial strategies and restrained in their borrowing, resulting in a relatively lower utilization of credit facilities. Additionally, the strengthening of the USD has limiting impact on growth in BDT portfolios. EBL’s loan portfolio is highly diversified and evenly distributed over 14 different industry segments. The segmentation is shown below.

Table 1: EBL’s Loan Portfolio Industry Category

Outstanding as on % Outstanding Dec 31, 2005 (BDT in millions)

Commerce & Trading

1,332

7.50%

Commodity Import

1,147

6.46%

Construction

627

3.53%

Edible Oil Refinery

1,524

8.58%

Electronic Goods

528

2.98%

Individual

1,859

10.47%

Pharmaceuticals & Allied Products

613

3.45%

RMG Industry

2,036

11.47%

Ship Breaking

1,045

5.89%

Steel Products

1,311

7.39%

Telecommunication

710

4.00%

Textiles

2,117

11.92%

Others

2,908

16.38%

Total

17,757

100.00%

In 2005, corporate clients continued to be the largest among business units holding approximately 88.8% of total loans outstanding while consumer was second with 9.6% and standing of SME was 3.6%.

2.7.3 FINANCIAL PERFORMANCE OF EBL Table 2 shows the comparative performance of EBL for five years. The graphical representation of the performance is based upon this table.

Table 2: Performance at a glance Particulars

2001

2002

2003

2004

2005

Authorized capital

1,000

1,000

1,000

1,000

1,000

Paid up capital

720

720

828

828

828

Reserve

2,322

2,448

2,560

2,733

3,132

Deposits and other accounts

13,277

13,661

11,952

15,649

19,396

Loans and Advances

9,946

10,891

11,288

14,973

17,758

Export

5,402

4,358

3,533

8,303

13,239

Import (LC)

11,415

12,642

16,256

24,414

29,692

Guarantee Business

1,054

1,183

354

947

555

Operating income

2,022

1,986

1,985

2,241

2,957

Operating Expenses

1,319

1,255

1,226

1,349

1,901

Operating Profit

703

731

759

892

1056

Net Profit

323

371

358

483

546

18,284

18,445

18,716

23,048

27,400

Total Assets contingent)

(excluding

(above figures are in million BDT) Book value per share (Tk)

265.02

295.29

281.87

317.73

370.93

Market value per share (Tk)

291

303

382

780

1222.75

Earning per share (Taka)

45

51

43

58

66

Dividend per share (Taka)

30

35

20

43

40

Return on Equity (Average)

16.93%

17.44%

15.33%

18.44%

19.17%

Return on Assets (Average)

1.84%

2.04%

1.94%

2.32%

2.17%

Classified loans as a % of total loans

11.52%

13.46%

13.61%

7.19%

5.41%

Capital Adequacy Ratio

22.49%

22.32%

18.27%

14.82%

18.76%

Cost to Income Ratio

29.30%

27.91%

28.17%

30.93%

33.66%

Net Interest Margin

3.46%

3.49%

2.47%

3.26%

2.81%

Number of Branches

22

22

22

22

22

Number of Employees

2.8

492

484

495

522

536

GROWTH AND DEVELOPMENT PROFILE OF EBL

2.8.1. GROWTH IN SALES VOLUME Growth in sales volume comprises of growth in deposits, growth in loans and advances and growth in export and import business. •

Growth in Deposits:

Deposits increased by 23.94% from Tk 15,649 million in 2004to Tk 19,396 million in 2005. But in 2003 the deposit decreased to Tk. 11952 million mainly because of reduction of some high interest deposit. The bank has focused on reducing cost of funds by increasing transactional deposits and other low-cost deposit. Rates of interest were revised periodically as par market condition.

Figure 1: Yearwise Growth pattern of Deposit

Deposit (in million BDT)

20000

15000

10000

5000

0

2001

2002

2003

2004

2005

Year

•

Loans & Advances:

The total loans and advances of the bank were Tk. 17,758 million in 2005 showing an increase of 18.60% over the year 2004. The total classified loans of the bank stood at 5.41% of the total loan in December 2005 as which was 7.19% at the end of December 2004. Then it increased even further in 2004 and became Tk. 14,973 million at the end of year.

Figure 2: Yearwise Growth pattern in Loans and Advances

Amount (in million BDT)

20000

15000

10000

5000

0 2001

2002

2003

2004

2005

Year •

Import & Export Business:

The bank’s total foreign exchange business was of Tk. 42,931 million, which is 27.53% higher than in the previous year. Foreign exchange business included Import of Tk. 29,692million and Export of Tk. 13,239 million. Major items of export were readymade garments, shrimps, tea, jute goods, leather goods and non-traditional items. Major import items were consumer goods and old vessels for scrapping, industrial raw materials, fabrics and accessories of garment industries etc.

Figure 3: Yearwise growth in Export/Import (LC)

Volume (in million BDT)

30000 24000 18000 12000 6000 0 2001

2002

2003

Year

2004

2005

Export

Import (LC)

2.8.2 •

GROWTH IN PROFIT AND INCOME Operating profit increased by 18.38% from 892 million in 2004 to 1,056 million in 2005. Net Operating Revenue (NII plus other income) increased by Tk. 300 million whereas total operating expense increased by Tk. 136 million. This strong profit growth is attributable to the phenomenal growth (69.25%) of Fees & Commission, Investment Income and FX Income.

Figure 4: Net Profit vs. Operating Profit 1800

Profit (in million Tk.)

546 1350 323

1056

900 703

Net Profit Operating Profit

450

0 2001

2002

2003

2004

2005

Year

•

Net Interest Income (NII) increased only by 4.54% from 679 million in 2004 to 710 million in 2005 mainly due to increase of interest income and expense in almost similar pace.

•

Interest Income increased by 27.45% from Tk. 1,628 million in 2004 to Tk. 2,075 million in 2005. Interest Expense also increased by 43.85% from Tk. 949 million in 2004 to Tk. 1,365 million in 2005. This unexpected rise in interest expense is mainly attributable to the overall increase in Deposit rates in the market and turbulent money market especially in the first half in 2005.

•

Income from investments (T-bills comprise 92%) increased by 12.03% from Tk. 266 million in 2004 to Tk. 298 million in 2005 mainly due to the increase of SLR requirement coupled with increase in base of SLR calculation.

•

The book value per share has been moved from Tk. 265 of 2001 to Tk. 371 in 2005. Against this book value, the market price as on 31/12/2005 at DSE was Tk. 1223. Figure 5 shows the comparative picture of the figures.

Figure 5: Market value per share vs Book value per share

Value per share (in Tk)

2000 1222.75

1600

Market value per share (Tk) Book value per share (Taka)

1200 800

291

400

370.93

265.02

0 2001

2002

2003

2004

2005

Year

•

Against Tk. 66 earning per share, dividend payout ratio was 60% i.e. Tk 40 in the year 2005. the following figure shows the graphical representation of earning per share vs. dividend per share over the years.

Figure 6: Earning Per Share vs Dividend Per Share 75

66

EPS/DPS (in TK)

60

45

45 40

30

30

Earning per share (Taka) Dividend per share (Taka)

15

0 2001

2002

2003

2004

2005

Year

2.9 SWOT ANALYSIS OF EASTERN BANK LTD. Studying the internal and external environment of EBL the following strengths, weaknesses, opportunities and threats could be identified: STRENGTHS OF THE ORGANIZATION

•

•

•

•

Changed Organizational Structure: Up until 2000 EBL carried out its operation like every other local bank. All of its braches acted as single banks and did everything from marketing to loan processing to relationship maintaining. In 2001 EBL changed its traditional way of doing business. Rather than operating as a geographical matrix, EBL started operating as a business matrix. The functional areas were separated and redefined as Business Units.

This has allowed management to operate more efficiently.

Centralized Processes: The new organizational structure has resulted in centralized operations. Before all the branches were empowered to do almost everything within limits. They were responsible for marketing, loan processing, account activity monitoring and other transactions. Their accountability did not go much beyond sending statements to the head office annually. Under the current system management has more control on the overall bank and its day-to-day operations. For example, loan default at branches would be lower if the Corporate Division and the Risk Management Division, at Head Office, scrutinize the loan proposals along with the branch managers.

Superior IT Platform: From 15 March 2003 EBL has started using Flex cube banking software, which caters to all the needs of retail, corporate, treasury and investment banking. Flex cube enables EBL to remain associated between all its branches and business units.

Human Resource: EBL’s main strength is its hardworking, efficient and dedicated workforce. Management always takes special care in choosing the officials. Also they provide extensive training program to develop skilled workforce.

WEAKNESSES OF THE ORGANIZATION Inadequate Marketing Approach: Currently EBL’s marketing programs include point-of-sale advertisements consisting of brochures and placards. Few inconspicuous billboards are placed at different locations. Occasionally press releases are given to highlight various features and changes. Lack of proper advertising campaign has resulted to poor brand familiarity.

OPPORTUNITIES FOR EBL Online Banking: On March 15, 2003 EBL went online. All its Dhaka and Chittagong branches are already connected through the web and transactions in accounts can be made from any one of the branches online. By the middle of July all the 22 branches would go online and thus customers all over Bangladesh will get access to all EBL products anytime from any branches. Also each and every

customer will be given an ID and a password, so that they can login to the website of EBL and carry out transactions on their own. EBL is the first local bank, which has gone online and gives its customers the satisfaction of anytime and any branch banking. In the fast paced life of today, people will appreciate this unique convenience and bank with EBL. New Products and Services: By the end of July 2003, EBL launched new consumer products like EBL Monthly Income Plan (MIP) and Savings Insurance Schemes. Also Automated Teller Machine (ATM), Telephone Banking, Credit Card Facility, Sweep in-out Facility etc was introduced. Although most of these are already available in other banks and EBL is quite late in introducing them, its current customer base will welcome the new features. In order to promote the new facilities EBL has decided to take up an extensive promotional program, which will include direct marketing and advertising. Already the first phase of selection and recruiting marketing executives and sales people has finished. If these services are properly communicated to their potential customers, it can be a good business growth opportunity for EBL. THREATS Lost Opportunities: Till date EBL offers very few consumer products e.g. car loans, house building loans, festival loans and other facilities like credit card, ATM, telephone banking etc. All the multinational and several of the local banks of Bangladesh already provide these and thus already have created a huge loyal customer base. When EBL starts offering these features it would be difficult to attract new customers and lure away the ones who do business with other banks as they have well established brand equity. Most of the established banks have extensive marketing practices and emphasize on aggressive direct marketing, which EBL has not started yet. Other opportunities have also been lost e.g. several of the banks both multinational and local participated in the ‘Automobile Shows’ to offer Car Loan schemes. EBL do not take part in these shows, though it has such offering. Although the bank has given out a press release about Internet banking, not much promotion was done as the management is waiting for all of the branches to go online. After that an extensive promotional program will be launched. However while waiting for the right moment, few other banks, which do not provide proper online banking, have already started massive promotion.

This publicity may dilute the uniqueness of EBL’s features.

CHAPTER 3

LITERATURE REVIEW OF PROJECT FINNACE

3.1

WHAT IS PROJECT FINANCING

Project financing involves non-recourse financing of the development and construction of a particular project in which the lender looks principally to the revenues expected to be generated by the project for the repayment of its loan and to the assets of the project as collateral for its loan rather than to the general credit of the project sponsor.

Project financing is commonly used as a financing method in capital-intensive industries for projects requiring large investments of funds, such as the construction of power plants, pipelines, transportation systems, mining facilities, industrial facilities and heavy manufacturing plants. The sponsors of such projects frequently are not sufficiently creditworthy to obtain traditional financing or are unwilling to take the risks and assume the debt obligations associated with traditional financings. Project financing permits the risks associated with such projects to be allocated among a number of parties at levels acceptable to each party.

The differences between “traditional loan” and “project finance” loan is that the latter involves the construction of a new project and its operation, hence it is sometimes referred as a Greenfield financing, the former may be used for a variety of corporate purposes.

Project finance loans have uniform characteristics: a) A roll –up of interest during construction b) An amortizing loan repayment structure with a notable structure of balloon payments. c) Tight tailoring for example, during construction between loan draws and stage payments and during operations between cash flow generation and loan repayments. d) Sharing with lenders of operating control of the project vehicles. e) Creation of various accounts and/ or cash traps to meet operating needs and contingencies. f) Complex documentation.

3.2

ADVANTAGES AND DISADVANTAGES

Principal Advantages Non-recourse The typical project financing involves a loan to enable the sponsor to construct a project where the loan is completely "non-recourse" to the sponsor, i.e., the sponsor has no obligation to make payments on the project loan if revenues generated by

the project are insufficient to cover the principal and interest payments on the loan. In order to minimize the risks associated with a non-recourse loan, a lender typically will require indirect credit supports in the form of guarantees, warranties and other covenants from the sponsor, its affiliates and other third parties involved with the project.

Maximize Leverage In a project financing, the sponsor typically seeks to finance the costs of development and construction of the project on a highly leveraged basis.

Frequently, such costs are financed using 80 to 100 percent debt. High leverage in a nonrecourse project financing permits a sponsor to put less in funds at risk, permits a sponsor to finance the project without diluting its equity investment in the project and, in certain circumstances, also may permit reductions in the cost of capital by substituting lowercost, tax-deductible interest for higher-cost, taxable returns on equity.

Off-Balance-Sheet Treatment Depending upon the structure of a project financing, the project sponsor may not be required to report any of the project debt on its balance sheet because such debt is non-recourse or of limited recourse to the sponsor. Off-balancesheet treatment can have the added practical benefit of helping the sponsor comply with covenants and restrictions relating to borrowing funds contained in other indentures and credit agreements to which the sponsor is a party.

Maximize Tax Benefits Project financings should be structured to maximize tax benefits and to assure that all available tax benefits are used by the sponsor or transferred, to the extent permissible, to another party through a partnership, lease or other vehicle.

Disadvantages Project financings are extremely complex. It may take a much longer period of time to structure, negotiate and document a project financing than a traditional financing, and the legal fees and related costs associated with a project financing can be very high. Because the risks assumed by lenders may be greater in a non-recourse project financing than in a more traditional financing, the cost of capital may be greater than with a traditional financing.

3.3

PROJECT FINANCING PARTICIPANTS

Sponsor/Developer The sponsor(s) or developer(s) of a project financing is the party that organizes all of the other parties and typically controls, and makes an equity investment in, the company or other entity that owns the project. If there is more than one sponsor, the sponsors typically will form a corporation or enter into a partnership or other

arrangement pursuant to which the sponsors will form a "project company" to own the project and establish their respective rights and responsibilities regarding the project.

Additional Equity Investors In addition to the sponsor(s), there frequently are additional equity investors in the project company. These additional investors may include one or more of the other project participants.

Construction Contractor The construction contractor enters into a contract with the project company for the design, engineering and construction of the project.

Operator The project operator enters into a long-term agreement with the project company for the day-to-day operation and maintenance of the project.

Feedstock Supplier The feedstock supplier(s) enters into a long-term agreement with the project company for the supply of feedstock (i.e., energy, raw materials or other resources) to the project (e.g., for a power plant, the feedstock supplier will supply fuel; for a paper mill, the feedstock supplier will supply wood pulp).

Product Off taker The product off taker(s) enters into a long-term agreement with the project company for the purchase of all of the energy, goods or other product produced at the project.

Lender The lender in a project financing is a financial institution or group of financial institutions that provide a loan to the project company to develop and construct the project and that take a security interest in all of the project assets.

3.4

THE FEASIBILITY STUDY

As one of the first steps in a project financing the sponsor or a technical consultant hired by the sponsor will prepare a feasibility study showing the financial viability of the project. Frequently, a prospective lender will hire its own independent consultants to prepare an independent feasibility study before the lender will commit to lend funds for the project.

The feasibility study should analyze every technical, financial and other aspect of the project, including the time-frame for completion of the various phases of the project development, and should clearly set forth all of the financial and other

assumptions upon which the conclusions of the study are based, Among the more important items contained in a feasibility study are:                 

3.5

Description of project Description of sponsor(s) Sponsors' Agreements Project site Governmental arrangements Source of funds Feedstock Agreements Off take Agreements Construction Contract Management of project Capital costs Working capital Equity sourcing Debt sourcing Financial projections Market study Assumptions PRINCIPAL AGREEMENTS IN A PROJECT FINANCING

1) Construction Contract Some of the more important terms of the construction contract are: • •

•

Project Description The construction contract should set forth a detailed description of all of the work necessary to complete the project.

Price Most project financing construction contracts are fixed-price contracts although some projects may be built on a cost-plus basis. If the contract is not fixed-price, additional debt or equity contributions may be necessary to complete the project, and the project agreements should clearly indicate the party or parties responsible for such contributions.

Payment Payments typically are made on a "milestone" or "completed work" basis, with a retainage. This payment procedure provides an incentive for the contractor to keep on schedule and useful monitoring points for the owner and the lender.

•

•

Completion Date The construction completion date, together with any time extensions resulting from an event of force majeure, must be consistent with the parties' obligations under the other project documents. If construction is not finished by the completion date, the contractor typically is required to pay liquidated damages to cover debt service for each day until the project is completed. If construction is completed early, the contractor frequently is entitled to an early completion bonus.

Performance Guarantees The contractor typically will guarantee that the project will be able to meet certain performance standards when completed. Such standards must be set at levels to assure that the project will generate sufficient revenues for debt service, operating costs and a return on equity. Such guarantees are measured by performance tests conducted by the contractor at the end of construction. If the project does not meet the guaranteed levels of performance, the contractor typically is required to make liquidated damages payments to the sponsor. If project performance exceeds the guaranteed minimum levels, the contractor may be entitled to bonus payments.

2) Feedstock Supply Agreements The project company will enter into one or more feedstock supply agreements for the supply of raw materials, energy or other resources over the life of the project. Frequently, feedstock supply agreements are structured on a "put-or-pay" basis, which means that the supplier must either supply the feedstock or pay the project company the difference in costs incurred in obtaining the feedstock from another source.

3) Product Offtake Agreements In a project financing, the product offtake agreements represent the source of revenue for the project. Such agreements must be structured in a manner to provide the project company with sufficient revenue to pay its project debt obligations and all other costs of operating, maintaining and owning the project.

Frequently, offtake agreements are structured on a "take-or-pay" basis, which means that the offtaker is obligated to pay for product on a regular basis whether or not the offtaker actually takes the product unless the product is unavailable due to a default by the project company. Like feedstock supply arrangements, offtake agreements frequently are on a fixed or scheduled price basis during the term of the project debt financing.

4) Operations and Maintenance Agreement The project company typically will enter into a long-term agreement for the day-to-day operation and maintenance of the project facilities with a company having the technical and financial expertise to operate the project in accordance with the cost and production specifications for the

project. The operator may be an independent company, or it may be one of the sponsors. The operator typically will be paid a fixed compensation and may be entitled to bonus payments for extraordinary project performance and be required to pay liquidated damages for project performance below specified levels.

5) Management Agreement 6) Loan and Security Agreement The borrower in a project financing typically is the project company formed by the sponsor(s) to own the project. The loan agreement will set forth the basic terms of the loan and will contain general provisions relating to maturity, interest rate and fees. The typical project financing loan agreement also will contain provisions such as these: •

• •

•

•

• •

•

•

Disbursement Controls These frequently take the form of conditions precedent to each drawdown, requiring the borrower to present invoices, builders' certificates or other evidence as to the need for and use of the funds.

Progress Reports The lender may require periodic reports certified by an independent consultant on the status of construction progress.

Covenants Not to Amend The borrower will covenant not to amend or waive any of its rights under the construction, feedstock, offtake, operations and maintenance, or other principal agreements without the consent of the lender.

Completion Covenants These require the borrower to complete the project in accordance with project plans and specifications and prohibit the borrower from materially altering the project plans without the consent of the lender.

Dividend Restrictions These covenants place restrictions on the payment of dividends or other distributions by the borrower until debt service obligations are satisfied.

Debt and Guarantee Restrictions The borrower may be prohibited from incurring additional debt or from guaranteeing other obligations.

Financial Covenants Such covenants require the maintenance of working capital and liquidity ratios, debt service coverage ratios, debt service reserves and other financial ratios to protect the credit of the borrower.

Subordination Lenders typically require other participants in the project to enter into a subordination agreement under which certain payments to such participants from the borrower under project agreements are restricted (either absolutely or partially) and made subordinate to the payment of debt service Security The project loan typically will be secured by multiple forms of collateral, including:

1.

2.

3.

4.

5.

6.

7.

8.

9.

Mortgage on the project facilities and real property.

Assignment of operating revenues.

Pledge of bank deposits.

Assignment of any letters of credit or performance or completion bonds relating to the project under which borrower is the beneficiary.

Liens on the borrower's personal property.

Assignment of insurance proceeds.

Assignment of all project agreements.

Pledge of stock in Project Company or assignment of partnership interests.

Assignment of any patents, trademarks or other intellectual property owned by the borrower.

7) Site Lease Agreement The project company typically enters into a long-term lease for the life of the project relating to the real property on which the project is to be located. Rental payments may be set in advance at a fixed rate or may be tied to project performance.

8) Insurance The general categories of insurance available in connection with project financings are: Standard Insurance The following types of insurance typically are obtained for all project financings and cover the most common types of losses that a project may suffer.

• Property Damage, including transportation, fire and extended casualty.

• Boiler and Machinery • Comprehensive General Liability.

• Worker's Compensation • Automobile Liability and Physical Damage • Umbrella or Excess Liability Optional Insurance The following types of insurance often are obtained in connection with a project financing. Coverages such as these are more expensive than standard insurance and require more tailoring to meet the specific needs of the project.

•

Business Interruption

•

Performance Bonds

•

Cost Overrun/Delayed Opening

•

Design Errors and Omissions

•

System Performance (Efficiency).

•

Pollution Liability

3.6

RISKS ASSOCIATED WITH PROJECTS

Despite the best intentions and thorough planning, unforeseen events can occur that may disrupt a project. These could be sovereign risks such as unanticipated instability in the government of host country, devaluation of the local currency, or from labor unrest. There are a variety of risks that each project faces at varying stages of the projects lifecycle:

•

Development risk: This is borne by the project sponsors, and covers the period of preparation prior to financial close. Lenders are not committed to the project at this stage and therefore bear none of the responsibility.

•

Construction Risk: This is normally borne by the construction contractor involved in the scheme and includes failure to complete construction within the agreed timeframe, cost overruns, and inability to meet specified design and construction requirements.

•

Technology Risk: This is common in projects involving IT/ new technologies. Here the supplier providing the technology is required to provide warranties and accept liability should its equipment not perform to expectations.

•

Performance/Operational Risk: This is normally borne by the operator who is responsible for the day to day maintenance and operation of the asset.

•

Interface risk: Members of the SPV set up to deliver the project are responsible for ensuring that the entire parties act together to deliver a successful project outcome.

•

Revenue Risk: If the SPV fails to deliver agreed levels of service and availability the procuring authority is within its rights to deduct payments. This is reflected in the payment mechanism for the project (It will specify reductions in revenue payments to the SPV in the event of service failure).

•

Force Majeure Risk: All parties are able to terminate their agreements in the event of natural disasters such as flood or earthquakes. Here liabilities are beyond the control of the supplying parties, this is reflected in a force majeure clause within the contract agreement.

CHAPTER 4

PROJECT FINANCE PRACTICE AT EBL 4.1

INTRODUCTION

Project financing is a complex operation for any financial institution. Usually, it involves mid-term or more frequently, long-term loan. Generally, the amount of loan sanctioned is quite substantial. The loan repayment schedule also covers a lengthy period of time. The project itself entails a multiple of probabilistic factors, which makes the project success an uncertain matter. Therefore, it is quite natural for a financial institution to exercise a cautious approach towards project financing.

Project financing forms an important part of the total loans and advances portfolio of EBL. The bank focuses on mainly industrial projects, both new and balancing, modernization, replacement, expansion (BMRE) of existing projects. The projects chosen for financing have to mid-term or long-term ones. Therefore, EBL finances them with term loans. The usual duration of the term loan is 2 to 6 years. The loan is repaid through equal installments, comprising principal and interest portions, over the term of the loan.

Generally monthly or quarterly installments are used to repay loan, but the quarterly mode being the most common mode of installment. The sponsors avail grace period advantage depending on the industry.

Project Operation of the Bank is of paramount importance as the greatest share of total revenue of the Bank is generated from it, maximum risk is centered in it and even the very existence of Bank depends on prudent management of the credit portfolio.

4.2

PREVIOUS PRACTICE OF PROJECT FINANCE AT EBL

Generally, the project financing dealing at EBL starts with the expression of interest for loan by the sponsors to the asset teams. Then after analyzing the project proposal by the asset team, they send it to the Head of Corporate Banking (HoCB) and Credit Risk Management (CRM) Division. After analyzing the risk by CRM division and fixing the loan limit, the proposal was then sent to the Board meeting for approval. The Credit Administration Division, in the mean time completed all the necessary documentation with the help of RMs. After approval it was again the responsibility of the RMs to ensure proper monitoring and timely repayment of installment.

The information that the sponsors had to supply are listed below: i)

ii)

Identification of Project and the Promoters ♦Name and brief introduction of the project ♦Name, address, background, educational qualification, technical qualification (if any), and business experience of project promoters/sponsors ♦Asset-Liability position of promoters and of sister concerns ♦Nature of the project: New or Balancing/Modernization/ Replacement/ Expansion (BMRE) Project Organization and Management ♦ Legal form of project organization

♦Organizational structure and management set-up ♦Authority distribution and reporting relationships ♦Shareholding distribution among promoters/sponsors ♦Memorandum of Association and Articles of Association of the project ♦Manpower requirement: managerial and administrative personnel, sales and distribution workforce, and production workers and technicians iii)

Technical Aspects of the Project ♦Land and location of the project ♦Building, structures, and fixture requirement ♦Machinery, equipment, and vehicles requirement ♦Raw materials and other inputs requirement ♦Utilities, power, and fuel supply ♦Approximate stages of project implementation/work schedule of the project ♦Proposed products, production capacity, and production schedule ♦Production procedure and technology to be used

iv)

Marketing Aspects of the Project ♦Proposed product mix ♦Pricing strategy ♦Mode/Channels of distribution ♦Promotional strategy ♦Targeted market segments and customer profile ♦Market positioning and differentiating strategies ♦Existing and projected market demands and supplies situation and demand gap ♦Schedule of sales ♦Local and global market outlook ♦Major competitors in the market

v)

Project costs and Financial Aspects of the Project ♦Detailed break-up of project costs: fixed, variable, and semi-variable ♦Working capital needs ♦Proposed debt-equity structure of the project ♦Proposed sources of financing ♦Proposed primary and collateral securities for loan with valuation ♦Proposed loan repayment schedule with desired moratorium period

♦Projected income statement, balance sheet, and funds/cash flow statements for 3 years ♦Break-even analysis and financial ratio analysis vi)

4.3

Socio-economic Aspects of the Project ♦Employment generation ♦Use of advanced technology ♦Contribution to GDP ♦Foreign exchange savings ♦Import substitution and/or potential for export earnings ♦Possible backward/forward linkage effect PROBLEMS WITH PREVIOUS PRACTICE

In previous practice, the respective relationship managers (RMs) were responsible for all kinds of technical and feasibility study. They were responsible for the selection and appraisal of any project. Since, in most of the cases, the RMs of EBL do not come from technical background, they did not have that technical expertise to do the analysis on their own rather to rely on the sponsors for any kind of technical analysis.

This practice sometimes led to some problematic situations which arose mainly from technical disturbance which the RMs could not point out or deliberate misrepresentation of information by the sponsors. Some of the situations are discussed below: East-West Suiting Mills Limited This textile mill had two sections: the weaving section and the finishing section. Machineries of the weaving section were bought on a turn-key basis and that of the finishing section were new. The problem associated with this company was that past due amount was increasing to such an extent that it was nearly at the brink of to be declared as classified account.

The reason behind this problem was mainly low production due to inefficient utilization. Basically the finishing machinery was new with more capacity than the weaving machinery. Weaving section couldn’t produce that much amount that finishing section could take care of. So, the finishing section remained unutilized due to capacity restriction of weaving section. Also the weaving machinery couldn’t produce the desired fabric for their sister concern, like Fit Elegance is a sister concern of EWSML. But the weaving section of EWSML couldn’t produce quality fabric that suited with the image of Fit Elegance. As a result, sales went down than the estimated amount and the company was not able to repay the loan amount on time.

This problem arose mainly due to lack of technical expertise of the RMs. Somehow, these issues were overlooked or being persuaded by the sponsors in their own way.

When the PFU has established, the problem was then handed over to them to solve. However, the PFU members have the technical expertise to look after all these issues. They went for extensive visit and discussed the situation with the concerned engineers of the company and suggested two probable solutions:

•

Firstly, to change the machine configuration so that it can produce the desired quality fabric by Fit Elegance;

•

Secondly, to go for extensive marketing so that other tailoring companies can use their products since there were no other way to return the machineries that were bought on a turn-key basis.

AST Beverage Ltd. This company produces soft drinks like Fizz-up, Euro Cola etc. This company had two main divisionsmaking bottles and preparing the solutions. The problem with associated with this company were twofold.

First, the bottling section again had two divisions-the Preform machine which produced the shape of the bottle and another was the Slip Applicator machine which was used for labeling the bottles. But the problem was that the Slip Applicator machine had capacity of finishing 17,000 bottles per day whereas the perform machine had a capacity of producing 30,000 bottles per day. Secondly, the bottles produced were not up to the mark because of use of low quality raw materials i.e. silica. As a result, the outputs produced were faulty and fragile and went out of order easily. So wastage level was high. For all these reasons the bottling division couldn’t keep pace in production with the beverage division and their production as well as sales went down to a greater extent.

S. Co. Steels Ltd. This company produced steel for construction material. EBL was a participant in the syndication while IDLC was the arranger. The company was liable to repay the installment after three months of commercial operation. But they were not able to repay the loan in time and as a result the past due amount were piling up. The concerned asset team then asked the help of PFU team to find out the problems. The PFU team investigated and listed the two reasons:

•

Initially in the proposal, the estimated production was shown as 200 metric ton per day and all the calculations were done on that basis. The RMs also agreed upon that agreement and did not go for further checking. But when the PFU team investigated the situation, they found out that the machine capacity was only 100 metric ton per day. As a result, the production as well as sales came down to less than half of the projected amount.

•

In this project, coal was used as the fuel, but the specification of coal was not maintained. For steel production, the coal should contain maximum 0.8% sulfur. But after testing the coal used in this company, it was found out that this coal contained almost 1.76% sulfur. As a result, the steels produced were faulty and not up to the standard. The reason behind this problem was that, in the proposal the source of fuel was mentioned to be Boropukuria Coal Mine. But in reality, they imported low quality coal from India breaching the agreement.

After finding the problems and the reasons behind these problems, the PFU suggested the sponsors to change machine configuration and also insisted them to use coal from Boropukuria. However, the sponsors asked for extending the loan limit for restructuring.

But the bank management refused to extend the limit rather insist them to repay the loan from their own, as the production went down to a greater extent.

4.4

CURRENT PRACTICE

In order to overcome all the aforementioned problems associated with Project Financing, the EBL management decided to establish a separate unit under corporate banking division named as Project Finance Unit (PFU), consists of members having technical as well as business expertise, who will work for the feasibility study and analysis of a new project booked by Relationship Manager (RM) s’ Units. All other steps remain the same as before. For Monitoring of project implementation PFU works with RM units.

4.4.1 Project Finance Unit The Project Finance Unit (PFU) at EBL consists of two members from technical and business background. The unit head is a Senior Vice President (SVP) with more than twenty years experience in project analysis and implementation with various financial and non-financial institutions. He is assisted by a Principal Officer (PO).

4.4.2 Duties and Responsibilities of PFU Job Description: For appraising a project, the PFU check all the technical and financial analysis on their own format rather than just to rely on the project proposal provided by the sponsors.

Their duty starts with evaluating the technical viability of the project, then evaluating financial feasibility, monitoring and finally ends with a completion report three months after the commercial operation of the project.

In order to evaluate technical viability of any project proposal PFU will: • Visit the project site to evaluate its suitability in terms of communication, infra-structural facilities such as availability of gas, water, electricity, etc.

• Estimate required list of machinery and equipment to balance the production target.

• Assess competitive prices of the equipment, list of constructions and prices thereof.

• Assess the manpower requirement.

• Assess requirement of raw materials, packing materials and process chemicals to meet its targeted production.

• Assess duty structure of plant and machinery; raw materials vis-à-vis finished products with the latest circulars • Collect current prices of raw materials and finished products.

In order to evaluate financial viability of any project proposal PFU will prepare complete spreads on the project proposal comprising of the following statements: • Detailed Project Cost • Detailed Means of Financing

• • • • • • • • • • • • • • • • • • • •

• • • •

Detailed Working Capital Requirement Detail Estimated Income Statement Details of Sales Estimate Detailed Cost of Goods Sold Details of Raw & Packing Materials requirement Details of Wages and Salaries.

Details of Utility Requirement Details of Sales, General and Administrative Expenses Detailed Financial Expenses Detailed Re-Payment Schedule of the Term Loan Detailed Break Even Analysis Details of Cash Flow Statement Detailed Debt-Service Coverage Ratio Analysis Detailed Interest Service Coverage Ratio Analysis Detailed Balance Sheet Analysis Detailed Cost –Benefit Analysis Detailed Pay Back Period Analysis Detailed Internal Rate of Return Analysis Detailed analysis on the contribution to of GDP Financial Highlights showing Operating Results, Growth Ratios, Profitability Ratios, Operating Efficiency Ratios, Liquidity Ratio etc Sensitivity Analysis at Reduced Capacity Utilization Sensitivity Analysis at Reduced Sales Rates Sensitivity Analysis at Inflated Raw materials cost Sensitivity Analysis at Reduced Sales Rate and Inflated Raw materials cost.

In order to monitor the project during implementation, PFU will do: • Frequent site visit to assess latest status of Project Implementation.

• Evaluation of the Physical works done at project site.

• Verification of the list of machinery and its brief specifications before importation of the same.

• Verification of the machinery and equipment after installation at the project site.

• Evaluation of the operating performance of the Project • Carryout diagnostic study of the commercially running projects as well as sick industries in terms of production, sales, profit and loss with a view to suggesting for Rehabilitation and/or Balancing, Modernization, Replacement and Expansion (BMRE).

Responsibility: PFU will be held liable for: • For any misrepresentation of data in the financial and technical appraisal of the project.

• To inform the management of the bank regarding the status of the project.

• Carrying out a diagnostic study, during project appraisal phase, in case of BMRE. What the project finance unit will not handle • EBL participations in other banks syndications.

• Project loans less than BDT 7.5 crores. Note loans can be in LC form as well.

• Negotiations with customers (RM’s job).

• Discussions with any regulatory bodies. (RM, Creditadmin, Operations, TSD job) • Discussions with Lawyers.

• Issues relating to security documentations (RM and Credit admin job).

Though the PFU is not responsible for project loan amount less than 7.5 crore and they do not participate in the appraisal procedure, but the asset team can ask for any technical assistance to PFU. 4.4.3 How PFU works with the asset team: The PFU works with the asset team in parallel. But the level of responsibility for the two units is different. Unit Head/RM would be accountable: • For the client’s information deficiencies.

• To prepare and forward the proposal, with utmost sincerity and due diligence, to the project financing unit.

• To co-ordinate among different departments such as credit administration, credit risk management, trade service and dealing room.

• RM must arrange all information requests.

• RM will keep PFU up to date with all latest information of the project implementation through diary notes.

• RM will keep PFU abreast of disbursement requests, LC opening regarding the specific project for the monitoring roles.

•

RM will accompany PFU on meetings with customers. The RM will be in charge during these meetings. PFU will develop a questionnaire for each visit which should be submitted to RM unit at least one day in advance.

Whereas, the duties and responsibilities of the PFU has been discussed in the earlier section. The workflow between the unit and its asset team can be explained in two-phase i.e. pre-sanction and post-sanction stage. The process is depicted in the following diagrams.

Asset Team Will pull the projects to the bank

Forwarding the proposal for appraisal

Forwarding the technically and financially viable proposal for next step to sanction

Project Financing Unit Will do the financial and technical appraisal based on the data given by RM/Unit Head/ other available source

Figure 1: Pre-sanction stage

Asking assistance regarding expertise comments

Asset Team Will do the regular monitoring

Project Financing Unit Will assist the asset teams Providing expertise data

Figure 2: Post-sanction stage

4.4.4

New Development

The PFU has been trying to develop the following formats to make the process more user friendly.

• A project evaluation questionnaire with financial spread sheet and all information requests which will be given to RM unit.

• A regulatory approval in hand format.

• A project due diligence report format.

• • • •

A monitoring plan format.

A site visit report format.

Periodic project status report format.

A Project loan monitoring responsibility completion format.

4.4.5 Process Diagram for Project Financing:

Project Proposal Received by Asset Team

Diary Note by RM to be sent to HoCB & PFU

Discussion with Project Sponsors by the Asset Team (May take technical assistance from PFU) Diary Note by PFU to be sent to HoCB & Asset Team

Project Proposal Comes to PFU Consent from HOCB is asked by asset team.

Project Summary by PFU to be sent to HoCB.

Financial & Technical Feasibility Study by PFU Project Visit by PFU. Visit Report to HoCB & CRM.

Financial & Technical Feasibility Report to Asset Team Credit Approval by Board & Copy of AFL to PFU.

Project monitoring schedule

by PFU, sent to Asset Team

Quarterly Monitoring Starts by PFU Monitoring report to HOCB, Asset team and CRM

Three months after commercial operation, the project is handed over to Asset Team.

CHAPTER 5 CASE STUDY: HA-MEEM DENIM LIMITED 5.1

PROJECT PROFILE

The proposal is for setting up of a 100% export oriented Denim Fabric manufacturing unit having Warping, Indigo dyeing, Weaving and Finishing facilities under the name and style of HA-MEEM DENIM LIMITED. The proposed textile project has been planned to turn out quality DENIM Fabrics for Garments making. The machinery for the project has been proposed to be imported from world famous manufacturer of Germany, Belgium, Italy, USA, etc. The latest machinery and technology will be provided in this project. After implementation the project will create job opportunities for 246 personnel of different categories. In the 1st phase the project will be equipped with 60 Nos. Airjet looms along with Indigo Dyeing plant and other related machinery.

It is expected that the project will go for commercial operation within 12 months from the date of opening of letter of credit for imported machinery. Total fixed cost of the project has been estimated at Tk. 8748.43 lac.

•

•

•

•

•

Location of the Project: FACTORY: Maona, Sreepur, Gazipur.

OFFICE: 41, Tejgaon Industrial Area.

Product Mix and Production Capacity Based on 3 shifts operation per day of 8 hours each and 345 working days per year, production capacity of the unit will approximately 14.72 million yards denim fabrics per year.

Land The project will be located at Maona, Sreepur, Gazipur. The project site has 112 bigha (36.666 acres) of land. Of this, 345,000 Sft. (24 bigha) of land will be used for the factory and other utilities.

Building The proposed factory building & other civil works for the project consists 122,244 sft. & total cost stands at Tk. 878.56 lac.

Imported Machinery

The project is based on the latest model imported machinery. The machinery to be imported are of similar type already operating in Bangladesh and in the neighboring countries. The major machinery includes Dyeing, Weaving and finishing units. A detailed list of machineries is been provided in the appendix A. •

Technical services and quality control For maintaining proper quality of products provision for a number of quality control equipment yarn strength count, Evenness tester, Fabric fastness tester, Spectrophotometer, Lab washing machine, Refractrometer, etc for testing and analyzing yarn to finish fabrics including computerized equipment has been considered in the project cost.

5.2

ANALYSIS OF THE PROJECT PROPOSAL BY PFU

5.2.1

MARKET ANALYSIS

Textile is considered topmost industrial sub-sector in Bangladesh as it contributes around 75.00% of export earnings and generates employment for over four million people which accounts for 45 percent of the country’s total industrial employment . The sub-sector meets the second basic need for clothing of country and contributes around 50% of the industrial value addition. But is showed burgeoning growth in the country over the last two decades due to over reliance on imported raw materials in the absence of appropriate support from backward linkage industry. During marketing analysis, the following points were considered: •

World Market for Denim Fabrics: The world market of denim has been stable over the years. The growth rates of demand, supply and price have also been more or less precise. The world market of denim fabrics could be summarized as follows: a) USA, Europe and Japan represent two third of global consumption. USA alone consumes 40% of the world’s product. b) The future possible scenario depicted by Gherzi Textile Organization (GTO), a worldwide renowned organization, is that currently the global demand is estimated to be 4.7 billion meters. As per GTO, the annual growth is estimated to be 4.8%. c) As per GTO’s forecast, Europe will lose production capacity due to higher production cost. This capacity will gradually be shifted to other countries with cheaper labour and production cost countries like Bangladesh, Vietnam, Srilanka, etc.

•

Existing Local Production The country’s demand for denim fabrics is currently being met through both local production and import.. The concerned officials of BGMEA could not supply any information about local production of denim fabrics. But it is reported by Beximco Denim Ltd. and Bengal Indigo Ltd. Officials that there are 4 existing denim units are operating in the country. The details of existing denim units are depicted in Table 3 below: Table 3: The Existing Denim Fabric Production Units with Capacity Sl. No.

Name of the Project

Annual Production Capacity (in million yard)

Actual production Capacity (80%)

01.

Bengal Indigo Ltd.

12.50

10.00

02.

Beximco Denim Ltd.

7.20

5.76

03.

Deep Textile Ltd.

6.00

4.80

04.

Shasha Denim Ltd.

16.80

13.44

Total

42.50

34.00

From Table 1, it is seen that the total local production of denim fabrics was 39.60 million yards in FY 2002-2003. The actual production of denim fabrics was 31.68 million yards (assuming 80% capacity utilization of existing units) in the same year.

According to the BGMEA’s report, around 80% of the woven fabrics are imported from abroad. Therefore, 20% of woven fabric vis-a-vis 20% of denim fabric is produced locally. Thus total demand for denim fabric will be 158.40 million yards in the local production is 31.68 million yards.

•

Demand Supply Gap and Market Share:

The project has been designed for production of denim fabric for export market only and as such the supply gap has been worked out considering the estimated export demand for denim fabrics. The proposed project has been designed to produce about 11.00 million yards of denim fabric per annum. Considering 100% capacity utilization of the proposed unit the market share to be satisfied as shown in Table 4.

Table 4: Supply Gap & Market Share (Fig. in million yards)

•

Year

Estimate d Demand

Supply

Supply Gap

Proposed production

Market Share

2004-2005

165

34

131

13.24

8.40

2005-2006

168

34

134

13.24

8.21

2006-2007

171

34

137

13.24

8.03

2007-2008

175

34

141

13.24

7.80

Product Quality: Product quality is a pre-requisite to ensure export market through local back to back L/C. As such, the quality of the product should at least be comparable with the imported yarn. In order to ensure good quality of the product the sponsors will have to recruit experienced manpower as well as to purchase good quality of raw materials.

Based on the above information, the bank management found out the following strengths of the company: i) Labor Cost: Bangladesh has distinct comparative advantage of cheap and usable labor. The abundant supply of labor has made the garment sector to be the number one export-earning sector of the country. ii) In House Consumption: Existing denim RMG units require around 11.0 million yards of denim per annum. This huge in-house demand gives ample opportunity of constant production without price-cut in the short run. iii) Locational Advantage: The proposed project is located at Maona, Sreepur, Gazipur beside Dhaka-Mymensingh highway. The land is well connected by road and all infrastructure facilities like water, power, gas, transport, etc. are available at the site.

iv)

v)

vi)

vii)

viii)

This will facilitate the project for inflow of raw materials and marketing of finished products smoothly.

Demand Supply gap: There is a huge demand-supply gap in Bangladesh as is evident in the preceding paragraphs (Projected Export Demand for Denim Fabrics).

Although a number of factories are coming up, yet the huge gap of approximately 128 million/year meter of fabric can not met in near future with the current rate of industrial growth. Hence, the denim market is likely to remain favourable in near future.

Cost Reduction: The establishment of backward linkage Industries of i.e. DENIM Manufacturing Unit will help to reduce production cost of export-oriented garment products and will increase the value addition in this sector.

Product and Market Diversification: To ensure good market-share in the world market, Bangladesh Exporters are trying to diversify their export items in line with other competitors. BGMEA has already established an Institute of fashion & technology to help introduce some new garment items. Establishment of backward linkage as denim factory will allow the exporters to have greater access within the market of USA, EU and Canada.

Lead Time: Currently the buyers allow 90 days to 120 days from the day of its order. At times it takes about 60 days to import fabrics and then the garments factory is left with only 30 days to produce the wears. To cope with this lead-time, the RMG manufacturers would always look for the supply from within the country even if it costs excess amount.

Other Defficulties of Imported Denim Fabrics: Imported fabrics are some time faulty and there is no way to rectify within the available time. This leads to short shipment creating mistrust and claiming of demurrage by the buyers. On the other hand, product within the country and particularly in own factory can be replaced if found faulty.

5.2.2 FINANCIAL ANALYSIS The following financial heads were analysed during analysis. The

Basic Heads

Parameters Estimated Total Project Cost

1. Investment

Estimated Fixed Cost of the Project

Values (in BDT) = Tk.801.024 million = Tk.796.931 million = Tk. 4.093 million

Initial Working Capital (Mention Purpose) a. Cost for Civil Construction: 2. Cost in Main b. C & F Cost of Imported Machineries: Heads

BDT 103.822 M USD 7,599,487.00 (BDT 516.765 M) =Tk. 563.274 million = Tk.240.307 million = 70:30

Debt 3.

Means Finance

of

Debt : Equity a. Interest Rate on Term Loan (to be calculated on quarterly rest) b. Interest Rate on Working Capital Loan (to be calculated quarterly) c. Loan Repayment Period (after disbursement to full settlement i.e. Door to Door) d. Repayment Mode e. Construction Period (up to the date of Commercial Operation from Disbursement of loan) f. Grace Period / Moratorium ( after loan disbursement) g. Operating Days per year h. Working Hrs. per day ( incl. overtime) i. Tax Holiday

4. Assumption

5.

Estimated Operating Results (in BDT)

6. Ratios (in %)

7. Break Analysis

8. DSCR

9. ISCR

Equity

Operating Year 1st Year 2nd Year 3rd Year Operating Year 1st Year 2nd Year 3rd Year

Operating Profit Tk. 149.406 million Tk. 168.470 million Tk. 178.609 million

a. 12.00% p.a b. 12.00% p.a c. 72 (Seventy Two) months d. Quarterly e. 9 (three) months f. 12 months g. 312 Working days h. 24 hrs i. 5 (five) Optg. Yrs.

NPAT Tk. 81.919 million Tk. 113.600 million Tk. 137.196 million

Gross Profit to EBIT to Sales Sales 21.4% 17.7% 21.2% 17.7% 20.9% 17.5%

NPAT to Sales 9.70% 11.95% 13.45%

a. Break Even Capacity : 41.085% of the rated Capacity b. Break Even Sales : Tk. 558.721 million ( equivalent) Even c. Cash Break Even Capacity: 28.00% of the rated capacity d. Cash Break Even Sales : Tk. 382.051 million ( equivalent) (note: analysis is carried out on the basis of costs & sales during of 3 rd Operating Year) Operating Year Times st 1 1.40 2nd 1.39 3rd 1.58 Operating Year 1st 2nd 3rd

Times 3.16 4.23 5.85

Basis for PFU’s satisfaction of recommending Ha Meem Denim Limited as a financially feasible project: 1. DSCR is not less than 1.39 (times) during its pay back period.

2. ISCR are more than 3.16 – which shows satisfactory financial strength of the project 3. Weighted Average Salary is BDT 7512 per month per person.

4. Contribution to GDP is significant in terms of employment creation & revenue generation.

5. Break Even Sales is BDT 558.721 M which is attainable within 1 st Operating Year.

5.2.3 SENSITIVITY ANALYSIS: The critical variables to which the financial viability of the project is sensitive have been identified to be cost of production and selling price of output. Necessary sensitivity analyses had been made and the project withstands the tests. Findings of tests are given below Table 5: Sensitivity Analysis i) With 5% increase in 1st Yr. 2nd Yr. 3rd Yr. 4th Yr. 5th Yr. the cost of production ------------------------------------------ ------------ ------------- ------------ ------------- -----------Net Profit after 89,324 111,124 134,380 156,203 168,820 Return on investment Debt-Service Coverage Ratio (times) ii) With 10% decrease in sales price of outputs Debt-Service Coverage Ratio (times)

TECHNICAL ANALYSIS

3.51

81,132

3.39

1.37

1.54

101,616

123,791

1.32

1.47

1.72

144,610

1.64

1.86

156,806

1.78

Technology involved in indigo dyeing and Denim fabrics manufacturing is familiar with the local technical personnel. Moreover, the project will hire foreign experts and technicians for successful installation of the plant. Foreign experts will also give training to local technicians to ensure quality production. However, it is expected that no problem will be faced by the project.

Continuous research and development effort have been made in the development of technologies to maximize productivity, ensure quality of products and to economize cost of production. The unit will use high speed Air Jet weaving technology in which production rates have increased tremendously. Shuttleless Airjet looms are in operation in our country.

The increased speed significant labour saving, noise reduction are main feature of Airjet loom, AIRJET loom has provided its higher insertion rate, unmatched versatility, operating reliability and future oriented automation. It satisfies the requirement of light, medium and heavy weight fabrics as well as fashion oriented fabrics.

Considering the above features for weaving DENIM FABRICS Airjet weaving machine have been selected for the project. The technology involved in AIR JET weaving is available in the country. It is expected that no problem in this regard will be faced by the project. However, in order to manufacture quality DENIM FABRICS skilled and experienced technical personnel will be recruited locally by the promoters.

The following table summarizes the analysis in short.

Type

1. Main Machineries

2. Utilities

Machineries/Construction The machinery for the project have been proposed to be imported from world famous manufacturer of Germany, Belgium, Italy, USA, etc. The latest machinery and technology will be provided in this project. In the 1st phase the project will be equipped with 56 Nos. Airjet looms along with Indigo Dyeing plant and other related machinery.

The Indigo Dyeing machinery will comprise of direct Warper, Indigo Dyeing, Sizing and dryer.

Comparative Comments The higher speed, significant labor saving, noise reduction are main features of Airjet loom, AIRJET loom has provided its higher insertion rate, unmatched versatility, operating reliability and future oriented automation.

It satisfies the requirement of light, medium and heavy weight fabrics as well as fashion oriented fabrics.

Utilities like Power, steam, air, These captive sources of humidification will be made available utilities will provide them from their own machineries. REB support for uninterrupted

3. Civil Construction

connection will be taken for only external lighting.

Pre-fabricated steel structure for Warping & Dyeing, finishing, mercerizing, weaving and fabric stores.

It covers an area of 118,680 sft (approx).

All construction for utilities (generator, boiler, humidification, compressor, etc) will be RCC structure of 11,646 sft. (approx).

production.

Construction for prefabricated steel structure has been started already.

RCC construction has not started yet.

Comments on Technical Feasibility Technology involved in indigo dyeing and Denim fabrics manufacturing is familiar with the local technical personnel. Moreover, the project will hire foreign experts and technicians for successful installation of the plant. Foreign experts will also give training to local technicians to ensure quality production. However, it is expected that no problem will be faced by the project.

Quality is a pre-condition for marking of any products in the present competitive world market. For maintaining proper quality of products provision for a number of quality control equipment for testing and analyzing yarn to finish fabrics including computerized equipment has been considered in the project cost.

5.3

FACILITIES PROVIDED BY EBL

After doing manifold analyses, PFU expresses its satisfaction in recommending Ha Meem Denim Limited as a financially & technically feasible project considering the information given by the RM team is true & collected from site visit is valid. The following table summarizes the terms and conditions of the project loan.

Table 6: Loan Repayment Schedule Particulars

Unit

Value

Principal loan

Tk

514,208

Moratorium Period Month Period of loan Year Construction Period after Disbursement of Term Month Loan Interest rate per annum %

12 6.00 9.00 12.00%

Interest rate per period Type of Installment Interest During Construction Period Capitalized Principal No. Installment.

Amount Per Installment

% Month Tk Tk Number Tk

3.00% 3.00 46,509 560,717 20 28,036

CHAPTER 6

CONCLUSION AND RECOMMENDATINS 6.1 OBSERVATIONS REGARDING CREDIT POLICY Some observations regarding the credit policy and guidelines of EBL are as follows: •

•

The policy guidelines of EBL are pretty much relevant for general lending operation, and not much focus on project financing, with a heavy bias towards legal matters dictated by Bangladesh Bank. While this is very much required, the negligence towards strategic contents of policy matter regarding lending is striking. For example, proper guidelines for borrower and project selection, sector-wise focus for project loan, etc. are absent.

According to Bangladesh Bank rule, lending should not cross 84% of total deposit of the Bank. But it is frequently observed that total lending and advances crossed 92% of total deposit. This may create liquidity problem for the bank.

6.2 OBSERVATIONS REGARDING PROJECT APPRAISAL METHODS Some observations regarding project appraisal methods used by EBL Ltd are as follows: • EBL has taken right decision to establish a separate PFU for appraising a project on their own way. While visiting a project, all the concerned departments like officials from CRM, Asset Teams and PFU, take part. This is a good practice in the sense that all the critical issues can be covered up.

• In the absence of credit rating agencies in the country, exhaustive investigation is required for assessing the credit standing of the loan applicant. EBL takes proper care of it in their own format, rather than ot rely only on CIB report by Bangladesh Bank. CIB report is published quarterly (Dec, April, Aug, Dec) and if a loan is classified on February one will not be able to properly analyze the credit

worthiness of a client. So, EBL developed a Credit Risk Grading Matrix (CRGM), which incorporates both quantitative and qualitative issues.

• EBL places a heavy emphasis on debt service ratios while appraising projects. But due importance also should be given profitability ratios because they are good indicators of a project's debt service capability.

• One vital aspect of project appraisal is risk analysis. EBL incorporates this risk analysis by introducing sensitivity analysis. It is done to see the project worth by changing the critical quantitative variables like sales price, raw materials prices, production volume, sales volume, etc. But in this bank unfortunately neglects this vital aspect.

• Another major Problem is that, the Board of Directors takes all decisions and in that stage proper emphasis is not given on project appraisal, as they are not professional Bankers. This may create bad loan in future.

• A pre-specified feasibility rationale or criteria, with a margin for flexibility on case basis, facilitates judgement on project merit and client's creditworthiness.

Unfortunately, EBL has not developed such criteria for project evaluation, rather it makes the project appraisers using entirely their own judgements. This causes a lack of reasonable standardization in project appraisal.

6.3 OBSERVATIONS REGARDING PROJECT FINANCING OPERATION At present EBL main focus area in on Trade Finance. The reason is to earn profit quickly.

Project financing is a long term investment. So high risk is involved there.

The positive sides of project financing operation at EBL are: • • • • •

•

Well-diversified Project loan portfolio.

EBL generally gives loan to an established project for expansion, not for a new one.

Give loans to projects for 2-6 years, not more than that. The higher the time period the higher the risk involved there.

Give syndicated loan. These are less risky.

Like foreign banks, the officials of Corporate Banking Division of EBL act like relationship manager. They always search for good investors and make long term relationship with them. This reduces the risk involved in project financing.

The bank’s credit officers continuously monitor the quality of loans. If the quality of a loan or borrower’s financial strength deteriorate to the extent that doubts arise over the borrower’s ability to repay the loan, management of the relationship is transferred to Special Asset Management Unit (SAMU).

Overall project financing operation at EBL does have some problems, which are described in the following: • Lack of Well-Documented Credit Policy For the smooth operation and efficient management of a bank's lending activities, an integrated credit policy is essential. It serves as a guiding framework and facilitates better decision-making. But EBL does not have a well-defined and welldocumented credit policy covering all aspects of its lending operation including project financing. As a result of it, there are no standardized or streamlined lending practices to bring about better discipline, efficiency, and control in its lending operation. Management is aware of this problem and recently a consulting firm is appointed to develop a Credit Policy for the bank.

• Time Delay For Processing of Loan Application There is no doubt about the fact that any bank has to take a cautious approach while processing loan applications to guard against the possibility of future default.

But efficiency in loan processing can cut down that time considerably. At EBL, the average loan processing time is relatively long. This is particularly true for project loan, which usually takes over 1 month to complete the processing. At the branch level, this is due to the shortage of efficient loan officers. Bureaucratic structure and nature of credit committees at the Head Office level of EBL is another contributing factor.

• Excessive Centralization Of Loan Disbursement Authority At EBL, final approval for any type or amount of project loan must come from the Head Office. Even if a small project loan is applied for at a branch far away from Dhaka, it is the Head Office, which gives the final approval. Such tight control is required for large project loans, but not justifiable for small amount of project loans. It also shows a lack of confidence the Head Office has on the ability and integrity of its branches.

• Excessive Pressure On PFU EBL’s Corporate Banking Division currently has eight units- with 5 in Dhaka area and 3 in Chittagong area. But there is only one PFU in Dhaka area. Again, the PFU consists of only two members. So, the PFU is kept under excessive pressure which may hamper their performance.

•

Overemphasis On Security Issue

Another problem is the overemphasis given to the primary and collateral securities while considering a project loan application. With the bank's insistence on a high security margin, many projects having very good profit potential are turned down for loan on grounds of inadequate securities against credit.

• Lack Of Proper Loan Supervision And Monitoring System In order to ensure timely repayment of loan installments, banks need to have wellcoordinated supervision and monitoring programs. But EBL has not paid due attention to this aspect of loan administration. The low frequency of monitoring programs does not allow the bank to keep abreast of a project's state of affairs in a timely manner. In addition, terms of project loan do not usually stipulate the borrower to make regular correspondence with the bank providing the latter with essential financial details of the project.

6.4

RECOMMENDATIONS

In view of the problems of project financing operation of Premier Bank Ltd., the following measures may be considered: • Proper documentation of credit policy The bank should prepare a formal credit policy in a documentary or manual form. This should cover the legal and operational aspects of lending as well as the strategic intent of the bank. For instance, it may identify the economic sectors towards which credit can be directed more profitably. The credit policy should be of an evolving nature, reflecting the changes and trends taking place in the economic sphere. The good side is that, top management already appointed a renowned consulting firm to prepare the credit policy.

• Quick loan processing Instead of relying heavily on manual paper work, skillful use of computers and sophisticated, advanced financial software can shorten the loan processing time quite considerably.

• Less centralization of loan disbursement authority The Head Office should allow its branches to sanction project loans up to certain limits. It should deal with projects requiring large amounts of loan.

•

Development of skilled loan officers

The bank should focus on recruiting loan officers having the right qualifications. They should also be trained up properly and allowed to specialize on the job. This will bring about qualitative improvement and efficiency in project financing operation. • Improvement of the project loan appraisal system Management should set up a unit, which will work under the supervision of credit division whose task will be to gather borrower information. This will help better assess the creditworthiness of a borrower. Also, the bank should change its approach towards the viability of a project. Instead of excessive reliance on the value of securities, it should attach due importance to the income generation capacity of the project as well. • Close supervision and monitoring of project loan Officer entrusted with the project shall make close supervision of the project under implementation by way of periodical visits, personal contact once in a month and make report thereon. For recovery of installment officer concerned shall maintain constant pressure both by letter and by personal contact and also by calling the borrower to the bank.