View with images and charts GSP Finance Company (Bangladesh) Limited (GSPB) Introduction Various important steps towards financial reform were initiated by the Government of Bangladesh to bring its economy in line with global expansion of the free market and international trading. To streamline the financial sector, the government introduced Financial Institution Act 1993 (Act 27). As a result, a healthy and stable atmosphere has been created, allowing private sector financial companies to operate smoothly and profitably, in the emerging economy of Bangladesh. There are now 50 commercial banks of which 4 are Nationalized Banks (NBC), 30 Private Commercial Banks (PCB), 11 Foreign Commercial Banks (FCB) and Development Financial Institutions (DFI). These banks are controlled by the Bangladesh Bank Act 1991. The county also has non-banking financial institutions (NBFI), 18 merchant banks, 6 Managers to Issue and 1 Issue Manager and Underwrite to promote its growing economy. The Financial Institution Act 1993 and Merchant Banks and Portfolio Managers Regulations govern these institutes 1996 respectively. All these have taken place in the backdrop of an increasing demand for a more developing financial sector with more financial products to cater to the needs of increasing private sector investments. The Government’s liberalized investment policy together with the promising resources of the country is attracting investors from all over the world. The favorable climate for financial institutions that would meet the requirements and challenges of the twenty first century in providing adequate lease financing and expertise in the industrial sector was keenly felt. Few entrepreneurs from overseas with a vision to take up the challenges to provide the necessary financial needs and to work as an industrial development partner with a global outlook came forward to open a financial company in Bangladesh. GSP Finance Company (Bangladesh) Limited (GSPB) was born drawing on the age-old experience rooted in the economies of the Far East. Her traditional expertise in the field of lease financing is being continually reviewed to adapt to current times and places. GSPB works with its clients changing needs into the future. At the interface between the clients and GSPB, is a team of experts, who are friendly and understanding to their needs. The scenario in the specialized finance institutions and banking sector in providing adequate and medium to long term industrial credit has certainly increased the prospects of lease financing in Bangladesh. Growth potential is evident from the fact that leased assets as a percentage of total industrial advance are very low (around 4.5%) comparing the other countries in the region. GSPB is committed to enhance the contribution of NBFIs towards a sustainable industrial development by participating in the areas of lease financing, merchant banking and other financial services. GSP Finance Company (Bangladesh) Limited (GSPB) was incorporated in Dhaka, Bangladesh on 29 th October 1995 with the Registrar of Joint Stock Companies and Firms. It started its commercial operation from 17 th April 1996 under license granted by Bangladesh Bank (Central Bank) in accordance with the Non-Banking Financial Institution Act of 1993.Mission Statement “To be among the top rated financial institutions assisting in the industrial in the industrial development of Bangladesh by efficient providing a wide range of financial products and services to selected clients.”
at a Incorporated in Bangladesh as Financial Institutions on October 29, 1995 as a Public Limited Company under the Companies Act 1994. • •
Received Certificate of Commencement of Business in January 14, 1996 & its license on March 04, 1996 as required under Section 4(1) of the Financial Institution Act 1993. Started commercial operation on April 17, 1996
• • • • • • •
Started Merchant banking operation on August 24, 1999 Lease Assets as at December 2004 was Tk. 1349 million (apprx.) Number of Management Staff: 28 Number of Secretarial/ Supporting Staff: 12 Auditor: A. Quasem & Co. Legal Advisor: Lee Khan & Associates Tax Consultant: Adil & Associates
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Paid up capital of Tk. 170 million. Paid Up Capital of Taka 170 million.
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Current Shareholders Equity Tk. 361.52 million. There has been an enormous growth in shareholders equity since 1996. It started with Tk.150 million and gradually progressed to Tk. 333.16 million in 2003. On 31st December, 2005, shareholders equity stood at Tk. 361.52 million.
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62.08% Shareholding is foreign, of which 42.95% are from financial institutions.
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Balanced percentage of lending exposures in diversified sectors and in quality names.
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Senior management from international banking background. Mid and junior management are professional bankers or professionals in their own fields.
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Local management empowered by the Board of Directors to act independently.
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Foreign directors from financial centers of the Far East have vast experience in international finance and capable of rendering technical/financial support.
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The company has already fulfilled the requirements of FID Circular # 02 dated 29 th June 2003 of Bangladesh Bank regarding the paid up capital & statutory reserves. Company’s paid up capital & statutory reserves stand at Tk. 268.3 million as against the required amount of Tk. 250.00 million as at December 31, 2004.
Share Holing Structu Mr. Feroz U. Haider Mr.
Sutham
14.12% Chansrichawla11.79%
GSP Finance Company Limited, Hong Kong GSP International Bank Limited Mr. Wolf-Peter Berthold Mr. Shareq Rahman Mr. Siraj U. Haider
11.95% 25.00% 6.18% 1.07% 1.67%
S. F. Haider Foundation Limited
1. 37%
Col. M. Nurul Islam ( Retd. )
13.48%
AVM Altaf H. Choudhury ( Retd. ), NDU, M.P Mr. Moin U. Haider Non-Resident Bangladeshi Interfox Holdings Limited
0.62% 2.35% 3.54% 0.86%
Total:
100.00%
List of Directors: SL 01 02 03
Name Mr.Sutham Chansrichawla Mr. Feroz U. Haider Mr. Gurdist Malhotra Representing: GSP Finance Company Limited (Hong Kong) Mr. Ramaswamy Soundaranjan Representing: GSP International Bank, Vanuatu Mr. Wolf Peter Berthold Mr. Shareq Rahman Mr. Siraj U. Haider Ms. Silwat A. Haider Representing: SF Haider Foundation Ltd. Colonel M Nurul Islam Psc (Retd.) Mr. Moin U. Haider
04 05 06 07 08 09 10
BUSINESSES •
Long/Mid-Term Finance • Lease • Term Loan
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Short Term Finance
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•
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Real Estate Finance
• • •
Factoring of Accounts Receivables Work Order Financing Bridge Finance
• • •
Individual House Loan Scheme Developers Finance Scheme Corporate Finance Scheme
• • • •
Syndication Merger & Acquisition Corporate Counseling Project Counseling
• • •
Issue Management Underwriting Private Placement
Corporate Finance
Merchant Banking
Status Chairman Managing Director Director Director Director Director Director Director Director Director
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The Board: Institutions nominated members; responsible for establishing the Company’s strategic policies and reviewing the operating performance of the Company.
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The Management Committee (MC): The Board appoints Management Committee; authorized to review and oversee day-to-day operational functions.
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The Credit Evaluation Committee (CEC): Consists of the Managing Director, Deputy Managing Director(s) and the three Department heads. All proposals are first placed, before CEC, for clearance and then climbs to MC and the Board, depending upon the amount of sanction.
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GSP Finance Company (Bangladesh) Limited follows an exhaustive credit appraisal process in making financing decisions.
KEY MANAGEMENT Name
Designation
Mr. Feroz U. Haider Mr. Helal Uddin Colonel M Nurul Islam Psc (Retd) Mr. M A Jalil Mr. Harun-or-Rashid Mr. Bakhtiar Khalid
Managing Director & CEO Executive Director Executive Director Consultant Controller, F&A DGM, C & M
MARKET ASPECT • • • •
Market penetration of leasing is above 4% of capital formation in the country vis-à-vis 20-25% in USA and Europe. The leasing industry is growing, at a rate of 27.68% per annum and reached BDT9.75 Billion in the year 2003, in terms of lease execution. There are 29 leasing companies in the country. GSP Finance Company (Bangladesh) Limited has competitive edge in the market because of foreign institutional shareholding, good track record of growth & profitability, well diversified business, professional management team and impeccable credit standing.
For financing its business activities, GSP Finance Company (Bangladesh) Limited primarily utilizes the following sources: Deposits Privately placed debenture Term Loan from international financial institutions Term Loan from commercial banks Securitization As on December 31, 2004, total Long Term Secured Term Loan is Tk. 698,702,174.00 & total Unsecured Long Term Loan is Tk. 42,646,197.00. Current portion of Long Term Debt as is Tk. 240,998,370.00. Since its inception, GSP Finance Company (Bangladesh) Limited has satisfied each and every liability on time. GSPB - at a glance: As on 31st December, 2005 (Audit conducted by A. Quasem & Co.)
SL
Particulars
Amount in Taka
01 02 03 04 05
Operating Revenue Operating Expense Profit for the Year Shareholders’ Equity Paid Up Capital
234651519 186217453 66200284 361523554 170,000,000
06 07 08 09 10 11 12 13 14
Long Term Loan (Secured) Long Term Loan (Unsecured) Current Portion of Long Term Debt Lease Finance & Advances (Long Term) Current Portion of Lease Assets Account Receivables & Advances Cash & Bank Balance Fixed Assets Net Current Assets
622511538 27265350 762930716 52627616 421301017 76131469 45963168 55589128 30221325
Aspect Departmentalization of GSPB GSPB has 6 departments, which together is the main driver or backbone of organization. All the products and services are offered through and the help of these departments. The departments are: • Credit & Marketing Department • Merchant Baking Unit • Financial Administration Department • Internal Control Department • Human Resources • IT Department The aim of GSPB is to provide quick and quality service to their both internal and external clients through the help of abovementioned departments.
Departments
Credit & Marketing Merchant Banking Unit Finance & Accounting Internal Control Human Resources IT Department The Credit & Marketing (C & M) department is related to “Lease”. Lease is the main product of GSPB and for that C & M is the most important department of GSPB (although term loan also facilitated, its portion in the total portfolio is negligible). This department does all the marketing for the organization. The “Relationship Officer” (RO) contact with the potential clients who are interested to acquire lease facilities from GSPB and collect primary information about the clients. ROs also visit the client’s business premises for which the lease finance will sanction. Based on his /her experience RO’s prepare a call report. Decision regarding whether to proceed with the lease or not is taken based on this report.
If the proposal is accepted, RO’s are also responsible for preparing credit memorandum, sanction letter, sanction advice and conduct other formalities for sanctioning the lease and close the deal. Merchant Baking Unit Merchant banking unit (MBU) is established in 1999, till today its operation is very limited. The only activity of this unit is to buy and sell stocks on behalf of its clients. But the list of clients is very limited. Main client of this department is GSPB itself. MBU has some selected clients for whom they trade stocks. As a result its profit contribution is also very limited. In near future this department will involve in underwriting. Financial Administration Department Financial Administration Department (FAD) is a supporting department of GSPB. The main activity of this department is to give financial support to C & M and MBU. As Non-Banking Financial Institution FAD does not have any activity with clients directly. Rather it is concerned with internal financial matters. Internal Control Department Internal Control Department (ICD) acts as an internal auditor. The major activities if ICD are to check and recheck the documents check the clients’ repayment patterns and monitor intra office activities. If there are any documents or required papers missed by the C & M department then ICD inform the RO to collect those documents. If there is any overdue occur then ICD inform the C & M to take necessary steps to collect the overdue. It can also check belonging of the officials to maintain discipline. Executive Director (ED) is in-charge of Human Resources department. The major task of this department is recruitment, yearly evaluation of employees, increase the benefit of employees and provide training to increase the efficiency of human resources in every level. IT Department IT Department is support the whole operation process by developing software for C & M, MBU and FAD. It is also responsible for maintenance of equipment. The company is in process of computerizing its entire leasing process i.e. the jobs done by the C&M and accounts department will be done through computer. IT will not only save precious time but also increase employee’s efficiency. So, the responsibility of the department will enhance even more in the near future. anization Structure As a private limited company the Board of Directors leads by Chairman and Managing director. Managing Director (MD) also heads both Credit & Marketing (C & M) Department and Internal Control Department (ICD). Assistant General Manager (AGM) heads Financial Administration Department (FAD). Executive Director (ED) is in the in the charge of Human Resource activities and overall administration. There are 21 management staffs who are supported by 12 supporting staffs. Share holding structure of GSPB GSPB’s authorized capital is Tk. 1000 million of which Tk. 170 million is fully paid-up. As at 31 st December 2004, shareholders equity stood at Tk. 337 million. 10% of the total shareholding is earmarked for future public offering within the next year or so. Products of GSPB The market is very competitive and the requirements of clients are increasing very rapidly. GSPB starts its operation with lease financing, as the market and clients demand dictate the activities of GSPB increasing to meet the need of its valuable clients as well as to stay in the market At present GSPB focused on the following activities.
1.
Products Lease Financing & Term Lending
2. 3. 4.
Merchant Banking Operation Money Market Operation Other Financial Market Operations
Table: Lists of Products Lease Financing The principal focus of the company is on the business of lease financing of capital goods for industries such as plant, machinery and equipment, construction equipment, marine/road transport, medical equipment, office equipment, power generator, boiler etc. GSPB emphasized strongly on diversifying its sector wise portfolio and identifying the optimum strategies for the top end of corporate business houses, private entrepreneurs and keen desire to expand the portfolio between small and medium business houses. Its aims at assisting clients to understand the dynamism and flexibility of lease finance and identify the characteristics of the market for exploiting dormant opportunities. Under this activity, GSPB’s principal focus is on Financial Capital Market such as Mutual fund, Bridging Loans, Underwriting, Issue Management, Pre IPO Placement Management, Portfolio Management and Investment in Shares, Stocks, Bonds, Debentures or Debenture Stocks. Among these above activities Merchant Banking Operation only does investment in Shares, Stocks, Bonds, Debentures or Debenture Stocks. But very recently the company will introduce portfolio management to its clients. Money Market Operation The company is engage in money market activities (placing and accepting Term Deposit) primarily in connection with its lending/funding operations. In October 2002 GSPB introduced debenture for its clients. Till date only few commercial banks are availing this facility. The portion of debenture in the portfolio is very small. The tenure for debenture is 3 (three) years. The funding rise by debenture in added to the working capital of GSPB. Other Financial Market Operations GSPB plans to focus on diverse financial services like Hire Purchase, Venture Capital to finance medium sized companies with clean record, good and sound management. Significant Policies: Basis of Accounting The accounting have been prepared based on the operating method of lease under historical cost convention of GAAP (General Accepted Accounting Principal) Accounting for Lease Operational revenue consists of lease rental receivable on monthly installment while depreciation on lease is accounted for as operational expenses. Depreciation Property, Plant and equipments for company’s own use is depreciated based on Straight-line Method from the date of their acquisition. Lease assets are depreciated over the lease period. Taxation The company has enjoyed tax exemption facilities for a period of five years commencing from April 17, 1996 to April 16, 2001. Accounting Practice:
On accounting of lease different countries have different standards but Bangladesh does not follow any specific standard. In this sub-continent normally following two are referred: • • •
International Act Standard 17, issued by International Accounting Standard Committee (IASC) Statement of Standard Accounting Practice 21, issued by Accounting Standard Committee (ASC) Both ICAB and ICMAB have not yet established any accounting standard for leasing. In Bangladesh legally or ethically no binding for following the standard published by IASC. But in view of membership of IASC it can be anticipated that accounting for leasing in Bangladesh should be guided by IAS 17.
As per IAS 17 most of the lease financed by the leasing companies in Bangladesh can be classified as a finance lease for which lessee is entitle to show the lease asset in their book and also entitle to change depreciation thereon. But existing tax laws do not support this treatment. As per law the legal owner of the asset is only entitled to show the assets in their books and changing depreciation thereon. So to avoid complicacy with the tax department and for other legal purpose leasing companies in Bangladesh are following the operating method of accounting. Differences are shown as under: Item
As per IAS – 17
Bangladesh Practice
Income Statement
Initial Direct Cost to be charged to income as the inception of lease.
a. Lease rentals as income on straight line or other systematic basis representing the time pattern of rental schedule. Depreciation as an expense as pre interest method matching with rental schedule.
Finance income to be associated to produce a constant periodic return on outstanding net investment. Balance Sheet
Gross investment in lease (Minimum Lease Payment + Unguaranted Residual Value). Unearned income (Gross Investment in Lease – Present Value of Gross Investment in Lease) as liability.
Lease equipment under lease asset caption as asset after deducting accumulated depreciation thereon.
Disclosure
Basis used for allocating income to produce a constant rate of return.
Basis or charging depreciation of lease assets
Table 2.3 Different Methods of Accounting Funding: As present the borrowed funds of GSPB consists of 6 (six) instruments, which are follows: • • • • • •
Term Loan Term Deposit Overnight Borrowing/Call Money Lease Deposit Overdraft Facilities CBSF (Credit Bridge Standby Facility) Fund
The company has over Tk. 337 million on its equity. As on December 31, 2004 total borrowing of GSPB is estimated to be Tk. 1332 million. Major portion of fund collected from the term loan from different banks. The cost of term loan (floating rate) from banks is now as high as 11.5% - 14%, which is a serious impediment for any leasing company to compete with the commercial banks leasing. The World Bank’s CBSF project helps GSPB to some extent to get fund at lower cost. Including GSPB only 5 (five) leasing companies are currently eligible for this fund. These companies are allowed to get fund of $4.00 million. GSPB has by this time used the 80% of the allocated fund.
The credit facility extended to GSPB by the following banks: • • • • • • • • •
Standard Chartered Bank BRAC Bank Basic Bank Export Import Bank of Bangladesh (EXIM Bank) Pubali Bank Ltd. Prime Bank Ltd. Southeast Bank Ltd. The City Bank Ltd. United Commercial Bank Ltd. (UCBL)
The credit lines from banks are taken in the form of term loan of 5 (five) years and also as a continuous loan in which the debt portion is changed continuously as the leasing firms repaying the loan. Among the total borrowed fund term loan is 23. Financial Analysis
GSP Finance Company (Bangladesh) Ltd.
Profit & Loss Account
Particulars
2005
2004
2003
2002
Trend
Lease Rental
198462776
467,021,281
501,509,917
391,281,996
Fluctuating
Other Income
36188743
45,718,645
22,592,949
19,635,582
Increasing
Total Operating Income
234651519
512,739,926
524,102,866
410,917,578
Fluctuating
Operating Expenses
186217453
446,787,517
445,414,605
303,710,462
Increasing
Profit for the Year
66200284
65,952,409
78,688,261
107,207,116
Decreasing
2005
2,004
2,003
2,002
Trend
Share Capital
170,000,000
170,000,000
170,000,000
170,000,000
Constant
Statutory Reserve
111511276
98,271,219
85,080,737
69,343,085
Increasing
Operating Revenue
Balance Sheet
Particulars
Sources of Fund
Equity Position
General Reserve
26202708
26,202,708
16,117,566
14,867,566
Increasing
Retained Earnings
53809570
42,924,343
61,957,558
38,506,949
Fluctuating
Total Equity
361523554
337,398,270
333,155,861
292,717,600
Increasing
Long Term Liability
762930716
873,763,817
726,227,590
750,724,853
Fluctuating
Current Liabilities
674538290
458,601,699
322,954,670
98,054,765
Increasing
Total Liability
1437469006
1,332,365,516
1,049,182,260
848,779,618
Increasing
Total Sources of Fund
1439946670
1,669,763,786
1,382,338,121
1,141,497,219
Increasing
Lease Finance & Advances
52627617
1,137,205,549
935,402,846
948,044,261
Fluctuating
Current Assets
704759615
477,237,612
392,244,967
139,096,453
Increasing
Fixed Assets
55598128
55,320,625
54,690,307
54,356,505
Increasing
Total Assets
1764565126
1,669,763,786
1,382,338,120
1,141,497,219
Increasing
Total Applications of Fund
1764565126
1,669,763,786
1,382,338,120
1,141,497,219
Increasing
Particulars
2005
2,004
2,003
2,002
Trend
Current Ratio
1.045
1.04
1.21
1.42
Decreasing
Debt-Equity Ratio
3.98
3.95
3.15
2.90
Increasing
Operating Profit Margin
9.17%
14.12%
15.69%
27.40%
Decreasing
Return on Equity
14.88%
19.55%
23.62%
36.62%
Decreasing
Sales to Total Assets
0.41
0.28
0.36
0.34
Fluctuating
Total Asset to Total Liabilities
1.22
1.25
1.32
1.34
Decreasing
Return on Total Assets
3.75%
3.95%
5.69%
9.39%
Decreasing
Earnings Per Share
38.94
38.80
46.29
63.06
Decreasing
Liability Position
Applications of Fund
Ratios
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There is a fluctuating trend in the Lease Rental figures over the years 2002, 2003, 2004 & 2005. Though Lease Rental went up in 2003, it went bit down in 2004 & 2005. The reason behind the decreased lease rental is less aggressive business in 2004 & 2005, particularly for higher interest rate, low volume business in early 2005.
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Other Income has a constant positive growth over the last 03 years except 2005. Other income consists Interest on Loan, Interest on Bank Account & Miscellaneous Income particularly from Merchant Banking Unit.
•
Total operating income has a fluctuating trend over the last 03 years 2002, 2003, 2004 & 2005 due to fluctuating mood in Lease Rental.
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Operating Expenses has a positive trend over the last 03 years, which is quite normal for a growing company. But in 2005 it tends to decrease.
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Share Capital of Tk. 17.00 crore is constant and no additional shares have been issued meanwhile. Both the statutory Reserve & General Reserve have an increasing trend over the last three years 2002, 2003, 2004 & 2005. Retained Earnings is in a fluctuating mood over the years (2002, 2003 & 2004) having a fall in 2004. Lower profit during the year 2004 is the reason behind the scene. It has increased in 2005.
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Total Equity position has an increasing trend over the last four years.
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Long Term Liabilities has fluctuating trend over the years 2002, 2003, 2004 & 2005. Long Term Liability position goes up in 2004. Long Term Liabilities comprise Lease Advances, Advance Lease Rental, Secured Term Loan, Un-secured Term Loan & Term Deposits.
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Current Liabilities has an increasing trend over the years which make the total Liability Position increasing over the said 04 years 2002, 2003, 2004 & 2005. Current Liabilities comprise Payable & Accrued Expenses, Short Term Loans & the current portion of Long Term Loans.
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Total Sources of Fund is creasing over the years due to steady growth in Equity Position & Total Liability Position.
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Lease Finance & Advances have a fluctuation trend over the four years. Though it goes bit down in 2003, it further increases in 2004 and again goes down in 2005.
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Current Assets have an increasing trend over the years except 2005 at which rapid decrease in asset has been occurred. Current Assets mainly comprise Investment in Shares, Accounts Receivables & Advances, Current Portion of Lease Assets, Cash & Bank Balance. The increasing trend is due to higher Investment in Shares net of provision & current portion of Lease Assets over the years.
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Fixed Assets has an increasing trend over the years.
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Total Asset Position has an increasing trend which ultimately causes the total application of fund increasing over the years. Ratio Analysis:
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Ratio A Liquidity Ratio
Liquidity Ratio measures the extent to which the firm can service its immediate obligation in effect assessing the firm’s ability to meet short run financial contingencies. In this case only the current ratio is calculated for the company to assess its ability to meet the short-term obligations since the company does not have inventory or other less liquid asset.
First of all, liquidity ratios in the form of current ratio, which will state the liquidity position of the company to meet short-term obligations. As a conventional rule, a current ratio of to 1 or more is considered satisfactory for the leasing company i.e. the higher the current ratio, the larger the amount of taka available per taka of current liability, the more the firms ability to meet the current obligation and the greater the safety of fund of short term creditors. But the too high a current ratio implies that more assets are in liquid form, which can otherwise be used to get higher return. Current Ratio for GSPB though satisfactory; i.e, greater than 1, it has an decreasing trend over the years. This is due to higher percentage change in current liability than that of current assets. •
Leverage Ratio
Leverage Ratio indicates in what extant the firm has financed its investment by borrowing. These ratios focus on the firm’s financial structure. The issues are the amount of debt the firm is using and the firm’s ability to serve its debt. To judge these two issues debt equity ratio and financial expenses coverage ratios are calculated respectively. Debt equity ratio indicates the relation that exists between long-term debt and equity. It is computed by dividing long-term debt by equity. The ratio is considered a very important tool for the analysis of the long-term financial solvency of any concern. It indicates the relative proportion of long-term debt and proprietors fund to the total assets of the business. The conventional ratio is 1:2, i.e., for every one taka of equity; long-tern debt should be 50 paisa. The debt equity ratio of 5 times is acceptable for the leasing company. High ratio indicates too much dependence over long-term debts and low ratio is the symptoms of much conservatism to the owner’s fund. The debt equity ratio has increased in every succeeding years under study but the ratio of GSPB is within the acceptable limit. The ratio has an increasing trend over the years 2002, 2003 & 2004. The Debt-Service Coverage Ratio is analyzed at our subsequent chapter when analyzing the CBSF ongoing eligibility. •
Profitability Ratio
Profitability Ratio measures the profit of the firm relative to sales, assets or equity. Profitability ratios describe the past profitability of the firm. Profitability of a firm can be judge through several ratios like; Return on Equity (ROE), Profit Margin, Earning Per Share (EPS) etc. The Return on Equity standard is at least 10% as per our observation, though there is no hard &fast rule practiced in Bangladesh. The ratio shows GSPB is maintaining a standard ROE (though decreasing over the last three years), 36.62%, 23.62% & 19.55% for the years 2002, 2003 & 2003 respectively. The reason is the decreasing trend in available profit. The standard Operating profit margin, as per our observation is 12%, which is followed by many leasing companies. GSPB, though having a decreasing trend, has been maintaining the standard ratio. EPS also reflects the upright performance with the expansion of shareholders equity. In Bangladesh, many assumes 10% earrings per share is standard. GSPB’s EPS much higher than the standard (Tk. 63.06, Tk. 46.29 & Tk. 38.80 / share over the years 2002, 2003 & 2003 respectively) though having a decreasing trend. •
Operational Efficiency
The trend in cost income ratio shows decrease in the cost as a proportion to income over time, which is a good indication for the profitability of the firm. This is due to good increase in the earning power of the company and lesser growth in the cost component. ROA can be used to state the operational efficiency of the assets. For ROA no standard is used but the higher the ratio the better it is. Over the last three years the ROA position of GSPB is going down ranging from 9.39% to 3.95% from 2002 to 03. Cash Flow Position
Particulars
2005
2004
2003
Net Cash Provided by operating Activities
6901098
192,387,172
276,005,597
Net Cash Used in Investment Activities
(36965772)
(460,047,635)
(435,765,853)
Net Cash Provided by Financing Activities
54486735
268,918,549
155,230,403
Net Increase/Decrease in Cash & Bank Balance
24422061
1,258,086
(4,529,853)
Add. Opening Cash & Bank Balance
21541706
20,283,021
24,812,874
Closing Cash & Bank Balance
45963168
21,541,107
20,283,021
Cash Flow Analysis: •
The cash generated from the operating activities is positive for the years 2005, 2004 & 2003, which is positive sign of the company. The positive cash flow from operating activities indicates that GSPB is efficient in its operation.
•
Negative Cash Flow from Investment Activities implies the client is expending more on Fixed Assets, Investment etc than that of selling.
•
The positive cash flow from Financing Activities implies the company is having more loans / advances than that of interest payment or dividend payment.
•
The overall cash flow is positive for the years 2002, 2003 & 2004 though net change in 2003 was negative.
•
Based on above calculations, it can be concluded that the company is still growing, which is proved by high investment.
GSP Finance Company (Bangladesh) Ltd. has been availing Funds under CBSF (Credit, Bridge & Standby Facility), a project funded by World Bank IDA funded project under Bangladesh Bank-GoB supervision managed by Vinster, New Zealand. Only 05 companies in Bangladesh has been availing the facility. They are IPDC, ULC, IDLC, Prime Finance & GSP Finance Company (Bangladesh) Ltd. The major facility under the project us availing credit facility at a very lower rate 7% to 8% on an average. To be eligible for the CBSF Funding, Participating Financial Institutions (PFIs) must comply with some criteria followed by CBSF. The ratios & all the figures asked for CBSF are of their own standard. All the criteria & GSP’s financial figures (based on 2003 audited statement) are presented as below. ONGOING ELIGIBILITY CRITERIA AS ON 31.12.2005 FOR PARTICIPATING FINANCIAL INSTITUTIONS GSP FINANCE COMPANY (BANGLADESH) LTD. Sl.
Criteria Compliance
with
Requirement
Actual
Compliance Status
FI shall comply with
Complied. Company
OK
Comment
relevant prudential regulations Bangladesh
and of
applicable laws and Bangladesh Bank Prudential regulations.
was incorporated under Companies Act 1994. Guided by Financial Institution Act, 1993 and all NBFI circulars / instructions followed meticulously. Merchant Banks and Portfolio managers’ regulation, 1996 and SEC rules are followed. Date of Incorporation is October 29, 1995. Commercial Operation started from April 17, 1996. BB license received on March 04, 1996. Permission for Merchant Banking received on August 24, 1999. Legally it’s a public company limited by shares (not listed). IPO is under process. List of directors is attached.
Adequacy Provisions
of
Comparison of provision required by BB regulations and the amount of provision made by FI
BB Circular No. FID/14/2000 for Financial Institutions. (Detail break-down attached as per Annexure ‘A’)
GSPB maintains a General provision on Principal Outstanding to follow prudent accounting. GSPB made provision on (02) two classified A/C as per BB circular.
Rate of Return
Real
Positive Real Rate of Return
26.72%
OK
(Working paper may be seen for calculation as per Annexure ‘B”) Capital Adequacy Ratio
Minimum Capital Adequacy Ratio of 9%.
Debt – Equity
Maximum debtequity ratio of 10
N/A
3.87 Times
OK
This is not applicable in case of NBFIs
OK
We have high capital vis-à-
times for NBFIs operating for at least 5 years, and 5 times for NBFIs operating for less than 5 years (but not less than 3 years)
(Working paper may be seen for calculation as per Annexure ‘B’)
vis debt.
Comparison between the weighted average life of monetary liabilities with weighted average life of credits.
The weighted average life of monetary liabilities should at least be longer than the weighted average life of credits.
Almost Equal (Working paper may be seen for calculation as per Annexure ‘G’)
About 20% of our assets are financed by own equity. Public deposits & all credit from banks are at fixed rate.
Mismatched Foreign Currency Position
Mismatched foreign currency position not to exceed 5% of Capital
N.A.
Collection Ratio
Minimum collection 80%
(total) ratio of
N.A.
OK 94.39% (Working paper on calculation may be seen at Annexure ‘B’)
Portfolio infection ratio & Portfolio delinquency status
Maximum Portfolio infection ratio of 20%
Debt Service Cover Ratio
Minimum debt service coverage ratio of 1.25 times.
1.41
Single Borrower Exposure
Maximum single borrower exposure to be less than 30% of capital
28% (Working paper may be seen for calculation as per Annexure ‘D’)
OK
Business exposure
Highest group borrower exposure to be less than 30%
30%
OK
group
OK 10.15% (Working paper may be seen for calculation as per Annexure ‘C’) OK
(Working paper may be seen for calculation as per Annexure ‘B’)
(Working paper may be seen for calculation as per
We do not deal in any foreign currency because we are not allowed by Bangladesh Bank to deal in foreign currency.
Annexure ‘D’) Insider Lending
Maximum Insider Lending of 25% of Capital
Nil
OK
Industry SubSector Exposure
Highest exposure in a single industry / subsector not to be higher than 35% of total portfolio.
16.21%
OK
Three years financial accounts
The accounts should be with clean auditors opinion without implied / hidden qualifications
No qualification in report
Management
Some policy documents to establish professional and sound management.
Detail enclosed (Annexure ‘F’)
DOE
FIs loan approval procedures should include certification of appropriate Department of Environment
OK almost all CBSF cases. Previously DOE clearance was not taken for all cases except CBSF. At present continuous efforts are being made to ensure DOE clearance certificate in all lease & loan cases. Clients are responsible for obtaining DOE. Responsibility on our part is to regular monitoring & sometimes advisory services regarding DOE certification procedure.
OK
Annual external auditor’s certification
PFIs have to submit their eligibility assessment based on the current year-end accounts within the period specified by CBSF
Enclosed (Current year-end accounts on which the calculations are based.)
OK
(Working paper may be seen for calculation as per Annexure ‘E’) OK
GSPB arrange different types of lease facility to its clients according o their needs. Mainly finance lease, which is of full payout type, is used. Other than finance lease the company leased out asset through sale and lease back system and sometimes leveraged lease finance. Sub lease under lease by the company is also allowed in certain cases. The banks and financial institutions provide financial lease in either of the following forms. •
Master Lease
Where a line of credit is granted to the lessee with a specific financial limit and definite time period within which a number of leasing transaction could be entered into. • Syndicated Lease Where a number of banks or institutions or leasing concerns pool together their funds for financing a big-ticket lease. •
Import Lease
Where equipment is imported in the joint name of lessor and lessee and lease out to the lessee. • Sale and Lease Back Where asset owned by lessee is sold out to the lessor and the lessor leases it back to the vendor lessee. The asset is sold to in market price and the seller firm receives the price in cash. •
Leveraged Lease
These agreements are made generally when in a very large or capital-intensive assets are to be acquired and a single lessor cannot provide the entire purchase price of the assets. 3 (three) parties are involved in such lease agreement. The lessor who provides the part of assets price as equity contribution of the purchase. The lender or loan participant who contributes the rest of the asset price. The lessee. Price of the product is dependent on the cost of fund. To acquire fund the company uses several sources and they have different cost structure too. So its very depending on the availability of the fund. Currently the company is not using marketing promotion tool to promote its products to potential clients. GSPB very recently participate in the worldwide web feeling the need to attract the future clients. It is the public relation by the relationship officers in the company who are engaged in the responsibility to induce clients in the various industrial sectors both individual and institutions as well as maintaining business relationship with current clients. GSPB has customers in 16 sectors of the country with diverse nature. The relationship officers are to maintain relation with existing customers and build new business relation with potential customers as well, the company is interested to build business relation with corporate clients through it has already individual clients too. Currently major share of the company’s portfolio comprises with the corporate clients in various sectors. Textile and transport sectors are the two highest technical sectors. GSPB has provided lease finance facility to diverse sector of the country. Of them textile with 19.77% of the total finance is the highest financed sector by the GSPB. Customers as sector with respective investment up to December 31, 2003 are given below.
Sector
Percentage (%)
1
Marine Transport
.54
2
Road Transport
18.03
3
Services
10.91
4
Distribution
2.04
5
Processed Food & Allied
1.25
6
Pharmaceuticals
8.97
7
Individuals & Others
3.25
8
Textile
15.95
9
Readymade Garments
9.58
10
Engineering & Workshop
11.25
11
Cement
4.27
12
Medical & Diagnostics
3.49
13
Toiletries
1.28
14
Poultry
2.40
15
Educational Institutions
8.17
16
Real Estate
0.04
Total
100.00
Sector-wise Percentage of Investment Sector Marine Transport
Percentage 0.21%
Road Transport
21.46%
Services (Banks, Insurance etc.)
7.44%
Distribution
2.26%
Processed Food & Allied
2.06%
Pharmaceuticals
9.33%
Individuals & Others
0.60%
Textile
20.42%
Readymade Garments
5.45%
Engineering & Workshop
6.68%
Cement
4.60%
Medical & Diagnostic
7.43%
Toiletries
0.55%
Agro Based Industry
0.20%
Packaging
0.04%
Educational Institutions
8.63%
Others
2.66%
•
Competitor:
Competitor analysis is very vital point to consider for any type of business. For leasing it becomes a burning issue. At present there are 27 Non-Banking Financial Institutions engaged in leasing which is quite big as compared to economic condition. There must have been correlation between the economic growth and the industrial growth. The number of companies in the lasing is proportionately higher than the growth of the economy and the financial market. So the result is razor skin competition. The fierce competition in the leasing business by so many players magnified the crucial problem of this sector, the problem of availability of fund and also reduces the profitability of the sector. The competition is still intensified by the entry of commercial banks in leasing business alongside their traditional business. But the recent Government initiative to restrict the further entry will help the existing firms to take a breath. The competitor of the company is any of the following type: • • •
Independent Leasing Company Finance Company Commercial Bank Subsidiary
There are 29 different Non-Banking Financial Institutions now do leasing activities in Bangladesh. Of them major portion i.e. 16 companies are independent leasing organizations with leasing as core business. Financial companies are the other player in this field. Most recently some banks also have started lease financing in addition to their traditional banking activities. In September 1995 Prime Bank Ltd. launched its leasing operation by establishing a separate leasing department at head office. Prime Bank Ltd. entered into this field from the commencement of its operation with the following objectives: Subsequently the leasing operation was merged with the Credit Division of Head Office. Considering advantageous aspect of lease financing and for strengthening and increasing lease business of Prime Bank Ltd. following the Prime Bank Ltd. other banks like Uttara Bank Ltd. in 1998, Mercantile Bank Ltd. in June 1999, Dhaka Bank Ltd. September 1999 and The City Bank Ltd. in October 2002started their respective leasing operation considering the fact that lease financing yields high return to the bank compared to other modes of financing. GSPB abides by the Financial Institutions Act 1993. GSPB was incorporated in Dhaka, Bangladesh on 29 th October 1995 with the Registrar of Joint Stock Companies and Firms. It started its commercial operation from April 17, 1996 under license granted by Bangladesh Bank (Central Bank) in accordance with Non-Banking Financial Institutions Act. 1993. On August 24, 1999 GSPB has formally been accorded approval to operate as a Merchant Bank by the Security and Exchange Commission (SEC) of Bangladesh. Accordingly the company follows rules and regulations of Bangladesh Bank. Since it is the regulatory authority of financial institutions, for Merchant Banking operation the company follows the rules stated by the Security and Exchange Commission of Bangladesh. •
Laws applicable to leasing companies
Under Financial Institution Act 1993 leasing company is defined as: • •
The company, which carries on as its business or part of its business the leasing of machinery or equipment of financing of such leasing operations. Leasing is an asset renting activity and is therefore govern by common law. The Contract Act 1872 applies to contracts of lease.
•
Restrictions of the company
• •
Only corporate bodies should be allow to engage in leasing business Leasing company can undertake any non-leasing activities but restriction exist for such activities as import, export and retail or wholesale business. The Act empowers the bank to fix the minimum capital for leasing companies. Opening of office and branches is also regulated. Companies accepting deposits from individual shall maintain 10% of their aggregate liabilities invested in prescribed securities. Each company every year shall transfer at least 20% of its divisible profit to a reserve fund, unless the aggregate of the share premium along with such fund is equal to or more than the paid up capital o such company. Any overdue of 6 (six) months is provisioned as per regulatory requirement (same as the Banks). However, Non-Banking Financial Institution’s have to maintain general provision of 1% of all dues. Very important restrictions are contained in sec. 14 of the Act on exposure by leasing companies. These restrictions are: Not accept any deposit, which is withdrawn by cheque or order of the depositor. Not deal in gold or any foreign exchange. Not expose more than 30% of its capital to any clients. Not to provide unsecured loan exceeding 5 (five) lac to any person. Not to acquire immovable properties exceeding 25% of the paid up capital of such company.
• • • • • • • • • •
GSPB at present make available 4 (four) different activities to its clients. But the principal focus of the Company is on business of lease financing of capital goods for industries such as plant, machinery, equipment, office equipment, power and energy equipment etc.
GSPB provides mainly two types of Lease to the clients. They are • Direct Lease • Sale and Lease Back o
Direct Lease
In direct lease the lessor (GSPB) buy the equipment/vehicles as the lessee’s (client) requirement and then lease the goods to the client.
Lease Requirement
Purchased by the Lessor
Leased to the Lessee
Fig : Direct Lease •
Sale and Lease Back
In sale and lease back the lessee (client) first sell the asset or transfer the title of ownership of the asset to the lessor at an agreed upon price. After alteration of the ownership the lessor lease the asset back to the lessee.
Sell the asset to the Lessor Lease Requirement
Leasing Process of GSPB
Lease back the asset to the Lessee Requirement
To acquire facility from the organization follows some step-by-step procedure. The total procedure is consists of 11 steps. • Application for Lease Facility • Analyze the Application • Discussion with the Client • Select the supplier • Prepare and Submit Credit Memorandum to the Management • Sanction of Lease • Documentation • Purchase Order • Security & Payments • Disbursement • Monitorin Step 1: Application for Lease Facility To acquire a lease facility from GSPB the clients first need to submit a proposal to the organization (Lessee) with a lease application form provides by GSPB, which is properly fill-up by the client while request for the lease. In the application form the clients have to provide some information, these are • Name of the applicant/ Company • Contact address of the individual/ company • Background of the organization • Nature of the business
• • • • • • • • •
List of Major shareholders and the their percentages List of sponsors Name of sister concern (s) if any Number of personnel Description of required lease items and units Information about Long term loan/ credit facilities availed from banks Information about other borrowing availed from banks Information about the deposit with banks Detail of the security
Beside that other documents are also necessary and need to submit with the application form. These are • Memorandum and Article of association • Audited Financial statement for last 3 years • Balance sheet • Profit and Loss account • Curriculum Vita of Managing Director, Directors Step 2: Analyze the Application The Credit and Marketing Department first analyze the application. During this analysis few things are closely examined by the organization. First, evaluate the organization’s history and position in the market. It is very important to identify the client’s market reputation. If the client is apply for project lease then it is very important to find out whether the client has proper control over the supporting activities to the project, such as, back-up to operate the project, maintenance and other supporting activities etc. Secondly the financial statements are closely studied to find the financial solvency of the client. During the financial study some important ratios are calculated to get the clear scenario of the clients business. The organization mainly focuses on • Current Ration • Debt-Equity Ratio • Gross Profit Margin • Net Profit Margin • Return on Equity (ROE) • Return on Assets (ROA) CIB Report and bankers Report Beside that GSPB asked for a report from “Credit Information Bureau” (CIB) about the applicant. All the information related to the clients borrowing is mentioned in CIB report. In the report all the borrowing are classified in four (4) categories, 1. UC – unclassified. 2. DF- Doubtful, 3. SS- Substandard and 4. BL – bad/Loss. GSPB only process further if the CIB report mentions the clients status as UC (Unclassified). Beside that the status of sister concern (s) must be also UC (Unclassified). If in the CIB Report the status of sister concern (s) is not UC (Unclassified) then the company have to change the status to UC (Unclassified) or withdraw the share from the sister concern (s) with in two (2) months. If the client (Lessee) fail to change the status as required then the lessor (GSPB) can asked for payback the entire lease amount. Other than CIB report the company (GSPB) also asked “Bankers Report” from each bank with whom the client and the sister concern(s) have transactions. In the “Bankers Report” the concern bank certified that whether the client maintain smooth transaction relation with the bank. To obtain the lease facility both the CIB report and Bankers report are very important. If the client’s declared facilities does not match with CIB Report and the Bankers Report then the company does not process further to provide lease facility to the client. Step 3: Discussion with the Client During the lease process the executives of Credit and Marketing department discuss with the client about the lease facility, which the client wish to acquire. Beside that the rate, tenures, mode of payments, lease advance, security and portion of finance are finalized through negotiation.
Step 4: Select the supplier After getting the clear CIB report and Bankers report, the company (Lessor) asked for quotations from different suppliers and selects the best offer regarding to both quality and price. The client has a full freedom to choose the supplier as their desire. In that case the client has to submit the quotation along with the lease application. The company also import desired lease asset if required by opening L/Cs. Most of the cases the client sells the L/C to the Lessee (GSPB) and then leases the items. This type of lease finance is called Sale & Lease Back or Indirect Lease. If the lessee (GSPB) directly open L/C for any equipment and lease those equipment to the lessor that is called direct lease. Step 5: Prepare and Submit Credit Memorandum to the Management The Credit and Marketing Department prepare a “Credit Memorandum” on the basis of “Lease Application” and direct discussion with the client. This Credit Memo is then presented to the management committee for approval. All the information related to client and the lease requirement is summarized in the Credit Memo. In the Credit Memo the following things are mentioned, • Name of the client • Address • Legal Status • Company Profile and Activities • Sponsors and Management • Present Banking Facilities • With GSPB (for existing clients) • With other Banks • CIB Report • Bankers Report • DOE Report • Financial Analysis • Facility • Terms and Conditions • Security Management checks the Credit Memo and identify if there is any discrepancy. If there is any then the management consults with the client about the interest rate, mode of payments, lease period, lease advance, security. Step 6: Sanction of Lease When the lessor and the lessee both agreed on the terms and conditions then the sanction letter is issued to the lessee from the lessor. In the sanction letter all the terms and conditions are clearly stated. In the sanction letter the Lessor states all total procurement cost, lease amount, lease time, monthly rental etc. Beside that 13 other conditions are mentioned in the sanction letter. If the party agreed in all the conditions then the lessee will sign the duplicate letter and send back to the lessor and then the further lease process is progressed. Step 7: Documentation After receiving the duplicate sanction letter from the lessee all the necessary documentation is completed. The lessee place • • • • •
Demand Promissory Note Dated Un-dated Revival Letter Letter of Authority
• • • • •
Personal Guarantee from each director Corporate Guarantee from the Managing Director of the company Lease agreement Sale Agreement (in case of Sale & Lease Back) Judicial papers and revenue stamps are used as required to prepare documents.
Step 8: Security & Payments After completion of all documentation the Lessor collect the advance payments and other dues. As mentioned in the sanction letter the lessee pays Documentation charges, Service Charges, First rental as advance. Beside that the lessor takes Lease Deposit, which is equivalent to 2 rentals, end of the lease agreement this amount is returned to the lessee. Lessee also deposits some amount as supplementary lease deposit, on which the lessee earns interest. And the lessee has to pay post-dated cheques equivalent to the rental terms in favor of the lessee. Step 9: Purchase Order The purchase order is issued to the supplier from the lessor when all the documents are singed by both the lessor and the lessee. The lessor provides 4 (Four) copies of “Purchase Order”. 1 st copy is kept by the less as office copy. The supplier accepts other 3 copies and one of the copies are kept by them. The lessee keeps 3rd copy and the 4th copy is returned to the lessor for documentation. Step 10: Disbursement When the supplier place the equipment/vehicle(s) mentioned in the purchase order supplied and installed, then the lessor disburse the lease amount in favor of the supplier. Step 11: Monitoring Monitoring is the activity to keep an eye on the clients’ activities. The main task in monitoring is to assure regular rental payments and take proper care of leased assets by the clients. By this time the lessee has to submit insurance papers for equipment/ vehicle(s) and in case of vehicle(s) registration has to make in favor of the lessor. As GSPB is under supervision of Bangladesh Bank and finance by CBSF, so the organization need to give a close look before grant any facility to the clients. To avail any facility from GSPB the client must fulfill some requirements. They are • Smooth Cash Flow for 3-4 years • Clear CIB Report of the client as well as its sister concern(s). • Memorandum and Articles certified by RJSC • Bankers Report from different Banks from where the client currently enjoying credit facilities. • VAT Registration Certificate • Environment Clearance Certificate from DOE • Location Certificate • No Objection Certificate (NOC) from banks where the assets are mortgage. Although the leased assets are entitle to GSPB, to acquire lease facility the company takes securities against the lease agreement. The amount and nature of security depends on the condition of the client’s nature of business and the market reputation. The clients those are prominent in their business sector only provide “Personal Guarantees” of each directors of the company and “Corporate Guarantee” and also “Corporate Guarantee” from its sister concern, if the sister concern already availed the lease facility from GSPB. For other clients those are not in very holding strong position in the market but have better prospect in future GSPB asks a negotiable amount as Fixed Deposit (FDR) or Mortgage land or both as security. Lessee can renew the security for subsequent lease facility. Most of the cases the lessor finance at most 70% of the total amount. In case of reputed clients the company finance up to 100%. As the company owns a lease asset by providing 70% finance, by this the company secures the position.
The recovery management is to manage or control over the return of invested assets by the organization. Recovery is very important for any investment. Any organization has to have a strong control over the recovery. The organization must meet the recovery rate as expected to drive the business smoothly. In leasing recovery is very important because recovered amount is reinvested in future lease financing. If the recovery rate of the company is very low then it is very difficult for the company to sanction further lease facilities. Sometime they loose clients because fail to provide sufficient funding to the clients or to provide lease facility from borrowings from other commercial banks or financial institutions in a high rate which causes high cost of fund. GSPB does not have any separate department or division for recovery. There is no designated person who is responsible for un-recovered funds. As the Credit and Marketing Department directly deals with the clients so they are suppose to be related with the clients monthly rental collection but as Accounts & Finance Department deals with financial information and record they are also involve with recovery. As the company does not designated anyone for this task, for that reason no one is fully responsible for any over dues. At present the Finance & Accounts Department informs the Credit & Marketing Department if any cheque returns from the clearance house (Bangladesh Bank). Only then the Credit & Marketing Department contact with the Lessee for repayment. But most of the time importance of recovery is covered by other activities of C & M. As a result the recovery rate is declining. Although the company selects its clients very carefully, but some of them are not regular in their payments. As a result the monthly overdue occur and recovery rate decreases. Recover rate fluctuates month to month because some clients fail to pay monthly rentals on time. The recovery rate stays below 100% because of two reasons, these are: • Over Due • Default Overdue Overdue rentals directly reflect on monthly financial report. GSPB faces overdue when there is insufficient fund in the clients account. Before avail lease facility the Lessee provides required number of post-dated cheques to the lessor. In due date the account department place the cheque to designated bank and transfer the amount from client’s (Lessee) account to GSPB’s (Lessor) account. But some time because of insufficient fund the rentals are not collected or transferred to lessor’s account. Due amounts are sometime collected in the consecutive month. When the lessor is sure that the lessee will not pay the overdue as well as future rentals that is called default. GSPB faced 1 (one) default case till today. At present GSPB is taking legal actions against the lessee. Some agreements are predicted as default in near future. In lease finance the leased assets are entitle to the lessor. If the lessee fails to pay the monthly rentals or fully fail to repay all dues to the lessor, the lessor can claim the assets. But most of the time lessor prefer and asked for monthly rentals rather than the leased assets. This psychology leads to lower recovery rate. Although GSPB is very selective about their clients, but the organization does not achieved 100% recovery rate because of monthly overdue payments. There are different reasons for any leasing company fail to achieve 100% recovery rate. The reasons are mentioned below: • • • • • • •
Change in Local & Foreign Policy Poor Sector’s Performance Poor Performance in Business Political Instability Insufficient Fund Client’s Relation with the Organization Clients Unwillingness o
Change in Local & Foreign Policy
Bangladesh has trade relationship with other foreign countries. Some major businesses are directly related with outside world. Foreign policies play a direct role deciding the performance of a company trading doing business with that particular country. Policies taken by a foreign country, which will not favor trade; will surely hinder the financial performance of that company, which will result in not paying the rentals. Local policies like taxes, Interest rate etc. effect the business in the same way. Readymade Garments would be the precise example here.
Withdrawal of quota, quota for the other countries, has already affected the RMG sector. Withdraw of government’s incentive to the textile industries has also hindered the expansion of the industry. As GSPB is providing a large amount of lease facilities in Textile and RMG industries any regulation change or other undesirable policies directly influence the recovery rate. •
Poor Sector’s Performance
When the entire sector is going through an unfavorable time; it is hard for the businesses in that sector to perform well. Consequently, it becomes hard for the lessees to repay the due amount. Generally, the amounts sanctioned to the sector businesses are quite larger & poor performance of a particular sector does possess a great threat. Our Cement industry would a proper example for this: As the industry is not doing as well as they are expected to, the companies strive to pay their rentals. In case of the foreign companies; they are mostly financed my their mother concerns but in case of the local cement produces, who are mostly financed by the local financial institutes struggle a lot more than the foreign companies to pay the amount due to be paid. •
Poor Performance in Business
A lessee takes the loan with a feasible expected financial performance; feasible enough to pay the monthly rentals. When a client’s financial performance does not match their expectation, it become hard for them to pay the rentals and have to carry the heavy burden of over-dues; in cases; they fail the pay back the whole amount. Business performance prominently influences the recovery rate through deciding the client’s ability to pay the due amount including the monthly rentals. • Political Instability Politics is one of the main driving forces of the economy. The political activities are also decides the industrial performance. •
Insufficient Fund
Insufficient fund is the most common reason of decreasing recovery. Before availing the lease facility the Lessee provides required number of post-dated cheques to the lessor. On due date the account department place the cheque to designated bank and transfer the amount from client’s (Lessee) account to GSPB’s (Lessor) account. But at times because of insufficient fund in the client’s particular account; the rentals are not collected or transferred to lessor’s account. Due amounts sometime collected in the following month. Even though some of the monthly rentals are collected in the following month or a certain period, the amounts are posted as overdue and reflect in recovery rate. •
Client’s Relation with the Organization
Some clients acquired because they have strong reference and have strong relation with the top management. In this cases some clients does not have fully sound position in the market and in future they fail to pay the rentals in time. •
Clients Unwillingness
The unwillingness to repay is another reason for declining recovery rate. Some clients do not pay their monthly rentals until the lessor reminds them. This is the notion of some people and this is one of the major obstacles in recovery. Comparison For comparison Industrial Promotion and Development Company (IPDC) and United Leasing Company (ULC) are chosen. •
Industrial Promotion and Development Company (IPDC)
Industrial Promotion and Development Company (IPDC) is one of the leading Non-Banking Financial Institutions of the country. IPDC is incorporated in 1981; this is the first private sector Development Finance Institution in Bangladesh. The products and services are provides by IPDC are Long Term Financing, Leasing,
Guarantees, Short Term Financing, Equity Investment, Syndication, Corporate Finance, Consulting Services and Capital Market Activities. •
United Leasing Company (ULC)
United Leasing Company (ULC) was incorporated in Bangladesh on 27 April 1989 as a public limited company under the Companies Act 1913 (presently 1994). It was granted license under the Financial Institution Act 1993. The shares of the company are quoted on Dhaka Stock Exchange Ltd. since 1994. The company is engage in equipment lease financing, hire purchase, bill discounting and project/term financing. ULC is ranked third among all the non-banking Financial Institutions by CBSF. Before analyze the main recovery some basics are needed to analyze to get a better idea about the selected organizations. As a private limited company IPDC has not disclose many major information that would help the report. For this reason IPDC has not take into account in all segments of analysis. Compare to IPDC GSPB has few products and services to offer. As IPDC is in the market for more than 20 year they gained vast experience and confidence to maintain diversified portfolio of products and services. Till todate GSPB depends on leasing, merchant banking and few Long and Short Financing.
Products & Services GSPB
IPDC
ULC
Lease Finance Leasing Leasing Money Market Operations Long Term Financing Hire purchase Merchant Banking Operation Short Term Financing Bill discounting Guarantees Project/term financing Equity Investment Syndication Corporate Finance Consulting Services Capital Market Activities Fig.: List of Products & Services Portion of Portfolio For all Non-Banking Financial Institutes leasing is not the major product. GSPB and ULC give most importance to lease financing in their business but for IPDC leasing is in the third position in total portfolio. Table below shows the percentage of leasing in total portfolio. GSPB
IPDC
ULC
Year 2003
99.74%
29.18%
98.03%
Year 2002
99.86%
28.89%
98.88%
Year 2001
99.09%
26.10%
97.29%
Year 2000
99.76%
21.41%
98.03%
Year 1999
99.92%
20.36%
98.46%
Table: Portion of Portfolio •
Net Profit
The main attraction of any business is its profit. High profit indicates better performance of the company. In the beginning of every year each organization projected their all-financial figures, in which net profit is the major one. End of each year they compare actual profit with the projected and evaluate the organization.
As the net profit of IPDC kept confidential so only GSPB and ULC’s 3 (three) years Net Profits are compared. Year (Tk.)
2003
Year (Tk.)
2002
Year (Tk.)
2001
Year 2000 (Tk.)
Year (Tk.)
1999
GSPB
7,86,68,261
10,72,07,113
10,95,13,008
6,81,90,291
3,90,50,267
Growth (%)
-2.66
-2.11
60.6
74.62
109.84
ULC
11,03,21,000
7,67,17,000
7,53,29,000
9,53,43,000
8,19,08,000
Growth (%)
43.8
1.85
-2.10
16.4
85.54
Table: Growth in Net Profit The table above shows the last 5 years net income, which indicates the high demand for lease in the market. In 1999 both GSPB and ULC achieved higher net profit than 1997, the growth rate were 109.84% and 85.54% respectively. That implies year 1999 many sectors availed lease facilities from different companies. In year 2000 ULC did not achieved as previous year but growth for GSPB’s in net profit was 74.62%. Like year 2000 in year 2001 GSPB’s growth in net profit is much higher than ULC. GSPB also had a very good growth rate in year 2001; in the same year ULCs growth rate was slightly negative. But GSPB’s Net income in the recent two years showed a negative trend and in the same time ULC’s net income was reasonably positive. •
Growth in Lease Disbursement
Sanction of lease does not mean the disbursement of lease amount. Although lease is sanctioned but the disbursement of money may take place after few months. This is why the contract amount may not match with disbursed amount. Disbursed amount is more important than contracted or sanctioned amount. Year 2003
Year 2002
Year 2001
Year 2000
Year 1999
GSPB
18.65%
17.13%
27.00%
19.17%
53.76%
ULC
19.85%
16.75%
19.00%
14.72%
7.23%
Table: Growths in Lease Disbursement Above figures implies the growth of disbursed lease amount end of each year. From 1998 to 1999 the growth for GSPB was very high but in the case of ULC the scenario is not same. But for ULC the growth is almost consistent. GSPB’s disbursement increased in year 1999 but after that growth is declining. •
Sector-wise Exposure in Lease Investment
At present GSPB is providing lease facilities in 15 different selected sectors of the country. The main objective of CBSF is to increase the growth of the economy, so they always prefer diversified financing and GSPB strictly following the objective of CBSF. The list of different sectors and sector-wise exposure is mentioned below
Sector
Percentage (%)
1
Marine Transport
0.54
2
Road Transport
18.03
3
Services
10.91
4
Distribution
2.04
5
Processed Food & Allied
1.25
6
Pharmaceuticals
8.97
7
Individuals & Others
3.25
8
Textile
15.95
9
Readymade Garments
9.58
10
Engineering & Workshop
11.25
11
Cement
4.27
12
Medical & Diagnostics
3.49
13
Toiletries
1.28
14
Poultry
2.40
15
Educational Institutions
8.17
16
Real Estate
0.04
Table :Sector-wise Exposure of GSPB ULC segregates total lease financing in to 5 (five) different sectors. In manufacturing sector they included different manufacturing concerns from different sectors. Other than manufacturing, textile, chemicals and services other clients are include under the title of “All Other�. The list and percentage of total lease finance in different sectors shown below, Sector
Percentage (%)
1
Textile
24
2
Chemicals
9
3
Other Manufacturing
28
4
Services
21
5
All Others
18
Table : Sector-wise Exposure of ULC IPDC only provided the name of different sectors where they financed lease. IPDC did not disclose the sector-wise exposure so; only the list of sectors is as follows, Sector 1
Agro based Project
2
Building
3
Chemicals & Pharmaceuticals
4
Engineering
5
Infrastructure Development
6
IT & Communication
7
Others
8
Plastic & Packaging
9
Processed Food & Allied
10
Readymade Garments
11
Services
12
Social Sector
13
Textile
Table :Sector-wise Lease investment of IPDC IPDC does not provide any lease facility to the individuals. They are only provides corporate lease financing. IPDC only do comparatively large financing, and individuals cannot have the ability to avail this kind of financing facilities. Beside that according to them the recovery rate will decrease if they include individuals in their portfolio. • Total Leased Assets All organizations do not only provide lease, besides lease financing they provide other products and services to their clients. So company’s total assets do not represent total leased assets. Following table summarizes the leased assets of GSPB and ULC from year 1999 to year 2003.
Year (Tk.)
2003
Year 2002 (Tk.)
Year 2001 (Tk.)
Year 2000 (Tk.)
Year (Tk.)
1999
GSPB
93,54,02,846
81,97,47,908
66,26,03,175
54,31,52,048
35,88,43,737
ULC
2,80,71,12,000
2,40,97,05,000
2,12,71,82,000
1,85,62,67,000
1,60,36,68,000
Table: Lease Assets •
Recovery Rate
The main earning of leasing companies is rental against leased assets. But not all clients are regular in their payments. The reasons for this irregularity cause decreasing recovery. The recovery rate of any organization reflects how efficient the organization is. Recovery not a after investment activity, it starts from the first steps of leasing process. Before sanction any lease the organization need to analyze the clients nature of business and repayment nature. Although the leasing companies are very much careful still some lessee are not regular in their payments. The annual recovery rates for last 3 (three) years (year 1999 to year 2003) are quoted below: Year 2003 (%)
Year 2002 (%)
Year 2001 (%)
Year 2000 (%)
Year 1999 (%)
GSPB
91.99
93.08
88.91
92.61
91.99
ULC
91.44
92.56
91.86
91.70
92.41
Table : Annual Recovery rate of GSPB & ULC From 1999 to 2003 the recovery rate for GSPB differs from 91.99% to 88.91%, which is not satisfactory for the organization. On an average the rate is 91.65%. As the company wants to achieve rate more than 95% yearly, so they need a very rapid and action for recovery management.
ULC has annual recovery rate more or less 91%. The rate is very close to GSPB. But the annual recovery rate of ULC is very stable for last few years. IPDC revealed that their annual recovery rate fluctuates between 95% to 92%, however the actual rate was not revealed. •
Sector-wise Recovery
In some sectors the leasing firms are achieving 100% recovery rate but some sectors are not regular in their payment. This reason the overall rate decreases. Total recovery rate does not provide any clear scenario of the organization. To analyze the recovery management sector-wise information is more reliable. Following table display the sector-wise recovery rate from year 1999 to year 2003 of GSPB.
1
Transport
a.
Marine
b.
Road
2003 (%)
2002 (%)
2001 (%)
2000 (%)
1999 (%)
100
100
100
100
100
95.49
93.71
97.20
100
92.39
2
Services
99.08
99.20
97.91
99.84
100
3
Distribution
91.87
99.37
100
99.87
100
4
Processed food & allied
100
99.67
100
99.80
100
5
Pharmaceuticals
80.12
100
100
100
100
6
Individual
92.17
95.05
96.04
94.26
98.66
7
Textile
93.09
97.23
97.61
98.78
98.77
8
Readymade Garments
77.57
87.28
85.46
N/A
N/A
9
Engineering& Workshop
97.31
86.39
93.11
97.25
98.39
10 Cement
76.96
52.82
24.78
27.41
0
11 Medical & Diagnostics
93.87
99.67
99.83
100
100
12 Other
100
100
44.44
74.92
100
13 Toiletries
98.04
88.56
93.33
100
N/A
14 Poultry
100
99.67
99.7
100
N/A
15 Education
97.31
95.56
99.33
98.44
N/A
Table: Sector-wise Annual Recovery Rate of GSPB Above table shows that some sectors like Marine Transport, Process Food and Allied, Medical and Diagnostics and Poultry sectors are very much regular in their payments. End of each year above mentioned sectors’ recovery rate was around 100% to 99.50%. Moderate rated sectors are Road Transport, Services, Textile, Individual and Education. Annual recovery rates of these sectors stay between below 100% to 90%. Very volatile sectors are those have recovery rate in below 90%. Readymade Garments, Engineering and Workshop, Publishing and Newspaper, Cement, Toiletries and others recovery reached to 80%. Some of abovementioned sectors often achieved 100% recovery rate also. Cement sector as observed in the above table is the most volatile one, which range from as low as 27.10 to 74%. As ULC divided its sectors under general head rather than specific sectors. As a result the recovery rates are very much different from GSPB.
Year (%)
2003Year 2002 (%)
Year 2001 (%)
Year 2000 (%)
Year 1999 (%)
Textile
88.32
93.87
89.27
88.32
91.87
Chemicals
94.36
96.89
95.29
96.36
96.89
Other Manufacturing
88.26
86.90
89.792
88.26
86.90
Service
99.18
100.00
99.28
100.00
100.00
All Other
85.54
89.38
85.66
85.54
86.38
Table : Sector-wise Annual Recovery Rate of ULC Only Chemicals and service sectors achieved recovery rate between 100% to 90%. Other than these two have recovery rate between 91.87% to 85.54%. Both GSPB and ULC have different ways to segregate the sector-wise investment, so it is very difficult to compare the recovery rate. But on an average both company wants to achieve the rate above 95% in each invested sectors. •
Recovery Management
•
Industrial Promotion & Development Company (IPDC)
In the beginning IPDC had a separate recovery division, which was designed to deal with the recovery of the due payments. But later on because of the separate activities of the recovery department; marketing personnel were not held liable for any un-recovered payments to be paid. This is why IPDC failed to evaluate the performance of the marketing personnel. Consequently this recovery division lost its importance and was eliminated. As there was no provision recovery division, the marketing personnel were given the enhanced responsibility from marketing, lease sanction to recover the payments till maturity. Again in October 2002 IPDC formed a recovery-monitoring cell, which is led by the General Manager (GM) of marketing. The main tasks of this of this particular department are to point out the large and risky clients and to take them into its account and to monitor the recovery activities of the marketing department. •
United Leasing Company (ULC)
ULC has a recovery division, which is a sub-division of the marketing department. As it is within the marketing department; the head of marketing monitors the recovery cell. After the disbursement the recovery cell takes the responsibility of the recovery of all payments. As a result; if there is any default the recovery cell is held liable. •
GSP Finance Company (Bangladesh) Limited (GSPB)
GSPB has no separate recovery division. After disbursement of lease the accounts department monthly place the cheques on due dates to the designated banks for collection. If any cheque returns from collection house only then the Accounts Department inform the Credit and Marketing Department. The personnel of Credit and Marketing Department are not give priorities to the recovery, as they are not held liable. As a result the recovery rate slowly decreasing. After analyzing all the information some facts are exposed and some effective recommendations are proposed. • • • •
IPDC is in the leasing business from 1981 and ULC is in from 1989. Compare to them GSPB is a new company and have less experience in Bangladesh market. Besides leasing IPDC and ULC offer other products and services in large scale the market. GSPB has Merchant Banking and Money Market Operation but in very small scale and also restricted. All 3 (three) organizations provide lease facilities to different sectors of the country. As the titles do not match with each other it is difficult to identify all the sectors where they are investing. GSPB’s client base is bit selected & market upper niche oriented.
• • • • • • • • • • • •
IPDC invest in Agro Based Projects and in Infrastructure Development, which are absent in GSPB’s portfolio. The amount of total leased asset of GSPB is 50% less than ULC. The reason is ULC is in the business for 16 years where as GSPB is in for 9 years. The overall recovery rate does not reflect the actual scenario as some sectors achieved the 100% recovery rate. The total recovery rate close to each other. GSPB’s recovery rate range from 93.08% to 88.91%, where as ULC has ranged 91.70% to 92.41% and IPDC has ranged from 92% to 95%. Sector-wise recovery helps to identify the poor performance and also indicate the economic condition of the country. Sector-wise recovery rate can focus on different sectors and identify the position in the economy by indicating the nature of payments. IPDC has separate recovery cell lead by General Manager (GM) and the rate of recovery is the highest among 3 (three) organizations. ULC has a recovery division under Marketing Department and the recovery rate is not around 91% but the rate is almost stable for last 5 (five) years. GSPB does not have any recovery division or cell and the recovery rate is fluctuating from 93.08% to 88.91%. As GSPB does have separate recovery division or cell, for that it is very lengthy process to take actions to collect overdue. And the problems arise that who will take the responsibility to make liaison between the client and the company. By recovery division management can held responsible the designated person for unrecovered payments. Recovery cell or division can provide extra effort to the un-recovered payments and take necessary actions promptly to collect the dues.
By analyzing 3 (three) different Non-banking Financial Institutions some recommendations are point out to make the GSPB’s overall management & recovery system effective. The recommendations are stated below: • • • • • • • • •
Separate recovery department is essential for increasing the recovery rate. The recovery division must involve a person from Marketing Department and one from Accounting Department. The Manager of Internal Control Department should supervise the division. The division must report to Managing Director or the Executive Director. Beside CIB and Bankers Report, GSPB should collect report on payment nature from the client’s suppliers and other who are directly related with clients business. Industry analysis should be done during the lease processing. GSPB must collect past data related to different industry and analyze the present situation as well as predict the future. Because most of lease are long term (2-5 Years) Although the clients are regular in their payment, a continuous close monitoring must be carry on to eliminate the default risk. Every month before payment date a person from recovery division must inform the clients by writing or through phone or e-mail. If the client fails to pay 3 (three) consecutive payments, the recovery cell should inform the management to take corrective actions. Client base should be more diversified rather than upper niche customer preference. Active plan must be implemented to have more branches, nationwide.
Non-Bank Financial Institutions are new dimension for Bangladesh’s economic growth. Efficient services from these companies can push up the industrial growth. Lease financing provides the industries a scope to invest without acquiring any liability. As all NBFI is providing lease facility by borrowing fund from Commercial banks, because of that the cost of lease facility is higher than direct borrowing. Only for this reason many firms are not stepping forward to avail lease facilities, event though all other manner it is convenient. In this situation some NBFI enjoys the low cost funding from CBSF, Bangladesh Bank and providing relatively cheaper lease facilities to the clients. Lease financing is a very mammoth step in industrial growth. Government support and proper knowledge and information will help the citizens to avail lease facilities from these established financial companies. In
developed countries the lease financing has a major contribution in the industrial as well as economic growth. So for the growth of the country NBFI can play a vital role in the future. The Following chapter is the supporting for the calculations made for CBSF ongoing eligibility. Criteria - 2: Adequacy of Provisions Calculation of Total Portfolio Lease Receivables: Non Current Portion Current Portion
921,300,819 199,547,643
Term Finance Equity Investments Advances against lease finance & term finance Total Portfolio
1,120,848,46 2 51,819,494 10,973,249 26,080,032 1,209,721,23 7
*All figures include current portion & not net of provision amount. Criterion - 3: Positive Real Rate of Return Calculation of Average Equity Equity as on 31st December 2002 Equity as on 31st December 2003 Less: Dividend declared (33%) Less: Dividend declaration tax (10%) Equity for 2003
292,717,600 333,155,861 56,100,000 5,610,000 271,445,861
Average Equity
282,081,731
Rate of Real Return: Net earnings after tax for the period Average Share Holders Equity Inflation Rate (In Decimal Form)
78,688,261 282,081,731 0.0440
Rate of Real Return
26.72
Criterion - 5: Calculation of Total Debt: Long-Term Liabilities Current Liabilities Total Liabilities -----------(1)
726,227,590 322,954,670 1,049,182,26 0
Equity as on 31st December 2003 ---------(2) (After adjustment of 33% dividend & dividend distribution tax)
271,445,861
Debt - Equity Ratio -----------(1)/(2)
3.87
Criterion - 8: Collection Ratio
Opening Net Receivable as on 01.01.03 Addition during the year Total
883,622,443 595,036,588 1,478,659,03 1
Less: Net lease receivable balance (31.12.2003) Total Principal Collection Collection of Lease Income Total Collection ------------(1)
1,120,848,46 2 310,346,193 191,163,724 501,509,917
Total Uncollection (Principal + Interest) Total Collectable Amount for the year---------(2)
29,800,953 531,310,870
Collection Ratio ---------------(1)/(2)
94.39%
Criterion - 10: Debt-Service Cover Ratio Earnings before tax & interest Non-Cash Expense: Depreciation Provisions: Provisions for lease Provision for Investment in Share Provision for Loans & Advances Total Non-Cash Expense Cash Collection from on balance sheet term credit Sub-Total ---------(1) Interest Expense Principal Payment: Loan (secured) paid during the period Loan (unsecured) paid during the period Term Deposit paid during the period Total Principal payment Sub Total---------(2)
185,742,383 2,850,295 1,658,996 422,319 518,195 5,449,805 310,346,193 501,538,381 107,054,122 146,154,572 95,696,636 5,875,917 247,727,125 354,781,247
Debt Service Coverage Ratio----------(1)/(2)
1.41
Criterion - 9: GSP Finance Company (Bangladesh) Limited Portfolio Infection Ratio No. of Client
Overdue
1
472,830
Principal Outstanding 2,096,364
Total Infected 2,569,194
% of Exposure 0.22%
1
363,135
1,798,012
2,161,147
0.19%
1
662,560
2,586,220
3,248,780
0.28%
1
535,905
2,922,744
3,458,649
0.30%
1
502,650
2,864,756
3,367,406
0.29%
Total
1
571,113
3,605,225
4,176,338
0.36%
2
506,927
815,306
1,322,233
0.12%
3
221,440
599,325
820,765
0.07%
4
2,145,597
19,377,199
21,522,796
1.88%
4
891,400
6,631,093
7,522,493
0.66%
5
100,600
91,501
192,101
0.02%
6
80,960
311,174
392,134
0.03%
7
211,100
313,783
524,883
0.05%
8
409,412
1,728,697
2,138,109
0.19%
9
654,220
4,923,496
5,577,716
0.49%
10
5,912,980
4,698,125
10,611,105
0.93%
11
800,000
11,082,530
11,882,530
1.04%
11
1,600,000
30,397,720
31,997,720
2.79%
12
452,730
2,515,722
2,968,452
0.26%
17,095,559
99,358,992
116,454,551
10.15%
Total Total Portfolio Less:Short Term Finance Less: Equity Investment Total Portfolio (for Criterion 9 only)
1,209,721,237 51,819,494 10,973,249 1,146,928,494
* No overdue has been observed in term lending.