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and also ensures standard of living to the all level of people in country. This is one of the key strategic thrusts of anti-poverty policy which would increase income and employment of the poor. For this kind of development, rapid growth of agriculture and the rural non-farm sector, expansion of small and medium enterprises (SMEs), development of rural infrastructure, and similar other activities that support labor-intensive growth of the economy are need to be emphasized. Through the development of SMEs employment will be generated, economic growth will be furthered and robust and competitive industrial sector in the country will be ensured. These SMEs are also important to rural industrialization and also ensure more equitable distribution of income by utilizing local resources more efficiently and supporting export growth and diversifying the export base. The growth in SME sector especially started since the 1990s. The data on the number of establishments show that small enterprises grew by 4.6 percent per year over the period FY78 to FY03, while medium enterprises grew by 6.4 percent during FY 82-FY 03. With special emphasis given to the development of SMEs, it is likely that these growth rates have continued and probably increased in recent years. The number of small enterprises increased to 55,916 in 2001 from 24,590 in 1981. As per the Economic Census 2001 and 2003 (BBS), the number of small enterprises stood at 74,629 which is 87 percent of the total number of enterprises, while the number of medium enterprises is 5,125 (6 percent). Over the years, the economy of Bangladesh has undergone significant structural transformation in terms of sectoral contribution to GDP. The share of agriculture in GDP declined from nearly 32 percent in FY81 to 22 percent in FY07. The share of industry, on the other hand, increased from 21 percent to 29 percent while the contribution of the services sector increased slowly from 47 percent to 49 percent over the same period. Within the industry sector, the contribution of manufacturing sector to GDP increased from 11.2 percent to 17.8 percent between 1981 and 2007 showing an average growth rate of 6.5 percent per year. Within manufacturing, the share of small scale industry in GDP increased from 3.2 percent in 1981 to 5.1 percent in 2007; while the corresponding share of large and medium scale industry
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increased from 8.0 percent to 12.7 percent. While the average yearly growth rate of both small scale industry and large and medium scale industry over the 1981-2007 period was similar at 6.5 percent, small scale industry witnessed higher growth rates in recent years. During 2001-2007, the average growth rate of small scale industry was 8.1 percent compared with 6.8 percent in the 1990s and 5.2 percent in the 1980s. (Rahman et al, 2008) SMEs are typically labor intensive industries with relatively low capital intensity. As such for a country like Bangladesh which is labor abundant and capital scarce, SMEs have a natural comparative advantage. (Financial Express, 2006) Most of the current larger enterprises have their origin in small and medium enterprises. SMEs are the starting point of development in the economies towards industrialization. SMEs have a propensity to employ more labor-intensive production processes than large enterprises. Consequently, they contribute significantly to the provision of productive employment opportunities, the generation of income and, eventually, the reduction of poverty. According to the statistics, in industrialized countries, SMEs are major contributors to private sector employment. Empirical studies have shown that SMEs contribute to over 55% of GDP and over 65% of total employment in high income countries. SMEs and informal enterprises, account for over 60% of GDP and over 70% of total employment in low income countries, while they contribute about 70% of GDP and 95% of total employment in middle income countries. (Fida, 2008) In Bangladesh, between 1986 and 2006, the labor force grew by nearly 3 percent while employment grew by 2.6 percent. Over the period, most of the employment growth took place in the SME sector. In the small enterprises, employment grew by 4.8 percent during 1978-1991 and by 5.5 percent during 1991-2001. Employment growth in the medium enterprises is estimated at 9.6 percent during 1988-2003. Between 80 percent and 85 percent of the total industrial employment and 23 percent of the country’s overall employment is accounted for by the SMEs and 40 percent of the country’s total labor force is engaged in SMEs. (Rahman et al, 2008)
POLICIES FOR SME DEVELOPMENT IN BANGLADESH
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namely. 2008) SMES ACCESS TO FINANCE – BARRIERS AND WINDOWS Getting access to finance is the most significant problem of SMEs in Bangladesh. This relates to getting the right amount of fund at the right time at reasonable rates with suitable repayment schedule and facing minimum bureaucratic hurdles.Bangladesh government adopted a number of programs for providing financial. Bangladesh lacks a vision for the SME sector and a comprehensive approach to the sector that would facilitate the growth of SMEs and upgrading of small enterprises. the Bank for Small Industries and Commerce (BASIC) was set up to finance SME sector. Usually SMEs do not have adequate to finance themselves and they do not have easy access to financial credit. The central bank also issued directives to both public and private commercial banks regarding working capital loans. This emerges as a critical disadvantage especially in cases where product design innovation is a major tool of ensuring competitiveness. Government has attempted to provide small and medium enterprises with access to finance through targeted lending. There were also attempts to channelize to the sector through public and private banks fund received from international agencies. 2007) One of the most compelling reasons for failure of SMEs is inadequate access to finance. Moreover. special interest rates and credit guarantee scheme. (Rahman et al. Despite of various programs and organizations. use of standardized documentation procedure and Page | 3 . (Rikta. There was a government directive to give certain percent of loanable fund to SME sector and a separate bank. and other assistance to SMEs involving the Bangladesh Small and Cottage Industries Corporation (BSCIC) and other organizations. marketing. technical. The SMEs require extensive technology acquisition and this requires capital to finance. SMEs have little capital base and they have little or no institutional financing which leads them not to stimulate their growth and in turn growth of the economy. There were provisions of favorable debt equity ratio. effectiveness of these efforts remained extremely limited due to many constraints including limited budget and personnel skills. and absence of effective market orientation of proposed interventions. inadequate links with small producers.
Since this sector is labor intensive with short gestation period. SME Page | 4 . accounts receivable. • Complex bureaucratic procedures and corruption. One of the main factors that have hampered flow of institutional finance into small and medium enterprises is a bank preoccupation with collateral based lending. • Absence of proper criteria for selecting potential SME entrepreneurs by the promotional institutions. achieving Millennium Development Goals (MDGs) especially eradication of extreme poverty and hunger. • Inadequate and ineffective coordination among concerned government agencies. Most of the SMEs are unable to put fixed assets as collateral for loan. (Rikta. gender equality and women empowerment. use of such movable asset for lending will involve certain difficulties. • Lack of a functional definition of SMEs that can characterize their unique positions. Notwithstanding all these arrangements for financing small and medium enterprises. 2007) SMALL AND MEDIUM ENTERPRISE (SME) CREDIT POLICY AND PROGRAM The role of Small and Medium Enterprises (SMEs) is indispensable for overall economic development of a country particularly for developing countries like Bangladesh. the actual delivery of institutional credit to this sector has been grossly inadequate.time limits for credit sanctioning and loan disbursement. Sales proceeds. Because of the informal nature of many SME transactions and high cost of small loan administration. inventory etc can be the basis of loan. but this requires proper documentation of the transactions of the SMEs and close monitoring and supervision on the part of the lending institutions. (Alam and Ullah. it is capable of increasing national income as well as rapid employment generation. • Limited availability of information on technical and marketing aspects of SMEs. • Collateral based lending procedures of banks and FIs that are not suitable for SMEs. 2006) So the major constraints of SME financing by banks and FIs can be summarized as: • Inadequate knowledge and ability to formulate proper project proposals for seeking institutional finance.
But reality is that expected outcome has not been achieved so far in this sector. The guidelines formulated by the newly created department for compliance of the banks and financial institutions for the development of SME sector are enumerated below: • For the first time in Bangladesh. IDA and ADB has been facilitated for the development of SME Sector. narrowing the gap of income inequality and poverty alleviation. it has become essential to include all segments of people in the growth process through facilitating credit to the sectors where less attention has been given due to present market mechanism. to ensure institutional financial facilities under easy conditions Bangladesh Bank has taken diverse steps.sector has played a vital role in economic development of some prosperous countries of Asia. Steps/Measures taken by Bangladesh Bank for SME Development: Bangladesh Bank has already introduced several schemes and programmes to flourish and expand SME Enterprises. like opening of ‘Dedicated Desk’ for SME and ‘SME Service Centre’ in the banks and special facilities for the women entrepreneurs. The present government has also put much emphasis on the development of SME sector considering it as ‘the driving force for industrialization. Reasonably. specially. monitoring and development of entrepreneurship in the SME sector. a new department namely ‘SME and Special Programmes Department’ has been established in Bangladesh Bank recently which will be solely responsible for policy formulation. an indicative target for SME loan disbursement has been set for 2010 by the banks and financial institutions considering SME development as one of the most important development Page | 5 . Our neighboring countries have also given due importance on SME. Refinance scheme funded by Bangladesh Bank. in agriculture and SME sector. In the back drop of recent global recession and changed circumstances. Terming SME as ‘employment generating machine’ they stressed on SME development for higher economic growth. Besides. facilitating fund.
• Each bank and financial institution shall establish a separate ‘Women Entrepreneurs’ Dedicated Desk’ with necessary and suitable manpower. For more participation of women entrepreneurs in industrial development of the country and for conducting business activities by women entrepreneurs in large number. SME loan shall be disbursed to the small. medium and women entrepreneurs. License for New Branches will be issued for financing the priority sectors like SME and agriculture from 2010 in the name of ‘SME/Agriculture Branch’ instead Page | 6 . • Banks & Financial Institutions shall put highest priority in receiving loan application from small and medium women entrepreneurs and settle the loan disbursement process within very reasonable time from the date of acceptance of the application. In that case. • Each bank/financial institution shall follow a separate business strategy in financing SME loan with least formalities in executing documentation to ensure easy and speedy loan sanction and disbursement process. priority shall have to be given to potential women entrepreneurs in respect of SME credit disbursement. 50.agenda of the country. • Banks and financial institutions may sanction up to Tk. group security/social security may be considered. region wise & sector wise. • The success in SME loan disbursement will be considered as yardstick for further approval of new branches of the concerned bank. 25.00. According to the target. • Following the 'Area Approach Method' banks/financial institutions will try to attain their indicative targets separately by dividing it as branch wise.000 (Fifty thousand) to Tk. Branch wise list of ‘Women Entrepreneurs’ Dedicated Desk’ should be sent to SME and Special Programmes Department of Bangladesh Bank within two months from the date of declaration of this policy and programme. provide them training on SME financing and suitably appoint a lady officer as chief of dedicated desk. • • • Priority shall be given to small entrepreneurs. 50. For small entrepreneurs credit limit will be ranged from Tk.00.000 to women entrepreneurs against personal guarantee.000 (Fifty lac).
In future. in order to involve banks in financing priority sector like SME and Agriculture’. SME loan shall be disbursed to the small. Area Approach Method: ‘Area Approach method’ shall be applied for SME sector like agricultural credit. Page | 7 . type of industrial products i. The SME credit target as fixed by the banks and financial institutions has been summarized at Table: 14. region wise and branch wise. However. areas famous for industrial production or important due to geographical location will be taken into consideration while disbursing SME loan. Besides. 23. According to the target. identified by IFC-SEDF and Upazila-wise lists of potential SME sectors identified by Branch Offices of BB (after discussion with the local bankers) are attached herewith. • Training programs shall be arranged for the entrepreneurs. • Each bank/financial institution shall fix the interest rate on SME loan sector/subsector wise. medium and women entrepreneurs. cluster based approach will be helpful for the bank’s risk analysis and intensive monitoring of SME financing. Target for SME Credit: A total target of SME credit worth Tk. For this purpose. light engineering clusters.of ‘SME Service Centre. banks/financial institutions will send their target to the SME and Special Programmes Department as well as branch offices of Bangladesh Bank fixing their target of SME loan sector wise. Territorial industrial production.e. bank/financial institution will inform Bangladesh Bank sector/sub-sector wise rate of interest immediately and ensure disbursement of refinanced fund to the clients (women entrepreneurs) at Bank rate +5% interest.995(Twenty three thousand nine hundred ninety five) crore has been set by the banks and financial institutions for the first time in 2010 considering SME development as one of the important development agenda of the country.
918 crore) of BB. financial institutions and NGOs. Bangladesh Bank is committed to facilitate SME credit through refinance window. the fund of BB. IDA and ADB is being channelised through refinance scheme. skill development of entrepreneurs.432 crore has been refinanced (up to December 2009) to 14. . . but availability of adequate fund is very much important.Cluster Development Policy: Banks/financial institutions will inform BB after adopting cluster development policy to flourish SME sector. Financing SME Sector: Access to finance is vital for SME sector development. IDA & ADB. . higher rate of interest is a major hindrance.Review & monitoring. That is why.Conduct baseline survey & diagnostic study. . Priority to the Small Entrepreneurs: Page | 8 .1. Moreover. 660 crore very soon with the newly arranged ADB fund. . Cluster development policy can be formulated in cooperation with banks. So far a total of Tk. Bangladesh Bank is going to launch anextended refinance scheme of Tk. In many instances. entrepreneurs raise complain regarding high rate of interest.Implementation of action plan. development of new clusters in special sector. Indeed. reduce credit risk and enhance overall product development. To develop SME sector. The objectives of this policy are to strengthen the existing cluster. Strategies for cluster development: . development & expansion of sustainable and competitive technology.122 enterprises using the revolving fund (Tk.Fixation of action plan.Identification of the cluster.Formation of committee for cluster development. and development of marketing channels.
creativity and expertise of women society make us surprised. Keeping this in view. 100% claims in industry and service sector is being refinanced. there exist many obstacles in women participation in the mainstream of economy although the degree of integrity. devotion. at least 40% of the total disbursement target of SME credit should be reserved for small entrepreneurs and the rest will be allocated to medium entrepreneurs. Special arrangement for Women Entrepreneurs: About half of the population of Bangladesh is women. Therefore. This policy will be continued to create a friendly environment for employment generation and higher production. small entrepreneurs have more prospects for generating employment. participation of women entrepreneurs in SME sector is vital for the flourishing of Bangladesh economy. In fact. But women participation in institutional economic sector is inadequate & the rate of women entrepreneurs is very low compared to that of male counterparts. Meantime. Similarly. at least 15% of total BB refinance fund for SME sector has been allocated for women entrepreneurs. Bangladesh Bank has taken some steps and formulated a guideline for the banks & financial institutions to ensure more institutional financial facilities for women entrepreneurs in SME sector. reducing unemployment and achieving economic growth. • With a view to organizing and making uniform industrial development and to ensure institutional credit facilities. women participation in the mainstream of economy is crucial for attaining sustainable economic growth & poverty reduction. Especially women participation in micro credit programmes and readymade garments industry is contributing significantly to the country’s industrialization. Page | 9 .Among SME enterprises/entrepreneurs in our country. Priority to Refinance in Industry (Manufacturing) and Service Sector: Industry and service sectors are given priority over the business sector under refinance scheme by Bangladesh Bank.
Bangladesh Homeworkers’ Women Association (BHWA). Banks and financial institutions shall take initiative to advertise all the facilities for women entrepreneurs in both electronic & print media. i. Handloom/Handicrafts Association. banks and financial institutions shall follow their own rules and banker-customer relationship to determine collateral for credit facilities more than Tk. Credit can also be provided against hypothecation of products and machineries. Banks and financial institutions shall apply their own due diligence method in selecting Page | 10 . such as.against personal guarantee if borrower is woman or majority of the owners of the enterprise are women.• • • • Interest rate for women entrepreneurs will be Bank rate (which is at present 5%) plus maximum 5%. • Banks/Financial Institutions shall establish special advice and service centre for women entrepreneurs in selected branches and ensure service friendly approach towards women entrepreneurs. 25. Bangladesh Women Chamber of Commerce & Industries (BWCCI). Banks/financial institutions may provide collateral free credit facilities up to Tk. Collateral: Lack of collateral of small entrepreneurs is deemed as a major hindrance to the expansion of SME credit. not more than 10% per annum. different Women Entrepreneurs’ Association. assistance can be sought from Bangladesh Small and Cottage Industries Corporation(BSCIC). SME Foundation & professional organizations. Banks and Financial Institutions may provide a maximum loan facility of Tk. National Association of Small & Cottage Industries of Bangladesh ( NASCIB) etc. 00. if needed.00. such as.25. Banks/Financial Institutions will accept and settle all types of loan applications of SME women entrepreneurs with the highest priority. Identification of the Real Women Entrepreneurs: To identify the real women entrepreneurs.00. Women Entrepreneurs Association of Bangladesh (WEAB).25. Mahila Samity.000/.000 against Personal Guarantee in SME sector especially for small and women entrepreneurs.000. However.e. Collateral free credit for the share-croppers in agricultural sector is being disbursed.
The operating cost of the banks is high for the small entrepreneurs. Acceptance and Consideration of Application: Respective bank branch will sanction the SME loan limit considering the annual requirement and following the existing credit norms. Generally loan defaulters will not be entitled to get new loan.clients/entrepreneurs. the rate of interest in this sector is somewhat higher. respective branches will accept the application of the small and medium entrepreneurs with their annual production plan. banks and financial institutions will consider the reasonable grace/moratorium period at the time of formulating credit policy for SME sector. For this purpose. Bangladesh Bank is providing refinance facility to banks and financial institutions at bank rate (at present 5%) in SME sector. banks/financial institutions shall formulate their own credit policy following the guidelines of the Central Bank as minimum benchmark and inform SME and Special Programmes Department of Bangladesh Bank. Grace Period: The entrepreneurs often raise complaints regarding short duration of grace period for repayment of SME loan. If necessary. Reasonably. Therefore. In this connection. The fund obtained at bank Page | 11 . Banks are being given directions to keep the interest rate within a tolerable limit. entrepreneurs will be allowed to modify their production plan on reasonable ground. Eligibility of the Borrower: Real entrepreneurs who are directly involved in SME sector will be considered eligible for SME credit. Group security or social security can also be considered in formulating such policy. Interest Rate on SME Credit: Banks/financial institutions shall fix up the interest rate on small and medium loan for the respective sector/sub-sector.
workshop and training on technology and design development. absence of SME information data base etc. BIBM. Monitoring of SME Credit: Like monitoring of agricultural credit. BWCCI. NASCIB. lack of skill and knowledge of the entrepreneurs to improve quality of products. three refinance schemes of Bangladesh Bank are already in place. In order to develop genuine small and medium entrepreneurs. on the other hand. monitoring of credit disbursement. For the purpose. The existing main problem of the demand side. DCCI. to address the supply side problems. it is essential to arrange trade fairs of the SME products matching buyer-supplier improving the quality of product and package design. Outsourcing of Credit Disbursement: Banks/financial institutions may seek assistance from private organizations/Non Government Organizations (NGO)/self-help group for selecting borrower. training for them etc. the banks/financial institutions have fixed target for disbursement in the current year. Besides. Training Programmes: The SME sector in Bangladesh faces problems both from supply side and demand side. The banks and financial institutions will incorporate the implementation status of such training programmes in their annual report. skill and marketing of SME products. institutions like BBTA. BB Branch Offices and Banks) will be established in case of SME credit. three tier monitoring systems (BB Head Office.rate through BB refinance window should be disbursed at bank rate + not more than 5% interest to the client level (in case of women entrepreneurs). FBCCI. includes: marketing of products. recovery. the commercial banks and international donor agencies will be requested to arrange training on entrepreneurship development where Bangladesh Bank will play the supporting role. Page | 12 . motivation of the borrowers. Besides. SME Foundation will be requested to arrange training programmes on the development of technology. However.
To achieve the objectives of SME credit policy. the respective banks/ financial institutions will submit accurate information/statements regarding SME credit on quarterly basis to Bangladesh Bank within 15 days of the next month following the quarter under reporting. To ensure satisfactory recovery of the disbursed credit in this sector to address any liquidity crisis. • • • • • To provide required credit to the small entrepreneurs without any harassment. In addition to the off-site & on-site supervision of SME loan. the Monitoring Cell will comprehensively monitor the SME credit management at the field level. To ensure area approach and cluster-based credit disbursement. an ‘SME Loan Monitoring Cell’ has been set up in the ‘SME and Special Programmes Department’. Special monitoring of the banks performance in providing credit to the women entrepreneurs. And so on. the respective Cell will take necessary steps against any complain regarding SME credit subject to investigation. district wise employment generation and poverty reduction. such as higher growth of industry and service sector. Meanwhile.Purpose of the Monitoring of SME Credit: • • To achieve the overall target of SME loan disbursement. To achieve sector wise industrialization. Besides. Methods of Monitoring of SME Credit: • Monitoring in the Head Office of the Central Bank: Comprehensive monitoring strategies/procedures are being adopted by Bangladesh Bank to monitor the SME policy implementation more effectively. • Submission of Information/Statements: To review the annual implementation progress of SME credit programmes. increasing the number of women entrepreneurs and their development. Page | 13 . the existing statements will be required to be continued as usual.
For this. • Monitoring by the Head Offices of the Banks: As part of their business strategy. o The letter requesting the Credit Information Bureau (CIB) of Banglaledesh Bank to verify loan classification status of the Page | 14 . respective banks will set up ‘Monitoring Unit’ and inform the same to Bangladesh Bank. o Guidance for filling up the application form and all other requirement should be advised at the time of supplying the application form to avoid delay.• Monitoring in the Branch Offices of the Central Bank: SME Credit Monitoring Cell will be established in the branch offices of Bangladesh Bank like Head Office. the banks will take the following steps to ensure sincerity. credit disbursement is the affairs of the credit disbursing bank. • Monitoring in the Banks Level: The respective banks have to ensure effective monitoring system so that real entrepreneurs can get the SME credit in time according to the SME credit policy and credit norms. In addition to comply with the existing credit norms. The banks sanction credit in favor of the customers after considering their credit worthiness and other relevant matters. higher authorities of banks must have clear vision and direction about disbursing SME credit. o Rationalizing the time line for credit processing and disbursement. o All supplementary queries shall be made to the applicant in one instance. They will also ensure that the entrepreneurs do not face any harassment and the indicative target of SME credit is achieved. o Simplifying of the SME credit Application Form. Usually. efficiency and speed in sanctioning and disbursement of SME loans. This Cell will take effective steps to monitor the SME credit disbursement and recovery activities by the banks/financial institutions of their respective areas intensively.
The officials in the regional/branch level may be rewarded on the basis of performance of SME credit disbursement and recovery. E-mail etc. SME Credit Monitoring Unit may be established in the regional offices. to take new steps and solve problems surfaced at the field level rapidly. As a part of regular monitoring. Modern information technology especially Mobile Phone.applicant shall marked “SME. Required training may be arranged for the officials related to SME for their capacity building. the priority” and CIB will provide the same on priority basis (within minimum time). o Quick settlement of borrower’s complain. may be used in order to monitor the activities of the regional offices and branches intensively. Core Group or Cell has to be established to monitor SME credit disbursement activities. The members of the Monitoring Unit will visit their respective areas from time to time to monitor that the disbursement is progressing in line with the target. the officers of Regional Offices/Monitoring Unit will arrange meeting with the officers of their respective branches and visit the branches from time to time to ensure that the potential entrepreneurs do not face any harassment. SME credit related item may be included in the agenda of annual/half yearly managers’ conference. The role of Regional Offices will perform the role of coordinator between higher authority of the bank and the branches. For the purpose. • Monitoring Activities in Regional Offices of the Banks: The smooth implementation of the SME program shall be monitored at regional offices level of the banks. They will address complain Page | 15 .
Preservation of Mobile Phone number of the Clients: To facilitate easy communication for proper monitoring of SME credit disbursement at field level mobile phone number of each borrower should be preserved at branches (mobile number of neighbor or close relative may be Page | 16 . In this context. the bank branches have to perform dynamic role in sanctioning and disbursing SME credit. Monitoring of the proper utilization of disbursed loan. Therefore. Motivating the entrepreneurs through necessary and comprehensive publicity. • Activities to be performed at the Bank Branches: The success of SME credit disbursement programmes mostly depends on the performance of the bank branches. Gearing up monitoring of SME loan recovery activities.related to SME credit instantly’ provide required directions to the branches and assist them to solve the problems existed in the branches. Identifying the courageous and successful small entrepreneurs and bring them under loan activities/programme. Bank branches will perform the following activities to disburse and recover SME loan: The branch manager will evaluate/decide the demand for and scope of SME loan disbursement. Arranging SME loan to interested eligible and bonafied entrepreneurs through easy transparent process and in a timely manner. Special initiative should be taken by every bank branch to disburse SME loan to the small women entrepreneurs. arrangement should be made to disburse SME loan in the local potential sectors.
licenses for SME/Agriculture branch are being issued instead of SME Service Centre from year 2010. Incentives: SME loan should be extended to rural areas instead of centralizing at urban areas. in order to involve the banks in financing SME and Agriculture sector. Banks will maintain sector wise (industry/product) information of credit flow. Availability of Information: Banks will display the detailed information regarding SME credit facilities in their website and also in each of their branches at a common and easily noticeable place. SME Service Centre: The banks (Private and Foreign) have so far opened 210 SME service centers to provide more facilities to SME clients.preserved marking ‘on request’. in case the borrower don’t have his own mobile). Notably. rate of default. Page | 17 . Authorized Dealer (AD) branch and exchange houses abroad. This information will help in evaluating the effectiveness of existing guidelines adopted by the government and will assist in formulating SME guidelines in the future. employment creation etc. A mobile/telephone directory of the SME borrowers may also be maintained at branch level. The overall success in SME target achievement will be considered as important criteria for allowing the respective banks to open new branch.
The banks already involved in Small Enterprise financing will ensure compliance with these guidelines within six month of the date of issuance of Small Enterprise Financing Prudential Regulations. the banks shall implement/follow the guidelines given below. stipulate responsibilities.PRUDENTIAL REGULATIONS FOR RE FINANCING Minimum Requirements for Banks for RE Financing Commercial banks must follow some general requirements to finance small enterprises along with some specific regulations given under each mode of financing separately. design internal controls and then ensure strict compliance with them. Page | 18 . specify security requirements. procedures and practices to define risks. And these minimum requirements do not bother to avoid commercial banks to establish policies. Pre-Operation Before embarking upon or undertaking Small Enterprise financing.
responsibilities and various staff positions. For every type of Small Enterprise finance activity. These profit and loss statements should be placed before the Board of Director in the immediate next Board Meeting.1. 90 180 & 360 days and above) on Reports interrelating delinquencies with various type of customers of monthly basis various attributes of the customers to enable the management to take important policy decisions and make appropriate modifications in the lending program • Quarterly product wise profit and loss account duly adjusted with the provision on account of classified accounts. disbursement and appropriate monitoring mechanism. which will be suitably staffed by personnel having sufficient expertise and experience in the field of consumer finance/business. powers/authority relating to approval/sanction of consumer finance facility. 2. 4. The policy shall explicitly specify the functions. 60. which shall internally cover loan administration. The branches of foreign banks in order to comply with these conditions shall place the reports before a committee Page | 19 . the bank shall develop a specific Product Program Guide (PPG). 3. The program shall include the objective/quantitative parameters for the eligibility of the borrower and determining the maximum permissible limit per borrower. which should be able to effectively cater to the needs of Small Enterprise financing portfolio and should be flexible enough to generate necessary information reports used by the management for effective monitoring of the bank's exposure in the area. The banks shall prepare comprehensive Small Enterprise credit policy duly approved by the Board of Directors. The PPG will also indicate the maximum permissible exposure banks will take against each product. Bank shall put in place and efficient computer based MIS for the purpose of Small Enterprise finance. The MIS is expected to generate the following periodical reports: • • Delinquency reports (for 30. including documentation. Banks shall establish separate Risk Management capacity for the purpose of Small Enterprise financing.
Banks should carefully study the details given in the statement and allow fresh finance/limit only after ensuring that the total exposure in relation to the repayment capacity of the customer does not exceed the reasonable limits as laid down in the approved policies of the banks. 7. The banks shall develop comprehensive recovery procedures for the delinquent loans. the net worth and information obtained from a Credit Information Bureau approved by Bangladesh Bank. The institutions starting consumer financing are encouraged to `impart sufficient training on an ongoing basis to their capability regarding the various aspects of Small Enterprise financing. Operations 1. Internal audit should Page | 20 . The declaration will also help banks to avoid exposure against an enterprise having multiple facilities from different institutions. Chief Finance Officer and Head of Small Enterprise. apart from other things. 3. The internal audit should also assess the adequacy of the internal control and ensure that the required policies and standards are developed and practiced. As a part of risk management process banks must identify the source of repayment and assess customer's ability to repay his/her past dealings with the bank. Internal audit and control function of the bank. Banks shall obtain a written declaration from the borrower revealing details of various facilities already obtained from other institutions. 5. However. The banks shall prepare standardized set of borrowing and recourse documents (duly cleared by their legal counsels) for each type of Small Enterprise financing. 6. The recovery procedures may vary from product to product. should be designed and strengthened so that it can efficiently undertake an objective review of the Small Enterprise finance portfolio from time to assess various risks and possible weaknesses. 2. distinct and objective triggers should be prescribed for taking preplanned enforcement/recovery measures.comprising of Chief Executive Officer.
Page | 21 . the banks must assess conditions in the particular sector / industry they are lending to and its future prospects. Prudential Regulations Regulation -1: Source and Capacity of repayment and Cash Flow Backed 1. For ease of reference and guidance of their customers. The banks shall ensure that their accounting and computer systems are well equipped to avoid charging of mark-up. 5. For this purpose it should be ensured that the mark-up charged on the outstanding amount is kept separate from the principal.also comment on the steps taken by the management to rectify the weaknesses pointed out by them in their previous reports for reducing the level of risk. the key risks to their businesses and their risk mitigants. Disclosure/Ethics The banks must clearly disclose all the important terms & conditions like fees. pre-payment penalties and the conditions under which that apply. charges and penalties. 4. which are internal including interest rate. banks are encouraged to publish brochures regarding frequently asked questions. The banks must be able to identify the key drivers of their borrowers businesses. The banks shall ensure that any repayment made by the borrower is accounted for before applying mark-up on the outstanding amount. Banks shall specifically identify the sources of repayment and asses the repayment capacity of the borrower on the basis of assets conversion cycle and expected future cash flows. In order to add value.
It is expected that in such cases banks shall assist the borrowers in obtaining the required information and no SE shall be declined access to credit merely on this ground. Regulation -4: Aggregate Exposure of a Bank on Small Enterprise Sector The aggregate exposure of a bank on SE sector shall not exceed the limits as specified below: % of Classified SE Advances to total Portfolio of SE Advances a.2.50 lac respectively subject to the following: a) In case of working capital finance . 2 lac and Tk. Regulation -3: Per party Exposure Limit The minimum and maximum exposure of a bank on a single SE shall remain within the range of Tk. In case of limited companies. It is recognized a large number of SEs will not be able to prepare future cash flows due to lack of sophistication and financial expertise.Maximum up to 100% of the net required working capital or 75% of the sum total of inventory and receivables whichever is lower. guarantees of all directors other than nominee directors shall be obtained.Maximum up to 90% of the purchase price. Below 5% Below 10% 10 times of equity 6 times of the equity Page | 22 Maximum Limit . The rationale and parameters used to project the future cash flows shall be documented and annexed with the cash flow analysis undertaken by the bank. b) In case of fixed assets purchase . Regulation -2: Personal Guarantees All facilities to SEs shall be backed by the personal guarantees of the owners of the SEs. b.
banks must take charge over assets being financed. Regulation. b) Equitable mortgage over immovable properties with registered Power of Attorney. c) Personal Guarantees of Spouse/Parents/other family members. Below 15% Up to and above 15% 4 times of the equity Up to the equity Regulation -5: Limit on Clean Facilities In order to facilitate growth of smaller loans. receivables. 5 lac to Tk. 5 lac: As a minimum. a) Hypothecation on the inventory. Guidelines for security requirements for loans of amounts more than Tk. plant & Regulation. d) One third party personal guarantee.c. 50 lac: machineries.7: Loan Documentation For all facilities. advance payments. For loan amounting Tk. e) Post dated cheques for each installment and one undated cheque for full loan value including full interest. 2 lac to Tk.5 lac.5lac are given in Regulation-6. facilities provided to SEs shall be secured by banks as follows: • • For loan amounting Tk. d.6: Securities Consequent to the regulation stated in Regulation -5. banks are free to determine security requirements for loans up to Tk. banks must obtain (as applicable) and not limit to the following documents before disbursement of loan: Page | 23 .
3) Trade License. b) Copy of Board Resolution of the company for availing credit facilities and authorizing Managing Director/ Chairman/Director for execution of documents and operation of the accounts.1) Loan Application Form duly signed by the customer. 2) Acceptance of the terms and conditions of Sanction Advice. d) e) f) g) Copy of last audited financial statement up to last 3 years Personal Guarantee of all the Directors including the Chairman and Managing Director. 6) Demand Promissory Note 7) Letter of hypothecation of stocks and goods 8) Letter of hypothecation of book debts & receivables Page | 24 . 4) In case of Partnership Firm: a) Copy of Registered Partnership Deed duly certified as true copy or a partnership Deed on non-judicial stamp of Tk. 150 denomination duly notarized. Certificate of registration of charges over the fixed and floating assets of the company duly issued by RJSC. securities etc. 05) In case of limited company: a) Copy of Memorandum & Articles of Association of the company including Certificate of incorporation duly certified by Registrar Joint Stock Companies (RJSC) and attested by the Managing Director accompanied by an up-to-date list of Directors. Certificate of registration of amendment of charges over the fixed and floating assets of the company duly issued by RJSC in case of repeat loan or change in terms and condition of Sanction Advice regarding loan amount. c) An Undertaking not to change the management of the company and the memorandum and articles of the company without prior permission of the bank.
financial statements singed by the borrower will suffice where the exposure is fully secured by liquid assets. relating to the business of every borrower who is a limited company or where exposure of a bank exceeds Tk.e. It is recognized that a large number of enterprises other than limited companies (i. Regulation-8: Margin Requirements Banks shall adhere to the minimum margin requirement as prescribed by Bangladesh Bank (if any). The condition of obtaining CIB report will be governed by rules & regulations as prescribed by Bangladesh Bank from time to time. banks should give due importance to the credit report relating to the borrower and his group obtained from a Credit Information Bureau (CIB) of Bangladesh Bank. However. sole proprietorship/partnership firms etc.) may not have proper books of accounts including balance sheet. 40 lac. Regulation-10: Minimum Conditions for Taking Exposure 1. Banks shall. 11) Personal Letter of Guarantee 12) Wherever practical. banks shall assist the borrowers in Page | 25 . for analysis and record. insurance policy for 110% of the stock value covering all risks with bank’s mortgage clause in joint name of the bank and client. It is expected that in such cases. 2. as a matter of rule. Regulation-9: Credit Information Bureau (CIB) Clearance While considering proposals for any exposure. profit & loss account and they may not be able to prepare current and future cash flows due to lack of sophistication and expertise. obtain a copy of financial statements duly audited by a practicing Chartered Accountant.9) Letter of hypothecation of plant & machinery 10) Charge on fixed assets..
where considered necessary. 3. In addition to the time-based criteria prescribed in table 01-03. shareholders. Regulation-11: Proper Utilization of Loan The Bank should ensure that the loans have been properly utilized by the SEs and for the same purposes for which they were acquired / obtained. subjective evaluation of performing and non-performing credit portfolio shall be made for risk assessment and. any account including the performing account will be classified. Banks should develop and implement an appropriate system for monitoring the utilization of loans. Each Bank shall develop its own Loan Application Form and ‘Borrowers Basic Fact Sheet’. Banks shall observe the prudential guidelines given at table 01-03 in the matter of classification of their SME asset portfolio and provisioning there-against.obtaining/developing such books of accounts as per forms/formats prescribed by each bank. Regulation-12: Restriction on Facilities to Related Parties Banks shall not take any exposure on a SE in which any of its directors. and the category of classification determined on the basis Page | 26 . Banks shall not approve and/or provide any exposure (including renewal. enhancement and rescheduling) until and unless the prescribed Loan Application From is accompanied by a ‘Borrower’s Basic Fact Sheet under the seal and signature of the borrower. employees or their immediate family members is holding 5% or more of the share capital of the SE. 2. Reference with regard to how the formats should be prepared has been made in the development guidelines. Regulation-13: Classification and Provisioning for Assets Loans / Advances 1.
of time based criteria shall be further downgraded. The provision held against classified assets will only be released when cash realization starts exceeding. as a result of quarterly assessment shall be provided for immediately in their books of accounts by the banks on quarterly basis. Submission of Returns 4. Apart from specific provisioning requirement as prescribed above. Shortfall in provisioning. and (iii) In case of sub-standard category 25% of the net book value of the assets. inclusive of its realizable value and documentation covering the advances. adequacy of the security. banks will create adequate general provision over the entire credit portfolio of Small Enterprise business. its cash flow. Such evaluation shall be carried out on the basis of credit worthiness of the borrower. at least on a quarterly basis. determined. Page | 27 . if any. Banks shall review. Timing of Creating Provisions 5. Further. Reversal of Provision 6. Therefore. the provision made on the advice of Bangladesh Bank will not be reversed without prior approval of Bangladesh Bank. 3. all banks shall maintain at all times a general provision of 5% of SE assets outstanding in its books. (i) (ii) In case of loss category the net book value of the assets: In case of doubtful category 50% of the net book value of the assets. Banks shall submit the borrower-wise annual statements regarding classified loans/ advances to the Banking Inspection Department. the collectability of their loans / advances portfolio and shall properly document the evaluations so made. operation of the account.
Bangladesh Bank shall also check adequacy of provisioning during their on-site inspections.Verification by the Auditors 7. Page | 28 .12 for classification and provisioning for assets have been complied with. The external auditors as a part of their audits of banks shall verify that all requirements of Regulation.
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