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Guides/ManualsMagazines/NewspapersRecipes/MenusSchool Work+ all categoriesFeaturedRecentPeopleAuthorsStudentsResearchersPublishersGovernment & NonprofitsBusinessesMusiciansArtists & DesignersTeachers+ all categoriesMost FollowedPopularBarbara Peterlin We're using Facebook to personalize your experience.Learn MoreDisableHomeMy DocumentsMy CollectionsMy ShelfView Public ProfileMessagesNotificationsSettingsHelpLog Out1First Page Previous Page Next Page / 64Sections not available Zoom Out Zoom In Fullscreen Exit FullscreenSelect View Mode View ModeSlideshowScroll Readcast Add a Comment Embed & Share Reading should be social! Post a message on your social networks to let others know what you're reading. Select the sites below and start sharing.Link accountReadcast this DocumentReadcast Complete!Click 'send' to Readcast!edit preferencesSet your preferences for next time...Choose 'auto' to readcast without being prompted.Barbara Pete...Barbara PeterlinLink accountAdvancedCancel Add a CommentSubmitshare:Characters: 400 Share & EmbedAdd to Collections DownloadAuto-hide: on Introduction1.1 Origin of the Report:In recent days the Small and Medium Enterprise (SME) Financing has become animportant area for Commercial Banks in Bangladesh. To align its corporate policy withthe regulation of Central Bank, banks have become more concerned about SME andopened windows to conduct business in this particular area. This study has beenconducted to fulfill the requirements of sixth term MBM program and gain an insightabout the present condition of small and medium enterprise in the economy of Bangladesh and their financing scenario in light of Bangladesh Bank regulation.1.2 Background of the Study:After Liberation of Bangladesh, intensive efforts were undertaken to accelerate the rate of industrialization in the country. At the beginning, import substitution and subsequentlyexport-led economic growth strategy was pursued for industrialization. In order to attainthis objective, large amount of industrial credit was funneled to the industrial sector. Butthe whole exercise of industrialization came to a halt with the massive diversion of resources to other non priority sectors. Policy makers, of late, have come to recognize thecontribution of SME sector towards economic development in the country. Small andmedium enterprises have been recognized as one of the most important means for providing better economic opportunities for the people of least developing countries likeBangladesh. A developing economy like that of ours suffers from many peculiar problemssuch as disproportionate pressure of population on agriculture due to lack of ruralindustrialization, unemployment and underemployment of human and materialsresources, unbalanced regional development etc. The contribution of small and problems is beyond doubt, provided basis.Small and medium enterprises populated countrieslike Bangladesh mediumenterprises in the solution of these they are organizedand run on scientific are particularly suitable for densely where SME sector can provide employment with

much lower investment per job provided. Out of 11% employment of the civilian labor force provided by themanufacturing sector, about two thirds are estimated to be provided by the small andcottage industries sector. Again, development of small industries facilitates the effectivemobilization of capital and labor resources. They also help in raising standards of living1 of people in rural areas. Contribution of SME sector to GDP remained above 4% duringthe period from 1985-86 to 1999-00. Moreover, the present contribution of SME sector toGDP is approximately 5% and SME sector employs 25% of the total labor forces, thusthis sector is the present available sector for creation of jobs (Saha, Sujit R. 2007).Research papers developed by Bakht, Zaid (1998) and Ahmad, Salahuddin et al. (1998)described that the policy environment within which SMEs in Bangladesh operateaccompanies legal, regulatory and administrative constraints to employment creation bySMEs. The robustness of SME contributions to employment generation is a common phenomenon in most developing countries in that the magnitude varies between 70% to95% in Africa and 40% to 70% in the countries of the Asia-Pacific region (Ahmed, M.U.1999).Liberalization of industrial and trade regimes along with globalization are likely to havehad significant effects on Bangladeshs SMEs (Ahmed, 2002; Bhattacharyaet. al.,2000).Various recent studies (Ahmed, M.U. 2001, ADB 2001, USAID 2001) show that SMEshave undergone significant structural changes in terms of product composition, degree of capitalization and market penetration in order to adjust to changes in technology, marketdemand and market access brought by globalization and market liberalization. Theofficial data show that the share of private investment in Bangladeshs GDP in the late1990s, which may be considered as the post-reform era, has remained more of lessconstant at around 15% (Bhattacharya, 2002). This may be interpreted as an evidence of stagnant private sector activities in the country.The recent private sector survey estimates the contribution of the micro, small, andmedium enterprises (MSMEs) is 20-25% of GDP (Daniels, 2003). While SMEs arecharacteristically highly diverse and heterogeneous, their traditional dominance is in afew industrial sub-sectors such as food, textiles and light engineering and wood, cane and bamboo products. According to SEDF sources quoted from ADB (2003), food and textileunits including garments account for over 60% of the registered SMEs.Despite these contributions in the economy of the country, Banking sectors are notinterested in financing the small and medium enterprises; rather there is a decline in theamount of advances by the Banking sector. There are approximately 52 Banks operating2 in our country and all are serving large enterprises rather than SMEs though only thesmall enterprises contribution is 5% in GDP of Bangladesh in 2007. But why?What are the causes for which Banks are not interested in financing this sector? Fromrecent statistical data of Sonali Bank of Bangladesh, we see that the credit recovery rate is51.44% in this sector. Why this recovery rate is not large enough? Why the SMEs arefailing to payback their credit to the lenders? We have tried to find out the answer of thesequestions in this research paper.1.3 Objectives of the Study:Based on the above discussion the following objectives are set for the study :To review the role of SMEs in the economy as well as current status of SMEsand their financing by Banks in Bangladesh.To find out the reason why the Banks are not interested (problems) to financethe SMEs.To review the present role of Regulatory Authorities in SME financing anddevelopment.1.4 Methodology of the Study:The study was conducted mainly based on secondary information although someinformation relating to entrepreneurs have been collected primarily. The sources of datainclude Office Records, BIBM -

Library, Different Research Paper regarding SMEs,Different Publications on SMEs of different banks and some websites.Sample banks of DNCBs, PCBs, and FCBs from the sample frame, was selected purposively considering the amount of loan size, interest rate, loan processing fees, periodof loans, mode of finance and management.Policies relating to SME financing such as fiscal policy, monetary policy and internal policies of commercial banks was examined thoroughly with a view to find out theinfluence of existing policies on SME financing. Trend and pattern of bank financing toSME was analyzed by classifying the financing in terms of areas, rate of interest, types,category, and banks.1.5 Limitations of the Study:3 Since this research is only for academic purpose, there were some limitations in thisstudy. These are mentioned below:1.Discussion about the Small and Medium Enterprises is a vast subject, but onlysome selected areas are covered in the research paper.2.The study is basically based on secondary data.3.Time was enough but it was not possible to give full concentration in this regarddue to continuous pressure from other courses.1.6 Organization of the Report:This paper is divided into ten chapters. The first chapter is the introduction of the report.The second chapter focuses on the current status of SMEs in the economy. The thirdchapter explains the current status of SME financing by banks in Bangladesh. The fourthchapter explains why banks are not interested in financing the SMEs. The fifth chapter shows minimum requirements for SME financing according to Bangladesh Bank. Thesixth chapter contains prudential regulations for SME financing by Bangladesh Bank. Theseventh chapter shows guidelines by Bangladesh Bank for SME financing. The eighthchapter describes other developmental activities for SME financing. The ninth chapter explains constraints of SME financing. The last chapter contains the concluding remarksof the report.4 Current Status of SMEs in the Economy2.1 Brief Macro-economic Review:Bangladesh, mainly backed by the growth of manufacturing, construction and servicesector has achieved a year-upon-year GDP growth of 6.51% in 2006-07, as comparedwith the 6.63% in FY 2005-06, and 5.38% in 2004-05. Per capita GDP recently surpassed$500. From 1% during the 1970s, growth rate of GDP per capita has ramped up to over 3% since the early 1990s and, since 2003-04, even higher, to 4 off percent. Growth has been more stable too; Bangladesh among the handful of countries that sustained positive per capita growth in each year since the early 1990s. This performance has beenunderpinned by rising agricultural and non-farm rural output and a rapid expansion inexport of readymade garments (RMG).Faster economic growth has helped Bangladesh to reduce the poverty rate by about 1(one) percentage point per year since 1990. Poverty fell from 60% in 1990 to 50% in2000. Although the latest poverty data are still being collected, proxy indicators suggestthat good progress on poverty reduction and social development has continued in recentyears. Many MDGs are also on track for being met. (World Bank 2005)The rate of gross investment in GDP in 2007-07 is 24.33%. The relative share of privatesector in gross investment, which has been growing secularly, is 18.73% in 2006-07.Between 2005-06 and 2006-07, credit to the private sector grew by 11.2%. The population growth rate averaged 1.5% or so; the literacy rate has averaged at 62% duringthis decade.Growth rate of manufacturing output of Bangladesh is on an increasing trend.Manufacturing growth during 1992-96 averaged 8.21%. In the next four years, thecorresponding growth averaged more than nine percent annually. Service sector grew atan average rate of 4.9%, which is lower than that of industries (manufacturing) sector.The quantum index of

SMEs has grown by 5.4%. The export of readymade garments(RMG) both woven and knitwear has picked up a commendable mode of growth, whichearns over 76% export earnings.5 2.2 Current Status of Small and Medium Enterprises in Bangladesh :The Small and Medium Enterprises worldwide are recognized as engines of economicgrowth. The commonly perceived merits often emphasized for their promotion especiallyin the developing countries like Bangladesh include their relatively high labor intensity,dependence on indigenous skills and technology, contributions to entrepreneurshipdevelopment and innovativeness and growth of industrial linkages.2.2.1 Definition :According to the latest circular of BANGLADESH BANK (Date 26/05/2008), thedefinition of Small & Medium Enterprise sector is given below:Small Enterprises Small enterprises refer to those enterprises which are not anyPublic Limited Companies and which fulfill the following criteriaService Concern-Having an investment of Tk. 50,000 to Tk. 50, 00,000 excludingland & building and / or employing up to 25 workers. Business Concern - Having an investment of Tk. 50,000 to Tk. 50, 00,000 excludingland & building and / or employing up to 25 workers. Manufacturing Concern - Having an investment of Tk. 50,000 to Tk. 1,50,00,000excluding land & building and / or employing up to 50 workers.Medium Enterprises Medium enterprises refer to those enterprises which are notany Public Limited Companies and which fulfill the following criteria- Service Concern-Having an investment of Tk. 50,00,000 to Tk. 10,00,00,000excluding land & building and / or employing up to 50 workers. Business Concern - Having an investment of Tk. 50,00,000 to Tk. 10,00,00,000excluding land & building and / or employing up to 50 workers. Manufacturing Concern - Having an investment of Tk. 1,50,00,000 to Tk.20,00,00,000 excluding land & building and / or employing up to 150 workers.SMEs in Bangladesh are also defined for purposes of industrial policies by Ministry of Industries (MOI). Historically, this definition has been in terms of fixed investment brackets, and a dual mode definition is in place, separate for manufacturingestablishments, and service establishments.6 According to the Industrial policy 2005,small and medium enterprises shall becategorized using the following definitions:a. Manufacturing enterprise: Small enterprise an enterprise should be treated as small if, in current market prices,the replacement cost of plant, machinery and other parts / components, fixtures, supportutility, and associated technical services by way of capitalized costs (of turn keyconsultancy services, for example), etc, excluding land and building, were to be up to tk.15 million; Medium enterprise -an enterprise would be treated as medium if, in current market prices, the replacement cost of plant, machinery and other parts / components, fixtures,support utility, and associated technical services by way of capitalized costs (such as turnkey consultancy services), etc, excluding land and building, were to be up to tk. 100million;b. Non-manufacturing enterprise: Small enterprise an enterprise should be treated as small if it has less than 25workers, in full time equivalents; Medium enterprise -an enterprise would be treated as medium if it has between 25and 100 employees.2.2.2 Overview of the SMEs in the economy of our country:There is a great interest in small and medium enterprises (SME) as a major plank of poverty reduction in Bangladesh. The government has formulated a comprehensiveindustrial policy 2005 by putting special emphasis for developing SMEs as a thrust sector for balanced and sustainable industrial development in the country to help deal with thechallenges of free Market economy and globalization.Some data with a national scope that are pertinent to characterizing SMEs in Bangladeshas of 2001-2003 are presented in Table 1. The highlight of this table is the following:There are some 78,440 private sector establishments of various sizes in Bangladesh

withsome 3.5 million workers employed in them. The urban Bangladesh accounts for some7 60% of units and 76% of employment in the private-sector enterprises. Rural Bangladeshaccounts for the rest. 93% of all units in Bangladesh belong in the SME category, i.e.have between 20 and 99 employees. However, SMEs account for only 44% of the totalemployment of the enterprise sector.Private companies limited by liability account for strictly a very small proportion of thetotal number of SMEs in Bangladesh.Table 1: Number of units and levels of employment in small and medium enterprises,2001-03 (All numbers are in thousands)DescriptionUrbanRuralTotalSmallMediumLargeSmallMediumLargeSmallMediumL arge No of units39.93.174.03629.01.29.8868.964.465.01% Of totalnumber of units50.94.05.138.11.61.1187.95.76.4Employment740.4211.51712.67516.885.85234.669 1257.2297.41947.3% Of totalemployment21.146.048.914.82.46.735.98.555.6Source: BBS Census of Enterprises, 2001/2003.Table 2 shows the average employment per establishment within each of the small andmedium classes for urban and rural Bangladesh in 2001/2003. The following results areworth highlighting. Let it be noted that these are weighted averages.First, the average employments per establishment for small establishments have values of between 17 and 20 workers across all industries. We find a similar a narrow range of between 65-69 employees for average employment size for medium enterprise.Table 2: Average head-count per establishment across Bangladeshs industries, 2001-038 (All numbers are inthousands)SmallMediumSMELargeAllFood and Tobacco18.665.121.0470.538.9Textile manufacturing19.166.221.9490.956.6Ready to wear apparels17.870.322.9512.7249.6Wood, leather & paper printing17.066.819.7373.938.0Chemicals and plastics19.167.022.7367.258.0 Non-metallic mineral products26.070.341.5196.883.4Fabricated goods, electrical & means of transport17.065.720.3282.535.1Mining and manufacture24.665.532.7227.758.9Various personal services17.566.019.9293.328.2Education/healthcare18.165.520.3292.426.7All industries18.266.721.2288.544.6Source: BBS Census of Enterprises, 2001/2003.Table 3 shows the percentage importance (in terms of both number of units and theemployment level) of SMEs in the overall world of enterprises. The numbers of SMEunits predominate the numbers of large enterprises: typically more than 90% of allenterprises are in the SME class-class. However, the percentages share of SMEs in totalemployment controlling for the location is almost always less than for the number of units.Table 3: The structure of industries in Bangladesh with respect to size of firms,2001-03(All numbers are in thousands)% Of establishments% Of total persons employedSmallMediumLargeSmallMediumLargeFood and Tobacco6.70.4.032.80.53.1Textile manufacturing14.20.91.26.01.313.2Ready to wear apparels1.80.21.70.70.320.1Wood, leather & paper printing2.90.20.21.10.21.4Chemicals and plastics1.70.10.20.70.21.7 Non-metallic mineral products1.60.90.90.91.34.0Fabricated goods, electrical &means of transport4.60.30.31.60.51.7Mining and manufacture0.2--0.10.10.2Various personal services13.61.20.89.31.85.1Education/healthcare31.11.50.812.62.25.2All industries87.95.76.435.98.555.6Source: SME Cell, using data from BBS Census of Enterprises, 2001/2003.9 Table 4 show that the relative importance of SMEs, both in terms of numericalimportance of establishments or employment, in the context of all enterprises withemployment size of exceeding 9 workers remains roughly similar across an urban-ruraldivide. The role of SMEs in production is therefore not affected by geography.Table 4: Proportion of SMEs in enterprise population, and in employment, byadministrative Divisions of Bangladesh, 2001-03 (All numbers are in thousands)DivisionsUrban (% Of SMEs in thenumber of urban

units)Urban (% Of SMEsemployment inurban areas)Rural ((% Of SMEs in thenumber of ruralunits)Rural (% Of SMEsemployment inrural areas)Dhaka 93.861.295.665.3Chittagong93.754.262.469.1Rajshahi95.365.997.981.3Khulna93.859.1 95.870.5Sylhet96.668.691.941.5Barisal95.769.497.882.7All divisions94.863.195.268.4Source: BBS Census of Enterprises, 2001/2003.Table 5 shows the percentage structure of small and medium enterprises, takenseparately, across a large number of industries. Like in the discussion of Table 3, weagain see the quantitative importance of food, beverage, textile manufacturing, non-metallic mineral products among manufacturing sub-sectors as providing the basis for small and medium enterprises in Bangladesh. Once again, the importance of services ishighlighted.Table 5: Industrial structure of small and medium enterprises in urban and rural Bangladesh, 2001-03 (All numbers are in thousands)SectorsProportion of smallenterprises in the totalProportion of mediumenterprises in the totalRuralenterprisesUrbanenterprisesRuralenterprisesUrbanenterprises10 Mining0.40.21.21.0Food and Tobacco16.69.37.49.0Textile MFG58.78.429.217.5Wearing apparels0.34.61.03.3Wood products0.22.60.41.8Tanning etc1.10.80.10.2Paper and printing0.13.30.43.4Chemicals and plastics0.44.20.74.6 Non-metallic mineral products6.11.147.93.1Fabricate products0.73.90.65.8Electrical equipment0.00.70.20.7Mfg. Transport equipment1.60.50.90.7Utility service0.25.01.93.0Construction0.10.50.61.8Trade2.44.90.54.4Eaterties1.47.10.35. 2Transport and Communication1.222.02.87.6Finance and Banking8.416.93.813.5Real Estate0.23.90.37.5Source: BBS Census of Enterprises, 2001/2003.2.2.3 Contribution of SMEs in the Economy:In view of present economic development effort in Bangladesh the SME sector plays animportant role. These are reflected in the following performance /activities of this sector: During the Fourth Five year plan, a total of 0.35 million jobs were created againstthe target of 0.4 million. Contribution of SME sector to GDP remained above 4.5% during the period from2000-01 to 2004-2005 despite decline in the amount of advances by the bankingsector to this sector. SME sector employs 25% of the total labour force. As a result, this sector is the present available sector for creation jobs. SME sector help alleviate poverty, increase income level of rural people and promote agro-industrial linkage in Bangladesh. SME sector requires lower energy supply, lower infrastructure facilities and thissector imposes less environmental risk. They contribute towards better utilization of local resources and skills that mightotherwise remain unutilized.11 Small industries being labour oriented are capable of generating moreemployment. They are necessary to maintain and retain traditional skills and handicrafts. They are the only medium for diversification of rural economy and for peacefuland concurrent socio-economic development of all classes of people.From the above discussion, we can say that SMEs are playing an important role in our economy in various ways.Current Status of SME Financing by Banks inBangladesh3.1. Current Status of SME Financing by Banks in BangladeshThe NCBs are disbursing significant amount of credit under various programs like SmallEnterprise Development Project, Self-help Credit Program, Projects for SmallEntrepreneurs, Special Investment Program and Agro-based Supervisory Industrial Creditetc. for the promotion and development of SMEs. The investment of private sector banksin financing SMEs remains insignificant in Bangladesh. Of all the private sector banks,BRAC Bank, Eastern Bank Ltd. (EBL), Prime Bank Ltd, Dhaka Bank Ltd, MercantileBank Ltd, Dutch-Bangla Bank Ltd, Islami Bank Bangladesh Ltd, IFIC Bank Ltd. have theleading role in SME financing. Bank of Small Industries and Commerce Bangladesh Ltd.(BASIC) is entrusted with the responsibility of providing medium and long-term loans for 12

promotion and development of small-scale industries. The memorandum and Articles of Association of the bank stipulates that 50% of loanable funds shall be used for financingsmall scale and cottage industries. The outstanding credit of BASIC stood at Tk158.9crore at the end of December 2001 for small and cottage industries sector that rose toTk178.7 crore by 12.46% at the end of December 2002.Table-6 gives an idea of the role of small and medium enterprises as destinations for bank credit in 2004 and 2005. Bangladeshs classification of bank advances lumps mediumenterprises with the large enterprises, while small units are lumped with cottage-basedunits. As such, unfortunately, it is not possible to speak of the access to finance issues for SMEs per se. We know however separately that SCIs corresponds to more than 99% of all productive establishments in Bangladesh. Out of 3.8 million establishments of all kinds in Bangladesh, only 10,798, or just about0.3% happen to fall in either medium or large establishment size class based onemployment size. The percentage is even much lower in manufacturing or trade---thetwo sub-sectors from which the case studies in this paper are drawn. And yet, suchstaggering smallness of the proportion of medium and large establishments is coupledwith a preponderance of large and medium enterprises in total credit disbursements fromthe banking system. It is quite safe to assume that of total credit disbursed to large-and-medium class, an overwhelming majority ---perhaps, 80% or so---is arrogated by largeestablishments. It becomes quickly clear that SMEs, for all their numerical superiorityamong establishments, receiving bank credit is the exception and not the rule.Why is the access to finance for the SMEs in Bangladesh not even based on neutralground, not to speak of rosy or good? This is because the issue of bank credit is based onthe ownership of collateral: bankers insist on immoveable property for collateral. Onlyabout 15-20% of the owners of SMEs own any immoveable property at all in which the bankers are interested. This automatically excludes about 80% of SMEs from beingamong the privileged client of a bank loan.Table 6: Percentage distribution of advances made by PCBs, FCBs and DNCBs in2005 and 2004: By receiving sectors(Numbers are percentages; last row shows the disbursements in Tk. crores)13 NAME OFSECTORS AND TYPEOF FINANCINGPRIVATECOMME-RCIALBanks,2005PRIVATECOMM-ERCIALBanks,2004FOREIGNCOMM-ERC IALBanks,2005FOREIGNCOMM-ERCIALBanks,2004DENATIONALISEDCOMM-ERCIALBanks,2004DENATIO- NALISEDCOMM-ERCIALBanks, 2005Agriculture0.80.60.10.156.710.8Large & Medium industry14.011.410.911.117.921.1SCI0.7.6.6.6.91.1WC large/medium industry17.214.427.226.37.117.9WC for SCI.9.71.41.3.4.9Construction8.715.70.90.81.66.7Transportation1.87.82.21.00.20.8 Storage0.21.60.00.03.01.3Trade financing46.639.024.921.27.730.2Miscellaneous9.18.231.737.64.69.3Total100.0100.0 100.0100.0100.0100.0Total advances53029402987819.866291063737662 Note: SCI stands for small and cottage industry; WC stands for working capitalSource: All estimates are based on trade estimates, and not based on detailed survey(s).In Banglaesh, some banks have come forward to finance SMEs for their development, butmany of them do not have good experience regarding loan servicing in this sector. In thenext page, small and cottage industry credit position in overall industrial credit of SonaliBank has been shown.Table 7: Small and Cottage Industry Credit Position in overall industrial credit of Sonali Bank as on 2003 (Taka in crore)INDUSTRYSMALL & COTTAGEINDUSTRYSCI CREDIT AS % OFICSanctioning1858.56523.0828.14Disbursement1258.57456.6836.28Recoverable1121.8 5556.6849.62Recovered427.84220.1251.44Overdue694.01336.5648.49Outstanding2260.00 685.3930.32Source: Bari, M. A. & Jamal, Sabera A. Reading materials of the course on Financing of SME, BIBM From the above table, we found that the recovered amount of credit is very low i.e. therecovery rate of disbursement is very poor. Small and Cottage Industry sector is facing ahuge overdue of credit that are disbursed to this sector.14

Scheduled banks in Bangladesh continued to provide credit to the small-scale industrialsector. But it is evident that deployment of resources in large and SME sector in therecent years is disproportionate compared to their relative contribution to GDP. Table 8shows the disproportionate picture.It shows from the table, that deployment of bank credit to large industries increasedgradually from 32.40% of total advances in 2000-01 to 39.60% of total advances in 2004-05. But advances to Small industries rose very slightly from 1.70% to 2.00% althoughcontribution of Small industry sector to GDP remained well above 4.5% during the same period.Table 8: Contribution of industries in GDP and their relative financing by banks (In percent)Year Contributionof industryto GDPContributionof largescaleindustry toGDPContributionof smallscaleindustry toGDPScheduled banksadvances toindustryScheduled banksadvances tolarge scaleindustryScheduled banksadvances tosmall scaleindustry2000-2001 15.4011.064.5434.1032.401.702001-2002 15.9011.414.5134.9033.201.702002-200316.6012.044.5636.1034.301.802003-200417.101 2.514.5938.4036.501.902004-200517.8013.194.6141.6039.602.00Source: i) Scheduled Bank Statistics, Bangladesh Bank different issues. ii) Economic Survey, Ministry of Finance, Govt. of the Peoples Republic of Bangladesh, different issues. iii) SME Foundation (Chowdhuryand Miah,2006)Outstanding advances by Denationalized Commercial Banks (DNCBs) depicted a risingtrend. The following table shows the amount of outstanding advances of DNCBs duringthe last few years.Table 9: Amount of outstanding advances of DNCBs during the last few years(Tk in million)Sonali BankJanata BankAgrani BankRupali Bank 200620072008*200620072008*200620072008*200620072008*Industrial sector 40533321180123412954130820422137115158252513518Large &mediumindustry315025311288232729121300153112986205645219350715 Small &cottageindustry9037905131442 8511839531183211Source: Resume of Activities of Banks and Financial Institutions, Ministry of Finance, Govt. of the PeoplesRepublic of Bangladesh, different issues.3.2 Comparative analysis of SME Credit Scheme of Six Different Bankscurrently available in Bangladesh3.2.1 Loan documents needed for SME financing by banksCriteria for loan selection are similar among financial institutions. Most frequentlyrequested documents by financial institutions as a part of the loan application processinclude: Personal guarantee Business plan Appraisal of assets to be financed Purchase agreement Cash flow projection Personal financial statement Formal application for financing Business financial statement Tin certificate Citizenship certificate Bank solvency certificate Vat certificate Export license3.2.2 About the Sample Banks3.2.2.1 Dhaka Bank Ltd.The Bank started branch operations at Belkuchi Sirajgonj in April 2003. Prior to theBanks intervention, the weaving community did not have the financial strength to stock their products till Eid ul Fitr when the annual sale takes place. Traders were takingadvantage to the situation by buying up entire productions at low prices and liquidatingstocks just before Eid. With financial services from Dhaka Bank Limited, the weavers16 have converted to power looms, significantly increased profitability and reduced theinvolvement of middlemen. Already they have identified several clusters and are workingon improving access to finance within these clusters.3.2.2.2 Dutch-Bangla Bank Ltd.Dutch-Bangla Bank Limited (the Bank) is a scheduled commercial bank. The Bank wasestablished under the Bank Companies Act 1991 and incorporated as a public limitedcompany under the Companies Act 1994 in Bangladesh with the primary objective tocarry on all kinds of banking business in Bangladesh. The Bank is listed with DhakaStock Exchange Limited and Chittagong Stock Exchange Limited.DBBL a Bangladesh European private joint venture scheduled commercial bank commenced formal operation from June 3, 1996. The Bank commenced its banking business with one branch on 4 July 1996. The bank

opened SME windows in 20013.2.2.3 Prime Bank Ltd.As per decision of the Board of Directors of Prime Bank Ltd. in its 78th meeting held on17.11.1999, Small & Medium Enterprise (SME) Cell has already been established atHead Office under the Credit Division. Now the bank can replicate quality anywhere in the world. So, the competitivedifferentiation comes from swiftness to market and innovation. And in this regard, smallcompanies right down to the individual can beat big bureaucratic companies ten out of tentimes. 3.2.2.4 Mercantile Bank Ltd.Mercantile bank is a third generation commercial bank. It has opened SME windows in1999 to encourage the small business activities.3.2.2.5 Eastern Bank Ltd.Small and Medium Enterprises (SME) in Bangladesh contributed 25% of gross domestic product (GDP) and 80% of the industrial jobs of the country in 2004. According to ADB,the country s estimated 6 million SMEs and micro enterprises firms of less than 100employees have a significant role in generating growth and jobs. This is a sector that hasits own distinct needs and requires specialized focus. Eastern Bank Ltd. (EBL) haslaunched SME Banking in early 2005 with this view in mind.Eastern Bank Ltd. Services in SME:17 Provide SMEs with easy access to financing.Deliver products that ensure superior returns to our customers.Orient customers with industry trends, regulatory issues etc, for their success.Value long-term relationship banking.3.2.2.6 BRAC Bank Ltd.The BRAC Bank ltd started its operation in 2001. The SME portfolio includes Prothoma Rin Exclusively designed for women Anonno Rin This is a small-scale loan Apurbo Rin In order to help our SME Supplier Finance3.2.3 Criterion for Sample Selection :The banks for comparative analysis have been chosen in the basis of the followingcriterion:3.2.3.1 Loan size1.Prime Bank Ltd Taka 1 Lac to Taka 75.00 Lacs2.Dhaka Bank Ltd - Taka 0.50 Lac to Taka 50.00 Lacs3.Eastern Bank Ltd- Taka 1 Lac to Taka 300.00 Lacs4.Mercantile Bank Ltd- Taka 0.50 Lac to Taka 2.00 Lacs5.Dutch-Bangla Bank Ltd- Taka 3 Lac to Taka 50.00 Lacs6.BRAC Bank Ltd- Taka 3 Lacs to Taka 30.00 LacsAmong the banks EBL offers the highest loan amount to the customers where as theBRAC bank offers the lowest loan to its customers.3.2.3.2 Rate of interest1.Prime Bank Ltd 13% to 15% p.a.2.Dhaka Bank Ltd - 12% to 13% p.a.3.Eastern Bank Ltd- 14% to 15% p.a.4.Mercantile Bank Ltd- 15% p.a.5.Dutch-Bangla Bank Ltd- 13% to 15% p.a.6.BRAC Bank Ltd- 18% to 24% p.a.18 In terms of interest rate the Dhaka Bank Ltd offers the lowest rate of interest to itscustomers. The highest rate is charged by BRAC Bank Ltd. The Mercantile Bank Ltd.have the only bank that offers fixed rate for any loan customers.3.2.3.3 Loan processing fees1.Prime Bank Ltd .50 % of the loan amount.2.Dhaka Bank Ltd - .00 % of the loan amount.3.Eastern Bank Ltd- not available4.Mercantile Bank Ltd- not available5.Dutch-Bangla Bank Ltd- not available6.BRAC Bank Ltd- .50 % of the loan amountAll the banks do not provide data about loan processing fees to their customers. The prime bank and BRAC bank limited only charges .50% as loan processing fess3.2.3.4 Period of loan1.Prime Bank Ltd 1 to 5 years.2.Dhaka Bank Ltd 1 to 3 years.3.Eastern Bank Ltd- up to 1 year.4.Mercantile Bank Ltd- up to 2 years.5.Dutch-Bangla Bank Ltd- 1.5 to 5 years.6.BRAC Bank Ltd- 1 to 3 years.Among the banks the highest loan maturity date is offered by DBBL and Mercantile Bank Limited offers the lowest maturity period3.2.3.5 Mode of Finance1.Prime Bank Ltd Term loan and working capital loan2.Dhaka Bank Ltd Term loan and working capital loan3.Eastern Bank LtdOnly working capital loan4.Mercantile Bank Ltd- Only term loan5.Dutch-Bangla Bank Ltd- Only term loan6.BRAC Bank Ltd- Only term loanAll the Banks providing SME financing facilities do not provide long-term loan to itscustomers. Among the banks Prime and Dhaka Bank limited both provides term loan andworking capital loan to their customers. Other bank either provides term loan or

workingcapital loan to its customers.19 3.2.3.6 ManagementOverall the management of the banks engaged in SME banking is efficient and havediverse knowledge of banking sector. BRAC bank has initiated to provide training of staffs for well managing the SME customers.3.2.4 Portfolio Size of different banks in SME Sector(Tk in crore)Serial NoName of the BankPortfolio Size1 BRAC Bank Ltd.950.002 Eastern Bank Ltd.300.003 Prime Bank Ltd.108.444 Dutch-Bangla Bank Ltd.16.385 Mercantile Bank Ltd.6.636 Dhaka Bank Ltd.5.72Total1,387.17Source: Annual Repots of Prime Bank Ltd., Dhaka Bank Ltd., Eastern Bank Ltd.,Mercantile Bank Ltd., Dutch-Bangla Bank Ltd. and BRAC Bank Ltd. 2007From the table we can see that the BRAC bank has the highest investment in the SMEsector followed by Eastern Bank Ltd. in second position. While the Prime Bank Ltd.,Dutch-Bangla Bank Ltd., Mercantile Bank Ltd. and Dhaka Bank Ltd. are third, forth, fifthand sixth respectively. Graph 1: Portfolio Size of Six different banks in SME Sector Portfolio Size68.5%21.6%0.5%7.8%0.4%1.2%Brac Bank Ltd.Dhaka Bank Ltd.Dutch-Bangla Bank Ltd.Eastern Bank Ltd.Mercantile Bank Ltd.Prime Bank Ltd.20 In the next page the following points are analyzed in the tabular form for the better understanding. Comparative analysis of SME credit scheme of six different banks (Policy part)for year the 2007. Comparative analysis of SME credit scheme of six different banks (Example of aloan) for year the 2007. Comparative analysis of SME credit scheme of six different banks (Performance part) for year the 2007. Year 2005Table 10 COMPARATIVE ANALYSIS OF SME CREDIT SCHEME OF DIFFERENT BANKS (Policy part) Year 2007ParticularsPrime Bank Ltd.Dhaka Bank Ltd.EasternBank Ltd.MercantileBank Ltd.Dutch-BanglaBank Ltd.BRAC Bank Ltd.Loan SizeTk.1.00 Lac toTk.75.00 LacsTk.0.50 Lac toTk.50.00 LacsTk.1.00Lac toTk.300.00LacsTk.0.50 Lac toTk.2.00 LacsTk.3.00 Lacs toTk.50.00 LacsTk.3.00 Lacsto Tk.30.00LacsRate of Interest13.00% -15.00% p.a.12.00%-13.00% p.a.14.00%-15.00% p.a.15.00% p.a.13.00% -14.00% p.a.18.00% -24.00% p.a.LoanProcessingFee0.50% of theLoan amount(once for thewhole period)1.00% of theLoan amount(once for thewhole period)---------------------------0.50% of theLoan amount(once for thewhole period)Risk Fund---------1.00% - 2.00% p.a. of theLoan amount---------1.00% of theLoan amount(once for thewhole period)------------------SupervisionFee1.00% - 2.00% p.a. of theLoan amount---------1.00% of theLoan amount(once for thewhole period)------------------UtilizationFee0.75% p.a.(SemiannuallyCharged)1.50% .p.a.(QuarterlyCharged)-------------------------------------Period of Loan01 Year to 05Year 01 Year to 03Year Up to 01Year Up to 02 Years1.5 Year to 05Year 01 Year to 03Year Mode of Term Loan as Term Loan as Only Only Term Loan Only Term Loan Only Term21 Financewell asWorkingCapital Loanwell as WorkingCapital LoanWorkingCapitalLoanLoanPastExperience of the Owner02 Years03 Years02 Years02 Years02 Years02 YearsSecurity:a) PrimaryPersonalGuaranteePersonalGuaranteePersonalGuaranteePersonalGuaranteePerso nalGuaranteePersonalGuaranteeb) SecondaryCollateralSecurity provisiondepends oncase-to-case basis.Up to Tk.5.00lacs CollateralFree(Case to Case)Above Tk.5.00lacs CollateralMandatoryCollateralSecurityMandatory---------------CollateralSecurityM andatory(Forced SaleValue 1.25Times of Loanamount)Up to Tk.8.00Lac withoutCollateralSecurity &aboveTk.8.00 LacwithCollateralSecuritySource: Primary sources (Data are collected from banks through personal communication)Table - 11 COMPARATIVE ANALYSIS OF SME CREDIT SCHEME OF DIFFERENT BANKS- (EXAMPLE OF A LOAN)Year 2007Exampleof a LoanPrime Bank Ltd.Dhaka Bank Ltd. Eastern Bank Ltd.MercantileBank Ltd.Dutch-BanglaBank Ltd.BRAC Bank Ltd.PrincipalAmountTk.1.00 LacTk.1.00 LacTk.1.00 LacTk.1.00 LacTk.1.00 LacTk.1.00 LacPeriod of Loan01 Year01 Year01 Year01 Year01 Year01 Year No. Of

Installment121212121212InstallmentSizeTk.8,978.00Tk.8,931.00Tk.9,025.00Tk.9,025. 00Tk.8,978.00Tk.9,168.00TotalInstallmentPaymentTk.1,07,736.00Tk.1,07,172.00Tk.1, 08,300.00Tk.1,08,300.00Tk.1,07,736.00Tk.1,10,016.00LoanProcessingFeeTk.500.00Tk. 1,000.00-------------------------------Tk.500.00Risk Fund---------Tk.2,000.00-----------Tk.1,000.00---------------------SupervisionFe e---------Tk.2,000.00-----------Tk.1,000.00----------------------UtilizationFeeT k.750.00Tk.1,500.00--------------------------------------------TotalPaymentTk.1, 08,986.00Tk.1,13,672.00Tk.1,08,300.00Tk.1,10,300.00Tk.1,07,736.00Tk.1,10,516.00 Source: Primary sources (Data are collected from banks through personal communication)22 Table 12 COMPARATIVE ANALYSIS OF SME CREDIT SCHEME OF DIFFERENT BANKS (PERFORMANCE PART)Year 2007PerformancePrimeBank Ltd.DhakaBank Ltd.EasternBank Ltd.MercantileBank Ltd.Dutch-BanglaBank Ltd.BRACBank Ltd.Year of Operation200120012001199920012001Disbursement (Upto 31.03.07)108.44Crore5.72Crore300.59Crore6.63Crore16.38Crore950.00CroreRate of Recovery100%100%97%79%99%98%(Actual92%) No. Of Manpower atH/O Level020302030324Source: Primary sources (Data are collected from banks through personal communication)23 Why Banks are Not Interested in Financing theSMEs4.1 Why Banks are not interested in financing the SMEsIn Bangladesh, several Banks are financing the SME sector but as mentioned earlier,many of them do not have good experience regarding the loan servicing in this sector.Banks lend the projects for making profit, but if the principal amount does not come back to the bank, then there will surely be adverse affect in the balance sheet of the bank. Thisis because of banks general function. A Banks general function is intermediation between borrower and lender. Bank takes deposit from the surplus unit i.e. lender anddeploy fund or credit to the deficit unit i.e. borrower. It is very clear that the amount that a bank provides to the deficit units may not be its own. So, it must repay the amount to thedepositors on demand. But if the disbursed amount does not come back to the bank, thenit may incur loss.This is the reason why banks are so conscious while lending any project. In recent years,it is observed that there are many defaulters in the SME sector. Many banks are facingthis default problem today. Still many banks are willing to invest in this sector.Though mentioned earlier, from the table 07, we see that Sonali Banks credit recoveryrate from Small and Cottage Industry sector is only 51.44% compared to the IndustrialCredit. The bank has a huge outstanding of credit in the SCI sector.Actually this is the main reason behind why banks are not interested in financing in SMEsector. Banks feel unsecured in financing this sector. Because the credit recovery ratefrom this sector is not good enough.4.2 Problems for financing SMEs:SME sector faces a number of problems (Ahmed, 2000) to facilitate institutional credit.These problems were looked into from the perspective of both borrower and lenders.24 4.2.1 Problems from borrowers perspective: Access to loan Collateral Complexity increases cost of loan Extremely short grace period Absence of comprehensive guidelines Longer loan processing time and associate cost of uncertainty Lack of basic infrastructure, inputs, managerial efficiency and inadequate sanction4.2.2 Problems from lenders perspective: Lack of information on loan application requirement among the SME loan seekers Absences of an appropriate and clear-cut legal framework for enforcing quick recovery.In addition, the following problems are identified in the SME sector:a.Inadequate allocation of fund for public sector. b.Lack of co-ordination among lending agencies.c.Shortage of long-term credit.d.Unstable share market.e.Lack of technological information.f.Lack of uniform delivery model and training.g.Absences of utilization of BSCIC services of NCBs for utilization of surplusfund.h.Lack of technology assessment, innovation and adaptation of technology.i.Lack of marketing effort and exploring new markets. j.Competitive product market because of market economy.As we see from the pints noted above, borrowers of SME loans are facing some severe problems that are discussed below:4.3.1 Access to loan:SMEs encounter great difficulties while

rising fixed and working capital because of thereluctance of banks to provide loans to SMEs. Banks are shy to lend to SMEs because of high processing and monitoring costs of loans to SMEs. The loan application forms for investment financing from banks are long, tedious, and redundant. Since the removal of the interest rate subsidy without the removal of interest band, financial institutions find25 little incentive to lend to SMEs. SMEs find it difficult to use non real estate assets ascollateral to obtain loans from the banks. In the past, the government has attempted to provide SMEs with access to finance through targeted lending. There was a governmentdirective that 5 per cent of a bank s loan portfolio be set aside for small and cottageindustry financing. A new bank, namely, the Bank of Small Industries and CommerceBangladesh Ltd (BASIC) was set up in 1988 with the objective of financing the small andcottage industries. There were also attempts to channelize fund received frominternational agencies such as the Asian Development Bank (ADB) to the sector through private banks. There were provisions of favorable debt equity ratio, special interest ratesand credit guarantee scheme. The central bank also issued directives to both public and private commercial banks regarding working capital loans, use of standardizeddocumentation procedure and time limits for credit sanctioning and loan disbursement.4.3.2 Collateral:The main problem of SMEs is that, they do not have enough collateral for getting fundfrom the bank. The banks have some regulation of taking a minimum amount of collateralagainst credit, but many small and medium entrepreneurs cannot fulfill the requirement.Thats why banks are also reluctant to provide credit to them, as it would be violation of their policy regulation.4.3.3 Lack of experience:Small and Medium Industry Entrepreneurs, in Bangladesh, have lack of experience in the business field. They do not have any training programs and they do not even have any business exposure. As a result, they cannot follow the right way of entrepreneurship in therelated field. So they incur loss in many cases.4.3.4 Extremely short grace period:In our country, grace period of repaying any credit is very low. According to the SMEentrepreneurs, almost all the Banks structured the loan in such a way that entrepreneurshave to start the repayment of credit within a very short time after disbursement of credit.This is really a big problem for the entrepreneurs because the entrepreneurs are bound togenerate profit instantly to fulfill the Banks requirement. But this is impossible, as a business needs a minimum time to be in a stable position and to generate profit.4.3.5 Cost of loan:Another problem is that extremely high interest rate for the entrepreneurs. Manyentrepreneurs is having problem because of high interest rate. Banks, in many cases,26 maintain high spread as a result there remains reckless competition of making more profitfrom the Banks perspective. And, sufferers are general entrepreneurs who borrow fromthe Bank.4.3.6 Absence of comprehensive guidelines:Another problem is that, there is an absence of comprehensive guidelines in the SMEsector. Most of the SMEs do not have any guidelines for controlling their business. Theydo not maintain any deliberate procedure in managing the enterprise; rather they go onwith the time-to-time changes in the business operation. As a result they cannot generateexpected profit from the business and fail to payback credit to the banks. Hence, Banksare reluctant to provide credit to them.4.3.7 Longer loan processing time and associate cost of uncertainty:Credit in this sector requires longer processing time. Though it is Small and MediumEnterprise Sector, processing time for loan is not short. As a result banks are unwilling toenter in this sector. Moreover, associate cost of uncertainty is also another issue and banksdo not want their funds to be

invested in an area where recovery of the fund is uncertain.4.3.8 Lack of basic infrastructure, inputs, managerial efficiency:Most of the SMEs do not have basic infrastructure of their own i.e. there is a lack of planned infrastructure in this sector. Inputs of the production are also not planned andinsufficient. Moreover, managerial efficiency is also a big issue in this regard. If there is poor managing efficiency, then the organization will never prosper in associate field. For better performance, good managing efficiency is needed.4.3.9 Inadequate sanction:And, inadequate sanction of loan should also be stated here. The loan provided to thissector is inadequate. As almost all SMEs do not have enough capital to start the business,they need adequate amount of fund in order to support the unexpected loss initially. Butas they do not get that, they cannot absorb the initial loss and eventually fail to payback the bank credit.In addition, some problems identified as these are from lenders perspective:4.3.10 Lack of information on loan application requirement among theSME loan seekers:As credit application requires availability adequate information, most of the SMEs do nothave adequate information. They do not maintain their financial statement appropriately27 of the business; even they do not feel the necessity of doing so. Thats why Banks are notgetting appropriate information regarding their business and themselves as well.4.3.11 Absence of an appropriate and clear-cut legal framework forenforcing quick recovery:Even Banks do not have appropriate legal framework in order to recover their disbursedcredit. Their recovery framework is not clear-cut as a result they fail to control theservicing of loan.These are the reasons why Banks are reluctant to finance the SMEs in Bangladesh.Minimum Requirements for SME Financingaccording to Bangladesh Bank5.1. Minimum Requirements for SME Financing according toBangladesh Bank:Apart from the specific regulations given under each mode of financing separately, the banks while undertaking Small Enterprise financing should also follow generalrequirements laid down here. It may by noted that these are the minimum requirementsand should not in any way be construed to restrict the role of the management processesthrough establishing comprehensive credit risk management systems appropriate to their type, scope, sophistication and scale of operations. The Board of Directors of the banksare required to establish policies, procedures and practices to define risks, stipulateresponsibilities, specify security requirements, design internal controls and then ensurestrict compliance with them.5.2 Pre-Operation:Before embarking upon or undertaking Small Enterprise financing, the banks shallimplement/follow the guidelines given below. The banks already involved in SmallEnterprise financing will ensure compliance with these guidelines within six month of thedate of issuance of Small Enterprise Financing Prudential Regulations.28 Banks shall establish separate Risk Management capacity for the purpose of SmallEnterprise financing, which will be suitably staffed by personnel having sufficientexpertise and experience in the field of consumer finance/business.The banks shall prepare comprehensive Small Enterprise credit policy duly approved bythe Board of Directors, which shall interalia cover loan administration, includingdocumentation, disbursement and appropriate monitoring mechanism. The policy shallexplicitly specify the functions, responsibilities and various staff positions, powers/authority relating to approval/sanction of consumer finance facility.For every type of Small Enterprise finance activity, the bank shall develop a specificProduct Program Guide (PPG). The program shall include the objective/quantitative parameters for the eligibility of the borrower and determining the maximum permissiblelimit per borrower. The PPG will also

indicate the maximum permissible exposure bankswill take against each product.Bank shall put in place and efficient computer based MIS for the purpose of SmallEnterprise finance, which should be able to effectively cater to the needs of SmallEnterprise financing portfolio and should be flexible enough to generate necessaryinformation reports used by the management for effective monitoring of the bank sexposure in the area. The MIS is expected to generate the following periodical reports:Reports interrelating delinquencies with various type of customers of various attributes of the customers to enable the management to take important policy decisions and makeappropriate modifications in the lending program.Quarterly product wise profit and loss account duly adjusted with the provision onaccount of classified accounts. These profit and loss statements should be placed beforethe Board of Director in the immediate next Board Meeting. The branches of foreign banks in order to comply with these conditions shall place the reports before a committeecomprising of Chief Executive Officer, Chief Finance Officer and Head of SmallEnterprise.The banks shall develop comprehensive recovery procedures for the delinquent loans.The recovery procedures may vary from product to product. However, distinct andobjective triggers should be prescribed for taking pre-planned enforcement/recoverymeasures.29 The institutions starting consumer financing are encouraged to `impart sufficient trainingon an ongoing basis to their capability regarding the various aspects of Small Enterprisefinancing.The banks shall prepare standardized set of borrowing and recourse documents (dulycleared by their legal counsels) for each type of Small Enterprise financing.5.3 Operations:Small Enterprise financing, like other credit facilities, must be subject to the Bank s risk management process setup for this particular business. The process may include,identifying source of repayment and assessing customer ability to repay his/her pastdealings with the bank, the net worth and information obtained from a Credit InformationBureau approved by Bangladesh Bank.At the time of granting facility under various modes of Small Enterprise financing, banksshall obtain a written declaration from the borrower divulging details of various facilitiesalready obtained from other institutions. The banks should carefully study the detailsgiven in the statement and allow fresh finance/limit only after ensuring that the totalexposure in relation to the repayment capacity of the customer does not exceed thereasonable limits as laid down in the approved policies of the banks. The declaration willalso help banks to avoid exposure against an enterprise having multiple facilities fromdifferent institutions.Internal audit and control function of the bank, apart from other things, should bedesigned and strengthened so that it can efficiently undertake an objective review of theSmall Enterprise finance portfolio from time to assess various risks and possibleweaknesses. The internal audit should also assess the adequacy of the internal control andensure that the required policies and standards are developed and practiced. Internal auditshould 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 banks shall ensure that their accounting and computer systems are well equipped toavoid charging of mark-up. For this purpose it should be ensured that the mark-upcharged on the outstanding amount is kept separate from the principal.30 The banks shall ensure that any repayment made by the borrower is accounted for beforeapplying mark-up on the outstanding amount.5.4 Disclosure/Ethics:The banks must clearly disclose all the important terms & conditions. Fees, charges and penalties, which are internal including interest rate, pre-payment penalties

and theconditions under which that apply. For ease of reference and guidance of their customers, banks are encouraged to publish brochures regarding frequently asked questions. 31 Prudential Regulations for SME Financing ByBangladesh Bank 6.1 Prudential Regulations for SME Financing By BangladeshBank:Prudential regulation establishes the outside limits and constraints placed on banks toensure the safety and soundness of banking system. They are the key elements to prevent,limit or stop the damage caused by poor management. The establishment of anappropriate regulatory framework is essential to ensure that government supervisors cancarry out and enforce their responsibilities. In the following prudential regulation of Bangladesh Bank has been given by which supervisors can smoothly check and balancethe operation of SME in Bangladesh.Regulation -16.1.1 Source and capacity of repayment and cash flow backed lending:Banks shall specifically identify the sources of repayment and asses the repaymentcapacity of the borrower on the basis of assets conversion cycle and expected future cashflows. In order to add value, the banks must assess conditions in the particular sector /industry they are lending to and its future prospects. The banks must be able to identifythe key drivers of their borrowers businesses, the key risks to their businesses and their risk mitigates.The rationale and parameters used to project the future cash flows shall be documentedand annexed with the cash flow analysis undertaken by the bank. It is recognized a largenumber of SMEs will not be able to prepare future cash flows due to lack of sophistication and financial expertise. It is expected that in such cases banks shall assistthe borrowers in obtaining the required information and no SE shall be declined access tocredit merely on this ground (for details, refer Regulation 10).32 Regulation -26.1.2 Personal guarantees:All facilities to SMEs shall be backed by the personal guarantees of the owners of theSMEs. In case of limited companies, guarantees of all directors other than nomineedirectors shall be obtained.Regulation -36.1.3 Per party exposure limit:The minimum and maximum exposure of a bank on a single SE shall remain within therange of Tk 2 lac and Tk.50 lac respectively subject to the following: In case of working capital finance - Maximum up to 100% of the net requiredworking capital or 75% of the sum total of inventory and receivables whichever islower. In case of fixed assets purchase - Maximum up to 90% of the purchase price.Regulation -46.1.4 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 TOTALPORTFOLIO OF SE ADVANCESMAXIMUM LIMITa. Below 5%10 times of equity b.Below 10%6 times of the equityc.Below 15%4 times of the equityd.Up to and above 15%Up to the equitySource: Prudential Regulations by Bangladesh Bank for SME Financing, Bangladesh Bank Quarterly April-June 2006Regulation -533 6.1.5 Limit on clean facilities:In order to facilitate growth of smaller loans, banks are free to determine securityrequirements for loans up to Tk.5 lac. Guidelines for security requirements for loans of amounts more than Tk.5lac are given in Regulation-6.Regulation - 66.1.6 Securities:Consequent to the regulation stated in Regulation -5, facilities provided to SEs shall besecured by banks as follows:For loan amounting Tk. 2 lac to Tk. 5 lac As a minimum banks must take charge over assets being financed.For loan amounting Tk. 5 lac to Tk. 50 laca)Hypothecation on the inventory, receivables, advance payments, plant &machineries. b)Equitable mortgage over immovable properties with registered Power of Attorney.c)Personal Guarantees of Spouse/Parents/other family members.d)One third party personal guarantee,e)Post dated cheques for each installment and one undated cheque for full loanvalue including full

interest.Regulation - 76.1.7 Loan documentation:For all facilities, banks must obtain (as applicable) and not limiting to followingdocuments before disbursement of loan can be made:1)Loan Application Form duly signed by the customer.2)Acceptance of the terms and conditions of Sanction Advice.3)Trade License.4)In case of Partnership Firm:34 Case Study on SME Banking DownloadPrintMobileCollectionsReport DocumentReport this document?Please tell us reason(s) for reporting this document Spam or junk Porn adult content Hateful or offensiveIf you are the copyright owner of this document and want to report it, please follow these directions to submit a copyright infringement notice.Report Cancel This is a private document. Info and Rating Reads:17,053Uploaded:06/24/2009Category:Uncategorized.Rated:(2 Ratings)Copyright:Attribution Non-commercial ABHIJIT PATHAKShare & Embed Related Documents PreviousNext p. p. p. p. p. p. p. p. p. p. p. p. p. p. p. p. p. p. p. p. p. p. p. p. p. p. p. p. p. p. p. p. p. p. p. p. p. p. p. p. p.

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