06.Final Thesis

Chapter-1: Introduction1.1: IntroductionSmall and medium enterprises (SMEs) all over the world have been playing a crucial role in promoting economic development as well as industrial production (Akterujjaman, 2010). In particular, SMEs provide the necessary foundations for sustained growth and rising income in the less developed and transitional economies. SME financing is a topic of significant research interest to academics and an issue of great importance to the policymakers of Bangladesh and around the world (Ahmed, M. U. 2000). Economic as well as technical and social arguments warrant the promotion of SMEs as they create large scale, low-cost employment opportunities, use locally available inputs and technologies, mobilize small and scattered private savings, develop entrepreneurship, and correct the regional imbalance in development that exists in developing countries (Akterujjaman, 2010). Despite all these potentials, SMEs are disappearing, abandoning the potential role they could have played in economic development. Several studies have identified the major obstacles that include, but not limited to financing, infrastructure facilities, taxes and regulations, and stability in policies. Access to financing continues to be one of the most significant challenges for the growth and survival of SMEs especially innovative ones (OECD, 2004). This paper focuses on the financial constraints that SMEs face in BRAC Bank. In Bangladesh, commercial banks are not interested to finance SMEs because of the high risk and high supervision cost associated with this type of financing. Absence of sound collateral puts SMEs at a relative disadvantage. It is generally recognized that SMEs have a significant role in employment generation, poverty reduction and overall economic growth, especially for a developing economy like Bangladesh. SMEs are typically labor-intensive industries with relatively low capital intensity.

1.2: Origin of the Research: As a mandatory part of the MBA program, all the students of Business faculty of Jahangirnagar University have to undergo a research program with an objective to gain practical knowledge about business world. After this program, the students have to submit a thesis paper.

1.3: Objectives of the StudyThe main objective of the study is to find out the major problems and prospects of SME loan management of BRAC Bank Ltd. However, the specific objectives are as follows:

1. To find out the problems and prospects in designing proper financial products for the SMEs.2. To find out the banks reasons for reluctance to providing loans to the SMEs.3. To suggest recommendations to overcome the problems related to SME loan management.

1.4: Scope of the research: Scope of the study is quite clear. SME Department is dealing with all types of Small and Medium loan activities in the bank, opportunities are there to learn other aspects of SME matters. Concept of SME and its impact in overall economy of Bangladesh Entrepreneurship development situation through SME banking Importance of SME banking in the context of Bangladesh Small entrepreneurs of rural-urban spectrum are enjoying the BRAC Bank loan facility. Virtual banking concept through SME banking

1.5: Limitations: I have faced the following barriers while preparing the report. 1. Data from BRAC Bank Ltd., Head Office is highly confidential for the outside people and I had no authority to use the core banking software (Finacle). 2. BRAC Bank Ltd. has very recently migrated from Millennium Banking System to Finacle. Thats why all the employees are very busy with their works; sometimes I had to wait more than one week for a piece of information. 3. I could get few more time to spend in collecting data for preparing my thesis paper.

Chapter-2: Methodology2.1 Methodology of the StudyMethodology describes working procedure of the study in a systematic manner. The study is a qualitative one supported by quantitative data wherever necessary. The quality of the research depends on a well designed methodology to achieve goals and objectives easily. A dictionary of Social Science defined, "Methodology is the systematic and logical study of the principles guiding scientific investigation" (Hamid, 1998). This research comprises four major stages of work: Conceptualization Collection of Primary and secondary data from different source Analysis of the collected data Recommendation and conclusion

The methodology of the study is given below. 2.2: Conceptualization SMEs in Bangladesh are defined for purposes of industrial policies by the 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 manufacturing establishments, and service establishments. For manufacturing enterprises, for manufacturing industries, the Taskforce defines:(a) An enterprise would be treated as small if, in todays market prices, the replacement cost of plant, machinery, building, structures, and other parts/components, fixtures, support utility, and associated technical services (such as turn-key consultancy), etc, were to up to Tk. 10 million;(b) An enterprise would be treated as medium if, in todays market prices, the replacement cost of plant, machinery, building, structures, and other parts/components, fixtures, support utility, and associated technical services (such as turn-key consultancy), etc, were to up to Tk. 100 million;(c) From both definitions above, land is excluded. (Kashfia , 2009).

For non-manufacturing activities (such as trading or other services), the Taskforce defines:(d) An enterprise would be treated as small if it has less than 25 workers, in full-time equivalents;(e) An enterprise would be treated as medium if it has between 25 and 100 employees;From both definitions above, land, once again, is excluded.Having said that, an alternative, albeit informal, definition, of SMEs is used by the Bangladesh Bureau of Statistics, using head-count for its basis. Enterprises with up to 9 employees are treated as micro; with between 10 and 49, as small; with between 50 and 99, as medium, and all the rest, as large. For statistical purposes, this is the definition that we use in this paper.Bangladesh accounts for some 60% of units and 76% of employment overall in the private-sector enterprise sector, with rural Bangladesh accounting for the rest. Ninety-three point six (93.6%) 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 total employment of the enterprise sector (Hoassain, 1998). And different articles on newspaper also inspired to conduct the study. These are the main belongings behind the development of concept of this study.

2.3: Developing Theoretical Framework The term Theoretical Framework means studying various reports, books and various local and international journals and it helps to define the goal and objectives of the study. In literature review part, various reports, several books, journals and various unpublished and published thesis related to SME to make a clear concept on various related issues and also to understand the relationship between the SME loan and management procedure.

2.4: Defining Goal and objectives of the research Defining the Goal and Objectives is another important stage of the methodology. In this step, goal and objectives are formulated. A well define goal and objective can make the researcher's work easy and simple.

2.5: Data Analysis MethodsA five-point Likert type scale statements and open ended question were used to measure the variables where 1 stands for strongly agree/very high and 5 stands for strongly disagree/very low effect on the statements. Following methods were applied for data collection:1. Observation: Data were also collected through observation during interview.2. Data were collected in February-March 2013. Analysis was done based on qualitative research method.

2.6: Sources of Data2.6.1: Primary Data collection This study is based on both primary and secondary data. Primary data were collected through personal interview (sample size-150) with a structured questionnaire and direct observations. The respondents and the sample units were drawn through convenience sampling method. Questionnaire was pre-tested and further improvement was done before conducting the survey. Respondents were assured of anonymity by asking them not to reveal their identity anywhere in the survey instrument. They were also told that neither their immediate supervisors nor their headquarters officials will have access to the individual questionnaire.

2.6.2: Secondary Data collection Secondary data including chart were collected from different sources like BRAC Bank Head office, SME Loan branches, and web site of BRAC Bank, different books, articles, journals and the base map itself acted as a secondary data source, annual reports of concerned bank. And other supporting information is collected to enrich the report from Statistical Year book, different reports and websites etc.

2.6.3: Final Thesis submission At the end, the thesis is arranged in different chapters in a coherent way and finally the final Thesis is submitted to the Thesis board.

Chapter-3: Literature Review 3.1: Literature Review The Daily Star in its editorial (2010) mentioned that many SME owners are to face difficulties when they require bank loans. In fact, SME financing has recently been identified by experts as one of the major problems faced by SMEs in Bangladesh. Mahmud (2011) said that the SMEs have very limited bank finance, which is only around 10 percent, while self-finance remains the major source of their finance contributing 76.5 percent of fixed capital and 51.8 percent of working capital.

A World Bank survey (2002) on Bangladeshs SMEs identified lack of finance as the major issue, with 55% SMEs reporting it. Bribes (21%), orders/marketing of product (28%), lack of knowledge (12%), and license for work (8%), along with new technology (8%) were also considered as major issues. Without the much vital capital, they have little chance of growth or even sustenance in this mobile world. This study has tried to pinpoint, through empirical research, the major, problems faced by SMEs and banks in Bangladesh in relation to financing and has provided recommendations based on the findings to improve the situation.

Rosen (2003) mentioned that SMEs make up the largest portion of the employment base in many developing countries and, indeed, are often the foundation of the local private sector.

The entrepreneurs behind them could and should play a much larger role in development, but too often are held back by a lack of ready access to financing from local formal sector financial institutions. IFC (2004) Annual Review report mentioned that in almost every part of the world limited access to finance is one of the biggest obstacles to private sector growth. This is especially true for smaller firms that have minimum influence on policy reform.

Bhattacharya and Chowdhury (2011) mentioned that Bangladesh Bank encourages banks to give loans to projects for diversified industrial development. From the point of view of limiting the credit risk exposures of the banks having a higher level of classified loan, the new rule is justified. However, to consider large loans as risky loans (by the new rule) is not reasonable. Moreover, for increasing the volume of lending to the SME sector, this sort of supply-side policy is not adequate. In fact, under both directed lending (before 1990) and deregulated lending (after 1990) regimes, the demand-side factors were not considered; consequently, resource allocation suffered.

3.2: Overview of the SMEs in the countryThere is great interest in small and medium enterprises (SMEs) as a major plank of poverty reduction in Bangladesh. Government of Bangladesh formulated a comprehensive Industrial Policy-2005 by putting special emphasis for developing Small and Medium Enterprises (SMEs) as a thrust sector for balanced and sustainable industrial development in the country to help deal with the challenges of free market economy and globalization (Alam, M. S., 2006).

A number of donors are working in Bangladesh in the interest of fostering SMEs. Some, like the GTZ, are working not with entrepreneurs but with the chambers and industry associations building their capacities to deliver needed services. Some, like the Catalyst, are putting together a comprehensive base of knowledge and insights about living production clusters, not all of them in manufacturing, namely, plastics, agricultural tools, textiles, pond culture, and vegetable-raising (Berger, A. N. and G. E. Udell. 2005). Yet others such as the SEDF are building enterprise-level capacities through training programs, efforts to upgrade project management skills, enhancing the appraisal and evaluation capacities of financial institutions concerned with SMEs.

Industrializations link to poverty reduction is througha) Haring-up the growth rate of the country; b) Enhancement of the productivity of the worker(s) in employment; c) Providing employment to the unemployed; d) Expanding consumer spending (and thus the confidence level) by sharing lower costs from scale economies via lower prices.

3.3: SMEs DefinedAccording to the European Union (2003) SMEs are defined as enterprises which have at most 250 employees and an annual turnover not exceeding 50 million Euros. Further there is the distinction of small enterprises-they have fewer than 50 staff members and less than 10 million Euros turnover -and micro-enterprises (less than 10 persons and 2 million Euros turnover).

According to the World Bank (2006) medium enterprises are defined as enterprises which have at most 300 employees and an annual turnover not exceeding 15 million US dollars. Further there is the distinction of small enterprises they have fewer than 50 staff members and up to 3 million US dollars turnover -and micro-enterprises have up to 10 persons and $100,000 turnover.

In the UK, sections 382 and 465 of the Companies Act 2006 define a SME for the purpose of accounting requirements.

According to this a small company is one that has a turnover of not more than 5.6 million, a balance sheet total of not more than 2.8 million and not more than 50 employees. A medium-sized company has a turnover of not more than 22.8 million, a balance sheet total of not more than 11.4 million and not more than 250 employees. It is worth noting that even within the UK this definition is not universally applied.

In the USA, the definition of small business is set by a government department called the Small Business Administration (SBA) Size Standards Office. The SBA uses the term size standards to indicate the largest a concern can be in order to still be considered a small business, and therefore able to benefit from small business targeted funding. The concern cannot be dominant in its field, on a national basis. It must also be independently owned and operated. Unlike the UK and the European Union which have simple definitions applied to all industries, the US has chosen to set size standards for each individual NAICS coded industry. This variation is intended to reflect industry differences in a better way. The most common size standards are 500 employees for most manufacturing and mining industries 100 employees for wholesale trade industries $6 million of annual receipts for most retail and service industries $28.5 million of annual receipts for most general & heavy construction industries $12 million of receipts for all special trade contractors $0.75 million of receipts for most agricultural industries Breaking down the SME definition, Industry Canada defines a small business as one that has fewer than 100 employees (if the business is a goods-producing business) or fewer than 50 employees (if the business is a service-based business). A firm that has more employees than these cut-offs but fewer than 500 employees is classified as a medium-sized business. (www.about.com)

In India the Small Scale Industries (SSIs) are industrial undertaking in which the investment in fixed assets in plant and machinery, whether held on ownership terms or on lease or by hire purchase does not exceed Rs. 10 million. The Small Scale Service And Business (Industry related) Enterprises (SSSBEs) are industry related service and business enterprises with investment in fixed assets, excluding land and building up to Ps. 1 million. (Ministry of trade and Industry, Government of India)

3.4: SME in BangladeshDifferent countries and organizations define SME differently. The Government of Bangladesh has categorized SME into two broad classes1. Manufacturing enterprise2. Non Manufacturing activities3. Manufacturing enterprise

3.4.1 Manufacturing enterprises can be divided into two categories; Small enterprise: An enterprise would be treated as small 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 (of turn-key consultancy services, for example), etc, excluding land and building, were to up to Tk. 10 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 (of turn-key consultancy services, for example), etc, excluding land and building, were to up to Tk. 100 million;

3.4.2 Non-manufacturing activities (such as trading or other services)Non-manufacturing activities can be divided into two categories; Small enterprise: An enterprise should be treated as small if it has less than 25 workers, in full-time equivalents;

Medium enterprise: An enterprise should be treated as small if it has between 25 and 100 employees.According to Bangladesh Bureau of Statistics different enterprises are defined as;No. of employeesMicro 0-9Small 10-49Medium 50-99Large Above 99The Ministry of Industries, Government of Bangladesh has been identified following booster sectors;1. Electronics and electrical2. Software-development3. Light engineering and metal-working4. Agro-processing/agro-business/plantation agriculture/specialist farming/tissue-culture5. Leather-making and leather goods6. Knitwear and ready-made garments7. Plastics and other synthetics8. Healthcare & diagnostics9. Educational services10. Pharmaceuticals/cosmetics/toiletries11. Fashion-rich personal effects, wear and consumption goods (Kashfia, 2009).

Chapter-4: BRAC BANK Limited at a Glance4.1: Corporate Information Registered Office: 1, Gulshan Avenue, Gulshan-1, Dhaka-1212 Company registration Number: C-37782(2082) of 1999 Inauguration of Banking Operations: 4th July 2001 First SME Unit Office: 1st January2002 Signing with Shore Cap as investor: 29th December 2003 Signing with IFC as investor: 8th May 2004 First ATM installed: 3rd April 2005 Preferential share issued: 31st January 2006 Signing with Infosys and 3i InfoTech for changing Banks IT platform: 1st August 2006 Listing with CSE: 24th January 2007 Listing with DSE: 28th January 2007 Commencement of share trading in DSE and CSE: 31st January 2007 Auditor S.F Ahmed & Co (Chartered Accountants, House # 25, Road # 13A, Block # D, Banani, Dhaka-1213. Legal Advisor, Law Valley, Shajan Tower, Commercial Block, Suit-202 (First Floor). 4 Shegun Bagicha, Dhaka-1000 (brac bank.com).

4.2: Background of BRAC BANK Ltd: BRAC Bank is a scheduled commercial bank established under the Banking Companies Act, 1991 and incorporated as a public company limited by shares on 20 May, 1999 under the Companies Act, 1994 in Bangladesh. The primary objective of the Bank is to carry on all kinds of banking business. The Bank could not start its operation till 03 June, 2001 since the activity of the Bank was suspended by the High Court of Bangladesh. Subsequently, the judgment of the High Court was set aside and dismissed by the Appellate Division of Supreme Court on 04 June, 2001 and accordingly, the Bank has started operations from 04 July, 2001. A fully operational Commercial Bank, BRAC Bank focuses on pursuing unexplored market niches in the Small and Medium Enterprise Business, which hitherto has remained largely untapped within the country. Almost 40% of BRAC Banks clients had no prior experience with formal banking. The Bank has 313 regional marketing unit offices offering services in the heart of rural and urban communities and employs about 1,200 business loan officers around 70% of total staff. The reason BRAC Bank is in business is to build a profitable and socially responsible financial institution focused on markets and businesses with growth potential, thereby assisting BRAC and stakeholders to build a "just, enlightened, healthy, democratic and poverty free Bangladesh." Which means to help make communities and economy of the country stronger and to help people achieve their dreams? We fulfill the purpose by reaching for high standards in everything we do: For our customers, our shareholders, our associates and our communities, upon which the future prosperity of our company rests. (bracbank.com)

4.3: Corporate Vision: BRAC Bank will be a unique organization in Bangladesh. It will be a knowledge-based organization where the BRAC Bank professionals will learn continuously from their customers and colleagues worldwide to add value. They will work as a team, stretch themselves, innovate and break barriers to serve customers and create customer loyalty through a value chain of responsive and professional service delivery. (bracbank.com)Continuous improvement, problem solution, excellence in service, business prudence, efficiency and adding value will be the operative words of the organization. BRAC Bank will serve its customers with respect and will work very hard to instill a strong customer service culture throughout the bank. It will treat its employees with dignity and will build a company of highly qualified professionals who have integrity and believe in the Banks vision and who are committed to its success. BRAC Bank will be a socially responsible institution that will not lend to businesses that have a detrimental impact on the environment and people. So BRAC Bank operates following a specific vision like: (bracbank.com). Building a profitable and socially responsible financial institution focused on Markets and Business with growth potential, thereby assisting BRAC and stakeholders build a "just, enlightened, healthy, democratic and poverty free Bangladesh" (bracbank.com).

4.4: Corporate Mission: 1. Sustained growth in 'Small & Medium Enterprise' sector 2. Continuous low cost deposit growth with controlled growth in Retained Assets 3. Corporate Assets to be funded through self-liability mobilization. Growth in Assets through Syndications and Investment in faster growing sectors 4. Continuous endeavor to increase fee based income 5. Keep our Debt Charges at 2% to maintain a steady profitable growth 6. Achieve efficient synergies between the bank's Branches, SME Unit Offices and BRAC field offices for delivery of Remittance and Bank's other products and services 7. Manage various lines of business in a fully controlled environment with no compromise on service quality 8. Keep a diverse, far flung team fully motivated and driven towards materializing the bank's vision into reality (bracbank.com)

4.5: Corporate Values: 1. Our Strength emanates from our owner - BRAC. This means, we will hold the following values and will be guided by them as we do our jobs. 2. Value the fact that we are a member of the BRAC family 3. Creating an honest, open and enabling environment 4. Have a strong customer focus and build relationships based on integrity, superior service and mutual benefit 5. Strive for profit & sound growth 6. Work as a team to serve the best interest of our owners 7. Relentless in pursuit of business innovation and improvement 8. Value and respect people and make decisions based on merit 9. Base recognition and reward on performance (bracbank.com).

4.6: Corporate Objectives: The objective of BRAC Bank Limited is specific and targeted to its vision and to position itself in the mindset of the people as a bank with difference. The objectives of BRAC Bank Limited are as follows: 1. Building a strong customer focus and relationship based on integrity, superior service. 2. To creating an honest, open and enabling environment 3. To value and respect people and make decisions based on merit 4. To strive for profit & sound growth 5. To value the fact that they are a member of the BRAC family- committed to the creation of employment opportunities across Bangladesh. 6. To work as a team to serve the best interest of our owners 7. To base recognition and reward on performance 8. To responsible, trustworthy and law-abiding in all that we do 9. To finance the international trade both in import and export. 10. To develop the standard of living of the limited income group by providing Consumer Credit. (bracbank.com)

4.7: Location of Branches, SME Centers & ATM Currently, BRAC Bank has 100 Branches, 60 SME Service Centers, 3 SME/Krishi Branches, more than 300 ATMs and 424 SME Unit offices across the country. It has disbursed over BDT10, 000 crores of SME loan and has over 500,000 individual customers who access online banking facilities. Its services cuts across all strata of clientele are it corporate, retail or SME. (bracbank.com)

4.8: Shareholding Structure: Table-1: Shareholding StructureShareholding Structure: Name of Shareholder Shareholding

BRAC 43.77%

International Finance Corporation 5.36%

ShoreCap Limited 0.86%

Non-Resident Bangladeshi 0.43%

Mutual Funds 3.22%

Institutions and General Public 46.36%

Fig-1: Shareholding StructureSource: (bracbank.com)

4.9: Management of BRAC Bank Limited:Boards of directors are the sole authority to take decision about the affairs of the business. Now there are 6 directors in the management of the bank. All the directors have good academic background and have huge experience in business. Sir Fazle Hasan Abed is the Founder of the bank. The board of directors holds meetings on a regular basis. The current management teams and board of directors name are given in the following table: Table-2: Management of BRAC Bank LimitedThe Board of Directors of BRAC Bank Limited includes: Mr. Muhammad A (Rumee) AliChairman

Mr. Quazi Md. Shariful AlaDirector

Mr. Mark A.Coffey (Nominated By ShoreCap International Limited)Director

Ms. Nihad KabirDirector

Ms. Tamara Hasan AbedDirector

Mr. Shib Narayan KairyDirector

Dr. Hafiz G.A.SiddiDirector

Syed Mahbubur RahmanManaging Director & CEO

Source: Annual Report BRAC Bank (2011)

4.10: Division of BRAC Bank Ltd: There are five different business units generating business BRAC BANK Limited: I. Small & Medium Enterprise (SME) II. Corporate Banking III. Retail Banking IV. Treasury V. Remittance Services

4.11: Currently offered Product & Service of BRAC Bank Ltd 4.10.1: Products and services The bank has wide range of Product line to suit the need of the people of all strata. In addition to convention product both Asset and liability sides the Bank offers special credit products for its customer. These are: Consumer financing Lease Financing Small Loan Festival Loan Housing Loan Long-term & Short term loan financing Real Estate and Civil Constriction SME and Agro Based. (bracbank.com).

4.10.2: Ancillary servicesBrokerage House service under the central depository with membership of bourse Foreign Currency Remittance over 100 outlets, 300 ATMs and over 500,000 plastics in the market, BRAC Bank offers a wide range of financial solutions to meet everyday need. Be it home loan, car loan, or simply a quick loan (bracbank.com).

4.10.3: Deposit Products Prapti Current Account

Table-3: Deposit ProductsDeposit Products Savings Account Triple Benefit Savings Account Savings Classic Account Aporajita Account Current Accounts Current Classic Account Current Plus EZee Account Salary Account Campus Account Term Deposits DPS Fixed Deposit Flexi DPS Interest First Fixed Deposit Freedom Fixed Deposit (FFD) Abiram Fixed Deposit

4.10.4: Non-Stop Banking Nonstop banking from 10 a.m. to 8 p.m. Online banking facility in all of the sections Up to 5 p.m. for the fixed branches More Information

4.10.5: Wholesale Banking BRAC Bank offers a full array of Financial Services to Corporations and Institutions. Having access to the deepest end of the country, BRAC Bank is there to assist businesses in Bangladesh. (bracbank.com)

4.10.6: Corporate Banking Corporate Loan Products Overdraft Short Term Loan Lease Finance Loan against Trust Receipt Work Order Finance Emerging Business Syndication Term Loan Project Finance Bill Purchase Bank Guarantees Trade Finance Letter of Credit (LC) Letter of Guarantee (LG) 4.10.7: Cash Management Cash & Trade Overview Liability Products Securities Services 4.10.8: Custodial Service Probashi Biniyog

4.10.9 Probashi Banking When any one send his/her hard-earned money from abroad to dear ones at the farthest end of Bangladesh, ask them to collect it from over 3,500 pay out locations of BRAC Bank. Every month, Probashi Banking executes around 150,000 transactions; which has made BRAC Bank one of the largest players among private commercial banks in channelizing inward remittance in the country. (bracbank.com).

4.10.10: Accounts & Deposits Probashi Current Account Probashi Savings Account Probashi Fixed Deposit Probashi Abiram Probashi DPS

4.10.11: Investments Probashi Wage Earners' Bond US Dollar Premium & Investment Bond Probashi Biniyog

4.10.12: Remittance Info Western Union Money Transfer Exchange Houses

4.10.13: SWOT Analysis of BRAC BANK: SWOT analysis is an important tool for evaluating the companys Strengths, Weaknesses, Opportunities and Threats. It helps the organization to identify how to evaluate its performance and scan the macro environment, which in turn would help organization to navigate in the turbulent ocean of competition. (brac bank Annual report)

40.10. 13.1: Strengths: Goodwill: BRAC bank LTD has already established a favorable reputation in the banking industry of the country particularly among the new comers. Within a period of 5 years, BBL has already established a firm footing in the banking sector having tremendous growth in the profits and deposits. All these have leaded them to earn a reputation in the banking field (brac bank Annual report).

Sponsors: BBL has been founded by a group of eminent entrepreneurs of the country having adequate financial strength. The sponsor directors belong to prominent resources persons of the country. The Board of Directors headed by its Chairman Sir. F. H. Abed. Therefore, BBL has a strong financial strength and it built upon a strong foundation.

Efficient Management: The top management of the bank is also major strength for the BBL has contributed heavily towards the growth and development of the bank. The top management officials have all worked in reputed banks and their years of banking experience, skills, expertise will continue to contribute towards further expansion of the bank. At BBL, the top management is the driving force and the think tank of the organization where policies are crafted and often cascaded down.

Facilities and equipment: BBL has sufficient physical facilities and equipments to provide better services to the customers. The bank has computerized and online banking operations under the software called Finacle banking operations. Counting machines in the teller counters have been installed for speedy service ant the cash counters. Computerized statements for the customers as well as for the internal use of the banks are also available (brac bank Annual report).

40.10. 13.2 Weaknesses: Lack of advertising and promotion of SME loan: This is a major setback for BBL and one of its weakest areas. BBLs adverting and promotional activities are satisfactory but it SME loan is not advertised well. It does not expose its SME product to general public and are not in lime light. As a result large numbers of people are not aware of the existence of this bank.

NGO name (BRAC): BRAC is one of the largest NGO of the world and it is operating its activities in Bangladesh. BRAC bank is not a NGO bank but many people of them country consider it as a NGO bank like Grameen bank which is not correct.

Remuneration: The remuneration package for the entry and the mid level management is considerably low. The compensation package for BBL entry level positions is even lower than the contemporary banks. Under the existing low payment structure, it will be difficult to attract and retain higher educated employees in BBL. Especially CROs are not satisfied with compensation package provided to them (brac bank Annual report).

40.10. 13.3 Opportunities: ATM: BBL always tries to provide excellent services to its customers. By considering this thing BBL provides ATM card to its customers and also provide available ATM booth in different locations in whole country.

Diversification: BBL can pursue a diversification strategy in expanding its current line of business. The management can consider options of starting merchant banking or diversify in to leasing and insurance. By expanding their business portfolio, BBL can reduce their business risk.

Product line proliferation: In this competitive environment BBL must expand its product line to enhance its sustainable competitive advantage.

Available Branches: With its proper and useful operational network, there is an opportunity for IFIC to further expand its branches in many remote and new location of the country which will deliver services to customer and earn a healthy profit for the bank (brac bank Annual report-2011).

40.10. 13.4 Threats Competition: Competition is the threat of any business. At the age of modern business the competition is increasing. Every bank has an intention to provide better services compared to others for capturing the customers.

Multinational banks: The emergence of multinational banks and their rapid expansion poses a potential threat to the new growing private banks. Due to the booming energy sector, more foreign banks are expected to arrive in Bangladesh. Moreover, the already existing foreign bank such as Standard Chartered is now pursuing an aggressive branch expansion strategy. This bank is establishing more branches countrywide and already launched is SME operation.

Upcoming banks: The upcoming private local banks can also pose a threat to the existing private commercial banks like BBL. It is expected that in the next few years more local private banks may emerge. If that happens the intensity of competition will rise further and banks will have to develop strategies to compete against an on slaughter of foreign banks.

Contemporary banks: The contemporary banks of BBL such as Dhaka bank, prime bank and Dutch Bangla Ltd. are its major rivals. Prime bank and other banks are carrying out aggressive campaign to attract lucrative clients as well as big time depositors.

Leasing companies: Leasing companies like IDLC and others are also competitor for BRAC Bank (brac bank Annual report-2011)Chapter-5 SME Banking Division

5.1: SME Banking DivisionIn our country the most valuable resource is our people. After independence the main goal of our country is to become economically stable country. Commercial Bank of our country is only working for larger industries and trading organizations and NGO or other Micro lenders are working here in the financial field, providing very small amount. But the small and medium entrepreneurs were ignored. As a socially responsible bank, BRAC Bank wants to see the release of grass-roots level to their economic height and also to make profit by serving the interest of missing middle groups. 50% of its total portfolio usually collected from urban areas, are channeled to support these entrepreneurs who in future will become the potential strength of our economy. BRAC Bank is the market leader in giving loans to Small and Medium Entrepreneurs (brac bank Annual report-2011). The division has captured 5.87% market share within SME Banking arena of Bangladesh. Till date BRAC Bank has served 369,246 borrowers, amounting BDT 176,740 million through its 550 customer touch points (SME Unit offices, SME Sales and Service Centers, SME Krishi Branches). Customer deposit grew by 47% in 2011copared to 2010.current level of deposit stands at BDT 13,193 million. Customer asset grew by 17% in 2011 compared to 2010. Current level of asset stands at BDT 43,529 million. Record breaking asset disbursement of BDT 463 corer was seen in October 2011, with a net asset growth of BDT BDT 212 corer in the Month alone. ((brac bank Annual report-2011)

5.2: SME Banking BRAC Bank, being the youngest bank, took a step to break away from usual tradition and tapped into the true suburb entrepreneurial initiatives. Today, with over 10,000 corers of loans disbursed till date, BRAC Bank is countrys largest SME financier that has made more than 265,000 dreams come true. ((brac bank Annual report-2011)

5.3: Procedure of BRAC bank SME loan Customer Relations Officer (CRO) helps a customer choose the scheme which best meets his financial requirements and fits his business size and nature. The CRO then collects all the requisite documents from the customer, consolidates the information, and after ensuring that all the required documentation are in place, he prepares the Loan Application Proposal (LAP) and passes it on to his Zonal Manager. The Zonal Manager visits the business, gives the file a final check and forwards it to the Credit Risk Management department of bank (brac bank.com).

The Credit Analyst in the SME Credit wing visits the business location and analyzes the loan proposal by making an assessment of the customers ability to repay based on his business profile and matching customers proposal with his credit assessment to determine whether the customer can be financed. Its credit officers are always proactive in identifying and managing any risks/gaps in the credit file and communicating them to the respective CROs so they can correct the discrepancies and provide the required information. In areas where there is no centralized credit assessment department, the bank has audit team that visits the business location and assesses the file (brac bank.com).

The Origination department verifies the documentation and opens the loan accounts of the customers. In addition, they help obtain the CIB of the customer, a mandatory requirement of Bangladesh Bank. The loan is then disbursed to the customer. SME Business and CRM jointly manage the collection responsibility across the country based on overdue aging. SME Repayment Unit performs the functions of loan repayment and the Closing Unit does the loan closure. The CRO obtains the deposit slip from the customers for the monthly installments; he sends a mobile text to Head Office for realization of the installment. The slips are collected at the repayment unit for reconciliation. As the loan matures, the closing and clearing units handle the necessary paperwork and forward the clearance certificate and redemption authority of mortgage property to the respective CRO/ZM, who then hand them over to customer (brac bank.com).

5.3.1 Enterprise Selection Criteria: The success of SME will largely depend on the selection of a business and man behind it. In terms of the business (Enterprise), the following attributes should be sought:

Business Age: The age of business must be one year. If the business is older than they got more preference and facility. Registration: The business should be legally registered, i.e., valid trade license, income tax or VAT registration, wherever applicable. Environment friendly: The business should be environment friendly, no narcotics or tobacco business. Define Market: The business must have a defined market with a clear potential growth Location of business: The business must be located ideally close to the market and the source of its raw materials/suppliers. It should have access to all the utilities, skilled manpowers that are required Riskiness of business: Any risk assessed by the management in turn will become a credit risk for the bank. So effort should make to understand the risk faced by the business.

5.3.2: Entrepreneur Selection Criteria: In order to understand the capability of the management behind the business, the following should be assessed: 1. The entrepreneur should be physically able and in good health, preferably between the age of 25-50. If he/she is an elderly person closer to 50, it should be seen what the succession process will be and whether it is clearly defined or not 2. The entrepreneur must have the necessary technical skill to run the business, i.e. academic background or vocational training, relevant work experience in another institution or years of experience in this line of business 3. The entrepreneur must have and acceptable social standing in the community (People should speak highly of him), he should possess a high level of integrity (Does not cheat anyone, generally helps people), and morally sound (Participates in community building) 4. The entrepreneur must possess a high level of enthusiasm and should demonstrate that he is in control of his business (Confidently replies to all queries) and has the ability to take up new and fresh challenges to take the business forward 5. Suppliers or creditors should corroborate that he pays on time and is general in nature 6. Clear-cut indication of source of income and reasonable ability to save (Rabbani, Mehnaz & Munshi, 2005).

5.3.3: Guarantor Selection Criteria: Equally important is the selection of a guarantor. The same attribute applicable for an entrepreneur is applicable to a guarantor. In addition he should posses the followings: 1. The guarantor must have the ability to repay the entire loan and is economically solvent (Check his net worth) 2. The guarantor should be aware about all the aspect of SEDF loan and his responsibility 3. Govt. and semi-govt. officials can be selected as a Guarantor such as schoolteacher, college teacher, doctor etc 4. Police, BDR and Army persons, political leaders and workers, and Imam of mosque cannot be selected as a guarantor 5. The guarantor should know the entrepreneur reasonable well and should preferably live in the same community (Rabbani, Mehnaz & Munshi 2005).

5.3.4: Type of Securities taken against Loan: 1. The following listed securities may be obtained from borrower against loan to enterprises, either individually or in a combination. 2. It is really up to the bank what they would like to accept as security from the borrower as not all the securities stated below are suitable: 3. Mortgage of loan and other immovable property with power of attorney to sell 4. Lien of Fixed Deposits receipts with banks and other non-banking financial institutions, lined, these have to confirm by the issuer 5. Lien of Pratirakshay sanchay patra, Bangladesh sanchay patra, ICB unit certificates and wage earner development bond, all considered Quasi or Near cash items 6. Lien of shares quoted in the stock exchange (This is rarely accepted) 7. Pledge of goods (Banks are akin to stay away from such securities now a days) 8. Hypothecation of Goods, Book Debt & Receivables, Plant & Machineries 9. Charge on fixed assets of a manufacturing enterprise 10. Lien of cheque, Drafts and order 11. Lien of work orders, payment to be routed through the bank and confirmed by the issuer 12. Shipping documents of imported goods (brac bank.com)

5.4: Monitoring: Monitoring is a system by which a bank can keep track of its clients and their operations. So monitoring is an essential task for a CRO to know the borrowers activities after the loan disbursement. This also facilitates the buildup of an information base for future reference. Importance of Monitoring: Through monitoring a CRO can see whether the enterprise invested the sanctioned amount in the pre-specified area of his business, how well the business is running, the attitude of the entrepreneur, cash credit sales and purchase, inventory position, work in process and finished goods etc, This information will help the CRO/BRAC Bank to recover the loan accruing to the schedule and to take the necessary decisions for repeat loans.

Business Condition The most important task of the CRO to monitor the business frequently, it will help him to understand whether the business is running well or not, and accordingly advice the borrower, whenever necessary. The frequency of monitoring should be at least once month if all things are in order.

Production The CRO will monitor the production activities of the business and if there is any problem in the production process, the CRO will try to help the entrepreneur to solve the problem. On the other hand the CRO can also stop the misuse of the loan other than for the purpose for which the loan was disbursed.

Sales Monitoring sales proceed is another important task of the CRO it will help him to forecast the monthly sales revenue, credit sales etc. which will ensure the recovery of the monthly loan repayments from the enterprise as well as to take necessary steps for future loans.

Investment It is very important to ensure that the entire loan has been invested in the manner invented. If the money is utilized in other areas, then it may not be possible to recover the loan. Target Market: 1. Trading of grocery item 2. Hardware 3. Chemical products 4. Sanitary ware 5. Building materials (rod, cement, brick, paint, and others) 6. Electrical and electronic items 7. Imported foods (biscuits, cheese, juice, and such items) 8. Light machinery 9. Large tailoring business 10. Weaving mills 11. Bakery 12. Printing house 13. Feed mill 14. Poultry 15. Dairy farm 16. Fisheries 17. Manual/auto rice mill 18. Boutiques and parlors 19. Restaurant 20. Distributor of FMCG products/others 21. Fish wholesaler 22. Food grain wholesaler 23. Wood processing/saw mills 24. Many more

5.5: Reasons of SME Banking The main focus of BRAC Bank is to develop human and economic position of the country. Its function is not limited only to providing and recovering of loan. But also try to develop economy of a country.

5.6: Support Small and Medium EnterpriseThe main aim of SME in our country is to support small and medium enterprise. In our country small and medium entrepreneurs do not have easy access to get loans from the commercial banks/ financial institutions. But BRAC Bank Ltd. Provides loans to such entrepreneur without any kind of mortgage.

Create Employment: To create employment opportunities in the market. By providing loan to the small enterprises entrepreneur got success on their business who cannot start or expand their business because of lack of fund.

Economic Development: Economic development of a country largely depends on the small and medium sized enterprises. If the missing middle become successful than our country economically developed.

Profit Making: SME program is a new dimensional banking system in the banking world. Most of the CROs are providing door-to-door services to the entrepreneurs. Entrepreneurs are satisfied by the service of the bank and making profit with guidance of the bank.

Encourage Manufacturing: The focus of BRAC Bank Ltd. is to encourage manufacturing by the entrepreneurs who produce by purchasing various types of materials. CROs try to educate them to produce material if possible because if they can produce in line of purchase profits will be high.

Map-1: SME Network of BRAC Bank

SME Network of BRAC BankSource: Annual report 2011

Chapter-6 SME Product Details of BRAC Bank6.1: Anonno Rin A business loan scheme for the purpose of working capital finance and/or fixed assets purchase to the small and medium sized trading, manufacturing, service, agriculture, non-farm activities, agro-based industries etc. all over Bangladesh through marketing and distribution offices (called unit offices) across the country. The loan, under this scheme, would be secured by hypothecation on the inventory, receivables, advance payments, plant & machineries, charge on immovable properties, third party personal guarantee, equitable/registered mortgage of landed property, full or partial cash cover (in the form of readily en cashable government bonds, mutual fund unit certificates and deposits/fixed deposits in our Bank or in other Banks if the entrepreneur(s)/owner(s) offers/agrees to offer)Table-4: Anonno RinNAME

FEATURESLOAN AMOUNT (BDT)

INTEREST RATE & TENURE

ELIGIBILITY CRITERIA

Anonno Rin

Loan without Mortgage, Easy installment

3 lac to 10 lacExcellent Borrowers might get reduced interest rates for repeat loans. 22% p.a. for the first time and 20% p.a. for the second time.

24% p.a18 60 years of age

Discounted rates for Excellent BorrowersMinimum 2 years experience in the same line of business

Quick, quality banking throughout the countryBusiness must be going concern for at least 3 or more years.

Source: operation manual, SME BRAC Bank (2011)

6.2: Apurbo Rin A business loan scheme for the purpose of working capital finance and/or fixed assets purchase to the small and medium sized trading, manufacturing, service, agriculture, non-farm activities, agro-based industries etc. all over Bangladesh through SME unit offices across the country. The loan, under this scheme, would be secured by hypothecation on the inventory, receivables, advance payments, plant & machineries, charge on immovable properties, third party personal guarantee, equitable/registered mortgage of landed property, full or partial cash cover (in the form of readily encashable government bonds, mutual fund unit certificates and deposits/fixed deposits in our Bank or in other Banks if the entrepreneur(s)/owner(s) offers/agrees to offer)Table-5: Apurbo Rin NAME

FEATURES

LOAN AMOUNT (BDT)



Apurbo

Without mortgage for loan below 10 lac.

10 Lac to 1 Crore Loans 17% p.a. at monthly rest for loans between 8.50 lac to 15 lac.25 60 years of age, Those who have property/land/building

Simple loan processing for expanding your business

Minimum 3 years of some sort of business activities

Quick disbursement, Easy installment and overdraft facilityBusiness must be a going concern for more than 3 years


6.3: Digoon Rin Digoon Rin is a loan facility for small and medium sized trading, manufacturing, service, agriculture, non-farm activities, agro-based industries etc. spread all over Bangladesh through our unit offices across the country. The product offers terminating loan facilities for the purpose of working capital finance and/or fixed assets purchase under Equated Monthly Installment loan facility or Single Installment Loan facility. To avail Digoon Loan facility the enterprise has to give 50% cash security (Fixed deposited of BRAC Bank) of the loan amount.

Table-6: Digoon RinNAME

FEATURES

LOAN AMOUNT (BDT



Digoon

Double amount of loan on your deposit5 lac to 30 lacEquated Monthly Installment loan facility: 17 %18 55 years of age

Attractive return against the depositSingle Installment Loan facility: 18 %

Must have at least 2 years of business experience

Flexible repayment plan in monthly installment and single installmentsBusiness must be a going concern for more than 2 years


6.4: Prothoma Rin Prothoma Rin is a loan facility for small and medium sized trading, manufacturing, service, agriculture, non-farm activities, agro-based industries etc. which are operated by women entrepreneurs, spread all over Bangladesh through our unit offices across the country. The product offers terminating loan facilities for the purpose of working capital finance and/or fixed assets purchase. Currently only a small percentage of our existing clients are women. This new loan product will help us to penetrate the women entrepreneurs who want to avail loan facility.

Table-7: Prothoma Rin NAME

FEATURES

LOAN AMOUNT (BDT)INTEREST RATE & TENURE


Prothoma

In case the tenant borrower cannot obtain trade license showing her name as owner of the business, loan can be sanctioned in the personal name of the borrower

Maximum BDT 1 million is offered to meet business needs. As low as 10% interest rate at monthly

18 55 years of age

Discounted rates for excellent borrowersAny kind of business having valid trade license, which is at least 2 years of old.

Repay the loan in the method and time period that suits you the best

Minimum of one year of continuous business history

Borrower availed any loan in the name of his/her sister concern business loan may be approved if the loan is regularly repaid from the sister concern business

The business should be located surrounding the unit offices of BRAC bank across the country


6.5: Pathshala Rin The product offers term loan facilities for the purpose of fixed assets purchase under Equated Monthly Installment. The loan would be secured by hypothecation on the inventory, receivables, advance payments, equipments, furniture & fixtures, charge on immovable properties, equitable/registered mortgage of landed property, partial or full cash cover (in the form of readily encashable mutual fund unit certificates and deposits/fixed deposits in our Bank or in other Banks).Table-8: Pathshala Rin NAME

FEATURES

LOAN AMOUNT(BDT)INTEREST RATE & TENURE


Pathshala

Without mortgage for loan below 10 lac

3 lac to 10 lac

24% p.a. at monthly rest for loan amounting 3 lac to 10 lac

The institution should be sole proprietorship, partnership, Private Limited Company, or Society

Loan for fixed assets purchase & civil construction

17% p.a. at monthly rest for loan amounting above 10 lac to 15 lac

The educational institute must be a profit making concern

Loan repayment can be spread up to 4 years

16% p.a. at monthly rest for loan amounting above 15 lac up to 30 lac

A small & medium educational institution that is in operation for minimum 3 years

Minimum documentation

Monthly repayment plan

Quick disbursement

Flexible interest rate based on security


6.6: Supplier Finance Supplier Finance is a loan facility for the enlisted suppliers of various corporate houses. Under this product, respective Suppliers will get loan limit maximum 80% of their last 1(one) year average monthly bills or work orders of particular corporate house. The product offers terminating loan facilities for the purpose of working capital finance under Equated Monthly Installment loan facility or Revolving Loan facility with multiple drawdown options and Single Installment based repayment plan. To avail this loan facility; BRAC Bank, particular corporate house and the enlisted supplier of particular corporate house have to sign a tripartite agreement.Table-9: Supplier Finance NAME

FEATURES



Supplier Finance

Equal monthly installment and revolving loan facility

3 lac to 30 lac

3 lac to 9.5 lac- 22% p.a at monthly rest

If you are an enlisted supplier of a corporate house with which BRAC Bank has a corporate tie- up

1% of loan amount as the processing fee10 lac to 15 lac - 17% p.a at monthly rest

Have 1 year continuous relationship with the purchasing firm

Above 15 lac to 30 lac - 15% p.a at monthly rest

Have minimum 3 years of continuous operation


6.7: Aroggo Rin The main objective of launching Aroggo loan is to finance private clinics and diagnostic centers to further broaden our SME customer base. Through Aroggo loan, health centers will get the opportunity to upgrade their medical facilities or expand business. This will contribute to the overall enhancement of health facilities available in Bangladesh.Table-10: Aroggo Rin NAME

FEATURES



Aroggo

Loan without mortgage up to 8 lac

3 lac to 10 lac

3 lac to 8 lac 20% p.a. at monthly rest

Doctors having 5 years of experience

A profit making concern

Easy loan processing

Above 8 lac to 15 lac - 17% p.a at monthly rest

Institutions with at least 2 years in operation

Loan repayment schedule is spread up to 3 yearsAbove 15 lac to 30 lac - 16% p.a at monthly rest

1% loan processing fee

Flexible interest rate based on security


6.8: Cash Secured Loan Cash Secured Loan is a loan facility for small and medium size trading, manufacturing, service, agriculture, non-farm activities, agro-based industries etc. spread all over Bangladesh through our branches or unit offices across the country. The product offers terminating loan facilities for any purpose related to business. There are two types of loan facility in the product i.e. Secured Loan and Secured Overdraft. These facilities are fully secured by fixed deposit of BRAC Bank.Table-11: Cash Secured Loan NAME

LOAN AMOUNT(BDT)INTEREST RATE &TENURE (Secured Loan)

INTEREST RATE & TENURE(Secured Overdraft)


Cash Secured Loan

3 lac to 30 lacType- A: Loan 100% of the face value of Fixed Deposit3% p.a. spread over Fixed Deposits interest rateType- D: Loan 95% of the face value of Fixed Deposit 3% p.a. Spread over Fixed Deposits interest rate.

The entrepreneur must have minimum 6 (Six) months experience in the same line of business.

Type- E:Loan 80% of the face value of Fixed Deposit. 2% p.a. spread over Fixed Deposits interest rate.To be determined by Trade license (if available)


6.9: Bizness AccountBizness Account is an interest bearing account only for business Enterprise for SME and Retail Banking. This product has been set in a way to encourage small & medium entrepreneur to enter into the wide range of modern banking facilities of BRAC Bank Limited.Table-12: Bizness AccountBBL SME Banking Products

NAME

FEATURES



Bizness Account Smart Business Card

50,000 withdrawing facility (per day) from ATM & 100, 000 from POS

4% interest on daily balance

Entrepreneurs aged between 18 to 60 years

24 hour Access to ATMs/ POS

No Minimum Balance, No Ledger Fees, No hidden costOpening balance -BDT-10,000.00

No bar for using POS

Interest paid to account twice a year

Small and medium sized business entrepreneur of a sole proprietorship business

Phone-Banking, Online Banking, SMS Banking, Internet Banking facility


Chapter-7 Data Analysis7.1: Data Analysis An analysis is generated from the questionnaire to fulfill the objectives of the study. The respondents were employees of BRAC Bank Limited and customer, sample size was 150 and simple random sample was applied. For the convenience of analysis the researcher has calculated the percentage of the responses. For the ease of better understanding, the researcher has presented the information of percentage under three headings (Agree/High, Neither Agree nor Disagree/Moderate, and Disagree/Low). Several judgments are being made from the responses of the employees of BRAC Bank Ltd. to validate the objectives of the study. The results are presented below. The study finds that SMEs are not preparing proper financial statement which creates problem for the bank in judging financial standings. It is also observed that SMEs are not maintaining proper licensing (Figure 7).BRAC Bank started its journey in 2001 with a mandate to serve the SMEs of Bangladesh & to realize dreams and aspirations of SMEs especially in remote areas of the country.

In-line with the mandate BRAC Bank continued to grow its SME portfolio, which is 53% of Banks total portfolio. Fig-2: Growth of BRAC Banks Portfolio

Source: Internal Data, SME Banking Operation of BBL

Fig-3: Growth of BRAC Banks Portfolio type


BRAC Bank Holds 9% SME Portfolio of Private Banks 5.29% SME Portfolio of Entire Industry

Fig-4: Growth of BRAC Bank SME Deposits Portfolio


Fig-5: Growth of BRAC Bank SME Deposits Portfolio


Fig-6: Loan type of SME BankingUnsecuredPartially Secured Secured

Above $32kNillShokti ShaomriddhiApurboShompodShohoj

$12k to $32kDurjoyShokti ShaomriddhiApurboShohoj

$32k to $12kAnonnoProthomaShamolimaShaomriddhiShohoj

Need Based Product offering (Variation in loan amount and security arrangement)Statement based/non statement based financial assessment

Product Loan Type

Term LoanSingle PaymentOver Draft

Anonno

Prothoma

Durjoy

Apurbo

Shakti

Shampad

Shamriddi

Shohoj

Shamolima

Segment driven product offering (Small business, women entrepreneur, agriculture sector, importer-exporter)Repayment tailored to cash flow pattern (cash cycle based payment/long term)

Source: Major Economic Indicators: Monthly Update Status as on 30 September 2011

Fig-7: Sourcing flow diagram of SME lone

Source: Major Economic Indicators: Monthly Update Status as on 30 September 2011

Fig-8: Credit Approval Process of SME LoanSource: Major Economic Indicators: Monthly Update Status as on 30 September 2011

Fig-9: SMEs prepare proper financial statement


Fig-10: SMEs maintain proper licensing


Fig-11: BRAC Bank Limited grant large loan for the SMEs


Fig-12: Responses on granting loan as cluster wise


Fig-13: Responses on consideration of BBL for promotion of the products


Fig-14: Responses on the ability to design appropriate financial products for SME segment


Fig-15: Responses on factors that can improve the quality of SME loan offering


7.2: Amount of SME Loan disbursed in 2011BRAC bank Ltd. Is the market leader in SME financing over the last few years. The scope of business is growing. Disbursement in SME financing has been increasing significantly in 2011; the total amount of disbursement was BDT 40147.95 millions. Table-1 shows that 89.06% of total loan amount was disbursed to Anonno borrowers. The position belongs to others which are 4.05%. In case of Apurbo, Aroggo, Diggon, Prothoma, the disbursement is 3.13%, 0.14%, 0.62%, 2.99% respectively.

Table-13: Amount of SME Loan disbursed in 2011SME LoanAmount of Loan Disbursed(BDT in millions)Percentage (%)

Anonno35757.3289.06

Apurbo1258.33.13

Aroggo56.340.14

Digoon rin 250.650.62

Prothoma1200.152.99

Others1625.194.05

Total40147.95100.00


Fig-16: Amount of Loan Disbursed (BDT in millions)


7.3: Amount of SME loan RepaidIn 2012 the total amount of repaid was BDT 9362.34 millions. Table-4 shows 85.06% of total amount was repaid by Anonno borrowers. Apurbo borrowers contributed 2.76%. In case of Aroggo, Diggon, Prothoma, the repayment is 2.76%, 0.16%, 0.54%, 8.01% respectively. Only 3.47% of total amount was repaid by others SME loan borrowers.SME LoanAmount of Loan Repaid (BDT in millions)Percentage (%)

Anonno7963.3085.06

Apurbo258.32.76

Aroggo15.120.16

Digoon rin 50.150.54

Prothoma750.358.01

Others325.123.47

Total9362.34100.00

Table-14: Amount of SME loan RepaidSource: Internal Data, SME Banking Operation of BBL

Fig-17: Amount of SME loan Repaid


7.4: Amount of Loan OverdueIn 2012 the total amount of loan overdue was BDT 1749.35 million. From the table its crearly seen that 87.07% of total amount of loan was overdue to Anonno borrowers.Apurbo borrowers contributed to 10.41%. In case of Aroggo, Diggon, Prothoma, the repayment is 0.03%, 1.58%, 0.55% respectively. Only 0.35% of total amount was overdue by others SME loan borrowers.

Table-15: Amount of Loan OverdueSME LoanAmount of Loan Overdue (BDT in millions)Percentage (%)

Anonno1523.21 87.07

Apurbo182.16 10.41

Aroggo0.58 0.03

Digoon rin 27.64 1.58

Prothoma9.58 0.55

Others6.18 0.35

Total1749.35 100.00


Fig-18: Amount of Loan Overdue

Source: Internal Data, SME Banking Operation of BBL7.5: No. of borrowers & defaulters of SME loanThe demand for SME loan has been increased over the years. Small and medium entrepreneurs are eager to expand their business by taking loan from banks or other financial institutions. In 2012 99,389 entrepreneurs took: SME loan from BRAC Bank and out of them 3,801 entrepreneurs default the loan. Table-16: No. of borrowers & defaulters of SME loanSME LoanNo. of BorrowersNo. of Defaulters

Anonno 93,5183568

Apurbo 132678

Aroggo315 19

Digoon rin 25721

Prothoma 234959

Others 162456

Total99,3893801


7.6: Reason behind SME loan defaulting in 2012Among the defaulters 16.17% were abscond. 58.46% default the load overdue due to business closed. 5.78% ware deceased. Case file was field to 16.87% of defaulters. Finally, 2.73% of defaulters defaulting the loan due to others reasons.

Table-17: Reason behind SME loan defaulting in 2012ReasonFrequency(f)Percentages (%)

Abscond 35016.17

Business Closed126558.46

Deceased 1255.78

Case file 36516.87

Others592.73

Total2,164100


Fig-19: Reason behind SME loan defaulting

Source: Internal Data, SME Banking Operation of BBL7.7: Nature of Business of SME Loan borrowersMost of the respondents (44.59%) are involved in trading business. 33.11 % borrowers are manufacturing in production and 14.19% entrepreneurs provide service. Only 8.11% of respondents have others type of business. Table-18: Nature of Business of SME Loan borrowersNature of BusinessFrequency(f)Percentage (%)

Trading6644.59

Manufacturing 4933.11

Service2114.19

Others128.11

Total148100.00

Source: Survey Data 2013 Fig-20: Nature of Business of SME Loan borrowers

Source: Survey Data 2013

7.8: Purpose of SME Loan TakenAmong the respondents 57.35% borrowers took SME loan for purchasing, fixed assets. Majority Of the respondent took loan for Purchase fixed asset and only 23.53% took loan for other purpose.

Table-19: Purpose of SME Loan TakenPurpose of SME Loan TakenFrequency(f)Percentage (%)

Purchase fixed asset7857.35

Gain working capital2619.12

Others3223.53

Total136100.00


Fig-21: Purpose of SME Loan Taken


7.9: Amount of SME loan taken Most of the respondents 52.82% took SME loan ranging from BDT 2.00 to 5.00 lac. 30.28% took loan from BDT 5.00 to 8.00 lac. 10.56% of total borrowers surveyed took loan from BDT 8.00 to 11.00 lac. Only 6.34%took SME loan ranging from BDT 11.00 to 30.00 lac.

Table-20: Amount of SME loan taken Amount of Loan (BDT in Lac)Frequency(f)Percentage (%)

2.00-5.007552.82

5.00-8.004330.28

8.00-11.001510.56

11.00-30.0096.34

Total142100.00


Fig-22: Amount of SME loan taken


7.10: Term of SME loan TakenAmong the respondents 4.17% took SME loan for the period less than 7 months. 8.33% of customer surveyed took loan for the period ranging from 7 to 14 months. Most of the respondents 40.97 % took loan for 14 to 21 months. Only 6.25% took SME loan for the long period 35 or more months.

Table-21: Term of SME loan TakenTerm of SME loan Taken Frequency(f)Percentage (%)

Below 7 Months 64.17

7-14 Months 128.33

14-21 Months5940.97

21-28 Months4631.94

28-35 Months128.33

35 or More96.25

Total144100.00


Fig-23: Term of SME loan Taken


7.11: Problem Faced by SME Loan BorrowersOut of 150 respondents 59 made responses to the question regarding problem faced. According to the most of the respondents (25.42%), higher interest rate is the main problem. 15.26% said that they faced problem when the loan was disbursed. 23.73% faced complex documentation process while applying for the loan. Finally 10.17% faced other problems.

Table-22: Problem Faced by SME Loan BorrowersProblem Frequency(f)Percentage (%)

Late Disbursement 915.26

CRO's Misconduct 813.56

Higher Interest rate 1525.42

Additional Charges711.86

Complex Documentation 1423.73

Others610.17

Total 59100


7.12: Age of SME Loan BorrowersOut of 150 respondents 125 made response to the question regarding age. Table 11 shows that age group is maximum frequency is 30-40 years. This group contributes to 36.00% of total respondent. The second large age is the 40-50years that contribute to 28.8%. It clearly shows that most of the SME loan provided to people who are aged and experienced but there are few borrowers who are above 50 or more years.

Table-23: Age of SME Loan BorrowersAge GroupFrequency(f)Percentage (%)

Below 20 years00

20-30 years2318.4

30-40 years 4536

40-50 years3628.8

50 years or More2116.8

Total 125100


Fig-24: Age of SME Loan Borrowers


7.13: Education qualification of SME Loan Borrowers124 out 150 respondents made response to the question regarding educational qualification. Table-12 shows that the educational qualification of most of the borrowers 42.74% surveyed is below SSC and 9.68% are educated up to SSC and 15.32% are educated up to HSC level.20.97% have completed graduation. Only 11.29% of respondent have post graduation degree. Table-24: Education qualification of SME Loan BorrowersEducation Frequency(f)Percentage (%)

Below SSC5342.74

SSC129.68

HSC1915.32

Bachelor2620.97

Masters1411.29

Total124100.00


Fig-25: Education qualification of SME Loan Borrowers


7.14: Monthly income of SME Loan BorrowersOut of 150 respondents 107 made response to the question regarding Monthly income of SME Loan Borrowers. Most of the respondent 24.30% belongs to the income level of BDT 20,000-30,000. 27.10% of customer surveyed earns more than BDT 50,000monthly.the monthly income of only 10.28%is less than BDT 10,000.

Table-25: Monthly income of SME Loan BorrowersMonthly Income (BDT)Frequency(f)Percentage (%)

Below 10,0001110.28

10,000-20,0001312.15

20,000-30,0002624.30

30,000-40,0001816.82

40,000-50,000109.35

50,000 or More2927.10

Total107100.00


Fig-26: Monthly income of SME Loan Borrowers


7.15: Business Experience of SME loan borrowers Business experience is one of the important criteria for the eligibility of being a borrower. From the table-14 it is clearly seen that most of the respondent 27.89% have business experience ranging from the 5 to 10 years.26.53% have experience for less than 5 years.17.69% have business experience for 10-15 years. Only 13.93% have experience for more than 20 years.

Table-26: Business Experience of SME loan borrowers Experience Frequency(f)Percentage (%)

Below 5 Years3926.53

5-10 Years4127.89

10-15 Years2617.69

15-20 Years2214.97

20 Years or More1912.93

Total147100.00


Fig-27: Business Experience of SME loan borrowers


7.16: Business asset of SME loan borrowers Out of 150 respondents 107 made response to the question regarding Business asset of SME loan borrowers Table -15shows that most of the respondent 55.97% have business asset of BDT 5 lac to 10 lac. 17.16 % of respondent have business asset less than BDT 5 lac. Only 8.21% of total borrowers surveyed have business asset more than BDT 20.00lac.

Table-27: Business asset of SME loan borrowers Business Assets (BDT in lac)Frequency(f)Percentage (%)

Below 5 lac2317.16

5.00-10.007555.97

10.00-15.001611.94

15.00-20.0096.72

20.00 or More118.21

Total134100.00


Fig-28: Business asset of SME loan borrowers


7.17: Prospect of SME loan Prapti Current Account BRAC Bank is offering current account named PRAPTI. Anyone can deposit and withdraw money through any branches, SME sales & service centers during banking hours and through ATM and CDM 24 hours. Besides, he/she will get interest daily on balance.

Eligibility Any kind of organization (such as sole proprietorship, partnership, private limited company, educational institution, NGO/Project, Co-operative society and so forth)

Specialty of PRAPTI Current account It is a current account in which interest is paid on daily balance. You can open up this account in any branches across the nation with only BDT 2000. For withdrawal need it will have debit card (only for sole proprietorship) with opening the account. And make their transactions through 21 SME sales and service centre, 48 agri branch and 86 branches, over 300 ATMs and 30 cash deposit machines without hassle.

Rate of Interest The following is the rate of interest applicable daily on ones balance.Amount of BalanceSpecific Interest Rate

0 - Below 5,0000%

5,000 - Below 100,0001%

100,000 - Below 250,0002%

250,000 Below 500,0003%

500,000 & Above4%

Miscellaneous Fee Relationship Fee (Half yearly)Free (If average balance is BDT 100,000 or above). BDT 500+15%VAT will be charged if average balance is below than BDT 100,000.

Debit Card/ ATM Card Fee (Yearly)BDT 600 + 15% VAT

Cheque Book FeeFirst cheque book is free (25 leaf). From 2nd cheque book (Maximum 100 Leaf) BDT 8 + 15% VAT (per leaf) will be charged if average balance is below than BDT 1,00,000.

Excise DutyAs per Government rules.

Inter / Intra City Online Banking FeeAs per schedule of charges

"Prachurjo" is a lucrative fixed deposit for small and medium businesses. With a minimum 50,000 TK, any business enterprise having valid trade license can open this account. Specialties 1. Tenure: Minimum 1 month and maximum 36 months2. No fees except govt excise / duty on interest earned,3. Interest is applicable on maturity4. No pre-encashment fees

7.18: Problems for financing SMEs: SME sector faces a number of problems to facilitate institutional credit. These problems were looked into from the perspective of both borrower and lenders.

7.18.1 Problems from Borrowers perspective: (a) Access to loan: SMEs encounter great difficulties while rising fixed and working capital because of the reluctance 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.

(b) Collateral: The banks have some regulation of taking a minimum amount of collateral against credit, but many small and medium entrepreneurs cannot fulfill the requirement.

(c) Complexity increases cost of loan: Many entrepreneurs is having problem because of high interest rate. Banks, in many cases maintain high spread as a result there remains reckless competition of making more profit from the Banks perspective. And, sufferers are general entrepreneurs who borrow from the Bank (Quader, and Ahmed 2005).

(d) Extremely short grace period: In our country, grace period of repaying any credit is very low. According to the SME entrepreneurs, almost all the Banks structured the loan in such a way that entrepreneurs have 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 to generate profit instantly to fulfill the Banks requirement.

(e) Absence of comprehensive guidelines: Another problem is that, there is an absence of comprehensive guidelines in the SME sector. Most of the SMEs do not have any guidelines for controlling their business. They do not maintain any deliberate procedure in managing the enterprise; rather they go on with the time-to-time changes in the business operation. As a result they cannot generate expected profit from the business and fail to payback credit to the banks.

(f) Longer loan processing time and associate cost of uncertainty: Credit in this sector requires longer processing time. Though it is small and medium enterprise Sector, processing time for loan is not short. As a result banks are unwilling to enter in this sector.

(g) Lack of basic infrastructure, inputs, managerial efficiency and inadequate sanction: Most of the SMEs do not have basic infrastructure of their own i.e. there is a lack of planned infrastructure in this sector.

7.18.2 Problems from lenders perspective:

(a) Lack of information on loan application requirement among the SME loan seekers: As credit application requires availability of adequate information, most of the SMEs do not have adequate information.

(b) Absence of an appropriate and clear-cut legal framework for enforcing quick recovery: Even Banks do not have appropriate legal framework in order to recover their disbursed credit. Their recovery framework is not clear-cut as a result they fail to control the servicing of loan.

Others problems: High employee turnoverDue to limited growth of SME most of the skilled employees leave SMEs. Its observed that SMEs are knowledge creators but poor at knowledge retention.

Absence of modern technologyOne of the main barriers for the development of SME in Bangladesh is inadequate technologies. Many SMEs have failed to adopt modern technology.

Poor physical infrastructureInadequate supply of necessary utilities like electricity, water, roads and highways hinder the growth of SME sector. Moreover unfavorable geographical conditions increase the transportation cost.

Financial constraintsAvailability of finance hinders the growth of SMEs in Bangladesh. Bangladeshi bank considers SMEs as high risk borrowers because of their inability to comply with the banks collateral requirements. Only about 15-20% of the owners of SMEs own any immovable property. Bankers issue loan on the basis of ownership of immovable property as collateral risk. As a result it automatically excludes rest 80% SMEs from the list of privileged clients of the banks.

Lack of uniform definitionIn Bangladesh the definition of SME has changed overtime in different industrial policy announced by the government in different year. Absence of uniform definition makes the formulation and implementation of SME policy difficult.

Lack of informationMiah (2006) has observed that SMEs have very limited use of information technology (IT). Accounting package is used by 1-2% of the SMEs. The use of computers is revealed by say 15% of the SMEs, while the use of the Internet for business purposes applies to say 8-10% of SMEs.

Lack of entrepreneurship skillsConservative attitude towards risk, lack of vision, ability to make plan and implementing those hinder the growth of SME in Bangladesh.

Participation of women entrepreneurs Equality of opportunity is a major problem for SME. Female entrepreneurs are treated discriminately. They are not well represented in business organization. Government does not provide adequate institutional assistance for women entrepreneurs.

Access to Market and lack of awareness regarding the importance of marketing toolFor SME, owing a retail space is very expensive in the major cities in Bangladesh. As a result many customers are not interested to buy products and services from SMEs. Because they cant judge the quality until they physically examined the product. Most of the cases SMEs in Bangladesh are not able to use the Integrated Marketing Communication (IMC) tools. But these tools play the role of important stimulus to motivate the customers and retain them. The country does not have enough marketing capability and resources to invest in marketing.

BureaucracyIts observed that the inadequate government supports are top ranking constraints for SMEs. Unnecessary layers of Bureaucracy and red-taps reduce the competitiveness of SME and raising the cost of transactions and operations.

Absence of transparent legal systemThe absence of an effective and transparent legal system discourages SMEs in exploring into risky ventures of business. There are a number of unnecessary formal requirements to start and run business that create high compliance costs and become barriers to SME development, growth and market entry.

Lack of commitment to innovation and customer satisfactionErnesto (2005) stated that to keep in pace with international competition, firms of all size are challenged to improve and innovate their products processes constantly. But in Bangladesh SMEs are still not relating the importance of satisfying and retaining customers by offering novel and desired benefits.

Lack of quality assuranceGovt. has failed to frame a national quality policy, provide adequate support systems and establish a national quality certification authority. As a consequence SME of Bangladesh has failed to ensure the quality of their products and services both in local and international market.

Lack of research and development facilitiesIt is observed that investment in R&D is still negligible in.Chapter-10: Research Findings, Recommendation and Conclusion Research Findings There are various problems and prospects that are associated with SME loan management of BRAC Bank. The findings of the analysis and interpretations are as follows:1. SMEs are not preparing proper financial statement which creates problem for the bank judging financial standings, profitability and credibility.2. SMEs are not maintaining proper licensing which makes SMEs difficult to trace, create problem for the bank maintaining records, and decrease SMEs credibility to the bankers.3. Upgraded technology affects SMEs ability to repay loans.4. BBL considers promotion for the product like Over Draft, Time Loan, and Term Loan to be adequate in SMEs sector.5. Bank is not yet able to design appropriate financial products for SME segment due to lack of importance and lack of feedback from SME owners.6. Payback period suggested by banker is 1-3 years.7. Bank does not consider informal loan providers as its competitors.8. Bank is ready to grant loan to SMEs as a cluster.9. Banks can trace SMEs better, can lower their cost of capital, and can give efficient service if they grant loan cluster wise.10. Shorter-term loans and lower interest rates will improve the quality of SME loan offering.11. Bank improves current SME offering through interconnection between individual and SME loans so that higher amounts can be extracted.12. Accurate credit rating information will improve the quality of SME loan offering.

RecommendationsIn order to overcome the above mentioned problems the following suggestions are recommended;1. It should be maintain proper financial statement for SMEs loan borrowers.2. Maintaining proper licensing is necessary to SME loan takers for the future security.3. Technology must be easier and understandable to the SME loan borrowers. 4. Financial products design should be appropriate for SME segment for feedback from SME owners.5. Interest rate is higher for SME loan. The interest rate as well as additional charges such as loan processing fee should be reduced.6. The documentation process must be easier because most of the borrowers are not well educated.7. The first step for BRAC Bank Limited would be to minimize this gap by relaxing bank procedures of SMEs loan management.8. Customer Relationship Officers (CRO) should be well-trained to provide better service to SME loan borrowers.9. Due to the absence of uniform definition the policy formulation and implementations are not possible. Bank should take initiative to develop a uniform definition of each category of SMEs.10. To encourage manufacturing, BRAC bank should provide more SME loan to entrepreneurs involved in production. 11. Effective monitoring system should be implemented for the whole recovery process.12. In this era of intense competition continuous planning and quality improvement act as a prerequisite for the survival of SMEs. In order to improve the quality SMEs can follow the Just in Time (JIT) philosophy and use Total Quality Management (TQM) and can ensure the improvement of quality and productivity at a time.13. The bank should develop an official credit-rating system in easier way, even if in a limited manner, as soon as possible so that they can have some idea about the reliability of their SME clients.

Conclusions The SME sector in many developing countries has usually been neglected and discriminated against in terms of access to government attention, access to finance, management and marketing expertise and technology, as compared with large enterprises. SMEs in Bangladesh contribute significantly to manufacturing growth and employment creation. There are around 27,000 medium sized enterprises and around 150,000 small-scale enterprises in the country. At present, 80 percent of manufacturing establishments are SMEs, accounting for 80 percent of the labor force, 50 percent of the output of the sector and 5 percent of GDP. SMEs provide vital linkages to larger enterprises, particularly in the high-growth export sector, and also form

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