IDLC

Performance Analysis of SME: A Study on IDLC Finance Limited

Performance Analysis of

Small & Medium Enterprises

(SME):

A Study on IDLC Finance Limited

1

Performance Analysis of SME: A Study on IDLC Finance LimitedPerformance Analysis of Small & Medium

Enterprises (SME):

A Study on IDLC Finance Limited

Prepared For:Ms. Samia Sultana Tani

Assistant ProfessorDepartment of Finance

Leading University

Prepared By:

Md. Sajjad HossainRoll no: 0702010048

BBA 16th BatchDepartment of Finance

Leading University

2

Date of Submission: 20th May, 2011

Performance Analysis of SME: A Study on IDLC Finance LimitedSupervisor’s Certificate

This is to certify that the internship report on “Performance Analysis of Small

Medium Enterprises (SME): A Study on IDLC Finance Limited” is the bona fide

record at the report is done by Md. Sajjad Hossain as a partial fulfillment of the

requirement of Bachelors of Business Administration (BBA) degree from the

Department of Finance, Leading University.

The report has been prepared under my guidance and is a record of the bona

fide work carried out successfully.

--------------------------------

Signature of the supervisor

Date:

3

Performance Analysis of SME: A Study on IDLC Finance LimitedDeclaration

I do hereby solemnly declare that the work presented in this internship report has

been carried out by me and has not been previously submitted to any other

university/college/organization for an academic qualification/certificate/diploma or

degree.

The work I have presented does not breach any existing copyright and no portion

of this report is copied from any work done earlier for a degree or otherwise.

I further undertake to indemnify the department against loss or damage arising

from breach of the foregoing obligations.

---------------------------

(Md. Sajjad Hossain)

Roll No: 0702010048 (BBA)

16th Batch

Date: ……………....

4

Performance Analysis of SME: A Study on IDLC Finance LimitedLetter of Transmittal

May 20, 2011

Ms. Samia Sultana Tani

Assistant Professor

Department of Finance

Leading University

Subject: Submission of internship report on “Risk Management of Small Business

Financing (SBF): A Study on IDLC Finance Limited”

Dear Madam,

It gave me an immense pleasure in presenting this internship report titled “Risk

Management of Small Business Financing (SBF): A Study on IDLC Finance Limited”

which was assigned to me as partial fulfillment of my Bachelors of Business

Administration (BBA) degree requirement. In this paper, I have tried my level best to

make this report as effective as possible.

I hope that the report serves the purpose that it was assigned for. I shall be pleased to

answer any sort of query you think is necessary, as now and when needed.

Sincerely

Md. Sajjad Hossain

Roll No: 0702010048 (BBA)

BBA 16th Batch

Department of Finance

Acknowledgement

5


I would like to express my deepest gratitude to my Internship Supervisor Ms. Samia

Sultana Tani, Assistant Professor, Department of Finance, Leading University, for her

heartfelt supervision, co-operation and advices. I also like pay my appreciation to our

chairman sir for arranging our internship program. I also thank all the staffs of this

department for their sincere support.

This internship report might never have been completed without the necessary practical

knowledge, assistance of many books, articles, websites, and primary data. It enhanced

my knowledge on SME activities as well as banking business. Thanks to all those

persons, who have assisted me, providing me co-operation, books and articles.

The members of IDLC Finance Ltd. management were very co-operative and helpful.

They helped me through providing various data, guidance and direction. I am grateful to

Mr. Kazi Mahmood Hossain, Head of Small Business Financing (SBF) of IDLC Finance

Ltd. for his cooperation and necessary support.

Finally I want to express my special thanks to Mr. Enayetur Rahman, Junior Officer of

CRM of SBF, under whom I have completed internship report. I am also grateful to all

other employees of Sylhet Branch Office for their support and assistance.

6

Performance Analysis of SME: A Study on IDLC Finance LimitedTable of Content

Chapter No.

Particulars Page No.

- Executive Summary viii

1.0 Introduction

1.1 Origin of the report O1

1.2 Objectives of the report O1

1.3 Scope of the report 02

1.4 Methodology of the report 02

1.5 Limitations of the report 03

2.0 Organizational Overview

2.1 The pioneer 04

2.2 Shareholding Structure 05

2.3 Guiding Principle 06

2.4 Product and Service 07

2.5 Subsidiaries 09

2.6 Financial Performance 09

2.7 Operational performance 11

2.8 Ratio Analysis 12

2.9 SWOT analysis 13

3.0 SME in Bangladesh

3.1 Current Conditions of SMEs in Bangladesh 17

3.2 Constraints on SME growth 19

3.3 Governments role towards SME 20

3.4 Levels of employment 21

3.5 Contribution of SME to GDP by sector 22

3.6 Major banks/FIs financing SME sector 22

3.7 Performance of banks and NBFIs 23

4.0 SME in IDLC

4.1 SME financing of IDLC 24

4.2 Rationale for SME financing at IDLC 24

4.3 Bangladesh bank refinancing 25

7

Performance Analysis of SME: A Study on IDLC Finance Limited 4.4 Customer segment 28

4.5 Products offered under SME financing 30

4.6 IDLC – commitment to SME sector 31

5.0 Managing Credit Risk in SME

5.1 Principles of sound lending 33

5.2 SBF financing schemes 34

5.3 Mandatory and discretionary verification of information for SBF proposals

36

5.4 Credit approval and service delivery process 38

5.5 Authority delegation under SME 39

5.6 Credit terms and conditions 40

5.7 Appraisal procedure of SME client 48

5.8 Sectoral exposure 50

6.0 Non Performing Loan & Overdue Analysis

6.1 Regression Analysis: Overdue versus Total Portfolio of Loan

52

6.2 Regression Analysis: Overdue Loan versus NPL 56

6.3 Trend Analysis for OD 60

7.0 Findings & Conclusion

7.1 Findings 61

7.2 Conclusion 62

- Appendix

8


List of Tables

Table No. Particulars Page No.

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10

11

Shareholding Structure of IDLC as of December 31,

2009

IDLC’s Capital Structure as of December 31, 2009

Growth of the company’s different sectors

Sources of revenue

Operational revenues

Ratios

Stock Information

SBF Financing Scheme

Sectoral Exposure

Overdue and Total Portfolio of loan

Overdue Loan versus NPL

05

05

09

10

11

12

12

34

50

53

57

List of Graphs

9

Performance Analysis of SME: A Study on IDLC Finance LimitedFigure No. Particulars Page No.

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

SME loans as percentage of total loans

Distribution of Employment

Institutional share of SME loan disbursement

Sectoral Exposure of SME Financing of IDLC

Scatter Diagram

Fitted Line Plot

Scatter Diagram

Fitted Line Plot

Trend Analysis Plot

18

21

23

51

53

53

57

57

60

Executive Summary

IDLC Finance Ltd. is the leading non-banking financial institution of Bangladesh. It

offers wide range of financial services with four major departments named 1) Corporate

services, 2) Capital Market services, 3) Personal Financial services and 4) Small &

Medium Enterprise (SME) financing. It has been providing loan facilities to small and

medium trading, manufacturing and service oriented enterprises all over the country for

more than 5 years. IDLC is playing a very commendable role in developing economic

condition of the country with excellent financial expertise. So it provides loan facility of

BDT 0.3 million to BDT 7.5 million to that small and medium enterprise who has no easy

access to banks/financial institutes.

The success of SME largely depends on the selection of a business and man behind the

business. IDLC provides this facility to those whose business operation is minimum one

year and environment friendly business. The business should be legally registered and

must have valid trade license. The entrepreneur should be physically able, preferably

between Customer relation officers search new potential customer by providing door-to-

door service. They talk with clients and monitor their manners, activities of their business

and provide the loan to the potential customers. SME, IDLC may provide 100% of net

required working capital but not exceeding 75% of the aggregate value of the inventory

10

Performance Analysis of SME: A Study on IDLC Finance Limitedand account receivable. Normally, organizations meet their working capital from over

draft loan but IDLC designed the loan to meet working capital but as term loan which is

repaid in installment. The customer relation officers also monitor the borrowers’

activities after the loan disbursement. Monitoring also facilitates the build up of an

information base for future reference.

SME loan can be repaid in two ways, 1) In equal monthly loan installment (EMI) with

monthly interest payment. 2) By one single payment at maturity, with interest repayable a

quarter- ends residual on maturity. Customer relation officers search new potential

customer by providing door to door service. Normally, organizations meet their working

capital from over draft loan but IDLC designed the loan to meet working capital but as

term loan which is repaid in installment. The customer relation officers also monitor the

borrowers’ activities after the loan disbursement. IDLC is very much conservative in

providing loan facilities to its client in order to ensure quality of the loans. For this reason

it emphasizes on the Credit Risk Management (CRM) - the team responsible for ensuring

quality of the loan and minimizing the number of NPL or Non-Performing Loan.

Basically the officers of CRM analyze the different aspects of potential clients using both

objective and subjective judgment.

The core competence of the IDLC is to provide the fastest and quality loans to the clients

in this country. To retain this competitive advantage IDLC would provide all sorts of

facilities whether they can give fastest services to clients than other banks. Also to

convey the customer focus, IDLC is trying to reduce collateral securities than its

competitors. Regarding the services by the CRO and CRM officers, almost all clients are

satisfied by getting these quick facilities from them. Though it is pioneer division of this

institute, I tried to give an in-depth analysis for every factor, which relates the credit risk

management of SME division.

Finally, regression analysis and trend analysis has done. The data of 18 months (from

January 2009 to June 2010) is used to analyze the overdue and NPL position of IDLC. By

analyzing the variable overdue loan and total portfolio of loan a significant negative

11

Performance Analysis of SME: A Study on IDLC Finance Limitedrelationship is found using simple regression analysis. Again analyzing the variable

overdue loan and non-performing loan no relationship has found. By trend analysis it has

found that overdue loan will be lower in the following months.

12


13

Chapter - 01


IntroductionIntroduction

1.0 INTRODUCTION

1.1 Origin of the Report

14

Performance Analysis of SME: A Study on IDLC Finance LimitedThe internship paper is a requirement to complete the BBA program of Department of

Finance, Leading University. I have joined the Small Business Finance (SBF) Team of

IDLC Finance Limited, Sylhet Branch, in February, 2011. Then I decided to do my

project paper on “Risk Management of Small Business Financing (SBF). As a part of the

internship program, the internship supervisor has assigned me to assess the credit and to

evaluate the loan and lease finance at IDLC Finance Limited. Organizational supervisor

Kazi Mahmood Hossain, Senior Manager of Credit Risk Management Division of IDLC

Finance Limited also approved the proposal. My honorable academic supervisor Ms.

Samia Sultana Tani has also approved the project proposal. As a financial institution

IDLC Finance Limited is very much looking forward to taking substantial exposure on

the Small and Medium Enterprises (SME). In this connection, this report has been

designed to analyze the current credit assessment procedure towards SME financing and

also term loan and lease finance opportunities to the end clients.

1.2 OBJECTIVES OF THE REPORT

The eventual purpose of the study is to increase real life experience in any kind of service

sector and to get a clear idea about the importance of training programs which consumes

valuable time and resources. The report encompasses a brief rundown on the various

functions and operations of the Credit Risk Management of Small Business Finance of

IDLC.

Apart from this, the report contains some specific objectives :

To know about the current practice of the assessing credit risk management of

small business financing of IDLC.

To construct a tentative suggestion to the SME about the loan and lease financing

advantages.

To focus on overdue loan, non-performing loan and total portfolio loan, to

measure the relationship between these variables using regression analysis.

15

Performance Analysis of SME: A Study on IDLC Finance Limited1.3 SCOPE OF THE REPORT

I have been working at the CRM of SBF of IDLC Finance Ltd and thus give me the way

to get myself familiarized with the non-banking environment for the first time indeed. I

have had an opportunity to gather experience by working in the different desks of the

department. SME financing is a relatively new concept to the financial institutions of

Bangladesh. Most of the Banks and Financial Institutions are involved in financing this

segment now a day. This segment is highly encouraged to be financed by the central bank

because the development of the country is indulged in the development of SMEs. Readers

can get help from this report because whole section is about SME financing. Lease and

loan are the core products of SME financing of IDLC Finance Limited. Readers will be

known about the alternatives between these two products. The area of concentration of

this report is confined in investigating different aspects of credit risk management of

small business financing, problems, prospects.

1.4 Methodology

The subject matter of this report is based on primary and secondary sources of data and

information. Here the regression and trend analysis is done to access the current position

of overdue and NPL of IDLC in SBF financing.

A. Primary Sources:

Face-to-face conversation with the respective officers and staffs of IDLC.

Practical work exposure from the different desks of the three departments of

the branch.

Study of the relevant files as instructed by the officers concerned.

Some opinions and ideas have been incorporated in the paper through

interactive sessions and interviews with the top management and mid level

executives of the organization

B. Secondary Sources:

Annual reports of IDLC Finance Ltd.

16

Performance Analysis of SME: A Study on IDLC Finance Limited Total overdue and NPL record in SBF System

Website of IDLC Finance Ltd.

Various books, Training articles, compilations etc. regarding credit risk and

risk management.

Prospectus

Different sites related to SME Financing.

1.5 Limitation

During my orientation I was able to learn a lot of things but still it was not enough. There

are some limitations that I can’t ignore. Data unavailability was the constraint. Official

documents on the detail activities of the department were not available. This report is

based on the whole process of credit assessment and evaluation of the term loan and lease

finance. SME Banking is a relatively new concept to the financial institutions of

Bangladesh. Most of the Banks involved in SME Banking are still in its rudimentary

stage. As a result, secondary data was fairly unavailable in this connection due to

insufficient research work conducted in this sector. Further it is added that the collection

of exact information is difficult because maximum information is confidential and those

information are modified before presenting in this report

17


18


Organizational Organizational ReviewReview

19

Chapter - 02

Performance Analysis of SME: A Study on IDLC Finance Limited2.1 THE PIONEER

IDLC Finance Ltd commenced its journey, in 1985, as the first leasing company of the

country with multinational collaboration and the lead sponsorship of the International

Finance Corporation (IFC) of The World Bank Group. Technical assistance was provided

by Korea Development Leasing Corporation (KDLC), the largest leasing company of the

Republic of South Korea.

IDLC, as a multi-product financial institution, offers a diverse array of financial services

and solutions to institutional and individual clients to meet their diverse and unique

requirements. The product offerings include Lease Finance, Term Finance, Real Estate

Finance, Short Term Finance, Corporate Finance, Merchant Banking, Term Deposit

Schemes, Debentures and Corporate Advisory Services.

IDLC's vision is to be Bangladesh’s best multi-product financial institution. In achieving

this vision and goal, we realize the importance of taking due care of all of

our constituents, particularly the share-holders, customers and workforce.

IDLC’s unique institutional shareholding structure, compromising mostly of financial

institutions, helps the company to constantly develop through sharing of experience and

professional approach at the highest policy making level. The company has authorized

capital of Taka 1,000,000,000 (10,000,000 shares of Taka 100 each) and paid up capital

of Taka 300,000,000 (3,000,000 ordinary shares of Taka 100 each). IDLC has also

established two wholly owned subsidiaries, IDLC Securities Limited and I, Cons Limited

to provide customers with security brokerage solutions and IT solutions, respectively.

20

Performance Analysis of SME: A Study on IDLC Finance Limited2.2 SHAREHOLDING STRUCTURE & CAPITAL STRUCTURE

IDLC was incorporated as a joint venture public limited company in the year 1985.

Among two foreign and two local financial institutions foreign institution holds 30% of

IDLC shares. Local sponsors and general public hold the rest 70% of the shares.

Institutional share holding comprising of financial institution helps development through

sharing of experience and professional approach at the highest policy making level. Brief

profile of share holding institutions is given below:

Table: Shareholding Structure of IDLC as of December 31, 2009

Sponsors 47.3%

Foreign Sponsors 30.00%

Korea Development Financing Corporation (KDFC), South

Korea

20.00%

Kookmin Bank, South Korea 10.00%

Domestic Sponsors 17.3%

The City Bank Limited 9.70%

Sadharan Bima Coporation 7.62%

General Public 52.7%

Mercantile Bank Ltd. 7.50%

Eskayef Bangladesh Ltd. 8.00%

Reliance Insurance Ltd. 7.00%

Other institutions 14.20%

Individuals 16.00%

Source: Annual Report of 2009, IDLC

Table: IDLC’s Capital Structure as of December 31, 2009

Authorized Capital BDT 1,000.00 Million

Paid-up Capital (including share premium) BDT 300.00 Million

21

Performance Analysis of SME: A Study on IDLC Finance LimitedSource: Annual Report of 2009, IDLC

2.3 GUIDING PRINCIPLES

IDLC is a multi-product financial institution offering an array of diverse financial

services and solutions to institutional and individual clients to meet their diverse and

unique requirements. Following are the guiding principles that shape the organizational

practice of IDLC

Customer first: IDLC has grown with its customers, who are believed to be the center

of all actions. As the crux of IDLC’s corporate philosophy, customer service gets the

highest priority.

Innovation: IDLC has continuously introduced new financial products for meeting the

needs of the entrepreneurs in a complex & challenging business environment. The

concept of innovation is in-built into the working culture.

Professional Knowledge: IDLC is staffed with qualified professionals and innovative

minds in the country. Years of operational experience, large industrial database and

competent workforce have gives them unparalleled advantages.

Professional ethics: The professional at IDLC maintain the highest degree of financial

and business ethics in all transactions with the clients. Over the last two decades, IDLC

have put in bets efforts to meet the expectations of the clients and investors.

One stop solution: Work at IDLC begins with the idea generation, and then goes on into

the feasibility study followed by arrangement of financing to implement the project.

IDLC advises the clients, finance them and even arrange financing for them via different

financing modes, namely: lease financing, term loan, bridge loan, syndication, bridge

loan, syndication, ordinary shares, preferred shares and debentures.

22

Performance Analysis of SME: A Study on IDLC Finance LimitedVision: Become the best performing and most innovative financial solutions

provider in the country

Mission: Create maximum possible values for all the stakeholders by adhering to

the highest ethical standards

For the Company: Relentless pursuit of customer satisfaction through

delivery of top quality services.

For the Shareholders: Maximize shareholders’ wealth through a

sustained return on the investment.

For the employees: Provide job satisfaction by making IDLC a center of

excellence with opportunity of career development.

For the society: Contribute to the well-being of the society, in general, by

acting as a responsible corporate citizen.

Goal: Long term maximization of Stakeholders’ value.

Corporate Philosophy: Discharge the functions with proper accountability for all

actions and results and bind to the highest ethical standards

2.4 PRODUCTS AND SERVICES

Name of Product Line Product Name

Structured Financing SyndicationAdvisory ServicesMerger and AcquisitionSecuritizationLocal Enterprise Investment Center

Real Estate Financing Real Estate FinanceHome Loan

23

Performance Analysis of SME: A Study on IDLC Finance LimitedReal Estate Developer FinanceHome Loans with Home Loan ShieldHome Equity Loans

Lease Financing Machinery Loan

Short Term Financing Factoring of Accounts ReceivableWork Order Finance

Deposit Schemes Cumulative Term DepositAnnual Profit Term DepositMonthly Earner DepositDouble Money DepositInter Corporate Deposit

Merchant Banking Services Issue ManagementUnderwritingPrivate PlacementPortfolio ManagementTrusteeship ManagementBridge Loan FinancingInvestment AdvisoryPlacement of Equity, Debentures and Bonds

Personal Loan Car LoanPersonal LoanFestival Loan

SME Loan Lease Finance & Term FinanceProfessional supports to SMEs


2.5 SUBSIDIARIES

IDLC Securities Limited, a fully owned subsidiary of IDLC, offers full-fledged

international standard brokerage service for retail and institutional clients. It has seats on

both the Dhaka and Chittagong Stock Exchanges. It is also a Depository Participant (DP)

of Central Depository Bangladesh Limited (CDBL).

24

Performance Analysis of SME: A Study on IDLC Finance LimitedI.Cons Limited, a fully owned subsidiary of IDLC provides world class IT solutions

starting from financial applications to IT infrastructure development and consultancy

services.

2.6 FINANCIAL PERFORMANCE

During the last five years IDLC major financial performance are presented here. This information is collected form the annual reports of the company.

Table: Growth of the company’s different sectors

(Tk. in Million) 2005 2006 2007 2008 2009 Growth

Lease and term loans executed 2,564 2,875 2,977 3,412 3750 9.9%

Housing finance disbursement 898 1,205 1,255 1,612 1839 14.08%

Short Term finance portfolio 355 326 213 336 317 -5.65%

Lease Finance portfolio 4,711 5,001 4,571 4,734 4383 -7.41%

Housing finance assets 1,643 2,441 3,065 3,915 4789 22.32%

48.52Total assets 8,800 11,680 15,056 17,442 2268

1

30.79%

Long term liabilities 6,605 8,099 11,103 12,115 1879

2

55.11%

Term deposit balance 4,487 5,610 8,257 8,249 9780 18.56%

Net current assets (237) (959) 1,401 1,559 1003 -33.66%

Shareholders' equity 851 950 1,247 1,611 2393 48.52%


This data shows stable growth of the company’s different sectors. Only the short term

financing portfolio decreased during this time due to diversifying into other product line.

It started personal loan, car loan scheme and SME loan separately.

From the very beginning of its operation, IDLC shows growing trends. Last few years its

assets i.e. investment on different sectors increased a lot. Although its shareholders’

equity do not increased significantly, it has a stable growth rate.

25

Performance Analysis of SME: A Study on IDLC Finance LimitedAnother important point to be noted here is that in recent years the difference between the

asset and debt increased. This indicates the financial strength of the company.

Since the capital market if growing for the last two decades, each product line of IDLC

shows increasing trend. Revenues from each product line are separately presented here.

Table: Sources of revenue


Lease Finance 4,174 4,711 5,001 4,571 4,734 3.57%Term Loan 2,030 2,564 2,875 2,977 3,412 14.61%Real Estate Finance 519 898 1,205 1,255 1,612 28.45%


The revenue growth for lease financing significantly increased in last one year. Same is

for real estate finance, term loan, and merchant banking. This indicates that IDLC is now

more investing these products as these are comparatively more profitable. On the other

side, structured finance decreased a little due to huge competition and introduction of

separate product line i.e. personal loan respectively.

26

Performance Analysis of SME: A Study on IDLC Finance Limited2.7 OPERATIONAL PERFORMANCE

At the end of the day the final result depends on how much profit the company is generating

through investment in different sectors. Thus like any financial institution, IDLC sincerely

evaluate its operational performance to find the profitability of each segment and products.

Table: Operational revenues


Operational revenue 859 1,008 1,291 2,023 2,618

29.41%

Operational expenses 612 747 1,059 1,655 2,022

22.17%

Financial expenses 418 536 815 1,246 1,552

24.56%

General and administrative expenses

95 135 167 225 294 30.67%

Profit - before tax 247 265 234 475 708 49.05%Net profit- after tax 134 153 155 303 406 33.99

%


During the last five years its operational revenues almost doubled. Although during the same

time period its operational expenses increased a lot, but this is mainly due to expansion of

activities, diversifying product line and investment in new fields. Thus the return is expected

to be multiplied in upcoming years. Particularly in 2008 the reason for increase of financial

expenses is liquidity crisis during the first half year that resulted in the high rate in the call

market.

This graph shows the comparative growth of operational revenue and net income after tax.

Since the company invested in new fields for last few years, its income was not increased like

its revenues. In 2008 its revenue increased by 29.41% but expenses increase by 22.17%. As a

result net income increased 33.99%.

27

Performance Analysis of SME: A Study on IDLC Finance Limited2.8 RATIO ANALYSIS

Ratio analysis used for actual performance analysis of the company. To evaluate IDLC’s

performance last five years data are used here to find out some important ratios.

Table: Ratios

2005 2006 2007 2008 2009 Growth

Current ratio 1.6 0.96 1.2 1.2 1.04 -

14.05%

Debt equity ratio 8.0 9.3 9.54 8.32 8.48 1.92%

Financial expenses coverage ratio 1.5 1.3 1.43 1.56 1.75 20.53%

Net asset value per share (Tk) 340 381 499 645 797 48.52%

Return on shareholders' equity 19.0

%

17.1

%

27.59

%

28.43

%

41.05

%

44.39%


Increasing trend in current ratio indicates company has less current liability than current

assets, which is not good. Decreasing debt equity tells that debt is decreasing compared to the

investment. Financial expenses coverage ratio is quite stable, which is a good sign. Increasing

net asset value per share directing strong confidence of shareholders although return on

equity increased a bit during this time period. This is mainly because of re-investment and

business expansion.

Table: Stock Information

2004 2005 2006 2007 2008 Growth

Earnings per share 53.59 61.20 62.80 121.33

162.55

33.97%

Price earnings ratio 13.9 9.9 7.6 10.02 14.08 40.52%

Dividend per share (%) 35 37.5 38.33 40 35 -12.5%

Market price (Tk) per share (Year end)

1,245 1,007 784 1220 2288 187%

28

Performance Analysis of SME: A Study on IDLC Finance LimitedDividend yield / return 2.81

%3.72%

4.89%

2.63 1.53 -41.8%


All the market ratios sign good position of shares of the company in the market.

Company gives increased dividend, both cash and share, each year except 2008 because

it re-invests a lot. All these ultimately increased the share price in the market.

Increase earnings per share also resulted due to proper and regular dividend. Increased

price earnings ratio also supports the trend. The last year it took a hike due to year end

market price rise. At that time share market was suffering because of political violence

and uncertainty.

All the above calculations and information provide explanation to the financial strength

of the company. Still the company has various fields to explore in the capital market of

Bangladesh.

2.9 SWOT Analysis

The SWOT analysis for IDLC can be described as follows:

Strengths

I. Reputation and brand imageII. Product portfolio

III. Quality Customer PortfolioIV. Human ResourcesV. Operational efficiencyVI. Employee Empowerment

Weakness

I. High Cost of fund II. More Focus on Volume

III. Too Much Diversification IV. Less People in Liability Marketing

Opportunity

I. Continuity of LiberalizationII. Foreign Investment in Prospective

Threats

1. Threat from banks2. Number of FI’s

29

Performance Analysis of SME: A Study on IDLC Finance LimitedSectors

III. Local banks inefficiency3. Regularity control of government

30


SME in SME in BangladeshBangladesh

31

Chapter - 03

Performance Analysis of SME: A Study on IDLC Finance Limited3.0. SME in Bangladesh

There are so many definitions of SMEs in Bangladesh. Industrial Policy document from

the Ministry of Industries defines a small enterprise as a registered enterprise with less

than 50 workers, excluding the cottage units, and with a fixed capital investment of less

than Taka 100 million. A medium enterprise is defined as a registered enterprise with

between 50 and 99 workers, and/or with a fixed capital investment between Taka 100

million and Taka 300 million (between USD 1.8 million and USD 5.4 million).

Under yet another definition the World Bank estimates that Bangladesh has

approximately 27.000 medium-scaled enterprises (here defined by the Government of

Bangladesh as registered enterprises with assets larger than USD 600.000 equivalent) and

150.000 small-scale enterprises (registered enterprises with assets of less than USD

600.000 equivalent). The small and medium scale enterprises (SMEs) are mainly found

within the industry and services sector. In 2000 the service sector represented about 51%

of Bangladesh GDP, while the industry sector represented 24.4%. SMEs represent

roughly 82% of the total industrial labor force and 23% of the total labor force.

Agriculture accounted for 24.6% of GDP in 2000, down from 40% in the 1980’s. Still,

agriculture is the primary occupation of about 70% of the population. These figures are,

like most other Bangladeshi statistics highly uncertain. Furthermore they reflect the fact

that most economic activities in the rural areas take place in the informal sector.

Agriculture therefore has a much larger share of the country’s “real” economy than is

reflected in the GDP figures.

SMEs are a very heterogeneous group in Bangladesh, comprising a wide variety of firms

of village handicraft makers, small machine shops, restaurants, printing presses, bicycle

rickshaw assembly, cartwheels, electrical goods, engineering workshops, footwear,

plastic products, plastic spectacle frames, print shops, specialized silk weaving, tailoring

shops owned by women, building material supply, food preparation, small grocery stores,

waste paper collection, etc. In the context of Bangladesh, a portion of readymade

32

Performance Analysis of SME: A Study on IDLC Finance Limitedgarments manufacturing enterprises also falls under SME sector. A typical SME in

Bangladesh requires on average investment of only Taka 36,000 compared to Taka

1,338,000 required by a large-scale industry in generating one unit of employment.

Small & Medium Enterprise (SME) plays a pivotal role in the economic growth and

development of a country. Actually, SME works as the platform for job creation, income

generation, development of forward and backward industrial linkages and fulfillment of

local social needs. SMEs occupy a unique position in the economy of Bangladesh.

Mainly private sector development depends on them.

The research findings of “National Private Sector Survey Of Enterprises In Bangladesh-

2003” (a study conducted by USAID, DFID and CIDA) indicates that SMEs contribute to

the extent of 25% of the GDP in Bangladesh, about 40% of the Gross Manufacturing

Output, 80% of Industrial Jobs and around 25% of the total Labor Force and the total

number of SME Entrepreneur is about 06 Million. Among other findings, the study

concludes that SME sector is significantly a rapid growth oriented sector to flourish in

Bangladesh.

Table 3.1: Definition of SME

Industry Classification

Manufacturing (based on value/replacement cost of durable resources other than land and factory buildings)

Service & Trading (based on number of workers)

Large > BDT 100 mln (US$ 1.5 mln) > 100

Medium BDT 15-100 mln (US$ 0.223-1.5 mln)

25-100

Small <BDT 15 mln (US$ 0.223 mln) <25

Cottage Industry in which members of a family are engaged part-time or full-time in production and service-oriented activities

Source: The definition is as per the Industrial Policy 2005 of the Ministry of Finance

Bangladesh Bank (BB) has set a new definition of the Small & Medium Enterprise (SMEs)

for commercial banks and financial institutions (non bank) to follow in case of sanctioning

33

Performance Analysis of SME: A Study on IDLC Finance Limitedloan or other banking services. Under the new definition, the small and medium enterprises

are in principle, not public limited companies and fulfill the following criteria

Table 3.2: Definition of SME

Sector SMALL MEDIUM

Service and Trading Total Fixed Assets worth BDT

0.05 mln to BVD 5 mln excluding

land and building and or

No. of employees not more than

25.

Total Fixed Assets worth

BDT 5 mln to BDT 10 mln

excluding land and building

and/or

No. of employees not more

than 50

Manufacturing Total Fixed Assets worth BDT

0.05 mln to BDT 15 mln


and/or

No. of employees not more than

50

Total Fixed Assets worth

BDT 15 mln to BDT 20 mln


and/or

No. of employees not more

than 150

Source: Monthly Business Review Vol: 4 Issue : 5, published by Industry and Equity Analysis Team, CRM

Department of IDLC Finance Ltd

In spite of their employment generating role SMEs in Bangladesh, as in the rest of South

Asia, do not realize their potential as significant contributors to sustainable growth and job

creation - both of which are particularly needed in this region to offset deep persistent

poverty levels. Global trade liberalization, perhaps above all other forces, is reshaping the

economies, bringing new possibilities, but also presenting new challenges. This applies to

Bangladesh SMEs as well.

3.1 Current Conditions of SMEs in Bangladesh

34


This was revealed in the released Bangladesh Bank annual report for fiscal 2006-07.

The report said, the key reasons behind the SMEs are not entering into

manufacturing are financial constrains, dismal state of utilities, technology and

policy discriminations. On the others hand, Bank and others financial institutions

generally prefer large enterprise clients because of lower transition costs, and

greater availability of collateral.

The SMEs also fall outside the reach of micro finance schemes, and thus

compelled to depend on formal sources of funds at much higher interest rates, the

Bangladesh Bank report said.

The BB report, however, said that other interrelated problems like shortage of

short and long term finance, lack of modern technology and lack of promotional

support services are major obstacles in the way of development of the SMEs

sector. Higher growth of the Small and Medium Enterprises (SMEs) can help cut

poverty to a satisfactory level by eliminating various prejudices against labour

intensive and creating jobs for the skilled manpower in the SME sector.

Considering these obstacles, the report said, Bangladesh Bank has adopted a

preferential lending policy to promote the SME sector in line with the government

development policies.

An amount of Taka 2.27 billion was refinanced through different banks and

financial institutions under some schemes during the fiscal 2006-07.

In the country, the annual report said, financing small and medium enterprises

(SMEs) from banking sector is a long-standing demand that has been high on the

agenda of the economists and the policymakers.

In Bangladesh the SMEs account for about 45% of manufacturing value addition.

They account for about 80%of industrial employment, about 90% of total

industrial units and about 25% of total labour force. Their total contribution to

export earnings varies from 75- 80% based on the Economic Census 2001-2003.

The total number of SMEs is estimated at 79754 establishments, of which 93.6%

are small and 6.4% are medium.

35

Performance Analysis of SME: A Study on IDLC Finance LimitedSME Scenario December 2008 December 2009 Change

Investment in SME

by Banks (Tk.)

43,439,53,00,000 51,147,59,00,000 (+) 18 %

% of SME in Total

Inv. By Banks

19.84 % 19.91% (+) .07 %

% of SME in Total

Inv of SOB

30 % 34 % (+) 4 %

% of SME in Total

Inv of PCB

18 % 16 % (-) 2%

% of SME in Total

Inv of NBFI

12 % 15 % (+) 3 %

% of SME in Total

Inv of FCB

6 % 10 % (+) 2%

SME loans as percentage of total loans

3.2. CONSTRAINTS ON SME GROWTH

36

Performance Analysis of SME: A Study on IDLC Finance LimitedThe lack of growth of SMEs in Bangladesh can be attributed to several factors, including:

Persistent low levels of national income that have precluded construction of efficient

physical infrastructure needed to grow competitive businesses;

Historical governance structures that have allowed the few well-connected to harvest

and keep the majority of economic resources, and restricted access for the majority;

Fairly long histories of government ownership/control of most productive, non-farm

resources, control that is only now being transferred partially to private sector.

Evolving but still highly fragmented policy/regulatory frameworks that have yet to

create the low-level barriers to business entry, operations, and trade that support SME

growth;

Underdevelopment of core market support institutions that supply essential public

and private services, including many government, financial and education services;

Unduly restricted access for private SMEs to credit services of banks, due in large

part to government-dominated financial sectors and politically motivated credit

policies, whether lending targets or directed subsidies;

Immature business development services (BDS) such as information, training, and

consulting services. This is due to general constraints to private sector development,

to government dominance of the marketplace. In some places it is also due to large

donor flows of subsidized funds that have distorted markets and crowded out

sustainable private sector provision of BDS.

37

Performance Analysis of SME: A Study on IDLC Finance Limited3.3.GOVERNMENTS ROLE TOWARDS SME

Industrial development has been attempted in the past under widely divergent policy regimes.

The early phase of industrialization was characterized by an import substitution strategy and

a strong regulatory role of the Government. Later the governments have turned, although not

always wholeheartedly, to market oriented deregulation. Significant achievements in

population control, food production, infrastructure development and stabilization of the

macro-economy have not been accompanied by sufficiently faster economic growth and the

employment generation needed to alleviate poverty by enhancing the role of the private, i.e.

SME sector.

The Government has recognized in the Industrial Policy document adopted in 1999, that the

industrial policy should be updated to achieve the objective of accelerating industrial growth

and to gain a greater industry share of the GDP. Support of small and medium enterprises is

part of this policy.

The World Bank states in its Bangladesh Country Strategy document that the Government’s

first priority must be to raise investment by giving the private sector the reform confidence

necessary to invest in export oriented manufacturing activities and by urgently and

substantially improving implementation of public investment in infrastructure and human

resource development. The Government’s second priority should be to make the deregulation

of the private sector much more effective, while third priority should be to enter into long

term arrangements with domestic and overseas investors. The World Bank emphasizes

completion of the long delayed privatization program.

38

Performance Analysis of SME: A Study on IDLC Finance Limited3.4 Levels of Employment

There are some 78,440 private-sector establishments of various sizes in

Bangladesh with some 3.5 million workers employed in the sector.

The size of the private-sector SMEs’ number which is based on this table.

Urban 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 three (93.6%) of all units in Bangladesh belong in the SME

category; have between 20 and 99 employees.

However SME Account for only 44% of total employment of the enterprise

sector.

Contribution of SME to Employment

Distribution of employment of SMEs & large industries, 2007/2008 (% of total

employed)

Distribution of Employment

36%

9%

55%

small medium large

39

Performance Analysis of SME: A Study on IDLC Finance Limited3.5 Contribution of SME to GDP by sector

3.6. MAJOR BANKS/FIs FINANCING SME SECTOR

Table 3.3: Major Banks and FI’s in SME Sector

IDLC Focusing strongly in the SME sector since 2005

BRAC Bank Most aggressive bank in the SME sector and leading financial

intermediary in terms of asset booking

Prime Bank The leading private sector bank in the country

Eastern Bank Opening SME kiosks in various parts of the country for

extending finance to the SME sector

Dhaka Bank Have recently started focusing in this sector

United Leasing

Company Limited

Has been concentrating mainly in the SME sector since

inception in 1989

Source: Monthly Business Review Vol: 4 Issue : 7, published by Industry and Equity Analysis Team, CRM Department of IDLC Finance Ltd

40

Performance Analysis of SME: A Study on IDLC Finance Limited3.7 Performance of Banks and NBFIs

Both banks and NBFIs are increasingly coming forward to provide finance to the

SME sector in order to uphold financial strength and increase technical capacity,

productivity, and contribution to industrial performance.

At the end of September 2008, specialized banks (SBs) distributed 48.1 percent

of their total disbursed loan to the SME sector but its share was only 3 percent of

the total SME loan

On the other hand, 18.1 percent of the total disbursed loan of private commercial

banks (PCBs) went to SME financing that constituted 48 percent of the total

institutional loan to SMEs.

There exist, however, considerable variations among the banks and NBFIs in

terms of their performance in SME financing.

Among the PCBs, Dhaka Bank Limited and BRAC Bank Limited distributed

83.9 percent and 75.2 percent respectively of their total loans to SMEs whereas

the BASIC Bank Limited was the leading performer among the SBs (88.6

percent).

The NBFIs are also emerging as important players in enhancing the accessibility

of formal financial services to the SME sector.

The MIDAS, Prime Finance and Investment Limited and IDLC are pioneers in

this respect.

Institutional Share of SME Loan Disbursement

48%

4%3%4%

41%

PCB FCB SB NBFI SOB

41


IDLC in SMEIDLC in SME

42

Chapter - 04

Performance Analysis of SME: A Study on IDLC Finance Limited4.1. SME FINANCING OF IDLC

Small & Medium Enterprise (SME) plays a pivotal role in the economic growth and

development of a country. Actually, SME works as the platform for job creation, income

generation, and development of forward and backward industrial linkages and fulfillment

of local social needs. SMEs occupy a unique position in the economy of Bangladesh.

Mainly private sector development depends on them.

There are many small and medium entrepreneurs in the country that have innovative idea,

spirit and potentiality to do something productive for local consumers as well as export

abroad. They can generate income and contribute to the GDP. They may also provide

employment to other people also. Development and growth of Small and Medium

Enterprise is vital for national development. Such type of beneficial enterprising

borrower can not go a long way for want of financial support because they have no access

to institutional credit facilities, as they cannot provide collateral security as demanded for

such credit facility. IDLC Finance Limited is committed to play positive role in the

overall socioeconomic development of the country.

4.2. RATIONALE FOR SME FINANCING AT IDLC

a) The scope of investment of NBFI is gradually going to be limited due to stiff

competition and small economy compared to large numbers of Financial Institution.

But the SME segment is still almost virgin, untapped and uncovered by institutional

finance and as such there is ample scope and good opportunity for investment so as to

take the advantage to increase the portfolio providing a viable and vast lending outlet

for IDLC. BRAC Bank the leading player in SME Financing claims that there are

almost 6 mln SME clients all over the country and they have financed 0.1 mln clients

so far and disbursed only BDT 5,000 crore since its inception.

(Source: News at The Daily Star).

43

Performance Analysis of SME: A Study on IDLC Finance Limitedb) Effective rate of return on SME Financing is comparatively higher over the large loan

because of lower bargaining strength of the customers. The large customers are

generally price sensitive and hard bargainers. As such the earning rate from SME

Financing is higher.

c) Large customers do not usually offer tangible securities and if given, very

insignificant compared to the credit volume to cover the risk. Thus the credit risk is

very high in case of Large Loan because of the big exposure without any tangible

security. Hence, IDLC is put into serious trouble in case of default making recovery of

the loan. But in case of SME, the risk is comparatively low as the loan amount is

small / moderate and in most cases is covered by security. Above all, lending risk of

IDLC is minimized, as the portfolio is diversified with small credit size.

d) Under SME it is easier to recover IDLC’s money by selling / foreclosing the security

as the customers have not that much strength to face court case unlike big customers.

e) Government and Bangladesh Bank provide very high incentives in financing SME

Clients. Bangladesh Bank provides refinancing to the FIs who finance in compliance

with the refinancing guidelines of Bangladesh Bank. BB provides refinancing @ 5%.

4.3. BANGLADESH BANK REFINANCING

Earlier vide a circular dated May 02, 2004, Bangladesh Bank (BB) launched Small

Enterprise Refinancing Scheme to promote SME sector with financial assistance from

IDA. After the complete use of this BB-IDA fund by participating Banks and Financial

Institutions, with financial assistance from ADB, BB has reintroduced the Small

Enterprise Refinancing Scheme vide a circular dated July 19, 2005. With the goal of

flourishing small and medium enterprises, in the second phase, under the Small

Enterprise Refinancing Scheme, BB will provide refinance facility to participating Banks

44

Performance Analysis of SME: A Study on IDLC Finance Limitedand FIs against their lending to small and medium enterprises. The Agricultural Credit &

Special Programs Department (ACSPD) of BB is implementing the scheme on behalf of

BB like the first phase. The refinancing interest rate to be charged by BB is prevailing

Bank rate, which is 6.00% at present.

Eligibility to Participate:

The following criteria are to be met by the participating FI for refinancing-

Percentage of classified loan against disbursed loan amount within the

range of Tk. 5,000,000.00 has to be below 10.00%.

Adequate capital as per BB guideline has to be maintained.

Adequate provisioning against classified loan as per BB guideline has to be

maintained.

Maintenance of Proper risk management and Anti-money Laundering rules

and regulations has to be ensured.

Rules and regulations as regards maximum exposure limits to any single or

group borrower have to be maintained.

Eligibility of Projects:

Participating FI can submit only those projects to BB for refinancing, which

have fixed assets not exceeding Tk. 10.00 million.

Refinancing will be provided against lease/loan within the range of Tk.

0.20 million to Tk. 5.00 million to small and medium enterprises in

individual case.

Lease/loan for BMRE to small enterprises engaged in manufacturing or

service will be eligible for refinancing.

Lease/loan for crop & fish production, consumer loan and personal loan

will not be eligible for refinancing.

45

Performance Analysis of SME: A Study on IDLC Finance Limited Lease/loan to small enterprises engaged in manufacturing, distributing and

servicing of alcoholic beverages, tobacco processing, radioactive and

associate materials, nuclear reactors, goods intended for military or

paramilitary purpose and other environmentally hazardous goods will not

be eligible for refinancing.

To encourage women entrepreneurship, 10.00% of total fund is kept aside

by BB for refinancing against lease/loan to enterprises run by women.

Refinancing Scope:

Refinancing will be available for working capital and term finances having following

maturity-

Short-term (working capital): Up to and including 12 months

Medium Term: More than 12 months and up to and including 36 months.

Long Term: More than 36 months and up to and including 60 months.

Loan Repayment:

Refinanced loan will be repaid in accordance with fixed repayment schedule prepared by

BB. Repayment schedule for refinanced loans of different maturity are as under-

Short Term (working capital): Repayable within one year from the date of

disbursement by BB in two equal half yearly installments with interest.

Medium Term: Repayable within three years including six (6) months grace period from

the date of disbursement by BB in five equal half yearly installments with interest.

Long Term: Repayable within five years including one year grace period from the date

of disbursement by BB in eight equal half yearly installments with interest.

46

Performance Analysis of SME: A Study on IDLC Finance Limited 4.4. CUSTOMER SEGMENT

Initially, small entrepreneurs located within the accessible area of our branches will be

the targeted areas under this program. The entrepreneurs should have an existing

profitable business or a viable business plan. Currently IDLC Finance is running its SME

operation in Dhaka, Chittagong, Sylhet, Narayangonj, Savar and Bogra. In 2010 IDLC

will expand its operation in some other districts like Comilla and Narshingdi by

inaugurating unit office in the vicinity.

4.4.1 Borrowers Selection

i) 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, expected future cash flows, his/her past dealings with the bank, the net

worth and information obtained from a Credit Information Bureau of Bangladesh

Bank. The bank must be able to identify the key drivers of their borrowers

businesses, the key risks to their businesses and their risk mitigates.

ii) At the time of granting facility under various modes of Small Enterprise

financing, a written declaration shall be obtained from the borrower divulging

details of various facilities already obtained from other institutions to ensure that

the total exposure in relation to the repayment capacity of the customer does not

exceed the reasonable limits as laid down in the approved policies of the bank as

well as to help avoid exposure having multiple facilities.

iii) The borrowing company/firm must be registered in Bangladesh and shares

owned by Bangladeshis. The applicant must be 100% privately owned, controlled

and operated. The applicant’s principal place of business must be in Bangladesh.

47

Performance Analysis of SME: A Study on IDLC Finance Limitediv) The age of the proprietor / partners / directors must range between 21 years to

55 years. Age limit is flexible when succession proposition is strong or the

business is a partnership or Private Limited Company.

4.4.2 Purpose

SEs have vast jurisdiction covering food, leather, electronic, light engineering, agro-

based industries, garment industries, trading, service industries etc. The SEs also do a

good deal of subcontracting jobs for large and medium scale industries, especially in

the garments sector. It simultaneously covers the areas of manufacturing, trading and

services. IDLC Finance Ltd disburses loan in the SEs to meet the following

requirements:

i) Working capital, ii) Purchasing of capital machinery; iii) Delivery Van /

Transport for business purpose, iv) Refurbishing office/Business premises, v) Other

eligible portfolio of the bank, vi) Purchase of commercial land, possession for new

venture.

4.4.3. Mode of Financing

Credit facilities available at IDLC for the SME clients are:

I) Any type of Term Loan II) Lease Facility.

4.4.4 Per Party Exposure Limit

The minimum and maximum exposure of IDLC Finance Limited on a single Small

Enterprise shall remain within the range of TK 2.00 lac and TK 50.00 lac respectively.

The minimum and maximum exposure of IDLC of Bangladesh Limited on a single

Medium Enterprise shall vary on case-to-case basis depending on the size of business,

48

Performance Analysis of SME: A Study on IDLC Finance Limitednature of business, growth potentiality, repayment capacity etc. But, all Small and

Medium Enterprise (SME) financing must comply the followings:

a) In case of working capital finance – Maximum up to 100% of the net required

working capital or 75% of the sum total of inventory and receivables whichever is

lower.

b) In case of fixed assets purchase – Maximum up to 80% of the purchase price.

c) In case of total exposure - Total exposure will not exceed 50% of the total assets.

4.5. PRODUCTS offered Under SME Financing

Small Business is a loan facility designed to finance small scale trading, manufacturing

and service ventures, especially to help small and medium entrepreneurs to meet their

short-term cash flow shortages and bridge the fund-flow gaps.

Eligibility

Entrepreneurs with minimum 2 years experience in the same line of business

Business must be a going concern with at least 2 years in operation

Loan Limit:

From BDT 3 lac to BDT 75 lac

Key Features

Loan without any collateral up to BDT 15 lac

For partly cash security loan up to BDT 35 lac

Loan for Working Capital Finance and/or Lease finance for business

Borrower having loan with other financial institute can also avail Small Business

Convenient repayment options of Equated Monthly Instalment and Customized

Repayment Schedule

Quick, quality door step customer service

49

Performance Analysis of SME: A Study on IDLC Finance LimitedABASHAN Loan

"ABASHAN" is loan facility for small business that will construct or already have

permanent structure for commercial rent (popularly known as mess rent) located

surrounding the industrial areas and EPZs across the country.

Eligibility

Entrepreneurs with minimum 1 year experience in the same line of business

Business must be a going concern with at least 1 year in operation

Monthly income from rental and other sources must be minimum TK. 50,000

Loan Limit:

From BDT 3 lac to BDT 20 lac

Key Features

Loan without any collateral up to BDT 15 lac

Borrower having loan with other financial institute can also avail Abashan Loan

Convenient Equated Monthly Instalment repayment system

Quick, quality door step customer service

4.6. IDLC – COMMITMENT TO SME SECTOR

A separate SME Division is in operation since early 2005 for extending finance

and support to SMEs

Around 78% of IDLC’s clients belong to the SME segment, based on fixed capital

investment size

SME clients share around 65% of our total loan portfolio

SME operations playing an increasingly important role in overall IDLC

operations:

50

Performance Analysis of SME: A Study on IDLC Finance Limited Total team members of SME Division has grown from 6 in 2005 to 60 at

present ( Including 26 contractual employees)

Disbursement target of BDT 3.0 billion for 2010 up from BDT 1.90 billion in

2005

In October 2005, IDLC launched three SME Small Business Finance schemes

ranging between BDT 0.3 - 7.5 mln (US$ 4,000-12,000) for facilitating the

growth of small businesses:

Business Loan

Machinery Loan

Double Loan

Business Loan is collateral free up to BDT 1mln (US$ 15,000)

If a business is feasible, no collateral may be necessary

Opened a dedicated SME Branch in Bogra, at the beginning of 2006, to

accommodate the SME clients in the Northern region of the country

Introduced Festival Loan product for financing seasonal increase of inventory of

SME businesses during the peak season

Recently launched a loan product for women entrepreneurs

Apart from the SME Finance schemes, IDLC offers Lease finance and Factoring

to the SME sector

We have plans to open a number of SME branches in other parts of the country in

the near future

Average credit size for small clients is around BDT 1,000,000 (US$ 15,000)

51


Managing Credit Risk in SME at IDLC

52

Chapter - 05

Performance Analysis of SME: A Study on IDLC Finance Limited5. CREDIT RISK MANAGEMENT IN SME

Institutions involved in lending, including SME Financing, carefully assess credit risk,

which is the possibility that borrowers will fail to pay their loan obligations as scheduled.

The judgments of these institutions affect the incidence of delinquency and default, two

important factors influencing profitability.

To assess credit risk, lenders gather information on a range of factors, including the

current and past financial circumstances of the prospective borrower and the nature and

value of the property serving as loan collateral. The precision with which credit risk can

be evaluated affects not only the profitability of loans that are originated but also the

extent to which applications for mortgages that would have been profitable is rejected.

For these reasons, lenders continually search for better ways to assess credit risk.

This discussion focuses mainly on the role of credit risk assessment in the approval

process rather than on its effects on pricing. Although the market for SME Financing is

characterized by some pricing of credit risk (acceptance of below-standard risk quality in

exchange for a higher interest rate or higher fees), applicants in general are either

accepted or rejected on the basis of whether they meet a lender’s underwriting standards.

5.1. PRINCIPLES OF SOUND LENDING

The principle of sound lending that is followed in the banking industry and in IDLC is

common to all conventional and unconventional interest free banking system. Some of

the principles are given as follows:

53

Performance Analysis of SME: A Study on IDLC Finance Limited1. Safety: By safety is meant that the borrower is in a position to repay the loan, along

with interest, according to the terms of the loan contract. The repayment of the loan is

depends on the borrower’s capacity to pay and willingness to pay. The former depends on

his tangible assets and the success of the business. The willingness to pay depends upon

the honesty and character of the borrower.

2. Profitability: Commercial banks are profit-earning institution. So they must invest

their fund in profitable sectors.

3. Liquidity: Bankers are essentially financial intermediaries for short-term funds. The

banker must ensure that the borrower is able to repay the loan on demand or within the

short period of time.

4. The principle of Diversification of Risks: A prudent banker always tries to select the

borrower very carefully and takes tangible assets as security to safeguard his interest.

5. The purpose of the loan: While lending his funds, the banker enquires from the

borrower the purpose for which he seeks the loan.

5.2 SBF FINANCING SCHEMES

The following are the key features of IDLC SBF scheme

TABLE : SBF FINANCING SCHEMES

Particulars General Product FeatureMinimum loan tenure 13 monthsMaximum loan tenure 48 monthsMinimum Track Record of Business

2 years

Validity of sanction 2 months from date of sanctionProcessing Fees (% of finance amount)

To be fixed at 1.00% of loan amount

Cheque dishonoring charge BDT 250 per dishonoring VAT on processing fees To be collected from client(15.00% of Processing fees)

54

Performance Analysis of SME: A Study on IDLC Finance LimitedParticulars General Product Feature

New financing to a client when a loan is already outstanding(Repeat Financing)

Minimum of six (6) months between consecutive financing subject to satisfactory repayment behavior and fulfilling maximum exposure and cumulative DSCR criteria.

Limiting criteria No government employee is eligible for loan. Employees of private organizations are eligible. However, employment must be verified.

Maximum financing/exposure criteria

50% of existing total asset or100% of existing equity, whichever is lower

Maximum exposure limit with a particular concern(amt. in BDT)

BDT 7,500,000

No. of third party personal guarantors (other than proprietor and spouse)

Two (2) out of which one (1) has to be a non relative.

Limiting Criteria of guarantors

The maximum number of loans against which an existing borrower can provide personal guarantee should be limited to one (1). Similarly a personal guarantor of an existing loan with IDLC can himself avail a loan from IDLC provided that he has not provided personal guarantee against more than one(1) loan with IDLC

Registered mortgage Required for loans above BDT 1.50 mln on a net exposure basis

Requirement of reporting third party guarantors to the CIB

Should be reported to the CIB

Fixed Asset Criteria Any client with more than BDT 10.00 mln of fixed assets(land, building and machinery) will not be eligible for availing financing under the Small Business Financing scheme

Interest rate to be provided against cash security :

(at present rates usually decline with increase in tenure)

Source: IDLC Product Program Guide

55

Performance Analysis of SME: A Study on IDLC Finance Limited5.3 MANDATORY AND DISCRETIONARY VERIFICATION OF

INFORMATION FOR SBF PROPOSALS

Under the Small Business Financing Scheme we provide lease and term loans

amounting from BDT 0.30 mln to BDT 7.50 mln to small business houses that are

either in Trading, Manufacturing or the Service sector. As part of the due diligence

process the credit team visits the client premises in order to assess & verify the

applying client’s business information that is provided by the marketing team.

However, due to practical constraints it was not always possible to verify the

personal information of the client as well as the third party guarantors

In order to complement, as well as strengthen, the due diligence process required for

performing credit investigation the Management approved the appointment of Prime

Asset Management Consultants (PAMC) for verifying the personal information of

all personal guarantors namely the client, spouse and two third party guarantors.

Client and third-party guarantor information that needs to be verified includes, but is

not limited to, the following:

matching of photograph and signature

verifying residential address, business address and phone numbers

verification of bank statement

We started outsourcing the guarantor information verification services thorough

PAMC from March 01, 2007. From analyzing the feedback report submitted by

PAMC as well as from discussions with them it became clear that in cases where

the third party guarantors are businessmen it is quite difficult and time

consuming to obtain the business related information like valuation of inventory

& machinery , verification of receivables and payables, and other assets.

56

Performance Analysis of SME: A Study on IDLC Finance LimitedMandatory Information Verification Requirement through PAMC

For Applying Business Concern:

Verification of Bank Statement

For Client & spouse:

Verification of residential address

Verification of status of residence (rented or owned)

Verification of phone number (fixed phone or mobile)

Photograph and National ID matching,

Signature matching

For Third party guarantor (businessman):

Verification of business name, business address and nature of business


Signature matching

Photograph and National ID matching

For Third party guarantor (non-businessman):

Verification of residential address

Verification of status of residence (rented or owned)


Photograph and National ID matching,

Signature matching.

Note: It needs to be mentioned that Items under the mandatory information verification

requirement is necessary for all cases and any deviation thereof needs to be approved by

the Management.

57

Performance Analysis of SME: A Study on IDLC Finance Limited5.4. CREDIT APPROVAL AND SERVICE DELIVERY PROCESS UNDER SME

DIVISION

The Marketing Manager-Retail Products and his team of CREs are responsible for

Business Development, Relationship Management, Service Delivery, Collection and

Follow-up.

The Marketing Manager-Retail Products does the initial screening of the Financing

Proposals generated by the CREs and send the Appraisal Form along with the terms

and conditions for financing and other necessary documents to the Credit Risk

Manager-Retail Products.

The Credit Risk Manager-Retail Products, upon his satisfaction that the Financing

Proposal complies with all the lending policies of IDLC, initiates the credit appraisal

of the Financing Proposal. However, if the Financing Proposal does not comply with

the IDLC lending policies the Marketing Manager-Retail Products will be informed

of the non-compliance and the reason thereof.

The sanction of any financing proposal is given to the client within seven (7)

working days of the receipt of any compliant proposal by the Credit Risk Manager-

Retail Products. The Credit Risk Manager-Retail Products review the Compliant

Proposal and undertake the risk assessment, client visit and credit investigation. Upon

finding of satisfactory business standing of the prospect a Credit Appraisal Report is

prepared and placed online before the Approving Authority.

Upon online approval of the Proposal the Credit Risk Manager-Retail Products signs

the Appraisal Report and send it for signing by the respective Sanctioning Authority

as delineated above.

After the Operations Division has received a copy of the signed Appraisal Report

prepares the Sanction Letter and all necessary Documents and forwards the

documents to the Marketing Manager-Retail Products for signing by the client. The

sanction letter is issued jointly by the Credit Risk Manager-Retail Products and any of

58

Performance Analysis of SME: A Study on IDLC Finance Limitedthe following persons: the Marketing Manager-Retail Products, the Senior Manager-

SME Division or the Head of SME Division. The completed Documents along with

the Client File is maintained by the Operations Division at the Corporate Head Office.

The Credit Risk Manager-Retail Products prepares and sign the Disbursement Memo

and send the Memo for approval by the Head of SME Division. The original

approved Memo is sent to the Operations Division for keeping in the Client File. The

Disbursement Voucher is prepared by the Operations Division and sent to the

Accounts Department for Cheque preparation.

The Operations Division is the custodian of all the Documents and Client Files.

5.5 AUTHORITY DELEGATION UNDER SME

Table 5.6.: Authority Delegation under the SME Division

Tasks Proposed delegation

Approving authority

Tier I: Up to 5 lacs, approval from HoCRM

Tier II: Above BDT 5 lacs – up to BDT 10 lacs, joint approval from HoSME and HoCRM

Tier III: Above BDT 10 lacs approval from CEO & MD, after clearance from CEC

Appraisal Report Up to 5 lacs, report to be signed by Credit Officer, Head of Credit - Small Business Finance (under CRM), and HoCRM.

Up to BDT 10 lacs, report to be signed by Credit Officer, Head of Credit - Small Business Finance (under CRM), HoSME and HoCRM

Above BDT 10 lacs, report to be signed by Credit Officer, Head of Credit - Small Business Finance (under CRM), HoCRM, HoSME, DMD, and CEO & MD.

Sanction LetterTo be signed by Head of Credit - Small Business Finance (under CRM) & HoSME

Disbursement As existing, to be approved by the Head of SME, in case of no

59

Performance Analysis of SME: A Study on IDLC Finance LimitedApproval

deviation. The Deputy Managing Director may approve any deviation, other than security and regulatory related deviation(s).

(Ref: Directive Directory 2007/002, ‘Delegation of post-approval disbursement’ dated May 7, 2007)


5.6 CREDIT TERMS AND CONDITIONS

5.6.1. Medium and Short Term

Medium and Short-Term facilities mean facilities with maturities of more than one

year but not exceeding ten years and Short Term Facilities mean with maturities up to

one year. In 2007 IDLC started it’s short term facility in the form of Festival Loans.

The loans are provided for tenure of 3 to 5 months meet up the seasonal demand.

5.6.2 Per Party Exposure Limit

The minimum and maximum exposure of the bank on single SE shall remain within

the range of TK 3 lac and TK 75 lac respectively subject to the following:

d) In case of working capital finance – Maximum up to 70% of the net required

working capital or 75% of the sum total of inventory and receivables whichever

is lower.

b) In case of fixed assets purchase – Maximum up to 80% of the purchase price.

5.6.3. Security Requirement

Limit on Clean Facility for Tk. 3 lac to Tk 10 lac:

In order to facilitate growth of smaller loans clients are allowed Collateral free loan

up to BDT 10 lac. But security and documentation procedures remain as per standard.

60

Performance Analysis of SME: A Study on IDLC Finance Limited For loan amounting TK. 10 lac to TK 50 lac

On case-to-case basis depending on Banker-customer relationship.

i. Hypothecation on the inventory, receivables, advance payments, plants &

machineries;

ii. Registered mortgage over immovable properties with registered power of

Attorney and Disclaimer from the mortgagor(s);

iii. Personal Guarantee of Spouse / parents / other family members;

iv. One third party guarantee from a person acceptable to the Bank;

v. Post dated cheques for each installment and one post dated cheque for full

loan value including full interest.

5.6.4 Common Information Checklist

For all facilities, banks must obtain (as applicable) and not limiting to following com-

mon documents before disbursement of loan can be made:

Loan Application Form duly signed by the customer. Loan Application From

should be accompanied by a ‘Borrower’s Basic Fact Sheet’ under the seal and

signature of the borrower.

A written declaration shall be obtained from the borrower divulging details of

various facilities already obtained from other institutions.

Acceptance of the terms and conditions of Offer Letter.

Up to date Trade License

Photographs & photocopy of passport/any other ID of the proprietor /partners

/directors duly attested.

Personal net worth statement of the proprietor /partners / directors.

Copy of TIN Certificate.

Short description of the products of the enterprise.

Project Profile (if new project).

Quotation/Intent / Pro-forma Invoice etc (as applicable).

Marketing distribution system of the company.

61

Performance Analysis of SME: A Study on IDLC Finance Limited Short profile of the proprietor / partners / directors mentioning their business

experience/education etc.

Brief description of the management of the company mentioning their educational

& professional experiences.

Name and address of the sister/allied concerns.

Group Brochure

Name and address of present bankers

A latest liability statement of all the other business concerns of the Group with

other Banks/Financial Institutions (Mentioning – name of business concern, name

of bank and branch, nature of facility, limit amount, outstanding. overdue if any

etc.)

Credit Information Bureau (CIB) report from Bangladesh Bank

Wherever practical, insurance policy for 110% of the stock value covering

potential risks with IDLC’s mortgage clause in joint name of the bank and client.

ADDITIONAL INFORMATION CHECKLIST FOR PROPRIETORSHIP

FIRM:

Copy of financial statements for at least 01 year for analysis and record. However,

financial statements signed by the borrower will suffice where the exposure is fully

secured by liquid assets.

ADDITIONAL INFORMATION CHECKLIST FOR PARTNERSHIP FIRM :

a) Copy of Registered Partnership Deed duly certified as true copy or a Partnership

Deed on non-judicial stamp of TK. 150 denomination duly notarized.

b) Copy of financial statements for at least 01 year, for analysis and record.

However, financial statements signed by the borrower will suffice where the

exposure is fully secured by liquid assets.

ADDITIONAL INFORMATION CHECKLIST FOR LIMITED COMPANY :

62

Performance Analysis of SME: A Study on IDLC Finance Limited Copy of Memorandum & Articles of Association of the company including

Certificate of Incorporation duly certified by Registrar Joint Stock Companies

(RJSC) and attested by the Managing Director accompanied by an up-to-date list

of Directors (Form-XII).

Copy of Board Resolution of the company for availing credit facilities and

authorizing Managing Director / Chairman / Director for execution of documents

and operation of the accounts.

An Undertaking not to change the management of the company and the

memorandum and articles of the company without prior permission of the IDLC.

Copy of financial statements for at least 01 year for analysis and record. However,

financial statements singed by the borrower will suffice where the exposure is

fully secured by liquid assets.

5.6.5 Common Charge Documents applicable for Proprietorship/

Partnership/Limited Company

Demand Promissory Note.

Letter of Hypothecation on stock-in-trade, raw materials, work in process

and finished goods.

Letter of Hypothecation on plant, machineries, equipments, vehicles etc.

Assignment of receivables, lease rentals, contract receivables etc.

Assignment of security money, advance rent, if any

Personal Letter of Guarantee from the Proprietor / Partners / Directors

Personal Guarantee from any other persons acceptable to the Bank.

Post dated cheques for each installment and one undated cheque for full

loan value including full interest.

Lien on deposits/financial instruments (FDR, shares of companies listed in

stock exchange, ICB Unit certificates etc with perfected lien) observing

necessary formalities.

63

Performance Analysis of SME: A Study on IDLC Finance Limited Any other documents as expedient/ deemed necessary by the branch/bank

depending on the nature of security such as, -Insurance Guarantee, Cross

Corporate Guarantee, Assignment of Contract, Security Money etc.

All security documents pertinent to the mortgage of properties to be examined by

the Panel Lawyer of the bank along with legal opinion.

5.6.6 Credit Information Bureau (CIB) Clearance

While considering a proposal, banks should give weight age to the Credit

Information Bureau (CIB) Report of Bangladesh Bank relating to the borrower &

his group. For financing CIB is a must and the CIB report must not be older than

3 months from the date of disbursement.

5.6.7. Mode of Repayment

a. For continuous loan credit turnover must be equal to the limit amount in a

quarter and full and final adjustment within the validity period.

b. For term loan, repayment to be made by monthly installments and full and

final adjustment within the validity period.

5.6.8. Minimum conditions for taking exposure

i. It is recognized that a large number of enterprises other than limited

companies (i.e., sole proprietorship/partnership firms etc) may not have proper

books of accounts including balance sheet, profit & loss account and they may

not be able to prepare current and future cash flows due to lack of

sophistication and expertise.

ii. It is expected that in such cases, banks shall assist the borrowers in

obtaining/developing such books of accounts as per forms/formats prescribed

by each bank and no SE shall be declined access to credit merely on this

ground. The rationale and parameters used to project the future cash flows

64

Performance Analysis of SME: A Study on IDLC Finance Limitedshall be documented and annexed with the cash flow analysis undertaken by

the branch.

iii. Bank/FI’s shall not approve and/or provide any exposure (including

renewal, enhancement and rescheduling) until and unless the prescribed Loan

Application From is accompanied by a ‘Borrower’s Basic Fact Sheet (refer

Appendix XIII) under the seal and signature of the borrower.

5.6.9 Restriction on facilities

Banks shall not take any exposure on a SE (Small Enterprise) in which any of

its directors, shareholders, employees or their immediate family members are

holding 5% or more of the share capital of the SE.

5.6.10. Delegation for sanction of loan under SE Scheme

i) The Head of Branches shall exercise their existing financial delegation

authorized by Head Office for sanction of credit facilities under small enterprise

fulfilling lending and security criteria i.e., 1.25 times collateral security in the

form of Registered Mortgage. Credit limit beyond delegation of the branch to be

sent to Head Office.

ii) Head of branches may also be authorized to sanction SE Loan (Term Loan)

obtaining security in the form of FDR up to 50% of the loan amount and doing

due diligence.

iii) SME Credit Unit at Head Office shall also directly handle the SE portfolio.

5.6.11. Sales team

The sales team / branch staff responsible for loan sales and should be the owner of

the customer relationship, and must be held responsible to ensure the accuracy of

the loan application submitted for approval. They must be familiar with the bank’s

Lending Guidelines and should conduct due diligence on new borrowers, purpose

of the loans and guarantors.

5.6.12 Approving of credits – by Credit Unit

65

Performance Analysis of SME: A Study on IDLC Finance Limited Applications are received at Credit Approval unit as per delegation of power. The

credit approval team will be independent from the sales team who will evaluate and

approve the loan. On receipt of the Applications it will be evaluated / assessed by

Credit Analysts / Managers on the basis of a fully documented Loan Presentation

Forms (LPF).

5.6.13 Disbursement – by Credit Administration

After approval, Credit Team will send / forward the Sanction Advice to the

operation unit for completion of documentation and disbursement of the loans

having disbursement authority from Credit Administration Unit. This will ensure

the better control of the bank asset and mitigate the risk of compromise of the

duties.

5.6.14. Classification and provisioning

Provision should be made on the basis of credit worthiness of the borrower, its cash

flow, operation of the account, adequacy of the security, inclusive of its realizable

value and documentation covering the advances for different categories of Loans

provision to be made as under:

Special Mention Account (SMA-overdue 90 days), no provision is required ii)

Unsatisfactory (overdue 120 days), provision 10%, iii) Substandard (overdue 180

days), provision 20%, iv) Doubtful (overdue 270 days), provision 50%, iv) Loss

(overdue by 12 months or above), provision 100%.

Branches shall observe the prudential guidelines given at Appendix X in the matter

of classification of their SME asset portfolio and provisioning there-against

(enclosed).

Apart from specific provisioning branches will create adequate general provision

over the entire credit portfolio of Small Enterprise business. Therefore, they should

maintain at all times a general provision of 5% of SE assets outstanding in its

books.

66

Performance Analysis of SME: A Study on IDLC Finance Limited Timing of creating provisions

Branches shall review, at least on a quarterly basis, the collectibility of their loans

/advances portfolio and shall properly document the evaluations so made. Shortfall

in provisioning, if any, determined, as a result of quarterly assessment shall be

provided for immediately in their books of accounts by the branch on quarterly

basis.

Reversal of provision

The provision held against classified assets will only be released when cash

realization starts exceeding-

a) In case of loss category the net book value of the assets;

b) In case of doubtful category 50% of the net book value of the assets; and

c) In case of sub-standard category 25% of the net book value of the assets.

Further, the provision made on the advice of Bangladesh Bank will not be reversed

without prior approval of Bangladesh Bank.

Transfer of files to Special Asset Management (SAM)

Any SBF contract that has accumulated more than six (6) overdue instalments will

automatically be transferred to the Special Asset Management team for further

follow-up and recovery:

- Approval, as per the existing tier of sanctioning authority of SBF loans, will be

required for transfer of client accounts that has accumulated more than six (6)

overdue instalments to SAM:

Table 5.6.: Authority Delegation under the SME Division

Finance Amount Approval authority

Upto BDT 500,000 Ho SBF

From BDT 500,001 to BDT 1,500,000 HoCRM & HoSBF

67

Performance Analysis of SME: A Study on IDLC Finance LimitedFrom BDT 1,500,001 to BDT 3,500,000 HoCRM, HoSME

Above BDT 3,500,000 HoSME & DMD


- The approval memo should contain details explaining the financing rationale, the

reasons for default, the actions adopted so far to regularize the account as well as

the proposed course of action.

- A quarterly report regarding the transfer of SBF accounts to SAM will be

prepared and circulated for the review of the top Management.

- Any problematic contract that is yet to accumulate more than six (6) overdue

installments may also be transferred to the Special Asset Management upon

approval if it is deemed necessary.

5.7 APPRAISAL PROCEDURE OF SME CLIENT

After the marketing stage, appraisal procedure starts. In appraising, a comprehensive

report has been prepared on the business performance of the client. The whole procedure

is carried out through the following step by step procedure:

Collecting preliminary information regarding the client: to collect the preliminary

information, IDLC maintain a standard formatted checklist. This checklist is

designed to collect the information regarding the necessary legal documents of the

company, owners liability position, financials of the business and its sister

organization and other necessary information. A sample checklist format is

attached at the Appendix-1for better understanding

Collecting CIB report of Bangladesh Bank to know the liability status of the

client: before any loan disbursement, Availing report from Credit Information

Bureau (CIB) of Bangladesh Bank regarding the liability status of the client is

mandatory.

68

Performance Analysis of SME: A Study on IDLC Finance Limited Writing the main report: ECD follows a standard format to write the appraisal

report on its client. This report format contains the following part to investigate

the credit worthiness of the client:

Client’s name, address, business type and other preliminary information

In case of an existing client, the exposure status of the client with IDLC

Description of the financing proposal in details and client’s previous track

record (in case of an existing client)

Financing rationales on client from different aspects like:

Background of the business and the main sponsors of the

business

Analyzing the market potentials of the product client deals with

Analyzing the shareholding structure of the company to reveal

whether any problem lies with it.

Keenly analyzing the previous 3 to 4 years financials of the client

and make different comments on the changes he faced over the years

Analyzing the business and financial condition of the sister

concerns, if any and its impact on the said concern.

Detail liability position of the client

Projection regarding the income statement and cash flow of the

client at post financing period and calculating the Debt Service Coverage

Ratio.

In case of lease, brief description of the leased equipment and its

price verification

5.8. SECTORAL EXPOSURE

69

Performance Analysis of SME: A Study on IDLC Finance LimitedSector wise distribution of the SME portfolio of IDLC is given below. This distribution shows the distribution pattern of some of the important sector.

Table: Sectoral Exposure

Name of Sector Exposure % ExposureDecember 31,

2009

Agro Based Industries 3,000,000.00 0.92%

Apparels & Accessories 81,245,000.00 25.04%

Automobile Spare Parts 17,400,000.00 5.36%

Building & Construction Materials 31,550,000.00 6.64%

DVD, VCD & CD 1,900,000.00 0.59%

Education 1,200,000.00 0.37%

Engineering 21,750,000.00 3.62%

Food & Beverage 4,150,000.00 1.28%

Furniture & Related Products 3,775,000.00 1.16%

Healthcare Service(Pharmacy) 12,100,000.00 2.50%

Healthcare Service(Diagnostic Centre) 12,700,000.00 3.91%

Home Appliances and House Hold Items 29,400,000.00 5.98%

Information Technology 13,000,000.00 4.01%

Mobile Handset & SIM, Accessories 3,850,000.00 1.19%

Packaging 9,215,000.00 2.84%

Paint & Hardware 7,950,000.00 1.22%

Printing 4,375,000.00 1.35%

Power & Energy 800,000.00 0.25%

Professional Services 3,600,000.00 1.11%

Service Others 34,550,000.00 10.65%

Washing Plant 1,170,000.00 0.36%

Textile - Local 69,200,000.00 15.16%

Leather & Leather Products 2,400,000.00 0.74%

Paper & Paper Products 4,800,000.00 1.48%

Pharmaceutical & Healthcare Products 800,000.00 0.25%

Iron & Steel 2,500,000.00 0.77%

Chemicals 800,000.00 0.25%

Telecommunication 2,000,000.00 0.62%

70

Performance Analysis of SME: A Study on IDLC Finance LimitedBooks & Stationery 1,300,000.00 0.40%

Total Exposure 65,480,000.00 100.00%

Source: IDLC Database, 2009

Fig: Sectoral Exposure of SME Financing of IDLC

Sectoral Exposure

6.6%

0.6%

3.6%1.3%

3.9%6.0%

4.0%

1.2%

2.8%

1.2%1.3%

0.2%

10.6%

0.4%

25.0%15.2%

2.5%

0.0%

0.4%

1.2%

0.8%

1.5%

0.6% 0.2%0.4%

0.9%

0.2%0.7%

1.1%

5.4%

Name of SectorAgro Based IndustriesApparels & AccessoriesAutomobile Spare PartsBuilding & Construction MaterialsDVD, VCD & CDEducationEngineeringFood & BeverageFurniture & Related ProductsHealthcare Service(Pharmacy)Healthcare Service(Diagnostic Centre)Home Appliances and House Hold ItemsInformation TechnologyMobile Handset & SIM, AccessoriesPackagingPaint & Hardw arePrintingPow er & EnergyProfessional ServicesService OthersWashing PlantTextile - LocalLeather & Leather ProductsPaper & Paper ProductsPharmaceutical & Healthcare Products Iron & SteelChemicalsTelecommunicationBooks & Stationery

Source: IDLC Database, 2009

71


Non Performing Loan (NPL) & Overdue Analysis

72

Chapter - 06

Performance Analysis of SME: A Study on IDLC Finance Limited6.1 Regression Analysis: Overdue Versus Total Portfolio of Loan

Table: Overdue and Total portfolio of loan

Date OD(Y) Total Portfolio(X)

Jan-09 56610332 1136423518

Feb-09 57508013 1109473716

Mar-09 53917301 1125634679

Apr-09 48728380 1159991736

May-09 54737690 1097568788

Jun-09 37436737 1186635920

Jul-09 43453112 1127228218

Aug-09 54117763 1177819529

Sep-09 65851402 1171491354

Oct-09 58855920 1075660250

Nov-09 60447107 1134291797

Dec-09 54117763 1187748043

Jan-10 49137108 1216491782

Feb-10 47792238 1226100444

Mar-10 34773251 1218822262

Apr-10 39589932 1286218030

May-10 35965944 1323332263

Jun-10 31366343 1382683804

From the table it appears that Y and X have a definite relationship. As X rises, Y tends to

decrease. By observing the data, it might be tempting to conclude that as the total

portfolio increases, lower will be the OD. These 18 data points are plotted on the

following two dimensional scales, with values of X along the horizontal axis and values

of Y along the vertical axis.

73

Performance Analysis of SME: A Study on IDLC Finance LimitedRegression Analysis: OD versus Total Portfolio

The regression equation is

OD = 158583751.5 - 0.0923 Total Portfolio

Figure 5Figure 5 illustrates an imperfect negative linear relationship. As X increases in these

scatter diagrams, Y decreases but not in a perfectly predictable way. Thus, Y might be

slightly higher or lower than expected. That is, the X-Y points do not lie on a straight

line.

Figure 6

74


ANOVA

df SS MS F P

Regression 1 9.39253E+14 9.39253E+14 20.03 0.0003

Residual 16 7.50169E+14 4.68856E+13

Total 17 1.68942E+15

Coefficients Standard Error

t Stat P-value Lower 95%

Intercept 158583751.5 24506888.75 6.470986717 7.72E-06 106631468.6

Total Portfolio (X)

-0.09230 0.020622859 -4.476 0.0003 -0.1360

Interpretation of the result:

1. Regression coefficient (Coef) =-0.09230. This value is the change in Y when X

increases by 1. It means when the total portfolio amount increases by TK. 1 the overdue

amount decreases by TK.0923.

2. Computed t value= -4.476.The computed t value is used to test whether the regression

coefficient ßi is significantly different from zero.

3. Constant = 158583751.5 .This value is the Y intercept.

4. The p value in the analysis of variance table (0.0003) indicates that the relationship

between OD and Total portfolio is statistically significant as p value is too small. This is

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.745627976

R Square 0.556

Adjusted R Square 0.528

Standard Error 6847302.546

Observations 18

75

Performance Analysis of SME: A Study on IDLC Finance Limitedalso shown by the p-value for the estimated coefficient of total portfolio, which is

0.0003.

5. R squared = .556. The fitted regression line explains 55.6% of the variance in OD

indicating that the model fits the data well.

7. Hypothesis testing:

Ho: ßi =0 (no linear relation)

Vs Hi: ßi ≠ 0 ( a linear relation)

F = MSR/MSE with df = 1, n-2.

Rejection region = F> Fα

Analysis of F ratio: The F ratio is 20.03 in this ANOVA table tests the null hypothesis

that the regression is not significant, that is, Ho: ßi =0. A large F value will allow

rejection of this hypothesis, suggesting a significant regression. In this case the tabulated

F value (df = 1, 16 α = .01) is 8.53.

Thus the hypothesis of no significant regression is rejected at the 1% significance level

since F = 20.03 > 8.53.

76

Performance Analysis of SME: A Study on IDLC Finance Limited6.2 Regression Analysis: Overdue Loan versus NPL

Table: Overdue Loan versus NPL

Date NPL OD

Jan-09 1.22% 56610332

Feb-09 0.95% 57508013

Mar-09 0.77% 53917301

Apr-09 0.99% 48728380

May-09 1.04% 54737690

Jun-09 1.02% 37436737

Jul-09 2.67% 43453112

Aug-09 2.01% 54117763

Sep-09 1.97% 65851402

Oct-09 2.01% 58855920

Nov-09 1.13% 60447107

Dec-09 1.09% 54117763

Jan-10 1.73% 49137108

Feb-10 1.72% 47792238

Mar-10 1.21% 34773251

Apr-10 1.12% 39589932

May-10 1.14% 35965944

Jun-10 1.13% 31366343

From the table it appears that Y and X have a definite relationship. As X rises, Y tends to

rise also. By observing the data, it might be tempting to conclude that as the OD

increases, more will be the NPL. These 18 data points are plotted on the following two

dimensional scales, with values of X along the horizontal axis and values of Y along the

vertical axis.

Regression Analysis: NPL versus OD

The regression equation is

NPL = 0.00967 + 0.000001 OD

77


Figure 3

Figure 3 illustrates an imperfect positive linear relationship. As X increases in these

scatter diagrams, Y increases but not in a perfectly predictable way. Thus, Y might be

slightly higher or lower than expected. That is, the X-Y points do not lie on a straight

line.

Figure 4

78

Performance Analysis of SME: A Study on IDLC Finance LimitedSUMMARY OUTPUT

Regression Statistics

Multiple R 0.166027267

R Square 0.0278

Adjusted R Square -0.033212131

Standard Error 0.005164314

Observations 18

ANOVA

df SS MS F P

Regression 1 1.2096E-05 1.2096E-05 0.456 0.510

Residual 16 0.000426722 2.66701E-05

Total 17 0.000438818

Coefficients Standard Error t Stat P-value

Intercept 0.009672 0.006292241 1.538182085 0.143544372

OD (X) 8.46161E-11 1.25645E-10 0.67 0.510

Interpretation of the result:

1. Regression coefficient (Coef) =.000001.This value is the change in Y when X

increases by 1.

2. Computed t value= 0.67.The computed t value is used to test whether the regression

coefficient ßi is significantly different from zero.

3. Constant = .009672. This value is the Y intercept

4. The p value in the analysis of variance table (0.510) indicates that the relationship

between NPL and Total portfolio is not statistically significant as p value is not too small.

This is also shown by the p-value for the estimated coefficient of OD, which is 0.510.

79

Performance Analysis of SME: A Study on IDLC Finance Limited5. R squared = .0278. The fitted regression line explains 2.8% of the variance in NPL

indicating that the model does not fits the data well.

7. Hypothesis testing:

Ho: ßi =0 (no linear relation)

Vs Hi:ßi ≠ 0 ( a linear relation)

F = MSR/MSE with df = 1, n-2.

Rejection region = F> Fα

Analysis of F ratio: The F ratio is 0.456 in this ANOVA table tests the null hypothesis

that the regression is not significant, that is, Ho: ßi =0. A large F value will allow

rejection of this hypothesis, suggesting a significant regression. In this case the tabulated

F value (df = 1, 16 α = .01) is 8.53.

Thus the hypothesis of no significant regression can not be rejected at the 1%

significance level since F = .456 < 8.53.

6.3. Trend Analysis for OD

80

Performance Analysis of SME: A Study on IDLC Finance LimitedUsing the data of the overdue loan (OD) of IDLC Finance ltd. from the month January

2009 to June 2010 a forecast is made for the next five months. The forecasted OD is

shown below:

Month July 2010 August

2010

September

2010

October

2010

November

2010

Overdue

Loan (Y)

39257884 38218326 37178768 36139210 35099652

Fitted Trend Equation

Yt = 59009487 - 1039558*tFrom the trend equation it is clear that, as time passes the overdue amount will decrease it other things remain unchanged. It is expected, next month the overdue loan amount will decrease by TK. 1039558.

Figure 5: Trend Analysis Plot

81


Findings & Findings & ConclusionConclusion

82

Chapter - 07

Performance Analysis of SME: A Study on IDLC Finance Limited7.1 Findings

The core competence of the IDLC is to provide the fastest and quality loans to the clients

in this country. To retain this competitive advantage IDLC would provide all sorts of

facilities whether they can give fastest services to clients than other banks. Also to

convey the customer focus, IDLC is trying to reduce collateral securities than its

competitors. Moreover the Non-performing Loan (NPL) of IDLC compare to other

financial institution is very low. The NPL of IDLC-SME varies from 1.5 to 2.5 on an

average over the months. Whereas the NPL of BRAC Bank the major player of SME loan

is almost 9.

Finally, regression analysis and trend analysis of overdue analysis has done. By analyzing

the variable overdue loan and total portfolio of loan a significant negative relationship is

found using simple regression analysis. Again analyzing the variable overdue loan and

non-performing loan no relationship has found. By trend analysis it has found that

overdue loan will be lower in the following months.

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Performance Analysis of SME: A Study on IDLC Finance Limited7.2 Conclusion

IDLC Finance Ltd. promotes broad-based participation in the Bangladesh economy

through the provision of high quality and modern services. IDLC is proving itself as the

fastest growing non-banking financial institution and showing remarkable progress of its

financial position with the mission of being countries leading financial solution provider

in a cost effective manner. SME loan is one of such quality product through which they

offer the small and mediocre entrepreneurs quality financial services and earn the

maximum profit as well. The recovery rate of this loan is 98% (approx.) which is

extremely good in comparison to any other FI’s recovery rate. IDLC has made it possible

as the loan is given to experienced, small and mediocre entrepreneurs most of whom are

middle aged, slightly educated and having moderate income and this class of people is

very loyal. But they can serve this class of customers with more commitment and loyalty

and they can turn the recovery rate to 100%. Credit risk management practice in this

organization is really a role model for other players in the SME sector of Bangladesh.

The government is very much positive to provide all sorts of facilities for ensuring the

growth of this sector. So potential of this sector from business perspective for the

specialized financial institutions is very high. To grab the opportunity in stepping further

depends on ensuring quality service with quality portfolio and IDLC is in a leading

position in this perspective. So ensuring the efficiency and smooth growth of over all

SME sector needs more prudential players like IDLC.

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Performance Analysis of SME: A Study on IDLC Finance LimitedReferences

1. Annual report 2008 of IDLC Finance Ltd.2. Database of IDLC Finance Ltd.3. http://www.idlc.com 4. Different booklets and papers of IDLC Finance Ltd.5. World Bank Board Paper 05.08.2001-MA.

Bangladesh, Country Commercial Guide 2001-2002; US Embassy; Dhaka; October 2001.

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http://www.idlc.com/

IDLC

Documents

samia sultana

fully owned

reduce collateral

real estate

highest ethical

total labor

competitive

idlc finance