Investment in SMEs of Eastern Bank limited: Problems and Prospects

Investment in SMEs of Eastern Bank limited: Problems and Prospects

CHAPTER 1INTRODUCTION

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1.1 ORIGIN OF THE REPORT

As a part of the BBA program requirement, I was assigned for doing my internship

in Eastern Bank Limited (EBL) for the period of 12 weeks starting from August 04,

2010 to November 04, 2010 as an intern by the Internship Placement Office,

Bachelor of Business Administration, University of Dhaka. The Human Resources

Department of EBL assigned me at the Principal SME center, Dhaka and my

organizational supervisor was Mr. Md. Khurshed Alam, Head of Business, Eastern

Bank Limited. My project was to get overall knowledge and to find the prospects

and problems of SME (Small & Medium Enterprise) financing activities of EBL. My

faculty supervisor Dr. H. M. Mosarof Hossain, Associate Professor, department of

Finance, Bachelor of Business Administration, University of Dhaka, also approved

the project and authorized me to prepare this report.

1.2 OBJECTIVES

The broad objective of this report is to study and assess the SME products of

Eastern Bank Limited and hence to get acquainted with the practical aspects of a

job. In addition, the specific objectives are

1. To be acquainted with Eastern Bank Limited as an organization.

2. To be familiar with the different SME products offered by the bank.

3. To know about the SME Banking in Eastern Bank Limited.

4. To find out the prospects of EBL in SME financing.

5. To determine the internal and external problems of EBL in SME financing.

6. To compare the performance among the EBL SME loan products.

1.3 SCOPE OF THE REPORT

The study would focus on the following areas.

SME Financing Policy of Eastern Bank Limited. SME Financing Procedures in Eastern Bank Limited. Analysis of EBL SME products.

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Each of the above areas would be critically analyzed in order to determine, from a

Bankers point of view, what issues are preventing SMEs to access the institutional

credit facilities.

1.5 METHODOLOGY AND VARIABLES

Primarily, for general concept development about the bank short interviews and

discussion sessions were taken. For the other information secondary sources like

books, publications and annual reports of the Eastern Bank Limited were collected.

In addition, to learn about SME Banking activities, policy, and procedures, the Credit

Manual and Credit Policy and different circulars, Product Program Guide (PPG) of

Eastern Bank limited were thoroughly analyzed. Different SME Product features of

the Bank were analyzed. For overall scenario of SME financing various publications

was reviewed and several discussion meeting were conducted with persons related

to SME financing.

1.5.1 SOURCES OF INFORMATION

Information collected to furnish this report is both from primary and secondary in

nature. The Primary sources are

Relevant file study as provided by the concerned officer.

Practical desk work

Face to face conversation with the officers.

The secondary sources are

Different Circulars issued by Eastern Bank Limited and Bangladesh Bank.

Different ‘procedure Manual’, published by Eastern Bank Limited

Annual Reports of Eastern Bank Limited

Periodicals published by Eastern Bank Limited

Publications obtained from different libraries and from Internet.

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The whole report was prepared through the following five steps:

Step 1 → planning for the content of the report

Step 2 → structuring the concepts

Step 3 → data collection through primary and secondary sources

Step 4 → analysis and interpretation of data

Step 5 → draw conclusions

1.6 LIMITATIONS OF THE REPORT

The major limitations faced during the preparation of this report are as follows –

Banks policy does not permit to disclose various data and information related to Credit portfolio.

Non-availability of data and information those are more recent on different activities of Eastern Bank Limited, Especially data of 2010.

Different internal information of EBL SME was found but this cannot be compared with other banks’ same information.

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CHAPTER 2PROFILE OF EASTERN BANK LIMITED

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2.1 EBL AT A GLANCE

Eastern Bank Ltd is a private-owned commercial bank of Bangladesh. Eastern Bank

Limited (EBL) is one of the modern, fully online and technologically superior

private commercial Banks in Bangladesh. Eastern Bank markets a wide range of

depository, loan & card products. Eastern Bank Limited provides commercial

banking products and services to the corporate, mid-market, and retail segment in

Bangladesh and internationally. Its deposit products include savings deposit, EBL

SB insurance account, deposit–retail, EBL campus account, EBL interesting account,

EBL confidence, salary account deposits, monthly deposit plan, bearer certificate of

deposits, bills payable and fixed deposits comprising short term deposits, term

deposits, and non resident foreign currency deposits. The company’s loan portfolio

comprise EBL Jibandhara loan, EBL Utshab loan, EBL home loan, EBL fast cash, EBL

fast loan, EBL executive loan, EBL auto loan, EBL travel Loan, EBL personal loan,

and education finance pack, as well as letters of credit, cash credits, overdrafts, and

purchased and discounted bills. It also provides financial products and services,

including corporate deposit accounts, syndicated financing, trustee and agency

services, term loan, project finance, export-import financing, working capital and

other finance, bonds and guarantees, investment and business counseling,

infrastructure finance, and cash management services, as well as treasury,

syndication, securities, and custody services. In addition, the company makes

investments, placements, and borrowing in money and capital markets; and deals

with foreign exchange business, as well as provides Internet banking, corporate

banking, and Hajj remittance services, such as handling foreign demand drafts and

foreign telegraphic transfers in Saudi Arabian and local currency. As of October 31,

2010, it had 39 branches, 60 owned automated teller machines (ATMs), and 218

shared Q-cash ATMs. Eastern Bank Limited was founded in 1992 and is

headquarter in Dhaka, Bangladesh. Through a network of branches & SME centers

countrywide. Eastern Bank has its presence in major cities/towns of the country

including Dhaka, Chittagong, Sylhet, Khulna and Rajshahi. Tracing its origin back to

1992, EBL is serving the individual and corporate clientele alike with remarkable

success offering innovative banking services since then.

2.2 HISTORY OF THE BANK6


The declaration of the Government’s bold are far-sighted to allow banks in the

private sectors to play its due role in the economy of Bangladesh, it has started the

process of creating new and dynamic financial institutions. One such institution is

the Eastern Bank Limited (EBL). The emergence of Eastern Bank Limited in the

private sector is an important event in the banking era of Bangladesh. Eastern Bank

Limited came into existence as a public limited company incorporated in

Bangladesh on August 8, 1992 with the primary objectives to carry on all kinds of

banking business in and outside of Bangladesh and to give effect to the Bank of

Credit and Commerce International (Overseas) Limited (Reconstruction) Scheme,

1992, framed by Bangladesh Bank with a view to safeguard the interest of the

depositors of erstwhile OCCI. Under the Scheme, EBL has taken over the entire

business assets, cash and liabilities of erstwhile BCCI in Bangladesh, with effect

from 16th August, 1992 as they stood after the reduction or adjustment in

accordance with the provisions of the Bank of Credit and Commerce International

(Overseas) Limited (Reconstruction) Scheme, 1992. EBL commenced its business

as scheduled bank with effect from August 16, 1992 with four branches-Principal

Branch, Dhaka; Motijheel Branch, Dhaka; Agrabad Branch, Chittagong and Khulna

Branch, with a motto to grow as a leader in the banking arena of Bangladesh

through better counseling and effect service to clients and thus to revitalize the

economy of the country. EBL resumed its operational activities initially with an

authorized capital of Tk. 1000 million. Into 10 million shares of Tk. 100 each and

paid up capital of Tk. 310 million. During 1994, the paid up capital has increased to

Tk. 600 million but the authorized capital remains unchanged at Tk. 1000 million.

The first Board of Directors of EBL constituted by the Govt. of Bangladesh,

consisted of 7 directors from various business and professions. Mr. Nurul Hussain

Khan was the chairman of the bank.

EBL is the successor of BCCI. In the 1991 when BCCI has collapsed internationally,

the operation of this bank has been closed sine die in Bangladesh. After a long time

discussions with BCCI employees and taking into consideration the depositors and

customers interest, Bangladesh Bank has given permission to form a bank named

Eastern Bank Limited by taking all assets and liabilities of erstwhile BCCI. This is

the brief history of EBL.

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2.3 VISION OF THE BANK

The vision statement of EBL is:

“To become the bank of choice by transforming the way we do business and developing a truly unique financial institution that delivers superior growth and financial performance and be the most recognizable brand in the financial services in Bangladesh.”

EBL dreams to become the bank to choice of the general public including both the

consumer and the corporate clients. It has adopted a new logo that looks very

dynamic in its attractive colors that reflect all the changes that are taking place in

EBL.

2.4 MISSION OF EBL

The mission statement of EBL is:

“We will deliver service excellence to all our

customers, both internal and external.

We will ensure to maximize shareholders’ value.

We will constantly challenge our systems, procedures

and training to maintain a cohesive and professional

team in order to achieve service excellence.

We will create an enabling environment and

embrace a team based culture where people will

excel.”

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2.5 VALUES OF EBL

Values carried out by EBL are:

We passionately drive customer delight.SERVICE EXCELLENCE We use customer satisfaction to accelerate growth.

We believe in change to bring in timely solution.

We share the business plan.OPENNESS We encourage two way communications.

We recognize achievements, celebrate results.

We care for each other.TRUST We share learning/ knowledge.

We empower our people.

We know our roadmap.COMMITMENT We believe in ‘continuous improvement’.

We do not wait to be told.

We say what we believe in.INTEGRITY We respect every relationship.

We do not abuse information power.

We are tax-abiding citizen.RESPONSIBLE We promote protection of the environment for our children.CORPORATE CITIZEN We conform to all laws, rules, norms, sentiments and values of

the land.

2.6 STRATEGIC PRIORITIES

EBL has some strategic priorities which it believes to be maintained in operating

the bank. These are

Further improvement of asset quality.

Further change in deposit mix to increase pie of low cost deposits.

To become cost efficient organization.

Moderate growth in conventional products.

Pursue inorganic growth through merger and acquisition.

Increase off-balance sheet business through product innovation.

Careful penetration in the capital market.

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Increase intrinsic value of the company by strengthening internal

controls through installation of clearly laid down policies, procedures

and processes.

Diversify corporate business to take advantage of PPP.

Increased and focused Corporate Social Responsibility (CSR).

Increase shareholders’ value.

Strengthen risk management.

Improve quality of human capital by strengthening their competencies.

Create world class IT infrastructure to deliver superior service to our

customers.

2.7 BUSINESS REVIEW OF EBL

Eastern Bank Limited (EBL) is a commercial bank with 39 online branches across

major cities in Bangladesh and 950 full time employees on year end 2009. It offers

full range of commercial banking products and services to the corporate, mid-

market and retail segment, the bank has comprehensive range of financial products

including corporate deposit accounts, syndicated financing, trustee and agency

services, term loam, project finance, working capital and other finance, bonds and

guarantees, investment and business counseling, infrastructure finance, cash

management services etc.

Unlike conventional branch banking, credit proposals as well as business

operations are processed centrally at EBL. Besides Main Operation, EBL has an

offshore Banking Unit (OBU) set up in 2004 which gives loans (on and off-balance

sheet exposure) and takes deposits only in freely convertible foreign currencies to

and from nonresident person/institution, fully foreign owned EPZ companies. EBL

organogram follows:

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Figure 1: Organogram of EBL

2.7.1 Corporate Banking:

Under the umbrella of Corporate Banking, there are nine relationship units, six in

Dhaka and three in Chittagong. The relationship units contribute to loan share both

in Loans and advances (measuring around 77% of total loans as of 31.12.09) as well

as fee based income by providing comprehensive financial solutions in the form of

Trade Finance, Working Capital, Project Finance etc. It also contributes a

considerable EBL deposit book which was 39 % in 2009.

Readymade garments and textiles comprise nearly one-fourth of Corporate

Banking’s portfolio. Major sectors financed by EBL are RMG, Textiles, Ship Breaking,

Commodity, Telecommunications, and Pharmaceuticals etc.

The focus of EBL in the year 2009 was to diversify its asset portfolio by entering

into new industries. As apart of its diversification, EBL started to enhance its footing

into new sectors such as aviation, healthcare, power, glassware and agribusiness

(processed food, poultry etc).

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There are three specialized units:

2.7.1.1 Structured Finance Unit:

SFU is dedicated to providing best structured solutions meeting the needs of the

clients, quality agency and trustee services, and maintaining a sustainable

relationship with all the parties involved. Today, SFU is not only providing term

loan involving local lenders but also arranging Preference Share Subscription, USD

Term Loan, and Offshore Finance etc. Following are some highlights of the success

of SFU:

In 2009, SFU won a bid worth USD 114.8 million of syndicating Bangladesh

Biman Boeing pre-delivery financing arrangement beating competition from

local and foreign banks.

Working as a lead arranger, SFU closed the deal of BDT 775 million Term

Loan for Regent Power Limited (a concern of Habib Group) which was

backed by IPFF, a World Bank funding facility for infrastructure projects.

SFU has been working as an Agent for ADB Agribusiness Project and actively

working with Asian Development Bank, Ministry of Finance and Local NGOs

– ASA, BRAC and TMSS.

2.7.1.2 Investment Banking Unit:

Recent global financial crisis failed to jolt the capital market of Bangladesh; rather

market capitalization of DSE has gone up by more than 80% in 2009 due to the

active IPO market, increased institutional investors’ participation, and surge of

Mutual Fund industry and sustained of the corporate entities in general.

EBL has identified the huge business potential in the capital market frontier in the

late 2007 which had driven the set up of investment banking in early 2008. Since

establishment, Investment Banking is successfully operating to develop new

business to serve the undeserved market potential. Subsequently, investment

banking has passed a very successful year of 2009 due to following developments.

Sponsoring Mutual Fund: Investment Banking developed the idea to

sponsor EBL 1st Mutual Fund (MF) of BDT 100 crore, the first MF in

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Bangladesh sponsored by a commercial bank, which was listed in the DSE in

August 2009. EBL being the sole sponsor holds 20% of the fund that had

NAV of BDT 11.87 as on December 31, 2009 against each unit of BDT 10.00.

Own Portfolio Performance: EBL has been actively managing an

investment portfolio since February 13, 2009. Up to the end of December,

the effective return from the secondary investment portfolio was 95.89%

taking into realized and unrealized return into account. Over the same

period, broad market return was 64.41% as measured by the DGEN’s

change.

Underwriting and Placement Participation: EBL was the largest

underwriter of Grameenphone Ltd’s IPO. EBL underwrote BDT 63.50 crore

of Grameenphone issue. EBL also participated in the private placement offer

of Grameenphone Ltd investing in 3.64 lacs share of GP Ltd an amount of

BDT 2.62 crore. EBL has also made arrangements to underwrite the IPO of

RAK Ceramics Ltd. to the tune of BDT 5.00 crore.

2.7.1.3 Cash Management Unit:

EBL Cash Management Unit aims at introducing efficient tools for maintain liquidity

of clients and maximizing their return. EBL has introduced a range of Cash

Management solutions that has enabled businesses to mange their cash flows

efficiently and effectively by optimizing liquidity, reducing default risk and lowering

operating cost.

Following are some mentionable deals made by Cash Management Unit during the

year 2009:

EBL pioneered in providing the Hajj Remittance Service to the private Hajj

Agencies through prepaid Hajj Card.

Collection agreement with one of the largest enterprises in the Power Sector

viz. Bangladesh Power Development Board.

Collection agreement with Meghna Petroleum limited, one of the largest Oil

Marketing Companies of Bangladesh.

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EBL has successfully initiated a depository relationship with Bangladesh

Telecom Regulatory Commission (BTRC) through collection of their security

deposit.

EBL was the first local bank in Bangladesh to start a depository relationship

with American Life Insurance Company.

Countrywide Payments and Collection solution for telecom industries, local

corporate houses and other institutional clients.

2.7.2 Consumer Banking:

EBL consumer Banking (CNB) has sustained its growth in deposit base and has

attracted low cost deposit fund in 2009 despite the adverse situation due to the

Global Economic Crisis. EMI Consumer Loan portfolio has also increased

significantly during the year. In 2009, CNB deposit grew by 23% while total

Consumer Loan portfolio (including credit cards) increased by 21%.

EBL branch network is further expanded to 39 with the introduction of 5 new

branches (Satmasjid Road, Banasree, Sirajuddowla Road, Choumuhani and Savar

branch). EBL own ATM network is extended to 60 with 24 new ATMs in important

locations around the country.

Carrying forward the legacy, EBL introduced three different and very customer

friendly products in 2009. “EBL Travel Card” was launched keeping in mind the

growing traveling population of Bangladesh. This Visa prepaid USD card helped the

travelers from the hassle of purchasing and carrying cash while in the move.

Keeping in mind the regulatory requirements and the need of the remitters, EBL

rebranded its non-resident business outlook and launched a set of service

propositions under the brand name “EBL Matribhumi”. EBL Matribhumi is service

concept where the maximum financial security and convenience in banking is

ensured. In 2009, EBL received approval for launching mobile phone based

remittance distribution service titled “EBL Smart Remit”.

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2.7.3 SME Banking:

Small and Medium Enterprises (SMEs) are the “engines of growth” in almost all the

emerging economies in the globe. The National Private Sector Enterprise Survey

which was conducted in 2003 estimates that about 6 million micro and small and

medium enterprises are doing business in Bangladesh and are employing more

than 31 million people nationwide. Furthermore, the data reveals that micro and

SME sector has employed 25% of the total workforce.

EBL SME Banking began journey in June 2006. As of now it has 28 SME Centers

located in the premier business of the country. EBL opened 12 new SME Centers up

to September 2010. EBL SME Banking has experienced a structural shift in 2009 by

separating the SE Business and ME Business completely, under two business heads

and thus making it more focused and accountable. This structure has enabled the

department to streamline its operation in every sector, starting from business

booking to overall monitoring of the assets to ensure healthy portfolio.

In January 2009, the management has approved a new SME definition in which the

ticket size for the Medium Enterprises bookings have been increased from BDT 50

million to BDT 100 million and the maximum ticket size for the Small Segment have

been increased from BDT 5.00 million to 7.00 million. The growth rate of EBL SME

Banking has always been on an upward trend: overall presence in the bank’s

balance sheet (loan portfolio) is also increasing from 7.80% in 2007, 9.25% in 2008

and about 11% at the end of 2009. The deposits grew by 36% from 2008.

2.8 REVIEW OF OPERATIONS

2.8.1 Trade Services (TSD):

EBL Trade Services has maintained its transactional growth with remarkable

accuracy and without significant increase in headcount. Due to spill over effects of

global recession, foreign trade business has declined. Although Trade Service has

managed to maintain an increasing trend in the number of LC, LG and Export Bills

in 2009, (28,181 in 2009 vs. 27,120 in 2008) trade business volume has decreased

(BDT 90,236.65 million in 2009 vs. BDT 98,258.65 million in 2008).

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EBL had extraordinary yields in 2009 from mutually beneficial relations with IFC

under Global Trade Finance Program (GFTP) and with ADB under Trade Finance

Facilitation Program (TFFP). Excellent utilization of IFC Line by EBL has

contributed to the increase of the Guarantee Line from USD 10 million to USD 30

million in 2009. Similarly ADB has increased TFFP line from USD 10 million to USD

15 million upon highly satisfactory utilization by EBL.

2.8.2 International Department

In order to facilitate Foreign Exchange (FX), Foreign Trade and Other Foreign

Currency (FCY) business and transactions, EBL maintains Correspondent Banking

relationship with number of banks at home and abroad. Standard Settlement

Instruction (SSI) including Drawing and Telegraphic Transfer (TT) arrangements

have been enhanced and ensured in all major currencies (USD, GBP, EURO, ACU

Dollar, SGD, JPY, AUD, CAD, CHF and Saudi Arabian Riyal). SSIs have been

rationalized to 26 numbers as of December 31, 2009. Business lines have been

enhanced with IFC to USD 30.00 million and ADB to USD 15 million along with

other business correspondents.

2.8.3 Service Delivery

Service Delivery, as part of centralized operations, was established in 2006 at

Dhaka and Chittagong with an objective to provide dedicated services to branches

and business units (Consumer, SME, Corporate, Treasury and Investment Banking).

In 2009, with broad objective of business support, Risk Management and optimum

utilization of Human resources, the SD has opened its Sylhet unit to ensure faster

processing for Sylhet zone branches locally. So now ‘Service Delivery’ is ensured

through three wings at Dhaka, Chittagong and Sylhet. This unit is now grouped six

functional units to perform as a focused group to bring in specialization, service

excellence, improvement in services and compliances, and risk mitigation service

deliveries. They are Account Services, Item Processing, Cash Management

Operations, Non resident Business Operations, Internet Banking Operations and

Treasury & Investment Banking support unit.

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2.9 INFORMATION TECHNOLOGY (IT)

EBL has initiated its Core Banking System up gradation to the latest Oracle’s

FLEXCUBE UBS version. This will enhance the customer service capabilities; further

improve cost per transaction, and better manage risks with latest control tools.

Some additional module set will allow EBL to introduce all latest channels for

customer transaction. An upgrade of payment card solution is also planned for

ecommerce, EMV issuing and acquiring capabilities. The preparatory work towards

integrated BASEL II compliance through automated tools is being done.

Technology innovation is one of the most effective ways to achieve cost savings by automating manual processes. More importantly, management of technology enables new revenue opportunities by providing better and timely information about internal processes and client data.

2.10 HUMAN RESOURCES

In an increasingly competitive business environment, the Bank is ever more

mindful of the importance of its people as a key success factor. Eastern Bank

therefore aims to create a work environment that enables staff to realize their full

capabilities and build for themselves a fulfilling career. The Bank has sought to

enhance the effectiveness of its recruitment and orientation process. It also further

developed its training curriculum and method in support of the Bank’s philosophy

of enabling people to continually develop themselves to their fullest potential.

Staffs were encouraged to continually learn and take on new challenges. Managers

were provided with further training to ensure they support their staff through

effective communication, coaching and constructive feedback. Moreover, the Bank

has also enhanced and implanted effective performance management practices.

This is to ensure that in planning, all employees and managers concentrate on most

important business issues, and in executing the plan, on monitoring and evaluating

the progress. Moreover, they are encouraged to continually take on more

challenges at both the individual and business unit levels.

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2.11 RISK MANAGEMENT PRACTICES AT EBL

2.11.1 Credit Risk Management:

The bank is exposed to credit risk in its lending operations. Credit risk is the risk of

loss that may occur from the failure of any counterparty to make required

payments in accordance with terms and practices. The bank has adopted a

framework for credit risk management, setting up of an independent Credit Risk

Management (CRM) team to establish better control and check in accordance with

the predetermined specific principles, and to reduce conflicts of interests in the

business units. The Head of Credit Risk Management (HoCRM) has clear

responsibility for management of credit risk. Policies/ instructions in this respect

are approved by the Board of Directors or authorities acting on their delegation.

Besides, subjective appraisal of credit application, bank use a numerical grading

system for quantifying the risk associated with a borrower, which is not a decision

making tool but a general indicator to compare risk perception about the borrower.

The grading is based on Credit Risk Grading Matrix (CRGM) that analyses a

borrower against quantitative and qualitative measures. Retail and small loans are

managed under separate Product Program Guidelines, approved by the Board of

Directors.

Credit exposure of Eastern Bank is measured and monitored by quarterly MIS on

portfolio, which is submitted to MD & CEO. Bank complies with related norms on

exposure stipulated by Bangladesh Bank and its self-made sector wise and product

wise exposure capping. Bank can automatically generate daily reports on borrower

wise limits, utilizations, overdue, repayment, etc.

2.11.2 Market Risk Management:

Market risk is the possibility of loss arising from changes in the value of a financial

instrument as a result of changes in market variables such as interest rates,

exchange rates, credit spread and other asset prices. The market risk in the bank is

managed in accordance with regulatory guidelines, governing lows and financial

and economic environment.

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Structural interest rate risk arises from the re-pricing characteristics of banking

assets and liabilities. Interest rate risk is the risk of potentially variability in

earnings and capital value resulting from changes in market interest rate. Asset

Liability Committee (ALCO) is mainly responsible for establishing guidelines for the

management of assets and liabilities, monitoring and minimizing interest rate risk

at an acceptable level. These guidelines and actions are taken in adherence to the

policies issued by Bangladesh Bank from time to time.

Liquidity risk is defined as the risk that the bank either does not have sufficient

financial resources available to meet all its obligations and commitments as they

fall due, or can access them only at excessive cost. It is the policy of the bank to

maintain adequate liquidity at all times. Liquidity risk management is governed by

Asset Liability Committee (ALCO) and responsible for both statutory and

prudential liquidity. Since liquidity have inverse relationship with profitability,

prudential management of liquidity is important. Asset deposit ratio of the bank as

on 31 December 2009 was 96.91% and the bank maintained statutory liquidity in

2009 in all cases.

2.11.3 Operational Risk Management:

Operational risk is the risk of loss resulting from inadequate or failed internal

processes, people or systems, or from external events. Operational risk includes

legal risk but excludes strategic and reputational risk. Operational risk is inherent

in bank’s business activities. According to BASEL II Bangladesh Bank guideline, the

bank follows ‘Basic Indicator Approach’ for computation of regulatory capital

against operational risks. Following table shows amount of regulatory capital

required for operational risk:

Table 1: Regulatory Capital Requirement

Particulars Amount (million BDT)Average of last three years gross income (GI)

3,712.89

Capital charge @ 15% on average GI

556.93

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2.12 REVIEW OF FINANCIALS

2.12.1 Summary financials

Eastern Bank Limited has made 24.93 percent growth in Operating profit (profit

before provisions and tax) during 2009 to BDT 2,980.16 million primarily due to

39.56 percent increase in Net Interest Income of NII (BDT 2,164.91 million vs. BDT

1,551.21 million in 2008) and 14.51 percent increase of other revenue (BDT

2,465.25 million compared to BDT 2,152.79 million in 2008) offset in party by

25.14 percent increase of operating expenses (BDT 1,649.99 million vs. BDT

1,318.46 million in 2008). Profit after tax increased by 82.33 percent to BDT

1,454.54 million compared to BDT 797.77 million in 2008 mainly due to decrease of

loan loss prevision by 38.52 percent (BDT 279.46 million vs. BDT 454.54 million in

2008). Therefore, Earning per Share (EPS) in 2009 jumped accordingly to BDT

58.53 compared to BDT 34.53 (resated) in 2008. Loans grew by 20.19 percent in

2009 (2009 end: BDT 47,667.99 million vs. 2008 end: BDT 39,662.16 million) and

Deposit increased by 18.32 percent in 2009 (2009 end: BDT 49,189.54 million vs.

2008 end: BDT 41,572.77 million).

2.12.2 Results of Operation

Our operating results in 2009 showed a balanced growth in every earning

component. Growth of NII during the said period was 39.56 percent compared to

18.21 percent growth in 2008. This was largely attributable to the fact that, Cost of

fund (Deposit and borrowing) has decreased by 79 basis points to 8.15 percent

(calculated based on daily average balances) during 2009 whereas yield on loans

and placements has decreased by only 29 basis points to 13.53 percent compared

to those of 2008. Growth of other revenue by 14.51 percent (BDT 2,465.25 million

in 2009 vs. BDT 2,152.79 million in 2008) has also played important role in

attaining 24.93 percent growth in operating profit during 2009. Following table

compares key operating financials of the period mentioned.

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Table 2: Key operating financials (Figures are in million BDT)

Year 2009 Year 2008 % ChangeInterest income 6,216.21 5,233.66 18.77%interest expense 4,051.31 3,682.45 10.00%Net interest income (NII) 2,164.91 1,551.21 39.56%Income from investments 1,107.30 862.90 28.32%Commission, exchange and brokerage 748.56 770.93 -2.90%Other operating income 609.39 518.96 17.42%Total other revenue 2,465.25 2,152.79 14.51%Total operating income 4,630.15 3,704.00 25.00%Total operating expense 1,649.99 1,318.46 25.14%Profit before provision and tax/Operating profit 2,980.16 2,385.54 24.93%Provision for loans and contingent assets:Specific provision 130.96 241.42 -45.75%General provision 148.50 213.12 -30.32%Total provisions 279.46 454.54 -38.52%Profit before tax for the year (PBT) 2,700.70 1,931.00 39.86%Tax provision 1,246.16 1,133.23 9.97%Profit after tax (PAT) 1,454.54 797.77 82.33%

2.12.3 Key Ratios

Since our profit after tax has increased by 82.33 percent during 2009, all the ratios

(including ROE and ROA) whose numerator is the PAT have jumped. Following

table summarizes some of the major financial ratios:

Table 3: Major financial ratios

Year 2009 Year 2008Return on average equity (ROE) 22.10% 18.64%Return on average assets (ROA) 2.34% 1.68%Cost to income ratio 35.54% 35.60%Capital adequacy ratio (Basel 1) 16.84% 12.71%NPL ratio 2.46% 3.30%EPS (BDT) 58.53% 34.53%Credit to deposit ratio 96.91% 95.40%Price to book value ratio 189.95% 172.69%

1. ROE: Profit after tax/Average of the year open and end equity, ROA: Profit after tax/Average of the year open and end assets.

2. Operating expense/Total operating income.3. NPL or classified loans at year end 2009/Total/loans.4. Gross loans without netting provision or interest suspense/Total

deposit at year end 2009.2.12.4 Financial Standing

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Loan portfolio of the Bank increased by 20.19 percent to BDT 47,667.99 million

whereas Deposits grew by 18.32 percent to BDT 49,189.54 million as on December

31,2009. In absolute numbers, Loans grew by BDT 8,005.83 million whereas

Deposits grew by BDT 7,616.77 million in 2009. Borrowing increased by BDT

3,886.59 million or 78.55 percent whereas placement decreased by BDT 370

million or 52.86 percent over those of 2008.

Investment increased by 65.38 percent to BDT 8,806.31 million as on December 31,

2009. Fixed Assets increased by 44.77 percent reaching BDT 1,804.05 million as on

year end 2009 mainly due to purchase of land costing BDT 52.36 million and

booking land revaluation gain of BDT 508.66 million. Shareholders’ Equity

increased by 78.10 percent and reached BDT 8,429.15 million as on year end 2009.

Finally, the Balance Sheet size of EBL i.e. Total Assets increased significantly by

27.97 percent and reached to BDT 69,870.74 million as on December 31, 2009.

2.12.5 Net Interest Income and Spread

Net interest income has increased by 39.56 percent during 2009 to BDT 2,164.91 million compared to BDT 1,551.21 million in 2008 mainly due to volume and rate effects as mentioned below.

Average loans and placements have increased by BDT 8,024.79 million or 21.33 percent in 2009 over that of 2008 causing interest income to rise by BDT 1,067.55 million in 2009 compared to 2008.

Yield on average loans and placement during 2009 has decreased by 29 basis points to 13.53 percent over 13.82 percent during 2008 casing interest income to fall by BDT 94.00 million.

Average deposits and borrowings have increased by BDT 5,742.21 million or 13.96 percent in 2009 over that of 2008 causing interest expense to rise by BDT 519.35 million in 2009 compared to 2008.

Cost of fund on average deposit and borrowing has decreased by 79 basis points to 8.15 percent over 8.94 percent during 2008 casing interest expense to fall by BDT 374.86 million.

2.12.6 Non-interest/operating expenses

22


Operating expenses have increased by 25.14 percent to BDT 1,649.99 million in 2009 compared to BDT 1,218.46 million in 2008 as sets forth in the following table:

Table 4: Operating expenses

2009 2008 % ChangeEmployee expense 743.05 610.01 21.81Directors’ fees and expenses 0.96 0.99 -3.77Other administrative expense 657.27 542.74 21.10Legal and professional expense 21.66 20.22 7.17Depreciation, repair and maintenance 220.70 141.84 55.59Audit fees 0.21 0.27 -23.84Charges on loan losses (write off) 6.14 2.39 157.06Total operating/Non interest expenses 1,649.99 1,318.46 25.14

Employee expenses have increased by 21.81 percent in 2009 over that of 2008 mainly due to increase of headcount from 763 to 878 during the year and routine increment of salary and benefits during the year. Depreciation on fixed assets have increased by 51.00 percent to BDT 120.07 million in 2009 whereas repair and maintenance expense have increased by 61.44 percent to BDT 100.62 million in 2009 was mainly due to increase of depreciation on various electronic and networking equipments and machinery and maintenance charges for newly opened branches, centers, ATMs etc.

23


CHAPTER 3SME & SME BANKING IN EBL

24


3.1 DEFINITION OF SME

Business process codification was first done on May 16, 2006. It is designed with

definition given by Prudential Guidelines of Bangladesh Bank for SE financing on

May 30, 2007. In the said memorandum, Small and Medium Enterprise was

segregated by yearly sales turnover, asset size and total manpower. Threshold limit

for allowing credit facility to Medium Enterprises was set for Tk. 6.00 crore.

Recently, BB has issued a new circular related to the definition of SME on May 26,

2008. The circular has increased the asset size for Small Enterprises (for

manufacturing and service concerns whereas trading concerns remain as it is) and

also aligned the manpower size for all types of Small Enterprises. The circular has

given new definition of ME which was absent in Prudential Guidelines.

New definition given by BB is as follows:

Table 5: SME definition given by BB

Small Segment Medium SegmentSector Asset size other

than land and building

Manpower Asset size other than land and

building

Manpower

Manufacturing BDT 50,000 to BDT 15,000,000

50 BDT 15,000,000 to BDT 200,000,000

150

Trading and Services

BDT 50,000 to BDT 5,000,000

25 BDT 5,000,000 to BDT 100,000,000

50

Proposed new definition by EBL:

Table 6: Definition of Small Enterprise by EBL

Nature of enterprise

Value of assets (excluding land &

building)

Manpower Yearly Sales Turnover

Maximum Loan Amount

Manufacturing BDT 50,000 to BDT 15,000,000

50BDT 500,000 to

BDT 200,000,000 BDT 7,500, 000Trading/ Service

BDT 50,000 to BDT 5,000,000

25

Table 7: Definition of Medium Enterprise by EBL25


Nature of enterprise

Value of assets (excluding land &

building)

Manpower Yearly Sales Turnover

Maximum Loan Amount

Manufacturing BDT 15,000,000 to BDT 200,000,000

150BDT 1,000,000 to BDT 500,000,000 BDT 100,000, 000Trading/

Service BDT 5,000,000 to BDT 100,000,000

50

EBL need to bring amendment to the existing definition for the following reasons:

To be line with Bangladesh Bank.

To grow their book by bringing the missing middle those one neither

addressed by corporate banking nor by SME banking.

To enlarge the scope of doing business of the Bank.

Small loan amount set by BB.

Medium loan amount is set by EBL.

Justification for enhancement of credit limit for medium enterprise from Tk. 6.00

crore to Tk.10.00 crore (based on BB circular ACSPD No-8, dated May 26, 2008):

1. Manufacturing Concern:

Asset size for manufacturing concern as set by Bangladesh Bank is Tk. 20.00

crore (excluding value of land and building).

Assume 30% of the asset is occupied by Fixed Asset (Plant & Machinery,

Furniture & Fixture, Advance against shop), i.e. Tk. 6.00 crore.

If EBL finances 70% of the Fixed Asset, total amount comes at Tk. 4.20 crore

(Tk. 6.00 crore×70%).

They have proposed total loan Amount for Tk. 4.00 crore (33% of client’s

equity).

Again, assume total sales turnover of the concern is Tk. 50.00 crore (as per

EBL’s new definition). Total asset turnover comes at 2.5 times.

Considering gross margin 10%, cost of goods sold comes at Tk. 45.00 crore.

Considering 120 days cash conversion cycle (it varies from business to

business), working capital requirement comes at Tk. 15.00 crore.

EBL is proposing total limit (funded and non-funded) up to Tk. 10.00 crore only.

2. Service and Trading concern:

26


Asset size for trading and service as set by BB is Tk. 10.00 crore (excluding value of land and building).

Assume 5% of the asset is occupied by Fixed Asset (Furniture & Fixture, Advance against shop), Current Asset comes at Tk 9.50 crore (Tk. 10.00 crore × 95%).

Again, assume total sales turnover of the concern is Tk. 50.00 crore (as per

EBL’s new definition). Total asset turnover comes at 5 times.

Considering gross margin 3%, cost of goods sold comes at Tk. 48.00 crore.

Considering 90 days cash conversion cycle (it varies from business to business),

total limit requirement comes at Tk. 12.13 crore.

Total fixed asset requirement Tk. 50.00 lac (EBL does not consider fixed asset

financing for trading and service concerns).

EBL is proposing total limit (funded and non-funded) up to Tk. 10.00 crore only.

Moreover, the sector wise segmentation of SME follows some criteria and EBL has made the following changes:

Table 8: SME Criteria

No. Particulars Existing Criteria

Proposed Criteria

Remarks

1 Educational Institutions

Dhaka and Chittagong (where student body is less than 2000)

All private school, college and university having student size less than 5000

Usually government bodies are treated as corporate and many schools, colleges and universities do operate in small scale and must be treated as SME.

2 Travel Agency, Mobile set, SIM/scratch card business, whole seller of rod and cement, whole seller of plain sheet, Fuel and CNG station

Sales Turnover

All are SME These businesses usually do not have defined structure and process. Business structure and capital are convenient to SME.

3 Private Service Telephone Networks (PSTN), ISP, Cable service providers

Corporate Banking

Will be defined by sales turnover

There are PSTN where investment is huge but there are ISPs where investment and sales turnover is not much

4 Diagnostics and shopping chains

All Corporate

As per sales turnover definition

Since capital and sales turnover varies from organization to organization

Exceptions:27


As per the proposed definition, there will be few clients, who will fall under

Corporate Banking in few parameters and under Medium Segment in few

parameters. For such clients, the business segment can be decided by Head of SME

Banking and Head/Area Head of Corporate Banking in consultation with the

Managing Director. Normal rule, out of 4 (four) criteria, if any client complies with 3

(three) criteria of Medium Segment, that entity will be treated as Medium segment

client and vice-versa.

Following Enterprise/ companies will not be treated as SME, they will be

considered as corporate clients.

All public limited companies

Govt. and semi govt. bodies

All chambers

All NGO’s

Educational institutions of Dhaka & Chittagong

All infrastructure project

Utility companies (PSTN, ISP’s, and Cable Service Providers)

Gas and Energy companies

International/ Transitional/ Multinational Organization

EPZ companies

Insurance Companies

Large Hospitals

Shopping Chains

Donor Driven Project

Airlines

Associations

Charities

Large buying houses

Large hotels

Apartments service associations

3.2 CREDIT ASSESSMENT & RISK GRADING

28


3.2.1 Credit Assessment

A thorough credit and risk assessment should be conducted prior to the granting of

loans, and at least annually thereafter for all facilities. The results of this assessment

should be presented in a Credit Application that originates from the relationship

manager/account officer (“RM”), and is approved by Credit Risk Management

(CRM). The RM should be the owner of the customer relationship, and must be held

responsible to ensure the accuracy of the entire credit application submitted for

approval. RMs must be familiar with the bank’s Lending Guidelines and should

conduct due diligence on new borrowers, principals, and guarantors.

It is essential that RMs know their customers and conduct due diligence on new

borrowers, principals, and guarantors to ensure such parties are in fact who they

represent themselves to be. Bank should have established Know Your Customer

(KYC) and Money Laundering guidelines which should be adhered to at all times.

Credit Applications should summaries the results of the RMs risk assessment and

include, as a minimum, the following details:

• Amount and type of loan(s) proposed.

• Purpose of loans.

• Loan Structure (Tenor, Covenants, Repayment Schedule, Interest)

• Security Arrangements

In addition, the following risk areas should be addressed:

• Borrower Analysis

The majority shareholders, management team and group or affiliate

companies should be assessed. Any issues regarding lack of management

depth, complicated ownership structures or intergroup transactions should be

addressed, and risks mitigated.

• Industry Analysis

The key risk factors of the borrower’s industry should be assessed. Any issues

regarding the borrower’s position in the industry, overall industry concerns or

29


competitive forces should be addressed and the strengths and weaknesses of

the borrower relative to its competition should be identified.

• Supplier/Buyer Analysis

Any customer or supplier concentration should be addressed, as these could

have a significant impact on the future viability of the borrower.

• Historical Financial Analysis

An analysis of a minimum of 3 years historical financial statements of the

borrower should be presented. Where reliance is placed on a corporate

guarantor, guarantor financial statements should also be analyzed. The

analysis should address the quality and sustainability of earnings, cash flow

and the strength of the borrower’s balance sheet. Specifically, cash flow,

leverage and profitability must be analyzed.

• Projected Financial Performance

Where term facilities (tenor > 1 year) are being proposed, a projection of the

borrower’s future financial performance should be provided, indicating an

analysis of the sufficiency of cash flow to service debt repayments. Loans

should not be granted if projected cash flow is insufficient to repay debts.

• Account Conduct

For existing borrowers, the historic performance in meeting repayment

obligations (trade payments, cheques, interest and principal payments, etc)

should be assessed.

• Adherence to Lending Guidelines

Credit Applications should clearly state whether or not the proposed

application is in compliance with the bank’s Lending Guidelines. The Bank’s

Head of Credit or Managing Director/CEO should approve Credit Applications

that do not adhere to the bank’s Lending Guidelines.

30


• Mitigating Factors

Mitigating factors for risks identified in the credit assessment should be

identified. Possible risks include, but are not limited to: margin sustainability

and/or volatility, high debt load (leverage/gearing), overstocking or debtor

issues; rapid growth, acquisition or expansion; new business line/product

expansion; management changes or succession issues; customer or supplier

concentrations; and lack of transparency or industry issues.

• Loan Structure

The amounts and tenors of financing proposed should be justified based on

the projected repayment ability and loan purpose. Excessive tenor or amount

relative to business needs increases the risk of fund diversion and may

adversely impact the borrower’s repayment ability.

• Security

A current valuation of collateral should be obtained and the quality and

priority of security being proposed should be assessed. Loans should not be

granted based solely on security. Adequacy and the extent of the insurance

coverage should be assessed.

• Name Lending

Credit proposals should not be unduly influenced by an over reliance on the

sponsoring principal’s reputation, reported independent means, or their

perceived willingness to inject funds into various business enterprises in case

of need. These situations should be discouraged and treated with great

caution. Rather, credit proposals and the granting of loans should be based on

sound fundamentals, supported by a thorough financial and risk analysis.

3.2.2 Risk Grading

Credit risk grading is a management tool to assess each borrowing clients of the

bank against a set of predetermined standards. It provides a method to monitor risk

of default based on historical, current and future anticipated information and

characteristics of a borrower or the environment where a borrow operates. Risk

31


grading is designed to enable all action plans on preventive basis and also

determine the associated asset pricing, credit cost, portfolio management and loan

loss reserves requirement. In sum, it is the bedrock for managing credit risk in a

bank.

Credit Risk Grading Process:

The following standard to be maintained for Small Enterprise loans:

a) Processing and approval of SE (Small Enterprise) loans shall follow the

Product Program Guide (PPG) as well as related instruction duly approved

by the management/ Board of Directors.

b) Risk Grading Matrix will not be applicable for SE Loans.

c) Downgrading and further Risk Grading will be determined on the basis of

overdue criteria.

d) Credit Administration Department must ensure the Risk Grading in the

system for each and every client under this guideline.

e) Any up-gradation must be determined on the basis of recovering of the

overdue installment.

Following rules will be observed while grading the portfolio:

No scoring id required for credits in the category Small Enterprise loan as

those are supported by specific PPG. Upgrading can be considered thereafter

for specific product, based on performance and improvement in financial

indicators or collateral/securities.

The risk grading of any client can be assigned at a better level on strong

quantitative grounds. Nevertheless, there are to be approved under specific

PPG.

In case of review of classified accounts for rescheduling purpose, EBL as well

as BB guideline will be meticulously followed in this regard.

For any accounts require downgrading/upgrading to/from classified

category (SS, DF, BL), approval of Managing Director is required.

CRM can also change risk grading in their normal course of portfolio review

or whenever such a situation warrants. Nevertheless, discussions with the

business units to be hold prior to doing so. In case of disagreement by the

32


business units, they have the right to appeal to DMD or MD about whose

discussion will be final.

The product wise risk grading to be set under the following risk grading parameters:

Table 9: Risk Grading

Risk Rating

Short Name Grade Definition

Superior SUP 1 • Facilities are fully secured by EBL deposit or cash margin.

• Credit facilities are fully covered by government guarantee.

• Credit facilities are fully covered by a top tier international bank/financial institution

• All security documentation should be in place.

Good GD 2 • Credit facilities are fully covered by the guarantee or pledged deposit of acceptable local bank, government security.

• Strong repayment capacity of the borrower and leverage.

• Ample liquidity, strong earnings and substantial cash flow, well balanced asset and liability structures.

• Well established, strong market share.• Proven track record to weather major

market disturbances/competition.• All security documentation should be in

place.Satisfactory SAT 3 • Credit facilities at least 75% covered by

cash or EBL FD or the guarantee or pledged deposit of local bank government security.

• Consistent earnings and cash flow.• Good growth in asset and liabilities.• Adequate liquidity and earnings.• Repayment capacity of the borrower is

strong.• Good management with second tier support

and identified succession lines.• Can formulate and execute long term

strategy.• Ability to weather occasional market

disturbances.• May be diversified in one or two industries• All security documentation should be in

place.

33


Acceptable ACCP 4 • Credit facilities at least 50% covered by cash or EBL FD or the guarantee or pledged deposit of local bank government security.

• If examined separately financial indicators may demonstrate some weaknesses but overall good financial condition.

• Sufficient liquidity, consistent earning and cash flow.

• Balanced growth in assets and liabilities.• Credit in this grade would normally be

secured by acceptable collateral (1st charge over inventory/ receivables/ equipment/ property).

• Acceptable management with sufficient industry experience and ready succession.

• May face difficulties in major market disturbances.

• Usually follows short term strategies.• May share market niches.• Full exposure covered by acceptable

collateral [hypothecation of stocks, machinery, car ,land and building] along with at least 30% covered by cash/ EBL FDR and/ loan value is 70% of the registered mortgaged collateral value supported by hypothecation of stock or other assets.

• All security documentation is in place.Fair FA 5 • Bankable credits as it meets minimum

underwriting standards.• Strained financial features to some extent

facing occasional cash flow crisis, inconsistent earnings and inadequate balance sheet structure.

• Ability to avail multi banking facility is somewhat limited.

• Family based management with a reasonable succession line.

• No collateral other than hypothecation of inventory, receivable and machinery.

• Overdue (principal or interest) up to 29 days.

34


Watch WA 6 • Requires greater attention than credit rated “Fair.”

• Warning signs in account conduct is getting. Prominent, though not going to stagnant situation delays experienced in settling past dues.

• Strained liquidity, declining margin and insufficient cash flow for debt servicing.

• Industry where the obligor operates is characterized with weak revenue and excess capacity.

• Primarily one man show. Departure of key person will expose the entity to unwarranted risks

• Vulnerable to moderate market disturbances.

• Overdue (principal or interest) for 30 days and above but not exceeding 59 days.

Marginal MG 7 • Alarming client and requires greater attention than credit related to “WATCH”.

• Overdue (principal or interest) for 60 days and above but not exceeding 89 days.

• Fund diversion, strained liquidity, declining margin and insufficient cash flow for debt servicing.

• Borrower incurs a loss, loan payments routinely fall past due, account conduct is poor, or other untoward factors are present.

Prudential guidelines for interest suspense and provisioning against Small

Enterprise (SE) Loans:

The Bank will follow Prudential Guidelines for SE financing for fixing the Risk

Grading from Special Mention to Bad/Loss. If any changes adopt by BB, this changes

must be enforced with immediate effect. Interest application and provision to be

maintained as per the said Prudential Guidelines, detail is as under:

35


Table 10: Provision for classified loan

Risk Rating Short Name

Grade Determinant Treatment of Income

Provision to be made

Special Mention

SM 8 Where markup or interest or principal is overdue (past due) by 90 days or more from the due date.

Unrealized markup or interest to be put in suspense account and not to be credited to income account except when realized in cash.

Provision at the rate of 5% of the difference resulting from the outstanding balance of loan account less the amount of interest suspense.

Substandard

SS 9 Where markup or interest or principal is overdue (past due) by 180 days or more from the due date.



Doubtful 10 Where markup or interest or principal is overdue (past due) by 12 months or more from the due date.


Provision at the rate of 50% of the difference resulting from the outstanding balance of loan account less the amount of

36


interest suspense.

Bad/Loss BL 11 Where markup or interest or principal is overdue (past due) by 18 months or more from the due date.



3.3 HANDLING CLASSIFIED SE LOANS

There are structured ways of handing the classified SE Loans (Having risk grading substandard to bad/loss). Early alert process and follow ups of overdue SE Loans

37


are followed. Process of monitoring to be followed by the Relationship Team as under:

Table 11: Monitoring Classified SE Loans

Past Due Range Strategy/ Action1 - 14 days Follow up and persuasion over phone. 15 – 44 days 1st remainder letter.45 – 59 days 2nd remainder letter.

LO/RM/BDM visits the client.60 – 89 days 3rd and final remainder letter shall be issued.

Group visit (RM, BDM, and LO). Letters to guarantors, employer, references. Warning of legal action by next 15 days.

90 – 179 days Final reminder and serve legal notice within 101 - 120 days.

Monthly review to CRM.Above 180 days/ Classified account

File to be transferred to Special Asset Management (SAM) unit.

Court case to be initiated. Letter to different banks and association and neighbor

businessmen to be issued. Action to be taken under NI Act as well as Civil Court Act.

3.4 SME OFFICERS HIERARCHY IN EBL

38


Figure 2: SME Hierarchy

3.5 SME LOAN APPROVAL PROCESS

The approval process segregates the work of Relationship managers marketing

from the approving authority. The responsibility for preparing the Credit

Application rests with the Relationship Manager (RM) within SME banking

department. Credit Applications are recommended for approval by the RM team

and forwarded to the approval team within Credit Risk Management (CRM)

department and approved by individual executives. The recommending or

39

Recommendation by RM

Central SME center (Reviewed by SME officials)

Recommendation by RM

CRM (Analyzed by officers of CRM)

Approved by HOCRM/DMD/MD


approving executives take responsibility for and are held accountable for their

recommendations or approval.

Approving SME proposals

The RM first sends the credit applications to the SME center in Head office Dhaka.

The SME center then checks the documents and make sure they are well within the

lending guidelines of the bank. They also provide additional condition for sanction

as appropriate. After reviewing they send the proposal to the CRM department. The

respective credit officers review the proposal and get the approval from the

approving authority.

The routing process of credit proposals and its approvals can be summarized as follows:

Figure 3: SE Loan Approval Process

40


3.6 DISBURSEMENT

After the approval of a loan proposal, legal charge documents are prepared as per

Bank’s Credit policy. Then the prepared charge documents are scrutinized and

checked by loan administration department. If all the documents found ok as per

policy then the loan amount is credited to the client’s Current Account by Credit

Admin Department.

3.7 LOAN MONITORING

To minimize Loan losses, monitoring procedures and systems are in place that

provides an early indication of the deteriorating financial health of a borrower. At a

minimum, systems are in place to report the following exceptions to relevant

executives in CRM and RM team:

Overdue principal or interest payments, overdue trade bills, account

excesses, and breach of loan covenants;

Loan terms and conditions are monitored, financial statements are received

on a regular basis, and any covenant breaches or exceptions are referred to

CRM and the RM team for timely follow-up.

Timely corrective action is taken to address findings of any internal, external

or regulator inspections/ audit.

All borrower relationships/ Loan facilities are reviewed and approved

through the submission of a Credit Application at least annually.

EBL has an excellent IT backbone which produces the above information for

central/head office as well as for SME Center to review.

41


CHAPTER 4SME PRODUCTS OF EBL

42


4.1 LOAN PRODUCTS

4.1.1 EBL AGRIM

EBL AGRIM is a terminating very short term loan facility (Payment on maturity) for

working capital and any other legitimate business purpose. Bank would finance

against net cash flow of the section economic entity derived from cash flow of any

creditworthy business. The product will allow the Bank to capture short term

benefit from the existing market opportunity.

Table 12: EBL AGRIM Product Features:

Purpose To help the Small & Medium Entrepreneurs to meet extra finance required during any events.

Availability All EBL branches and SME Centers through the SME Relationship Managers/Loan Officers.

Target Customers Small & Medium Enterprises as defined by EBL & Bangladesh Bank, Target customers are RMG (manufacturer and trading), Footwear, limitation Jewelry & Cosmetics, Electronics item (TV, Freeze, Fan) etc.

Loan Amount Minimum BDT 200,000Maximum BDT 950,000

Interest Rate 19% p.a. calculated on monthly declining balance method (Interest Rate can be changed by ALCO from time to time based on market situation).

Processing Fee 1% of loan amount, charged upon disbursement exclusive of VAT.

Disbursement Period Disbursement will be completed 30 days before the eventLoan Tenor The loan tenor amount will be allowed for 1 month to 6 months

period depending upon the nature of business. i.e. for manufacturing maximum 6 months, for trading maximum 3 months.

Partial Payment/ Early Payment

Partial/Early settlement fee waived.

Disbursement Mode Credit to customer’s CASA account with EBL in full/ or Pay Order given to the supplier/ vendor.

Repayment Full amount will be repaid maximum 21 days after the event (Eid or Puja). Interest should be realized on monthly basis. System will auto debit the CASA account.

Installment Failure Charge

Penal interest of 4% p.a. on the overdue amount.

Stamp Charges All relevant stamp charges will be on borrower’s account and will be debited from the account at the time of disbursement

Collateral/ Security • In case of proprietorship concern two personal guarantees to

43


be obtained [criteria mentioned in the section 3 of PRG].• In case of Private Ltd. Co. or partnership company PG of all

the directors/ partners to be obtained.• One UDC [Undated cheque] for the full amount of the loan

including full interest.• Fire & flood insurance is mandatory on inventory & other

associated assets of the business as it covers at least 110% of EBL financing amount. For waiver of flood insurance clause, unit to provide strong justification in the CM.

• Simple hypothecation on fixed or floating asset and on the purchase fixed assets of the business.

4.1.2 EBL UDDOG

There are around 106,000 bankable small and medium enterprises (SMEs) in

Bangladesh according to a market survey. Based on the estimate there is a total

funding requirements of BDT 200 Billion. A lot of banks are financing for their

working capital, fixed asset purchase and other business purposes through

complicated or less friendly credit analysis methods by taking land and/ or building

as primary collateral. EBL as specified in its Small Enterprise Financing Policy,

would like to offer simply structured process based, yet risk mitigating product to

the SMEs. EBL “UDDOG” has been designed based on the above objectives to

achieve.

EBL UDDOG is a terminating loan facility (EMI based) for working capital, fixed

asset purchases of any other business purpose. Bank would finance against net cash

flow of the socio economic entity derived from cash flow of any creditworthy

business and secure the lending against lest of EBL fixed deposit amounting 50% of

total volume. The product will allow the Bank to capture the existing market

opportunity.

Table 13: EBL UDDOG Product Features

Purpose Any legal business purpose

Availability All EBL branches and SME centers through direct sales by SME Relationship managers/loan officers.

Target customer small & medium enterprises as defined by EBL

44


Loan amount minimum BDT 600.000/- maximum 5,000,000/-

Interest rate 18% p.a. calculated on monthly declining balance method (Interest rates can be changed by ALCO from time to time based on market situation)

Processing Fee 1% of loan amount, charged upon disbursement, exclusive of vat

Repayment tenor Minimum 12 months, maximum 60 months (as per clients payment capacity calculated as per cash flow method)

Disbursement mode To client’s casa account with EBL in full.

Repayment • 5th/10th/15th/20th/25th of the month• system will auto debit the casa account

Partial pre payment/early payment

Allowed after 06 months. Min 15% of the loan outstanding to be pre paid fee: 1% of the pre paid/early payment amount.

Installment failure charge

penal interest of 4% p.a. on the overdue amount

EMI cheque bounce charge

BDT 500 exclusive of vat

Stamp charges All relevant stamp charges will be on borrower’s account and will be debite3d from the account at the time of disbursement

Takeover from other bank

In case of takeover from other bank after loan approval the loan amount will be given in form of p.o. (pay order) to the other bank to settle the outstanding as well as closing charge

Collateral/ Security • In case of proprietorship concern two personal guarantees to be obtained criteria mentioned in the section 3 of PPG.

• In case of private ltd. Co. or. Partnership company pg of all the directors/partners to be obtained.

• PDC (post dated cheque) for 3 three installment and 01 one UDC undated cheque for the full amount of the loan including full interest.

• Fire & flood insurance is mandatory on inventory & other associated assets of the business as it covers at

45


least 110% of EBL. Financing amount. For waiver of flood insurance clause, unit to provide strong justification in the CM.

• Simple hypothecation on fixed or floating asset and on the purchase fixed assets of the business.

• Lien on fixed deposit 50% of loan amount for new borrower of SME banking. FDR tenor must be in line with loan maturity. In case of FDR tenor is lesser than the loan maturity, auto-renew instruction to be obtained from the client. Any prior encashment of FDR, no interest will be given on it.

• In case of pay order issued for taking over other institutional liability, copy of p.o. deposit slip with mentioning loan A/C number duly verified by SME unit except LO will be acceptable as no liability certificate.

4.1.3 EBL ASHA

ASHA is an EMI based unsecured terminating loan facility, offered to small

enterprise for any legitimate business purpose. Presently, EBL is planning to

penetrate the current market share of some lending banks in SME Banking

segment.

Under this plan, EBL will consider only those clients as eligible for enjoying tending

facility from SME Banking division of leading banks.

EBL is increasing its interest rate from 18% to 20% and tenor from 2 years to 3

years. The main purpose of these changes is to earn more profit in long run as well

as to increase the market share by convincing the potential customers with longer

repayment facility.

Table 14: EBL ASHA Product Features

Purpose Any legitimate business purpose which will have .......of indirect contribution to business revenue growth of cost reduction. Borrower must declare specific business purpose of the loan.

Availability All EBL branches and SME Centers through the SME Relationship Managers/Loan Officers.

46


Target Customers Small Enterprises as defined by “Bangladesh Bank Prudential Regulations for Small Enterprises Financing and existing SME borrower of leading banks.

Loan Amount Minimum BDT 200,000Maximum BDT 1,000,000

Interest Rate 20% p.a. calculated on monthly declining balance method (Interest Rate can be changed by ALCO from time to time based on market situation).

Processing Fee 1% of loan amount, charged upon disbursement inclusive of VAT.

Repayment Tenor Minimum 03 months and maximum 36 months for the first loan.

Partial Payment/Early Payment

Allowed after 3 months

Disbursement Mode Credit to customer’s CASA account with EBL in full.Repayment • 10th/ 20th/ 30th of the month or someday from the

next month of disbursement.• Through post dated cheques (PDC). After the cheque is

cleared, system will auto debit installment from customer’s CASA account. (PDC to be dated 2 days earlier than the repayment date)


Penal interest of 4% p.a. on the overdue amount.

EMI Cheque Bounce Charge

BDT 500 inclusive of VAT.

Collateral/Security • 2(two) Personal Guarantee• Post Dated Cheques for each installment and one

undated cheque for 110% of the sanctioned loan amount (mandatory)

• Simple Hypothecation on Business fixed and/or floating assets.

• Hypothecation of goods and commodities• Hypothecation of book debts and receivables.

4.1.4 EBL PUJI

PUJI is a terminating loan facility (EMI based) for working capital finance to small

enterprises against surplus cash flow derived from patrimony situation of any

creditworthy business secured by collateral (registered mortgage on land &

building) security.47


Table 15: EBL PUJI Product Features

Purpose Working capital finance (stocks, receivables, overhead expense excise duties, bill payments, advance payments)

Availability All EBL branches and SME Centers through direct sales by SME Relationship Managers/ Loan Officers.

Target Customers Small Enterprises as defined by “Bangladesh Bank Prudential Regulations for Small Enterprises Financing”

Loan Amount Minimum BDT 500,000/- Maximum BDT 5,000,000/-Loan to Price Ratio 100% of working capital needInterest Rate 17% p.a. calculated on monthly declining balance method

(Interest rates can be changed by ALCO from time to time base on market situation)

Processing Fee 1% of loan amount, charged upon disbursement, inclusive of VAT

Repayment Tenor Minimum 12 months. Maximum 36 months. (As per cents payment capacity calculated from cash flow and DBR)

Grace Period Maximum one monthPayment of interest only during grace period.

Partial Pre payment/Early Payment

Allowed after 6 months. Min. 30% of the loan outstanding to be pre paid but only once in the entire loan tenure. Fee 1% of the pre paid/early payment amount.

Grace Period Maximum one monthPayment of interest only during grace period.

Disbursement Mode To client’s CASA account with EBL in full.Repayment • 10th/ 20th/ 30th/ day of the month

• Through post dated cheques (PDC) of the strongest bank account. After the cheque is cleared, system will auto debit installment from customer’s CASA account. (PDC to be dated 8th/ 18th/ 28th day of month)

• In case of EBL account as the strongest account, no PDC will be taken and system will auto debit the CASA account.


Penal interest of 4% p.a. on the overdue amount

Stamp Charges All relevant stamp charges will be on borrower’s account and will be debited from the account at the time of disbursement

48


Collateral/ Security • Personal guarantee• Post dated cheques for each installment and one

undated cheque for the full amount of the loan including full interest (mandatory)

• Registered mortgage on land or building, title duly vetted by bank’s approved lawyer/agency

• Simple hypothecation on business fixed or floating asset• Insurance on stocks with required risk coverage

Mortgage Property Valuation

Valuation must be done by bank’s approved professional value and value must be at per with the loan amount. However, valuation done jointly by BDM and loan officers on government housing plots is acceptable.

4.1.5 EBL BANIJYO

The role of small and medium enterprises (SMEs) to economic growth of a country

is well, recognized. Across the globe it is strongly perceived that SMEs do play a

vital role in the industrial development of a country. There are about 177000

enterprises working under the umbrella of micro, small and medium enterprises in

the country. Growth of economy of a state is heavily dependent on the development

of SMEs and developing countries have showed the success part toward the rest of

the world. All developing countries are closely eyeing on the development of SMEs

and financial institutions are also focusing on the opportunities of worthy business.

Bangladesh SME is mainly based on trading of different items ranging from

industrial raw materials to finished goods. SME’s have large stake in importing

industrial raw material, mobile set, electronic items, and commodities. EBL

BANIJYO is a composite package offered to the customer who has settled track

record in the same line of business with good reputation. It is the thirst of the make

to have LC facility in less margin with post import finance manager SME has the

mindset to settle down their business and to earn high state and usually are adobe

by the regulation, if they are well informed. Huge potential SME trade market is

49


antacid though it is pregnant with potentially. EBL takes the drive to explore the

market to get the maximum benefit out of it.

Table 16: EBL BANIJYA Product Features

Purpose Import of any legitimate marketable products

Availability All EBL branches are SME Centers through direct sales by

SME Relationship Manager/ Loan Officers.

Target Customers Small & Medium Enterprises as defined by EBL. More

specifically small inverter of easily marketable products

like mobile accessories, toys, apparels, shoe, batteries

cosmetics, stationeries, food items (BSTI approved),

Textile accessories, chemicals etc.

Perishable item to be imported with 100% margin as the

longevity is too short.

Terms of BB’S

Prudential Regulations

of SE finance

Not manufactory

Generic Products Sight Letter of Credit & Post Import Loan

Maximum Limit • SLC/ULC: BDT 20M

• Import loans: BDT 20M

• 4-5% of limit will be allowed for exchanges rate

fluctuation

Pricing • 0.50% commission for first quarter for SLC/ULC.

0.25% for subsequent quarter.

• 15% interest rate per annum for import loan. It may

be revised as per 88 or EBL guidelines from time to

time.

Processing Fee 0.25% or minimum BDT5000.00 of limit amount, charged

upon disbursement, exclusive of VAT

Facility tenor • SLC/ULC Maximum 1 year with 30 to 180 days

revolving.

• Import loans Maximum 1 year with maximum 180

days revolving as per cash cycle. 50


Margin Usually 40%/50% margin in the form of EBL FDR at the

time of opening the LC. It may flexible as per banker client

relationship.

Disbursement of

Import loan

• Maximum 100% of the document value will be

disbursed in the form of import loan when margin at

the time of opening LC is in the form of cash

• Maximum 100% of the value will be disbursed in the

form of import loan when 40% margin at the time of

opening LC is in the form of FDR.

• Client may retire the document by making 100%

payment of document value and may not enjoy the

import loan.

Adjustment of Import

loan

• Entire import loan will be adjusted along with accrued

up to date interest on or before maturity from the

sales proceeds/ own sources of the client.

• Client may partially adjust the loan by encasing the

FDR and the rest from own sources.

• Client may settle down the entire import loan facility

from cash and release the FDR when margin is in the

form of FDR.

• We will Ancash the FDR if client fails to adjust the

import loan at maturity and collect the residual

amount from the client.

Stamp Charges for

documentation

All relevant stamp charges will be on borrower’s account

and will be debited from the account at the time of

loading the limit

Original IRC Original IRC is preferred to be kept with EBL. If client has

other bank, copy of IRC along with NOC of that particular

bank must be enclosed with the charge documents.

In case of LC against indent, indenter’s IRC and BB

permission must be updated.

Bill of entry • Client must give an undertaking that there is no

51


overdue Bill of entry with any banks in Bangladesh

• Moreover if client has opened any LC from any bank

earlier, client must submit a certificate from the

previous Bank(s) regarding confirmation of no

overdue Bill of entry.

• If IRC is kept with other bank, that bank also has to

give a certificate that there is no over due bill of entry

under this IRC.

FDR Tenor Tenor of the FDR must be of at least 3 months. If

outstanding is remained FDR will be automatically

renewed along with interest.

Facility withheld No facility will be executed to the following cases:

• IRC not updated

• Trade license/TIN/VAT not updated

• Membership of any association (Business or trade

body) is not updated

• Fails to submit Bill of entry in due time (Before getting

the status of over due)

• If any Import loan is over due or any dispute in the LC

Collateral/ Security • 40% margin in the form of cash or EBL FDR at the

time of opening the LC

• Registered charge must be created on

inventory/Machinery/Equipment. It can be 1st/2nd or

3rd charge (in case of limited company)

• Simple hypothecation of inventory/ Machinery/

Equipment in cash of proprietorship firm.

• Personal Guarantee of all the Proprietor/ directors/

partners of the obligor

• All necessary charge document prescribed by bank.

• A UDC equivalent to 110% of the limit loan amount

with memorandum of cheque deposit.

• Fire/ Flood insurance of the stock/ machinery/

52


equipment covering 110% of the import loan/

Acceptance.

4.1.6 EBL MUKTI

In Bangladesh, the number of woman entrepreneurs is increasing. Many women

are now involving in starting new business and also performing good. As an

individual new business person, some they need loan for their business purpose. In

this case, Bangladesh Bank is extending its hand to spur the business growth of

women entrepreneurs and mandated banks to provide loans to them. Banks also

get refinance facility from BB. EBL MUKTI is an EMI based product launched for the

women entrepreneurs.

Product Features:

Credit facility up to BDT 300,000 (three lac) in any legitimate business

No requirement of land/building mortgage

Yearly interest rate is 10%, which is the lowest in the country

Repayable in 18 months

Facility is only for Women Entrepreneurs

Eligibility:

Any legitimate business with at least two years of operation

Business Cash Flow to support repayment

4.1.7 EBL UDDOM

It is a newly launched product in EBL SME. It is basically a combination of SME

Loan and Overdraft facility. Clients can avail a facility to repay a part of the loan in

EMI basis and remaining part as per the client’s suitable time.

Table 17: EBL UDDOM Product Features

Loan Ceiling BDT 10 lac to 50 lac (Fresh BDT 30.00 lac

& Repeat BDT 50.00 lac)

Interest Rate 16% per annum

Processing Fees 1% (Excluding VAT)

53


Tenor Minimum 12 months

Maximum 48 months

Collateral/Security Personal Guarantee

50% FDR of loan amount and 40% for

repeat loan

Repayment EMI and swing in OD account

OD OD will be auto renewal subject provide

some up dated documents like TIN, TL,

insurance & stock report

DBR Calculation

DBR=¿ All existing EMIs+ EMI and monthly ¿interest expenses of OD of the ¿

proposed EBL Loan ¿¿¿¿ Average Net Monthly Cash Flow ¿from socio economic entity ¿

¿¿[Minimum 12 months][All existing EMI shall

be added back to average net monthly cash

flow to avoid duplication]

Age of Borrow Minimum 22 years & Maximum 60 years

Lengths of Business Minimum 2 years

Repayment Date 5/20/15/20/25

Bank Reflection At least 60% reflected above BDT 15.00

lac to BDT 50.00 lac and below BDT 15.00

lac bank reflection is 30%

DBR Ratio 65%

54


4.2 DEPOSIT PRODUCTS

4.2.1 EBL SHUBIDHA

“EBL SHUBIDHA” is daily interest bearing and half-yearly interest paying Current Account, link with Short Term Deposit account.

Table 18: EBL SUBIDHA Product Features

Eligibility • Must have valid Trade license/partnership deed/documents for limited liability company issued by proper authority to conduct the business.

• Photo, ID• Other documents as per Account opening

requirements specified by Bangladesh Bank.• No individual can open this account.

Availability All EBL branchesMinimum Opening Amount

TK 1 Lac (Taka One Lac) only

Interest Rate @ 5% P.A.Rate change Interest rate will be reset periodically upon review by

EBL’s Asset Liability Committee and will be subject to change as per deposit rate sheet

Interest Calculation Interest will be calculated on daily basis. Customer will require BDT 1000K as minimum day end balance in this account to entitle the interest. No interest will be allowed for the day when any day end credit balance is less than BDT 100K

Interest Payment Interest will be credited to the link Short Term deposit Account on half yearly basis.

Tax Deduction Interest is tax deductible and will be deducted at source as per GOB rules

Excise Duty & VAT Will be deducted as per NBR rules Ledger Fee waiver Ledger fee waiver will be applicable if monthly average

balance is BDT 100,000.00 or more. In all other cases BDT 300 will be charged as ledger fees on half yearly basis but no ledger fee from the CD A/C.

Debit Card • Debit Card facility will be provided to any of the signatories (proprietorship/partnership as per mode of account operation) of the account.

• Debit Card issuing charge will be BDT 575 (including VAT) per year.

55


On Line Facility There will be no online charge for deposit/ withdrawal for an amount up to BDT 10.00 lac from account opening Branch to other Branches of other cities. Above BDT 10.00 lac, deposit/withdrawal charge will be realized as per schedule of charges of SME Banking. However, there will be no online charge for any transaction in the same city.

Others terms & conditions

• Day end balance of CD account will be automatically transferred to the STD account by SWEEP-OUT facility at free of cost

• SWEEP-IN facility will be tagged in CD account so that system can automatically credit fund in CD account from the STD account in case of need. Cheque book will be issued only against the CD account.

• Regular statement of the Current Account to be sent to the customers on monthly basis and link STD Account on half yearly basis at free of charge.

Nomination & Death of account holder

• Only one person can be nominated by the account holder for each account

• Nomination will be cancelled if the nominee dies in the life time of the account holder. The account holder in such cases will advise in writing a new nominee.

• The account holder, with written instruction, may change the nominee any time.

• In the event of account holder’s death, his/her nominee will not be allowed to continue the account and the available proceeds of the account (after all the deductions, if any), will be credited in the name of the Nominee or to the account of Nominee with EBL.

• In case where there is no nominee the Succession Certificate from the appropriate court will be required for releasing the balance amount after the death of the account holder.

56


4.3 CONVENTIONAL CREDIT FACILITIES OF EBL

Table 19: Conventional credit facilities of EBL

NAME DESCRIPTION PURPOSE RISK FACTOR TENOR/VALIDITY

PAD Payment against document

• Advance against Sight L/C

• Forced Loan

Recourse on title to import document

21 Days per Bangladesh Bank

LTR Loan Against Trust Receipt

• To finance import L/Cs

• Recourse on Sales

• Clean Finance

180 days

CC (HYPO) Cash Credit against hypothecation of inventory debts

• To finance inventory • Other business

operations • General purpose

• Recourse on pledged inventory

• Ever green

12 months

CC (PLEDGE) Cash Credit against pledge of inventory and book debts

To finance pledged inventory

• Recourse on pledged inventory

• Ever green

12 months

ACCEPTANCE Acceptance against ULC

To finance assets thru Bank’s Acceptance

Recourse on Sales

12 months

OAP Own Acceptance Purchase

• To refinance Bank’s Acceptance

• Forced Loan

• No recourse• Clean finance• Ever green

12 months

LBPD Local Bill Purchased Documentary

• To purchase/discount against loan usance L/C

• Upfront interest to be realize

• Resource on Banks through acceptance

• Residual on client

180 days

FBPD Foreign Bill Purchased Documentary

• To purchase/ discount/ negotiate export documents against Sight/ Usance Export L/C

• Upfront interest to be realize (difference in FX rate)

• Resource on Banks acceptance


45/ 180 days

LAFBD (CLEAN)

Loan Against Foreign Bill Clean

To finance export contract

• Clean finance• Performance

risk

120 days

LAFBD Loan Against Foreign Bill Documentary

To finance export documents against Export contract Sight/Usance

• Recourse on export document

• Payment risk

45/180 days

57


SLC Sight Letter of Credit For importation Recourse on title to import document

12 months

ULC Usance Letter of Credit

For importation Recourse on sales

12 months

LG • Letter of Guarantee• BB/ PG/ APG/

RB/Pay

For contractual obligations

• Performance risk

• Ever Green

• Specific Period• Open ended

SOD Secured overdraft General Purpose • 100% cash covered

• No credit risk • Ever Green

12 months

OD Overdraft against other collateral

General purpose • High credit risk

• Recourse on sales

• Ever green

12 months

IMPORT LOAN (HYPO)

Import loan against Hypothecation inventory and book debts

To finance import L/C or against contract

Recourse on sales

180 days

IMPORT LOAN (PLEDGE)

Import loan against imported merchandise pledged and hypothecation of Book debts

To finance imported merchandise under pledge

• Recourse on pledge inventory

• High monitoring risk

180 days

DEMAND LOAN (Hypo)

Demand loan against hypothecation of inventory and book debts

• To finance inventory procured locally

• To finance Duty/ Tax

Recourse on Sales

180 Days

DEMAND LOAN (Pledge)

Demand loan against pledged inventory procured locally and hypothecation of book debts

To finance inventory procured locally under pledge

• Recourse on pledge inventory

• High monitoring risk

180 days

Time Loan Time Loan against other security/ collateral/ support

To finance fixed/ other assets

• Recourse on sales

• Collateralize by fixed/ other assets

12 months

TERM LOAN Term loan against fixed assets

To finance fixed assets • Recourse on fixed assets

• High risk

• Over 12 months

• Max 7 years

58


PC Packing Credit against Export L/C & Export Order

• To finance export L/C• Pre-shipment finance

• Performance risk

• Lien on Export L/C

• 180 days

BCP (Foreign) Bankers Cheque Purchase (Foreign)

• To purchase/ discount foreign currency drafts/ pay order

• Upfront interest to be realized (diff. in FX rate)



• 30 days

BCP (Local) Bankers Cheque Purchase (Local)

• To purchase/ discount foreign currency drafts/ pay order

• Upfront interest to be realized



• 30 days

Fwd FX Forward Contract Cover exchange risk against Letter of Credits

Performance risk

180/ 360 days

59


CHAPTER 5PROBLEMS AND PROSPECTS OF SME

60


5.1 SME FINANCING IN BANGLADESH

A survey of the small and micro enterprises operating in the Dhaka metropolitan

area showed that enterprises which required between USD 4,000 to USD 200,000

financing have no access to any form of financial services as well as overall

professional services including marketing, accounting and professional support

services. The main source of financing for SMEs in Bangladesh is loans from

members of the family and friends. These loans often take time to mobilize and are

therefore not helpful in times of emergency.

When SMEs turn to the private banks, they mainly do it to obtain loans to cover

their working capital needs. But only a small portion of them actually obtains loans

from the banks. Trade credit is the second most important source for working

capital to many small entrepreneurs. After the success in the microfinance sector,

several small entrepreneurs came up with larger scale business. Then SME sector

flourished.

5.2 GOVERNMENT ROLES 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

61


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.

5.3 EMPLOYMENT CREATION

There are a huge number of business fall under the SME definition, e.g. 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 maternal supply, food

preparation, small grocery stores, waste paper collection, etc. In the context of

Bangladesh, a portion of readymade garments 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.

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.

62


5.4. CONSTRAINTS TO SME GROWTH

The 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 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 governments, financial and

educational 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’s flows of interest than loans from the banks.

Moneylenders are also included in the list of sources of funds for SMEs, but are

only used tin emergency situations. Finally, supplier credit for capital items,

other business owners, venture capital companies etc, are other sources of SME

financing.

The reasons generally provided by the SMEs why purchase of fixed assets are not

financed by banks are:

The enterprises lack good collateral securities.

Informal loans are faster and more convenient,

Interest rates charged by relatives and friends are lower.

63


For many SMEs applying for formal credit is an innovative act. Proper

documentation can take considerable time and effort when an entrepreneur is not

familiar with such procedures.

The credit market in Bangladesh can be divided based on funding requirement and

access to finance. Currently, micro-finance entities are helping activities requiring

up to USD 4,000, and the formal commercial banking system is financing credit

greater than USD 200,000.

5.5 REVIEW OF SME IN EBL

Year end 2009

Loans and Advances Deposits

SME; 10.58%

Consumer; 11.98%

Corporate; 77.44%

SME; 6.03%

Consumer; 55.17%

Corporate; 38.79%

Figure 4: SME, Corporate & Consumer Banking 2009

64


Year end 2008

Loans and Advances Deposits

SME; 9.19%

Consu

mer;

11.88%

Corporate, 78.93%

SME; 5.25%

Consumer; 53.18%

Corporate; 41.57%

Figure 5: SME, Corporate & Consumer Banking 2008

In the portfolia, the percentage of SME loans and advances is increased from 9.19% in 2008 to 10.58% in 2009. Again, the deposits also increased by 0.78 % over the year. This is an positive sign for SME.

5.6 PROBLEMS OF EBL IN SME FINANCING:

The problems which may hinder the SME business of EBL are:

1. Competition from other banks: Many other banks are now providing SME

loan. They are also making separate SME sales and service centers to satisfy

the businessmen. For example, BRAC Bank Limited, a major competitor, has

429 SME unit offices across the country and 60 online SME sales and service

centers. Therefore, EBL is facing stiff competition in SME banking.

2. Employee Turnover: The employee turnover is high in SME sector.

Because, almost all other banks are involving in SME banking and they need

experienced people to be competitive. So, retaining employees is becoming a

major challenge for EBL.

65


3. Training New LOs: Every month new Loan Officers are joining in EBL. But

they are not being well-trained. They are basically learning from other LOs

who may not have enough time to teach them. So, the learning process is

somewhat delayed. If the new LOs are provided knowledge about consumer

behavior, they can perform better.

4. Target to the LOs: LOs are given target on monthly basis and it should be.

But the problem is that the LOs can provide loans to wrong businessmen to

fulfill their targets even though they are not the only one to approve and

disburse loans. Manipulation may occur to give loans.

5. Compliances: There should be compliances in giving loans. Some times business people need loan urgently. But due to rigid approval and disbursement processes, he/she may not get loan in due time and incur loss in business.

6. No of SMA Accounts:This is a very alarming sign that the number of SMA accounts per month in

SE is increasing over the years. Over the six months from October 2009 to

March, it is increased about 47%.

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09Jul-0

9

Aug-09Sep

-09Oct-

09

Nov-09Dec-

09Jan

-10Feb

-10

Mar-10

0

50

100

150

200

250

300

350

No of SMA accounts

Figure 9: SMA accounts trend

66


7. Disbursement vs. Achievement:Most of the time average disbursement target per LO is not achieved. Hence,

management can give a close look at this to enhance the performances of

LOs so that target achievement may turn to be a suitable return source.

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09Jul-0

9

Aug-09Sep

-09Oct-

09

Nov-09Dec-

09Jan

-10Feb

-10

Mar-10

-

50,000

100,000

150,000

200,000

250,000

Average Dis-bursement Target/LO (in "000")Average Achieve-ment/LO (in "000")

Figure 10: Disbursement vs. Achievement

8. Disbursement Mode: After approval and proper documentation the loan amount is disbursed to customer's current account in respective branch of EBL. Client must have an account with to get the loan from the Bank. But in other bank, e.g. BRAC, there is no such condition. Borrowers with having account with other bank can get loan from BRAC Bank. As a result BRAC provides their SME loans to areas where it has no branch banking operation.

67


5.6 PROSPECTS OF EBL IN SME FINANCING

EBL can be said to have a great prospects in SME banking because of the following reasons:

1. Marketing: EBL marketing team is very strong in promoting their products.

Since, in a competitive market, advertising plays a great role, EBL is getting

better response because of its ad in different places. They put their

advertisement in the billboard of many roadside conspicuous places. EBL also

gives ad in the between the news of different television channels. Moreover,

they get many phone calls from the newspaper ads. Finally, brochures for

different products help the clients to get brief information. All of the above

mentioned advertising mediums make EBL competitive in the market for SME

financing.

2. Super brand Award 2009/2011: EBL got the Super brand Award Bangladesh

2009/2011. This is also creating a positive image in the mind of the clients to be

involved in banking with EBL. Because of this award, clients now believe that

EBL is giving best services.

3. SME Centers: At the end of 2009, EBL had 23 structured SME centers through

out the country. There is about 25% growth in the number of SME centers.

4. Modern Banking: This is another reason why people may prefer EBL.

Nowadays, the world is moving towards the digit world and Bangladesh

Government is also dreaming to turned it be digital within some years. Since,

EBL is providing mobile banking, online banking facilities, its customer base is

increasing over the year.

5. Repeat Clients: There were 45 repeat customers per month on an average

which indicates that the clients were satisfied with the service provided by EBL.

6. Disbursement: Although the disbursement was not smooth, there is an

increasing trend in the disbursement per month.68


(Figures are in “000”)

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09Jul-0

9

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

-

100,000

200,000

300,000

400,000

500,000

600,000

700,000

Figure 6: Disbursement Trend

7. Income Generation: The total income (interest income & fees income) is

increasing. It shows that EBL is doing well in generating returns from its

investment in SME.


Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09Jul-0

9

Aug-09Sep

-09Oct-

09

Nov-09Dec-

09Jan

-10Feb

-10

Mar-10

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

Interest IncomeFees IncomeTotal Income

Figure 7: Income Trend (Interest & Fees)

69


8. Gap between Received and Approved Loans: There is always a gap between received and approved loans and recently, this gap is widening. This may be for the CRM to be due diligent in approving loans and rescuing the bank from bad loans.


Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09Jul-0

9

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

-

50

100

150

200

250

Chart Title

Loan Approved Loan Received

Figure 8: Comparison between received and approved loans

9. Purpose of Loan: EBL provides the ASHA loan for any legitimate business

purpose which will have direct or indirect contribution to business revenue

growth or cost reduction. Borrower must declare specific business purpose

of the loan. But other Banks which involve in SME financing give loan only

for working capital requirement and fixed asset purchase. In this respect,

EBL’s financing is more flexible than the competitors.

5.8 PRODUCT WISE ANALYSIS70


5.8.1 Product wise Outstanding Growth

Table 20: Product wise Outstanding

Name of Product

Balance onDecember-

2008(in million)

Balance onDecember-

2009(in million)

Growth in2009

(in million)

% ofGrowth

in2009

ASHA 783.33

836.43

53.10 6.78%

AGRIM 1.35

0.34

(1.02) -75.19%

MUKTI 3.85

63.27

59.42 15.43%

PUJI 21.76

13.75

(8.01) -36.82%

UDDOG 1,591.06

1,913.70

322.64 20.28%

Total 2,401.35

2,827.49

426.13 17.75%

Among various SME products offered by EBL, the balance of AGRIM and PUJI is

decreased in 2009 in comparison with 2008. But the other products ASHA, MUKTI,

PUJI have positive change over the years.

5.8.2 Product wise Number of Accounts

The below pie charts depict the percentage of number of accounts in different EBL

SME products in the month of February and March of 2010. From the charts, it is

very clear that the number of clients of ASHA and UDDOG are much higher than the

other products.

71


ASHA65%

MUKTI

0%

PUJI0%

UDDOG35%

Percentage of Number of Accounts

September 2010

ASHA64%

MUKTI

0%

PUJI

0%

UDDOG35%

Percentage of Number of Accounts October 2010

Figure 10: Product wise number of accounts Sep. & October, 2010

72


CHAPTER 6FINDINGS, RECOMMENDATION

&CONCLUSION

73


SMEs are expected to boost efficiency and growth and lead economic development

because they can contribute higher profit margin. SME sector is said to be the “Engine

of Job Creation”. SMEs play an important role in promoting growth and development,

including for the poor and has social dimension in economic development.

There is no doubt that operating with SME is no doubt is becoming a challenge for

banks and other non-bank financial institutions. Therefore strategic fit of different SME

products can bring the desired return. In Bangladesh, Small and Medium Enterprises did

not get the same access to banks and financial institutions as big companies did. This is

the key to do business with SME. In that case BRAC Bank took the challenge and

started SME banking in 2001and became the pioneer in SME Banking. Now, BRAC

bank is the market leader in SME financing with 59 SME Service Centers and 429 Unit

offices countrywide. On the other hand EBL has started its SME Banking from 2006 and

it has now 23 SME sales and service centers, i.e., it has much less market access in

comparison with BRAC Bank.

The conclusion can be made:

1. The percentage of SME loans and advances is increased from 9.19% in 2008 to

10.58% in 2009.

2. The deposits from SME also increased by 0.78 % over the year.

3. The marketing team of EBL is very strong in promoting their products.

4. There is a growth of about 25% in the number of SME centers.

5. The repeat client of EBL per month is 45.

6. Although the disbursement was not smooth, there is an increasing trend in the

disbursement per month.

7. EBL provides the ASHA loan for any legitimate business purpose which will

have direct or indirect contribution to business revenue growth or cost reduction.

Although there is huge competition coming from other banks and other adverse

situations exist, EBL is doing better than many other banks.

74


BIBLIOGRAPHY

75


1. “Annual Report”, 2009, Eastern Bank Limited.

2. “Annual Report”, 2009, BRAC Bank Limited.

3. “Problems and Prospects of Small Business Development in Bangladesh”, Super

Admin, Academic Publishers, 2006.

4. “Revisiting SME Financing in Bangladesh”, Mohammad Moniruzzaman

Siddiquee, K. M. Zahidul Islam, Masud Ibn Rahman, Daffodil International

University Journal of Business and Economics, Vol. 1, No. 1, July 2006

5. Constraints to SME Development in Bangladesh, Job Opportunities and Business

Support (JOBS) Program, Nazmul Hossain Retrieved from World Wide Web:

http://scholar.google.com/url?sa=U&q=http://128.8.56.108iris-data/docs/

bd1.pdf

6. EBL Official website: www.ebl-bd.com

7. “Industrial Policy of Bangladesh 2002”, Government of Bangladesh. 8. “Annual Report 2008-09”, Small and Medium Enterprise Foundation

76

http://scholar.google.com/url?sa=U&q=http://128.8.56.108iris-data/docs/bd1.pdf

http://scholar.google.com/url?sa=U&q=http://128.8.56.108iris-data/docs/bd1.pdf

Investment in SMEs of Eastern Bank limited: Problems and Prospects

Documents

eastern bank limited

smes of eastern bank

bangladesh bank

different sme products

sme financing procedures

ebl sme loan products

analysis of ebl sme

bank short interviews