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SME Financing and Green Banking by Commercial Banks:

A Case Study of BASIC Bank Limited.

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1.1 Background of the study:

Enterprises and financial institutions in Bangladesh face an insuperable obstacle to

efficient credit transactions. Specially Small and Medium Enterprises (SME) are one of

the potential sector of a developing country like us. It is now recognized that the small

and medium enterprises (SMEs) are playing an increasingly important role as engines

for economic growth and employment in many regions of our country. SME

development, as instruments of employment and income generation, human

development and poverty alleviation, export promotion, stimulation of private

ownership, competition and entrepreneurship and hence the driving forces behind the

growth of a vibrant industrial market economy, has generated considerable interest

among the policymakers, academics, business circle and the international donor

agencies in recent times. So we have selected specialized bank for SME financing like

BASIC Bank Ltd. Moreover, other private commercial bank like BRAC Bank Ltd,

Mercantile Bank Ltd, are taking SME financing not for their business expansion but

also for as a competitive market for emerging market.

The term Green Banking is now popular worldwide now-a-days. It is for stopping the

environmental degradation and making this planet habitable. Bankers are the important

professional group who has interaction with the other groups of people and also with

general masses. They can adopt different green activities within their in-house

environment and also can initiate the protection of the air pollution, water pollution by

their clients. Bankers can finance the green projects, which are environmental friendly

and discourage the projects that damage the environment.

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1.2 Objectives of the Report

General objective:

The general objective of the study is to draw a comparative picture of SME loan of

BASIC Bank Limited with other banks as well as view the current status of SME loan.

This report also presents an elementary study about the new concept of Green Banking

directed by Bangladesh Bank for inspiring the environment friendly projects.

Specific objectives:

The specific focuses of the study are:

To depict the procedures they follow for lending credit to the customers.

To critically analyze the performance of Asset Product and Liability product

of BASIC Bank Ltd.

To describe the detailed operational procedure of SME Loan along with their

associated benefits.

To know how Green banking operates to encourage the small and medium

enterprises (SME).

1.3 Methodology

Type of research:

I want to classify my research report into Analytical Research as I will use facts or

information already available and analyze these to make critical evaluation about the

performance of BASIC Bank Limited in comparison to other three commercial banks.

Research approach:

According to the above research type I basically will use both quantitative approach and

qualitative approach. Under quantitative approach I will collect information related

research and use database from which to infer characteristics or relationships of

population.

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Data Collection:

a. Primary Sources:Discussion with the respective organization's officials about

the small and medium enterprises financing activities, their monitoring,

classification and maintaining a long-term relationship with these firms.

b. Secondary Source: For the completion of the present study, secondary data

will be collected. The main sources of secondary data are:

i.Internal Sources:Annual Report of BASIC Bank Ltd, BRAC Bank Ltd,

Dhaka Bank Limited and Mercantile Bank Ltd.

Manuals, and brochures of BASIC Bank limited and

different publications of Bangladesh Bank.

ii.External Sources:

Credit Manual of BASIC Bank Ltd and other three banks.

Internet

Guideline of Bangladesh Bank.

Green Banking Policy Guideline of Bangladesh Bank &

BASIC Bank Ltd.

Data

Primary Sources Secondary Source

Internal Sources External Sources

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Informal discussion with customers and observation while

working in different desks.

Method employed:

Some specific methods are being used for making this report. Some of the decisions are

made based on the interpretation of the analysis. In my report I use the following

statistical tools:

Correlation Multiple regressions. Analysis of variance.

Data analysis and interpretation:

I have made graphical analysis of various variables of SME Financing. The tables of the

respective graphs are presented in appendices part. I interpret the variables according to

their trend.

Sequence of the Report:

Chapter 01: Introduction

Chapter02: Textual Knowledge of SME

Chapter03: Review of the literature

Chapter04: SME Contribution in Bangladesh

Chapter05: Organizational overview of BASIC Bank Ltd.

Chapter06: SME financing in BASIC Bank Ltd.

Chapter07: SME Financing Performance of BASIC Bank Ltd

Chapter08: Comparative Analysis among BASIC, BRAC & Mercantile bank Ltd.

Chapter09: Green Banking in BASIC Bank Ltd.

Chapter10; Indentification of Problems

Chapter11: Policy Suggestions

Chapter12: Conclusions

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1.4 Rationale of the study

The report covers the over view of SME loan, identification of problems regarding SMEloan, types of SME and sector of SME credit allocation of different thrust sectors of

BASIC Bank Ltd, Mercantile Bank Ltd, and BRAC Bank Ltd. The report also includes

the new concepts of Green Banking that would create a competitive advantage of

banking sector to finance environment friendly SMEs.

1.5 Scope of the study

Internship is the part of BBA course and it is an opportunity to any fresh graduate gain

practical experience in corporate world. I am having opportunity to work with BASIC

Bank Limited. With this bank I am trying to implement educational experience in this

bank. Bangladesh is one of the underdeveloped countries in the world. The economy of

the country has a lot left to be desired and there are lots of scopes for massive

improvement. In an economy like this, banking sector can play a vital role to improve

the overall social-economic condition of the country. The banks by playing the role of

an intermediary can mobilize the excess fund of surplus sectors to provide necessary

finance, to those sectors, which are needed to promote for the sound development of the

economy.

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1.6 Limitation of the study

Though I will have given utmost effort to prepare this paper but there will be some

limitations of the study. They are as follows-

Since the report has to be made parallel to office work within three

months, time might be a major constraint in accumulating all sorts of

information. I will get only one month to prepare this report. Due to time

limitation many aspects could not be discussed in the present study

because SME is a vast subject.

Confidentiality of data might be another important barrier that might be

faced during the conduct of this study. Every organization has their own

secrecy that is not revealed to others. While collecting data on different

banks, it is obvious that employees would not disclose enough

information for the sake of confidentiality of their respective organization.

This paper has focused on the most sensitive part of the organization i.e.

loan and advance. So the bank authority hesitated to disclose important

information to maintain business secrecy.

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2.1 Definition of SME:

Small & Medium Enterprises SMEs are recognized as engine of economic growth and

employment generation for sustainable industrialization in both developed and

developing countries of the world. In context of Bangladesh, there is no alternative ofsmall and medium enterprises for rapid industrialization and national economic growth

through lower capital investment and employment generation.Small & mediumenterprises are those industrial and business concerns having fixed asset not more than

taka10 million. A variety of definitions concerning small and medium enterprises exists

in Bangladesh. Some of the definitions that are used in Bangladesh are given below:

BANGLADESH BANK defines Small & Medium Enterprise sector:

1. Small Enterprises

Small enterprises refer to those enterprises which are not any Public Limited Companiesand which fulfill the following criteria-

Service Concern

Having an investment of Tk. 50,000 to Tk. 50, 00,000 excluding land & building and / or

employing up to 25 workers.

Business Concern

Having an investment of Tk. 50,000 to Tk. 50, 00,000 excluding land & building and / or


Manufacturing Concern

Having an investment of Tk. 50,000 to Tk. 1,50,00,000 excluding land & building and / or


2. Medium Enterprises

Medium enterprises refer to those enterprises which are not any Public Limited

Companies and which fulfill the following criteria-

Service Concern

Having an investment of Tk. 50,00,000 to Tk. 10,00,00,000excluding land & building and /

or employing up to 50 workers.Business Concern

Having an investment of Tk. 50,00,000 to Tk. 10,00,00,000excluding land & building and /

or employing up to 50 workers.

Manufacturing Concern Having an investment of Tk. 1,50,00,000 to Tk.20,00,00,000

excluding land & building and / or employing up to 150 workers.

Source: Ban ladesh Bank.

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Table: A

Bangladesh Better Business Forum (BBBF) definition in 2008:

Enterprise Sector Asset size No. of

employees

Small Service Total fixed asset excluding land & building

Tk. 50000-Tk. 5 Million

Less than 25

Trade Total asset worth Tk. 50000-Tk. 5 Million

excluding the value of fixed asset

Less than 25

Manufacturing Total fixed asset excluding land & building

Tk. 50000-Tk. 5 Million

Less than 25

Medium Service Total fixed asset excluding land & building

Tk. 5 Million -Tk. 10 Million

Less than 50

Trade Total asset worth Tk. 5 Million -Tk. 10

Million excluding the value of fixed asset

Less than 50

Manufacturing Total fixed asset excluding land & building

Tk. 15 Million -Tk. 20 Million

Less than 150

Source: BBBF

Bangladesh Bureau Statistics (BBS) definition:

BBS uses a definition of size based on employment size. Establishments employing between

10 and 49 workers are called small; those employing between 50 and 99 workers are called

medium; and, finally, those employing between 100 or more workers are called large

Source: BBS

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Source: SME Policy Strategies-2005

2.2 Developing Country SME

There are many countries which are developing giving concentration on the SME

sector. Here some of the country positions in SME are given below to have an overview

about the contribution of SME in GDP, employment generation and export.

SME in China:

SME are a vital force for the sustained development of the Chinese economy. SMEs

account for 99% of all enterprises in China. SMEs are already making contributions to

the growth of GDP, Fiscal revenue, employment creation and export. The contribution

of SMEs in Chinese economy is shown below according to the year of 2006:

Ratio Contribution in %

SMEs/ Total enterprise 98.98%

SMEs total asset/ All Enterprises 55.15%

SMEs production/ All Production 68.7%

SMEs jobs/ Total jobs 74.53%

New Jobs 71.88%

Export earning 69.20%

Table: C; Source: Internet

Ministry of Industries definition:

Enterprise Sector Asset size No. of employees

Small Trade No position taken Less than 25

Manufacturing Total fixed asset excluding land &

building of up to Tk. Tk. 15 Million

No position taken

Medium Trade No position taken more than 25

Manufacturing Total fixed asset excluding land &

building of between Tk. 15 Million -Tk.

10 Million

No position taken

Table: B

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SME in Europe:

SMEs account for a dominant proportion of EUs economic activities. More than 10 %

of one-person European SMEs would recruit new employees. Since these enterprises

make up more than 50% of all businesses in the EU, this could translate into 1. 5

million new jobs in the Union.

SME in India:

The small and medium enterprises today constitute a very important segment of the

Indian economy. SMEs sector has emerged as a dynamic and vibrant sector of the

economy. Today, it accounts for nearly 35% of the gross value of output in the

manufacturing sector and over 40% of the total exports from the country. In terms of

value added this sector accounts for about 40% of the value added in the manufacturing

sector. The sector's contribution to employment is second highest next to agriculture.

SMEs Sector plays a major role in India's present export performance. 45%-50% of the

Indian Exports is contributed by the sector. Direct exports from the sector account for

nearly 35% of total exports. Besides direct exports, it is estimated that small-scale

industrial units contribute around 15% to exports indirectly. This takes place through

merchant exporters, trading houses and export houses. They may also be in the form of

export orders from large units or the production of parts and components for use for

finished exportable goods. The exports from SMEs sector have shown excellent growth

rates in this decade. The product groups which dominate the exports from SMEs sector

include sports goods, readymade garments, woolen garments and knitwear, plastic

products, processed food and leather products.

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Small and Medium Enterprises (SMEs) play a major role in economic development,

particularly in emerging countries. Small and medium-sized businesses are a major part

of the economy and the effective financing of such businesses makes a significant

contribution to economic growth and performance generally. A study on SME activities

of BRAC Bank Ltdby Khondhokar Mamnun Ahmed shows that BRAC Bank is one of

the leading banks to foster the growth of SME in Bangladesh. BRAC Bank Ltd also

presents attractive interest rate to its valued clients in order to support their business.

A study by Dr. Srinivas on Banks Finance to SME sectors- Issues & Prospects

illustrates the present scenario of SME financing position in India. Though most of the

banks in India were reluctant to give financial support to SME sector in the past, they

are now becoming eager to help the SME as SME contributes greatly in their economy.

The concept of Green Banking developed in the western countries, which has been

replicated by many developing countries. It means the eco-friendly or environment-

friendly banking and it also refers to ethical banking or sustainable banking.

Study on SME and economic development in Europe by Dr. Andrzej Byrt defines

Small is beautiful. This research found out that SMEs account for a dominant

proportion of EUs economicactivities. In practice 75 million jobs, i.e. two thirds of all

privatesector jobs in the EU are in SMEs which make them all in all a gianton the EUSingle Market, although the average firm in the EUemploys only 7 people. In certain

sectors such as textiles, furnitureand construction, sectors which play also an important

role in theEuropean fair business within tradition SMEs account for more than 80 p.c.

of employment.

Research papers developed byBakht, Zaid (1998) and Ahmad, Salahuddin et al. (1998)

described that the policy environment within which SMEs in Bangladesh operateaccom

panies legal, regulatory and administrative constraints to employment creation by

SMEs. The robustness of SME contributions to employment generation is a common

phenomenon in most developing countries in that the magnitude varies between 70%

to95% in Africa and 40% to 70% in the countries of the Asia-Pacific region.

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Study by Patrick Meagher onSecured Finance for SMEs in Bangladesh describes

enterprises and financial institutions in Bangladesh face an insuperable obstacle to

efficient credit transactions. Policies and legal institutions prevent these parties from

reaping the potentially huge gains that are available on the basis of secured finance

transactions. The transactions make up an estimated 80 percent of finance for small and

medium enterprises in the U.S., and are critically important to other industrial

economies. Modern secured finance mechanisms offer a powerful means of mobilizing

the value of a broad range of capital as a loan security, and thereby creating profitable

opportunities for a wide spectrum of potential users and providers of financial services.

Study on Global cash management: Going Green shows that Green banking is awin-win situation for all participants, and banks would be well served in their efforts to

bring these benefits to the attention of the corporate clients in an increasingly

competitive marketplace. By adopting greener banking practices, businesses will not

only be helping the environment, but will also benefit from greater operational

efficiencies, a lower vulnerability to manual errors and fraud, and cost reductions.

Project report on Green Banking: An Innovative Initiative for Sustainable

Development by Mridul Dharwal, Assistant Professor (Economics and Business

Studies), , School of Business Studies, Sharda University, Greater Noida shows how

green banking reduces the firms risk position, increases the efficiency of the bank and

profitability. This report also illustrates different strategies of green banking and the

performances of Indian banks implication of green banking.

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4.1 Overview of the SMEs in the economy of Bangladesh:

There is a great interest in small and medium enterprises (SME) as a major plank

of poverty reduction in Bangladesh. The government has formulated a comprehensivein

dustrial policy 2005 by putting special emphasis for developing SMEs as a thrust

sector for balanced and sustainable industrial development in the country to help deal

with the challenges of free Market economy and globalization. There are some 78,440

private sector establishments of various sizes in Bangladesh with some 3.5 million

workers employed in them. The urban Bangladesh accounts for some 60% of units and

76% of employment in the private-sector enterprises. Rural Bangladesh accounts for the

rest. 93% of all units in Bangladesh belong in the SME category have between 20 and

99 employees. However, SMEs account for only 44% of the total employment of the

enterprise sector. Private companies limited by liability account for strictly a very small

proportion of the total number of SMEs in Bangladesh.

4.2 Thrust Sector of SME in Bangladesh

As Bangladesh is a developing country small and medium enterprises play a vital role

in economic development and profit generation. There are some thrust sectors

identified by the government as likely to have both better growth prospects as well as

some comparative or competitive advantage for Bangladesh. The Industrial Policy

1999had identified the following 16 thrust sectors:

Agro-based industries Jute goods

Artificial flower making Jewellery and diamond cutting and

polishing

Computer software and information

technology

Leather

Electronics Oil and gas

Frozen foods Sericulture and the silk industry

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Floriculture Stuffed toys

Gift items Textiles

Infrastructure Tourism

Table: D: Source: SME Foundation

4.3 Contribution of SMEs in the Economy:

In view of present economic development effort in Bangladesh the SME sector plays an

important role. These are reflected in the following performance /activities of this

sector:

Contribution of SME sector to GDP remained above 4.5% during the period

from2004-2005 to 2007-2008 despite decline in the amount of advances by the

banking sector to this sector.

SME sector employs 25% of the total labor force. As a result, this sector is

the present available sector for creation jobs. A total of 0.35 million jobs were

created against the target of 0.4 million.

SME sector help alleviate poverty, increase income level of rural people

and promote agro-industrial linkage in Bangladesh.

SME sector requires lower energy supply, lower infrastructure facilities and this

sector imposes less environmental risk.

They contribute towards better utilization of local resources and skills that might

otherwise remain unutilized.

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4.4 SME Contribution in GDP of Bangladesh:

The small and medium enterprises as the most cost-effective and advisable means of

providing employment and injecting dynamism into industrial growth, both for poverty

alleviation and for contribution to the GDP. The contribution of SME sectors in our

countrys GDP is given below:

Sectors 2005 2006 2007 2008 2009 2010

Small & Medium

Enterprises4.78% 5.23% 5.86% 6.47% 7.09% 7.26%

Table: E, Source: Internet

From 2005 the SME contribution to our economy is increasing which shows a good

sign to our country. Our SME industry is also flourishing year after year.

4.5 SME Credit-Distribution Package in Bangladesh:

A credit-distribution package shall be worked out by the Ministry of Industries. An

innovative scheme---rather like a two-stage screening mechanism---that can really

probe for the bone fide of the applicants as entrepreneur material will be deployed.

Donor financial resources made available specifically to help with

implementation of SME policy being enunciated here would only be allocated to

0.00%

2.00%

4.00%

6.00%

8.00%

2005 2006 2007 2008 2009 2010

Small & Medium Enterprises

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competitively-selected enterprises within the booster industries here being

prescribed.

Of the total resources available, no more than 20% may be earmarked for

medium enterprises, while the remainder, 80%, will be earmarked for small

enterprises. Within each division, the resources will be divided up into a public-

sector venture-capital fund (10%), approximately on the lines of the currently-

implemented EEF at the Bangladesh Bank. The remainder will be allocated to a

credit fund. (This does not have anything to do with debt-equity ratio relevant in

discussions of enterprise financing.)

In the short run, the distribution of the credit fund and venture-capital fund will

be the task of the BASIC Bank, which is here being recommended as the lead

bank, it being borne in mind that BASIC Bank will closely work with the

Advisory Panel. (Over the medium term, this responsibility will devolve to the

SME Foundation.) The Ministry of Industry and the SME Advisory

Panel/Foundation, as the case may be, will determine modalities of how to

implement both the credit-fund and the venture-capital fund.

A publicly-mandated venture-capital scheme will be created in deference to the

rationale cited in the main text. It will also give a stimulus to the morale of

entrepreneurs who commit in-house capital to projects with novel and

potentially innovative processes and technologies with demonstrable potential

for commercial success. Such projects have a-typically high risk and high

returns. This recommendation is rationalized in terms of the private under-

investment based on extensive, even potentially crippling, negative pecuniary

externalities in certain among the booster industries prescribed here, with regard

to the leaching of shareholders value outward from the enterprise.

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Within the purview of the Advisory Panel, projects to be funded from the

venture-capital fund will be evaluated by a team of experts which will be

constituted as a part of the implementation of SME Policy.

The Advisory Panel working together with the Lead Bank in the short-term, and

the SME Foundation in the medium- and long-term would implement a

transparent and meritocratic arrangement for steering public equity and debt

resources into a genuinely deserving selection of enterprises.

The development of human resources in both the BASIC Bank and the SME

Foundation with regard to effective targeting of resources made available under

public equity funding would remain imperative.

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5.1 Historical Background of BASIC Bank Ltd:

BASIC Bank Limited (Bangladesh Small Industries and Commerce Bank Limited)

registered under the Companies Act 1913 on the 2nd

of August, 1988, started its

operations from the 21st

of January, 1989. It is governed by the Banking Companies Act

1991. The Bank was established as the policy makers of the country felt the urgency for

a bank in the private sector for financing small scale Industries (SSIs). At the outset, the

Bank started as a joint venture enterprise of the BCC Foundation with 70 percent shares

and the Government of Bangladesh (GOB) with the remaining 30 percent shares. The

BCC Foundation being nonfunctional following the closure of the BCCI, the

Government of Bangladesh took over 100 percent ownership of the bank on 4 th June

1992. Thus the Bank is state-owned. However, the Bank is not nationalized; it operates

like a private bank as before. BASIC Bank Limited is unique in its objectives. It is a

blend of development and commercial banks. The Memorandum and Articles of

Association of the Bank stipulate that 50 percent of loanable funds shall be invested in

small and cottage industries sector.

5.2 Objectives of BASIC Bank Ltd:

Adjudged as one of the soundest banks in Bangladesh, BASIC Bank is unique in its

objectives. It is a blend of development and commercial banking functions. Their

objectives are:

Steady growth in client base and their high retention rate since Banks inception

testify to the immense confidence they repose on its services.

Diversified products in both liability and assets sides particularly a wide range

of lending products related to development of small industries and micro

enterprises, and commercial and trading activities attract entrepreneurs from

varied economic fields.

Special importance is given to individual clients through providing personalized

services.

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5.3 Motto of BASIC Bank Ltd:

Development of clientele as well as human resources of the Bank.

5.4 Functions of BASIC Bank Ltd:

As a blend of development and commercial banking the bank provide clients with a full

range of service to help them grow their assets and net worth. They place particular

emphasis on small balance sheet size composed of quality assets and steady and

sustainable growth. The Bank is particularly eager to the following facts:

Offer term loans to clients, especially to develop small scale enterprises.

Provide full-fledged commercial banking services like collection of deposits,

short term trade finance, working capital finance in processing and

manufacturing units and financing and facilitating international trade.

Attach special importance to technical and advisory support to small scale

industries in order to enabling them to run their enterprises successfully.

Micro Credit to the urban poor through linkage with NGOs with a view to

facilitating their access to the formal financial market for the mobilization of

resources is another diversification of our services.

Provide an environment in which our staff members feel they can exercise their

initiative and judgment within a clearly established framework.

Coping with the competitive and rapidly changing financial market of the

country, BASIC Bank maintains close connections with its clients, the

regulatory authorities, the shareholders (the Government of Bangladesh), other

banks and financial institutions.

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5.5Corporate Strategy of BASIC Bank Ltd:

Financing establishment of small units of industries and business and facilitate their

growth Small Balance Sheet size composed of quality assets. Their corporate strategies

are:

Steady and sustainable growth.

Investment in a cautious way.

Adoption of new banking technology.

To employ funds for profitable purposes in various fields with special

emphasis on small scale industries.

To undertake project promotion on identify profitable areas of investment.

To search for newer avenues for investment and develop new products to

suit such needs.

To establish linkage with other institutions which are engaged in financing

micro enterprises.

To cooperate and collaborate with institutions entrusted with the

responsibility of promoting and aiding SSI sector.

5.6 Corporate Information:

Head Office Sena Kalyan Bhaban (5th Floor),195 Motijheel C/A,

Dhaka-1000

Main Branch Bana Shilpa Bhaban (Ground floor) 73 Motijheel C/A,

Dhaka-1000

Credit Rating Report AA2 (Long Term), ST-2 (Short term)

Credit Rating Agency CRAB

Auditor Syful Shamsul Alam & Co. Chartered Accountants

Table: F, Source: Annual Report

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5.7 Departments of BASIC Bank Ltd:

It would be hazardous if all of the activities like deposit collection, export and import,

remittance collection, account opening, human resource management etc are done in

one department. So departmentalization is necessary in doing all works in an orderly

manner. BASIC Bank Ltd also has different department to accomplish all the works in

an efficient manner. These are the following departments of BASIC Bank Ltds head

office and branch office.

BASIC Bank Ltd.

Branch OfficeCorporate

Credit Department Foreign Exchange Department Human Resources Department Treasury IT (Information Technology) Industrial Credit Division Commercial Credit Division Micro Credit & Special Finance

Division

Small Enterprise Finance Division Establishment Division Research &Development Division Finance & Accounts Division Green Banking Policy

Implementation Unit

General Banking Department Credit Department Export import Division

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5.8 Financial Highlights:

(Amount in millions)

Particulars 2010 2009 2008 2007 2006 2005

Authorized

Capital

2000.00 2000.00 2000.00 2000.00 2000.00 2000.00

Paid up

Capital

1964.65 1455.30 1309.77 1247.40 945.00 810.00

Deposits 49259.60 34501.69 38368.23 31947.98 24084.65 22325.58

Loans and

Advances

46341.51 29261.53 27269.13 22263.35 22263.35 15339.35

Import 42205.90 33976.60 27359.77 22270.87 17804.27 14094.96

Export 42205.90 19887.70 22270.87 16794.96 15463.74 11,097.23

Net Profit 660.93 648.85 549.86 282.96 554.14 285.49

Table: G, Source: Annual Report

From the table, it is clear that year by year the performance of deposit collection, loan &

advance & net profit generation is well. We all know that banks are the intermediaries

to collect deposit from customer through different bank account with attractive interest

rate ant make investment and credit facility that are profitable to the bank in order to

generate enough interest income for interest payment and profit generation.

5.9Products and services:

5.9.1 General Banking:

The general banking department does the most important and basic works of the bank. All

other departments are linked with this department. It also pays a vital role in deposit

mobilization of the branch. BASIC Bank Ltd provides different types of accounts, locker

facilities and special types of saving scheme under general banking.

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For proper functioning and excellent customer service this department is divided into

various sections namely as follows-

5.9.2 Functions of General Banking Division:

Functions of General Banking Division1. Account opening 2. Pay order issue3. Cheque book issuing 4. Telephonic Transfer5. Signature Scanning 6. Account enquiry7. Demand draft issue 8. Providing Accounts Statements9. Solvency certificate issuing 10.Account transfer11.Account closing 12.Dispatch13.Return of Bangladesh Bank and Head office statements

Table: H, Source: BASIC Bank Ltd.

General Banking

Deposit section

Account opening section

Accounts section

FDR section

Remittance section

Cash section

Bills and clearing section

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5.9.3 Foreign Exchange Department:

Foreign Exchange department facilitate the inflow and outflow of foreign currency

exchange by opening export-import L/C. This department also facilitates local L/C. The

foreign exchange department of BASIC Bank Ltd includes the following activities:

Foreign

Exchange

Department

Import:

Opening of letter of credit Advance bills Bills for collection Import loans and guarantees

Export:

Pre-shipment advances Purchase of foreign bills Negotiating of foreign bills Export guarantees Advising/ conforming letters of credit Advance for deferred payment export Advance a ainst bills for collectionRemittance:

Issue of D.D, T.T & M.T. Payment of D.D, T.T, M.T Issues and encashment travelers Cheque Sale and encashment of foreign currency

notes

Non-residence accounts

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5.9.4 Different Deposit Accounts:

Like all other commercial banks, BASIC bank Ltd also offers current deposit account,

savings deposit accounts, special noticed deposit scheme & fixed deposit accounts with

attractive interest rate and loan available facility. But there are some special bank

accounts that provide the customers with special benefits like high interest rate,

doubling the monetary benefit etc. Some of the special accounts are:

a. BASIC Double Benefit Scheme:

Under this scheme, one can deposit a certain amount of money for a period of 6 years

and will get back the double amount that he/she deposited.

b. BASIC Monthly Benefit Scheme:The depositor of this account will get the regular benefit of savings account. The special

feature of this account is if the customer deposit taka one lac (Multiples), he/ she will

get one thousand (multiples) monthly.

c. BASIC Premium plus Current Account:

This is a special current account. Though current account does not contain interest, this

BASIC Premium plus Current account offers customer interest. Moreover there are no

remittance charges for this account.

5.9.5 Loans and advances:

BASIC Bank Ltd mainly deals with small and medium enterprises. So their loan and

advances are for the small and medium scale industries. They offer long term loan,

working capital loan, loan against trust receipt, secured overdraft etc to its customer. An

overview of loan and advances will be given in SME financing and BASIC Bank

section.

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6.1 Objectives of SME Financing:

BASIC Bank Ltd started its journey as a specialized bank to provide project loan and

working capital support to small & cottage industries. With the pace of time and

redefinition of scale of industries the bank is now focused on small and medium sector

industries (SMI) to accelerate the pace of development to small and medium industry of

Bangladesh. Besides the bank is rendering all kinds of banking services like commercial

banks. It is mandated in the Article of Association of bank to provide credit a minimum

of 50% of its loanable fund to the small and medium industry sectors. As a broad policy

objective in respect of small and medium industry sector financing the bank undertakes

the following tasks:

Extending financial assistance to small & medium industries in private sector in

the form of short term working capital loan, medium term and ling term capital

finance to new projects and BMRE of SSI & MSI.

Extending financial assistance to micro enterprises and collaborate with other

institutions engaged in financing and developing such enterprises.

Co-operate and collaborate with institutions entrusted with the responsibilities

of promoting and aiding SMI sector.

6.2 Main principles of BASIC Bank Ltd for SME Financing:

At the time of extending credit BASIC bank limited follows certain principles. Main

principles of lending operations in BASIC Bank are as follows:

50% of total credit will be invested to small and medium industry.

BASIC Bank gives importance to finance export oriented industry or import

substitute industry.

BASIC Bank always welcomes any new type of projects rather than

conventional industry.

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Projects, fixed costs within 20 crore (excluding land& building) is defined as

SMI. So BASIC Bank expects the proposed projects are within 20 crore.

There should be debt to equity ratio as determined by the bank on individual

case basis. Common practice of debt ratio is 70:30.

All lending will adequately be secured with acceptable collateral security and

margin requirements.

End use of term loan and working capital facilities will be closely monitored

to ensure that the funds are used for the purpose of which those were

advanced.

Bank maintains credit deposit ratio nearly 80% to maintain liquidity and not to

be in crisis of fund. Bank does not fall short of short term temporary funds o0r

borrowings from other banks or through short term money market operations.

Bank offers premium interest rate to high credit rating borrowers.

In BASIC bank, most of the deposit chunk is in fixed deposit. Thus the bank

can easily go for term lending.

6.3 Loan product of BASIC for SME financing:

BASIC Bank Ltd has been offering a wide range of credit facilities to meet the financial

needs of its customers. Grossly the products are of the following two types:

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6.3.1 Funded credit facilities:

a. Term loan:

Term loan is allowed for procuring fixed assets of the project. The loan is sanctioned at

a debt to equity ratio. To increase the stake of the sponsors, BASIC Bank always

emphasizes on equity participation. There are many instances that due to poor equity

participation projects have become sick. Right now BASIC Bank is in practice to

finance term loan at the rate of 70:30 debt to equity ratio. Term loan is secured by

registered mortgage of immovable property such as land, building, and hypothecation of

machinery. Repayment of term loan is generally made in some installments. Generally 6

month grace period is allowed before commencement of repayment of installments.

Repayment pattern is made as per nature and momentum of cash inflow of the projects.

The term loan is categorized according to its tenure. Following are the types of term

loan:

Mid term loan: the tenure of mid term loan is greater than one year up to 3

years. Generally mid term loan is allowed where the bank thinks the project has a

higher rate of return (IRR). The bank is very analytical to allow the period of the

loan because if insufficient period for repayment is allowed, the project will be in

trouble.

SME Credit

Facilities

Non-Funded

Credit

Funded Credit

Term loan

Working Capital

Trade Finance

Letter of Credit

Bank Guarantee

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Long term loan: Long term loan is allowed for 5 years. Most of the cases the

bank sanctions this sort of loans. For a new project where substantial machinery

is to be financed by a bank and IRR is not too much high to repay the loan within

less than 5 years.

b. Working capital:

Working capital is needed by a concern for its current operational purposes. It is

regarded as life blood of the concern. Several factors to be considered while assessing

the working capital requirement of a concern like operational cycle, growth and

expansion, price hike etc. all current asset requirement is summed up and 30%margin is

deducted. The rest amount is maximum permissible portion of bank to finance. There

are following forms of working capital:

Secured overdraft (SOD):

This is an overdraft facility secured by encashable securities like FDR, Government

bond, wage earner bond etc. It represents permission to overdraw its current account up

to sanctioned limit. The loan is allowed keeping some margin generally 5%. Proper

turnover in an overdraft limit is a must.

Cash credit:

Like overdraft, cash credit is a continuous credit which is generally sanctioned for one

year which is further renewable as per requirement of the borrower. After assessing the

working capital requirement and keeping proper margin a limit is sanctioned though the

client is entitled to overdraw within the sanctioned limit, the banker keeps watch on

each and every transaction. There are two types of cash credit:

Cash credit (Hypothecation): when cash credit is sanctioned underhypothecation of stock of goods it is called CC (Hypo). In this case of

hypothecation, the stock remains under the possession and ownership of the

borrower. Only the right belongs to the bank through creating the charge of

hypothecation. In this case the client has to submit stock report regularly which

is to be verified by the bankers time to time.

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Cash credit (Pledge): in case of cash credit pledge, only the ownership

belongs to the borrower. The possession, control and right remain with

bank. The nature of operation in CC (Pledge) account is different than

that of CC (hypo).

c. Trade finance:

International trade dealings are one of the major business activities undertaken by

BASIC Bank Ltd. To facilitate international trade transactions, it has arranged

correspondent relationship with large number of international banks, which are active

across the globe. A. D. branch are staffed by personnel experienced in International

Trade Finance for processing import and export transaction. BASIC Bank offers a

complete range of Trade Finance services. It offers following services:

Issuing advising and confirming of documentary credits. Pre-shipment and post shipment finance. Negotiation and purchase of export bills. Discounting of bill of exchange. Collection of bills.

The bank provides finance related to L/C and post import finance like loan against

imported merchandise and loan against trust receipt to the importers. The bank provides

back to back L/C and pre-shipment finance facilities like packing credit and post

shipment finance like foreign bill purchase to exporters.

i. Import finance:

Loan is given to importers for buying imported items. Each loan be related to one

specific import transaction and the term of the financing can vary depending on the type

of products imported on the need of the importer. BASIC Bank extends finance to the

importers in the form of:

Payment against documents (PAD): After establishing the letter of credit, the bank is

bound to honor its commitment pay for import bills when these are presented for

payment. The foreign correspondent, who negotiates the documents, gets payment as

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per stipulated reimbursement terms of the L/C to the debit of the account of L/C

opening bank, F.C account. The opening bank lodges the shipping documents in their

books and responds debit advice originated by foreign correspondent to the debit of

payment against document account.

Loan against imported merchandise (LIM): it is allowed against imported

merchandise storing the same in banks custody. The merchandise is cleared by the

bank through its approved clearing agents. If the party has the storage of money to clear

the goods from the airport, then he wants bank loan. The advance is adjusted by

delivering the goods against payment by importer. The documents remain with the

bank.

Loan against trust receipt for retirement of import bills (LTR): It is post import

finance. Depending on the relationship with the client, Bank allows LTR facilities for

retirement of import documents instead of LIM. Documents are given to the party

adjusts the LTR. LTR facilities are usually allowed for 90 days for each case. In case of

manufacturing concern, production and operation cycle must be taken into

consideration for allowing the tenure of LTR.

ii. Export finance:

Pre-shipment finance: loan given by BASIC Bank to the exporter to provide liquidity

for buying or processing goods to be exported. Pre-shipment finance in the form of:

Packing credit (PC): Pre-shipment finance under the name of packing credit , is

essentially a very short term advance granted by the bank to an exported to enable him

to produce, process, manufacture pack and ship the goods to the buyers abroad in

conformity with the terms & condition of export L/C contract.

Post shipment finance: Loan provided to the exporters against their export receivables,post shipment finance in the form of:

Foreign bill purchase (FBP)/ local bill purchase (LBP): The foreign or local bill

purchased or discounted is a facility granted by the bank to its customer whereby the

bank purchases or discounts the customers sight export documents.

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Loan against documentary bill (LADB): In some cases when we get local currency

instead of foreign currency (in case of sight bill), the bank does not purchase or discount

the bill rather the bank makes short term advances to the extent to the extent of a certain

percentage (say 90%) of a bill amount.

Local general against cash incentive: In case of fund shortage of exporter, BASIC

Bank allow loan against lien of pending claimed cash incentive. Loan is adjusted from

receivable cash incentive proceeds. Cash incentive payment is a time consuming

procedure and there is always uncertainty.

6.3.2 Non-funded credit facilities:

Non funded credit facilities are those where bank doesnt have to outlay cash, rather

than merely giving a commitment or promise to pay. Two types of credit facilities are:

a. 3.2.1 Letter of credit:

A letter of credit is a document issued by a bank stating its commitment to pay someone

(supplier/ exporter/seller) a stated amount of money on behalf of a buyer as long as the

seller meets very specific terms and conditions. Letter of credit is more formally called

documentary letter of credit because the banks handling the transaction deal in

documents as opposed to goods. Documentary letter of credit is subject to the Uniform

Custom & Practice for Documentary Credit (UCPDC), Brochure no. 600, of the

International Chamber of Commerce (ICC) in Paris.

b. Bank Guarantee:

A bank guarantee is a written irrevocable obligation by the bank to pay a agreed sum of

money to the beneficiary in the event of default by a third party in fulfilling their

obligations under the terms of the bank guarantee. This is issued by the bank at the

request of contractors, wholesalers, companies involved in transaction etc. for the

purpose of handling the guarantee request they receive in their operation. According to

the purpose of guarantee, bank guarantee can be classified in following ways:

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Bid Bond:

Bid Bond or tender guarantee is a surety bond issued by the bank upon the request by

the bidder/ tenderer expressing the banks commitment to meeting the claim of the

beneficiary (the party who invites tender) in case of the bidder withdraws from the bidduring the bid period or fails to accept the award when he/ she becomes the winner.

Performance bond/ guarantee:

Performance bond is a n undertaking issued by the bank in favor of the buyer/ employee

at the request of the supplier/ service provider, whereby the bank undertakes to make

payment to the beneficiary in the event of default by the principle (Supplier/ service

provider) in due performance of the terms of the contract.

Advance payment guarantee:

This is issued by the bank in favor of a buyer and at the request of the seller/ contractor

(who receives in advance) representing the banks commitment to repay the sum in the

event that the seller fails to honor the contract terms in their entirely or in part.

Suppliers credit guarantee:

Such guarantee is issued by the bank to meet any claims to be made by the local or

foreign supplier in case of the debtor fails to repay in accordance with the terms and

conditions of the contract.

Retention guarantee:

A guarantee issued at the request of contractor to secure repayment of the retention

money held by the employer during different phases of the project.

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6.4 SME Credit operation of BASIC Bank:

BASIC Bank Ltd is a banking company registered under the Companies Act 1913. The

bank operates as scheduled bank undertaking all types of banking transactions. It isblend of development finance and commercial banking. The bank by its memorandum

and Article of Association is entrusted with the responsibility of providing medium and

long term loans and other financial assistance for promotion of small scale industries

sector. It is stipulated in its MA & AA that at least 50% of the banks loanable fund

shall be used for financing SSI.

6.4.1 Credit Policy of BASIC Bank Ltd:

To supplement the effort of the government for the economic uplift of the country

through industrialization, the bank has developed its own credit policy keeping in view

the government policy in this respect and provisions contained in the Banking

Companies Act 1991 and other related rules and regulations. The entrepreneur of small

industry concern/ project requiring financial assistance from BASIC need to fulfill the

following criteria:

Appraisal criteria:

Standard loan application form is issued only after the promoter is found credit

worthy and acceptable after evaluation of information submitted in First

Information Sheet.

Viability of each and every project recommended for financing is subjected to

thorough scrutiny and detailed appraisal. The report must cover the basic areas

of project viability.

Project should be designed with appropriate machinery.

Project should have necessary infrastructural facilities and environment aspect

shall be carefully examined.

Market prospect and potential should be ensured at competitive prices.

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Debt service coverage ratio should be at least 2.5 times at the optimum level of

production.

The project should have satisfactory breakeven point and margin of safety.

The period of loan should be determined based on cash flow potential and

payback period and shall not normally exceed 5 years.

Security criteria:

Registered mortgage by way of creating first charge/ mortgage on the land,

building/structure of the project.

Hypothecation/ pledge of machinery, equipment and other inventories and

floating charge on all other assets.

For leasehold land or rented premises the security coverage should be available

in the form of acceptable collateral of urban properties.

Comprehensive insurance coverage on the project assets and goods.

Life insurance on the life of the promoter/sponsor of the project to the extent of

20% of individual shareholding

Deposit of share certificate of sponsor equity.

Maximum investment & assistance:

Aggregate loans and advances shall not exceed 10 times the banks net worth or

65% of customer deposits whichever is lower. Of this generally 50% shall be

deployed in financing small industries both as term loam against foxed assets

and working capital.

The growth in the number and amount of loans and advances should not exceed

the capability of the banks manpower in terms of close monitoring and

supervision.

No credit shall be extended to customer entity which exceeds in total

commitment more than 10% of the Banks capital and free reserve except with

the approval of the board of directors.

All credit extension tone customer or group exceeding tk. 3.00 crore or

equivalent shall require the prior approval of the board.

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Loan should be dispersed to cover wide sector of industries. However loans to a

particular sector shall not exceed 25% of its total loan at any given time.

6.4.2 Project appraisal by BASIC Bank Ltd:

When a firm approaches for loan to BASIC Bank Ltd it has to make a project profile

consisting of project details, product, profitability, management aspects, forecast about

future marketability of the product, risk involved. After getting the project the bank

analyses the projects viability from the following perspective:

6.4.2.1 Management aspect:

Managerial feasibility refers to the assessment of ability of management personnel in

managing a project efficiently. The management personnel should have:

Technical skill to use knowledge, method and technique (acquired fromexperience, education and training) to perform the job.

Human skill to maintain interpersonal relationship within or outside of theorganization.

Conceptual skill to understand the complexities in overall organization.Entrepreneur/promoter has to be creditworthy and competent enough to run the

proposed industry. Besides the management of the proposed project, manpowerplanning, bio data of key personnel and organogram are analyzed to apprai8se the

management feasibility.

6.5.2.2 Marketing viability:

Marketing aspect is very crucial part of project appraisal. BASIC Bank ltd considers the

following points for assessing marketing feasibility:

Product mix

Demand supply gap Market prospect for the product at competitive price Distributional channel, promotional activities.

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6.5.2.3 Technical viability:

BASIC Bank has been practicing the concept of project based lending rather than

traditional security based lending approach. Technical team is essential in assessing

technical aspect of a project. Most of the projects are typically capital intensive and

engineering supervision prior to approval of credit is a prerequisite. Head office is

having a technical team under industrial credit division whose exclusive job is to assess

the technical matters. The project submitted by the borrower is judged from technical

point of view effectively. Following items are considered to assess technical viability:

Location of the project Land, land development and civil construction Availability of required machinery and its technology Rated capacity and attainable capacity of machinery Installation of machinery Raw material requirement, raw material availability, sources of raw materials. Manufacturing process and its flow diagram Safety provision Project completion schedule Availability of infrastructural facilities such as road and transport Availability of utilities such as gas, electricity, water etc. Climatic position in the project area. Availability of required labor. Political factors such as government patronage, industrial [policy of

government.

Proximity to complementary project.

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6.5.2.4 Financial viability:

Various financial tools and techniques are used in testing financial viability of projectsuch as:

a. Capital budgeting:

Under capital budgeting technique there are two methods- non discounted method and

discounted method. Under non discounted method bank use the following method:

Payback period: the period within which the volume of investment is expected to be

returned from the project. Payback period must be less than the tenure of the term loan.

Generally BASIC Bank Ltd prefers projects having payback period less than 5 years.

Under discounted method time value of money is considered. Here the following

calculations are being used:

Net present value: It is the difference between present value of expected inflow or

benefit and that of outflow or investment. Under this method expected future benefits

are being converted into present value using reasonable rate of discount. A positive

NPV at the rate 25% discount rate is a must.

Internal Rate of Return (IRR): It is a rate at which the present value of inflow equates

the present value of outflows. IRR tells the minimum required rate of return from an

investment. Acceptable IRR is being determined by considering the opportunity cost,

cost of capital, the prevailing maximum return in the economy etc. IRR should

preferably be not less than 25%.

Profitability Index: It is calculated by dividing present value of inflow with the present

value of outflow. A project can be accepted if PI>1.

b. Breakeven analysis:

Break even analysis is commonly known as the Cost- Volume- Profit (CVP) analysis.

Breakeven analysis shows the relationship between cost and revenue with output or

sales that is required to equate the cost. Moreover, break even analysis provides a clear

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idea about the required volume of sales to earn a target profit. Thus break even analysis

helps the decision criteria. Break even analysis is done to check whether the project is

capable to generate profit using the attainable capacity.

c. Sensitivity analysis:

Sensitivity analysis provides the picture of relative changes in overall profitability due

to change in any one variable. Usually changes in material and other variable cost or

change in selling price are being taken into consideration for making sensitivity analysis

in BASIC Bank ltd.

d. Ratio analysis:

The common ratios that are being practiced in BASIC Bank ltd is current ratio (not less

than 1), Debt to Equity ratio (70:30), debt service coverage ratio (not less than 2),

interest coverage ratio (not less than 2), operating profit margin (not less than 5%).

6.4.2. 5. Socio economic aspect:

The observation of this aspect is to see whether the project is socially. As a part of socio

economic feasibility study BASIC Bank studies following parameters:

Employment generation Foreign exchange earning Environment impact Economic linkage impact Contribution to GDP

6.4. 3 Sanction procedure:The term loan application for small industries will preliminary by scrutinized taking

into account personal credibility of the sponsors, availability of owners equity,

account/ deposit relationship with the bank, past history of activity, other banks

transaction etc.

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If prima facia of the project appears viable and acceptable to the bank then full dressed

appraisal report shall be carried out taking into account the management, technical,

marketing and financial aspects. Formal application in standard form of the bank shall

be obtained along with required project examination fee tk. 5000.00 for project having

investment cost below tk. 50.00 lac and tk.10000.00 for the project having cost above

tk. 50.00 lac.

In order to build up sponsor, stake is to have ready to liquid asset for investment in the

project and as practiced by other DFIs of the country BASIC may also continue to ask

for equity deposit as under:

20% and 30% of the proposed equity along with loan application form to

be deposited.Balanced equity amount as per terms of sanction to be realized after

sanction of loan.

Equity deposit so realized will be kept in STD A/C carrying interest at STD rate. The

said equity deposit will be realized as per need of the project to be determined after

assessing investment needs of the project.

6.4.4 Procedure for valuation of land & building:

In choosing the right location suitable site should be inspected from technical viewpoint

like availability of utilities, means of transport, availability of manpower, etc, Price of

land should be determined based on present forced sale value of the land. In case, if felt

so, value of land may be determined through spot survey of the land by a surveyor

registered at Registrar of Land during past 3 years. The covered area of the factory to be

determined on the basis of actual requirement for production process, storage facilities

and other necessary structure. Clearance from environment pollution control authority

to be taken when necessary.

6.4.5 Risk Faced in SME credit & its management:

The risk of BASIC Bank Limited is defined as the possibility of losses, financial or

otherwise. The risk management of the Bank covers core risk areas of banking viz.

credit risk, liquidity risk, market risk that includes foreign exchange risk, interest rate

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risk, equity risk, operational risk and reputation risk arising from money laundering

incidences. The prime objective of the risk management is that the Bank evaluates and

takes well calculative business risks and thereby safeguards the Banks capital, its

financial resources and profitability from various business risks through its own

measures and through implementing Bangladesh Bank's guidelines and following some

of the best practices as under:

Credit risk:It arises mainly from lending, trade finance, leasing and treasury businesses. This can be

described as potential loss arising from the failure of a counter party to perform as per

contractual agreement with the Bank. The failure may result from unwillingness of the

counter party or decline in his / her financial condition. Therefore, the Banks credit risk

management activities have been designed to address all these issues.

Credit Risk management:The Bank has segregated duties of the officers / executives involved in credit related

activities. A separate Corporate Division has been formed at Head Office which is

entrusted with the duties of maintaining effective relationship with the customers,

marketing of credit products, exploring new business opportunities, etc. Moreover,

credit approval, administration, monitoring and recovery functions have been

segregated. Another division naming Credit Administration Division (CAD) has also

been established to oversee mainly documentation facilities. In line with Bangladesh

Bank guidelines the Bank has segregated marketing, approval and monitoring/recovery

functions. The credit risk management includes borrower risk analysis, financial

statement analysis, industrial analysis, historical performance of the customer, security

of the proposed credit facility and market reputation of the borrower etc. The Bank

takes its lending decision based on the credit risk assessment report by appraisal team.

In determining Single borrower / Large loan limit, the instructions of Bangladesh Bank

are strictly followed. Internal audit is conducted at periodical intervals to ensure

compliance of Banks and Regulatory policies. Loans are classified as per Bangladesh

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Banks guidelines. Concentration of single borrower / large loan limit is shown in the

notes to the financial statements.

Interest rate risk:Interest rate risk may arise either from trading portfolio or non-trading portfolio.

Interest rate risk of non-trading business arises from mismatches between the future

yield of an asset and its funding cost.

Interest rate risk Management:Asset Liability Committee (ALCO) monitors the interest rate movement on a regular

basis.

Foreign exchange riskForeign exchange risk is defined as the potential change in earnings due to change in

market prices. The foreign exchange risk of the Bank is minimal as all the transactions

are carried out on behalf of the customers against underlying L/C commitments and

other remittance requirements.

Foreign exchange risk Management:Treasury Department independently conducts the transactions and the back office of

treasury is responsible for verification of the deals and passing of their entries in the

books of account. All foreign exchange transactions are revalued at Mark-to-Market

rate as determined by Bangladesh Bank at the month-end. All Nostro accounts are

reconciled on a monthly basis and outstanding entry beyond 30 days is reviewed by the

management for its settlement. The position maintained by the bank at the end of day

was within the stipulated limit prescribed by the Bangladesh Bank.

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6.4.6 Credit pricing:

BASIC Bank Ltd. follows the credit policy of the bank and instruction of Bangladesh

Bank and Banks Head Office time to time. The first step of credit proceedings is the

request for credit from the clients. Then scrutinizing and collection of information from

primary and secondary sources take place. Credit appraisal is the core part of credit

operation. On the basis of appraisal, approval is given by the higher authority. Flow

chart for processing SME loan is given below:

Rate of Interest on Lending

Category Interest Rate

Small Industry / Enterprise:

a. Small Industry / Enterprise: Service and Manufacturing

Term Lending 15.00%p.a

Working Capital 16.00%p.a

b. Small Enterprise: Business / Commercial / Trading

Term Lending 16.00% p.a

Working Capital 17.00% p.a

Medium Industry / Enterprise:

a. Medium Industry / Enterprise: Service and ManufacturingTerm Lending 15.00%p.a


b. Medium Enterprise: Business / Commercial / TradingTerm Lending 17.00%p.a


Table: I, Source: WWW.basicbanklimited.com

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6.4.7 Credit approval process of BASIC Bank ltd:

Figure: Flow chart of credit operation system of BASIC Bank Ltd.

Borrower approaches the branch for credit

Interview with relationship officer, creditin-charge, and Branchin- Charge

Borrower submits Loan Application in prescribed format along with relevant paper

CRO applies for CIB enquiry

CRO visits the business again to assess sales, stocks, go-down, sister concern (if any)

Customers come to unit office with Guarantor & fills LAF & A/C opening form

CRO visits customer residence

Appraisal at branch level by branch credit committee, same time CIB report from

Bangladesh Bank is obtained, legal opinion from Legal Advisors & Valuation report

from enlisted surveyors are collected

Credit Line Proposal (CLP) is sent to Head office Credit & Loan Administration

Appraisal at Head office by Head Office Credit Committee

Approval by Board of Director (if necessary)

Sanction letter to the Borrower mentioning the terms & conditions

Completion of documentary requirement

Disbursement of loan after getting all the required original docs including CIB

Clearance from Bangladesh Bank

Loan supervision, Monitoring & control

Loan Admin checks the docs and sends them to credit committee for appraisal

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6.5 Supervision and follow up of credit BASIC Bank Ltd:

The basic objective of monitoring and follow up is to ensure that the credit granted by

the bank are safe as the fund lent by the banks belong to the depositors and bank

management has tremendous responsibility in safeguarding the interest of depositors.

The supervision of projects includes adequate control procedures in disbursement of

loan and the continuous monitoring of project operations during its period of

construction and implementation through report requirement as well as plant visits. A

project under implementation is visited every month and progress report is submitted to

the management. Bank official on project supervision keeps watch over the estimation

made and notes the deviation for taking quick remedial measures.

BASIC Bank tries to ensure that money lent is properly used for generation of income

through increased economic activities and money is repaid in time. All these are

ensured through as effective supervision and follow up system. The bank has been

following a series of measures, both in Head Office and branch level, to follow up and

supervision of loan and advances to avoid and minimize non performing loan of the

bank.

The two terms supervision and follow up are closely related. Supervision gives more

emphasis on proper end use of fund lent. It includes adequate arrangements by bank for

maintaining close contact with the borrower and its activities in order to remain well

informed about the position and progress of the purpose financed and to offer

appropriate guidance to the borrower, where necessary. Follow up includes effort to

ensure that the terms and conditions are complied with and money lent is repaid as per

schedule of repayment. It also includes effort to regularize the irregular advances.

Recovery of advances largely depends on effective follow-up. In conductingsupervision and follow up, BASIC Bank follows the undernoted methods:

Keeping watch over the accounts to ensure that operations are regular and as per

procedure. Particular care is taken when the balance in the account remains very

near or goes beyond the drawing limit or there is no good turnover.

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Ensuring the inputs/ materials are purchased/ procured as per procedures/ terms

of sanction and are used properly and outputs are sold properly.

Keeping watch over the inflow and outflow of fund.

Collecting periodical reports, returns and information about the borrower and

examine the activities of the project/ enterprise financed.

Ensuring that security/ collaterals have been obtained as per terms of sanction

and valuation has been assessed correctly and security is maintained properly.

Ensuring that property has been properly insured where required as per policy,

procedures and practice.

Ensuring that the documents have been obtained as per terms of sanction and asper procedure for such type of advance. If not get the documents regularized.

Keeping regular contact with the borrower both formally and informally and pay

regular visit to the projects/ enterprise financed.

Keep watch over the repayment trend and see that the advance does not turn up

as irregular or stuck up and becomes time barred.

Ensure that appropriate actions are taken in time to regularize the irregularities

and recover the loan as per schedule.

Obtaining periodical balance confirmation from the borrower and necessary

fresh document is obtained (in case of renewal/ enhancement of loan).

To check whether there is any adverse trends in market, economic and political

conditions which may endanger the reliability of the facility.

To check that borrowers business is being satisfactorily conducted as reflectedthrough a review and analysis of the financial and operating statement.

To make sure Compliance of term of approval.

To check satisfactory conduct (turnover, regularity of repayment etc.) of the

borrowing accounts.

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To assess the adequacy of collateral value.

In order to ensure an effective supervision BASIC Bank ensures end use of fund. To see

that the fund lent to the borrower are used for the purpose for which they have been

given. In order to ensure end use of term loan funds, it is practice to disburse the money

directly to the supplier who has supplied the fixed assets and not to the borrower

directly. On the other hand in case of working capital advance the objective to acquire

current assets, supervision of end use of fund is comparatively hard and possibility of

diversion in case of cash credit (hypothecation) is more. The working capital utilization

is checked to great extent by ensuring that the borrower computes his working capital

requirements and furnishes a statement regarding inventory and book debts as shown in

monthly statements. Bankers frequently visit the business house to verify the actual

position of current assets. Moreover, the borrower is required to maintain the proper

current ratio.

6.6 Recovery of nonperforming loan (NPL):

BASIC Bank Limited has been following a series of measures to recover the default

amount of loan and advances both in Branch and Head Office level. Branches have

been given yearly target to recover dues from the existing default borrower to reduce

the classified loans and advances up to minimum level. BASIC bank takes the following

steps to recover the stuck up credit:

Exerting moral pressure:

The bankers visit the borrowers place of business again and again and find out the

cases of nonpayment of the banks dues. The banker may also request some influential

customers of the area to exert pressure on the borrower to clear banks dues. If there is a

guarantor, he is also called upon to adjust the account or have it adjusted by the

principal.

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Legal procedure:

In case the borrower does not adjust the default loan, the only course left open to the

bank is to sent a legal notice stating the undesirable character of the credit and recall

and ask the party to liquidate it within a stipulated time falling which the securities willhave to be disposed off without further reference to him at the best possible market rate

either in public auction or by private negotiation according to the convenience of the

bank. After the securities have been sold and the bank will resort a legal auction to

recover the dues. If no favorable response is made by the borrower guarantor after

sending notice, the bank disposes of the securities and adjusts the account. Presently

banks are empowered to dispose of the securities without intervention of the court under

the Artha Rin Adalat Act 2003. If the credit is not fully secured and where there is a

shortfall to adjust the advance after disposal of securities, bank file a suit against the

borrower and guarantor for recovery of banks dues.

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7.1 SWOT Analysis of BASIC Bank Ltd:

The comparison of Strengths, Weaknesses, Opportunities and Threats is normally referred

to as a SWOT analysis. Its central purpose is to identify the strategies that will create a firm-

specific business model that will best align, fit, or match a companys resources and

capabilities to the demands of the environment in which it operates. It helps the

organization to identify how to evaluate its performance and scan the macro environment,

which in turn would help organization to navigate in the turbulent ocean of competition.

Strength:

BASIC Bank Ltd has a vast line of services, which can attract people of

different segment of the society.Low lending interest rate compared to other PCBs & FCBs interest rate.

Lower interest in term loan than other working capital loan which is very

exceptional in financial market.

Team work at mid level and lower level

Interactive corporate culture

Customization and flexibility in credit products.

No loan processing fees

No commitment fees

Substantial grace period in term loan as per cash flow of the project.

Bank offers supplementary service such as financial advisory services and

technical advisory services by dint of its divergent and resourceful pool of

human resources.

Loyal and strong customer base.

Sufficient repayment period (up to 5 years).

Weakness:

BASIC Bank Limited currently dont have any strong Marketing Activities

through mass media e.g. Television.

Deposit product is not well diversified

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Conservative approaches in lending operations.

Loan processing time is a bit longer

Opportunities:

Huge untapped sub-urban and rural SME market. As SME concept is getting

popular day by day in the country, so there will be more opportunities to explore

new customer.

Apart from government low cost deposit, BASIC Bank receives low cost fund

from Bangladesh Bank, various international development banks and

development agency for relatively longer period.

Threats:

The main threat for BASIC Bank Limited is a wide range of competitors. About

ten of them are multinational. The multinational banks came to our country with

vast resources, like financial and marketing skill. Also new invented business

tools and techniques are channeled to them from their parent organization.

Economic recession that results in industrial depression.

There are some upcoming banks that are joining in our banking industry and

create a great challenge for BASIC Bank Limited in customer attraction and

retention with attractive interest rate.

Matching of Strength and Opportunities with Weaknesses and Threats:

In the credit policy I have found everything all right except the techniques used for

screening the client. BASIC bank has some very efficient and highly educated

professionals who can easily solve the problem if they concentrate on the issue. So the

weakness can be eliminated easily through its strength.

The credit policy of BASIC has been perfectly designed depending on the government

funds and assistance. But as it is sure that, government will sell its share in near future

BASIC has to revise its credit policy by considering alternative source of fund.

International funds can be alternatives for government source if BASIC can

continuously reduce its classification rate.

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Alike other bank BASIC can enforce its marketing operation to grab the small savings

of the middle class. And a small change is enough to do so as the strength of the present

credit policy is capable to take any pressure.

So from the SWOT analysis of the credit policy of the bank I have found that, the credit

policy of BASIC Bank is sound with some exception. And small revise of the policy

can be the best policy that can lead a bank to the peak of success.

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7.2 Individual Company Analysis

Loan to deposit liabilities & SMI loan to total loan ratio

Graph: 01

Ref: Appendix: Table 1

Graph: 02