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CHAPTER 01: INTRODUCTION

1.1 ORIGIN

OF THE

REPORT

As a part of the Internship Program of Bachelors of Business Administration program


requirement, I chose to do my internship in the BRAC Bank Limited (BBL) for the
period of 16 weeks starting from 01 March 2006 to 10 May 2006. In BBL I was assigned
to the different concerned departments. My organizational supervisor was Ms. Tahniyat
A. Karim, VP & Head of Human Resources. My project is Prospect of SME Banking in
Bangladesh: The BRAC Bank Perspective which was assigned by organizational
supervisor of the said bank. My faculty supervisor Mr. Mohammad Mohiuddin, Lecturer,
IBA, also approved the project and authorized me to prepare this report.

1.2 OBJECTIVE

OF THE

REPORT

The objective of the report is to study and evaluate the prospects of BBL in the SME
sector of Bangladesh. In the process of doing so, I have assessed the

1.3 SCOPE

OF THE

STUDY

I have limited the study to the following parameters:

The total concept SME loan

BBLs special focus on SME loan to promote small entrepreneurs all over the
country

Characteristic of SME loan as a sophisticated area of finance.

Recent performance level of the BBL SME loans in the country.

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

1.4 METHODOLOGY
The study uses both primary data and secondary data. The report is divided into two
parts. One is the Organization Part and the other is the Project Part. The parts are virtually
separate from one another.
1.4.1 PRIMARY SOURCES
For general concept development about the bank short interviews and discussion sessions
were taken as primary source. More over a market survey was conducted with a specific
questioner. To identify the implementation, supervision, monitoring and repayment
practice- interview with the employee and extensive study of the existing file was and
practical case observation was done.

1.4.2 SECONDARY SOURCES


The information for the Organization part of the report was collected from secondary
sources like books, published reports and website of BBL (www.bracbank.com). For
gathering concept of SME loan products of BBL, the Product Program Guidelines (PPGs)
were thoroughly analyzed.
1.4.3 SAMPLING
For the survey, cluster sampling was thought to be appropriate. The SME clients of BBL
can be categorized into four clusters

Manufacturing Businesses

Trading Businesses

Agro-based Businesses

Service Businesses

Within the clusters, random sampling was conducted according to advantage of the
surveyor and also considering the time factor. The sample frame was the list of existing

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

clients of BBL SME loan facilities and the sample unit was the individual entrepreneur.
The sample size for each cluster was determined as per the ratio of the total populations
of the clusters. The total sample size was limited to 200.

1.5 LIMITATIONS
Despite my earnest efforts, there were some limitations that hindered the progress of this
report.

On 26 April 2006, due to an unfortunate accident, the SME department of BBL


caught fire. All documents were destroyed and it took many weeks to restore all
information from backups. This greatly hindered the information collection
process for the report.

The sample size of the survey conducted was 200 only due to time considerations.
However, the diversified nature of the respondents will hopefully make up for this
lacking.

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

Most recent data and information were not available. Therefore the timeframe for
the report had to be limited to December 2005.

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

CHAPTER 02: THE ECONOMY AND OVERALL


BANKING SECTOR
2.1 WORLD ECONOMY- AN OVERVIEW
As we enter into the new millennium the process of trade liberalization
and globalization have presented new challenges as well as greater
opportunities. Economic boundaries of nations are being abolished and
the world is gradually becoming a global village. In the beginning of
the year 1999 the Euro currency started to replace the currency of
eleven European Union countries. In the financial service sector
profound changes have been taking place globally. E-commerce is
becoming the predominant mode of transactions. We are witnessing
revolutionary changes in the fields of cost control, retail channels,
range and delivery of services, accessibility and reach. These changes
have already triggered off reorganization, amalgamation, and takeover
of financial institution globally.
The prospect of a faster pace of monetary tightening contributed to a
sharp drop in equity prices around the world in early October 2005.
Equity markets rebounded strongly since November, boosted by signs
of still robust growth in the US as well as announcements of mergers,
share buybacks and dividend increases. Japan outperformed most
other equity markets throughout this period. Upward revisions in policy
rates had a surprisingly muted impact on the prices of emerging
market assets. Emerging markets benefited from record inflows of
foreign portfolio investment in 2005. As concerns about slowing US
growth eased, emerging markets bounced back strongly from their late

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

October lows. By late November, equity and bond prices had returned
to their end-September highs and had generally reached record levels
by early January 2006. Equity markets have, however, weakened
overseas thereafter mainly on account of renewed firmness in global
crude oil prices. Corporate credit default swap rates and bond spreads
remained more or less unchanged in October although they have
widened significantly since November. While long-term interest rates
rose in many markets in September and October, they retreated
slightly in November, and at the end of December it was still unclear
whether the recent rise in yields would prove as ephemeral as previous
increases. The increase in longer-term yields mainly reflected upward
revisions to interest rate expectations over the near term. Further, the
potential for rising energy costs to add to inflationary pressures was a
key focus of investors attention. The rise in implied volatility also
reflected growing uncertainty about the economic outlook. During
December 27-30, 2005 yields on 10-year US Treasuries fell briefly
below those on two-year notes for the first time since December 2000,
inverting in intra-day trading and signaling expectations that interest
rates could fall in future that is generally associated with weak growth.
This inversion came as analysts were finally anticipating an end to the
current tightening cycle and a lower long-term risk premium than in
the past. In January 2006, however, the spread has turned positive
again. The US dollar appreciated by 3.5% in trade-weighted terms
during 2005 and a similar trend continued in January 2006.
Of the major central banks, the US Federal Reserve has raised its policy
rate by 25 basis points each on thirteen occasions from 1.0% in June
2004 to 4.25% by December 2005 while recently providing indications
of nearing the end of the cycle of measured rise in the policy rate. The
Bank of England has kept its rate unchanged at 4.50% since August
2005 in response to slowing domestic growth. The European Central
5

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

Bank (ECB) has raised its policy rate by 25 basis points in response to
rising inflationary expectations, after holding it unchanged at 2.0%
since June 2003. Monetary policy has been tightened in several
economies in emerging Asia, primarily in response to higher fuel prices
and to the measured pace of policy tightening in the US. Bank
Indonesia raised its policy rate by 50 basis points to 12.75% on
December 6, 2005 which was the tenth successive increase during the
year. In Thailand, the 14-day repurchase rate was increased for the
seventh time since January 2005 from 2.00% to 4.25% on January 18,
2006. Monetary authorities in Singapore and Hong Kong raised their
policy rates by 187 basis points and 200 basis points, respectively,
during the year up to December. In Malaysia, the policy rate was hiked
to 3.0% in end-November, 2005. In emerging market economies in
general, the direction of policy change has been towards either
tightening or withdrawal of the accommodative stance.
Economic growth in developing Asia and the Pacific surprised on the
upside in 2005. In September last year, the Asian Development
Outlook (ADO) 2005 Update forecast aggregate regional growth of
6.6%. The ADO 2006s estimate of growth is now 7.4%, well above the
average rate of growth in the region since 2000. If purchasing power
parity weights, rather than weights based on market exchange rates,
are used to aggregate over countries, regional growth in 2005 is
estimated to have been even faster, at 8.0%. With the release of
revised gross domestic product estimates for 2004 in a number of
countries, growth in 2004 has now been raised to 7.8%, from 7.4% in
the ADO 2005 Update.
On the basis of a broadly favorable outlook for the international
economy,

the

continuing

trend

toward

improved

economic

management and performance, and apparent resilience to high oil


6

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

prices, the ADO 2006 revises up its aggregate growth projection for
2006, and, to a lesser extent, for 2007 (Figure 1.1.1). Aggregate
regional growth of 7.2% is now expected in 2006, easing to 7.0% in
2007. But risks remain, and could yet unsettle a generally positive
outlook. These risks include the possibility of a disorderly unraveling of
global payments imbalances (which are still widening), heightened
protectionist trade pressures, yet higher oil prices, and the possibility
of an antigen shift of the avian flu virus into the human population.

2.2 BANGLADESH ECONOMY-AN

OVER VIEW

The improved political environment in the country, after a delayed


period of civil disobedience brought a much-awaited economic stability
during the financial year (FY) 2003-2005.
The macro economic development during the year was marked by a
healthy GDP growth and moderate inflation. For the second year
running bumper rice harvest maintained growth at above 5% and GDP
growth during the FY 2004 was at 5.52%. On the other hand, the
growth performance in industry was slow with manufacturing growth
3.3% being one of the lowest rates in the recent years. Several
unfavorable factors contributed to this situation which included
disturbance in the supply of natural gas which in the turn affected the
power supply and production activities. Furthermore, labor disputes
during the second quarter of the year badly affected the operation of
Chittagong port. In the services sector, growth in transportation,
storage and communication contributed to about 13% to the total GDP
but growth in trade sector was slow due to lower import growth.
During the year some positive initiative were taken in the banking
sector with improvements in the legal and regulatory environment to

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

improve loan recovery but unfortunately the high quantum of non


performing assets and under capitalization continued to plague the
entire banking sector thus causing a major threat to the macro
economic stability. The size of classified loans increased significantly
which contributed to lower profitability of the banks.
Reserve of gross foreign exchange

of the BB stood lower at

US$3033.88 million at the end of March,2005 compared to US$3179.41


million at the end of February. This was, however, higher than US$
2653.50 million at the end of March, 2004. The pressure on foreign
exchange reserve continues due to low aid disbursement and sizeable
private capital outflow, which amounted to around US$ 120 million.
The official exchange rate was devaluated by 4.6% in seven steps in FY
2002 and in two steps during July-August 02 thus raising the
cumulative rate of devaluation to 6.7%. The external account declined
from over 5% of GDP to less than 3% ( US$ 0.9 million) in FY 02 which
was mainly a result of healthy export growth (14%) and a significant
increase in remittances from abroad, which in turn was due to stable
political environment and a higher rate of contraction in import of food
grains and capital goods.
Investment rate in FY 04 showed some increase and the declining
trend in private savings was substantially reserved. The national
savings rate increased from 11.9% of GDP in FY 03 to 14.6% in FY 04.
This was partly due to increased inward remittances, increase in
nominal interest rates and lower rate of inflation.
Some key indicators of the economy of Bangladesh are given follows:
Total revenue collection : The government of Bangladesh
collect total revenue

during July-March,2004-05 increased by

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

Tk.2351.08 crore or 11.72 % to Tk.20294.60 crore compared to


Tk.18165.49 crore during the same period of the preceding year
Outstanding borrowing of the government: At the end of
February,2005 the outstanding borrowing of the government
stood

at

Tk.35031.91

crore,

recording

an

increase

of

Tk.1543.47 crore or 4.61% over June,2004


Exports: During July-February, 2004-05 total export of the
country stood higher by US$622.86 million or 13.00% to
US$5415.60 million compared to US$4792.74 million during the
same period of the preceding year
Import payments: During July-January, 2004-05 total import
payment increased by US$1233.70 million or 21.31% to
US$7023.50 million compared to US$5789.80 million during the
same period of the preceding year.
Fresh opening of import LCs: During July-February, 2004-05
fresh opening of import LCs increased by US$1834.58 million
or 24.30 % to US$ 9382.84 million compared to US$7548.26
million during the same period of the preceding year
Total

remittances:

During

July-March,2004-05 stood total

remittances of the country higher by US$320.20 million or


12.79 % to US$2823.03 million compared to US$2502.83 million
during the same period of the preceding year
Gross foreign exchange reserves: Reserve of gross foreign
exchange of the BB stood lower at US$3033.88 million at the
end of March,2005 compared to US$3179.41 million at the end of

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

February. This was, however, higher than US$2653.50 million at


the end of March, 2004
Gross foreign exchange balances: Balances of gross foreign
exchange held abroad by commercial banks stood higher at
US$397.16 million at the end of March, 2005 compared to
US$364.67 million at the end of February, 2005 and US$312.61
million at the end of March, 2004
The rate of inflation: The inflation rate increased to 6.38 % in
February, 2005 from 5.52 % of January, 2005.

2.3 BANKING SECTOR

IN

BANGLADESH

The Bangladesh banking sector relative to the size of its economy is


comparatively larger than many economies of similar level of
development and per capita income. The total size of the sector at
26.54%

of

GDP

dominates

the

financial

system,

which

is

proportionately large for a country with a per capita income of only


about US$ 370. The non-bank financial sector, including capital market
institutions is only 3.22% of GDP, which is much smaller than the
banking sector. The market capitalization of the Dhaka Stock Exchange
was US$1,025 million or 2.19% of GDP as at mid-June 2002. In
contrast, the size of the total financial sector in India, including banks
and non-banks as well as the capital market is 150% (March 2002) of
its GDP, with commercial banks accounting for 58.3% of GDP.

10

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

Access to banking services for the population has improved during the
last three decades. While population per branch was 57,700 in 1972, it
was 19,800 in 1991. In 2001 it again rose to 21,300, due to winding up
of a number of branches and growth in population. Compared to Indias
15,000 persons per branch in 2000, Bangladesh is not far behind in
this regard. This indicates that access to the banking system in the
country is not a significant problem.
The finance sector remains predominantly bank-based, accounting for
96% of the sectors resources. While there are sound banks, based on
IAS, the banking sub-sector as a whole is technically insolvent.
Consolidated data reported tend to have significantly understated
provisions. Adjusting partly for the understatements, the financials of
the banking sub-sector are characterized by about 32% NPL ratio,
US$720 million shortfall in provisions, US$1,106 million shortfall in
provisions and capital combined, and losses of US$685 million after
adjusting for the shortfall in provisions in mid 2001. The adjustments
would possibly be larger if provisioning as followed by major
international auditors were applied. National Commercialized Banks
(NCBs) also have disproportionately large and unexplained Other
Assets that include, in particular, jute and other subsidized credits,
suspense accounts and various receivables. To what extent these
questionable assets have been provisioned remains unclear.
The banking sector of Bangladesh comprises four categories of
scheduled banks. As of June 2005, 49 scheduled banks are operating in
Bangladesh with a network of 6318 branches. The structure of the
banking system in Bangladesh is categorized in the following table.

TABLE 1: STRUCTURE

11

OF THE

BANKING SYSTEM

IN

BANGLADESH

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

Type of
Bank
NCB
NSB
PCB
FCB
Total

No.
4
5
30
10
49

(MARCH 2005 )
No. of
% of Total
Branches
3388
1334
1557
39
6318

Asset
40.14
7.13
42.67
9.46
100

% of Total
Deposit
39.78
7.22
47.18
5.82
100

Source: Bangladesh Bank

In addition, one national co-operative bank, one Ansar-VDP Bank, one


Karmasangsthan Bank and one Grameen Bank and some nonscheduled banks are also in operation. In order to enhance the overall
efficiency of NCBs, decisions have been taken to rationalize bank
branches, and up to June 2005, 91 new branches were established and
9 existing branches were closed under the 'branch rationalization
program'.
Banks and other financial institutions have been playing a key role in
activating the financial sector that in turn infuses dynamism to the
economy. Banks are engaged in upgrading the socio-economic status
of the country by investing money to productive sectors. However, in
the context of globalization and operation of market economy these
institutions are facing immense competition with regard to speedy
transaction of financial intermediation and as such they are to provide
their service as efficiently and effectively as possible. Given this
scenario, importance has been attached to the development of the
financial market through banking sector.
In order to uphold the rule of banking sector in financial market
development the Government has taken a range of measures which

12

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

include further deployment of bank branches and evaluation of their


performance,

classification

of

loans

following

the

international

standards assessment of capital adequacy, determination of quality of


assets and earning of impressive profit.

13

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

CHAPTER 03: ORGANIZATIONAL OVERVIEW


3.1 BACKGROUND
BRAC Bank Limited started its journey on the 4th of July 2001 originating from its
source BRAC Bangladesh Rural Advancement Committee. BRAC is known as the one
of the most successful NGO in the world. Mainly, BRAC Bank originated due to
successful story of BRAC micro finance. The Chairman, Mr. Fazle Hasan Abed believed
that until modern, competitive financial services are readily available including credit
in amounts, terms and conditions that small can access, Bangladesh will not be able to
create the large middle class that is a prerequisite to social stability. So, the BRAC Bank
Limited came into existence due to the need of mass financing, which wouldnt have
been possible with BRAC micro finance itself.
Today BRAC Bank is considered as third generation bank extending full range of
banking facilities by providing efficient, friendly and modern fully automated on-line
service on a profitable basis. Since its inception, it has introduced fully integrated online
banking service to provide all kinds of banking facilities from any of its conveniently
located branches.

3.2 THE VISION


The vision of BRAC Bank Ltd. is -Building a profitable and socially responsible financial
institution focused on Markets and Businesses with Growth Potential, thereby Assisting
BRAC and stakeholders build a just, enlightened, healthy, democratic and poverty free
Bangladesh. The BRAC Banks vision is thus aligned with those of BRAC

14

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

3.3 CAPITAL STRUCTURE

AND

EQUITY PARTNERS

BRAC Bank has started with an initial capital of amount BDT 250 million, while the
authorized capital is BDT 1,000 million. Over time the bank has increased it capital base
because of its steady growth and within three years of operations, it has doubled its
capital base to BDT 500 million. The Bank has planned to go public by the last quarter of
this year (2006) and raise its paid up capital to BDT 1000 million. BRAC Bank
originated with Local and International Institutional shareholding including BRAC as
promoter with IFC and ShoreCap International, UK. Here is the break-up of BRAC
Banks shareholdings positions.

3.4 BRANCHES

AND

NETWORKS

The expansion of BRAC Bank is growing very fast. Now, in total there are 13 operating
branches and more branches will open up in the coming year. To provide a strong
network across the country BRAC Bank has 260 unit offices for SME purpose. Market
Research Executive (MRE) a position has been created to capture the stronger market
share, which will work closely with the Direct Sales Executive. BRAC Bank will open up
three Sales Booths in the major area of the city and Kiosk in the shopping malls, which
will cater the needs of the customers where branches are not in close areas. These will
serve in terms of opening and closing accounts and selling products. In addition, BRAC
Bank has also set up three ATM machines in three main areas of the city, keeping a target
in mind that within the mid of next year the Bank will set up some more ATM machines.

3.5 HIGHLIGHTS

OF

LONG TERM PLANNING

TABLE 2: HIGHLIGHTS OF LONG TERM PLANNING


Particulars
Num. Of Branch

15

Actual (2005)

Projected (2009)

14

60

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

TABLE 2: HIGHLIGHTS OF LONG TERM PLANNING


Particulars

Actual (2005)

Projected (2009)

100

Unit Office

287

450

Staff

1200

4100

21(crore)

232(crore)

ATM

50

POs

50

500

No. Of Booth

Profit Before Tax

16

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

CHAPTER 04: FUNCTIONAL DIVISIONS OF BRAC


BANK LIMITED
BRAC Bank has a centralized banking structure through online banking system that
resembles the ABNAMRO Model. BBL consisted of four major divisions namely Small and Medium Enterprise (SME) Division,
Retail Banking,
Corporate Banking
Treasury Division.
Other important division are Credit Administration, Loan Administration, Trade Fin, IT,
HRM, CCU, Internal Control etc, which work to support the major business divisions.

4.1 SME DIVISION


The biggest operational division of BRAC bank is the SME (Small & Medium
Enterprise) Division. SME is directly related to business of the bank. BRAC Bank
extends loans to potential small and medium trading, manufacturing and service
enterprises. This loan is able to provide quick and quality banking services to targeted
business at any places of the country. Potential women entrepreneurs will also get the
facilities of SME loan; this initiation is to play a role in the socio-economic development of the
country by expansion of business as well as creation of employment. BRAC Bank was

titled to be the fastest growing bank in 2004 & 2005, and it had a profit of 14 crore taka.
The profitability of the bank came mostly from the SME sector. SME division is enriched
with more than 700 staffs and it has almost 300 unit offices all over the country.
4.1.1 STRUCTURE

17

OF

SME

DIVISION

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

Field Level: In the field level there are three types of designated BRAC Bank
staff operates. They are Customer Relation Officer (CRO), Zonal Officer (ZO)
and Territory Officer (TM).

o CRO (Customer Relationship Officers): There are about 700 CRO


working all over the country in 300 unit offices. CRO are assigned to spot
potential entrepreneurs through out the country and motivate them to take
loan from BRAC Bank. Each CRO falls under their assigned territory and
they have to perform their job within that. They are under direct
supervision of the Zonal Officers (ZO). CRO goes to people, identifies
their need and according their need, suggest them to avail loan from
BRAC Bank. CRO are responsible for evaluating the trustworthiness of
the client whether they are capable to repay the loan or not. To provide
loan and ensuring loan repayment are the two main tasks done by the
CRO.

o ZO (Zonal Officers): There are 36 Zonal Officers. These ZO controls the


CRO. They visit the spot that the CRO already located. Each and every
enterprise will be visited by ZO. ZO has the authority to sanction loan
highest up to taka 3 lakh.

o TM (Territory Manager): There are 4 team Managers. They supervise


the ZO.

o QAO (Quality Assurance Officer): There are 12 Quality Assurance


Officer. They perform the job of monitoring. They supervise the ZO and
TM.

Head Office Level:

Credit:

18

The Credit limit varies depending on the rank.

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

ZO has the authority to sanction up to highest 3 lakh.

TM has the authority to sanction up to highest 5 lakh

If the credit limit exceed taka 10 lakh it goes to Credit Committee

If the credit limit exceeds taka 20 lakh it goes to the Board.

Loan Admin - The posting is done in the system


(MBS) in the Loan Admin. Then Loan Admin sends requisition to Fin
Admin.

Fin Admin: Fin Admin take care of the other


expenses.

Recovery: Recovery Dept. prepares an overdue


report and informs the TM. Recovery dept. keeps track of the money.
Legal notices are given to the defaulters.

MIS: MIS dept. keeps the total record of loan from


its sanction to repayment.

4.2 RETAIL BANKING

Retail Banking is known as general banking where the individual customers get services
time to time from the local branches of the larger commercial banks. In BRAC Bank
Retail section has been divided into two parts

Distribution Serve the acquired customers

Sales Business acquisition.

They both are interdependent and work closely with each other. Retail offers different
types of competitive banking products to the customers. The retail division of the BRAC

19

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

Bank also offers some special types of deposits and loan scheme for the customer
attention.
4.2.1 RETAIL DEPOSIT PRODUCTS

Current Account.

Saving Account (Maximize and Normal Saving Account).

Deposit Premium Scheme (DPS).

Short Term Deposit (STD).

Normal FDR.

Abiram (A hybrid of Fixed Deposit with pays internal on a monthly interval).

4.2.2 RETAIL LOAN PRODUCTS

Salary Loan

Credit Card Loan

Life Style Loan

Unsecured Personal Loan

Secured Over Draft

Teachers Loan

High Flyer Loan

Premium Term Deposit (PTD)

Shahaj Loan (For Bank Staff only)

Ashadharon (For Bank Staff only)

4.3 CORPORATE DIVISION


Like Retail, corporate department has also two different wings - Corporate Banking
division & Cash Management.

20

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

4.3.1 CORPORATE BANKING DIVISION


Corporate Banking is a specialized area of BRAC Bank, which addresses the diverse
financial needs of Corporate Clients.
This division exists to provide banking services and financial partnership with local and
foreign business houses (Public and Private Limited Companies), NGOs, trading houses,
joint ventures and various government bodies/corporations etc. As the financial partner of
choice for the corporate sector, BRAC Bank wants to be distinguished by its:

Quality of service

Value of innovative solutions

Level of trust with clients

Customer knowledge

Corporate clients can access a wide range of financial services offered by corporate
banking division including:

Debt Capital

Equity Capital

Ongoing relation support

Financial Markets

Products: BRAC Bank provides a comprehensive range of innovative


corporate financial solutions tailored to suit each companys needs. This range
includes both funded and non-funded facilities. Following are some of the
products that BBL offers to its clients:

Corporate Finance
o Loan Syndication
o Project Finance: Short and Medium term

21

Finance/Credit Extension

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

Overdrafts

Demand Finance

Working Capital Finance

Receivable Discounting

Pre and Post Export Financing

Short-term loan: revolving loans, LATR etc.

Trade
o Letter of credit: Sight, Unsance etc.
o Guarantee: Performance, Security, Advance Payment etc.

Lease financing

Target Market:
o Pharmaceuticals, Toiletries, Chemicals and Pesticides
o Power Generation, oil exploration, Industrial and household gases
(Liquid, Petroleum Gases etc.)
o Edible oil, Bulk Trading Essential Commodities, Industrial Raw
Materials, Agricultural Inputs, Cement.
o Garments, Textiles and related backward linkages industries including
spinning, Knitting, Yarn, Garment accessories etc.
o Food Processing and Beverage Industries.
o Cable and Cable wire, Information Technology.
o Leasing Companies/Non Banking Financial Institutions.
o Health service Industry, Non Governmental Organizations.
o Importers/dealers of machinery, Industrial, Electrical equipment
o Education Institutions, Bone china, Ceramics, Melamine, plastic
products.
o Manufacturing

and

Trading

of

Consumer

Durables,

Telecommunication, and Contractor Finance.

22

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

o Ship Breaking, Re-rolling Corrugated Iron (CI) Sheet Mfg and related
business.
o Air Lines, Shipping Lines, Freight Forwarders, Testing Inspection
agencies, Footwear and Leather.
o Tobacco products and Tea.

Target Customers Group:


o Leading Domestic Corporate and Trading Houses.
o Local medium and large corporate.
o MNCs
o NGOs
o Educational Institutions.

4.3.2 TRANSACTION SALES & SERVICES (TRS)


The major responsibility of BRAC Banks TRS Division is to support their Corporate
Customer with the combined network covers Dhaka, Chittagong, Sylhet & Savar
presently. TRS offer the no cost on line banking facility through 13 branches BRAC
Bank. They offer cash deposit and withdrawals, cheque deposits, and money transfer
facility, account enquiries, give cheque book requisition and Account Statement with
their following type of account:

23

Current Account

Short Deposit Account (STD)

Fixed Deposit

Savings Account (for corporate employees)

Convertible Account

FC Account

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

TRS division also has Priority Service System for their Corporate Customer, which
manages their business finance and cash resources very conveniently. Priority Service
Banking includes the following special services:

Pick-up & Delivery Services

Auto fax Report

Corporate Help Line

Inward Remittance Information

Express Payment

4.4 TREASURY
Treasury division at BBL deals with the fund position. This division calculates and
projects the fund requirement to meet day-to-day operation. It has also two wings, one is
front office and the other is back office. Front office deals with directly to the money
market of the country. Their main job is to lend money to other financial institution on
call or short-term basis, if the bank has additional money idle. Or if the bank falls short in
liquidity, this division borrows money from other financial institution on the same basis.
On the other hand the back office keeps records of the fund position of the bank.
4.4.1OBJECTIVE

Managing mandatory liquidity.

Maximizing return from fund management.

Matching Asset and Liability.

Generating profit from Intermediary functions.

4.4.2 BUSINESS SEGREGATION

24

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

Money Market: Money Market is a network of financial institutions linked by


telecommunication network to facilitate lending and borrowing of fund for shortterm (less than a year).

Foreign Exchange Market: It is the organizational framework within which,


financial institutions and individuals trade or exchange foreign currencies.

4.4.3 FUNCTIONS
Money Market:
o Maintenance of Statutory Reserve
o Meeting Branch/ Division fund requirements
o Call Loan taking and placing
o Term taking and placement
o Market analysis

Foreign Exchange Market:


o Circulation of exchange and interest rate on FX. Deposits
o Maintenance of daily exchange position within the limit
o Nostro funding
o Forward quote

CHAPTER 05: FINANCIAL PERFORMANCE REVIEW


5.1 PERFORMANCE

AT A

GLANCE

TABLE 3: PERFORMANCE
Particulars

OF

BBL

2005

2004

2003

Paid up capital

500,00

500,000

405,020

Total Capital including general provisions

0
988891

650,294

424,327

25

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

Capital Surplus/deficit
Total Assets
Total Deposits
Total Loan & Advances
Credit Deposit Ratio
Classified loans against total loans and

40753
73,684
16876009 10,015,936
13409010 8,168,979
11719312 5,819,792
87.94%
71.24%
2.25%
1.97%

157,178
4,542,043
3,497,303
2,870,107
82.07%
1.06%

advances (%)
Profit after taxes & provisions
Amount of classified loans during current year
Provision kept against classified loans
Provisions surplus/deficit
Cost of fund
Interest earning assets
Non interest earning assets
Return on Investment (ROI)
Return on Assets (ROA)
Incomes from investments
Earnings per share

192680
265179
134061
26862
7.58
16278383
597626
8.54
1.14
292067
38.54

30,281
30,542
8,183
173
7.50%
4,475,543
66,501
3.73%
0.67%
94,790
12.09

99,303
114,414
84,432
40,841
7.23%
9,735,349
280,587
8.57%
0.99%
166,967
23.16

5.2 BALANCE SHEET PERFORMANCE

During the year, BBL has expanded their business rapidly and undertook significant
operations in trade finance business (i.e. 750% growth in the year 2004 over last year)
along with the same upward trend in SME, commercial and retail lending activities.
Propelled by strong growth in both loans and deposits, the Banks operating income
increased substantially in 2005.
BBL has a 164% growth rate on its deposits in the financial year 2005 comparing to its
previous years (2004) and the same time it also has a 201% growth arte over its loans
and advances. Though the advance to deposit ratio i.e. 71.24% comparatively comedown
in 2004 from 2003, it again picked up in 2005 (87%). These upward trends in both
deposit and loans, helps the bank to increase its assets by 168% over its previous years
(2004) assets. BBL has also enjoyed higher growth rate on its fixed and other assets.

26

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

5.2.1 PROFITABILITY
In the year 2005 the bank has earned an operating profit of BDT 586 million compared to
BDT 320 million in the previous year with a stunning growth rate of 183%. This was
possible, as BBL has earned a 165% growth on its interest income where as its interest
expense growth was 93% from the year 2003. This difference has basically occurred
because the cost of fund did not increase to extent of increase in return on loan.
The growth rate of operating expenses has also gone up by 103%, but this trend is
acceptable because the bank has earned growth rate of over 100% in all aspects. More
over a growth of amount 193% in its profit after tax supports the rationality of such hike
in operating expenses earned.
All this upward trends help BBL to increase the Earnings Per Share by almost 165%
(from 23.16 to 38.54).

5.2.2 OTHER PERFORMANCE INDICATOR

Capital Adequacy: Capital adequacy focuses on the total risk weighted capital
intended to protect the depositors from the potential shocks of losses that a bank
might incur. In the year 2005 BBL has maintained capital adequacy ratio of
10.15% against standard of minimum 9.00% set by Bangladesh Bank. This keeps
more options to absorb default loan amount.

Asset Quality: The asset composition of BBL shows a high proportion of loans
and advances (87%) in total assets. A high proportion of loans and advances
indicate vulnerability of assets to credit risk, since the portion of non-performing
assets is significant in our country. But the classified loans against total loans and
advances of BBL are only 2.25%. Though this ratio gone up from the year 2004,

27

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

but compare to 103% increase in loans and advances this upward trend is still in
acceptable level.

Management Soundness: Management Soundness is very difficult to measure,


because it requires a qualitative measurement rather than quantitative
measurement. Nevertheless ratios such as total expenditure to total income are
generally used to measure management soundness. In this regard BBLs total
expenditure to total income ratio is 53%, which shows that more than half of its
total income need to be spent for meeting operating expenses.

Liquidity: At present BBLs liquidity ratio is 24% out of Bangladesh Banks


minimum requirement 20%. So the bank may feel comfort but the liquidity
statement shows that for short period usually 1-3 months BBL has liquidity gap or
in other words, for short period, the bank has a short fall to meet its liquidity.

28

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

CHAPTER O6: ENVIRONMENTAL ANALYSIS

6.1 MACRO ENVIRONMENT ANALYSIS


It is very important to carry out a macro environment scanning for the banking industry
in order to identify and analyze the external factor that affected the growth and
development of the banking sector in Bangladesh. A through analysis of the macro
environment in which the banks operate will allow the banks to develop pro-active
strategies and navigate the organization in the turbulent ocean of competition.
The financial institutions are always heavily influenced by the macro economic
conditions both globally, regionally or locally. The key macro economic indicators like
GDP growth rate, inflation, industrial growth rate, expansion of trade and commerce and
other factors affects the operations and the pricing strategy of the bank. BRAC Bank
Limited (BBL), since its inception has achieved a steady growth rate. However, the
present economic downturn or recession is affecting BBLs operations. The country is
now under a deep recession having a major decline in industrial growth rate, galloping
inflationary pressure, and decline in international trade with export targets for the fiscal
year yet to be achieved and other factors will eventually affect BBL and other banks
pricing strategies. Many banks will have to revise the interest rate structure for its various
services in order to cope with economic slowdown. However, SME results for BBL is
quite satisfactory as they have surprised their stipulated targets despite the economic
sluggishness going on in the country.
6.1.1 DEMOGRAPHIC ENVIRONMENT
Demography is the study of human populations in terms of size, density, location, age,
gender, race, occupation and other statistics. The demographic environment is of major
interest to marketers because it involves people and people make up markets. In terms of
SME requirements customer is the main part of bank. If there is no client there is no
29

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

business. According to the location BRAC Bank SME unit offices already has reached in
every cities around the country for providing door to door facilities. Some key factors of
demographic environment are- urbanization, education, living standard etc. For exampleIn terms of urbanization, lots of new business and enterprises are growing rapidly in the
city or town. So more banks can be aggressive for providing loans in newly developing
areas. For having new banks in the city, the standard of living will increase for the
people. Education is another major factor for developing a nation. Without literacy
standard of living could not come for individuals. So each and every factor is interrelated
to each other.
6.1.2 ECONOMIC ENVIRONMENT
Factors that affect consumer buying power and spending patterns. SME is very careful
regarding economic issues in the country. Customer relation office is always keen to
check purchasing materials and leading lifestyle of the client. Because if the economic
condition of a client become bad then he/she might not repay the loan. On the other hand
if war occurs between the two countries then price of the products will increase and
people will loss purchasing power. In this way, organization might affect economically.
On the other hand, A steady growth rate with continues market oriented reforms will
contribute positively by expanding the volume of business and profitability of the bank.
In an economy, a steady growth means there will be more investment, savings, and
consumption in the economy. As a result, bank also get more deposit and more projects
for credit disbursement.
After disbursing the loan, if the economic condition of the business is being poor then
BRAC Bank regenerate the repayment schedule of the client to repay the loan. On the
other hand if the economic condition rise up then client repay the whole amount in favor
of BRAC Bank Limited.

30

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

6.1.3 SOCIAL ENVIRONMENT


As banks are service oriented organizations, they always have to consider the attitude of
the customer. Customer now want a speedy service accompanied by attractive and well
decorated impressive branches with customer friendly officers providing tailor made
services to the customers. SME of BRAC Bank impressive office has already earned a
reputation for the bank and has attracted lots of potential customers around the country.
In order to match with the customer needs, banks are also increasing varieties of products
such as single short products, different short and medium term products and other
services. One of the key factors of a social environment is social class growth. It carry out
attitudes of various classes of people, such as upper class, middle class, lower class upper
lower class, upper lower class, etc. The customer relation officer of BRAC Bank deals
with them regarding their social classes.
The clients are accepting the SME loans with knowing the interest rate of 24% ( 2% per
month). Client wants fast service rather than paying 24% interest. Some clients are
argued about the interest rates which BRAC Bank is now think of to reduce it. BRAC
Bank already have 3000 clients and disbursed 100 crore. Next year its projected target is
8000-10000 clients and captures the market in our country. So, SME has a rapid growth
in the market.
6.1.4 POLITICAL ENVIRONMENT
The political environment consists of law, government agencies and pressure groups that
influence and limit various organizations and individuals in a given society. SME of
BRAC bank have to abide national laws like festivals, holidays. On the other hand,
hartals, strikes, barriers can affect the economic condition of SME of BRAC Bank
Limited. Under the latest World Bank recommendation the banking division of the
ministry of finance is being abolished a; step further in providing autonomy to
31

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

Bangladesh Bank. The emergence of SME of BBL and other contemporary banks and the
arrival of the foreign banks are all due to the on going reforms in the financial sector of
Bangladesh. BBL is restricted to provide loans for the political leaders. Customer
services officers of BRAC bank always avoid the political leaders who carry out
business. But if any pressure occurs from the political sides to have the loan the top
management handles the situation but never give the loan to them.
6.1.5 TECHNOLOGICAL ENVIRONMENT
BRAC bank of SME division has a strong network in the whole country. The main head
office is in the capital city from which it operates with all the unit offices by means of
mobile telephone. In the near future, SME might handed over the palmtop computer to all
customer services offices to provide accurate and quick service to the clients.
6.1.6 ECOLOGICAL ENVIRONMENT
Sometimes ecological environment can turnout the business of the clients. Foods,
disasters can affect the business after having the BRAC bank loans or fire can burn out
the whole business. To protect from these disasters BRAC bank do the insurance policy
with the joint names of the client. So that client can get feedback from the insurance
policy to run again his business. If client do not get support from the insurance company
then BRAC bank give time or generate the client repayment schedule

6.2 MICRO ENVIRONMENT ANALYSIS


Marketing management job is to attract and build relationship with customers by creating
customer value and satisfaction. It depends on other factors in the organization
microenvironment- suppliers, customers, competitors, various publics which make up the
organizations value delivery system.
The company needs to study its customer marketer closely in terms of Small and Medium
Enterprise of BRAC Bank Limited and their customers group is specified. Their target

32

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

group is only Small and Medium Enterprise client. The CRO closely monitor and try to
build good report with clients. On the other hand corporate clients are different to have
the loan. Each market type has special characteristics that call for careful study by the
marketer.
In terms of SME, most clients are carrying out trading business rather than manufacturing
business. Few clients are attached with service business like pharmaceutical, hospital,
homeopath etc. In the trading business clients want loans to meet their working capital
requirement. On the other hand, clients want 10-15 for purchasing fixed assets. In our
country mostly 35-40 years old clients are carrying out loans regarding the type of their
business. The clients who interested to take the loan of SME then they have maintained at
least one year running business. It is a policy of this bank because in the mean while
client can understand his business and can set a future plan.
The educational qualification of our clients is very poor. Clients are under-graduate but
carry out good business. SME support their clients who are carrying out good business
and also give suggestions and guidelines to develop their business. If any client has
maintained loans with other banks then SME is restricted to provide loans for that clients.
The client to have a clearance certificate to get the loan from the BRAC bank.
It has been found out that in our country most clients need small loans to develop their
own business. The world is being globalized and modernized. So by think of it client take
risks to enhance and develop their business and BRAC bank is a good helping hand to
help them.
In our country, clients want more time to repay the loan. BRAC bank gives adequate time
for the client to repay the loan whether they can get benefit from it. Clients are very
happy to repay the loan by equal monthly installment. Clients know the right time to
repay the loan at the right place. But in the pick season, most client wants short fund
requirement to carry out good business. Regarding interest rates, clients are not talk about
more because clients get the loan at the right time from the BRAC bank. Clients are also

33

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

happy by the issuance of security preferences because they do not have to provide any
collateral security for hypothecation or unsecured loans.
SME of BRAC bank networks has every where in Bangladesh. So clients can have the
SME loans wherever his business exists in the country. Also clients get the fast service
from the BRAC bank.
The purpose of this loan is the economic development in our country, which might divert
the clients mind after having the loans for expansion. Many clients have ambition to
expand from trading to manufacturing business to generate more profit.
When a CRO would visit a business, the client must provide the proper and right
information and show the right documents for justifying a good client. If any CRO feel
bad smell in the business then the CRO reject that client without concerning the
management. So clients should be feel comfortable to provide proper information to have
the loan.
Regarding the service by the CRO, almost all clients are satisfied by get these quick
facilities from them. Though it is pioneer division of this bank, so client should be fully
satisfied by having this facility.

6.3 INDUSTRY ANALYSIS: SME


6.3.1 THREAT

OF

FACILITY OF

BRAC BANK LTD.

NEW ENTRANT

In every industry, there is a threat of new entry, which varies according to industry.
Similarly, the banking sector of Bangladesh also faces the threat of new entrants.
However, the threat comes from two directions. The first threat comes from the arrival of
the multinational banks and their branch expansion particularly due to the booming
energy sector. For example, Standard Chartered Bank already inaugurate the SME loan.
Another threats comes from the emergence of new private commercial banks. For

34

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

example, Southeast Bank, Dhaka Bank & others, the countries traditional banks are
facing the treat of further competition and better quality service. Similarly, the potential
banks that may emerge in the next few years will further enhance the intensity of
competition and may pose further threat to the existing banks. At the same time, arrival
of the foreign banks is posing threat and pressure on the existing banks. At the same time,
arrival of the foreign banks is posing threat and pressure on the existing banks. Already
Standard Chartered Bank and Hongking Sanghai Bangking Corporation (HSBC) has
started to provide small loans to clients and they are also going to start door to door
services to clients.
6.3.2 GROWTH

IN THE INDUSTRY

The rivalry among the competitors and the growth in the industry depends upon
the intensity of competition. If the industry has a high intensity of competition then
the industry will have a high growth rate, as all the firms will try to beat the others
in order to grab the market share. Similarly, the banking sector of Bangladesh is
growing considerably and at the same time competition is increasing. Currently
BRAC bank SME division is a pioneer one and carrying out Digital Technology
Management Systems.
6.3.3 COMPETITORS

Identifying the banks competitors: In terms of world bank advice, most of the
private banks are now ready to provide small or micro credit loan facility to the
clients because small loans are less risky than the corporate loan. At the recent
trend, many banks like Standard Chartered, Islami bank of Bangladesh, Southeast
Bank, Datch Bangla Bank Limited etc are going to take many aggressive steps in
terms of small loan to clients.

Determining the competitors objectives: In our country, to provide big loans or


long term loans are risky because Bangladesh Bank is carrying out lots of
defaulters list. So most of the banks are now interested to provide small or micro

35

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

credit lending in terms of small and medium enterprise buniness. The objective of
the competitors is to capture in the market by providing small loans regarding and
manufacturing business. But everyones common objective is economic
development of this country.

Identify the competitors strategy: Standard chartered bank already sent


marketing troops surrounding the cities for providing loans and deposits. CITI
Bank is going to start retail service business for capturing the market. So
competitors analysis is important factor to carry out in the long run business for
any organizations. Among these banks, many of them have lower interest rates but
lots of hidden costs and services.

36

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

CHAPTER 07: KEY ASPECTS RELATED TO THE


MARKETING OF SME PRODUCTS IN BBL
7.1 DEMAND CREATION

The SME division of BBL basically provides micro credit loans to small and medium
enterprises. Because of its unique nature, the demand for SME loans is different in nature
to the demand for corporate or retail loans. A huge portion of the target market has
traditionally been neglected by the banking sector and hence, is ignorant about banking
activities. Thus, awareness building has been, and still is, a vital activity of the demand
management process of SME loans. The process flow of demand creation is as follows:
Market

Customer

Identification

Needs
Identification

Product
Development

Relationship
Building

37

Awareness
Creation

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

The CROs play a vital role in all the stages of demand creation apart from market
identification and product development. They provide door-to-door services for the
clients and at the same time are always in search for potential new clients. Because
clients are ignorant about banking products that may satisfy their needs, the CROs
identify their needs, evaluate their requirements and determine which products are most
suitable for them.
The major security of the SME products is building relationship between clients and
banks. Demand basically comes from two groups: new customers and repeat customers.
Because banks are facing new marketing realities like changing demographics, slow
growth economy, more sophisticated competitors etc., BBL cannot afford to lose clients.
The key to customer retention is superior value and satisfaction. As BBL recognizes this
fact, repeat borrowers of SME products enjoy lots of extra benefits.

7.2 MARKET SEGMENTATION


The market consists of many types of customers, products and needs and the marketer
has to determine which segments offer the best opportunity for achieving company
objectives. BBL segments the market for banking products into three categories based on
the nature of the consumer:

TABLE 4: MARKET SEGMENTATION


Segment

Target Market
or more

Small & Medium

38

BBL

Enterprises with loan requirement of Taka 30 lacs

Corporate

Enterprise

OF

Enterprises with loan requirement of Taka 2-30 lacs

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

Individuals with loan requirements for consumer

Retail

purposes

By segmenting its consumers into these categories, BBL is trying to serve niche markets
where there is ample opportunity for growth.
Within SME, the market is further segmented on the basis of the nature of the business as
follows:

Small
Small &
& Medium
Medium Enterprise
Enterprise

Trading
Trading
Wholesale
Wholesale
Retail
Retail
General
General
Stores
Stores

Manufacturin
Manufacturin
gg

Agriculture
Agriculture

Mills
Mills

Food
Food

Bakery
Bakery

Beverage
Beverage

Press
Press

Poultry
Poultry

Factory
Factory

Dairy
Dairy

Service
Service
Pathology
Pathology
Hospital
Hospital
Schools
Schools&
&
Colleges
Colleges

7.3 TARGET CUSTOMERS


To succeed in todays competitive marketplace, organizations must be able to hold on to
its customers by delivering greater value. In order to do this, an organization must be able
to identify the customers who would be benefited from their products. BRAC Bank has
targeted the small and medium enterprises that have small loan requirements as the target
consumers of their SME products. However, BBL does not finance business startups. The
business has to be at least two years old to avail the SME loan facilities offered by BBL.
Most of such businesses are sole proprietorships. There are some partnerships as well, but

39

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

limited companies are rarely seen in this category. The survey that I had conducted
brought up the following results as common characteristics of the respondents:

The mean age of the respondents was 38.71 years and mode was 33 years.

71.50% of the respondents did not pursue education after completing their HSC.
44.50% of the respondents did not complete HSC.

The average working capital requirement of the respondents per month was
almost Tk. 28,000.

Thus the target customers can be classified as the entrepreneurs who have little or no
formal education, between the age group of 30-40 years and having working capital
requirement of around Tk. 30,000.

7.4 MARKET POSITIONING

Every product must have a unique proposition that will enable it to fulfill the customers
needs. In case of loans, there are four factors that might influence the clients decisions
regarding the selection of a loan from a bank:

Interest Rate

Collateral

Time Involved in Acquiring the Loan

Repayment Scheme and Tenure

Not all factors influence every segment of the market. In the survey conducted, the
following findings were revealed when the respondents were asked about their prime
reason for obtaining SME loans from BBL:

40

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

From this response, it can be concluded that BBL has been successful in positioning its
SME loans as collateral-free and quick to get. In the segment that it operates, these
features are the pre-dominant influencing factors in the minds of the clients. This position
has enabled BBL to attain the astounding growth that it has already achieved in such a
short time.

7.5 DEVELOPING THE MARKETING MIX

FOR

SME LOANS

7.5.1 PRODUCT
In order to serve the market more efficiently, BBL has designed various products that will
be able to satisfy the needs of the clients. The summary of all the SME loan products of
BBL can be found in Appendix III. However, a few important factors are worth
mentioning here.

41

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

TABLE 5: DIFFERENT SME LOAN PRODUCTS

Purpose

Loan Size
Repayment

Anonno

Apurbo

Fixed

Fixed

Asset,

Asset,

Fixed

Working

Working

Asset

Capital

Capital

2-8 lacs

8-30 lacs

OF

BBL

Digun

Supplier

Rin
Fixed

Finance

Fixed

Asset,

Working

Asset

Working

Capital

Pathshala Aroggo

Capital
2-3 lacs

2-3 lacs

5-30 lacs

3-30 lacs

Single Payment of Principal and Monthly Interest Payment/

Scheme

Monthly Installment of Full Volume

BBL has various SME products to satisfy the needs of the different types of clients in the
SME market. The different loan sizes are set to attract enterprises of different sizes.
Loans are approved on the basis of inventory and total receivables. Usually, up to 75% of
the average inventory and receivables is granted as loan.
7.5.2 PRICE
The price of loans is actually the interest paid for it and the charges,
fees or commissions associated with it. In case of BBL, the pricing for
SME products are as follows:

TABLE 6: PRICING

OF

DIFFERENT SME LOAN PRODUCTS

Interest
Anonno
Apurbo
Aroggo

42

OF

BBL

Loan Processing Fee

24% p.a. (22% after regular 1% of loan amount plus


payment of first time loan)
VAT
1% of the loan amount
17% p.a. for loan Tk. 8 to 15 lac
plus VAT
(0.75%
after
regular
16% p.a. for loan Tk. 15 to 30 lac
payment of first loan)
20% p.a. for loan Tk. 2.00-8.00 lac 1% of loan amount plus
VAT
17% p.a. for loan Tk. 8.01-15.00
Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

TABLE 6: PRICING

OF

DIFFERENT SME LOAN PRODUCTS

Interest

OF

BBL

Loan Processing Fee

lac
16% p.a for loan Tk. 15.00-30 lac
24% p.a. for loan Tk. 2.00-10.00
lac
Pathsha
la

1.5% of loan amount for


17% p.a. for loan Tk. 10.01-15.00 loan 4-7.5 lacs
lac
16% p.a for loan Tk. 15.00-30 lac

Digun
Rin

2% of loan amount for


loan Tk. 2-3.5 lacs

Equated Monthly Installment loan


facility: 17%
Single Installment Loan facility:
18%
22% p.a. for 3 lacs to 9.5 lacs

1% of loan amount for


loan Tk. 8 lac and above
1.5% of
plus VAT

loan

amount

Supplier 17% p.a. for 10 lacs to 15 lacs


1% of loan amount plus
VAT
Finance
15% p.a. for above 10 lacs to 15
lacs
This differentiated pricing method for different amount of loans is designed to attract
clients with various requirements.
7.5.3 PLACE (DISTRIBUTION)
BBL offers loans to SME clients all over the country. However, loans are processed
centrally in the SME Division of the Asset Operations Department. The base unit of the
distribution channel of the SME Department is the Unit Office. There are 2-7 CROs in
each unit office based on the market potential of that particular unit. The CROs are
responsible for the grass-root level distribution of SME loans. At present, there are
almost 1050 CRos operating in the country.

43

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

The distribution channel of SME loans is as follows:

Territory
Zonal
Office

Zonal
Office

Unit Office

Unit Office

Unit Office

Unit Office

The country is divided into 7 territories. There are 65 Zonal Offices and 319 Unit Offices
in the country. Zonal Officers have the authority to approve loans up to Tk. 8 lacs.
7.5.4 PROMOTION
Due to the nature of clients, direct marketing techniques are very effective for the
promotion of SME loans of BBL. BBL has two main types of promotional activities:

Door-to-Door Service: The CROs identify potential clients and reach them with
loan offerings. Most of these clients are illiterate and do not maintain any
financial documents. The CROs help them prepare documents required by the
bank for them and provide them with necessary support in activities like account
opening, transaction, etc. The CROs also promote the SME loan products to
potential clients. Because they have a target to achieve, they do this willingly.

Flyers & Brochures: For the more educated clients, BBL provides flyers and
brochures in the unit offices as well as in the branches. These flyers contain
specific features of the product they advertise. However, as this type of promotion

44

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

is handled by the Marketing Department, it would not be within the scope of this
report to discuss more elaborately on this promotional tool.

7.6 SWOT

ANALYSIS

SWOT analysis is an important tool for evaluating the companys Strengths, Weaknesses,
Opportunities and Threats. It helps the organization to identify how to evaluate its
performance and scan the macro environment, which in turn would help organization to
navigate in the turbulent ocean of competition.
7.6.1 STRENGTHS

Company Reputation: BRAC bank has already established a favorable


reputation in the banking industry of the country particularly among the new
comers. Within a period of 5 years, BBL has already established a firm footing in
the banking sector having tremendous growth in the profits and deposits. All these
have led them to earn a reputation in the banking field.

Investors: BBL has been founded by a group of eminent entrepreneurs of the


country having adequate financial strength. The shareholders of the bank are all
institutions themselves, which adds to the financial strength of the bank. This is
one of the main reasons why BBL has been able to overcome the huge setup cost
of the SME loan distribution channel and also the huge running cost of the SME
Department.

Facilities and Equipment: BBL has adequate physical facilities and equipments
to provide better services to the customers. The bank has computerized and online
banking operations under the software called MBS banking operations. This has
shortened the loan processing time considerable. At the same time, BBL can
utilize the distribution channel of its major investor, BRAC to operate in the rural
regions of the country.

45

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

7.6.3 WEAKNESSES

Advertising and Promotion of SME Loan: This is a major set back for BBL
and one of its weakest areas. BBLs adverting and promotional activities are
satisfactory but its SME loans are not advertised well. It does not expose its SME
product to general public and are not in lime light. BBL does not have neon signs
or any other type of advertisement for SME loans in the city. As a result people
are not aware of the existence of this bank.

Unsatisfactory Remuneration Package: The CROs are not entirely satisfied


with the compensation package they receive. There is no target-based bonus
system in the bank, although the CROs have to meet targets. Although the CROs
are provided with motorcycles and mobile phones, it is not enough to motivate
them.

Huge Operating Cost: Because of the current structure, the operational cost of
SME loans is high. This has reduced considerably the profit from this business
unit.

7.6.3 OPPORTUNITIES

Diversification: BBL can pursue a diversification strategy in expanding its


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

Product Line Proliferation: In this competitive environment BBL must expand


its product line to enhance its sustainable competitive advantage. As a part of its
product line proliferation, BBL can introduce new, more segment-oriented
products in the SME sector.

46

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

Use of ATM in Disbursement Process: ATMs and POS machines can be used to
disburse with loans more efficiently. If each unit office is provided with a POS
machine, it would be easier for clients to repay loans. Also, it would reduce the
pressure on the CROs.

7.6.4 THREATS

Multinational Banks: The emergence of multinational banks and their rapid


expansion poses a potential threat to the new growing private banks. Due to the
booming energy sector, more foreign banks are expected to arrive in Bangladesh.
Moreover, the already existing foreign banks such as Standard Chartered are now
pursuing an aggressive branch expansion strategy. This bank is establishing more
branches countrywide and has already launched its SME operations. Since the
foreign banks have tremendous financial strength, it will pose a threat to local
banks.

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

National Specialized Banks: NSBs pose the major threat to BBL in the SME
sector. At present, they hold the major portion of the SME market. If these banks
begin to think aggressively about financing the SME sector, they may prove to be
BBLs prime competitors.

47

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

CHAPTER 08: ANALYSIS OF SME LOANS IN BBL:


PRESENT SCENARIO
8.1 DEFINITION

OF

SME

There are a lot of confusions regarding the definition of SME within the banking sectors.
For example, BBL defines SME as enterprises with loan requirements of Tk 2-30 lacs. In
Standard Chartered Bank, however, SME starts from Tk. 50 lacs. Again in the NCBs,
SME includes even smaller enterprises with loan requirements of Tk. 50,000 or less.
However, for the context of this report, SME will be counted as enterprises with loan
requirements of Tk. 2-30 lacs.

8.2 INVESTMENTS

IN

THE

SME SECTOR

BY

THE

BANKING

INDUSTRY

8.2.1 CATEGORY-WISE MARKET SHARE


The market of SME loans is dominated mainly by the NCBs with a market share of
53.37%. The total size of the market is Tk. 45.652 billion. Category-wise distribution of
SME loans in the banking industry is shown in the following table:

TABLE 7: BANK CATEGORY-WISE DISTRIBUTION


OF THE

VOLUME OF SME LOANS


Figures in '000,000 BDT

48

Volume

Percentage

NCB

23,294

53.37%

PCB

11,125

25.49%

FCB

2,450

5.61%

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

NSB

6,778

15.53%

Total

43,647

100.00%

The top ten market players in the SME banking sector and their market share are shown
below:

8.2.2 REASONS BEHIND


49

THE

DOMINANCE

OF

NCBS

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

There are various reasons behind the dominance of NCBs in the SME sector.
Unfortunately, NSBs, which are supposed to support the SME sector, could not make
such a dominant presence in the industry. The reasons behind the dominance of NCBs in
the SME sector are discussed below:

Interest Rates: The NCBs invest in the small and medium


industry at a very low interest rate. The average interest rate for
SME loans in the different categories are compared below:

The lowest interest rate is in Agrani Bank which has an average interest rate of 7.50%
only. The highest interest rate is in BBL, which is 17.05%.

Network: The NCBs have a much better network in terms of branches established
throughout the country. As a result, their contact is also far-reaching. The nature
of SME clients is such that in order to reach them, a bank must have access to

50

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

rural areas. As all transactions must be done through branches, it gives the NCBs
a distinct advantage in the SME sector. The average branch size of the different
banks in Bangladesh (category-wise) is shown in the following table:

TABLE 8: CATEGORY-WISE BRANCH STRENGTH

OF

BANKS

Category

No. of Branches

Average Branch
Size

NCB

2904

968

PCB

2077

67

FCB

18

18

NSB

1335

267

Government Assistance: Bangladesh Bank provides financial


assistance to NCBs and NSBs to invest in the SME sector. This
allows them to operate, even with a loss, at a lower price than
the other banks. This is one of the main reasons why the interest
rates in the NCBs are so low and thus, attractive for the clients.

8.2.3 GROWTH

51

IN

SME FINANCING

BY THE

BANKING INDUSTRY

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

Investments in the SME sector have experienced an upward sloping

curve in the last three years. From Figure 4 we can see that the NSBs have
actually suffered negative growth in the year 2005. The growth rate for the PCBs is the
highest at 83.61% over the period. The volume of loans in the NCBs increased at 13.20%
and in the FCBs at 60%.
8.2.4 COMPARISON

OF THE

GROWTH RATE

OF THE

MAJOR PLAYERS

The trend for the top ten market share holders is as follows:

52

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

This figure depicts the rather poor condition of the NSBs. The NCBs have experienced
stagnant or negative growth during these three years. BBL and IFIC Bank have grown at
a consistent rate during this period. Standard Chartered Bank has also made remarkable
progress during this period. Janata Bank and RKUB have experienced negative growth in
one year during this period while BSB had a constantly negative growth rate.
The growth rate in 2004 and 2005 of the top ten SME investing banks are as follows:

53

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

TABLE 9: GROWTH RATE FOR THE TOP TEN SME


INVESTORS
Bank

2004

2005

Agrani Bank

5.84%

0.23%

Sonali Bank

38.36%

15.63%

Janata Bank

-15.06%

10.31%

IFIC Bank

38.85%

26.49%

BRAC Bank

81.75%

48.62%

BSRS

12.31%

15.85%

3542.86%

60.13%

RKUB

12.12%

-0.25%

Eastern Bank

328.65%

16.83%

BSB

-10.51%

-63.38%

SCB

In both 2004 and, the highest growth rate was achieved by Standard Chartered Bank3542.86% and 60.13% respectively. However, as the bank has started SME banking only
in 2004, this growth rate is expected. Same is the case for Eastern Bank Limited, which
has experienced a growth of 328.65% in 2003. The growth rates for the NCBs are less
because of the following reasons:

Huge Volume: The NCBs are the market leaders in the SME banking segment.
Because of the huge volume of SME loans they have already achieved, it is
impossible for them to sustain the same growth rate.

Existence for a Longer Period: The NCBs have started SME banking in the
1990s. It is impossible to maintain a high growth rate for such a long time. The
SME market has almost reached the maturity stage for the NCBs.

Aggressive Marketing by the PCBs: After their emergence in the SME sector in
the early 2000s, the PCBs have adopted an aggressive strategy in marketing their

54

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

SME products. This has enabled them to snatch away a considerable portion of
the SME market from the NCBs. As they could not compete with the interest
rates, they provided other facilities like minimum collateral and shorter
processing time.

8.3 SME BANKING IN BBL

5.3.1 CONTRIBUTION

OF THE

MAJOR BUSINESS DIVISIONS

As is shown from Figure 2, BBL is one of the major investors in the SME segment of
Bangladeshs economy with a market share of 7.78%. Even within the bank, SME
consists of a major portion of the total loan portfolio. The bank policy requires that at
least 50% of the total loan portfolio should be allocated to SME. The contribution of
SME loans in BBLs loan portfolio is shown in Figure 6.
The contribution of SME in the overall loan portfolio was highest in 2003 at 61.14%.
However, in 2005, the contribution has decreased to 42.45%. This is mainly due to the
managements concentration on retail loan products, the share of which has increased
from 17.55% in 2002 to 31.19% in 2006.

55

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

The total loan portfolio of BBL in the years 2002, 2003 and 2004 is shown in the
following table:

TABLE 10: DIVISION-WISE LOAN PORTFOLIO

OF

BBL

Figures in Million BDT

2002

2003

2004

2005

SME

331

1,890

3,435

331

Retail

110

578

1,229

110

Corporate

184

623

1,405

184

Total

625

3,091

6,069

12,027

8.3.2 GROWTH
56

IN THE

BUSINESS DIVISIONS

OF

BBL

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

The growth rate in the business divisions of BBL are as follows:

TABLE 11: GROWTH

IN THE
OF

BUSINESS DIVISIONS

BBL

2003

2004

2005

SME

470.72%

81.76%

48.61%

Retail

426.41%

112.72%

205.10%

Corporate

237.95%

125.33%

125.76%

The year 2003 brought about huge growth in all the divisions of BBL. As the bank began
its operations in late 2001, this was expected. Although the growth rate declined in the
subsequent years, the bank still managed to sustain at least a 100% growth rate in the
retail and corporate division. But the growth in the SME division continued to decline
drastically through the years 2004 and 2005. This scenario is clearly depicted in the trend
analysis of the loan volumes in the different business divisions of BBL.

57

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

Figure7 shows that SME has maintained a steady slope over the years, whereas the slope
for retail and corporate has begun to become steeper after 2005. This indicates that retail
and corporate are experiencing a greater growth than SME from 2004.

8.3.3 PRODUCT-WISE BREAKDOWN

OF

SME LOANS IN BBL

The first product introduced in SME banking by BBL in 2001 was Anonno loan, which
was an any-purpose loan with a range of Tk. 2-8 lacs. This loan still remains the most
dominant product with a share of almost 85% of the SME loan portfolio. After the
success of Anonno, Apurba was introduced with a range of Tk. 8-30 lacs. This product
also became quite popular and now has a share of 12%. Aroggo and Pathshala were
introduced in 2004 to capture specific segments of the SME market, namely the healthcare and education sector. These loans have a combined portfolio share of 2.5%. The
most recent loans, Digun Rin and Supplier Finance, have not made significant progress
yet, and have a combined portfolio share of 0.5%.

8.3.4 INVESTMENT SECTOR-WISE BREAKDOWN

OF

SME PRODUCTS

OF

BBL

Based on investment sector, BBL has segmented the SME market into 4 categories:
Trade, Manufacturing, Agriculture and Services. The portfolio share in each of the
segments is shown in Figure 9 and 10.

58

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

Although trading companies have an 87.43% share and service companies 1.57%,
number-wise, the volume-wise share is 83.48% and 1.07% respectively. On the other
hand, manufacturing and agro-based companies have a larger share in volume than in
number of loans. This signifies the fact that the average loan size of trading companies is
actually smaller than that of manufacturing and agriculture companies.

8.3.5 SECTOR-WISE GROWTH


If we compare the sector-wise trend of SME loans as is shown in Figure 11, we can see
that investment in the trading companies has the steepest curve. This indicates the huge
increase volume-wise in this sector on a year-to-year basis. Service sector, on the other
hand, has experienced slow increase in volume up to 2005. However, if we take a closer
look at Figure 12 which indicates percentage increase on a year-to year basis, we can see
that only the service sector has experienced an increasing trend in terms of percentage
growth over the period. Investment growth in the manufacturing sector has also begun to
increase from 2004. From these figures it can be concluded that although, the trading
sector still accounts for the bulk of the portfolio, manufacturing and service sectors have
enormous potential for growth.

59

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

60

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

8.4 PERFORMANCE

OF

SME LOANS OF BBL

The performance of a loan is determined by the repayment status of that loan. A loan has
two statuses which determine its performance:

Regular Loan: When the repayment of a loan is made on time it is considered to


be a regular loan. A loan is performing as long as the installments of that loan are
paid on time.

Irregular Loan: A loan becomes irregular when the installments are not paid on
time or when installments are missed. The number of irregular accounts reflects
the overall credit quality of a loan portfolio because it is the point from where
loan accounts tend to move towards being defaulted. Therefore the actual
recovery efforts by the bank start here.

8.4.1 PERFORMANCE

IN

COMPARISON

TO

OTHER BUSINESS DIVISIONS

To analyze the performance of loans, BBL maintains records of overdue installments. In


some cases, clients pay partial installments and in such situations, the installment is
counted as per the proportion of paid amount to installment amount. There are two
measures of performance evaluation in BBL.

Portfolio at Risk (PAR): The percentage of the total outstanding amount of


irregular loans is known as Portfolio at Risk (PAR). PAR is the total amount
outstanding of the irregular portion of the loan accounts expressed as a percentage
of the outstanding amount of total loan portfolio. It is so called because the
chance of its becoming Bad Debt is more than the regular accounts and hence,
this portion of the portfolio is deemed to be at risk. The performance of loans in
the different business divisions of BBL as on December 31 2005 is shown in the
following table:

61

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

TABLE 12: PERFORMANCE

OF

LOANS

IN

BBL

Figures in BDT 000

Retail

SME

Corporate

4,094,181

4,806,200

2,875,300

Overdue 6 Installments &


Above

17,110

29,812

2,116

Overdue 5-5.99 Installments

10,355

29,495

1,645

Overdue 4-4.99 Installments

17,153

33,609

5,801

Overdue 3-3.99 Installments

29,592

36,609

2,693

Overdue 2-2.99 Installments

106,382

58,981

97,676

Overdue 1-1.99 Installments

287,690

79,733

150,854

Total Overdue

468,282

268,239

260,785

PAR

11.44%

5.58%

9.07%

Arrear-Outstanding Ratio

0.0085

0.0497

0.0385

Outstanding (31 Dec 05)

An analysis of the above table will reveal that in case of retail and corporate
loans, most loans are irregular for one or two installments. The case is different
with SME, though. In SME, the CROs pursue clients for repayment right from the
first installment date. Therefore, the chances of irregularity are minimal.
However, in case of larger SME loans, irregularity exists because the installment
amounts sometimes become too big for the clients and they find it difficult to pay.
In comparison with retail loans and corporate loans, the PAR is very low for SME
loans.

Arrear-Outstanding Ratio: The arrear amount of an overdue loan is the total


amount of the installments that have been missed. The performance is calculated
by dividing the total arrear amount by the total outstanding amount. The lower the
ratio, the better is the performance of a particular loan or loan segment. The above

62

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

table shows that the arrear-outstanding ratio of SME loans is higher than that of
both retail and corporate loans. This can be explained by the following factors:
o In both retail and corporate loans, the volume of irregular loans in the 11.99 installments category is proportionately much higher than that of the
other categories. In retail loans, this consists of 61.44% of the overdue
volume, and in corporate loans this figure is 57.85%. As a consequence,
the total arrear amount is also very low. Also, in case of SME loans, there
is a uniformity of overdue volume in each category, where as in the other
two divisions, the volume gradually goes down as the installments
increase. This fact is better reflected in Figure 13.

63

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

o The loan size of SME and Corporate loans are larger than that of Retail
loans. As the tenure is more or less the same for all types of loans, the
installment size in retail is much smaller than those of SME and corporate.
Hence, the arrear amount is also smaller.
8.4.2 PERFORMANCE

OF

SME LOANS OVER THE LAST THREE YEARS

If we consider the PAR over the last three years, as is shown in Figure 14, we can see that
the PAR of SME and Corporate loans has decreased in 2005, whereas that of retail loan
depicts a reversal. The sudden increase in PAR of retail loans is due to the introduction
and irregularity of one product- the Salary Loan, which makes up a bulk of the retail
portfolio. The decreasing trend of PAR of SME loans is a reflection of their better
performance. The trend for corporate loans is also decreasing. However, it has always
been more than that of SME loans.
Figure 15 shows the arrear ratio of the BBL loans over the last three years. The ratio for
retail loans and corporate loans is declining steadily, whereas that of SME loans is
increasing steadily. In 2003, the ratio for corporate loans was much higher than those of

64

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

SME and retail loans, which were almost identical. In 2004, the ratios for SME and
corporate loans respectively were almost the same. This goes to show that in the SME
sector, higher number of installments are becoming overdue, which is a cause for
concern.

8.4.3 SECTOR-WISE PERFORMANCE


Figure 16 shows the sector-wise PAR of SME loans from 2003 to 2005. From the graph,
it can be seen that the PAR in the service sector has undergone constant improvement
going down from 3.73% in 2003 to 2.01% in 2005. PAR in the agriculture and the
manufacturing sector have increased in 2004 whereas the PAR in trading sector has
decreased to 5.07% in 2005 after increasing to 9.84% in 2004 from 8.23% in 2003. The
PAR for the overall SME loans reflects the changes in the trading sector, mainly because
of the huge market share of the sector. The agriculture sector has maintained a fairly
stable PAR at and around 6% throughout the three-year period.

65

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

66

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

CHAPTER 09: FINDINGS & RECOMMENDATIONS

9.1 FINDINGS
The scenario in the SME sector is quite complex. The data analyzed did not indicate any
specific trend in the market. However, the situation can be termed fairly prospective if the
market can be properly exploited. Based on my analysis I have presented my findings
below.
9.1.1 OPPORTUNITY

OF GROWTH

At present the market leaders in the SME industry are the NCBs. However, their market
share has declined gradually in the last three years. The market share of the different
categories of banks over the previous three years is shown in the following table.

TABLE 11: CATEGORY-WISE MARKET OF SME LOANS


Figures in '000,000 BDT

2003

2004

2005

NCB

54.48%

50.59%

51.03%

PCB

16.11%

20.90%

24.37%

FCB
NSB

0.11%
23.96%

3.61%
20.17%

53.67%
14.85%

In 2003, the market share of the NCBs in the SME sector was 54.48% which declined to
51.03% in 2005. Again, the market share of PCBs has increased from 16.11% in 2003 to
24.37% in 2005. As the PCBs are penetrating the market in the SME sector, the growth
potential for BBL in the SME sector is increasing year by year.

67

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

Amongst the PCBs investing in the SME sector, BBL has a market share of 45.89%. It is
the second largest PCB behind IFIC Bank in this sector. As the PCBs have a market share
that is gradually increasing, BBL has a tremendous potential to be the market leaders in
the SME sector in the near future. The growth rate of SME loans of BBL from 2003 to
2005 was 172.12%. A comparison of the growth rate of the major banks in the SME
sector is shown in the following table:

TABLE 12: GROWTH RATE


THE

OF THE

MAJOR BANKS IN

SME SECTOR

Bank

Growth Rate

Agrani Bank

6.08%

Sonali Bank

59.98%

IFIC Bank

75.64%

BRAC Bank

172.12%

9.1.2 DECLINING GROWTH

RATE OF

SME LOANS

From Table 9 it can be gathered that the growth rate of SME Banking of BBL has
declined from 470.72% in 2003 to 48.61% in 2005. This may seem perfectly natural as
the business moves on. However, the key issue of any successful business is whether it
can sustain its growth. BBL has failed to do so for the following reasons.

Loan Range: BBL has defined its SME sector as enterprises with loan
requirements of Taka 2-30 lacs. In such a definition, enterprises with lesser loan
requirements miss out. In the survey conducted, the required loan amount of the
clients was asked. Figure 17 is a summary of the answers found.

68

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

26% of the respondents wanted a loan of below Tk. 2 lacs. Due to the policy of
BBL, they were forced to take a Taka 2 lac loan, even though they did not require
the amount. Many more such clients might not have been able to avail BBL loans
due to their low loan requirements.

Interest Rate: The interest rate of BBL is the highest among its competitors.
Although BBL provides other facilities to its clients, the high interest rate
discourages many clients to approach the bank for loans. During the survey,
38.50% of the respondents appeared to be neutral about the interest rate of SME
loans of BBL. 35% of the respondents were not satisfied with the interest rate
while 26.50% were happy with it. This indicates that many more potential clients
were put off by the high interest rates.

Lack of Branches: At present, BBL has 18 branches throughout the country in 4


districts. Because of the lack of branches, loan processing and repayment is
considered to be arduous to many clients. As all transactions have to be done
through the branches, according to Bangladesh Bank regulations, clients outside
the branch network have to get and repay the loans through correspondent banks.

69

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

9.1.3 INCREASING PORTFOLIO SHARE

OF

RETAIL

AND

CORPORATE

In 2002 retail loans had a portfolio share of 18.70%. In 2005 its share had increased to
31.19%. During the same period, the portfolio share of SME decreased from 61.14% to
42.45% and that of corporate loans increased from 20.17% to 26.37%.
There are two main factors that contributed to the growth of retail in 2004. They are:

Increasing Number of Products: At present, the number of retail products in


BBL is 10. The recent inclusion of two new products- study loan and travel loan
has bolstered the sales of retail products. SME on the other hand has only 6
products, and among them, Apurbo loan is an extension of Anonno loan.

Segmented Market Approach: Retail loans are designed to cater to the needs of
the clients of different segments. These loans are tailor-made according to the
need requirements of the different segments. For example, salary loans are only
for employees and not businessmen, teachers loan and doctors loan for teachers
and doctors respectively, and high-flyer loans for airlines personnel. This
segmented approach is new for SME loans, and there are only three such
segmentation-oriented products- Pathshala loan, Aroggo loan and Supplier
Finance.

The growth in corporate loans can be accredited to the inclusion of a new corporate loan
product, the CommerZ Loan. This is a product to attract medium enterprises. The loan
range of this product is from Taka 30 lacs to Taka 2 crore.
9.1.4 PORTFOLIO STRUCTURE

OF

SME LOANS

Figures 8, 9 and 10 portray the portfolio structure of SME loans product-wise and sectorwise. Anonno loans are the most dominant loan products in the SME portfolio. Aroggo
and Pathshala, being new products, havent yet been able to penetrate the market

70

Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

significantly. However, the huge volume of Anonno loans indicates that the average loan
requirement of the clients is in between Taka 2-8 lacs.
In the sector-wise portfolio, trading companies dominate the market both volume-wise
and number-wise. Although trading companies have an 87.43% share and service
companies 1.57%, number-wise, the volume-wise share is 83.48% and 1.07%
respectively. On the other hand, manufacturing and agro-based companies have a larger
share in volume than in number of loans. This signifies the fact that the average loan size
of trading companies is actually smaller than that of manufacturing and agriculture
companies.
Figure 11 and 12 portray the growth in each investment sector. All the sectors have grown
steadily from 2002 to 2005. However, apart from the service sector, all the sectors have
experienced declining growth rates from 2003. The manufacturing sector has started an
increasing trend again from 2004, but the agriculture and trading sector is on a steady
decline. However, the portfolio share of trading sector has increased from 80.43% in
2002 to 87.43% in 2005. The portfolio share of the segments from 2002 to 2005 is given
in the following table.

TABLE 13: SECTOR-WISE PORTFOLIO SHARE


FROM 2002-2005

OF

SME LOANS

Trade

Manufacturing

Agriculture

Service

2002

80.43%

14.51%

3.82%

1.24%

2003

85.41%

11.27%

2.84%

0.47%

2004

82.91%

11.53%

4.53%

1.51%

2005

87.43%

4.85%

6.15%

1.57%

The portfolio share of trade sector has gradually increased over the period, while that of
the manufacturing sector has gradually decreased. However, both the agriculture and
service sector have increased their contribution in the SME loan portfolio. Although the

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Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

dependence on the trading sector is still very high, BBL is trying to diversify into other
sectors of the economy as well.
The reason for the gradual decrease in the portfolio share of manufacturing companies is
that entrepreneurs tend to change quickly from manufacturing companies to trading
companies. In the survey conducted, 34% of the respondents revealed that they were
engaged in other businesses before their present endeavor. Out of this 34%, 36.76% were
engaged in manufacturing business before turning to trading concerns.
9.1.5 PERFORMANCE

OF

SME LOANS

In 2005, the PAR of SME loans was the lowest amongst retail, SME and corporate loans.
However, the Arrear Ratio was the highest. In both retail and corporate loans, the volume
of irregular loans in the 1-1.99 installments category is proportionately much higher than
that of the other categories. In retail loans, this consists of 61.44% of the overdue volume,
and in corporate loans this figure is 57.85%. As a consequence, the total arrear amount is
also very low. Also, in case of SME loans, there is a uniformity of overdue volume in
each category, which is shown in Table 10 and Figure 13. In the other two divisions, the
volume gradually goes down as the installments increase.
The PAR of SME and Corporate loans has improved from 2003 to 2005 while that of
retail has deteriorated as shown in Figure 14. The arrear ratio, however, has been on an
increasing trend for the SMEs. This states the fact that the performance of SME loans
have begun to deteriorate.
From Figure 16 we can see that the PAR for manufacturing and agriculture sector is
increasing. Both these sectors require immense capital investment, and hence, the loan
size is also high. Thus the installment sizes are also big, which makes it difficult for the
client to repay the loan on time. Trading and service sectors, on the other hand, mostly
require working capital financing, and thus their loan size is also small. This leads to
better performance of these sectors in terms of PAR.

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Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

9.2 RECOMMENDATIONS
On the basis of the above findings, I have made the following recommendations that BBL
may take into considerations in order to exploit the potential SME market.
6.2.1 INCREASE

THE

RANGE FOR SME LOANS

As the survey and analysis have revealed, many SMEs require a smaller loan size. The
current loan floor of Taka 2 lacs is actually an excess of funds for them. Thus BBL can
consider dropping the floor to Taka 1 lac. This will increase the market size as well as the
prospect for faster growth.
9.2.2 SEGMENT-ORIENTED APPROACH
As is the case for retail products, SME can pursue a more segment oriented approach to
capture a larger portion of the market. BBL can introduce new tailor-made products for
the different sectors. New product with slight modifications in price can be introduced for
the following segments:

Clothes and footwear industry, which captures about 19% of the total portfolio.

Grocery and household items, which captures about 15% of the total portfolio.

The service sector, which has the highest growth rate among the four sectors.

9.2.3 DIVERSIFICATION

INTO

OTHER SECTORS

At present, the SME division is overly dependent on the trading sector, which has more
than an 80% portfolio share. If this sector begins to under-perform, it will be reflected in
the performance of the whole division. Thus BBL needs to diversify into other sectors to
minimize risk. More focus should be put on the other sectors, specially the service sector.
Promotional campaigns can be held to create market awareness in these sectors. New and
modified products can be introduced to these sectors. A more diversified portfolio will
reduce the risk associated with SME loans.

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Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

9.2.4 INTRODUCING OVERDRAFT FACILITIES

INTO THE

SME SECTOR

Overdraft facilities can be introduced to the SME sector for clients with small loan
requirements. This facility will enhance the prospect of working capital financing. The
size of the facility may be smaller than the existing loan sizes, but the interest rate will be
higher. As the size of the facility will be small and the tenure very short, the higher
interest rate will not affect the client much.

9.2.5

PROPER MONITORING

OF

LOANS

There is an existing recovery team for the SME division to monitor the performance of
SME loans, yet, the performance is declining. Therefore, BBL has to be more careful on
this issue. In order to improve the performance of SME loans the following steps can be
taken.

An Early Alert System can be introduced. This will keep track of the probability
of loans going bad. The system will consist of a detailed database of all loans
outstanding and will be updated daily. It will also signal the repayment date,
amount and client particulars of a loan ahead of time so that the CROs can then
pursue the client to repay on time. A team can be allocated to constantly monitor
the database. The existing system identifies non-performing loans only after
installments become overdue. The database is updated monthly, which makes the
recovery process slow.

Whenever more than one consecutive installment is missed, the loan should be
reviewed for rescheduling. This will increase the probability of repayment for the
client. If more than six consecutive installments are missed, the rescheduling can
be forced on the client with a rescheduling charge debited from his account.

9.3 CONCLUSION

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Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective

BRAC Bank is an SME focused bank. The prospects of the SME market are great, and
the market size is also huge. Research in this field has only begun recently, and the
specifics of the market are still not clearly outlined. At the same time, this market is a
risky market, as it involves dealing with entities which are prone to default. However,
because of its tremendous potential, it is worth taking the risk. But in the process, BBL
has to take care to minimize the risk involved in investing in this sector. As the SME
sector is relatively new, the performance of the loans in this segment cannot be evaluated
conclusively yet. A cautious approach to the SME market will enable BBL to exploit the
prospects of this segment.

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Prospect of SME Banking in Bangladesh: The BRAC Bank Perspective