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Chapter one (Introduction)

1.0 Introduction The Small and Medium Enterprises worldwide are recognized as engines of economic growth. The commonly perceived merits often emphasized for their promotion especially in the developing countries like Bangladesh include their relatively high labor intensity, dependence on indigenous skills and technology, contribution to entrepreneurship development and innovativeness and growth of industrial linkage. According to the latest circular of BANGLADESH BANK (Date 2 6 / 0 5 / 2 0 0 8 ) , t h e definition of Small & Medium Enterprise sector is given below:

Small Enterprises
Small enterprises refer to those enterprises which are not any Public Limited Companies and which fulfill the following criteriaService Concern -Having an investment of Tk. 50,000 to Tk. 50, 00,000 excluding land & building and / or employing up to 25 workers. Business Concern -Having an investment of Tk. 50,000 to Tk. 50, 00,000 excluding land & building and/or employing up to 25 workers. Manufacturing Concern -Having an investment of Tk. 50,000 to Tk. 1, 50, 00,000 excluding land & building and / or employing up to 50 workers.

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Medium Enterprises
Medium enterprises refer to those enterprises which are not any Public Limited Companies and which fulfill the following criteriaService Concern -Having an investment of Tk. 50, 00,000 to Tk. 10, 00, 00,000excluding land & building and / or employing up to 50 workers. Business Concern -Having an investment of Tk. 50,00,000 to Tk. 10,00,00,000excluding land & building and / or employing up to 50 workers. Manufacturing Concern -Having an investment of Tk. 1, 50,00,000 to Tk.20,00,00,000 excluding land & building and / or employing up to 150 workers.

Bangladesh Bank sets SME financing targeted at Tk 625 billion for the year 2011(A collected news about SME loan from financial express)
The central Bank has set target for disbursement of loans at over Tk625 billion for the small and medium enterprises (SME) sector in calendar year, 2011, marking a 64.56 percent increase over that of the previous year. The bank and financial institution initially set the target at Tk 240 billion in 2010. But the SME financing target was later revised upward for the year to Tk 380 billion to meet the growing demand for such credit.

Page-3 SME sectors: Besides, the loans will be given to more than 60categories of operations in the SME sector such as Light engineering Handicraft, Flower, Fish processing, Handloom, rice-mill, Jamdani, Rajshahi silk.

Bank of Small Industries and Commerce Bangladesh Ltd. (BASIC) is entrusted with the responsibility of providing medium and long-term loans for promotion and development of small-scale industries. The memorandum and Articles of Association of the bank stipulates that 50% of loan able funds shall be used for financing small scale and cottage industries.

SME from the speech of budget 2012-2013

Financing in SME sector: 164. Development of SME sector is one of our main agenda. In order to develop this sector, a target of Tk. 23,995 crore in the previous budget to be disbursed by the banks and financial institutions as SME loans. In line with this, the banks and financial institutions have strengthened the process of disbursing SME loans. Up to April, 2012, an amount of Tk. 2,330.14 crore has been refinanced under the SME refinancing scheme of Bangladesh Bank. Women friendly SME programme: 165. As many as 64 SME helpline centers have been set up at the district level BSCIC industries assistance centers and another 7 in different trade bodies. All SME entrepreneurs, both male and female, are receiving required information services and

Page-4 training from these centers. All the bank and non bank financial institutions have been directed to set up dedicated desk for women entrepreneurs. At the same time, at least 15 percent of the financing scheme has been allocated for the women entrepreneurs. Moreover, a collateral free loan program up to Tk 25 lacs has been introduced for them. BSCIC Industrial sector: 166. Bangladesh Small and cottage Industries (BSCIC) has so far established 74 industrial estates across the country to provide infrastructural facilities to private entrepreneurs in setting up small and cottage industries. Up to March, 2012, as many as 9,699 industrial plots have been allocated to different industrial units. In FY 2010-11, goods worth Tk. 29,027 crore were manufactured in these industrial units, out of which, goods worth Tk. 16,625 crore were export commodities.

1.1 Statement of the problem The recent private sector survey estimates the contribution of the micro, small, and medium enterprises (MSMEs) is 25-30% of GDP (Daniels, 2007). While SMEs are characteristically highly diverse and heterogeneous, their traditional dominance is in a few industrial sub-sectors such as food, textiles and light engineering and wood, cane and bamboo products. According to SEDF sources quoted from ADB (2011), food and textile units including garments account for over 60% of the registered SMEs. Despite these contributions in the economy of the country, Banking sectors are not interested in financing the small and medium enterprises; rather there is a decline in the amount of advances by the Banking sector. There are approximately 52 Banks operating in our country and all are serving large enterprises rather than SMEs though only the small enterprises contribution is 5% in GDP of Bangladesh in 2011. But why? What are the causes for which Banks are not interested in financing this sector? From recent statistical data of Sonali Bank of Bangladesh, we see that the credit recovery rate is51.44% in this

Page-5 sector. Why this recovery rate is not large enough? Why the SMEs are failing to payback their credit to the lenders? We have tried to find out the answer of these questions in this research paper.

1.2 Objectives of the study Based on the above discussion the following objectives are set for the study: To review the role of SMEs in the economy as well as current status of SMEs and their financing by Banks in Bangladesh. To find out the reason why the Banks are not interested (problems) to finance the SMEs. To review the present role Regulatory Authorities in SMEs financing and development.

1.3 Methodology of the study The study was conducted mainly based on secondary information although some information relating to entrepreneurs have been colleted primarily. The sources of data include office record, different Research paper regarding SMEs, different publications on SMEs of different banks and some websites. Sample bank of Dhaka Bank Ltd, Eastern bank Ltd, Prime Bank Ltd from the sample frame, was selected purposively considering the amount of loan size interest rate loan processing fess period of loans, mode of finance and management. 1.4 Literature Review

Page-6 After Liberation of Bangladesh, intensive efforts were undertaken to accelerate the rate of industrialization in the country. At the beginning, import substitution and subsequently export-led economic growth strategy was pursued for industrialization. In order to attain this objective, large amount of industrial credit was funneled to the industrial sector. But the whole exercise of industrialization came to a halt with the massive diversion of resources to other non priority sectors. Policy makers, of late, have come to recognize the contribution of SME sector towards economic development in the country. Small and medium enterprises have been recognized as one of the most important means for providing better economic opportunities for the people of least developing countries like Bangladesh. Small and medium enterprises are particularly suitable for densely populated countries like Bangladesh where SME sector can provide employment with much lower investment per job provided. Out of 11% employment of the civilian labor force provided by the manufacturing sector, about two thirds are estimated to be provided by the small and cottage industries sector. Again, development of small industries facilitates the effective mobilization of capital and labor resources. They also help in raising standards of living of people in rural areas. Contribution of SME sector to GDP remained above 4% during the period from 1985-86 to 1999-00. Moreover, the present contribution of SME sector to GDP is approximately 5% and SME sector employs 25% of the total labor forces, thus this sector is the present available sector for creation of jobs (Saha, Sujit R. 2007). 1.5 Limitations of the study Since this research paper is only for academic purposes, there were some limitations in this study. These are mentioned bellow: Discussion about the Small and Medium Enterprises is a vast subject but only some selected areas are converted in this research paper. The study is basically based on secondary information. Time was enough but it was not possible to give most recent data in this regard because of primary data are not available.

Chapter two

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(SMEs in the economy)

2.0 SMEs in the economy of our country There is a great interest in small and medium enterprises (SME) as a major plank of poverty reduction in Bangladesh. The government has formulated a comprehensive industrial policy 2005 by putting special emphasis for developing SMEs as a thrust sector for balanced and sustainable industrial development in the country to help deal with the challenges of free Market economy and globalization. Some data with a national scope that are pertinent to characterizing SMEs in Bangladesh as of 2001-2003 are presented in Table 1. Private companies limited by liability account for strictly a very small proportion of the total number of SMEs in Bangladesh. Table 1: Number of units and levels of employment in small and medium enterprises, 2001-2003 (All numbers are in thousand)

Description No of units % of total Number of units Employment % of total employment

Small 39.9 50.9

Urban Medium 3.17 4.0

Large 4.036 5.1

Small 29.0 38.1

Rural Mediu m 1.29 1.6

Large .88 1.11

Small 68.96 1.11

Total Medium 4.46 87.9

Large 5.01 5.7

740.4 21.14

211.5 6.0

1712.6 7 48.9

516.8 14.8

85.85 2.4

234.66 6.7

1257. 2 35.9

297.4 8.5

1947.3 55.6

Source: BBS Census of Enterprises 2001, 2003 2.1 Contribution of SMEs in the economy

Page-8 In view of present economic development effort in Bangladesh the SME sector plays an important role. These are reflected in the following performance/activities of this sector: During the Fourth Five year plan, a total of 0.35 million jobs were created against the target of 0.4 million. Contribution of SME sector to GDP remained above 5.5% during the period from2005-2007 to 2009-2011 despite decline in the amount of advances by the banking sector to this sector. SME sector employs 25% of the total labor force. As a result, this sector is the present available sector for creation jobs. SME sector help alleviate poverty, increase income level of rural people and promote agro-industrial linkage in Bangladesh. SME sector requires lower energy supply, lower infrastructure facilities and this sector imposes less environmental risk. They contribute towards better utilization of local resources and skills that might otherwise remain unutilized. Small industries being labor oriented are capable of generating more employment. They are necessary to maintain and retain traditional skills and handicrafts. They are the only medium for diversification of rural economy and for peaceful and concurrent socio-economic development of all classes of people. From the above discussion, we can say that SMEs are playing an important role in our economy in various ways.

Chapter Three

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(Current status of SME financing by Bank in Bangladesh)

3.0 Current status of SME financing by banks in Bangladesh

The NCBs are disbursing significant amount of credit under various programs like Small Enterprise Development Project, Self-help Credit Program, and Projects for Small Entrepreneurs, Special Investment Program and Agro-based Supervisory Industrial Credited. For the promotion and development of SMEs. The investment of private sector banks in financing SMEs remains in significant in Bangladesh. Of all the private sector banks, BRAC Bank, Eastern Bank Ltd. (EBL), Prime Bank Ltd, Dhaka Bank Ltd, Mercantile Bank Ltd, Dutch-Bangla Bank Ltd, Islami Bank Bangladesh Ltd, IFIC Bank Ltd. have the leading role in SME financing. Bank of Small Industries and Commerce Bangladesh Ltd. (BASIC) are entrusted with the responsibility of providing medium and long-term loans for promotion and development of small-scale industries. The memorandum and Articles of Association of the bank stipulates that 50% of loan able funds shall be used for financing small scale and cottage industries. Bangladesh has 47 banks and 29 non-bank financial institutions. As of June, their outstanding SME loans stood at Tk 360,564 crore, which is 20.12 percent of their total loans and advances. With Tk 3,000 crore in outstanding loans, AB Bank's financing in the SME sector now accounts for 33 percent of its total portfolio. On average, its financing is growing at 25 percent a year. In 2012, AB Bank plans to lend Tk 3,700 crore to SMEs.

Page-10 Table-2 gives an idea of the role of small and medium enterprises as destinations for bank credit in 2004 and 2005. Bangladesh Classification bank advances lumps medium enterprises with the large enterprises, while small units are lumped with cottage-based units. As such, unfortunately, it is not possible to speak of the access to finance issues for SMEs per se. We know however separately that SCIs corresponds to more than 99% of all productive establishments in Bangladesh. Table 2: Percentage distribution of advances made by PCBs, FCBs and DNCBs in 2004/2005.

Name of factors and time of finance

Private commer cial Bank 2005 0.8 14.0 0.7 17.2 0.9 8.7 1.8 0.2 46.6 9.1 100.0 53029

Private commer cial Bank 2004 0.6 11.4 0.6 14.4 0.7 15.7 7.8 1.6 39.0 8.2 100.0 40298

Foreign commercial Bank 2005 0.1 10.9 0.6 27.2 1.4 0.9 2.2 0.0 24.9 31.7 100.0 7819.8

Foreign commercial Bank 2004 0.1 11.1 0.6 26.3 1.3 0.8 1.0 0.0 21.2 37.6 100.0 6629

De Nationalized Commercial Bank 2005 56.7 17.9 0.9 7.1 0.4 1.6 0.2 3.0 7.7 4.6 100.0 10637

De Nationalized Commercial Bank 2004 10.8 21.1 1.1 17.9 0.9 6.7 0.8 1.3 30.2 9.3 100.0 3766

Agriculture Large and medium industry SCI WC Large medium industry Construction Transportation Storage Trade finance Miscellaneous Total Total advances

Note: SCI stands for small and cottage Industry WC stands for working capital Table 3 shows an idea of Small and cottage industry credit position in overall industrial of Sonali Bank.

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Industry Sanctioning Disbursement Recoverable Recovered Overdue Outstanding 1858.56 1258.57 1121.85 427.84 694.01 2260.00 Small & Cottage industry 523.08 456.68 556.68 220.12 336.56 685.39 28.14 36.28 49.62 51.44 48.49 30.32 SCI Credit As % of IC

Source: Bari, M. A. & Jamal, Sabera A. Reading materials of the course on Financing of SME, BIBM

Table 4 shows the disproportionate picture. It shows from the table, that deployment of bank credit to large industries increased gradually from 35.20% of total advances in 2005-07 to 42.30% of total advances in 200911. But advances to Small industries rose very slightly from 1.70% to 2.00% although contribution of Small industry sector to GDP remained well above 5.5% during the same period.

Table 5: Contribution of industries in GDP and their relative financing by banks (In percent)

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Year

Contribution Of industry to GDP

Contribution of large scale industry to GDP

Contribution of small scale industry to GDP

Schedule Banks Advances to GDP

Schedule Banks Advances to large Scale industry 32.40 33.20 34.30 36.50 39.60

Schedule Banks Advances to small Scale industry 1.70 1.70 1.80 1.90 2.00

20012002 20022003 20032004 20042005 20052006

15.40 15.90 16.60 17.10 17.80

11.06 11.41 12.04 12.51 13.19

4.54 4.51 4.56 4.59 4.61

34.10 34.90 36.10 38.40 41.60

Source: I) Scheduled Bank Statistics, Bangladesh Bank different issues. ii) Economic Survey, Ministry of Finance, Govt. of the Peoples Republic of Bangladesh, different issues. iii) SME Foundation (Chowdhury and Miah, 2006) Outstanding advances by Denationalized Commercial Banks (DNCBs) depicted a rising trend. The following table shows the amount of outstanding advances of DNCBs during the last few years

Table 6: Amount of outstanding advances of DNCBs during the last few years. (Tk in million)

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Sonali Bank 2006 2007 4053 3321 3150 2531 Janata Bank 2006 2007 2341 2954 2327 2912 Agrani Bank 2006 2007 2008 2042 2137 1151 1531 1298 620 Rupali Bank 2006 2007 2008 582 5251 3518 564 5219 3507

Industrial sector Large & Medium industry Small &cottage industry

2008 1801 1288

2008 1308 1300

903

790

513

14

42

511

839

531

18

32

11

Source: Resume of Activities of Banks and Financial Institutions, Ministry of Finance, Govt. of the Peoples Republic of Bangladesh, different issues.

3.1 Comparative analysis of SME credit scheme of six different banks currently available in Bangladesh

3.1.1 Loan documents needed for SME financing by banks

Criteria for loan selection are similar among financial institutions. Most frequently requested documents by financial institutions as a part of the loan application process include:

Personal guarantee Business plan Appraisal of assets to be financed Purchase agreement

Page-14 Cash flow projection Personal financial statement Formal application for financing Business financial statement Tin certificate Citizenship certificate Bank solvency certificate Vat certificate Export license

3.1.2 About the sample Bank 3.1.2.1 Dhaka Bank Ltd

Interest & experience in SME financing Since inception, The Dhaka Bank has held socio-economic development in high esteem and was among the first to recognize the potentials of SMEs. Dhaka Banks Involvement Recognizing the SME segments value additions and employment generation capabilities quite early, the Bank has pioneered SME financing in Bangladesh in 2003, focusing on stimulating the manufacturing sector and actively promoting trading and service businesses. Story of successful Branch in SME financing:

Page-15 The Bank started branch operations at Belkuchi Sirajgonj in April 2003.Prior to the Banks intervention, the weaving community did not have the financial strength to stock their products till Eid ul Fitr when the annual sale takes place. Traders were taking advantage to the situation by buying up entire productions at low prices and liquidating stocks just before Eid. With financial services from Dhaka Bank Limited, the weavers have converted to power looms, significantly increased profitability and reduced the involvement of middlemen.

3.1.2.2 Dutch-Bangla Bank Ltd Dutch-Bangla Bank Limited (the Bank) is a scheduled commercial bank. The Bank was established under the Bank Companies Act 1991 and incorporated as a public limited company under the Companies Act 1994 in Bangladesh with the primary objective to carryon all kinds of banking business in Bangladesh. The Bank is listed with Dhaka Stock Exchange Limited and Chittagong Stock Exchange Limited. DBBL a Bangladesh European private joint venture scheduled commercial bank commenced formal operation from June 3, 1996. The Bank commenced its banking business with one branch on 4 July 1996. The bank opened SME windows in 2001. Dutch-Bangla Bank ltd services in SMEs Smart SME cash- credit Smart SME term- loan Small -shop financing scheme

3.1.2.3 Prime Bank Ltd

Page-16 SMEs services in prime bank ltd Sahaj Rin(collateral free loan) -provides the loan facility to successfully grow the Small & Medium enterprise business. Chalti Rin (working capital loan) -Offers the loan facility to increase working capital base by financing day to day business of the Small & medium enterprise business. Digun Rin(Double loan) -Encashing long held saving and provides the required capital for the business operation. Sampod Rin (capital loan) -Offers the loan facility to argument capital base for the business expansion. Moushami Rin (seasonal loan) -Offers the loan facility o grab the additional opportunities in various festivals and seasonal events . Anchol (women entrepreneurs loan ) -Provide the credit facility for the women entrepreneurs to expand and operate their businesses at desired level. Abad (crop loan) - To help farmers, share cropper and landless farmers to bear the cost of tilling of land, fertilizers, pesticides, irrigation, seed etc. for producing different crops and vegetables. 3.1.2.4 Mercantile Bank Ltd

Page-17 Mercantile bank is a third generation commercial bank. It has opened SME windows in1999 to encourage the small business activities. SME services The Bank intends to encourage the small and medium entrepreneurs and hence structured its SME financing activities. The products are: Chaka (term loan) Small and Medium Entrepreneurs of our country are striving to play significant role in the steady growth of GDP through profitable expansion of existing business as well as setting up new venture in the competitive business world but most of the times they fail to address the same due to dearth of capital. Mercantile Bank is assisting SME customers offering CHAKA loan facility to overcome the situation. Anayna(women entrepreneurs loan) For balanced & sustainable economic growth with inclusiveness all classes people of the society, active involvement of women in the business is immediately required and our bank has given highest priority for financing to the Women Entrepreneurs offering a loan facility ananya. Chalti Muldhan(continuous loan) In order to help SME customers to operate their business uninterruptedly, Mercantile Bank Limited has introduced continuous loan facility styled chalti muldhan. Single payment (short term seasonal loan) In order to patronize SME customers for capturing this seasonal business opportunity, Mercantile Bank Ltd has introduced single payment loanfacility. 3.1.2.5 Eastern Bank Ltd

Page-18 Eastern Bank Ltd. (EBL) has launched SME Banking in early 2005. Services in SME: Provide SMEs with easy access to financing. Deliver products that ensure superior returns to our customers. Orient customers with industry trends, regulatory issues etc, for their success. Value long-term relationship banking.

SME products are: EBL agrim EBLudoy EBL bannijyo EBL unnoti EBL krishi rin SME double return EBL asha

3.1.2.6 Brac bank ltd

The BRAC Bank ltd started its operation in 2001. The SME portfolio includes: Prothoma Rin Exclusively designed for women. Anonno Rin This is a small-scale loan. Apurbo Rin In order to help our SME. Supplier Finance.

3.1.3 Criterion for sample selection

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The banks for comparative analysis have been chosen in the basis of the following criterion: 3.1.3.1 Loan size 1. Prime Bank Ltd Taka 1 Lac to Taka 75.00 Lacs 2. Dhaka Bank Ltd - Taka 0.50 Lac to Taka 50.00 Lacs 3. Eastern Bank Ltd- Taka 1 Lac to Taka 300.00 Lacs 4. Mercantile Bank Ltd- Taka 0.50 Lac to Taka 2.00 Lacs 5. Dutch-Bangla Bank Ltd- Taka 3 Lac to Taka 50.00 Lacs 6. BRAC Bank Ltd- Taka 3 Lacs to Taka 30.00 Lacs Among the banks EBL offers the highest loan amount to the customers where as the BRAC bank offers the lowest loan to its customers. 3.1.3.2 Rate of interest 1. Prime Bank Ltd 13% to 15% p.a. 2. Dhaka Bank Ltd - 12% to 13% p.a. 3. Eastern Bank Ltd- 14% to 15% p.a. 4. Mercantile Bank Ltd- 15% p.a. 5. Dutch-Bangla Bank Ltd- 13% to 15% p.a. 6. BRAC Bank Ltd- 18% to 24% p.a. In terms of interest rate the Dhaka Bank Ltd offers the lowest rate of interest to its customers. The highest rate is charged by BRAC Bank Ltd. The Mercantile Bank Ltd. have the only bank that offers fixed rate for any loan customers.

3.1.3.3 Loan processing fees

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1. Prime Bank Ltd .50 % of the loan amount. 2. Dhaka Bank Ltd - .00 % of the loan amount. 3. Eastern Bank Ltd- not available 4. Mercantile Bank Ltd- not available 5. Dutch-Bangla Bank Ltd- not available 6. BRAC Bank Ltd- .50 % of the loan amount All the banks do not provide data about loan processing fees to their customers. The prime bank and BRAC bank limited only charges .50% as loan processing fess. 3.1.3.4 Period of loan 1. Prime Bank Ltd 1 to 5 years. 2. Dhaka Bank Ltd 1 to 3 years. 3. Eastern Bank Ltd- up to 1 year. 4. Mercantile Bank Ltd- up to 2 years. 5. Dutch-Bangla Bank Ltd- 1.5 to 5 years. 6. BRAC Bank Ltd- 1 to 3 years. Among the banks the highest loan maturity date is offered by DBBL and Mercantile Bank Limited offers the lowest maturity period 3.1.3.5 Mode of Finance 1. Prime Bank Ltd Term loan and working capital loan 2. Dhaka Bank Ltd Term loan and working capital loan 3. Eastern Bank Ltd- Only working capital loan 4. Mercantile Bank Ltd- Only term loan 5. Dutch-Bangla Bank Ltd- Only term loan 6. BRAC Bank Ltd- Only term loan

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All the Banks providing SME financing facilities do not provide long-term loan to its customers. Among the banks Prime and Dhaka Bank limited both provides term loan and working capital loan to their customers. Other bank either provides term loan or working capital loan to its customers. 3.1.3.6 Management Overall the management of the banks engaged in SME banking is efficient and have diverse knowledge of banking sector. BRAC bank has initiated to provide training of staffs for well managing the SME customers.

3.1.4 Portfolio Size of different banks in SME Sector

(Tk in Crore)
Serial No. 1 2 3 4 5 6 Name of Bank Brac Bank Ltd Eastern Bank Ltd Prime Bank Ltd Dutch-Bangla Bank Ltd Mercantile Bank Ltd Dhaka Bank Ltd Total Portfolio Size 950.00 300.00 108.44 16.38 6.63 5.72 1,387.17

Source: Annual Repots of Prime Bank Ltd., Dhaka Bank Ltd., and Eastern Bank Ltd.,
Mercantile Bank Ltd., Dutch-Bangla Bank Ltd. and BRAC Bank Ltd. 2007.

From the table we can see that the BRAC bank has the highest investment in the SME sector followed by Eastern Bank Ltd. in second position. While the Prime Bank Ltd., Dutch-Bangla Bank Ltd., Mercantile Bank Ltd. and Dhaka Bank Ltd. are third, forth, fifth and sixth respectively.

Chapter Four

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(Why banks are not interested in financing the SMEs)

4.0 Why banks are not interested in financing the SMEs In Bangladesh, several Banks are financing the SME sector but as mentioned earlier, many of them do not have good experience regarding the loan servicing in this sector. Banks lend the projects for making profit, but if the principal amount does not come back to the bank, then there will surely be adverse affect in the balance sheet of the bank. This is because of banks general function. A Banks general function is intermediation between borrower and lender. Bank takes deposit from the surplus unit i.e. lender and deploy fund or credit to the deficit unit i.e. borrower. It is very clear that the amount that a bank provides to the deficit units may not be its own. So, it must repay the amount to the depositors on demand. But if the disbursed amount does not come back to the bank, then it may incur loss. This is the reason why banks are so conscious while lending any project. In recent years, it is observed that there are many defaulters in the SME sector. Many banks are facing this default problem today. Still many banks are willing to invest in this sector. Though mentioned earlier, from the table 03, we see that Sonali Banks credit recovery rate from Small and Cottage Industry sector is only 51.44% compared to the Industrial Credit. The bank has a huge outstanding of credit in the SCI sector. Actually this is the main reason behind why banks are not interested in financing in SME sector. Banks feel unsecured in financing this sector. Because the credit recovery rate from this sector is not good enough.

4.1 Problems for financing SMEs

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4.1.1 Access to loan:

SMEs encounter great difficulties while rising fixed and working capital because of the reluctance of banks to provide loans to SMEs. Banks are shy to lend to SMEs because of high processing and monitoring costs of loans to SMEs. The loan application forms for investment financing from banks are long, tedious, and redundant. Since the removal of the interest rate subsidy without the removal of interest band, financial institutions find little incentive to lend to SMEs.

4.1.2 Collateral:
The main problem of SMEs is that, they do not have enough collateral for getting fund from the bank. The banks have some regulation of taking a minimum amount of collateral against credit, but many small and medium entrepreneurs cannot fulfill the requirement. Thats why banks are also reluctant to provide credit to them.

4.1.3 Lack of experience:

Small and Medium Industry Entrepreneurs, in Bangladesh, have lack of experience in the business field. They do not have any training programs and they do not even have any business exposure. As a result, they cannot follow the right way of entrepreneurship in the related field. So they incur loss in many cases.

4.1.4 Longer loan processing time and associate cost of uncertainty:

Credit in this sector requires longer processing time. Though it is small and Medium Enterprise Sector, processing time for loan is not short. As a result banks are unwilling to enter in this sector.

4.1.5 Lack of basic infrastructure, inputs, managerial efficiency:

Page-24 Most of the SMEs do not have basic infrastructure of their own i.e. there is a lack of planned infrastructure in this sector. Inputs of the production are also not planned and insufficient. Moreover, managerial efficiency is also a big issue in this regard.

4.1.6 Inadequate sanction:

The loan provided to this sector is inadequate. As almost all SMEs do not have enough capital to start the business, they need adequate amount of fund in order to support the unexpected loss initially. But as they do not get that, they cannot absorb the initial loss and eventually fail to payback the bank credit. In addition, some problems identified as these are from lenders perspective:

4.1.7 Lack of information on loan application requirement among the SME loan seekers:
As credit application requires availability adequate information, most of the SMEs do not have adequate information. They do not maintain their financial statement appropriately of the business; even they do not feel the necessity of doing so. Thats why Banks are not getting appropriate information regarding their business and themselves as well.

4.1.8 Absence of an appropriate and clear-cut legal framework for enforcing quick recovery:
Even Banks do not have appropriate legal framework in order to recover their disbursed credit. Their recovery framework is not clear-cut as a result they fail to control the servicing of loan. These are the reasons why Banks are reluctant to finance the SMEs in Bangladesh.

Chapter Five (Minimum Requirements for SME Financing

Page-25

According to Bangladesh Bank)

5.0 Minimum requirements for SME financing according to Bangladesh bank Apart from the specific regulations given under each mode of financing separately, the banks while undertaking Small Enterprise financing should also follow general requirements laid down here. It may by noted that these are the minimum requirements and should not in any way be construed to restrict the role of the management processes through establishing comprehensive credit risk management systems appropriate to their type, scope, sophistication and scale of operations. The Board of Directors of the banks are required to establish policies, procedures and practices to define risks, stipulate responsibilities, specify security requirements, design internal controls and then ensure strict compliance with them.

5.1 Pre-operation Before embarking upon or undertaking Small Enterprise financing, the banks shall implement/follow the guidelines given below. The banks already involved in Small Enterprise financing will ensure compliance with these guidelines within six month of the date of issuance of Small Enterprise Financing Prudential Regulations. Banks shall establish separate Risk Management capacity for the purpose of Small Enterprise financing, which will be suitably staffed by personnel having sufficient expertise and experience in the field of consumer finance/business. The banks shall prepare comprehensive Small Enterprise credit policy duly approved by the Board of Directors, which shall interalia cover loan administration, including documentation, disbursement and appropriate monitoring mechanism. The policy shall explicitly specify the functions,

Page-26 responsibilities and various staff positions, powers/authority relating to approval/sanction of consumer finance facility. For every type of Small Enterprise finance activity, the bank shall develop a specific Product Program Guide (PPG). 5.2 Operations

Small Enterprise financing, like other credit facilities, must be subject to the Bank's risk management process setup for this particular business. The process may include, identifying source of repayment and assessing customer' ability to repay his/her past dealings with the bank, the net worth and information obtained from a Credit Information Bureau approved by Bangladesh Bank. At the time of granting facility under various modes of Small Enterprise financing, banks shall obtain a written declaration from the borrower divulging details of various facilities already obtained from other institutions. The banks should carefully study the details given in the statement and allow fresh finance/limit only after ensuring that the total exposure in relation to the repayment capacity of the customer does not exceed the reasonable limits as laid down in the approved policies of the banks. The declaration will also help banks to avoid exposure against an enterprise having multiple facilities from different institutions.

5.3 Disclosure/ethics The banks must clearly disclose all the important terms & conditions. Fees, charges and penalties, which are internal including interest rate, pre-payment penalties and the conditions under which that apply. For ease of reference and guidance of their customers, banks are encouraged to publish brochures regarding frequently asked questions.

Chapter Six (Prudential Regulations for SME Financing By

Page-27

Bangladesh Bank) 6.0 Prudential regulations for SME financing by Bangladesh bank
Prudential regulation establishes the outside limits and constraints placed on banks to ensure the safety and soundness of banking system. They are the key elements to prevent, limit or stop the damage caused by poor management. In the following prudential regulation of Bangladesh Bank has been given by which supervisors can smoothly check and balance the operation of SME in Bangladesh.

Regulation -1
6.0.1 Source and capacity of repayment and cash flow backed lending
Banks shall specifically identify the sources of repayment and asses the repayment capacity of the borrower on the basis of assets conversion cycle and expected future cash flows. In order to add value, the banks must assess conditions in the particular sector /industry they are lending to and its future prospects. The banks must be able to identify the key drivers of their borrowers businesses, the key risks to their businesses and their risk mitigates.

Regulation -2
6.0.2 Personal guarantees
All facilities to SMEs shall be backed by the personal guarantees of the owners of the SMEs. In case of limited companies, guarantees of all directors other than nominee directors shall be obtained.

Regulation -3
6.0.3 per party exposure limit

Page-28

The minimum and maximum exposure of a bank on a single SME shall remain within the range of Tk 2 lac and Tk.50 lac respectively subject to the following: In case of working capital finance - Maximum up to 100% of the net required working capital or 75% of the sum total of inventory and receivables whichever is lower. In case of fixed assets purchase - Maximum up to 90% of the purchase price.

Regulation -4
6.0.4 Aggregate exposure of a bank on small enterprise sector
The aggregate exposure of a bank on SME sector shall not exceed the limits as specified below:
% of classified se advances to total portfolio of se Advances a. Bellow 5% B. Bellow 10% c. Bellow 15% D. Up to and above 15% Maximum Unit 10 times of equity 6 times of equity 4 times of equity Up to the equity

Source: Prudential Regulations by Bangladesh Bank for SME Financing,

Bangladesh Bank Quarterly April-June 2006.

Regulation -5
6.0.5 Limit on clean facilities

Page-29 In order to facilitate growth of smaller loans, banks are free to determine security requirements for loans up to Tk.5 lac. Guidelines for security requirements for loans of amounts more than Tk.5lac are given in Regulation-6.

Regulation 6
6.0.6 Securities
Consequent to the regulation stated in Regulation -5, facilities provided to SMEs shall be secured by banks as follows: For loan amounting Tk. 2 lac to Tk. 5 lac As a minimum banks must take charge over assets being financed.

For loan amounting Tk. 5 lac to Tk. 50 lac) Hypothecation on the inventory, receivables, advance payments, plant & machineries. Equitable mortgage over immovable properties with registered Power of Attorney. Personal Guarantees of Spouse/Parents/other family members. One third party personal guarantee, Post dated cheques for each installment and one undated cheque for full loan value including full interest.

Regulation 7
6.0.7 Loan documentation

Page-30 For all facilities, banks must obtain (as applicable) and not limiting to following documents before disbursement of loan can be made: 1) Loan Application Form duly signed by the customer. 2) Acceptance of the terms and conditions of Sanction Advice. 3) Trade License. 4) In case of Partnership Firm: Copy of Registered Partnership Deed duly certified as true copy or partnership Deed on non-judicial stamp of Tk.150 denomination duly notarized. 5) In case of limited company: a) Copy of Memorandum & Articles of Association of the company including Certificate of incorporation duly certified by Registrar Joint Stock Companies (RJSC) and attested by the Managing Director accompanied by an up-to-date list of Directors, b) Copy of Board Resolution of the company for availing credit facilities and authorizing Managing Director/ Chairman/Director for execution of documents and operation of the accounts, c) An Undertaking no to change the management of the company and the memorandum and articles of the company without prior permission of the bank. d) Copy of last audited financial statement up to last 3 years (as applicable and subject to Regulation-10) e) Personal Guarantee of all the Directors including the Chairman and Managing Director, f) Certificate of registration of charges over the fixed and floating assets of the

Page-31 company duly issued by RJSC, g) Certificate of registration of amendment of charges over the fixed and floating assets of the company duly issued by RJSC in case of repeat loan or change in terms and condition of Sanction Advice regarding loan amount, securities etc., 6) Demand Promissory Note 7) Letter of hypothecation of stocks and goods 8) Letter of hypothecation of book debts & receivables 9) Letter of hypothecation of plant & machinery 10) Charge on fixed assets.

Regulation -8
6.0.8 Margin requirements
Banks shall adhere to the minimum margin requirement as prescribed by Bangladesh Bank (if any).

Regulation -9
6.0.9 Credit information bureau (CIB) clearance
While considering proposals for any exposure, banks should give due weight age to the credit report relating to the borrower and his group obtained from a of Bangladesh Bank. The condition of obtaining CIB report will be governed by rules & regulations as prescribed by Bangladesh Bank from time to time.

Regulation -10
6.0.10 Minimum conditions for taking exposure

Page-32

Banks shall, as a matter of rule, obtain a copy of financial statements duly audited by a practicing Chartered Accountant, relating to the business of every borrower who is a limited company or where exposure of a bank exceeds Tk.40lac, for analysis and record. However, financial statements singed by the borrower will suffice where the exposure is fully secured by liquid assets. It is recognized that a large number of enterprises other than limited companies (i.e., sole proprietorship/partnership firms etc.) may not have proper books of accounts including balance sheet, profit & loss account and they may not be able to prepare current and future cash flows due to lack of sophistication and expertise. It is expected that in such cases, banks shall assist the borrowers in obtaining/developing such books of accounts as per forms/formats prescribed by each bank. Reference with regard to how the formats should be prepared has been made in the development guidelines. Each Bank shall develop its own Loan Application Form and Borrowers Basic Fact Sheet. Banks shall not approve and/or provide any exposure (including renewal, enhancement and rescheduling) until and unless the prescribed Loan Application From is accompanied by a Borrowers Basic Fact Sheet under the seal and signature of the borrower.

Regulation -11
6.0.11 Proper utilization of loan
The Bank should ensure that the loans have been properly utilized by the SMEs and for the same purposes for which they were acquired / obtained. Banks should develop and implement an appropriate system for monitoring the utilization of loans.

Regulation -12
6.0.12 Restriction on facilities to related parties

Page-33 Banks shall not take any exposure on a SME in which any of its director; shareholder, employee or their immediate family members is holding 5% or more of the share capital of the SME.

Regulation -13
6.0.13 Classification and provisioning for assets
Loans / Advances Banks shall observe the prudential guidelines given at in the matter of classification of their SME asset portfolio and provisioning there-against. In addition to the time-based criteria, subjective evaluation of performing and non- performing credit portfolio shall be made for risk assessment and, where considered necessary, any account including the performing account will be classified, and the category of classification determined on the basis of time based criteria shall be further downgraded. Submission of returns Banks shall submit the borrower-wise annual statements regarding classified

loans/advances to the Banking Inspection Department. Verification by the Auditors The external auditors as a part of their audits of banks shall verify that all requirements of Regulation-10.

Chapter Seven (Guidelines by Bangladesh Bank for SME Financing)

Page-34

7.0 Guidelines by Bangladesh bank for SME Financing The purpose of the Development Guidelines is to provide directional guidelines to the banks that are considering introduction of Small Enterprises financing to entrepreneurs all across Bangladesh. These Guidelines will assist banks to develop and implement pragmatic and value added products, efficient Credit Approval & Risk Management processes, sound organization structure, strong credit administration and robust collection procedures.

The Process Guidelines have been organized into the following sections: Policy Guidelines 1. Product Program Guidelines 2. Segregation of Duties 3. Credit Approval Procedural Guidelines 1. Approval Process 2. Credit Administration 3. Risk Management 4. Collection & Remedial Management

7.1 Policy guidelines

Page-35 Before embarking upon Small Enterprises financing, banks shall develop fully documented product program guidelines. These guidelines shall include objective/quantitative parameters for the eligibility of the borrowers and determining the maximum permissible limit per borrower. These fundamental guidelines will be the key elements that would support each banks credit culture and they will dictate banks behavior when dealing with customers and managing lending portfolio of such loans. Any deviations from these guidelines must in all cases, will require approval from competent authority.

Therefore, the following credit principles are the ultimate reference points for all concerned bank staff making consumer-financing decisions: Assess the entrepreneurs character for integrity and willingness to repay, Only lend when the entrepreneur has capacity and ability to repay, Only extend credit if bank can sufficiently understand and manage the risk, Use common sense and past experience in conjunction with thorough evaluation and credit analysis, Do not base decisions solely on customers reputation, accepted practice, other lenders risk assessment or the recommendations of other officers, Be proactive in identifying, managing and communicating credit risk, Be diligent in ensuring that credit exposures and activities comply with the requirement set out in Product Program.

7.1.1 Product program guideline

Page-36

Banks have the right to alter / amend these guidelines in terms of their policy with out compromising the fundamentals of credit principles. While developing Product Program Guidelines (PPG) for any product - the following guidelines must be included in the PPG documents. PPG Guideline No. 1: Customer Segment PPG Guideline No. 2: Purpose PPG Guideline No. 3: Nationality PPG Guideline No. 4: Age Limit - Minimum age (years) / Maximum age(years) PPG Guideline No. 5: Minimum Income PPG Guideline No. 6: Loan Size PPG Guideline No. 7: Loan to Price Ratio PPG Guideline No. 8: Security/ Collateral PPG Guideline No. 9: Legal Documents PPG Guideline No. 10: Interest Rate PPG Guideline No. 11: Maximum Term of Loan PPG Guideline No. 12: Repayment Method PPG Guideline No. 13: Disbursement Mode PPG Guideline No. 14: Disbursement pre-condition PPG Guideline No. 15: Debt Burden Ratio (DBR %) PPG Guideline No. 16: Verification of Personal Details and Quotation PPG Guideline No. 17: Substantiation of Income

These guidelines are suggestive but not limited to this list, based on the requirements further guidelines to be incorporated in the PPG to ensure that the PPG is covering all the aspects of risk and return for the particular product.

Page-37

7.1.2 Segregation of Duties

Adequate segregation of duties is a prerequisite of an effective system of internal control. To be adequate, segregation must ensure that persons independent of each other perform the following functions, although, within limits, certain may be combined so long there is adequate supervision: Credit approval, monitoring and recovery by Credit unit Credit documentation and administrations Loans processing and disbursement unit Sales and marketing Sales and Branch Credit recovery by Credit unit

The Credit Administration under Operations department will check and ensure the documentation and disburse the loans.

7.1.3 Credit Approval

Applications are received at Credit Approval unit from sales team / branches. As mentioned in Regulation- 10 part 2, banks should develop their own set of comprehensive Loan Presentation Forms (LPF), which should at minimum include the following documents: a) Credit Memorandum b) Work sheet for Working Capital Requirement c) Income Statement d) Balance Sheet e) Cash Flow Statement f) Financial Ratios) g) Checklists Applications will bee evaluated / assessed by Credit Analysts / Managers on the basis of a fully documented Loan Presentation Forms (LPF).

Page-38 7.2 Procedural guidelines This section outlines the main procedures that are required to ensure compliance with the policies.

7.2.1 Approval Process

Credit approval authority must be delegated in writing from the Head of Small Enterprise responsible for the Small Enterprise business, acknowledged by recipients and records of all delegation retained. The credit approval function should be separate from the marketing / sales function. Approvals must be evidenced in writing, or by electronic signature. Approval records must be kept on file with the Credit Applications. Any breaches of lending authority should be reported to MD/CEO, Head of Internal Control, and Head of Credit. It is essential that executives charged with approving loans have relevant training and experience to carry out their responsibilities effectively. As a minimum, approving executives should have: At least 5 years experience working in Branch / Sales team as a relationship manager or account executive. Training and experience in financial statement, cash flow and risk analysis. A good working knowledge of Accounting. A good understanding of the local market.

A monthly summary of all new facilities approved, renewed, enhanced, and a list of proposals declined stating reasons thereof should be reported by Credit Team to the Business Head.

Page-39

7.2.2 Credit Administration

After approval, Credit Team will send / forward the approved application along with the security and other documents to the Credit Administration Department under Operations Unit for processing. The Credit Administration function is critical in ensuring that proper documentation and approvals are in place prior to the disbursement of loan facilities.

Credit Documentation Credit Documentation dept is responsible: To ensure that all security documentation complies with the terms of approval. To control loan disbursements only after all terms and conditions of approval have been met, and all security documentation as per the checklist of approved PPG is in place. To maintain control over all security documentation. To monitor borrowers compliance with agreed terms and conditions, and general monitoring of account conduct/performance. Upon performing the above, Documentation dept will forward the Limit Insertion.

Instruction to the Loan Administration unit for limit and other information to input into the banks main system.

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7.2.3 Risk Management

Credit Risk The credit risk is managed by the Credit & Collections unit (CCU), which is completely segregated from business/sales. The following elements contribute to the management of credit risks: The credit risk associated with the products is managed by the following: 1. Loans will be given only after proper verification of customers static data and after proper assessment & confirmation of income related documents, which will objectively ascertain customers repayment capacity. 2. Proposals will be assessed by independent Credit division (CCU) that is completely separated from business/sales. 3. Every loan will be secured by hypothecation over the asset financed, and customers authority taken for re-possession of the asset in case of loan loss. 4. The loan approval system is encouraged to be parameter driven as much as possible which will substantially eliminate the subjective part of the assessment procedure. 5. There will be dedicated collection force that will ensure timely monitoring of loan repayment and its follow up. 6. The Credit & Collection activities will be managed centrally and loan approval authorities will be controlled centrally where the branch managers or sales people will have no involvement.

Page-41 Fraud Risk There is an inherent fraud risk in any lending business. The most common fraud risk is: Application Fraud The applicants signature may not be verified for authenticity. However, the applicants identity should be confirmed by way of scrutiny of identification and other documentation. A Contact Point Verification (CPV) agency should be in place to verify applicants residence, office and contact phone numbers etc. Liquidity and Funding Risk This risk should be managed and the position monitored by the Asset Liability Committee headed by the Managing Director / CEOs of the banks. Political and Economic Risk Political and economical environment of a country play a big role behind the success of business. Banks should always keep a close watch in these areas so that it is able to position itself in the backdrop of any changes in countrys political and economical scenario. Operational Risk For consumer loans, the activities of front line sales and behind-the-scene maintenance and support are clearly segregated. Credit & Collections Unit (CCU) will be formed. CCU will manage the following aspects of the product: a) Inputs, approvals, customer file maintenance, monitoring & collections; b) The Operation jobs like disbursal in the system including rising debit standing orders and the lodgment and maintenance of securities.

Page-42

7.2.4 Collection & Remedial Management Monitoring

A banks loan portfolio should be subject to a continuous process of monitoring. This will be achieved by regular generation of over limit and overdue reports, showing where facilities are being exceeded and where payments of interest and repayment of principle are late. Besides that the systems should be in place to report the following exceptions to relevant executives in Credit / sales and branch marketing staff: Past due principal or interest payments; Timely corrective action is taken to address findings of any internal, external or regulator inspection/audit; All loan facilities are reviewed annually. Computer systems should be able to produce the reports for central / head office as well as branch review. Recovery This procedure has been designed to enable the collection staff to systematically recover the dues and identify / prevent potential losses, while maintaining a high standard of service and retaining good relations with the customers. Collection Objectives The goal of the collection process is to obtain payments promptly while minimizing collection expense and write-off costs as well as maintaining the customers goodwill by a high standard of service. For this reason it is important that the collector should endeavor to resolve the account at the first time worked.

Page-43 Identification and Allocation of Accounts When a customer fails to pay the minimum amount due or installment by the payment due date, the account is considered in arrears or delinquent. When accounts are delinquent, collection procedures are instituted to regularize the accounts without losing the customers goodwill whilst ensuring that the banks interests are protected. Collection/Monitoring Steps To identify and manage arrears, the following aging classification is adopted: As and when an account become delinquent, collection system works together to achieve business objectives. At the beginning of the month collection unit has taken the total asset portfolio from the system.
Days past due (DPD) 1-14 15-29 30-44 42-59 Collection Action Letter , follow up and persuasion over phone 1st reminder letter Sl no 1 follows 2nd reminder letter single visit

3rd reminder letter Group visit by team member Follow up over phone Letter to guarantor, Employer , Reference all above follows Warning legal action by next 15 days Call up loan Find reminder & services legal notice Legal proceed begin Repossession stands Telephone call legal Collection effort continues by officers & agents Letter to different banks association

60-89

90 and above

Chapter Eight

Page-44

(Constraints of SME Financing)

8.0 Constraints of SME Financing SMEs undoubtedly play a very important role in the economy of Bangladesh in terms of output, employment, and private sector activities. In recent years, structural changes suggest a shift from traditional to relatively modern product categories with higher capitalization and use of better production techniques. But implementing SMEs have faced the following constraints. They are:

1. Legal, Regulatory, and Administrative Constraints 2. Financial Constraints

8.1 Legal, Regulatory, and Administrative constraints As mentioned earlier, policy reforms of the past decade have brought about substantial relaxation in the investment sanctioning procedure. No prior approval is now required for investments involving own finance. However, there is scope for further improvement in the following procedural aspects relating to investment regulations.

8.1.1 Trade License

Investors are required to procure trade license from local government bodies by paying statutory fees. The process involves unnecessary delays, harassment and side payments. The procedure needs to be simplified and the issuance of the license made automatic subject to payment of requisite fees and declaration by the investor that the proposed investment is in conformity with the rules and regulations and zoning restrictions of the local government authority.

Page-45

8.1.2 Registration under Factories Act

According to the Factories Act 1965, all manufacturing units employing 10 or more workers are required to be registered with the office of the Chief Inspector of Factories and Establishments. The job of the Factory Inspector is to oversee the working condition and safety measures in the factory. In practice, the regulation has proved to be a major source of delay, harassment and unofficial payments for the investors particularly for those in the SME sub-sector as the existing regulations do not differentiate between different size categories with respect to safety and working conditions requirements.

8.1.3 Clearance from the Department of Environment

All industries are also required to obtain a certificate from the Department of Environment in respect of proper arrangement for anti-pollution and safety measures. Here again, the requirements should be clearly stated for the type and size categories of industry and the investor should be allowed to go ahead with investment on the basis of the undertaking that the requirements will be complied with.

8.2 Financial constraints

8.2.1 Access to Finance

SMEs encounter great difficulties while rising fixed and working capital because of the reluctance of banks to provide loans to SMEs. The loan application forms for investment financing from banks are long, tedious, and redundant. Since the removal of the interest rate subsidy without the removal of interest band, financial institutions find little incentive to lend to SMEs. SMEs find it difficult to use non real estate assets as collateral to obtain loans from the banks.

Page-46

8.2.2 Extremely short grace period

In our country, grace period of repaying any credit is very low. According to the SME entrepreneurs, almost all the Banks structured the loan in such a way that entrepreneurs have to start the repayment of credit within a very short time after disbursement of credit.

8.2.3 High interest rate

Another problem is that extremely high interest rate for the entrepreneurs. Many entrepreneurs is having problem because of high interest rate. Banks, in many cases, maintain high spread as a result there remains reckless competition of making more profit from the Banks perspective.

8.2.4 Collateral Requirements

One of the main factors that have hampered flow of institutional finance into SMEs is banks' pre-occupation with collateral based lending. Traditionally banks have used fixed asset ownership, particularly land ownership as the basis for judging credit-worthiness.

8.2.5 Bureaucracy and Corruption

The performance of the bank officials is not properly evaluated they lack the incentive to bring a large number of suitable borrowers, particularly those in the SME sector, within the fold of institutional financing.

Chapter Nine (Finding, conclusion and Recommendation)

Page-47 Finding and analysis Banks and other financial institutions have stepped up efforts to take products and services to the largely untapped small and medium entrepreneurs in the country. They are devising more products to cater to this vast segment of the economy, as it has turned out to be a profitable business arena. Bankers say the loan recovery rate in this sector is high, thanks to the excellent repayment behavior of the clients. The number of loan defaulters is low compared to corporate clients. Women entrepreneurs are particularly good banking clients. We have been financing the sector for a long time. Our efforts have increased after the central bank's special focus on the sector in recent times, said Product Kumar Saha, principal officer of the bank's SME banking division. EXIM Bank officials said SME lending accounts for 80 percent of its loan portfolio. The bank now has Tk 5,000 in loans outstanding in the sector with over 11,400 clients. Its financing is growing at 12 percent a year. Most banks have introduced special products for women entrepreneurs, lending up to Tk 25 lacs without any collateral, at 10 percent interest, in line with BB guidelines The role of SMEs in providing productive employment and earning opportunities has emerged as an important concern among policy makers, donor agencies and researchers. Regardless of the correct magnitude, SMEs undoubtedly play a very important role in the economy of Bangladesh in terms of output, employment, and private sector activities. They are quite predominant in the industrial structure of Bangladesh comprising over 90% of all industrial units. Together, the various categories of SMEs are reported to contribute between 80-85% of industrial employment and 23% of total civilian employment (SEDF, 2011).

Conclusion SME financing plays a contribution in Bangladeshi economy. It is a business which changes the traditional business successful to make employment from unemployment. The importance of SME sector is well-recognized world over owing to its significant

Page-48 contribution in achieving various socio-economic objectives, such as employment generation, contribution to national output and exports, fostering new entrepreneurship and to provide depth to the industrial base of the economy. Bangladesh has a vibrant SME sector that plays an important role in sustaining economic growth, increasing trade, generating employment and creating new entrepreneurship in our country.

Recommendation

1. Seed Money, Leasing, Venture Capital and Investment Funding

There is a need for improving different aspects of financial services of SMEs, such as seed money, leasing, venture capital and investment funding. There is a lack of long-term loans; interest rates are high, Guarantee/Security issues, exchange risks etc. All these limit the development of SMEs. Finance, both short and long term, should be provided at market cost of capital. Fund should be made available through encouragement for setting up Venture Capital organization in Bangladesh. The concept of venture capital (VC) has successfully operating in the USA, EU countries, and Canada.

2. Establishment of Small Business Investment and Lending Corporation (SBILC)

We should start with something effective for industrial development in general and the SMEs sector in particular. Such a step, for example, could be the establishment of a separate corporate body. That means a separate financing institution could be developed, with joint ownership of the public and private sector. To make the proposed initiative effective in achieving its goals, government may set up a Small Business Investment and Lending Corporation (SBILC).

Page-49 The SBILC can be formed under Small Business Investment and Lending Act passed through the Parliament. Under SBILC there may have external and Internal Financing policies. Taken from the different countries experiences the different types of financing policies and programme that can be introduced through SBILC, is enumerated below: Low Doc Loan Programme, which may allows small business to use a simple one-page application for loans up to Tk.50, 000; loans between Tk.50, 000 and Tk.1,00,000 may require the one-page application plus personal tax returns for three years and a personal financial statement from entrepreneur. Direct loans, this type of loan may be provided directly to the small business with Public funds and no participation. The interest rate charged on direct loans depends on the cost of money to the government and it changes as general interest rates fluctuate. It can be limited to a fixed ceiling. Guaranteed loan.When private lenders extend loans to small businesses, SBIL Cin those cases can provide guarantee for repayment in case the borrower defaults on the loan, which may be given for a defined amount of loan and up to certain percentage e.g.,80% or 75% of loans. Seasonal line of credit programme may be offered for short-term capital to growing companies needing to finance seasonal buildups of inventory or accounts receivable. The maturity period cannot be exceeding 12 months and the company must repay it form cash flow.

3. Establishment of R&D Institute for Enterprise and Entrepreneurship Development, Training and Research Institute

Page-50 In a country like Bangladesh, where entrepreneurial initiative is rare and shy, a separate institute for entrepreneur ship development, it should be developed. To make it a centre of excellence in SMEs development, it should be designed, involving educational institutional, business associations, relevant government bodies, private research agencies, and individual consultants having experience in SMEs development

4. Establishment of a separate bank for women entrepreneurs:

Establishment of a separate bank for women entrepreneurs will accelerate the development of women SME through their increased access to formal financial institution.

5. Training program for women entrepreneurs:

Increase the capacity of women entrepreneurs through training and awareness raising activities on financial management, business procedures and other regulatory process such as trade license, tax and VAT, etc. At the same time, initiatives should be undertaken to sensitize the people working with respective regulatory institutions so that women SME can easily arrange necessary documents for loan application and other procedures.

6. Implementation and Monitoring of Policy Measures for SMEs:

Only policy prescription is not the end, if it is not implemented through different measures timely and properly. How far policy measures are implemented, along with, what effect -desired or not - such policy measures has had on the development of SMEs should also be monitored from time to time.

End Matter
Bibliography The Daily Star (2011), Messing up website SME Banking. Accessed on 22 December 2011 from www.thedailystar.net .

Page-51 Asian Development Bank(2012),Messing up website -Bangladesh country Economic Review . Accessed on April 2012 from the website www.AsiandevelopementBank. Anik Ahmed (March 2012), retrieved from http://independent.academia.edu/akahmedjnu/papers/458521/SME-Financing present status and future possibility. Annual Repots of Prime Bank Ltd, Dhaka Bank Ltd,and Eastern Bank Ltd, Mercentile Bank Ltd,Dutch-Bangla Bank Ltd. and BRAC Bank Ltd. 2007-Banks in SME sector . Bakht, Zahid (1988) and Ahmed , Salahuddinetal (1988) Research Paper Policy Environment within SME in Bangladesh Operate accompanies legal, regulatory and administrative constraints to employment creation by SMEs. Products or Services of SME SME Banking Collected from website - Prime Bank Ltd, Dhaka Bank Ltd,and Eastern Bank Ltd, Mercentile Bank Ltd,Dutch-Bangla Bank Ltd. and BRAC Bank Ltd. Various Studies on SME Banking - Ahmed , MU. 2001 ADB 2001 USAID 2001. Scheduled Bank Statistics, Bangladesh Bank different issues.Economic Survey, Ministry of Finance, Govt. of the PeoplesRepublic of Bangladesh, different issues. SME foundation (Chowdhury and Miah, 2006). Bangladesh Bureau of Statistics, Census of enterprises 2001, 2003 Overview of SME in the Economy of Bangladesh.