CHAPTER ONE INTRODUCTION

1.1 Background of the Study: Industries play a pivotal role in the economic development of every country. This is why industrialization has been adopted as a vital instrument of economic development in many developing countries. Realizing this, Govt. of Bangladesh has a Development Financing Institution (DFI) named Bangladesh Shilpa Bank (BSB) on 31st December 1972 under the president Order No. 129 of 1972 with a mission of accelerating the process of industrialization of the country by providing financial assistance and equity support. 1.2 Problem Statement: For a developing country like Bangladesh a huge amount of capital investment is very much needed both in private and public sectors. In order to get maximum benefits from such capital investment, the project appraisal is very important. Any error in appraisal will have an adverse impact on capital structure of the country. Project appraisal means the examination of project before the project is undertaken. It refers to the evaluation of projects and selection between alternatives. Project appraisal report is prepared by Loan Operation Department. The project has been appraised by an appraisal team consisting of engineer, economist and financial analyst. This report critically evaluates the proposed project through technical analysis, economic analysis and financial evaluation. When the project is found to be technically feasible, financially rewarding and economically & commercially viable only then that project is financed by BSB. This study will make an attempt to the project Appraisal Practice of BSB. 1.3 Objectives of the Study: This report examines the project appraisal procedure of BSB. To do this it examines how BSB appraises project what information it deeds from the entrepreneur & what aspects of a project need to scrutinize & evaluate of its particular project. 1

The objectives are summarized as follows: To get an overall idea about the existing projects appraisal procedure; Evaluate the particular project regarding the appraisal; To determine the limitations or problems (if any) of the project appraisal; To recommend necessary steps to over come such limitations. 1.4 Rationale of the Study: Theoretical knowledge is not enough for business student, because there is a far gap between theoretical knowledge and practical field. Our internship program has been launched mainly to bridge this gap. Bangladesh is one of the poorest countries with a large unemployed population. As the opportunity to expand agricultural sector is limited, so we have to incline to expand industrial sector to overcome our existing problems like unemployment, low economic growth and low living standard. Here industrial sector is very weak. To consider the real situation government has established Bangladesh Shilpa Bank to stimulate industrialization. This bank provides term loan to different industry and entrepreneur. The purpose of Bangladesh Shilpa Bank is not only to grant credit but also to develop the country through industrialization by selecting correct project and provides assistance in different way to implement successfully of selected project. 1.5 Scope of the Study: This report will mainly focus on the project appraisal of Bangladesh Shilpa Bank. The proposed study will cover the appraisal practice, procedures and technique followed by the Loan Operation department (LOD) in the preparation of appraisal report. 1.6 Methodology of the Study: Correct and smooth completion of research work requires adherence to some rules and methodologies. Rules were followed to ease the data collection procedure. Accuracy of study depends on the information and data analysis. 1.6.1 Study Area:

The area of my study has been encompassed the operation area of Bangladesh Shilpa Bank Head office and the Dhaka Commercial Branch of Shilpa Bank. 1.6.2 Target Group: To accumulate the required data I have contacted with each departmental head along with other concerned executive of Bangladesh Shilpa Bank. In case of industry diagnosis I have got in close with the responsible personnel of Project Implementation Department of BSB to collect the information. 1.6.3 Types of Research: In this study the descriptive type of research has undertaken to gain insights and understanding about overall operation of BSB and the sick industry. 1.6.4 Sources of Information: The data will be collect from both primary and secondary sources. Sources of Primary Data: The sources of primary data are: Face to face interview. Official records & documents of BSB. Communication with other respective personnel of BSB. Expert opinion. Secondary sources: The sources of secondary data are: Annual report & appraisal manual of BSB. Project appraisal report. Journals and relevant books.

1.7 Justification of the Study: This study will have both practical and academic value. It will help to get a clear idea about the overall features of BSB. On the other hand, the findings of this study will help

to take appropriate actions and steps for the betterment of the existing practice which basically help the industrial development of the country.

1.8 Limitation of the Study: This Internship Report is my first assignment outside our course curriculum in the practical life. I, the students of Department of Management Studies, just have completed our formal education stage. After completing the institutional experience, Practical performance in the formal stages become difficult. So in performing this report our lack of proper knowledge greatly influenced in this performance. Beside above, some other limitations are: 1. Lack of availability of data 2. Many personnel of BSB were reluctant to provide useful information. 3. Improper combination among various departments 4. They are in government employee so have no eagerness to supply more because of extra hardness. 5. Up-to-date information were not available 6. Sufficient records, publications, facts and figures are not available. These constraints narrowed the scope of the real analysis. 7. For the reason of confidentiality, some useful information cannot be expressed in this report. 8. Time is a limitation that would mostly with stands a comprehensive study on the topic selected.

CHAPTER TWO LITERATURE REVIEW

2.1 History of Banking in Bangladesh: After the liberation former State Bank of Pakistan which was established by the state bank of act 1948. Further, it replaced by Bangladesh Bank by presidential order in 1972. Thus Bangladesh Bank acts as the Central Bank of the country. It control, supervises and looks after the Private Schedule Banks as well as the Nationalized Banks, formed by the amalgamating the business of the 12 banks in Bangladesh before liberations. 2.2 The Services Provided by the Banks in Bangladesh: (i) Agency services: (a) Dividend received. (b) Share stock exchange (c) Share application money receive (d) Payment of subscription, premium, rents etc. (e) Collection of cheque, bill, promissory note (f) Income tax return (ii) General utility service: (a) L/C, travelers cheque (b) Custody of valuable & discount (c) financial advisory services (d) Bank- Zero credit (e) Bank- standard order (f) Credit and services (g) Budget for credit worthily customers (iii) Overseas trading services

(a) Finance foreign trade (b) Foreign currency transaction (c) Settlement of foreign debt. (d) Receipt and dispatch the documents relating to import and export. (f) Arrange warehouse for goes shipped. (h) Collection of remittance (iv) Information and other services: (a) Major source of information on overseas trade (b) Provides regular bulletin on trade economic conditions (c) Social reports on commodities of markets. (d) Advice in the appointment of suitable agent or foreign trade. (e) Providing confidential opinion regarding the financial soundness of the firm. (f) Provide tax information, change lax law etc. (g) Providing information regarding the companys activities. 2.3 Classification of Bank:

Bank

Commercial Bank

Investment and industrial bank

Exchange Bank

Co-operative Bank

Merchant Bank

Savings Bank

Central Bank

2.4 Features of Banking Business: General features like other business. (1) Ownership: Sale proprietorship, partnership or limited co. (2) Formation: It forms according to existing laws of the country. It is a limited co. So it is needed to follow company act 1994.

(3) Legal entity: Legal entity means the business entity. If it is a limited co. then it has separate artificial legal entity. (4) Profit earnings: The main purpose of banking business is to earn profit. (5) Service-selling organization: It provides money to those person or organization that needs it. It transfers money according to the need of the client. It also helps its clients to run business smoothly. (6) Sources of investment: The main source of its funds is deposit from people or various organizations. (7) Trader of interest: It pays interest on deposits and collects interest from those who take loan from banks. (8) Work with confidence: It ensures safekeeping of deposited money of depositors and proper utilization of money. (9) Intermediation: Intermediation between surplus units and deficit units. (10) Business inventory: Money and near money, negotiable instruments etc. (11) Traders of credit: A major portion of its funds is used for giving loan and a major portion of its profit also comes from this loan to others. (12) Money transfer: It transfer money from one country to another country i.e. credit card. (13) Agent of clients: Bank sometimes collects checks, bills etc for its clients. It also pays bills, cheeks etc for its clients. (14) Safeguard of clients: It sometimes gives security of clients valuable documents i.e. jewelry etc. (15) Financial solvency: A banking business always be solvent financially because its business will not continue in proper way. (16) Capital formation: Banks collects scattered amount from the people and form capital for production purpose. (17) Sources of credit for government: Sometimes, the bank pay loan to the govt. at the period of inflation, deflation, recession etc. 2.5 Objectives of Banking Business: (a) Owners point of views: Earning profit Creating goodwill

Raising efficiency Rendering services Investment of capital Insurance notes and currency Capital formation. Money market control Creation of employment Advice in financial matters Deposit money Safeguard of the deposited money Advice and consultation Representation and trustee Raising living standard

(b) Government point of view:

(c) Banker client point of view:

2.6 Literature Review: A project is a proposal for an investment to create, expand and/or develops certain facilities in order to increase the productions of goods and/or services in a community during a certain period of time. For the purpose of BSB, project means a scheme for capital investment to develop facilities to provide goods and services. BSB's main function is to extend financial assistance to industrial project. It basically needs to be satisfied about the overall viability of a project to be financed. For this purpose, an objective assessment of the viability of the project is required to be examined by BSB from various points of view. Project appraisal coyer five different aspects of a project: Management and Organization, Technical, Market, Economic, and Financial. An assessment of the promoters in respect of their integrity, experience and capabi1ities to implement and run the project is of prime importance before extending credit facilities to them. There are no set rules to find out if the borrowers or promoters are the men of integrity. It is to be done by direct and indirect investigation. The borrower's experience .and capabilities can, on the other hand, be assessed in terms of his educational

background, spatial qualifications, practical business experience, receptiveness to new ideas, or good advice, the general reputation and above all his potentiality to learn new things and adaptability to new and changing situation. Closely related to the management is the type of organizational structure necessary to carry out and operate the project successfully. So far as organization is concerned, there are two basic queries; hat organization is needed to bring the project to the operating stage and what organization will be needed thereafter. In the operating phase, one of the most common questions is the extent to which responsibility and authority should be centralized or delegated. The answer depends on the scale of operation, its geographical dispersion, the degree of specialization of personnel, and the number of persons to whom responsibility can be delegated. Internal controls should also be reviewed. The technical aspects of in industrial project are appraised to determine whether the project is sound with regard to every engineering and technological consideration, including product specification, process, size, internal balance, suitability and availability of physical facilities, designs and layouts of equipment and buildings etc. In a developing country like Bangladesh, where there is hardly and indigenous technological base to support the industrialization process the industr1al undertakings have to be conceived on the basis of know or borrowed technology until such time as the development of local technology is sufficient. The basic aspects to be analyzed in the course of technical appraisal are Products/ Service; Raw materials; Skills and technology required for manufacture/ service; Testing and analytical report; Labor; Transporting; Work schedule; Estimation and evaluation of cost. The relative importance of these aspects will, however, vary from project to project. An industrial project is to bring in some goods 'or services for a community. But the community does not need them infinitely. Their demand is of course finite and at given prices. For appropriate marketing objective, it is necessary to look at depth into the macro/micro demand/ supply situation for specific products in the market; Existing and expected competition in local and foreign markets; the market share, etc. While appraising industrial projects, the Bank is required to analyze these factors and to bring out the objective in quantitative terms-Product identification; Nature of Demand; Type of Demand: there are various types of demand for the product/service in question. These are 9

direct, derived, new, replacement demand, Size and Composition of the Present Demand etc. In economic appraisal, the project is looked at from the national or social point of view and the economic cash flow is constructed on the basis of "true or real prices", commonly known as accounting or shadow prices. Economic appraisal should cover both quantifiable and non-quantifiable benefits (where applicable). Such benefits are Economic Rate of Return (ERR), Bruno Ration! Domestic Resource Cost, Contribution of Gross Domestic Product, and Employment Generation and Cost per employment. The term non-quantifiable refers both (1) to effects that are known to arise but which cannot be measured in physical terms and (2) to effects, which cannot be valued. Difficulties in quantification and valuation will often go together. Quantification problems often are data problem a certain effect could not be measured, but has not been. The main purpose of financial appraisal is to assess if the proposed project is viable in term of its operation in the future years and its financial soundness. The financial analyst should have a clear idea as to what is intended to be achieved through the financial appraisal. The financial appraisal is directed to examine mainly the following two aspects: Fund requirement to bring the project in to existence and the probable sources from which the required funds will be mobilized; and Prospects of adequate revenue generation by the project when it goes into operation and the likely position of the concern with regard to its actual cash generation (liquidity) and its probable impact upon the financial condition (solvency) The first aspect deals with the estimation of total of the project (fixed cost + net working capital) and a suitable financial arrangement (debtequity relation). The second aspect relates to the analysis of production-cost profit at different volume of production carried up to the year the project attains its normal capacity operation. Sources of Information: Bangladesh Shilpa bank, 2005 Annual Report 2004-2005. Bangladesh Shilpa Bank August 1984.Manual of Project Appraisal Project Management-The Managerial Process -Clifford F. Gray -Erik W. Larson

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CHAPTER THREE OVERVIEW OF BANGLADESH SHILPA BANK

3.1 Introduction: Bangladesh Shilpa Bank (BSB), once a leading developed financing institutional (DFI) established in 1972 with a mission of accelerating the process of industrialization of the country by providing financial assistance and equity support. After getting liberation a newly born country required rapid financial assistance and advisory services to industrialize the nation and BSB supposed to bolster in this regard. It has been extending long and medium term loan facilities in local and foreign currencies to industrialize projects (both new and BMRE) in the private and public sectors. With the passage of time due to mismanagement of loan distribution and ill motive of borrower left he sector derelict. 3.2 Institutional Overview of BSB: Institutional Overview of BSB Established Organization October 31,1972 Hear office Division Department Zonal office Branch office Manpower

Dhaka 05 21 03 15 743

3.3 Capital structure and sources of fund: Capital Structure of BSB

Capital Structure
Authorized Paid Up 11

Tk. (in Million) 2000 2000

Authorized capital of Bangladesh Shilpa Bank is Tk.2ooo million and the amount of paid up capital Tk.2000 million. Other sources of Banks fund are the Government, Bangladesh Bank, Commercial Banks local/ overseas financial institutions and supplies credit. At least fifty one percent of the authorized capital of Bangladesh Shilpa Bank must be subscribed by the government and remaining forty nine percent may be subscribed Bangladeshi nationals or by local or foreign Financial Institutions. Presently, 100 per cent ownership of the bank belongs to the Government. 3.4 Ownership of BSB At least 51 percent of the Authorized capital of BSB be subscribed by Bangladesh government and remaining 49 percent be subscribed by Bangladesh nationals or by financial institutions local or foreign. Presently, 100 percent ownership of the Bank belongs to the government. 3.5 Mission: Bangladesh Shilpa Bank is the state owned Lending Department Financial Institution (DFI) of Bangladesh. The mission of BSB is accelerating the process of industrialization of the country by providing financial assistance and equity support. 3.6 Management: The overall policy formulation and the general direction of Bank's operation vest in a Board of Directors appointed by the Government. This Board of Directors consists of 9(nine) members including the Chairman and the Managing Director. Non-Governments shareholders subscribing to the capital of the Bank shall eventually elect 4 directors amongst themselves. The Managing Director is the Chief Executive of the Bank. The General Managers assist the Managing Director in conducting the overall banking business. 3.7 Functions of BSB: BSB extends long and medium term loan facilities in local and foreign currencies to industrial projects (both new and BMRE) in the private and public sectors Besides the Bank also performs the following activities.

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Provide working capital loans to industrial project. Assist in the form of underwriting and bridge finance to public limited companies as equity support. Issues guarantees for repayment of loan on behalf of borrowers, Extends commercial Banking services along with deposit mobilization. Purchases and sells shares/ securities for BSB and on behalf of customers as a member of Dhaka Stock Exchange (DSE) Ltd. and Citation Stock Exchange (CSE) Ltd. for capital market development and Conduct project promotional activities with preparation of various sub-sect oral study reports.

3.8 Organizational Chart and Zonal & Branch Offices of BSB (Location):

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14

3.9 BSB at a Glance: Particulars Project condition (in numbers) Loan application Received Term Loan Sanction: New BMRE Additional Total Term Loan Disbursed Working Capital Loan Sanctioned Start of Commercial Operation Entrance into Loan Portfolio Rephasement/rescheduling Liquidation of Loan Liabilities Total Loan Portfolio Loan Condition (in Million Taka) Term Loaned Sanctioned Term Loan Disbursed Working Capital Loan Sanctioned Working Capital Loan Disbursed Loan Recovered Loan Rephrased /Rescheduled 2002-2003 31 18 2 1 21 11 3 2 7 27 31 461 2003-2004 51 21 3 3 27 14 5 4 6 17 22 308 2004-2005 83 34 1 3 38 23 3 7 14 23 41 144

1418 170 30 9 1316 507

989 297 19 28 1124 149

1009 144 14 21 1391 259

3.10 Operational Activities of the Bank: Bangladesh Shilpa Bank being the prime development financing institutional continued its effort to make on effective contribution towards expansion of industrialization process of the country. It emphasized on long term lending to the viable new projects having comparative advantages, export prospects, forward and backward linkage and local technology as well as raw materials based projects. Top priority has been given for realization of its loans towards augmenting and recycling of the invertible funds and maintaining satisfactory loan portfolio for increasing profitability. With this end in view the Bank has undertaken some realistic steps towards replacement. Rescheduling and liquidating of loan accounts of sick / closed / stuck-up projects with waiver facilities where deemed appropriate.

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2.12 Financial Position of Bangladesh Shilpa Bank: Bangladesh Shilpa Bank

Balance Sheet

Particulars

As on 30 June 2004 30-06-2005

30-06-2004

Property and Assets Cash Cash in hand Cash with Bangladesh Bank & Sonali Bank (including foreign currencies) Balance with other Banks & Financial Institutions Money at call & short notice Investment Loans & Advances Premises and Fixed Assets Other Assets Non-banking Assets Total Property& Assets 277,520,084 9,809,890 267,710,194 22,182,635 404,255,751 3175,025,483 8,910,675,0369 209,547,189 1,013,175,579 -14,012,381,757 95,634,414 5,678,336 89,8,956,078 28,435,909 163,321,405 3,797,520,014 16,168,683,300 213,809,235 1,191,076,087 21,658,480,364 7,191,001,129 712,141,504 252,939,444 13,266,701 195,726,523 250,208,835 -------11,282,390,411 19,185,533,042 2,000,000,000 134,744,560 430,444,059 392,355,487 (484,596,785) 1,371,856,066 21,658,480,364

Liabilities and capital Borrowing from other Banks & 7,191,001,129 Agents Deposits & other Account 712,141,504 -Current Account 241,091,575 -Bills Payable 22,564,900 -Savings Bank Account 213,246,286 Fixed Deposits 233,524,345 Other Deposits --------Other Liabilities 5,137,207,953 Total Liabilities 11,759,050,354 Capital/ Shareholders equity Paid-up Capital 2,000,000,000 Quasi Equity 134,744,560 Statutory Reserve 430,444,059 Reserve Fund & other Reserves 392,355,487 Profit & Loss Account (704,212,704) Total Shareholders equity 2,472,947,320 Total Liabilities & Shareholders equity 14,012,381,757

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Bangladesh Shilpa Bank

Profit and Loss Account

For the year ended 30 June 2004 2004-2005 Taka Interest and discount 642,097,036 (50,416,450) Interest paid on deposit, borrowing, etc. Particulars Net Interest Income Investment income Commission, exchange and brokerage Other operating income A. Total Operating Income 591,680,586 17,949,940 7,968,952 47,168,647 664,768,125

2003-2004 Taka 683,024,493 (61,828,848) 621,195,645 10,017,977 9,015,708 42,397,933 682,627,263 144,783,273 9,952,962 4,903,600 3,064,629 127,000 3,589,167 271,080 412,420 14,648,650 -26,554,862 208,307,643 474,319,620 52,670114 27,499,125 -394,150,381 -394,150,381 26,940,874 421,091,255 (905,688,041) (484,596,786)

Salaries and allowances 155,682,099 Rent, taxes, insurance, light, etc. 10,751,051 Law charges 2,852,243 Postage, telegram, telephone and stamps 2,591,637 Auditors fees 127,000 Stationary, printing, advertisement, etc. 3,336,756 Managing Directors/Chief Executives salary & 452,114 fees Directors fees 365,058 Depreciation and repair of fixed assets 16,729,028 Sale from or dealing with non-banking assets -Other expenditure 34,279,941 B. Total Operating Expense 609,644,390 Profit before provision (A-B) Loan loss provision Provision for investment Others Total Profit before Income tax Provision for income tax Net Profit after Taxation for the year Loan loss provided in previous year written back Net Profit after adjustment Accumulated loss brought forward Accumulated loss carried forward 55,123,735 263,253,247 18,242,700 -(226,372,212) -(226,372.212) 6,756,294 (219,615,918 (484,596,786) (704,212,704)

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Bangladesh Shilpa Bank

Cash Flow Statement

For The Year End 30th June Particulars 2004-2005 Taka A. Cash Flow from Operational Activities Interest Received in cash 615,209,219 Receipts form other Operating Activities 55,410,132 Dividend Receipts 8,728,869 Fee & Commission Received 8,948,538 Recoveries on Loans previously written off -Interest paid (36,994,741) Cash Payment to Employees (156,134,213) Cash Payment to Suppliers (27,150,080) Payment for other operating activities (400,475,932) Operating Profit before changes in operating assets and liabilities 67,541,791 Increase/Decrease of operating Assets Fund Advances to Customers Investment Other Assets

2003-2004 Taka 654,346,099 42,397,933 10,017,977 9,015,708 -(40,943,888) (145,054,353) (15,643,860) (29,013,032) 485,122,483

7,258,008,264 381,560,185 (132,169,394) 7,507,399,055

264,174,659 (378,631,544) (89,287,717) 553,518,486

Increase/Decrease of operating Liabilities Deposit from Customers Increase/Decrease in Other Liabilities

1,714,396 (6,111,538,349) (6,113,252,745

50,732,669 56,057,703 106,790,372 1,145,431,342 (4,907,752) 190,415 (4,717,337) 680,000,000 (1,801,019,584) (1,121,019,584) 19,694,421 104,375,902 124,070,323

Net Cash Flow from Investing Activities before tax 1,461,688,102 B. Net Cash Flow from Investing Activities (Increase/Decrease) Purchase of Fixed Assets (6,469,873) Proceeds from sale of Properties of Fixed Assets -Net Cash Flow from investing Activities (6,469,873) C. Cash Flow from Financial Increase/ Decrease: Increase/Decrease in Paid up Capital -Increase/Decrease in Borrowings (1,279,585,834) Net Cash Flow from Financial Activities (1,279,585,834) D. Net Increase/Decrease of Cash & Cash 1,175,632,395 Equivalent (A+B+C) E. Opening Cash & Cash Equivalent 124,070,323 F. Closing Cash & Cash Equivalent (D+E) 299,702,718

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3.12 Significant Financial Indicator of Bangladesh Shilpa Bank: Description Total Income (after provision for bad doubtful debts) Net profit (Loss) before tax Total loan & advances (after provision for bad & doubtful debts & interest suspense) Total borrowing Paid up capital (Percentage) Total income to total assets Net profit to total income (Ratio) Debt-equity ratio Debt-service coverage (times) 2000-01 1012 676 7133 8743 1320 4.12 66.80 26.33:1 3.70 Year (Taka in million) 2001-02 2002-03 2003-04 1237 1100 771 915 7151 8919 1320 5.00 73.97 16.43:1 4 790 6877 8992 1320 4.93 71.82 7:01 4 421 6513 7191 2000 3.56 54.60 3:01 2 2004-05 722 (220) 5269 5911 2000 5.15 (30.47) 2.94:1 1

3.13 Strength of BSB: BSD is a development finance institution. It plays significant role in the industrial development of Bangladesh. Its untiring endeavor is remarkable. As a finance institution it has both strength and weakness. All the contribution of BSB is the consequences due to its strength. On the other hand failure ness of BSB is for unconsciousness and unauthorized exercise of power. It is indeed that the contribution of BSB is below the expectation. It fails to achieve the target because a great portion of loss is compensated against its contribution. Many experts tell BSB fails to use his resources successfully as a result it is a loosing concern. It is true but some external interfere also responsible for unfortunate losses. Although there are some drawbacks, BSB has some strong side that may ensure future achievements. These are the following: BSB has greater capacity to collect money from foreign countries. It may

come through loan aid, grant etc. and BSB has many potential sectors where it can disburse more money as loan. If BSB able to merge between two (resource mobilization and loan disburse), it will give good results for the economy as well. BSB is only one industrial bank of our country. All industrial must have to

go BSB for industrial loan. They can take these opportunities through their willingness and service mentally. 19

BSB has some skill manpower such as Engineer, Economist, Business

executives, lower and so forth. Their capabilities are deteriorating for lack of proper working environment and unexpected political pressure. In some cases they are not able to work independently. If BSB can use his personnel sufficiently, it will be profitable in future. BSB has luxurious building which is situated a commercial area in the

center of Dhaka city. Suitable location is increasing its popularity within the country and abroad. BSB has goodwill in the market. All the businessmen know BSB. BSB

acquires this reputation through his thirty years service life. We expect BSB is able to maximum use of its resources and will be profitable thereon. I hope that our government will help BSB to perform his duties independently. There is no alternative way of employment generation of our country without industrialization, which is essential for poverty alleviation.

3.14 Weakness of BSB: The weaknesses that I found in the operational activities are as follows: As a big organization has limited publication even they have no particular books on BSB that may cover everything. Lack of co-ordination in the policies or directives. Weak internal control and working environment. Many people are working in a big room. As a result office room has converted into a noisy place

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CHAPTER FOUR ACTIVITIES OF BANGLADESH SHILPA BANK

4.0 ACTIVITIES OF BANGLADESH SHILPA BANK: Bangladesh Shilpa Bank encompasses various department and zonal offices to discharge its activities. To perform efficient and effectively BSB in its board meeting has determined the schedule activities of various departments and zonal offices and they supposed to perform the task accordingly and the respective employee have to repot according to organizational hierarchy. Activities of some important department are enumerated below. 4.1 Loan Operation Department: LOD is the starting department of sanctioning loan to the sponsors and in this department various analysis are made for making decision whether the proposed projects are viable or not. Anyone who wants to loan from BSB, he has to fulfill certain criteria. Bangladesh Shilpa Bank (BSB) grants loan on the basis of certain criteria. The first Activities of loan granting are done by the loan operation department. Any entrepreneur who wants to borrow money, from BSB must fulfill at first bank standard questionnaire from (BSQF) terms of Tk 1000.These processes are as follows: At first an application form is supplies to the entrepreneur. After filling up the application from it is submitted by the Entrepreneur. A project appraisal letter is supplied by the entrepreneur. After analyzing the project appraisal, the board decides the loan should be sanctioned or not. If the loan is sanctioned it is forwarded to the project implementation department.

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Overview of Loan Operation Department: Figure:2 OVERVIEW OF LOD Start with BSQF Submission of BSQF with proposed projects

Put up Appraisal Report

Evaluation of proposed project by a team member Pass process to Project implementation Dept. Documentations as well as others End of this department

Major Functions of Loan Operation Department (LOD): Take essential action for preparation of application for loan to be processed or sanctioned. Invitation and inspiration of lease financing by the foreign investors/entrepreneurs/ machinery producing company. Preparing and preserving statements of investments and guarantee of non-resident Bangladeshi, maintaining core paper and sanction letter. To provide logistic support to the investors in relation with industrial loan, application form of loan (along with 1/8th of 1% project estimated cost and other necessary documents) / capital distribution, accepting, processing and analyzing project offer and forwarding loan application. Examining, processing and sanctioning joint venture investment proposal of Bangladeshi with foreigners

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 Project loan proposal evaluation/justification and proposal sent to loan sanction sub-committee to sanction loan and getting approval from respective activity. To take necessary action to process and approve co-financing projects. Accepting the clearance letter from Investment Board on project proposal Loan sanction letter prepared and sent to respective department. Revaluation of past evaluated loan agreement if necessary, according to up-to-date information. According to foreign investment authoritys requisition, updating the project evaluation report. Issuing respective notice in terms of changes of government /Bank rules to loan procurement and sanction time to time. Approving and processing underwriting shares of project financed by banks and other financial institution, as a member of I.C.B. consortium. Preparation of long term statement about pending loan application and sanction project etc. Preserving core paper, sanction letter and sanction article of the projects already sanctioned. Regular revision of investment policy and providing recommendation there off and notification issue about the policies.. To take respective steps about various governmental bodies approval to sanction of non-resident Bangladeshis loan proposals. To give necessary advice to Zonal Branches of Bank about project evaluation and also about their sanctioned loan project. Computerization of loan management activities. Properly implementing duties and responsibilities assigned by the head of the department. Selling application form to non-residence Bangladeshi. Giving advice about preparation of loan application form to non-resident Bangladeshi. To take action to approve of joins foreign project to be set up and preparation of regulations for the same.

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 To give advice about advantage of loan and deliberation of foreign investors/ entrepreneurs proposal. 4.2 Documentation and Machinery Procurement Department After sanctioning loan by loan operation department, it issues a letter to documentation department, parties and after concerned departments. The documentation department issues a letter to the parties to produce necessary documents. Those documents are: Memorandum of Association Articles of Association. The land upon which the project will be established, document of this land must be produced. Receipts of rent. Documentation fee. Mouja Map. The document that reveal that the land were not sold within preceding two years.

Then a form is filled up. These documents are sent to lawyer. It every thing is ok it is transferred to project implementation department. There are three types of security, which must be giving to the bank Project land Collateral security Share certificate

In the documentation process the borrowers are required to submit a copy of memorandum of association and articles of association. It is returned after the conflation that in has been submitted according to the rules the borrower company must submit it after the authorization by direction of registration of Joint Stock Company and firm. The following activities are performed during the time of documentation process: The borrower company must submit necessary documents Verification of documents by documentation and machinery department and law department. Preparation of all documents of the borrower company director.

The machinery wing of Machinery and Documentation Department performs the following functions: 24

 Preparation of rules and regulation related to machinery procurement, and coordination of zonal and branch offices activities and completion of other officers for the same. Necessary advice given to investors/ entrepreneurs about tender invitation to collect project machinery. Offered machinery and related documents evaluation and necessary information collection about suppliers. Equipment schedule preparation/ selection and approving for tender Preparation of list of pre-shipping investigator through notice and receive approval. Arranging investigation procedures of importable machinery. Recommendation about various project regulated by loan separating department and zonal office. Comparative study of machinery, price justification, selection and approval receiving of authority. Information collection about different price of machinery of different capacity in industrial production The documentation wing of Machinery and Documentation Department performs the following functions: Examination of project memorandum and statements of affairs. Change filling at company register office of mortgage land. Renewal of necessary document in time. Conformation of bank guarantee from debtors and keeping it properly and renewal before expired of due time. Documentation and contract completion with loan receiver after loan sanction. Document given by company to bank or document of land evaluation and investigation of document is land sub-registration office. Site conformation about land/ project according to document and marking the law by government surveyor if necessary. Unplanned investigation of document kept in registrars storage room. Actual document collection from registrar and act as custodian for that document.

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 Other activities given by department head.

4.3 Project Implementation Department Project implementation is one of the most important functions conducted by BSB. When the loan operation department grants the loan, it is the responsibility of this department to help the borrower and provide the guidelines to the borrower so the project is implemented accurately and easily. The Project Implementation Department (PID) performs their duty according to loan sanctioning letter. When the loan is sanctioned by the loan operation department it is forwarded to project implementation department (PID) performs the following activities: Undertaking necessary initiative after granting loan in favor of the project. Taking necessary action to make the factory layout. Making necessary adjustment, in case of change of the project place, change of board of directions and change/ extension product mix etc. Making necessary attempt to give the loan a stage by stage after the loan granting To ensure that necessary capital has been supplied by the entrepreneur and to ensure its proper utilization. To give necessary assai stance in the case of Bridge loan from any financial instep tuition. Taking necessary initiatives to contact the lay-out of the project according to construction cycle. Monitoring the machinery of the project, inspection and taking any kind of advice regarding to any machine related problem from machinery department. Verification of new material process of project ensuring the cash capital according to the loan terms and condition and providing necessary assistance in this matter. Inspection and monitoring experimental production and extension of loan period.

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 Making the final construction report (FCR) and transferring it to central recovery department (CRD) and concerned department/ authorities. Determination of the construction period of the project preparing loan repayment schedule and taking after necessary action regarding this. Monitoring and inspecting the project to see whether the project is implementing according to time schedule and taking necessary initiatives to solve any kind of problem arising out there from and providing necessary advice to the entrepreneur. Receiving insurance letter against the predetermined risk implementation priest assets and ensuring its deposit to ban

4.4 Central Recovery Department Project implementation department makes a repayment schedule and given it- to the borrower. Nominally the interval is 6 months. This department inspects the project after every 6 months to see whether there is any leakage. If the borrower fails to repay the loan as the application of the borrower it is rescheduled. Sometimes a portion or interest is exempted. If the borrower fails to repay the loan, than it is transfer to law department to take legal action. On the application of the borrower sometime the project is transferred to project rehabilitation department to restore the project. The main functions of Central Recovery Department (CRD) are following Information provide to branch central department about progress of loan repayment and other for the same. Watching of progress of project, investigation according to instructed scheduled, maintaining and inform about problem arising and taking respective decision for the project. Arrangement of insurance policy against projects assets and to up date of insurance for the same. Make good contact with loan holder to speed up loan payment/ recovery. Proposal for extra loan to existing project and processing, sanctioning, and implementation with the approval of Loan Operation Department for that project. Processing and implementation of loan rescheduling.

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 Make close communication with Loan Recovery Department, other Branch Control Department, Project Implementation, Loan Rehabilitation, and Advance Department about preparation of rules and regulation of project management and loan recovery. Analysis of yearly financial statement of loan holder company and make advice about companys problem. 4.5 Loan Accounting Department: Loan accounting department is the department which centrally maintains all loan accounts of the bank. There are 4 sections which performs the activities of the department. 1. Not due section. 2. Amount due section overdue section 3. Replacement section 4. General and policy section Description: I. Not due is the installment not yet due for payment in schedule time fixed by the Project department/ Branch officer. II. The payment of installment and interest in not paid cleared in time is overdue. The functions of this section are: a) Accurately list of balance preparation.
b) Advice sending to borrower. c) Quarter/ half year by interest charge.

Ill. When the overdue is rephrased or waived then the replacement section will do the needful activities. IV. General and policy section do the following: a) To prepare the monthly Trial Balance. b) Monthly recovery statement. c) Monthly disbursement schedule d) To make entry all the transaction as per daily statement received from the branch officer.

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e) All list of balances of not due send to the Head Office and Branch Office. f) To prepare distribution of work among the officers and staff as specific guidelines of the authorities.

Not Due Section: I) Quarterly/ half yearly installment and interest charge and transferred it to amount due section. 2) The rate of interest is fixed by the prevailing interest at the time of execution of loan document. 3) Foreign currency installment and interest will full as foreign currency loan agreement as per contract of overseas donor agency. The functions of this department are stated below Provide information about project loan accounts to loan holder, related bank authority, departments, and zonal and branch office regularly. To record statistical information about collection of loan installment and supply to various related department. The information is also presented to the Managing directors for their concern. Maintaining accounts of matured and non-matured loan of the projects of the bank. Keep records of local and foreign loan affairs of Bank financed projects. To classify and reclassify the loan accounts according to the loan operation, loan recovery, project rehabilitation, all regional and branch officers, law department and proper authorities along with proper authoritys approval. Preparation of loan statement schedule and supply that information to various department and branch office monthly and quarterly basis. Make conformation about yearly loan statement and up dated loan statement to loan holder. To provide the loan accounts regularly to the borrower, related bank authorities department, regional and branch offices.

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 To supply information about payable installment, interest and other accounts to the related department, branch, regional offices and the borrower and timely recovering the due amount. Re-evaluation of existing loan accounting method and correction, refurnishing and to update that method(s). To classify loan according to the borrower conditions. Maintain all loan accounts and submit trial balance to central accounting department in monthly basis. To ensure the supply of projects loan accounts to the borrower and the current position of the loan accounts. 4.6 Project Rehabilitation department (PRD) The objective of BSB is to make industrialization of the country. But many of the projects, which are loaned by BSB, become sick and cannot carry on their projects. There are many reasons, so government tries to revive the proposed project for greater advancement of the country. The main activities and responsibility of Project Rehabilitation department are as follows: 1) When files are transferred to Project Rehabilitation department, it traces the cause of sickness and Recommend to take initiative to rehabilitate a project. The rehabilitation process starts after the recommendation of the advisory committee formed by the General Managers. 2) The files of the projects are transferred to Law Department to take necessary actions, which are deemed not rehabilitate. Again if there is no opportunity to rehabilitate any it also rejected. 3) Verification of the proposal regarding rehabilitation recommendation preparing the implementation schedule and taking necessary initiatives to take care the project and deciding the single or joint management of the bank over the project if necessary. 4) Taking rehabilitation program controlling projects management and monitoring and ensuring the management system taken over by bank and performing other activities regarding these. 5) Production of the rehabilitated project, making of the products analyzing the targeted loan recovery and actual situation and taking necessary initiates regarding these.

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6) Retraction of bank participation stage by stage from the project, which is profitable. 7) Other activities given by department head.

4.7 Law Department In the Shilpa Bank fails to recover its loan in the normal way, it must under taken alternative action and file case in the court. The causes which Shilpa Bank tiles cases are: I. Recovery case
: - Section 33 : - Section 5(a)

II. Financial Loan Case

III. Certificate Case IV. Bankruptcy Case V. Case if check is not cashed
(Petition case)

: - Section 35
: - Section 9(1) : - Section 198

VI. Case if machinery of project is transferred from the project without permission VII. Case if false properties are mortgaged
: - Section 40

: - Section 37

I. Recovery Case: Case is filed with the court of District Judge or Sub Judge the concerned company and its director such case filed according to Bangladesh Shilpa Bank ordinance 1972 section 33. II. Finance Loan Case: Such case is filed against the concerned company and its directors to recover the loan which is due. III. Certificate Case: Thus case is filed against the loan de/twit company and its director according to public demand Recovery Act 1913 with the court of respective General Certificate Officer.

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Iv. Insolvency Case:

Bankruptcy case can be riled if at least Tk 5 lacks is due. This case if filed according to insolvency Act 1997. V. Case if check is not cashed: This case if filed in any check is dishonored. It is done according to the Negotiable Instrument Act, 1994

This department mainly performs the following functions: To take legal action against loan defaulter and declaration of legal notice for the same. Make communication with court for auction sale of machineries of that project which captured by courts degree. Preparation of banks special consultant/ legal adviser and panel lawyers schedule and make communicate with them to supervise suit and also monitoring and coordination of them work. Advising bank to the interest of bank lawful. Taking all arrangements to sue against all the loan defaulters as per the rule of banking ordinance. Monitoring cases done by the branches, projects petition to the high court and Supreme Court and carrying them till end. Managing the cases that filling by loan holder against bank with the help of lawyer(s). Rectifying present law/ policy to recover the loan amount from the loan defaulter if so needed. Executing /obeying duties and responsibilities assigned by the head of the department time to time.

4.8 Human Resource Management Department (HRD)

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The department of human resource management was not same name as now. Modernizing the structure of the administration of the bank and Development the skill of the human resources and reducing operating cost of the organization. The directors 244th meeting was conducted on 23rd April, 1996. In this meeting, rename of the Administration department as "Administration and Human Resource Department" and Department of labor as 'department of Human resources Management'.

Sections of this department: There are five sections in this department Section 1. General administrative & policy section, Activities - Fixing principles relating to human Resource activities/position, - Fixing principles relating to organization. -Fixing principles relating to delegation of power, -Activities relating to trade union, -Send statements relating to delegation of power. -Provide employment policy, -Provide transfer policy, -Provide promotion policy, -Fixing pay scale. -Fixing annual increment policy. -Mitigates the complaint against personnel. -Provide scholarship policy, -Assist the helpless personnel, -Provide retirement benefit. -Provide medical facility & allowances. -Provide vacation opportunities, -Provide conveyance facility & allowances; -Provide house rent allowances. -Provide cloths benefits.

2. Management section

3. Disciplinary section 4. Welfare section

5. Leave & medical section

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Functions of Human Resource Management Department are: 1. To give medical facilities to the stuff. 2. To maintain relationship with retired or dead stuffs and their families to know their conditions. 3. To maintain and grant leaves without regular leave. 4. To coordinate and evaluate the branch and regional stuff activities. 5. To step and implement for opening new branch office. 6. To maintain relationship with government and other institution 7. To prepare and implement policy about human resources and related activities. 8. To control the activities the staff of the banks and take proper step to implement computer technology. 9. To perform the activities assigned by the departmental head. 10. To control the administration of human resources of the bank. 11. To give loan for house building, by cycle, motorcycle, and ensure their proper utilizations. 12. To assess and collect compatible personnel who will be perfect for the bank. 13. To take program and implement for developing human resources. 14. To make appointment, promotion and appraising skill of officer and stuff. 15. To make service rules, correction, expansion, administration rules, sub rules, orders, notice etc for controlling and stuff. 16. To give scholarship to the brilliant student of the university for appointing and finding skilled officer. 17. To give general scholarship to the brilliant and daughter of stuff. 18. To communicate with trade union scrutinizing their demands, open discuss developing the relationship with administration proper implementation of labor law.

4.9 Dhaka Commercial Branch: Bangladesh Shilpa Bank is a specialized bank. Basically BSB extends long and medium term loan in local and foreign currencies to industrial projects both in the private and public sector. At the beginning their main motive is to industrialize all over the country. But in 13 April 1982, BSB has gone to the general banking system with 13 branches at a

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time. BSB established the commercial branch, Dhaka Office in 1st July 1996. Directing all functions with the general rules and regulation and laws of Bangladesh Shilpa Bank, it performs the following functions: Buying and selling of prize bond, saving certificate etc. Share issue, share purchase and other related activities for public limited company. Loan and Advance provided against term deposit and other bill of exchange. Issue of guarantee of local currency for short-term commercial loan. All general banking activities according to traditional rules, regulation and Bangladesh Shilpa Bank Ordinance. Formulating the rules of deposit collection making attraction for deposit and preservation of the amount of deposit. Providing running capital loans to industrial projects. Supporting sub-division in advanced transaction of current capital section with cash loan. Take steps about computerization of all banking activities. Accomplishment of the responsibility often given by the decision head. Identifying the fields of investment of the deposit collected and co-ordination of advance-subdivision and central account sub-division in order to conform appropriate and lucrative investment. Preparation of general banking rules and co-ordination with branch office for the same. Collection of installment of governments due from expected capital projects. Completion of issued cheque transaction through clearing house of Bangladesh Bank. Regular statement submission according to requisition of Bangladesh Bank.

Co-Ordination among Departments: One department needs the help of other departments in almost every work. So, one department depends on others for their functions to perform. To perform functions 35

properly, there must be communication among departments, same as the case of BSBs departments. For example project implementation departments functions depend on the Loan Operation Department. If LOD does sanction any loan, there are no functions to be performed by the project implementation department. So there must be co-ordination among department otherwise the bank cannot perform well. The co-ordination is very important for banking activities. One department of BSB depends on others directly or indirectly. The direct relationship among departments is shown graphically:

Loan Operation

Documentation & Machinery

Project Implementation

Central Accounts

Central Recovery

Law

Project Rehabilitation

Human Resources Department Fig: Relationship among department The functions of BSB starts from the loan operation department and ends at the central recovery department if the project runs successfully otherwise it ends through the law department whose functions are to take necessary action to case. Central accounts department has direct relationship with all departments. The bill and salary of all

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departments are paid through central accounts department. Human resources department sees the welfare of the employee of all departments. It arranges training programs, allows leave, gives promotions, and gives retirement benefits.

CHAPTER FIVE PROJECT APPRAISAL PROCEDURE

5.1. INTRODUCTION A project is a proposal for an investment to create, expand and/or develops certain facilities in order to increase the production of goods and/or services in a community during a certain period of time. For the purpose of BSB, project means a scheme for capital investment to develop facilities to provide goods and services. BSB's main function is to extend financial assistance to industrial project. It basically needs to be satisfied about the overall viability of a project to be financed. For this purpose, an objective assessment of the viability of the project is required to be examined by BSB from various points of view. This is what can be called project appraisal. The aim of project appraisal is to examine the need, which a project is designed to meet and to judge whether the project is likely to meet this need in an efficient way. Project appraisal provides a rational basis for decision-making. In case of short-term lending, it is not usually necessary to make expensive study of the customer's future potential Examination of general creditworthiness of a customer and his current financial position is adequate.

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There can be no fixed or standardized approach to project appraisal. Numerous and diverse elements enter into the process of appraisal. It is difficult to have a cut and dried formula with the help of which a proposal for financial assistance can be adjusted straightway as acceptable or unacceptable. While broadly the same set of factors is taken into consideration in the scrutiny of individual applications, the weight age given to the factors varies from project to project. In practice, project appraisal coyer five different aspects of a project, viz. (1) Management and Organization (2) Technical (3) Market (4) Economic, and (5) Financial. 5.2 MANAGEMENT ASPECTS An assessment of the promoters in respect of their integrity, experience and capabi1ities to implement and run the project is of prime importance before extending credit facilities to them. There are no set of rules to find out if the borrowers or promoters are the men of integrity. It is to be done by direct and indirect investigation. The borrower's experience and capabilities can, on the other hand, be assessed in terms of his educational background, spatial qualifications, practical business experience, receptiveness to new ideas, or good advice, the general reputation and above all his potentiality to learn new things and adaptability to new and changing situation. The extent to which crucial probing with regard to these aspects may be necessary depends on the type of the project and the background of promoters. If, for example, a project incorporating a relatively complex technique and process is promoted by an entrepreneur with proven abilities and experience, the crucial areas to be probed may be, among others, the competence of the managerial and technical executives likely to be in charge of the project. But if such as the competence and previous experience of the promoter, their collaboration tie-up arrangement, the technical and managerial backing he has already line up, their financial resource, etc. may have to be thoroughly scrutinized. 5.3 ORGANIZATIONAL ASPECTS

38

Closely related to the management is the type of organizational structure necessary to carry out and operate the project successfully. So far as organization is concerned, there are two basic queries; what organization is needed to bring the project to the operating stage and what organization will be needed thereafter. In the operating phase, one of the most common questions is the extent to which responsibility and authority should be centralized or delegated. The answer depends on the scale of operation, its geographical dispersion, the degree of specialization of personnel, and the number of persons to whom responsibility can be delegated. Internal controls should also be reviewed. These are basic to sound organization. For a management to function efficiently, the organization should be able to provide prompt reports on current performance that can be checked against both past performance and previous projections of future trends so as to bring problems to light as they arise. It is equally important that the organization should be able to put the decisions of management into effect without delay. Besides, sound budget and inventory control are needed. 5.3.1. CREDIT INVESTIGATION Appraisal of management and organization of project cannot be dined adequately without undertaking methodical credit investigation. The following two broad objectives are intended to be realized through the credit investigation. (1) Proper identification of the application, and (2) Degeneration of their ability and willingness to abide by their agreement with the Baric In order words, whether they can and will live up to their commitments in a nominal way. Through an organized credit investigation answers to the following specific questions are sought: (a) Who are the applicants? (b) What are their present professions or vocations? (c) Are they persons of proven honesty and recognized integrity? (d) Are they persons of proven honesty and recognized integrity? (e) What is the extent of their financial worth? (f) How much they can and are willing to invest from their own resources? (g) How far they are capable of implementing and running the project. 5.3.2. SOURCE OF CREDIT DATA

39

For the purpose of evaluating the credit worthiness of the applicants, particulars and information are necessary about their character (honesty and integrity), capital (properties and possessions), capacity (entrepreneurial and managerial ability), liquidity (cash and non- cash assets), etc. Information necessary for evaluating these traits and qualities can be obtained from a number of Sources. There are several methods like written requests, telephone conversation, meeting information at social gatherings, etc. which may be jointly or severally adopted to obtain the required information. The usual sources of information can be broadly divided into internal sources and external sources. The external sources can again be sub-divided into personal contacts and indirect investigation

5.3.3. INTERNAL SOURCES In case the applicants are exiting borrowers of the Bank, the internal records and behavior of respective loan accounts will reveal great deal of information about their bank-ability. Details of past borrowings/ equity-support such as amount, date of sanction, amount repaid, amount outstanding and overdue, together with comments on aspects like replacements, moratorium, etc. if any, should be incorporated in the credit report. 5.3.4. EXTERNAL SOURCES For the new applicants, the credit investigator has to depend primarily on the external source to verify the statements and declarations made in the loan application. The main external sources are: (a) Credit Information Bureau (CIB) Report. If the corn report indicates that the proposed sponsors are defaulters to any Bank/OFI, their proposal should be turned down as per decision of the GOB, (b) Interview with the applicants, (c) Financial statements, deed and statutory documents, etc. (d) Inspection of the apple incants, place of business and properties, and (e) Other sources like commercial bankers of the applicants, business firms, trade circle, friends and associates, Registrar of join Stock Companies/Firms, District Registrar Sub-registrar, Local periodicals, Government Publications, etc. 5.3.5. APPLICANTS-THEIR HONESTY AND INTEGRITY

40

The main task of the credit investigator is to ascertain the real identity of the applicants with regard to their honesty, integrity and their legal authority to borrow or to raise institutional equity. The starting point for him is the loan application and specifically the declaration of the personal assets of the applicants. On this basis, he should have a threadbare discussion with the applications. The credit investigator should keep it in mind that the applicants should not only be citizens of Bangladesh, but they must also not be minors, bankrupts or persons of unsound mind. He should also be well aware of the legal status of proprietorship concerns, partnership firms and limited liability companies with regard to membership, capital, objectives, borrowing capacity and tax obligations. 5.3.6. PROPERTIES AND POSSESSIONS OF THE APPLICANTS The financial standing of the applicants is judged by means, of direct reference to their movable and immovable properties. The value' of total assets minus corresponding borrowings, if any, would indicate the net worth. Although the assets free from encumbrances should from the basis of assessing the financial standing, the details of the existing borrowings from different sources should be stated in the credit report to throw light on the borrowings from different sources should be stated in the credit report to throw light on the borrowings habits of the applicants. There are compelling reasons for which the credit investigator has to be satisfied about the ownership and real value of the declared assets. 5.3.7. LIQUIDITY STATUS OF THE APPLICANTS The credit investigator must be satisfied that the applicants are financially capable of undertaking a project of the contemplated size. This calls for determination of the sources and the extent of funds that the applicants are capable of mobilizing and also the extent they are ready to invest. The liquid funds necessary for investment in the project may be mobilized by the applicants from one or more conventional sources. 5.3.8. CAPACITY OF THE APPLICANTS Because of the complexity involved in setting up and ensuring profitable operations of an industrial project, the most important pre-requisite that the Bank expects the applicants to possess is the capability to manage and supervise. The success of a project depends 41

primarily on this trait of the sponsors. Its presence blooms a project and its absence dooms the same. Unfortunately this is most difficult to judge. As indicated in the proceeding paragraph, the entire credit analysis is directed to point up this qualitative characteristic of the sponsors. Individual, capability is reflected in the conglomeration of skill and resourcefulness, education and. experience, age and personal health, etc. The first consideration for the credit investigator is to ascertain how successful the applicants are in their present trade and profession. The second consideration is to judge whether they are financially and managerially competent to undertake implementation of the project. The thing consideration is to forecast ability to run the project successfully upon implementation. Analysis of the past operations, opinion of the commercial bankers, independent opinion from outside sources, etc. would be useful in assessing the capability of the applicants. It may be mentioned here that while assessing the sponsors capability, the following point should be examined. * Past repayment performance of existing loans. 5.4. TECHNOLOGICAL ASPECTS The technical aspects of in industrial project are appraised to determine whether the project is sound with regard to every engineering and technological consideration, including product specification, process, size, internal balance, suitability and availability of physical facilities, designs and layouts of equipment and buildings etc. In a developing country like Bangladesh, where there is hardly and indigenous technological base to support the industrialization process the industrial undertakings have to be conceived on the basis of know or borrowed technology until such time as the development of local technology is sufficient. The second important aspect of technical study includes evaluation of resources to be used for setting up the project as well as operating it subsequently. The physical resources to be used are to be transformed into financial tens. Hence, the task of the engineer is to evaluate quantitatively the resources such as project land, building materials, machinery, equipment, stores and spares, raw materials, labors, power, fuel, etc. Then he is to work out the cost of these resources. In monetary tens to determine the capital cost of the project and also its operating cost after implementation. While evaluating the capital outlay and physical facilities, the engineer will have to determine the production cycle and also the time schedule for implementing the project. 42

In the case of a project involving technical collaboration or borrowed technology, the project engineer has to examine various facets of technology transplant and its adoption to suit the local conditions including the terms and conditions of technology transfer and financial and economic implications of such transfer of technology. Although basically, technology transfer takes place between two systems, namely, the domestic acquisition system (the sponsors) and the delivery system (foreign collaborations), the development bank which acts as a gate-keeper between the two systems has a vital role to play in determining the suitability of the borrowed technology, the terms and conditions of technology transfer and its impact on the project as a whole. The ultimate aim of project appraisal by a Development bank is to determine the profitability of the project both from commercial and social points of view. This cannot be undertaken unless through technical studies and cost analysis have been made a related technical problems solved. Thus, the technical studies and cost analysis provided the basis both for the initial estimates of the profitability of an investment during the initial stages and for the final decision to implement the project or not. The technical appraisal, therefore, constitutes the foundation of the entire super-structure of project appraisal. A development Bank may need to consult or contact with specialized engineering services from outside for specialized matters, particulars relating to project to be based on complex technology. However, good at engineer of Development Bank may be in studies or specific operations, he cannot be expected to be expert in all fields of specialization. This point is of great practical significance while dealing with a project in which the country has no previous experience. In such a situation, particularly in the case of a project involving large capital outlay, it is advisable to find out best advisors (consultants) from outside. For because any defect in the project design and formulation will eventually affect the enterprise adversely. 5.4.1. BASIC ASPECTS OF TECHNICAL APPRAISAL The basic aspects to be analyzed in the course of technical appraisal are 5.4.1 (A) Preliminary investigation 43

(a) Products/ Service; (b) Raw materials; (c) Skills and technology required for manufacture/ service; and (d) Testing and analytical report. 5.4.1(B) Selection of production process (a) Choice of alternative and selection criteria; (b) Wastage in manufacturing process; (d) Disposal of wastes and effluents; and (e) Environment and pollution control. I II. III. Machinery and equipment for production/service Productive capacity and efficiency. Site selection(a) Technical factors; (b) Cost factors of production; (c) Marketing factors; (d) Administrative and housing factors; and (e) Transportation factors. IV. Layout plan(a) Site; (b) Building; (c) Plant and Machinery; and (d) Supplementary Installations. V. Analysis and evaluation of utilities and supplies(a) Raw materials; (b) Stores and spares; (c) Technical know-how; (d) Transfer of technology; (e) Labor; and (f) Transporting. VI. VII. Work Schedule. Estimation and evaluation of cost.

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The relative importance of these aspects will, however, vary from project to project. 5.5. MARKETING APPRAISAL An industrial project is to bring in some goods or services for a community. But the community does not need them infinitely. Their demand is of course finite and at given prices. 5.5.1. CONCEPT OF MARKET Ordinarily, the market means a precise place where commercial transactions occur. In a broader sense, however, it is termed as the sum of contacts between buyers and sellers of a product or service, the price and quantity exchanged of which are detonated by the forces of demand and supply. Market, in this sense, may be formally organized and geographically centered or it may, be either. The market includes the whole environment in which the enterprise is to live and to which it must adapt itself consumers, suppliers, competitors and all kinds of technical, material, political, legal and administrative restrictions. Market analysis is the first "screening" stage in the project appraisal, at which projects that cannot expect satisfactory market acceptance shall be rejected. 5.5.2. MARKETING PLAN A: Marketing Objective: Marketing plan, as in the case of production and financial plan, should have objective in the backdrop and the objective is what is wanted to be achieved. The objective may be more than one and quantifiable. For appropriate marketing objective, it is necessary to look at depth into the (a) macro/micro demand/ supply situation for specific products in the market, (b) existing and expected competition in local and foreign markets, (c) market share, etc. While appraising industrial projects, the Bank is required to analyze these factors and to bring out the objective in quantitative terms. (a) Product identification: The study of this environment should begin with proper identification of the goods or services to be exposed to the environment. One way of identifying them is in term of their complementarily and Competitiveness. Complementary goods are used together in a 45

single consumption activity. Cameras, films and developing instruments and chemicals constitute a set of such complements. Complementary goods may be sold together or separately. Another way of distinguishing goods and services is in terms of their consumers. These are: Final goods, Intermediate goods and Investment Goods. Lastly, the goods and services may be either new or existing in the market. (b) Nature of Demand (c) Type of Demand: (I) There are various types of demand for the products/services in question. These are direct, derived, new, replacement demand, etc. The market analyst should identify the type of demand be created for the product(s)/ services. (II) Size and Composition of Present Demand, Market Size. 5.5.3. METHODOLOGY: The initial objective of demand analysis is the determination of current effective demand. Effective demand represents the total quantity of a specific product purchased at a given price in a particular market over a given period. The base for estimation is the actual consumption figure during the relevant period. The equation of apparent consumption is as follows: C=P+ (M-X) + S Where, C P M X S = = = = = Consumption Domestic production Imports Exports Changes in Stock

Once current demand has been estimated for the entire market, it becomes necessary to segment the market to make future projections. Effective market segmentation will therefore: - help to understand better market behavior and responses, - enable the concentration of efforts on promising market segments, 46

- enable the fine tuning of marketing strategy to the needs of target segments, - increase total sales, reduce costs and step up profits. The most typical variables, by which markets can by segmented are as follows: A: Consumer Markets (1) Geographic: - Administrative regions - Geographic regions - Climate - City-size - Rural-district cut-size. (2) Socio-economic: - Income (level, dynamics, distribution) - Age - Sex - Occupation - Education - Income elasticity of demand - Prices and availability of complimentary goods - Govt. policies - Culture (3) Personality and behavior: - Life style - Leadership - Ambition - Extroversion and introversion - Service sensitivity and introversion - service sensitivity - Promotional sensitivity B: Industrial Markets: (1) Number and types of industrial users: - Size - Ownership 47

- Regional concentration - Vertical vs. horizontal markets (2) Buying power: - Number of employees - Number of employees - Value-added.

The market analyst should collect and analyses the following data for export market: (I) World Trade: - Names of the countries to which the product will be exported - How these countries are at present meeting their demand. If through import, what are the countries of their origin? - Time series data regarding export and import. (ii). Characteristics of Specific Intermediaries (Exporter, Importer): - General description of types available - Margins - Effectiveness - Marketing tasks they are able and prepare to carry. (iii) Transport and Insurance: - Traditional transportation means - Costs of freight and insurance - Delivery terms, DIF, FOB, etc. (iv) Market Accessibility: - Tariffs and fees - Non-tariff barrier - Health, medical and safety requirements - Import quotas - Political and administrative barriers. (v) Terms and conditions of sales and distribution arrangement (vi) Export incentive available (vii) Past export trend/ performance of the product(s)

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5.5.4. SUPPLY ANALYSIS: Local producer's past and present output, together with capacity utilization review provides a convenient departure point for an analysis of supply situation and outlook, which combined with combined with demand estimates, will determine the project's position in the market and thus expected. Compared with the variety of methods applicable for demand forecasting, projecting the future supply position in the market is a rather unassuming task. Availability of the production in the market is a function of: -domestic producers present and projected capacities -new projects being under construction present and projected export volume -foreign manufacturer' capacities, marketing strategies and development plans, - Government policies. 5.5.5. SUPPLY GAP: Considering the future demand for the product and total potential supply of the same, the analyst should, estimate the projected supply gap. It is to be examined how the supply gap justifies the setting up of the project under consideration. 5.5.6. MARKET SHARE: Having estimated the supply gap, the market analyst should calculate the project's contribution towards the reduction of this gap. In fact, market share is the marketing objective. 5.5.7. MARKETING INFORMATION The procedure of market analysis, outlined above, call for systematic collection of information about the market for the goods and services to be considered. Some of this information is quantitative while other is qualitative. 5.5.8. QUANTITATIVE INFORMATION The following quantitative information is to be collected in physical on a national basis: Consumption Data: 1. Production 2. Imports 3. Exports

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For international comparison, such data for comparable foreign countries are also to be collected. Industrial census: 1. Number of productive units 2. Distribution of productive units by location. 3. Installed production capacity. Demographic Data: 1. Distribution of population by age, sex, marital status, religion, literacy, income, occupation and region. 2. Average size of a family 3. Rate of population growth 4. Rate of organization. The following quantitative data, express in terms of value, are also be collected on a national basis: Prices: 1. F.G.B. price of exports. 2. C.LF. price of imports. 3. Ex-factory price of products and services. 4. Wholesale price annual average. 5. Consumer's price index. 6. Cost of living. The above quantitative data should be collected for several for several years in the past so as to constitute historical series. 5.5.9. QUALITATIVE INFORMATION: The qualitative information, which may be required for market analysis, is: 1. Location information-Transport and communication facilities, water and power facilities, nearness to the market, etc. 2. Possibilities of continued supply of inputs. 3. Attitude of customers. 4. Climatic characteristics. 5. Methods of distribution-market and non-market 6. Government policies: (a) Economic Development objectives, 50

(b) Health and safety standards, (c) Investment/International policy, (d) Taxation policy, (e) Export policy, (f) Monetary policy, (g) Labor policy, (h) Others, if any.

5.6. ECONOMIC APPRAISAL In economic appraisal, the project is looked at from the national or social point of view and the economic cash flow is constructed on the basis of "true or real prices", commonly known as accounting or shadow prices. Economic analysis of a project aims at determining whether that project is consistent with overall national and sector-wise objectives and whether the investment proposed is the best means of achieving the intended objectives. It involves a systematic evaluation of a range of options for achieving the intended objectives. Allocating resources to a sector or specific purposes reduce the resources available for other sectors and purposes. Therefore, it is essential that the allocation of investment resources be efficient among sectors. Economic appraisal is the primary means of determining whether a proposed investment is worthwhile. It should determine whether a project is acceptable and, if it is, whether it is the best alternative. Economic appraisal should cover both quantifiable and non-quantifiable benefits (where applicable). Such benefits are described below: 5.6.1. QUANTIFIABLE BENEFITS: Following are the quantifiable benefits of economic appraisal: (a) Economic Rate of Return (ERR), (b) Bruno Ratio/ Domestic Resource Cost, (c) Contribution of Gross Domestic Product, and (d) Employment Generation and Cost per employment.

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(a) ECONOMIC RATE OF RETURN (ERR): ERR measures the potential earning power of the social resources used in the project and thus help the assessment of investment proposal. It is worked out at which the present value of costs becomes equal to the present value of benefits. Net present value (NPV) is the net value or net benefit of a project when all costs have been discounted to the present at the accounting rate of interest.

After working out the ERR, it should be compared with the Accounting Rate of Interest (ARI).The ARI is nothing but the opportunity cost of capital which is supposed to maximize the use and productivity of invest-able resources in the country. The broad decision criterion is that, other things being equal, the project whose ERR is less than the ARI should ordinarily be rejected unless other unquantifiable benefits are adequate or the project can be qualitatively justified. (b) BRUNO RATIO/ DOMESTIC RESOURCE COST (DRC): An industrial project will either be import substitute or export oriented or combination of both in nature. In developing country, development of industrial projects, normally involves substantial amount of scarce foreign exchange. On the basis of more absolute amount of saving and/or earning of foreign exchange of an investment proposal, the optimal allocation of scarce resources (both domestic and external) may not be achieved, the implicit foreign exchange. In other words it indicates the domestic resource cost involved in foreign exchange to be saved/ earned by a project. The domestic resource cost (DRC) involved in saving/ earning foreign exchange by a project is normally worked out by dividing the real domestic cost in Taka by real net foreign exchange to be saved/ earned. It is normally expressed as Taka cost per unit off foreign exchange (i.e. $ or) saved/ earned i.e. the amount of Taka required to save earn a Dollar or Pound Sterling. If domestic resources are expressed in domestic currency and foreign exchange is expressed in dollars, a DRC of less than the (Shadow) exchange rate is considered quite acceptable. (c) CONTRIBUTION TO GROSS DOMESTIC PRODUCT (GDP)

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Contribution to GDP of a project is estimated from sales value and inter-firm transactions. Data regarding sales value is taken from the calculation of sales estimate of the financial appraisal. Sales value of fourth year is taken. Similarly, data relating to inter-firm transaction of fourth year is collected from the calculation sheet of cost of goods sold and general administration and selling expenses of the financial appraisal Detail calculation of contribution to GDP of a project may be worked out as per the following format: Sales (fourth year) Less: Inter firm transaction (fourth year) Raw and packing materials Stores and spares Water, power and fuel Repair and maintenance Rent, tax and insurance Postage, telephone, faxes etc. Stationery and printing Traveling and conveyance Advertisement Miscellaneous Contribution to GDP (A-B) xx xx xx xx xx xx xx xx xx xx xxx XXX XXX XXX

(d) EMPLOYMENT GENERATION AND COST PER EMPLOYMENT: The number of full-time and part-time jobs measured in man-years expected to be created both during construction and during operation of the project should be estimated separately. If data are available, these estimates should be related to Regional, sectoral and national levels of unemployment and under employment and under employment. Where possible, the degree of labor intensiveness (i.e. the number of workers employed per unit of investment) of the project should also be estimated. 5.6.2. Non-quantifiable/ Intangible Benefits/ Externalities: The term non-quantifiable refers both (1) to effects that are known to arise but which cannot be measured in physical terms and (2) to effects, which cannot be valued.

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Difficulties in quantification and valuation will often go together. Quantification problems often are data problem a certain effect could not be measured, but has not been.

5.7. FINANCIAL APPRAISAL The main purpose of financial appraisal is to assess if the proposed project is viable in term of its operation in the future years and its financial soundness. The financial analyst should have a clear idea as to what is intended to be achieved through the financial appraisal. The financial appraisal is directed to examine mainly the following two aspects: (a) Fund requirement to bring the project in to existence and the probable sources from which the required funds will be mobilized; and (b) Prospects of adequate revenue generation by the project when it goes into operation and the likely position of the concern with regard to its actual cash generation (liquidity) and its probable impact upon the financial condition (solvency). The first aspect deals with the estimation of total of the project (fixed cost + net working capital) and a suitable financial arrangement (debt-equity relation). The second aspect relates to the analysis of production-cost profit at different volume of production carried up to the year the project attains its normal capacity operation. 5.7.1. Cost of the Project: The cost of a project represents all capital expenditure to be incurred for acquisition of its fixed assets plus the net contribution of long-term resources in the proposed current assents. In other words, the fixed cost of the project plus the net (or permanent) working capital requirement to run the project will comprise its total cost. 5.7.2. Fixed Cost of the Project: The requirement of physical assets for a project is essentially an engineering estimate. The analyst should, however, recheck the various cost items detailed in the fixed cost statement given in the technical report. The idea is to see that all costs are included and the cost estimates are realistic. The analyst should go through item by item and also look in to their ramification. Individual item of tangible assents will have a required quantity (Q) and a price (P). The Q indicates any quantity in area, number, volume, or any other 54

suitable unit of measurement. The P indicates the price for a specific unit of Q. The fixed cost of a project is the aggregate of cost of land, building construction, plant, and machinery and equipments, and are expenses (capitalized) and a margin for contingencies (any or may not be considered). 5.7.3. Working Capital: Apart from investment in the fixed assets, liquid funds are necessary for investment in current assets like stocks of raw materials, good-in-process, finished goods, stores and spares, debtors, etc. The portion of fund, which remains invested in current assets of a concern, is called its working capital. Such assets are characterized by their tangibility and short-liveliness. It is worthwhile to mention here that Bangladesh Bank issues some policy guidelines from time to time as to what will be the tied up period while calculating working capital requirement pending on the nature of the project, which should be followed during appraisal. 5.7.4. Means of Finance: A project may be financed in the following two ways: The entire finance may be provided by the sponsors; or Part of the finance may be provided by the sponsors and the rest by the Creditors. 5.7.5. Analysis of Financial Statement: Proper interpretation of data presented by financial statements helps in(i) Judging the profitability of operation during the past periods, (ii) Indicating the trends which may reveal future probabilities, (iii) Determining the financial condition at a specified date, (iv) Predicting the future ability to meet the existing or anticipated credit obligations, (v) Judging the capability of the management in meeting the changing conditions arising out of implementation of the proposed project or on-set of a bad business time. After estimating the costs of the project, means of finance, sales and costs of sale, the financial statements of an existing concern should be analyzed through calculation of a number of financial ratios.

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5.7.6. Ratio Analysis: Despite various approaches to financial analysis, the ratios can be classified into the following four fundamental categories: (i) (ii) (iii) (iv) Liquidity Rations (These are also called Loan Safety Ratios); Leverage Ratios; Activity Rations (Management Efficiency Ratios); and Profitability Ratios.

Liquidity Ratios are designed to measure the ability of the concern to meet its immediate and maturing debt obligations. Leverage Rations measure the extent of funds contributed by the owners of the project as capital compared to the funds provided by its long-term creditors. Activity Ratios measure how effectively the project is employing its resources. Profitability Ratios show the management's overall effectiveness as revealed by the returns generated on sales and investment. 5.7.7. Financial Projections: Financial projections are final translation of plan for a project in monetary terms. In other words, projections reflect in concrete terms the anticipation of the analyst regarding the future income and expenditure and their probable impact upon the assets, liabilities and equity of a proposed project. Through financial projections, answers are sought to the following questions: (i) (ii) What it should cost to produce and sell the product? and What it should sell for?

5.7.8. Presentations: The third basic requirement of financial projections is a suitable technique for calculation and presentation. The analyst will have to utilize his knowledge of accounting. The financial projections are prepared and presented within the accounting framework. The quality of the projections would, therefore, depend upon the analyst's knowledge of accounting. The financial projections involve working out the following three interrelated statements for a number of years in respect of a project: (i) Forecast of earnings this will measure the cost of production and profitability; 56

(ii) Fund flow statement which will indicate major or prominent fund inflows and outflows; (iii) projected Balance Sheets which will depict the capital structure and assets spread at the and of periods used in (i) and (ii) above. 5.7.9. Cost of Production: Once the computation of future sales is completed, the next step is to calculate the relevant cost of sales. This process involves preparation of some sort of expenses budgets for the relevant years for which sales have been calculated. All the expenses can be broadly divided into the following three categories: (i) (ii) (iii) Cost of goods sold; General, Administrative and selling expenses; and Financial expenses.

CHAPTER SIX LOAN RECOVERY

6.0 Central Recovery Department (CRD) Project implementation department makes a repayment schedule and given it to the borrower. Nominally the interval is 6 months. This department inspects the project after every 6 months to see whether there is any leakage. If the borrower fails to repay the loan as the application of the borrower it is rescheduled. Sometimes a portion or interest is exempted. If the borrower fails to repay the loan, than it is transfer to law department to take legal action. On the application of the borrower sometime the project is transferred to project rehabilitation department to restore the project.

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Hierarchy of management of Central Recovery Department Now total staff 23, Approved 29, Vacant 6

DGM

AGM-1

AGM-2

SM-1

SM-1

SM-3

SM-4

SM-5

Vacant

Seminar Office

Seminar Office

Seminar Office

Seminar Office

Manager

Manager-1

Manager-2

6.1 Principles of classification of loan and provisioning: For the purpose of classification all loans and advances are divided into four categories. (a) Continuous loan, (b) Demand loan, (c) Term loan, (d) Short-term agricultural and micro-credit.

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a) Continuous loan: The loan which can be granted and recovered without any repayment schedule but have an expiry date and maximum limit are called continuous loan. b) Demand loan: The loan which must be repaid as the bank calls it is called demand loan. c) Term loan: The loan which must be repaid as the banks calls it is called term loan. Objective criteria: If any continuers loan is not repaid within the expiry date that it is called irregular loan. The classification of loan is as follows: 6 months> continuous loan> 3 months = Sub-standard 12 months>continuous loan>6 months = Doubtful Continuous loan> 12 months = Bad and loss If any installment of any tern loan is not repaid within specific date it is treated installment default. 6.2 Maintenance of Provision: 1. On the basis of the quality of the loan the following precession are maintained: Unclassified Classified: A. Substandard B. Doubtful C. Bad debt 20% 50% 100% 1%

2. On the term agricultural and micro-credit the following provision to be keptA. On all debt other than bad debt 5% B. On bad debt 100% 6.3 Rescheduling Procedures (a) On the application of loan rescheduling the bank inspects reason of the loan default. If it is revealed that the borrower has spent the money in another way instead of the specific investment than such application will not be considered. In this case legal action will be taken. (b) The position of liabilities of borrowers to other bank is to be considered (c) The bank will analyze the cash flow statement audited Balance Sheet, Income Statement and other financial statements. 59

(d) If necessary, the bank will inspect the business of the borrower to ensure that he will be able to repay the rescheduled loan.

Rescheduling of Term Loan: (a) A term loan may be rescheduled if 15% of expired installment or 10% of total due which ever is lower is paid in cash at first. (b) A term is considerable to be rescheduled for the second time if 30% of expired installment or 20% of total due which ever is lower is paid in cash. (c) To reschedule term for the third time or more 50% of expired installment or 30% of due which ever is lower must be paid in cash.

Demand and Continuous Loan Rescheduling: (a) To reschedule the Demand Loan and Continuous Loan the rate of down payment are as followsInspired Loan Unto 1 crore 1 to 5 crores 5 core and above Table-12 Rate of Down payment 15% 10%(but not less than 15 lacks) 5% (but not less than 50 lacks)

(b) To reschedule the Demand Loan and continuous loan which has been converted into term loan 30% of expired installment or 20% of total clues which ever is lower must be paid in cash. (c) If the loan is required to reschedule again 50% of expired installment or 30% of total dues must be paid in cash at first.

6.4 Loan Recovered: Loan recovery is a crucial index to measure the success of a lending organization. Like previous year, this year too, the Bank has strengthened its recovery drive for realizing loans and dues from its borrowers and significant success was achieved.

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Recovery of Loan Category of Loans

Amount Recovered (million Taka) 2003-2004 2004-2005 1061 3 34 98 1196 45 150 195 1391

A. Loan Term Loans: Loan Term Project Loans 915 Bridge Loan 1 Staff Loan 35 Administered Loan 105 Sub-Total: 1056 B. Short Term Loans: Working Capital Loans 27 Others (Debenture/Shares/Loans against 41 FDR) Sub-Total: 68 Grand Total (A+B): 1124

Total recovery target of loans during FY 2004-05 was Tk.1400.00 million against which actual cash recovery was Tk.1391.44 million constituting 99 percent of the target. During the reporting year, outstanding loan of Tk.259.48 million was regularized through rescheduling and rephasement of bad and doubtful loan accounts. The amounts regularized through cash recovery and rescheduling were Tk.1124.20 million and Tk.149.4 million respectively in FY2003-04. During FY 2004-05, the recovery drive was affected to some extent, among others, due to the ever-memorable serious flood the country experienced. During 2004-05 the percentage of classified loan stood at 41% with a 21% decrease over the 62% of the preceding year. In other words, with an increase of Tk.6359.69 million during the reporting year, the classified amount of loan stood at Tk.3664.71 million from Tk.10024.40 million in the previous year.

6.5 Loan Portfolio: During FY 2004-05, loan liabilities of 41 projects were liquidated and 14 new projects were recorded in the Banks loan portfolio. As on 30th June, 2005 total number of projects in the loan portfolio stood at 166 with a total loan outstanding of Tk.7441.91 million compared to that of 308 projects having a total outstanding loan of Tk.13998.11 million in the preceding year. Out of 166 projects in the loan portfolio, 60 were export-oriented, 72 import substituting and 34 service/ other industries.

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Sector-Wise Position of Banks Loan Portfolio (As on 30-06-2005) Sectors Number projects Food and Allied products 31 Jute and Allied product 3 Cotton. Woolen and Synthetic Textiles 53 Paper, Paper Products and Printing 6 Tannery and Leather Products 4 Non-metallic Mineral Products 2 Forest and Wooden Products 1 Rubber and Rubber Products 0 Basic Metal Products 1 Metal Products 5 Electrical Machinery and Goods 0 Machinery and spare Parts 6 Transport Equipment 6 Chemical and Pharmaceuticals 15 Petrol-Chemical Products 5 Service Industries 18 Miscellaneous 7 Total BSB Projects 163 Total BSCIC-Sponsored projects 3 Grand Total 166
Sectorwise Loan Outstanding (Major Sectors)

of Amount of Total Loan (million Tk.) 491 538 5304 177 100 100 7 0 2 31 0 45 16 198 133 204 96 7442 0 7442

2.38% 7.12% 2.66% 2.74% 6.60%

Textile Jute & Allied Food & Allied Service Industries

7.23% 71.27%

Chemical & Pharma Paper & Printing Others

6.6 Legal Actions Taken for Recovery of Loans: The Bank initiates legal actions under the BSB order, 1972 and Artho Rin Adalat Aien2003 against those defaulting and recalcitrant borrowers who fail to come up with any satisfactory proposal for settlement of Banks dues after all normal recovery efforts have been exhausted.

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Legal Actions Taken Position of Projects Under litigation Legal Notice Issued Filing of Suit Case Settled Outside the Court Auction

2003-2004 No. Of Projects 126 205 6 2

2004-2005 No. Of Projects 33 23 11 11

In FY 2004-05, legal notices were issued against 33 defaulting companies for recovery of Banks dues while lawsuits were filed against 11 companies. Besides, 79 sale notices were published in the national dailies for auction. At the same time, efforts were made for settlement of disputes outside the court through negotiation. As a result, 23 litigated companies settled the disputes outside the court and assets of 11 projects were sold through auction during the year.

6.7 Loan Written off: During FY 2004-05, the Bank has written off Tk.6155.28 million as loan liability of 171 projects under Bangladesh Bank's guidelines. Sometimes the justify that for various reason loan amount would not be paid because of various reasons such as Default Culture Due to change in technology With the passage of time Due to change in fashion of human beings Due to change in demands of people Tuff competition among the same type of companies Intention of theft Lack of morality Inefficiency management of the organization for which the organization can not

survive success fully. Some of the reasons out of the total problem, BSB rescheduled the undue amount. The bank always try to receive the project but if the authority think that this reasons is faulty

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of the sponsors then it is transferred to law department to take legal action. Sometimes, the project is transferred to project rehabilitation department to restore the project.

6.8 Limited factors of CRD Highly political pressure for recovery of loan. The steps for recovery of loan are not satisfactory. The authorized persons who are employed for recovery of loan are not free

from biasness. The authorized persons who are employed are not efficient and skillful. The management is not professional for recovery of loan. Legal action procedure for recovery of loan is not so strong. Lack of motivation to collect the old loan. Lack of coordination with other departments.

6.9 Recommendation factors of CRD New technique should be applied for recovery of loan. The management for recovery of loan should be free from biasness. Political pressure the recovery of loan should be stopped. Proper action should be taken for recovery of loan. CRD should be employed experience, skillful and professional manpower. Coordination with other department should be increased. To declare some incentives for recovery of loan.

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CHAPTER SEVEN SICK INDUSTRIES

7.1 Precautions about Sick Industry: Sick situation arises in an industry in some abnormal period. But if the rate of sickness is overwhelming then it becomes a matter of fact. So before providing loan importance must be given on evaluation. If the evaluation procedure is correct, sick industry situation may avoid quite easily. So at pre-investment stage the following things must be considered Examine the project is done appropriately. The project cost is calculated in a proper way. The proper place is selected. Defect machineries must not be purchased. Ensure that skilled and experienced personnel are easily found. Proper stapes are taken to protect uneven breakdown of electricity. Ensure that proper people are involved in the managing committee. Ensure the financial capability of the initiator. Ensure the procedure of makeup the preliminary cost and the doubtful loss. Ensure the quality of the produced product. Ensure the proper way to marketing the produced products. Consider the change of test of customer. Proper plan is taken to implement the project. Steps are taken to avoid the potential conflict

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7.2

The Symptoms of Sick Industry:

The symptoms of sick industry are as follows The initiator is unable to pay sufficient money at the implementation stage. The delay of implementation increases the project cost. It also creates many problems and the burden of loan interest is increased. Lack of full production or frequent obstruction of industry. The initiator is unable to pay the loan installment and other liability. The failure in payment of loan installment in time increases the burden of loan. Inability to submit the financial statement in time. Increase the tendency of undertaking unfair means in preparing the papers of stock materials. Profit from investment is decrease gradually. The project faces loss gradually. The production level decreases gradually. Taking loan from various sources at a high rate. Applied for a large amount of loan. Non-cooperating tendency with the loan providing bankers. Lacking of perfection in the market.

7.3 Causes of Sickness: Bangladesh Shilpa Bank undertakes various projects by providing finance, machinery and other aids, some projects are implemented and successful and some projects are failed to attain the goal and these firms are called sick firm. There are various reasons of sick firm. But to discuss it easily I classify it in two classes. They are The reasons that are beyond die control of the project owner; and The reasons that arc under control of the project owner.

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The above causes are further divided into seven (7) causes. The causes are discussed below according to their importance though all of the causes are important.

1. Financial Problems/Shortage of Working Capital The shortage of working capital is the most acute problem for majority of the sick industries. The problems, which lead an industry towards sick, are as follows Shortage of working capital, i.e. if they do not manage the sufficient working capital. When the means of financing is not available. When the project is not profitable. When the production is not reached at the break-even point. When they can't calculate appropriate risk level of sick. Cash flow of the project is not available. If actual cost of the project is more than the budgeted cost. Lack of operating capital. Higher fixed cost When variable cost increase. Does not ensure sufficient mortgage.

2. Marketing Problem: The marketing problems, which lead an industry towards sick, are as follows High competition in the market Cheap price of the foreign product Cost of production is high. When the market share of project is under low appraisal

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When change the consumption trends in the past and present consumption level Introduction of new brand of product If the market is not monitor properly Improper market justification Lack of market expansion and product diversification.

3. Technological Problem: The technological problems, which lead an industry towards sick, are as follows Lower capacity of the machine resulting price will be higher. Inconsistency between the origin of raw materials and the factory location, production of products and final consumption adversely affect the business. Lack of communication system. Lack of infrastructure facilities. In availability of supply of gas, electricity and water etc. Selection of old and backdated technologies to be used in production. The equipment and machine chosen are not appropriate. Lack of modern technology. Wrongly or inappropriate selection of the machinery.

4. Administrative and Managerial Problem: The administrative problems, which lead an industry towards sick, are as follows> Insufficient appointment of employee > Unskilled human resources > Corruption and intentional misuse of organizational assets. > Lack of proper planning, organizing, controlling, administrating and monitoring. > Weak management of the project.

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> Lack of efficiency of employment as well as management.

5. Economic Problem: The economic problems, which lead an industry towards sick, are as follows> Economic problem comes from the social Cost Benefit Analysis. > It docs not impact of the project on the distribution of the income in the society as well as the level of saving and investment. 6. Political Problem: The political problems, which lead an industry towards sick, are as follows> Political pressure to loan procurement > In appropriate action taken by govt. to protect smuggling > Political terrorism > Political pressure > Insufficient facilities provided by govt. to industrialist like tax rebel etc. > Political problem like worker unrest, hartal etc.

7. Other reasons of sickness: Except the above problems there are also some problems, which lead an industry towards sick. They are as follows> Over estimation of mortgage value > Delay of loan procurement and sanctioning process > Delay of documentation formalities in respect of loan > Causing of rehabilitation measures > Insufficient enforcement of law for recovery of loan > Inappropriate location of industries

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> Insufficient infrastructure facilities > Political pressure to loan procurement > In appropriate action taken by govt. to protect smuggling > Political terrorism 7.4 Sick Industries: In Bangladesh there are so many sick industries. The sick industry concept is not the newest one. It is occurring from the pre-independence of Bangladesh and Bangladesh inherent some sick industries from its birth. After independence this is also continuing. The exact figure of sick industry is not identified. There 274 sick industries that are financed by BSB.

7.5 Impact of Sick Industry in Bangladesh or BSB: Increases the classified loan. Increase the lending rate of interest, which adversely affect the new and regular borrowers.

Affects adversely in the economic growth rate of the country. Creates adverse psychological impact on the prospective entrepreneurs. Adverse effect in banks profitability. Increase of non-performing assets in organizational level as well as national level. Decrease in productivity at national level. Decrease contribution in GDP and GNP.

7.6 Recommendation of the Special Committee of BSB: The loan account may be reschedule subject to the acceptance of the following terms by the company 50% interest of loan may be exempted according to the Govt. roles and regulation and the remaining 50% interest may be transferred as block and the total liability is to be refunded within 10 years.

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In order to increase the income of the company, it may directly export its goods for which it may avail back-to-back L.C. facilities from any bank or financial institution for which the BSB will give NOC.

The loan receiving company has to pay 10% of the total loan receipt as down Payment

No additional charge shall be created on the properties mortgage with the BSB in regards to the NOC provided by BSB for back-to-back L.C. facilities.

The machinery, which the entrepreneur's installed later, shall be has to be mortgage with the bank.

If the loan receiver's do not agree to the above proposal than as an alternative arrangement the loan account may be closed down after refund of the total

loan with exemption of the total interest. Should the above mentioned proposal are not complied with by the

entrepreneur, arrangement has to be made for taking legal action against the entrepreneur's and sell the properties of the project in order to realized the loan.

7.8 Recommendation to Resolve Sickness from my Point of View: Encouraging the borrower to repay the loan in proper time. Preserving documents need to be computerized instead of filing. National observation committee can be established to analyze, evaluate and solute proper loan recovery. Employees who are directly involved in loan recovery should be motivated. & 5C's must be considered when selecting borrower, i.e. Capital, Capacity, Character, Condition and collateral. Proper communication should be established with the clients. Number of trained supervisor to be revised. Profitable project should be identified and loaned. Proper policy to e adopted and implemented.

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Real entrepreneur should be given loan. Political pressure should be ignored if not possible should communicate with respective higher authority.

CHAPTER EIGHT FINDINGS, CONCLUSION & RECOMMENDATIONS

Internship program is an essential requirement for completion of BBA program. To fulfill this requirement, I was assigned to BSB. I worked there for three months. During that period I learned the activities of eight departments of BSB. The names of the departments are Loan operation department, documentation and machinery procurement department, project implementation and supervision department, loan recovery department, loan accounting department, rehabilitation department and law department. I have prepared report on the activities of loan operation department. The main task of the department is to appraise projects. They appraise projects mainly under five aspects such as management and organizational, technical, marketing, economic and financial. Each of above aspects has been described in this report. I have found some problems regarding the project appraisal by BSB, which are stated in the next paragraph. 8.1 Findings: There are some problems involved in the project appraisal practice of BSB. Some of them relate to BSBs own institutional weaknesses and some of them relate to the borrowers'. During the internship program the following findings are obtained:

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1) Sometimes improper feasibility reports are submitted by sponsors, which do not contain adequate and reliable information. 2) Lack of business experience of the entrepreneurs. 3) Lengthy procedure and long time (more than three months) involved in the appraisal of project. 4) Lack of financial commitment on the part of the borrower, the result being the failure of mobilization of equity by them in future means they divert their equity in other purpose after getting the loan amount. 5) Some feel that of absence of an up-to-date project appraisal manua1, because the present manual was designed 20 years ago. So many aspects should consider which do not cover by the existing manual. 6) Dependence on imported technology and non-availability of adequate information about that from local source. Lack of adequate, updated and accurate information in the country and both primary and secondary data are not readily available. 7) Inadequate attention is paid to analyze risk and uncertainties associated with the projects, means only sensitivity analysis is done to analyze risk. 8) Lack of co-ordination among various financial institutions in exchange of information. 9) Inadequate attention to social cost and benefits. 10) There is no system of accountability of the appraisal team if the approved project fails due to their improper appraisal. 11) Unstable tariff and fiscal policy, political instability of the country, resulting in poor project appraisal especially from the economic viewpoint. 12) The main aim of BSB is to stimulate industrialization throughout the country. 13) Loans are given to sponsors through preparing appraisal report. 14) The nature of credit shows that it mainly grants term loan. 15) Sometimes inefficient allocations of resources have created a huge amount of bad debt. 16) There are some sick industries are in the BSB 17) Political interruption in sanctioning loan. 18) Unstable policy of management due to political changes over time. 19) If bank make the procedure of keeping up-do-date information but in some case there some case of rescheduling the total procedure is reversed so its high to maintain current and updated system of accounting. 20) Lacking of co-ordination among the various departments. 73

21) Lacks of eagerness to devote themselves for bank because of lower benefits are given to employees. 22) Despite of BSBs problem in financial condition, it helps in various social, cultural development of the country. 23) Sometimes BSB helps more by giving more additional financing to project. 24) Project rehabilitation is one of the criteria of BSB that revive the sick project. 25) Complex judiciary systems. 26) Contribution to the GDP is remarkable through industrialization process. 27) Help in implementing the projects. 28) Giving advice about the projects function for their future success. 29) Contribution of BSB is highest in the industrialization of Bangladesh though theres some problem. 8.2 Conclusion: I believe & hope that this report will offer a number of benefits to improve and update the loan sanction procedure for its smooth operation and will cooperate in redesigning the system and atmosphere of the department. If a small portion of sickness of the projects is reduced it would be a great benefit to the bank as well as to the whole nation. I put here some recommendations it would help in selecting appropriate, socially contributable and more employment opportunity creatable projects in true sense. If this report can improve the existing condition of sanctioning procedure, and is implemented, my little initiatives will get a breathed satisfaction. 8.3 Suggestions to Overcome the Major Problems Involved in Project Appraisal Procedure: In order to improve the existing project appraisal practice of BSB, the following possible measures need to be undertaken: 1) Ensuring proper feasibility study, the responsibility of feasibility report should be imposed, to some extent on the entrepreneurs. 2) Steps should be taken for developing entrepreneurial skill and ability of the sponsors. Training of the entrepreneurs should be arranged before sanctioning loan against projects. 3) The fixed time of three months for processing of project application should be strictly following; sometime it takes more than ten months to appraise a project.

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4) Equity share should be raised so that the entrepreneurs have more participation in the project. 5) The project appraisal manual should be updated. 6) Steps should be taken to strengthen the existing feed back system, so that the problem of getting information about technology can overcome. 7) Both primary and secondary database of the country should be strengthened and improved. 8) Risk adjusted discount rate method, certainty equivalent method, program evaluation and review technique (PERT) and probability analysis etc. should be introduced to assess risks and uncertainties involved in the projects. 9) A co-ordination cell should be established for sharing information among various institutions. 10) More emphasis on the effect of a project to measure socio-economic cost and benefit (SCBA) should be taken into consideration. 11) A market research institution should be established for proper market survey and the assumptions should be more realistic. 12) Responsibility should be fixed to all according to their involvement in appraisal of projects. 13) Profitable project should be indefinite and lowered. 14) When appraise any 5c should be considered-character, capacity, condition, collateral and capital. 15) Regular communication should be maintained with the details. 16) Political pressure should be reduced. 17) National observation committee can be established to analyze, evaluate and verified the proposed project. 18} Law and order situation should be improved. 19) Physical verification should be incorrect when appraised any project. 20) The principles of accountability should be introduced in an effect.

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References

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Bangladesh Shilpa bank, 2005. Annual Report 2004-2005. Bangladesh Shilpa bank august 1984.manual of, project appraisal Bangladesh Shilpa Bank Ordinance 1972. Bangladesh Institute of Bank Management Project Management-The managerial process - Clifford F. Gray - Erik W. Larson

Website of Bangladesh Shilpa Bank.

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APPENDIX PROJECT APPRAISAL FORMAT OF BSB I. Summary and recommendations 0 Name, Location and Capacity of the Project 0 Proposal for loan . 0 Status of the Government consent 0 Promoters and their background 0 Global network of the sponsors 0 Land, Building and Machinery 0 Raw materials 0 Utilities 0 Market aspects 0 Economic aspects 0 Financial aspects 0 Security of the Joan 0 Conclusions 2. Introduction, Management and Organization 0 Background of the project 0 BSB's loan portfolio and sectoral performance 0 Background of the sponsors 0 History of past performance of the existing business 0 Income tax payment position 77

0 Bankers opinion 0 Source of fund mobilization 0 Cash availability 0 Corporate set up of the company 0 Management

3. Technical Aspects 0 project purpose and design 0 production capacity 0 technology and Manufacturing process 0 land and location 0 building and other civil works 0 machinery and equipment 0 furniture and fixture 0 instal1ation, technical services and quality control 0 raw and packing materials 0 utilities 0 store and spares 0 repair and maintenance . 0 safety provision 0 manpower requirement . 0 pollution 0 construction schedule 4. Market Aspects 0 Identification of product / service 0 Uses users of the product/ service 0 Analysis of the domestic demand and the sources of supply(1ocal and import) to meet the demand for the proposed product(s) during the last few years. 0 Analyses of the demand for the product(s) in the export market. 0 Projection of dem8nd 0 Assessment of existing and potential supply of the product in the market 78

0 Projected supply gaps and project's contribution towards the reduction of this gap 0 Capacity utilization of existing projects 0 Position of BSB financed projects 0 Analysis of product pricing, Government control and subsidy 0 Availability of required raw and packing materials and pricing thereof 0 Promotional strategies 0 Marketing budget 0 Product qualities 0 Location advantages considered from Marketing/distribution and infrastructural facilities point of view. 5. Economic Aspects 0 Economic rate of return .0 Foreign earnings/ savings 0 Value added 0 Employment generation 0 Linkage effects 0 Other socio- economic benefits 6. Financial Aspects 0 Cost of the project 0 Means of finance 0 Debt equity ratios 0 Fixed asset coverage 0 Break-even analyses 0 Cash flow statement 0 Projected balance sheets 0 Financial rate of return 0 Sensitivity analyses 0 Working capital estimate 0 Estimate of financial expenses 7. Status of Government Consent and security of loan 8. Conclusion Recommendations 79

0 Conclusions 0 Disbursement schedule 0 Rate of interest and other charges 0 Period of loan 0 Capital structure 0 Special conditions 0 Other usual terms and conditions of loan.

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