Financing SME in Mutual Trust Bank

General objective of this report is to analysis Financing SME in Bangladesh, here focus on Mutual Trust Bank. As MTBL management is emphasizing its focus on SME credit this study aims to analysis the SME credit operation in MTBL.  More specifically, this study wants to explore the problems to finance SME credit in context of Mutual Trust Bank Limited in Bangladesh.

Introduction

Banking concept has been evolved since the rapid development of Information Technology.  The primary activities of any bank are to collect deposit and invest in different areas to earn profit.  Mutual Trust Bank also follows the policies.  Nowadays almost all over the world, SME (small and medium enterprise) concept is a well-orchestrated name, which has indeed added a new feather to the gamete of banking glossary.  SME is the important sector to invest deposit in short-term basis.  From the internal circular letter the allocation of MTBL for the SME credit on 2007 was 15 million.

The SME worldwide are recognized as engines of economic growth.  The commonly perceived merits often emphasized for their promotion especially in the developing countries like Bangladesh include their relatively high labor intensity, dependence on indigenous skills and technology, contributions to entrepreneurship development and innovativeness and growth of industrial linkages.

Bangladesh Bureau of Statistics (BBS) or many other agencies and NGO survey of results (2006) drew the conclusion that there were approximately 6 million micro, small and medium enterprises (MSMEs), which a total of 31 million people and included enterprises with up to 100 workers employing, equivalent to 40 per cent of the total population of the country of age 15 years and above.  The most recent private sector survey estimates the contribution of the micro, small, and medium enterprises (MSMEs) is to be between 20-25 per cent of GDP (Daniels, 2003).  Both urban and rural areas income in is provided by the MSMEs, which are about three quarters or more of the household.  In our country there are almost 30 million people unemployed.  And SMEs have numerous preoperative to improve our total GDP.  Another vital finding of the survey under discussion was that SMEs contributed nearly 25 per cent of the GDP (BDT 2,996 billion) in 2003.  The commercial banks should provide SME loan to those people without harassment.

In Bangladesh the SMEs account for about 45% of manufacturing value addition. They account for about 80%of industrial employment, about 90% of total industrial units and about 25% of total labor force.  Their total contribution to export earnings varies from 75- 80% based on the Economic Census 2001-2003.  The total number of SMEs is estimated at 79754 establishments, of which 93.6% are small and 6.4% are medium.  The 2003 Private Sector Survey estimated about 6 million micro, small, and medium enterprises define as enterprises, with fewer than 100 employees who contributed around 20-25% of GDP.

Problem Statement:

The contribution of SME to the economy is well known.  According to BSCIC (Bangladesh Small and Cottage Industries Corporation), (1994), in1989/90, 89 per cent of total industrial establishment is small and cottage industries.  From SMEs about 87 per cent of total employment and more than 50 per cent of total manufacturing value added. Despite its extensive coverage in manufacturing and service related activities, productivity and supply of SMEs is very poor.  In the various categories of SME are reported to contribute between 80 to 85 per cent of industrial employment and 23 per cent of total civilian employment (SEDF, 2003).  While the SMEs are characteristically highly diverse and heterogeneous, their traditional dominance is in a few industrial sub-sectors such as food, textiles and light engineering whole seller and in small garments production. SMEs are based on relatively small investment; their survival depends on readily available markets with an easy access.

As MTBL management is emphasizing its focus on SME credit this study aims to analysis the SME credit operation in MTBL.  More specifically, this study wants to explore the problems to finance SME credit in context of Mutual Trust Bank Limited in Bangladesh.

Objectives of the study:

• To have understand SME with special reference to MTBL
• To have a glimpse of SME activities of MTBL
• To blend the theoretical knowledge with practical approach.

Profile of Mutual Trust Bank Limited

Mutual Trust Bank limited was incorporated on September 29, 1999 under companies act 1994as a public company limited by shares for carrying out all kinds of banking activities with Authorized Capital of BDT 1,000,000,000 dividend into 10,000,000 ordinary shares of BDT.100 each.  The bank was constituted 12 first Board of Directors. Mutual Trust Bank Limited provides the facilities which are online Banking, SME credit ATM Support, Corporate credit, Consumer credit, foreign trade, corresponding banking. The newly developed technology based services also provides Fund Transfer through Internet, Debit Card and deposit facility.  They will recently introduce Credit card facility. Though they are newly entered in banking sector in Bangladesh, they make available all kinds of services, which other bank offer.

Objective of Mutual Trust bank:

Mutual Trust bank Ltd is a third generation Bank.  Like all business enterprise the main objective of Mutual Trust bank is to enhance shareholders value by maximizing profit and benefiting the society by its activity.  To achieve the objective the bank provides innovative products for the customers with qualified distribution and exceptional customer relation program.  To enhance the quality of the products and services well trained individual are recruited who are given on the job and off the job training to better performance, which ultimately helps in fulfilling the objective.

Mission:

Mutual Trust bank Ltd aspire to be the most admired financial institution in the country, recognized as a dynamic, innovative and client focused company that offers an array products and services in the search for excellence and to create an impressive economic value.

Vision:

Vision of Mutual; Trust Bank Ltd is “To be the bank of 1^st choice by creating exception value for our clients, investors and employees”.

Corporate culture:

This bank is one of the most disciplined Banks in distinctive corporate culture.  Here they believe in share meaning, shared understanding, shared sense making.  The people of the bank can see and understand events, activities, objects and situation in a distinctive way.  They mould their manners and etiquette, character individually to suit the purpose of the bank and the needs of the customers, who are paramount importance to us.

Activities of Mutual Trust Bank Ltd:

As like other commercial banks Mutual Trust Bank Ltd provides the following services:

1. Consumer Banking
2. Foreign Trade
3. Corresponding Banking

Mutual Trust Bank Ltd consumer banking products

1. Consumer banking: Mutual Trust Bank Ltd aims to satisfy all clients, regardless of how big or small they maw be. Individuals are counseled on the best type of accounts suitable to them such as Current, Saving, Short Term Deposits, Fixed Deposits, Consumer asset and liability products, etc.
2. List of saving schemes of MTBL

Types of Credit Facilities:

There are basically two major products namely letter of Credit and Letter of Guarantee. Under Funded Credit, The bank offers the following services to meet the requirement of clients as well as making a profit.  The loan and advance products.

List of Credits Facilities Provided by MTBL

Other Services

The bank believes that technology based product and services will play significant role in the performance of the bank and to satisfy the customers as people are getting more conscious about the bank service, which receive from a bank. For delivering first service and reduce hassle, the bank has introduced online banking service all over the country. The bank has introduced other products and services to serve the competitive market. These are:

1. SWIFT services
2. L/C Delivery Services
3. Locker Services
4. ATM services

Overview of SME in MTBL

MTBL introduced Small and Medium Enterprise program in accordance with the prudential regulation and guidelines of Bangladesh bank.  Earlier extending credit facilities in different sector like trade, service and industry under such kind of program were combined into credit division.  But on April 2007 these activities had segregated from the credit division and separate division was formed in the name of SME Division.

A large section of our business community consists of small business owners who are doing business with their own capital.  Many of these small business owners are sincere, honest and hard working but cannot run properly or extend their business because of shortage of capital.  They do not get enough financial assistance from banks or non-banking financial institutions mainly because they do not have tangible security to offer as collateral.  Many of these small businessmen can run their business smoothly and also expand their business, if they are extended some financial support.  With the objective of extending financial support to this section of businessman a new scheme named Small and Medium enterprise loan scheme prepared by MTBL.  As earlier mention that MTBL newly introduced SME credit, so it is still new in market.  The bank has made substantial amount of investment in SME sector covering 8.30% of its total credit portfolio.  As a vision of diversifying the credit portfolio as well as to minimize credit risk, the bank is now focusing more on SME sector and gradually reducing the dependence on corporate credit.  Last one year their total SME credit was BDT 1547.75 million.

The objectives of SME of MTBL:

MTBL recently introduced SME credit it has some objectives, which are

• To help the genuine businessmen having entrepreneurship quality and honest to run and expand their business smoothly.
• To enable the small and medium community to do business with bank finance and increase their income.
• To improve the banking habit of self employed persons.
• To contribute towards development of socio-economic condition of the country.
• To diversify bank’s lending keeping pace with the requirement of time.

Eligibility of the SME clients:

• Any genuine small business man having at least 3 years of experience with small capital but entrepreneurship quality with honestly, integrity and sincerely.
• Small businessmen with no collateral or any other security offered against the loan.
• The prospective borrower must have a current deposit account with the branch of the bank from where he wants to avail the loan facility.
• The business has to be profitable in nature.

Procedure for application:

The client must have a current account in the branch from which he aims to get the loan. He has to submit an application with necessary documents.  The required documents are

List of Necessary Documents Needed for SME credit before disbursement

The following papers will have to be submitted by the prospective borrower while applying for loan concerned branch manager will verify the genuineness of applicant, their business, information and particulars provided in the application by an officer of the branch.  He will also ascertain credit worthiness of the applicant by applying his best prudence.  If all conceivable aspects of the client are found acceptable in all respect and if the inspecting officer is fully satisfied with the business prospect of the client and his credit worthiness, the branch manger will process the loan proposal and forward the same complete in all respects along with the copy of application with his recommendation to the head of SME, SME division, Head office.

After the credit proposal has been approved, the credit officers of SME Head Office check whether all the security components are collected properly.  If all requirements are there, documentation and arrangements are prepared for credit sanction.  A sanction advice for every particular SME credit is sent to the branch manager for final disbursement.  The branch manager will disburse the loan after completion of all formalities and documents.  The following document must be obtained before disbursement.

List of Necessary Documents for SME credit after approval proposal

Branches, after collecting the sanction advice, make a signing event with agreed terms and conditions between bank and individual client.  After that, credit is disbursed to the client’s current account.  The total process requires 20/25, in special cases, one month from receiving client’s application up to disbursement.  The loan will disbursed in the form of term loan

Without completion of any of these steps including credit assessment, approval and proper documentation, no SME credit will be disbursed.  The total process started from application received at branch level up to credit disbursement can be shown in a diagram, which is common for all Private Commercial Banks who offer SME credit.  This diagram along with the whole process is approved by Bangladesh Bank in a guideline named “Prudential Regulations for Consumer Financing, 2004”.

Credit ceiling:  Maximum amount of loan under this scheme will be up to BDT 5.00 lac without collateral and above BDT 5.00 lac with collateral for any individual/ firm for running/ expansion of his business.

Interest and other charges:

• Interest: at 16% at quarterly rest, subject to change
• Application fees: BDT 500only
• Risk fund: 1% or minimum BDT 500 shall be realized once at the time of disbursement of loan.

Payment of loan period:

The loan is to be rapid by equal monthly installments including interest within 3, 4, 5 years.  Repayment will start from the 2^nd month of available of the loan.  The client will enjoy one-month grace period.  Loan installments will have to be paid within 10^th days of every following month.  If any three installments are not paid, the borrower will be treated as a defaulter and a penalty interest at 1% per month will be charged on the defaulted amount (Minimum BDT.100).

MTBL invest SME loan in various sector like wholesale, retail shop, repair shop, manufacturing, construction, real estate, storage and communication.  Every commercial bank can act a vital role by providing loan to SME.

List of SME Loan sanctioned of MTBL according to Branch

Above the list we can see that the demand of small and medium business loan is high in rural area. In our country 85% is rural area, if the bank can provide proper supply of SME loan to rural people according to demand, total GDP will increase.

Findings, Recommendations and Conclusion

Findings:

SMEs find great difficulties while increasing fixed and working capital because of the reluctance of banks to provide loans to SMEs.  Most of them take loan last year, as I mentioned before MTBL just started this loan service last year (April 2007).  Total 396 SME loan proposals sanctioned with in one year (2007-2008 till now).  They take the loan for 5 years because they are low profit enterprises.  From questionnaire survey the problems are found faced by customers and bankers getting and proving SME loans.

High requirement of collateral:

According to customers MTBL required high collateral.  The SME credit holder application for the loan for BDT 5 lacs because they don’t have that much wealth to keep as mortgage to the bank.  Though they need more than BDT 5 lacs they cannot apply for it.  The applicants have to show collateral if the loan amount is above BDT 5 lacs.  For middle class people it is difficult to show collateral.  One of the respondents keeps his shop as mortgage because he applied for BDT 7 lacs.

High requirement of experience:

Another problem faced by clients getting loan, which is the bank’s required 3 years experience in current business which is a little tough for them. It should be at least 1 or 2 years experience.  Some small enterprise cannot expand their business only for shortage of capital and it is hard to run the business.  The experience should be required as business types.  BRAC bank requires different business experience on different business types.

Difficulties in collecting documents:

The common thing is that the all five customers and bankers said about the problems, most of the customers exacerbate to bring all the updated documents.  The roles are made by Bangladesh Bank and the commercial banks only follow those roles.  In rural area most of the customers are not high educated and they do not know about the necessary documents.  To collect documents and make it update customers need at least two weeks, which also reason for delaying getting loan.

Lengthy loan processing time:

The processing for loan application forms and for investment financing from banks is lengthy, annoying, and redundant.  From the survey customers said that the processing of loan disbursement is lengthy.  MTBL takes 20 to 25 days for CIB (credit information bureau) to be returned back to the branches.  After getting CIB report it takes again 20 to 25 days to sanction and customers want fast service delivery.  Getting CIB report takes 20 o 25 days because Bangladesh Bank provides the CIB report.  Approval of CIB report generally it takes at least 15 to 20 days for almost all banks to loan disbursement.

Interest rate and flexibility in installment payments:

The interest rate is comparing low than other commercial private banks.  The other banks like BRAC bank interest rate 25%, Dhaka bank Ltd is 18% and Eastern bank Ltd is 21%.  The SME credit holders are small traders so want low interest rate for long duration.  The flexible installment and the time duration of repay of loan are highly appreciated by customer.  MTBL offer three types of loan repay duration they are 3 years, 4 years and 5 years.  Comparatively the bank is new in this field that is why they could not establish all the facilities and achieve the satisfactory level of customers.

But MTBL is planning to add new features so that it can compete with other commercial banks.  They have already appointed some new employees for adding attractive features.

Lack of Business counseling and advice:

There is shortage of people of managing relatively fast growing business and lack of business skills.  These entrepreneurs need some guidelines to run their business.  The MTBL currently faces the lack of facilities to provide any suggestion to customers to run their business in a profitable way. For example standard chartered bank and HSBC bank provides cash management and treasury services as business counselor and adviser to the customers to run the business profitably.

Inadequate promotional activities:

MTBL does not have any promotional activities for SME loan.  As they are new in market they have to use high promotion to aware customer about their products.  They only use direct sales agent, which is not sufficient.

Discourage to provide SME loan:

The high processing and monitoring costs of loans to SMEs banks are shy to provide loan to SMEs.  Though customers repay the every installment with in due time, bankers are not interested to provide loan to small and medium enterprises. Because SMEs do not provide real estate asset to use as collateral and necessary documents to obtain loans and it is the main barrier.  They prefer and feel easy to provide consumer-financing loan, which are home loan, car loan, home repair and others.

Recommendations:

As a developing country SMEs is important sector to achieve the desired growth rate of GDP.  The manufacturing sector has to be made extremely animated, increasing both its growth rate and its involvement to the GDP by leaps and bounds.  The most cost-effective way for this would be through development of SMEs.  Higher growth of the Small and Medium Enterprises (SMEs) can help cut poverty to a satisfactory level by eliminating various prejudices against labor intensive and creating jobs for the skilled manpower in the SME sector.

MTBL is almost new in this market. The bank sanctioned 396 proposal and 51 is under process to sanction SME loan.  It is a good opening for a new bank in a competitive market. The amount of total loan is almost BDT 1548 million and it is to move towards greater efficiency in its growth structure.  From the one-year working experience though it has some problems, positive impacts reflected that the customers are paying off all the installments timely which show that the customers are in profitable running business and in a fairly rapid growth of the sector.  From above problems I suggest MTBL to consider following recommends

Separate sectors for SME loan:

MTBL can capture middle class, upper middle class and upper class businessman who would be their targeted clients.  They can separate cells for separate clients segments or separate business sectors.  Like garments, suppliers, manufacturers, agriculture, importer exporter, and other sectors they can offer SME credit.

Promotional activities for SME credit

The promotional activities of SME credit of MTBL are inadequate.  They have to more aware about promotional activities, because clients are only informed by more promotional activities.  Large number of people watches television and listen radio that can able to draw their attention about SME credit and also by colorful billboard.

Flexible requirements:

MTBL do not have any separate sectors for SMEs.  They can offer different types of business loan for different amount, interest, experience and installment.  For example BRAC bank has three types for SME loan they are

• Apurbo rin- loan amount is BDT 8 lacs to 30 lacs (experience 3 year)
• Trade Plus- loan amount is between BDT 5 lacs to 30 lacs, (no experience)
• Super supply loan for retailers- loan amount between BDT 4 lacs to 30 lacs (experience 1 year)

Recognizing entrepreneurial accomplishment

MTBL can sponsor events and program that support and encourage the entrepreneurs. Other states have programs that recognize the achievements of entrepreneurs and promote opportunities of entrepreneurs.  MTBL can organize annual awards that recognize the best business plan, which also encourage many other entrepreneurs.

Reduce the lengthy process 

The SME loan disbursement process involves unnecessary delays, harassment and side payments.  The procedure needs to be simplified and the issuance of the loan. The proposed investment should be legal and conformity with the rules and regulations.  MTBL should develop their IT department to centralize the data of client which reduce time and cost.  Between SME Head Office and branch can communicate and share the necessary documents.  Online loan sanction from SME HO to branch helps to reduce the lengthy process. Simple loan processing for expanding business, quick disbursement and flexible monthly repayment plan which are helps to serve fast service, which also satisfied customers.

Provide suggestion and advice to entrepreneurs:     

SME entrepreneur of Bangladesh lack business skills and knowledge about how to start and run business.  MTBL can provide suggestions to their customer to run on the business and keep up date data about their cash flow.  It helps to predict up coming loan installment payments from customers.  If a business seeks to grow and succeed, these professional acquaintances are needed to perform certain task that required specialist expertise.  At this stage MTBL can play the role of accountants, lawyers, consultants in improving the effectiveness of planning in small and medium business.

Conclusion :

SME credit has been a fabulous modernism in the private commercial banking sector in recent years.  The growth of SME credit, especially, in a developing country’s economy, is feature to the rapid advances in information technology, the developing macroeconomic environment, financial market reform, and several micro-level demand and supply side factors.

In today’s Bangladesh, SME sector is improving, banks, especially, the private commercial banks can play a big role for developing SME and constantly point to make profit and satiability revenue from SME credit.  In particular, SME credit constancy is seen as important for commercial banks seeking to balance the instability of riskier business lines, such as trading and other capital-market activities.  While SME credit offers exceptional opportunities for growth, the challenges are equally demoralizing.  However MTBL is newly introduce the SME credit in market, it will be able to survive in SME banking industry in future will depend upon the capacity building of the banks to meet the challenges and make proper use of it’s opportunities in profitable way.

Though MTBL has some problems, it has also some opportunities.  The first year investment indicates high prospective of SME credit of MTBL.  The demand of SME credit is increasing day by day and MBL can cope up its problem, which can be able to continue its journey in profitable path

APPENDIX

Questionnaire for SME credit holder:

• When did you take SME loan from MTBL?

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• What was the amount of SME loan?

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• Did you provide any collateral security for your loan?

If yes then what was the collateral?

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• What were the problems faced by you for getting SME loan?

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• How long did the bank take to approve the loan after applying for it?

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• What do you think about the interest rate of this bank comparing to some other commercial banks?

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•  Among the three installment options (3, 4, or 5 years) which one you prefer most and why?

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• Are you satisfied with all the SME facilities of this bank?

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Questionnaire for the Bankers:

• What are the problems you have face while approving for a loan?

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• Do you provide the loan with suggestions to your customers so that they can run their business profitably?

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• How do you feel about the demand of SME loan in this market?

Can your SME loan’s facilities compete with the other banks’ one?

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• Can your customers pay installments and interest rate according to the bank schedule?

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• Do you maintain updated information regard your borrowers’ financial position?

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• What is this bank’s future plan about expanding the SME baking section?

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