Report on Prospect of SME Banking in Bangladesh

Main purpose of this report is to analysis Prospect of SME Banking in Bangladesh, here focus on AB Bank Limited. Report also observe the overall Small and Medium Enterprise credit policy and analyze the actual position of the Small and Medium Enterprise Banking of AB Bank. Finally find out the problem and prospect of SME banking services and provide some suggestion and recommendations about SME Banking on the basis of findings.

Objective of the Study

The objective of the report is to study and evaluate the prospects of SME sector in Bangladesh. and also familiarize students with the real business situation, to compare them with the business theories & at last stage make a report on assign task. Beside this the specific objective are as follows :

• To make an overview on the Small amd Medium Enterprise Banking of AB Bank
• To know the major problem of small and Medium Enterprise Banking in AB Bank Ltd.
• To observe the overall Small and Medium Enterprise credit policy of AB Bank Ltd.
• To analyze the actual position of the Small and Medium Enterprise Banking of AB Bank Ltd.

Methodology

The study requires various types of information, past and present policies, procedures, and method of credit management. Both primary and secondary data available have been used in preparing this report.

Sources of Data:

Primary Sources

1. Discussion with officials of the AB Bank Limited.
2. Expert opinions comment.
3. Utilities the personal experiences

Secondary sources

1. Bank’s Annual report.
2. Bank’s website.
3. The Daily Financial Express
4. Bangladesh bank publication
5. A Text Book of Commercial Bank Management (By Peter Rose).

SCENARIO OF REGARDING THE MAIN TOPIC OF THE REPORT IN BANGLADESH

Definition of SME

There are a lot of confusions regarding the definition of SME within the banking sectors. For example, AB BANK LTD defines SME as enterprises with loan requirements of Tk 2-50 lacks. In Standard Chartered Bank, however, SME starts from Tk. 50 lacks. Again in the NCBs, SME includes even smaller enterprises with loan requirements of Tk. 50,000 or less. However, for the context of this report, SME will be counted as enterprises with loan requirements of Tk. 2-50 lacks. There is no universally accepted definition of SMEs, in fact it is not possible. Because it depends not only on investment level and number of workers but also on technologies and technical complexities of production, degrees of skills demanded from workers and managers, end use of  products and so on, which varies from country to country (please see Appendix A). For example, the EU members state Germany defines SME as an enterprise with a limit of 500 employees, while in Belgium it is only 100. There is no standard definition for a small business in the United States also. Generally it is determined by the industry in which it competes, where income and number of employees will determine whether a company is a small business or not. Small and cottage industries (SCIs) in the previous versions of the Industrial Policy of Bangladesh has been replaced by SME in the Industrial Policy 1999, which defines “small industry” as an enterprises (excluding cottage units) employing fewer than 50 workers and/or with a fixed capital investment of less than BDT 100 million and “medium industry” as enterprises employing between 50 to 99 workers and/or with a fixed capital investment of between BDT 100 million add 300 million (GOB, 1999). This definition has the second highest upper limit on fixed assets for SMEs in South Asia and Southeast Asia, after Singapore, and does not accurately reflect the size of SMEs (ADB, 2004).

SME banking in Bangladesh

Like many other developing countries, Bangladesh has utilized the traditional “blunt” approaches to rural development, such as the “green revolution” in agriculture, which was once thought to be capable of eradicating poverty through trickle-down effects on income and employment for the poor. In the 1960s, “industrialization” was also thought to be able to absorb the surplus labor released from agriculture following ‘capital-intensive’ technological innovations, which was also failed. The policy makers failed to realize that we should develop ‘labor-intensive’ industries rather than ‘capital-intensive’ industries because Bangladesh is a labor abundant but capital scarce country and SMEs have a natural comparative advantage. And it is widely claimed that relative to large capital-intensive industries, SMEs are more labor-intensive, that is they employ more labor.

SME Create Jobs

They play an important role in generating employment at reasonable rates of remuneration, especially for workers with limited skills and women who have few alternative sources of income. They therefore provide an important vehicle for the sustainable achievement of the poverty – reduction objectives at the core of the present development agenda. In Bangladesh, SMEs employ around 31 million people.

Constraints

Some basic constraints for SME development are:

1. Lack of methodologies and approaches for development and promotion
2. Lack of appropriate service delivery mechanisms and service providers
3. Lack of market information and market linkage
4. Lack of sources of technology and equipment
5. Shortage of Capital

Investments in the SME Sector by the Banking Industry

Category-wise Market Share

Category-wise distribution of SME loans in the banking industry is shown in the following table:

AN OVERVIEW OF THE ORGANIZATION

BACKGROUND

AB Bank Limited, the first private sector bank was incorporated in Bangladesh on 31st December 1981 as Arab Bangladesh Bank Limited and started its operation with effect from April 12, 1982.

AB Bank is known as one of leading bank of the country since its commencement 29 years ago. It continues to remain updated with the latest products and services, considering consumer and client perspectives. AB Bank has thus been able to keep their consumer’s and client’s trust while upholding their reliability, across time.

During the last 29 years, AB Bank Limited has opened 82 Branches in different Business Centers of the country, one foreign Branch in Mumbai, India and also established a wholly owned Subsidiary Finance Company in Hong Kong in the name of AB International Finance Limited. To facilitate cross border trade and payment related services, the Bank has correspondent relationship with over 220 international banks of repute across 58 countries of the World.

In spite of adverse market conditions, AB Bank Limited which turned 28 this year, concluded the 2008 financial year with good results. The Bank’s consolidated profit after taxes amounted to Taka 230 cr which is 21% higher than that of 2007. The asset base of AB grew by 32% from 2007 to stand at over Tk 8,400 cr as at the end of 2008.

The Bank showed strong growth in loans and deposits. Deposit of the Bank rose by Tk. 1518 cr ie., 28.45% while the diversified Loan Portfolio grew by over 30% during the year and recorded a Tk 1579 cr increase. Foreign Trade Business handled was Tk 9,898 cr indicating a growth of over 40% in 2008.

The Bank maintained its sound credit rating in 2008 to that of the previous year. The Credit Rating Agency of Bangladesh Limited (CRAB) awarded the Bank an A1 rating in the long term and ST-2 rating in the short Term.

AB Bank believes in modernization. The bank took a conscious decision to rejuvenate its past identity – an identity that the bank carried as Arab Bangladesh Bank Limited for twenty five long years. As a result of this decision, the bank chose to rename itself as AB Bank Limited and the Bangladesh Bank put its affirmative stamp on November 14, 2007.

The Bank decided to change its traditional color and logo to bring about a fresh approach in the financial world; an approach, which like its new logo is based on bonding, and trust. The bank has developed its logo considering the contemporary time. The new logo represents our cultural “Sheetal pati” as it reflects the bonding with its clientele and fulfilling their every need. Thus the new spirit of AB is “Bonding”. The Logo of the bank is primarily “red”, as red represents velocity of speed and purity. Our new logo innovates, bonding of affiliates that generate changes considering its customer demand. AB Bank launched the new Logo on its 25th Anniversary year.

Corporate Information of AB Bank Limited

Name of the Company

AB Bank Ltd

Legal Form: A public limited company incorporated on 31st December, 1981 under the Companies Act, 1913 and listed in the Dhaka Stock Exchange Ltd and Chittagong Stock Exchange Ltd.

Commencement of Business

27th February 1982

Registered Office

BCIC Bhaban, 30-31, Dilkusha C/A

Dhaka 1000, Bangladesh.

Tel: +88-02-9560312

Fax: +88-02-9564122, +88-02-956413

SWIFT: ABBLBDDH

E-mail: info@abbank.com.bd

Web: www.abbank.com.bd

Auditors

S.F. Ahmed & Co.

Chartered Accountants

Tax Consultant

K.M. Hassan & Co.

Chartered Accountants

Legal Retainer

1. Rouf & Associates

Chittagong Regional Office

Spensers Building, 26 Agrabad C/A, Chittagong

Tel: 713381-83, 713385-86(031)

Fax: 713384 (031)

E-mail: agrmg@abbank.com.bd

Sylhet Regional Office

Biswa Road, Shahjalal Uposhohor Point, Sylhet 3100

Tel: (0821) 725042, 815085

Fax: 725042

E-mail: gdntmg@abbank.com.bd

Khulna Regional Office

Mollick Shopping Complex Limited, 99 Khan A Sabur Road, Khulna

Tel: (041) 720311, 723062, 724090

Mobile: 01199-660075

Fax: (041) 720311

E-mail: khlnmg@abbank.com.bd

Rajshahi Regional Offic

Organizing Structure of ABBL

Arab Bangladesh Bank Ltd. (ABBL) was incorporated on 31^st December 1981, under the company’s act-1913 as a pioneer commercial bank in the private sector in Bangladesh with its Head Office in Dhaka. The bank started functioning from 12^th April 1982 with the approval of Bangladesh Bank under the guidelines, rules and regulations given for scheduled commercial banks operating in Bangladesh. It was initially a joint venture commercial bank between Bangladeshi sponsors and Dubai Bank Ltd. Dubai (U.A.E.) having respective share holdings as under:

Bangladesh sponsors                                     :  20%

Bangladeshi General Public                         : 15%

Bangladesh Government                             : 05%

Dubai Bank Ltd.    : 60%

Subsequently, the Union Bank of Middle East Ltd. inherited the shares of Dubai Bank Ltd. In 1986 and continued as its shareholder till early 1987, when they decided to offload their investment in Bangladesh. As per provisions of the bank Articles of Associations, with the approval of Bangladesh Bank and the controller of Capital issue Government of Bangladesh, the shares (60%) held by the Union Bank of Middle East (UBME), were purchase by the Bangladeshi Sponsored Directors, raising total shares of holding to 80% of total share capital. However, as desired by the government of Bangladesh the sponsors.

Directors, who acquired the 60% shareholdings of Union Bank of Middle East (UBME), unclosed 50% of share purchased by them from UBME to the general public of Bangladesh raising the public share holdings to the 45% of total share capital of the bank. The Objective of the bank is to undertake all kinds of banking and foreign exchange business in Bangladesh as well as abroad through its brandies/correspondents.

NUMBER OF BRANCES

The expansion of AB Bank is growing very fast. Now, in total there are33 operating branches and more branches will open up in the coming year. To provide a strong network across the country AB Bank has 160 unit offices for SME purpose. Market Research Executive (MRE) a position has been created to capture the stronger market share, which will work closely with the Direct Sales Executive.

NUMBER OF EMPLOYESS

There Are Twenty five thousands employees are actively evolved in the above AB bank  Ltd.

VISION STATEMENT

“To be the trendsetter for innovative banking with excellence & perfection. The vision of AB Bank Ltd building profitable and socially responsible financial institution focused on Markets and Businesses with Growth Potential, thereby Assisting AB BANK LTD stakeholders build a “just, enlightened, healthy, democratic and poverty free Bangladesh”.  AB Banks visions thus aligned with those of AB Bank.

MISION STATEMENT

“To be the best performing bank in the country”

PRODUCT/ SERVICES SCHEME

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

Price

The price of loans is actually the interest paid for it and the charges, fees or commissions associated with it. In case of AB BANK LTD, the pricing for SME products are as follow

Place (Distribution)

BBL offers loans to SME clients all over the country. However, loans are processed centrally in the SME Division of the Asset Operations Department. The base unit of the distribution channel of the SME Department is the Unit Office.The distribution channel of SME loans is as follows:

The country is divided into 7 territories. There are 65 Zonal Offices and 319 Unit Offices in the country. Zonal Officers have the authority to approve loans up to Tk. 8 lacs.

Promotion

Due to the nature of clients, direct marketing techniques are very effective for the promotion of SME loans of AB BANK LTD. AB BANK LTD has two main types of promotional activities:

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

• Flyers & Brochures: For the more educated clients, AB BANK LTD provides flyers and brochures in the unit offices as well as in the branches. These flyers contain specific features of the product they advertise. However, as this type of promotion is handled by the Marketing Department, it would not be within the scope of this report to discuss more elaborately on this promotional tool.

• AB Bank provides a comprehensive range of innovative corporate financial solutions tailored to suit each company’s needs. This range includes both funded and non-funded facilities. Following are some of the products that AB BANK LTD offers to its clients:

Corporate Finance

• Loan Syndication
• Project Finance: Short and Medium term

• Finance/Credit Extension
• Overdrafts
• Demand Finance
• Working Capital Finance
• Receivable Discounting
• Pre and Post Export Financing
• Short-term loan: revolving loans, LATR etc.

 Target Market:

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

 Target Customers Group:

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

Transaction Sales & Services (TRS)

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

• Current Account
• Short Deposit Account (STD)
• Fixed Deposit
• Savings Account (for corporate employees)
• Convertible Account
• FC Account

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

• Pick-up & Delivery Services
• Auto fax Report
• Corporate Help Line
• Inward Remittance Information
• Express Payment

 Treasury

Treasury division at AB BANK LTD deals with the fund position. This division calculates and projects the fund requirement to meet day-to-day operation. It has also two wings, one is front office and the other is back office. Front office deals with directly to the money market of the country. Their main job is to lend money to other financial institution on call or short-term basis.

PRINCIPAL   ACTIVITES

SME Division

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

 Structure of SME division

• Field Level: In the field level there are three types of designated AB Bank staff operates. They are Loan Officer, Relationship Manager(RM) and Business Development Manager (BDM)
• Loan Officer: There are about 200 Loan Officers working all over the country in 100 unit offices. Loan Officers are assigned to spot potential entrepreneurs through out the country and motivate them to take loan from AB Bank. Each Loan Officer falls under their assigned territory and they have to perform their job within that. They are under direct supervision of the Relationship Manager (RM). Loan Officers goes to people identifies their need and according their need, suggest them to avail loan from AB Bank. Loan Officers are responsible for evaluating the trustworthiness of the client whether they are capable to repay the loan or not. To provide loan and ensuring loan repayment are the two main tasks done by the Loan Officer.
• Relationship Manager (RM): There are 36 Relationship Manager. These RM controls the Loan Officer. They visit the spot that the Loan Officer already located. Each and every enterprise will be visited by RM. RM has the authority to sanction loan highest up to   taka 3 lakh.
• BDM (Business Development Manager): There are 4 BDM. They supervise the RM.
• QAO (Quality Assurance Officer): There are 12 Quality Assurance Officer. They perform the job of monitoring. They supervise the RM and BDM.

Head Office Level:

Credit:

• The Credit limit varies depending on the rank.
• RM has the authority to sanction up to highest 3 lakh.
• BDM has the authority to sanction up to highest 5 lakh
• If the credit limit exceed taka 10 lakh it goes to Credit Committee
• If the credit limit exceeds taka 20 lakh it goes to the Board.

Loan Admin – The posting is done in the system in the Loan Admin. Then Loan Admin sends requisition to Fin Admin.

Fin Admin: Fin Admin take care of the other expenses.

Recovery: Recovery Dept. prepares an overdue report and informs the BDM Recovery dept. keeps track of the money. Legal notices are given to the defaulters

MIS: MIS dept. keeps the total record of loan from its sanction to repayment.

Retail Banking

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

• Distribution – Serve the acquired customers
• Sales – Business acquisition.

They both are interdependent and work closely with each other. Retail offers different types of competitive banking products to the customers. The retail division of AB Bank also offers some special types of deposits and loan scheme for the customer attention.

 Retail Deposit Products

• Current Account.
• Saving Account (Maximize and Normal Saving Account).
• Deposit Premium Scheme (DPS).
• Short Term Deposit (STD).
• Normal FDR.
• Abiram (A hybrid of Fixed Deposit with pays internal on a monthly interval).

 Retail Loan Products

• Salary Loan
• Credit Card Loan
• Life Style Loan
• Unsecured Personal Loan
• Secured Over Draft
• Teachers Loan
• High Flyer Loan
• Premium Term Deposit (PTD)
• Shahaj Loan (For Bank Staff only)
• Ashadharon (For Bank Staff only)

Corporate Division

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

 Corporate Banking Division

Corporate Banking is a specialized area of AB Bank, which addresses the diverse financial needs of Corporate Clients.

This division exists to provide banking services and financial partnership with local and foreign business houses (Public and Private Limited Companies), NGO’s, trading houses, joint ventures and various government bodies/corporations etc. As the financial partner of choice for the corporate sector, AB Bank wants to be distinguished by its:

• Quality of service
• Value of innovative solutions
• Level of trust with clients
• Customer knowledge

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

• Debt Capital
• Equity Capital
• Ongoing relation support
• Financial Markets

Education

• AB Bank limited assisted 20 blind students to participate in a specialized ICT training program. A contribution of Tk. 10.00 lac was made for phase-1 of the program. Upon successful completion of phase-1, 8 visually impaired students were able to find gainful employment in various offices.
• The Bank contributed a further Tk. 12.41 lac in August 2009 to BODA towards providing Braille support for visually impaired students.

Social Welfare

• AB Bank’s “Save the River” campaign appeared in national dailies in July 2009.
• Supported the awareness campaign of ADHUNIK-‘Amra Dhumpan Nibaron Kori’ aimed at youths of the country.
• Supported an exhibition organized by SAARC Women’s Association, Dhaka to set up a life saving ventilator for the ICU unit at the Shishu Hospital.
• Contributed to Zonta International Club to raise funds for “Shishu Bikash Kendro” for 160 under privileged children.
• Contributed Tk. 5 lac to ‘Chhayanat’, a cultural organization, to partly support the construction of an auditorium.

SOWT ANALYSIS OF THE ORGANIZATION

INDIFICATION OF STRENGTH, WEAKNESS, OPPORTUNITIES AND THREATS OF THE ORGANATTION

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

Strengths

• Company Reputation: AB Bank has already established a favorable reputation in the banking industry of the country particularly among the new comers. Within a period of 5 years, AB BANK LTD has already established a firm footing in the banking sector having tremendous growth in the profits and deposits. All these have led them to earn a reputation in the banking field.

• Investors: AB BANK LTD has been founded by a group of eminent entrepreneurs of the country having adequate financial strength. The shareholders of the bank are all institutions themselves, which adds to the financial strength of the bank. This is one of the ma   in reasons why AB BANK LTD has been able to overcome the huge setup cost of the SME loan distribution channel and also the huge running cost of the SME Department.

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

Weaknesses

• Advertising and Promotion of SME Loan: This is a major set back for AB BANK LTD and one of its weakest areas. AB BANK LTD’s adverting and promotional activities are satisfactory but its SME loans are not advertised well. It does not expose its SME product to general public and are not in lime light. AB BANK LTD does not have neon signs or any other type of advertisement for SME loans in the AB Bank. As a result people are not aware of the existence of this bank.
• Unsatisfactory Remuneration Package: The CROs are not entirely satisfied with the compensation package they receive. There is no target-based bonus system in the bank, although the CROs have to meet targets. Although the CROs are provided with motorcycles and mobile phones, it is not enough to motivate them.
• Huge Operating Cost: Because of the current structure, the operational cost of SME loans is high. This has reduced considerably the profit from this business unit.

Opportunities

• Diversification: AB BANK LTD can pursue a diversification strategy in expanding its current line of business. The management can consider options of starting merchant banking or diversify in to leasing and insurance. By expanding their business portfolio, AB BANK LTD can reduce their business risk.

• Product Line Proliferation: In this competitive environment AB BANK LTD must expand its product line to enhance its sustainable competitive advantage. As a part of its product line proliferation, AB BANK LTD can introduce new, more segment-oriented products in the SME sector.

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

Threats

• Multinational Banks: The emergence of multinational banks and their rapid expansion poses a potential threat to the new growing private banks. Due to the booming energy sector, more foreign banks are expected to arrive in Bangladesh. Moreover, the already existing foreign banks such as Standard Chartered are now pursuing an aggressive branch expansion strategy. This bank is establishing more branches countrywide and has already launched its SME operations. Since the foreign banks have tremendous financial strength, it will pose a threat to local banks.
• Upcoming Banks: The upcoming private local banks can also pose a threat to the existing private commercial banks like AB BANK LTD. It is expected that in the next few years more local private banks may emerge. If that happens the intensity of competition will rise further and banks will have to develop strategies to compete against an on slaughter of foreign banks.
• National Specialized Banks: NSBs pose the major threat to BBL in the SME sector. At present, they hold the major portion of the SME market. If these banks begin to think aggressively about financing the SME sector, they may prove to be AB BANK LTD’s prime competitor.

DRAW CONCLUSION

From the above SWOT we see that CBL has many strong and weak sides internally and externally. But it should always focus on customer satisfaction and try to be a standard quality bank all over the country. AB Bank Limited has adequate capital, high interest rate for DPS and Savings account and its goodwill. AB Bank Limited can adopt diversification strategy in expanding the business into insurance company.

PREPARE ACTION PLAN

The action plan of SWOT analysis is to translate the diagnosis of the company’s situation into action for improving the company’s strategy and business prospects –

• The AB bank limited uses their strengths and capabilities as cornerstones for strategy.
• The AB bank limited pursues those opportunities best suited to bank strengths and capabilities.
• The AB bank limited correct weaknesses and deficiencies that impair pursuit of important market opportunities or heighten vulnerability to external threats.

PRICTICAL EXPERIENCES GATHERED THROGH COMPLETING THIS REPORT.

• As a partial fulfillment of BBA program, Jagannath university I am conducting research on: “SME BANKING OF AB BANK LTD”. The information gathered will be used for academic purpose only Research work is not an easy task in a developing country like Bangladesh. When I stared doing my research work, I had to face some difficulties including respondents are so busy in their work. They could not provide time enough for the information required for preparing research paper. Lack of the up to date information is one of the major limitation. Others limitations are as follows:

• Access to various information, as it is the secrets of this report success, so I have to accomplish this study depending on some limited materials.

• I also face some problems because lack of sufficient books in AB Bank Ltd Library about Small and Medium Enterprise Banking.

• Because of time and cost constrains, it is not possible to generate a representative sample size and also to use simple random sampling procedure.

• Lack of time and resource constraint has also limited the scope to conduct the survey smoothly and so as to prepare the report.

• Experience makes a man efficient such kind of research of research activity is done by me for the first time. That’s why inexperience creates obstacle to follow the systematic and logical research methodology.

• Although above limitations, I tried my level best to prepare this master paper. I think this master paper will be a good source of further research about SME banking.

  ANALYSIS

Performance at a Glance

Balance Sheet Performance

During the year, AB BANK LTD has expanded their business rapidly and undertook significant operations in trade finance business (i.e. 750% growth in the year 2006 over last year) along with the same upward trend in SME, commercial and retail lending activities. Propelled by strong growth in both loans and deposits, the Bank’s operating income increased substantially in 2007.

AB BANK LTD has a 164% growth rate on its deposits in the financial year 2007 comparing to its previous year’s (2006) and the same time it also has a 201% growth arte over its loans and advances. Though the advance to deposit ratio i.e. 71.24% comparatively comedown in 2006 from 2005, it again picked up in 2006 (87%). These upward trends in both deposit and loans, helps the bank to increase its assets by 168% over its previous year’s (2005) assets. AB BANK LTD has also enjoyed higher growth rate on its fixed and other assets.

 Profitability

In the year 2007 the bank has earned an operating profit of BDT 586 million compared to BDT 320 million in the previous year with a stunning growth rate of 183%.  This was possible, as AB BANK LTD has earned a 165% growth on its interest income where as its interest expense growth was 93% from the year 2005. This difference has basically occurred because the cost of fund did not increase to extent of increase in return on loan.

The growth rate of operating expenses has also gone up by 103%, but this trend is acceptable because the bank has earned growth rate of over 100% in all aspects. More over a growth of amount 193% in its profit after tax supports the rationality of such hike in operating expenses earned. All this upward trends help AB BANK LTD to increase the Earnings Per Share by almost 165% (from 23.16 to 38.54)

 Other Performance Indicator

• Capital Adequacy: Capital adequacy focuses on the total risk weighted capital intended to protect the depositors from the potential shocks of losses that a bank might incur. In the year 2007 AB BANK LTD has maintained capital adequacy ratio of 10.15% against standard of minimum 9.00% set by Bangladesh Bank. This keeps more options to absorb default loan amount.
• Asset Quality: The asset composition of AB BANK LTD shows a high proportion of loans and advances (87%) in total assets. A high proportion of loans and advances indicate vulnerability of assets to credit risk, since the portion of non-performing assets is significant in our country. But the classified loans against total loans and advances of AB BANK LTD are only 2.25%. Though this ratio gone up from the year 2006, but compare to 103% increase in loans and advances this upward trend is still in acceptable level.
• Management Soundness: Management Soundness is very difficult to measure, because it requires a qualitative measurement rather than quantitative measurement. Nevertheless ratios such as total expenditure to total income are generally used to measure management soundness. In this regard AB BANK LTD’s total expenditure to total income ratio is 53%, which shows that more than half of its total income need to be spent for meeting operating expenses.
• Liquidity: At present AB BANK LTD’s liquidity ratio is 24% out of Bangladesh Bank’s minimum requirement 20%. So the bank may feel comfort but the liquidity statement shows that for short period usually 1-3 months AB BANK LTD has liquidity gap or in other words, for short period, the bank has a short fall to meet its liquidity.

FINDINGS

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

Opportunity of growth

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

In 2006, the market share of the NCBs in the SME sector was 54.48% which declined to 51.03% in 2008. Again, the market share of PCBs has increased from 16.11% in 2006 to 24.37% in 2008. As the PCBs are penetrating the market in the SME sector, the growth potential for AB BANK LTD in the SME sector is increasing year by year.

Amongst the PCBs investing in the SME sector, AB BANK LTD has a market share of 30.89%. It is the third largest PCB behind IFIC Bank in this sector. As the PCBs have a market share that is gradually increasing, AB BANK LTD has a tremendous potential to be the market leaders in the SME sector in the near future. The growth rate of SME loans of AB BANK LTD from 2006 to 2008 was 172.12%. A comparison of the growth rate of the major banks in the SME sector is shown in the following table:

Declining Growth rate of SME loans

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

• Loan Range: AB BANK LTD has defined its SME sector as enterprises with loan requirements of Taka 4-50 lacs. In such a definition, enterprises with lesser loan requirements miss out. In the survey conducted, the required loan amount of the clients was asked. Figure 17 is a summary of the answers found.

• Interest Rate: The interest rate of AB BANK LTD is the highest among its competitors. Although AB BANK LTD provides other facilities to its clients, the high interest rate discourages many clients to approach the bank for loans. During the survey, 38.50% of the respondents appeared to be neutral about the interest rate of SME loans of AB BANK LTD. 35% of the respondents were not satisfied with the interest rate while 26.50% were happy with it. This indicates that many more potential clients were put off by the high interest rates.
• Lack of Branches: At present, AB BANK LTD has 18 branches throughout the country in 4 districts. Because of the lack of branches, loan processing and repayment is considered to be arduous to many clients. As all transactions have to be done through the branches, according to Bangladesh Bank regulations, clients outside the branch network have to get and repay the loans through correspondent banks.

Increasing Portfolio Share of Retail and Corporate

In 2005 retail loans had a portfolio share of 18.70%. In 2008 its share had increased to 31.19%. During the same period, the portfolio share of SME decreased from 61.14% to 42.45% and that of corporate loans increased from 20.17% to 26.37%.

There are two main factors that contributed to the growth of retail in 2007. They are:

• Increasing Number of Products: At present, the number of retail products in AB BANK LTD is 10. The recent inclusion of two new products- study loan and travel loan has bolstered the sales of retail products. SME on the other hand has only 5 products, and among them, Muldhon Loan is an extension of Munafa loan.

• Segmented Market Approach: Retail loans are designed to cater to the needs of the clients of different segments. These loans are tailor-made according to the need requirements of the different segments. For example, salary loans are only for employees and not businessmen, teachers’ loan and doctors’ loan for teachers and doctors respectively, and high-flyer loans for airlines personnel.

Portfolio Structure of SME Loans

Figures 8, 9 and 10 portray the portfolio structure of SME loans product-wise and sector-wise. Muldhon loans are the most dominant loan products in the SME portfolio. Sulov and Sheba, being new products, haven’t yet been able to penetrate the market significantly. However, the huge volume of Muldhon loans indicates that the average loan requirement of the clients is in between Taka 4-9.90 lacs.

CONCLUSIONS

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

RECOMMENDATIONAS

On the basis of the above findings, I have made the following recommendations that AB BANK LTD may take into considerations in order to exploit the potential SME market.

Increase the Range for SME Loans

As the survey and analysis have revealed, many SMEs require a smaller loan size. The current loan floor of Taka 4 lacs is actually an excess of funds for them. Thus AB BANK LTD can consider dropping the floor to Taka 1 lac. This will increase the market size as well as the prospect for faster growth.

Segment-Oriented Approach

As is the case for retail products, SME can pursue a more segment oriented approach to capture a larger portion of the market. AB BANK LTD can introduce new tailor-made products for the different sectors. New product with slight modifications in price can be introduced for the following segments:

• Clothes and footwear industry, which captures about 19% of the total portfolio.
• Grocery and household items, which captures about 15% of the total portfolio.
• The service sector, which has the highest growth rate among the four sectors.

Diversification into Other Sectors

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

Introducing Overdraft Facilities into the SME Sector

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

Proper Monitoring of Loans

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

QUESTONNAIRE

Questionnaire on Customer Viewpoint on  SME Banking Of CBL:

I am conducting research on SME BANKING OF THE AB BANK LTD on15 customers of the CBL the information gathered will be used for academic purpose only .All personal information will be kept confidential. This questionnaire is analyzed by using LIKERT scale method.

AB  Bank Limited has a well good-will for SME banking loan.

The interest rate of  SME loan of AB Bank Limited is reasonable.

The AB Bank Ltd. Loan policy is not more favorable than other banks.

Interest SME of AB Bank Ltd. has created a good impact on  customer

Existing branches are sufficient for Banking.

If the loan agreement form is in Bangla format so it would be more flexible to you.

It is a lenghty process for getting an loan from AB Bank Ltd.

Bank should increase its SME laon payback durable.

SME department division should add more products with existing product line.

For comprehensive promotion, credit banking division should go for more advertising.

QUESTIONNAIRE ON EMPLOYEE VIEWPOINT OF SME BANKING

I am conducting research on SME banking CBL on 15 employees of  the  CBL the information gathered will be used for academic purpose only .All persons information will be kept confidential .Almost all employees viewpoint is more or less same. They said that they provide a successful SME BANKING services to the customer in successful way in according to customer demand.

1. Do the customer satisfied on your interest rate? a) Yes b) No
2. How many types of SME loan are you providing at present? Ans:…………….

3. Which documents are needed for taking SME loan? a) Lien b)personal Guarantee c) all of the above
4. How do you satisfied the customers?
5. How many features may be added in future?
6. How much satisfied of the customer on payment system?
7. How much supportive of the bank to the customer? a)much b)little
8. Do you think that your interest rate is high compare to another? a) Yes b) no
9. IS the Facility of this bank is neat and clean?

a) Strongly agree c) neutral

b) Agree d) disagree

10. Loan sanctioning procedure is very easy?

a) Strongly agree c) agree

b) Neutral d) disagree

11. Customer satisfaction of CBL SME service?

12. Commitment of CBL is?

13. Competitive position of CBL is?

a) Very good c) poor

b) Moderate d) good

13. Net income of CBL SME department is?