Report on Sick Industry Rehabilitation in Bangladesh (Part-3)

Rehabilitation of Sick Industries

5.1 Introduction:

Rehabilitation means to reshape the existing industries or projects so that may operate successfully in future Keeping it mind I tried my best to find the appropriate way rehabilitate a sick industry.

  5.2 Rehabilitation policy:

All sick industries are not rehabilitated because the all-sick industries have not all possibilities to rehabilitate. It depends mainly on the nature of the sickness. The sick industry that is probable to rehabilitate BSB provides and assists the projects in a predefined framework. The predefined criterions that are taken at the time of rehabilitation are as follows:

1.   Financial measurement

2.   Marketing measurement, and

3.   Technical measurement

In the case of rehabilitating a sick industry, the bank takes different policy in different situation, which are as follows:

i. Financial measurement

In the financial measurement the project should compute the cost of capital and maintain capital budgeting. The present value of net cash inflow should be higher than the present value of cash out flow In such a case, the bank provides some financial treatment that the amount of interest is to be waived or providing consulting service, i.e.

o   Success about the proper way

o   Inspiration by providing motivation

After considering an industry as a sick, then the industry is taken into rehabilitation by aiding above additional support of that sick industry that can recovers the additional investment after that it seems to be as rehabilitated industry otherwise not. In some extraordinary cases they bound to take some terrible decision because of some political pressure.

ii. Marketing Measurement:

Management of the project should measure the aggregate demand of the product or the project and also maintain the market share. Consumption trends and production are to measure for rehabilitation a sick firm.

iii. .   Technical Measurement:

Whether the raw material and technology are available or not that must be measured in the form of price and quantity. If they thought that some technological change would reestablish the project they make some technological changes.

 5.3 Rehabilitation program:

The BSB also puts realistic effort to rehabilitate its sick, problem-ridden and stuck-up projects. In this respective BSB has taken three dimensional measures comprising of

1. Debt relief
2. injection of additional funds
3. direct management

The bank for rehabilitation of the sick projects took these three steps. It is mentionable that with a view to making such projects capable of debt servicing through profitable operation, the bank tried to solve their problems through a combination of measure including a financial package.

The bank has so far rehabilitated 53 such projects. The list of these projects is already mentioned in the sick industry chapter of this report. A summarized position of the facilities extended under its rehabilitation program is shown below-

The bank also makes a program of taking over management of the sick projects directly where the above measures were not considered sufficient due to inefficient management /mismanagement. So they created a department called “sick project management department” for ensuring efficient management of such sick projects. The responsibility of this department is to make such projects capable of debts servicing through profitable operation. So the bank continued sanctioning of term loan during FY 2003-2004. This year local currency of loan of tk 989 million, which was sanctioned to 27projects. Of the total sanctioned amount tk 687 million was for 21 new projects and an additional loan of taka 302 million was for on-going projects including 3 for BMRE purposes.

5.4 Rehabilitation Management:

To stimulate industrialization in the county, Bangladesh Shilpa Bank was established in 1972. So, it finances in different types of industries. The industries on which it finances, all are not become successful one. Some of them are foiled to succeed and are identified as sick industries. They find out the causes of sickness of a particular project. Some time they reschedule loan according to the capacities of the project. Moreover more information and advises may be given so that the entrepreneur may run the business more effectively, sufficient return may gain and contribute to the economy. If the project is not rehabilitate, the file is sent to the law department and finally sued against the project. The main activities of rehabilitation department are as follow:

This department primarily selects a project, which become sick. FDD investigates the project, find out the causes of sickness, and formed a committee to investigate the project. Then it is taken under the consideration for Rehabilitation. After considering it as a rehabilitate industry, it is taken into consideration under Rehabilitation program after the approval of rehabilitation consultant committee.

• To take necessary action to rehabilitate sick project after appropriate investigation.
• Taking steps about the rehabilitation document examination, recommendation preparation, implementation, and activation of plain.
• To take confirmation about the project profitability.
• Taking necessary steps about the production, marketing of product and loan repayment.
• Duties give up to the third party or previous management, after successful managing of the project.
• Managing and directing recommendation preparation about take over project.
• Analyze and compare the production, marketing, and recovery of the rehabilitated project and take necessary action accordingly.
• When there is no scope to rehabilitate a project, document transfer to

5.5 Rehabilitation of Sick Industries:

All the sick industries are not possible to rehabilitate for a number of reasons. It is mainly depends on the nature of the sickness. The sick industry that is probable to rehabilitate, PRD provides and assists it according to predefined criterion Sick Industry, which are rehabilitated PRD provides:

• Assisting for replacement of machine and aiding additional machinery;   Financial treatment that the amount of interest is to be waived or rephrased;

•    Providing additional loan;

•    Making changes in the management structure;

•    Providing consulting service.

The Sick Industry which seems to continue profitably in future if they have some additional loans or some specific assistance from the BSB then the project is undertaken in rehabilitation program if the committee suggests that the project is no longer continue because of insufficient demand of its product or the industry is failed because of the ill motive of the entrepreneur of diversify the fund into another asset in such cases thePDR, normally sends the file in the law department.

5.6 Relationship between appraisal practices, monitoring and sickness:

These three things are very much inter-related; a project goes into sickness due to the inappropriate appraisal practice and monitoring. The linkage amount them is discussed below: –

5.6.1 Appraisal Practices:

Appraisal practices are done from the five aspects. Such as –

a)  Managerial aspect

b)  Technical aspect

c) Financial aspect

d) Economical aspect

Whether the project is feasible or not from the above mentioned perspective of aspects.

5.6.2 Monitoring:

Monitoring is to supervise and control during the implementation of the project from the viewpoint of the BSB is to proper utilization of loans and recover the installment of loan payment in due time.

5.6.3 Sickness:

When monitoring and appraisal practice is not accomplished properly then the projects are considered as sick. So project implementation depends on the appropriate monitoring and appraisal practice.

5.7.1 Term loan sanction:

Table-5: Sanction of Term Loan for the session of 1998-99 to 2007-08

(Figures in million Taka)

Source: Annual Reports 2007-2008

5.7.2 Sector wise outstanding loan:

Sector –wise position of banks loan portfolio

(as on 30-06-2008)

From the above table, BSB always prioritizes those projects that are based on Cotton, Woolen and Synthetic Textile. The reason behind this is, this sector is now booming and most good entrepreneurs now like to come here and as they have excellent business performance and efficient management BSB sanction loan within a short period of time, even within 15 days where maximum period is 90 days. Outstanding loans helps us to know about the condition of sectors, if the condition of any sector is booming or future prosper is very good; in that case, the amount of outstanding loan would be high. On the other, if BSB thinks that in near future the growth will be downward in that case BSB doesn’t sanction any more loans in that sector. According to the analysis, we could observe that sectors like rubber and electrical machinery; BSB did not have any outstanding loan during the period of 2006-07 and 2007-08 .The loan that has given by BSB to this sector. Has already been collected and overall outstanding position of loan in the above mentioned sectors is downward this is because BSB now is more selective.

and careful to sanction any more loan. Moreover, they are now facing fund crisis and trying to recover the loan from the existing projects and in 2008this crisis have become acute problem as a result they do not give any more loan

  5.7.3 Commitment & Disbursement:

The word commitment means sanction the loan but not yet disbursed. For disbursement the loan, BSB gives the money in some stages during the project implementation period and normally this is a penned of tow years. We have made a trend analysis of commitment and disbursement for the penned of 2003-04 to 2007-08S and in the below we have presented the trend analysis with a chat also.

5.7.4 Disbursement of Loan:

5.7.5 Loan Portfolio:

In FY 2007-08, the total number of projects in the loan portfolio stands at 177 with total loan liabilities of Tk 5699.74 million for keeping the written –of loan in separate ledger as per the guidelines of Bangladesh Bank. Among these projects, 57 are export – oriented, 79 imports – substitute and 41 are service / other industries. In FY 2007 – 08,       loan liabilities of 21 projects are liquidated and 14 new projects have entered into the loan portfolio with loan liabilities of Tk 182.28 million. In the same date of the previous financial year, there were 179 projects with total loan liabilities of Tk 6229.6 million. Of these 179 projects, 59 were export – oriented, 79 import substitute and 41 were service/ other industries. As on June, 2008, the total written – off projects and amount of loan kept in separate loan ledger by the Bank is 321 and tk 12531 million respectively. On the other hand, as on June, 2007 the total written – off projects and amount of loan kept in separate loan ledger by the bank were 325 and 12478 million respectively.

6 Recovery of Loan:

In the following an analysis of trend of recovery of loans is given and data is collected from annual reports of last 10 years.

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 real realizing loan and dues from its borrowers and significant success was achieved.

5.7.7 Legal Action Taken for Recovery of Loan:

The Bank initiates legal actions under the BSB order 1972 against those defaulting and recalcitrant borrowers who fail to come up with any satisfactory settlement of bank dues after all normal recovery effort has been exhausted. In the following a trend analysis is given to understand the scenario.

5.7 Rehabilitation Procedure:

The success and failure of rehabilitation is dependent on how many projects they are       rehabilitated and amongst the rehabilitated projects from how many they would able to recollect this money back.

In 2008, Review Committee of ministry of Industry identified 53 projects as sick industries, which were sanctioned loan before the year of 1995 and this committee also suggested that these 53 projects could not continue in near future and to forgive overdue interest this committee, sent the files to the ministry of Finance. BSB collected principal loan from 23 projects by liquidating them and remaining 30 projects file have been sent to the law department. In rehabilitating these industries, Bangladesh Government provided 50% of the rehabilitation cost and the bank itself provided the rest of the portion.

1.   Loans are given to sponsors through preparing the appraisal report where adequate analysis is made and helps BSB to minimize the risk. *6.   The nature of credit shows that it mainly grants term loan.

2.   Lack of financial commitment on the part of the borrower, the result is being the failure of mobilization of equity by them in future that is, they divert their equity in other purpose after getting the loan amount.

3.   Before the FY 1996-97 the Internet was not so available as a result there was huge information asymmetry about the machines and manufacture which caused many projects to become sick, but after the mentioned period BSB has become very careful to sanction loan. Proper attention was not given to social costs and  benefit .  BSB helps borrower by giving not only by loan but also gives additional technical support and continuously monitor as well as supervise the project performance that helps to succeed. Some borrowers often do not give enough consideration in terms and conditions of loan agreement as a result they do not get loan during the implementation stages. Oil Loan recovery is mainly depended upon the borrower desire ness. It means that in some cases, the borrowers willingly do not pay the installment rather use the installment amount of money for any other speculative motive to get return which is higher than the penalty interest payment 12. Project rehabilitation is the criteria of BSB that revive the sick project.  BSB in case of rehabilitation of any project forgive penalty interest up to 100%, which is imposed for any default installment. BSB also forgive overdue interest. A complex judiciary system is an obstacle to settle down any case as a result BSB often faces prompt efficient recovery.  Most of the time the govt. appoints inefficient Board of Directors who do not have technical skills to formulate effective policy. 616. BSB is now using LAN (Local Area Network) to have prompt information but unfortunately there is only one computer in each department, which is a hindrance to have benefits of LAN.

4. Lacks of eagerness of employees to devote themselves for bank because of lower benefits are given to them.

5. Despite BSB’s problem in financial condition, it helps in various social.

7. Political interruption in sanctioning loan is the major problems for BSB. Sometimes inefficient allocations of resources have created a huge amount of bed debt.

8. Contribution of BSB is remarkable in the industrialization of Bangladesh.

9. Unstable policy of management due to political changes over time.

10. High educated, efficient and skilled personnel are in the management.

5.8 LIST OF A FEW SUCCESSFUL RTEHABILITATD INDUSTRIES:

After taking some initiatives and providing assistance in terms of management, technical, marketing and financial the following sick projects financed by BSB has become successful during the year 2003-2005

6.1 NAME AND LOCATION OF THE PROJECT

6.2  Board of directors and Borrowers and their net worth (position as on: October-1995):

6.3 Classification of project and production capacity:

The project was taken in to hand for various types of zippers.

6.4 Project Execution and Implementation:

The construction period for the project was 8 months. The wanted to go in production in September 1997.But the company could not go in production by January 1999 which was time for repayment of loan. As the imported machinery were identified as unable to produce good quality of zipper. The entrepreneurs could not go for commercial production.

6.5 Securities Against BSB’s LOAN ( POSITION AS ON 19-12-98):

6.6             Credit Information Board (CIB) on Director’s credit Exposure ( position as on 30-06-04):

6.7            Types of loan:

6.8            Position of loan A\C S ( As on 01-01-04):

6.9 loan classification status (as on 31-12-03):

6.10 provisions (as on 31-12-03) including cash credit:

6.11 Down payment:

a)      Required tk…………………….lack

b)      Deposited tk…………………..lack

c)      Shortfall tk ……………………lack

6.12 Reasons for short fall::

The company could not pay any down payment because the borrowing company could not star their commercial operation to the specified period.

6.13 General remarks: if any:

The company could not star their production for the problem of machinery so that it could be consider as sick industry.

6.14 Steps taken to recover the loan by BSB:

1. To recover the loan, the bank will exert continuous pressure on all companies director.
2. The borrowing company paid loan to the BSB from other sources if income i.e. trading business.
3. Because the loan borrowing company was not sincere to refund the loan. So a notice was served on the company on 30-06-05
4. The loan amount which was paid by the loan borrowing company after deducting the principal amount, the rest of the amount could be paid within 90 days.
5. Recommendation of the special committee of BSB for waiver of interest.

6.15 Recommendation of the special committee regarding waiver of interest:

1. To waiver of the penal interest (if any ) and general interest 100%
2. Payment after deducting waiver of interest should be paid within 30 days in accordance with repayment schedule stipulated by the bank.
3. At first the borrowing company have to pay the down payment (5% of principal amount, litigation & other cost) to apply for waiver of interest facility. They have to apply within 30 days of getting the letter the bank.
4. There fore mentioned recommendation will be implemented and then the law suit will be revoked.

  6.16 Circumstances under which rebate facilities had been allowed:

a) They could not go for operation in spite of assembling machinery in the factory.

b)      The imported machinery was identified as unable to produce good quality of zipper.

c)The imported machinery was considered as obsolete.

d)     The borrowers were included to repay the loan from their personnel sources in accordance with recommendation of special committee for waiver interest.

e)The subsidies of taka 15.36 lacks will be received from the Govt. The estimated value of the assets of the project was taka 8 lack to 10 lack on 19-10-04

6.17 statement of outstanding loan:

6.18 Loan repayment schedule:

M\S J.K.K Industries limited

6.19 conditions for repayment of loan:

1. interest will not be imposed on the company’s loan a\c from 01-10-2005
2. The loan will be refunded by 10, three monthly installments of which the first 9 installments amounting to taka 2.12 lacks and the last installment amounting to taka 2.08 lacks. The date of first installments 31-06-2008 and the date of last installment is 30-06-2008
3. if the company failed to repay any of 2 installment then the rebate facilities will be cancelled
4. Approval of bank is to be taken to sell the assets of the project and the selling price will gave to deposit to the bank.
5. If any of installments is delayed for sometimes then interest will be charged for that delayed period.
6. At last the loan amount of the company will have to be liquidated

But the borrowing company could not pay the loan amount within the specified period. The loan repayment facility extended by the BSB from 30-06-2008 to 30-04-2009 by the two installments. The borrowing company paid the last installment on 17-06-2009. Finally Board of Directors meeting took the decision to refund their documents against the loan provided by Bangladesh shiplap bank

6.20 Recommendation:

The recommendation to resolve sickness from my point of view is as follows:

1. There are various reasons behind the sickness of the project. To identify the reasons why the projects is sick.
2. Some employees are involved to sanction the loan to the entrepreneur. To identify employee who is liable for the sick project.
3. Proper punishment should be given to the liable person. Otherwise they could not change their nature.
4. Properly check the feasibility report before issuing loan.
5. There are various policies, rules and regulations are existing in the BSB. Proper policy to be adopted and implemented.
6. Project must be scrutinizing in and appropriate manner.
7. Political pressure should be ignored.
8. BSB should give more consideration on physical investigation before issuing loan.

Bangladesh shilpa bank plays a vital role for industrialization as a developed financial institution. BSB Sis continuing its bolstering endeavor for up-graduation of our economy. Although there are a lot of favorable and strengthen position of BSB in respect of its activates. Nevertheless BSB has some drawbacks that are responsible for huge amount of losses each year. BSB should overcome such problem as early as possible to become a profitable one, one important problem of BSB  is that it is a decentralized organization  and each  department is responsible for particular activities  but they have lack of co- operation to achieve the central objectives. We observed a large number of projects are sick and they are loan defaulter. For that I criticize the loan appraisal procedure because it is the vital documents for loan issue. In this situation I recommendation some points that will help BSB to overcome some of their problems

7.2 Findings:

As a developed financial institution, BSB plays a vital role for industrialization. BSB is continuing its bolstering endeavor for up graduation of our country, although there are a lot of favorable and strengthen position of BSB in respect of its activities. Nevertheless BSB has some drawbacks that are responsible for huge amount of losses each year. BSB should overcome such problem as early as possible to become a profitable one. One important problem of BSB is that it is a decentralized organization and each department is responsible for particular activities but they have a lack of co ordination to achieve the central objectives. We observed a large number of projects are sick and they are loan defaulter. For that reason I criticize the loan appraisal procedure because it is the vital documents for loan issue. During my internship program, the following findings are obtained:

1. Lengthy procedure and long time (more than three months) involved in the appraisal of project but in case exiting borrower they sanction the loan within 15 days because management appraisal is not required in this regard.
2. Manual of project appraisal was designed 18 years ago.
3. The main aim of BSB is to stimulate industrialization throughout the country as a result they sometimes sanction loan in those projects where infrastructure facilities in not available which cause a project to be sick.
4. BSB gives most of its loan to those entrepreneurs who have enough business experience or have family business except the influence of political and pressure group and they do not encourage the young entrepreneurs.
5. Loan is given to sponsors through preparing the appraisal report where adequate analysis is made and helps BSB to minimize the risk.
6. The nature of credit shows that it mainly grants term loan.
7. Lack of financial commitment on the part of the borrower, the result is being the failure of mobilization of equity by them in future is they divert their equity in other purpose after getting the loan amount.
8. Before the FY 1996-97 the internet was not as available as result there was huge information asymmetry about the machines and manufactures, which caused many projects to become sick, but after the mentioned period BSB has become very careful to sanction loan. Proper attention was not given to social costs and benefits.
9. BSB helps borrower by giving not only by loan but also gives additional technical support and continuously monitor as well as supervise e projects performance that helps to succeed.
10. some borrowers often so not give enough consideration in terms and condition so loan agreement as a result they do not get lain during the implementation stages.
11. Loan recovery is mainly depended upon the borrower desire ness. I means that in some cases, the borrower willingly do not pay the installment rather use the installment amount of money for any other speculative motive to get return which is higher than the penalty interest payment
12.  Project rehabilitation is the criteria of BSB that revive the sick project.
13. BSB in case of rehabilitation of any project forgive penalty interest up to 100% , which is imposed for any default installment . BSB also forgive overdue interest.
14. A complex judiciary system is an obstacle to settle down any case as result BSB often faces prompt efficient recovery.
15. Most of the time the govt. appoints inefficient Board of Directors who do not have technical skills to formulate effective policy.
16. BSB is now using LAN (Local Area Network) to have prompt information but unfortunately there is only one computer in each department, which is a hindrance to have benefits of LAN.
17. Lacks of eagerness of employees to devote themselves for bank because of lower benefits are given to them.
18. Despite BSB problem in financial condition, it helps in various social, cultural developments for the county.
19. Political interruption in sanctioning loan is the major problems for BSB.
20. Some times inefficient allocations of resources have created a huge amount of bed debt.
21. Contribution of BSB is remarkable in the industrialization of Bangladesh.
22. Unstable policy of management due to political changes over time.
23. high educated , efficient and skilled personnel are in the management

 7.3 Recommendations:

Considering the contribution towards accelerating the industrialization process I have given the following the following recommendations:

1.   Loan appraisal procedure is time consuming and to some extent project plan become irrelevant after getting the loan. Since all the process is completed so he is bound to take this loan because some expenditure already been incurred (sunk cost). As a result loan recovery may slow and some time default. My suggestion is that BSB should rearrange appraisal procedure so that the entrepreneur can take loan within a short period of time.

2.   BSB should avoid unnecessary political interference. To resolve this acute problem my recommendation is to reduce the interference of Govt. and the bank should appoint and select its own directors. Moreover, professional body must be appointed so that effective policy can be formulated.

3.   BSB should give more consideration on physical investigation before issuing a loan. However project appraisal should be strict so that nobody can use its loopholes. Sometime real entrepreneur and young entrepreneur should be identified and young entrepreneur should be encouraged to get loan.

4.   Employees who are directly involved with loan recovery should be motivated.

5.   Bangladesh Shilpa Bank should introduce modern communication system so that every department or unit can get information in his or her desk. Now one department must have to go to other departments for information and has one computer in each department, which is an obstacle to get prompt information. My suggestion is that to make available computer for each employee so that they can make best utilization of computer technology.

6.   Encouraging the borrower to repay the loan in time. Special arrangements should be introduced in this respect Legal steps should be dynamic so that default loan recovery is accelerated. And security against the loan should be sufficient to recover the loan.

7.   Project must be scrutinized in and appropriate manner as well as the sponsor taking in to consideration on the changing environment and economic reforms and globalizations

 7.4 Conclusion:

Bangladesh Shilpa Bank is a well- known special bank of our country. We cannot think industrialization in our country without meaningful contribution of Bangladesh Shilpa Bank. Although there are some drawbacks of BSB’s activities nevertheless it plays an important role in the industrial sector of Bangladesh. We get clear idea about this contribution through the analysis of the BSB activities from 1972 to till now. Although some unexpected political pressure hamper such activity but BSB always tries to overcome these sorts of problems by his own policy and procedure. We observed that BSB able to continue to GDP through their industrialization. It is clear that industrialization the base of the economy of the country. Bangladesh Shilpa Bank is now among concern but it tries to overcome such problem. I have observed that the loss of BSB is 220 million in FY 2007-08. Another notable thing is that BSB reduce their loan sanctioning area. We think it is not good news for our economy because new industries are essential for employment generation. At present BSB carefully takes steps for sanctioning loan because of a huge fund become irrecoverable due to sickness of various projects. It is indeed that sickness is the consequences of unconscious and lack of investigation in case of issue of loan. We know sick project is the burden of bank as well as overall economy of the Bangladesh. We also think proper scrutinizing of project proposal and careful physical verification may make sure to be profitable of that industry as well as for Bangladesh Shilpa Bank. Bangladesh Shilpa Bank should concentrate on loan recovery that is necessary for long-term profitability and sustainability. Without pros and cons everybody should to confess of BSB contribution. We expect continue their operations without influence and contribute more and more to out industry that brings good luck to the nation.