Internship Report on SME Loan Borrowers of Brac Bank Limited

Executive Summary

This report aims at providing an overall analysis of the repayment behavior of the SME loan borrowers of Brac Bank Limited. Before going to the analysis, it is mandatory to know something about the organization, its core products that it offers to its customers; about the SME loan, its classifications and the whole of its process starting from loan sanction to recovery and closing of the loan.

That’s why, first of all, I made an overview of the organization, BRAC bank Limited, where I had completed my internship program. Here I tried to focus the bank’s history of origination, its mission and vision, major departments and business units and major products and services. Then I said something about Asset Operations Department, the department where I was to perform my job responsibility. SME is the next section where I gave my concentration. Here I focused on the terms and conditions of giving SME loan, enterprise selection criteria and documentation. Then talked about the procedure of SME loan where I delineated the sanction, disbursement, repayment and closing of SME loan.
After talking about the whole process of SME loan, I made an attempt to analyze the repayment behavior of SME loan borrowers. For this end in view, I have collected information about 20 SME borrowers. Then I have chosen eight major variables which have an impact on the recovery rate of SME loan. That is, these are the variables which may change the repayment behavior of SME borrowers. I found some significant variable like age, experience and income of the entrepreneurs which might have an impact on repayment of the loan.

Finally I got some findings from the analysis of the repayment behavior of SME loan borrowers. Then I conclude my report saying some policy implications.

Introduction

1.01 Background of the study:

Through this report an individual can expect to have a good knowledge and understanding on the various methods of operation performed by BRAC Bank Limited particularly in the area of Financial Institutional Services. From the last three months of the bank’s disbursement, everything is tried to include in precise form. I have tried my level best to put more emphasis on the SME loan and its recovery process since it was the topic of my internship program. This report is to be used only for the academic purpose. I have collected all the necessary and relevant data from various primary, secondary and tertiary sources. After three months long hard labor, it has become possible for me to make the report comprehensive and factual. The data is truly and strictly confidential and no one can use its components in full or partial. I would like to give thanks to everyone who has helped and encouraged me in the process of preparing this report.

1.02 Origin of the Report:
As a mandatory part of the BBA program, all the students of Faculty of Business Studies, Asian University of Bangladesh have to undergo a three-month long internship program with an objective to gain practical knowledge about business world. After this program, the students have to submit an internship report, which reflects their activities during the program. I joined the BRAC Bank Limited to undergo his internship program for the period of 3 months starting from September 15, 2007 to December 20, 2007. In BBL I was assigned in the Asset Operations Department. My organizational supervisor was Mr. Nasiruddin Ahmed, Senior Manager, Asset Operations Department. My project is ‘An overview on repayment behavior of SME loan borrowers of BRAC Bank Limited’ which was assigned by my internal supervisor Md. Abdul Awal Chowdhury.

1.03 Objective of the Report:

1.03.01 Broad Objectives

To analyze the repayment behavior of SME loan borrowers

To know SME loan and its process of recovery

1.03.02 Specific Objectives

To find out basic appraisal of SME loan
To know the enterprise selection criteria to provide SME loan
To know the terms and conditions of SME loans
To know the disbursement and recovery procedures of SME loans
To make some policy implications and conclusion to further the development of SME loan products of BBL
To know the work process and monitoring system of Asset operation Department
To access the key performance indicator of the department
To know how the SME loan borrowers would behave in repaying their loan.
To know whether SME loan borrowers are dully paying their installments or not.

1.04 Methodology:

1.04.01 Data requirements:

In fact, my aim was to collect as much information as it can be possible for me to make an overview of the bank, its mission and vision, its departments and its functions. Of course I had to collect enough information so that I can make an analysis of SME loan and the specific behavior of its borrowers. I have collected around forty customers’ information so that I could know something about their age, education, experience, loan repayment behavior and so on. The data collected allowed me to make an analysis regarding SME loan, its process starting from sanction of loan to closing of loan and especially regarding SME loan borrowers behaviors that is whether they are paying dully or lately or they have any default tendency.

1.04.02 Sources of data:

For collecting the required data, I have used different sources or methods like the following:

Primary data sources:

Interviews of Customer relationship officers(CROs)
Focus group meetings
Direct observation
Secondary data sources:
Operational manual
Official Website
Banking journals
BBL newsletters
Research papers

1.04.03 Techniques of analysis:

Quantitative and qualitative data were collected and analyzed according to acceptable standards of practice. Different tables and graphs were used to make the data meaningful and comparable. Qualitative data were analyzed rationally and in comparison with current market condition. Necessary percentages and averages were calculated and the analyzed results were described step by step.

1.05 Scope:

Scope of the study is quite clear. Since Asset Operations Department is dealing with all types of loan activities in the bank, studying these core themes, Opportunities are there to learn other aspects of SME matters.

Concept of SME and its impact in overall economy of Bangladesh
Entrepreneurship development situation through SME banking
Importance of SME banking in context of Bangladesh
Pioneer’s strategy regarding SME banking
Small entrepreneurs of rural –urban spectrum are enjoying the BRAC Bank loan facility without the presence of bank at rural area.
Virtual banking concept through SME banking

1.06 Limitations:

The study has suffered from a number of barriers

Data from BRAC Bank is highly confidential for the outside people and I had no authority to use the core banking software.
BBL changes its core banking software, MBS to Finacle that’s why all the employees are very busy with their work, sometimes I had to wait more than one week for a piece of information.
Time is also a big constraint for my research. I have to submit a broader deal in a shorter form of outcome.
It was difficult to communicate with the customers, as many of them were unable to give me much time for interview.
As I have taken a sample of 37 observations, there may be sampling error.
I had to go under my day to day job responsibility that I was supposed to do so. So I could get few more time to spend in collecting data for preparing my internship report.

Organization Profile

2.0 preambles

BRAC Bank Limited, with institutional shareholdings by BRAC, International Finance Corporation (IFC) and Shore cap International, has been the fastest growing Bank in 2004 and 2005. The Bank operates under a “double bottom line” agenda where profit and social responsibility go hand in hand as it strives towards a poverty-free, enlightened Bangladesh.
A fully operational Commercial Bank, BRAC Bank focuses on pursuing unexplored market niches in the Small and Medium Enterprise Business, which hitherto has remained largely untapped within the country. In the last five years of operation, the Bank has disbursed over BDT 1500 crore in loans to nearly 50,000 small and medium entrepreneurs. The management of the Bank believes that this sector of the economy can contribute the most to the rapid generation of employment in Bangladesh. Since inception in July 2001, the Bank’s footprint has grown to 26 branches, 350 SME unit offices and 19 ATM sites across the country, and the customer base has expanded to 200,000 deposit and 45,000 advance accounts. In the years ahead BRAC Bank expects to introduce many more services and products as well as add a wider network of SME unit offices, Retail Branches and ATMs and paid up capital of the same bank is Tk 500.million.

Fig-1.2 Shareholders of BRAC Bank Limited

2.01 Background of the Organization:
BRAC Bank Limited is a scheduled commercial bank in Bangladesh. It established in Bangladesh under the Banking Companies Act, 1991 and incorporated as private limited company on 20 May 1999 under the Companies Act, 1994. The primary objective of the Bank is to provide all kinds of banking business. At the very beginning the Bank faced some legal obligation because the High Court of Bangladesh suspended activity of the Bank and it could fail to start its operations till 03 June 2001. Eventually, the judgment of the High Court was set aside and dismissed by the Appellate Division of the Supreme Court on 04 June 2001 and the Bank has started its operations from July 04, 2001. The Chairman of the Bank is Mr. Fazle Hasan Abed. Now the Managing Director of the bank is Mr. Imran Rahman. The bank has made a reasonable progress due to its visionary management people and its appropriate policy and implementation.

2.02 Logo of BRAC Bank:

2.03 Corporate Vision:
BRAC Bank will be a unique organization in Bangladesh. It will be a knowledge-based organization where the BRAC Bank professionals will learn continuously from their customers and colleagues worldwide to add value. They will work as a team, stretch themselves, innovate and break barriers to serve customers and create customer loyalty through a value chain of responsive and professional service delivery.

Continuous improvement, problem solution, excellence in service, business prudence, efficiency and adding value will be the operative words of the organization. BRAC Bank will serve its customers with respect and will work very hard to instill a strong customer service culture throughout the bank. It will treat its employees with dignity and will build a company of highly qualified professionals who have integrity and believe in the Bank’s vision and who are committed to its success. BRAC Bank will be a socially responsible institution that will not lend to businesses that have a detrimental impact on the environment and people. So Brac Bank operates following a specific vision like:

“Building a profitable and socially responsible financial institution focused on Markets and Business with growth potential, thereby assisting BRAC and stakeholders build a “just, enlightened, healthy, democratic and poverty free Bangladesh”.

2.04 Corporate Mission:
Sustained growth in ‘small & Medium Enterprise’ sector
Continuous low cost deposit growth with controlled growth in Retained Assets
Corporate Assets to be funded through self-liability mobilization. Growth in Assets through Syndications and Investment in faster growing sectors
Continuous endeavor to increase fee based income
Keep our Debt Charges at 2% to maintain a steady profitable growth
Achieve efficient synergies between the bank’s Branches, SME Unit Offices and BRAC field offices for delivery of Remittance and Bank’s other products and services
Manage various lines of business in a fully controlled environment with no compromise on service quality
Keep a diverse, far flung team fully motivated and driven towards materializing the bank’s vision into reality
2.05 Corporate Values:
The Bank’s Strength emanates from its owner – BRAC. This means, it will hold the following values and will be guided by them as it does its jobs.

Value the fact that we are a member of the BRAC family
Creating an honest, open and enabling environment
Have a strong customer focus and build relationships based on integrity, superior service and mutual benefit
Strive for profit & sound growth
Work as a team to serve the best interest of our owners
Relentless in pursuit of business innovation and improvement
Value and respect people and make decisions based on merit
Base recognition and reward on performance
Responsible, trustworthy and law-abiding in all that we do.

2.06 Goals:

BRAC Bank will be the absolute market leader in the number of loans given to small and medium sized enterprises through out Bangladesh. It will be a world-class organization in terms of service quality and establishing relationships that help its customers to develop and grow successfully. It will be the Bank of choice both for its employees and its customers, the model bank in this part of the world.

2.07 Objectives of the Bank:

The objective of BRAC Bank Limited is specific and targeted to its vision and to position itself in the mindset of the people as a bank with difference. The objective of BRAC Bank Limited is as follows:

Building a strong customer focus and relationship based on integrity, superior service.
To creating an honest, open and enabling environment
To value and respect people and make decisions based on merit
To strive for profit & sound growth
To value the fact that they are the members of the BRAC family – committed to the creation of employment opportunities across Bangladesh.
To work as a team to serve the best interest of our owners
To relentless in pursuit of business innovation and improvement
To base recognition and reward on performance
To responsible, trustworthy and law-abiding in all that we do
To mobilize the savings and channeling it out as loan or advance as the company approve.
To establish, maintain, carry on, transact and undertake all kinds of investment and financial business including underwriting, managing and distributing the issue of stocks, debentures, and other securities.
To finance the international trade both in import and export.
To develop the standard of living of the limited income group by providing Consumer Credit.
To finance the industry, trade and commerce in both the conventional way and by offering customer friendly credit service.
To encourage the new entrepreneurs for investment and thus to develop the country’s industry sector and contribute to the economic development.

2.08 Bank’s Culture:

Bank has adopted trust as a corporate value which is acronym for team work, respect for all people, unquestionable integrity, excellence in everything BRAC Bank of SME do, Sense of urgency in getting things done and total commitment.
All employees are expected to conduct themselves in accordance with the rules and regulations of the bank.

2.09 Bribes & Inducements:
It is not acceptable to offer or receive any form of bribe or inducement, or direct anyone else to do on behalf of the bank. The following activities are strictly prohibited:
Payment or other benefits which violate the country’s law or the bank’s policies
Payment or other benefits for procurement of business
Payment or other benefits to public officials or politicians to induce them to exercise their discretion in the bank’s favor
2.10 Management of BRAC Bank Limited:

Boards of directors are the sole authority to take decision about the affairs of the business. Now there are 5 directors in the management of the bank. All the directors have good academic background and have huge experience in business. Mr. Fazle Hasan Abed is the chairperson of the bank. The board of directors holds meetings on a regular basis. The current management teams and board of directors’ name are given in the following table:

Management team:

Board of Directors:

2.11 Departments of BRAC Bank Limited:
If the jobs are not organized considering their interrelationship and are not allocated in a particular department it would be very difficult to control the system effectively. If the departmentalization is not fitted for the particular works there would be haphazard situation and the performance of a particular department would not be measured. BRAC Bank Limited has does this work very well. Departments are as follows:

1. Human Resources Department
2. Financial Administration Department
3. Asset Operations Department
4. Credit Division
5. SME Division
6. Internal Control & Compliance Department
7. Marketing & Product Development
8. Impaired Asset Management
9. Remittance Operation Department
10. Treasury Front
11. Treasury Back
12. General Infrastructure Service
13. Information Technology Department
14. Customer Service Delivery
15. Cards Division
16. Call Center
17. Cash Management
18. Secured Remittance department
19. Women Entrepreneur Cell
20. Payment Service

2.12 Business Units:

There are five different business units generating business BRAC Bank Limited:
Small & Medium Enterprise (SME)
Corporate Banking
Retail Banking
Treasury
Remittance Services

All the units are being operated in a centralized manner to minimize costs and risks.

2.13 Products and Services:

2.13.01 Small & Medium Enterprise (SME):

For SME loan operation, BRAC Bank Ltd has in total 900 unit offices, 80 zonal office, 12 territory and 1800 Customer Relationship Officers. These CROs work for the Bank to converge clients for getting the SME loan. Once CROs get the loan application and if it is less than 500,000 TK then zonal officer has the authority to approve the loan. But if it is above 500,000 then the CROs send it to Head Office for all necessary approval. After approving the loan then Asset Operation Department starts its work. As the scopes of businesses are growing, the amount of files and disbursement is getting bigger. In May 2007, AOD has processed 3249 files amounting Tk. 1,235,200,000. So SME Division’s success greatly relies on the performance. Up to April 2007, BBL provides loans for 70000 clients and in total 2265 crore TK. But the most important thing is only 17 crore TK is bad loan; this is a great achievement for SME unit of BBL. Currently they have 44147 outstanding clients and in total 1070 crore TK SME loan.

SME Products-
1. Prothoma Rin.
2. Supplier Finance.
3. Anonno Rin.
4. Digoon Rin.
5. AroggoRin.
6. Pathshala Rin.
7. Opurbo Rin.

SME Loan process flow is shown below-

When a customer comes to the unit office for a loan request, first he/she meets with the customer relationship officer to discuss about the loan, which loan product is suitable for him/her. After then the following process takes place:

2.013.02 Corporate Banking:

Categories- the facilities our corporate Division offers to our customers are mainly of two-
Funded Facilities Non-Funded Facilities

Funded Facilities-
Funded tells us that this type of facilities allows the customer to have money ‘on his hand’ for use i.e. he will get money as to meet his business demand. Examples are-
Working Capital Loan.
Over Draft Facility.
Term Loan.
Lease Finance.
Demand Loan.

Non-Funded Facilities-
Non-Funded facilities are those type of facilities where customers don’t get fund on their hand rather get Bank’s Guarantee service to do international trading-import and export. Letters of Credit, Bank guarantees etc. are the examples of the non-funded facilities.
Working Process of corporate wing-
An example will be handy to understand when the corporate wing starts its work. Say you are one of our clients. You need Tk. 5 core to be used in your business. The first you may contact is the RM (Relationship Manager) who is our delegate to make all kinds of negotiation with you. He then Would take the proposal to the corporate Head takes it for further analysis such as whether it would be profitable venture for the Bank, or whether the Bank can disburse more in the industry etc. Then if the Corporate Head thinks it fit to go ahead, he then would take the file to the credit division – works to find out the worthiness of the borrower and other relevant facts important to assess the possibility of recovery. Then it goes to the credit committee and then finally the file goes to the Managing Director. A diagram is given for better understanding-

2.13.03 Retail Banking:
Retail Loans are consumers’ loan. Based on the customer demand these loans are given. BRAC Bank has a wide range of retail loan-

1. Car Loan. 2. Doctor’s Loan.
3. Secured Loan/OD. 4. High Flyer Loan.
5. Top Up Loan. 6. Credit Card Loan.
7. Study Loan. 8. Teacher’s Loan.
9. Now Loan. 10. Salary Loan.

Process Flow of Retail Loan

BRAC Bank’s Retail Division is being operated centrally. Under the Retail Banking Division all the branches, which acts as sales & service center, are reportable to Head of Retail Banking. Different products of Retail Banking are as follows:
i) Deposit Products
ii) Lending Products
iii) Locker Services
iv) Remittance Services etc.
The product and services that are currently available are given below-
I) Depository Products
BRAC Bank Limited is now offering 6 depository products for mobilizing the savings of the general people:
• Savings A/C
• Current A/C
• STD A/C
• Fixed Deposit A/C
• DPS A/C

II) Loan Products
BRAC Bank is offering the following loan and advance product to the client for financing different purpose that fulfill the requirements of the bank and have good return to the investment as well as satisfy the client. The loan and advance products are:

III) New Product and services
The bank has its concentration for new product and services development for satisfying its customer and increasing its customer base. The bank firmly believes that technology based product and services will play significant role in the performance of the bank as people are getting more conscious about their service quality. They prefer now faster service with least cost. For delivering faster service the bank has introduced online banking service from the very beginning. There are some new products and services that BBL has lately introduced. These are:
Now Loan
Salary Loan
Credit card Services (Proposed)
Islamic Banking Services (Proposed)
ATM services

BRAC Bank Limited is always emphasizing the improvement of banking service and betterment of living standard of the general people of Bangladesh. The product and services are targeted to the lower level to the upper level income group in deposit collection. For lending, the services are made if certain requirements are fulfilled.

IV) Treasury

Money Market Desk
BRAC Bank has a strong presence in the Treasury Market in Bangladesh. The Money Market Desk of the Treasury Division mainly deals in Bangladeshi Taka transactions. The basic activities undertaken by the Money Market Desk are:
Management of Statutory Reserves viz. Cash Reserve Ratio (CRR) & Statutory Liquidity Ratio (SLR)
Daily Funds & Liquidity Management
Investment Management

Treasury Services
Call/Overnight Lending & Borrowing
Term Money Borrowing & Lending
Repurchase Agreement
Treasury Bills (T-Bills)

v) Secured Remittance Services (SRS)

BRAC bank has introduced an innovative remittance services for Bangladeshis living abroad with some unique features compared to any of the existing remittance program. Bangladeshi expatriates can now send their money to their relatives any where in Bangladesh even to the remotest part within 24 hours at a reasonable cost and competitive exchange rate.

vi) Information Technology (IT)

BRAC Bank Ltd. is currently running countrywide true online banking system. The system allows their customers to do transactions all around the country. The bank cheques are all marked with Barcodes that makes each cheque unique and disallows it to be duplicated. All the signature and customer information with their pictures can be verified from any console at any branch on the bank. We also ensure Offsite backup and Disaster Recovery. Their Goal is to provide a true online baking system, which will not only fulfill the demand of time but also set new benchmarks in twenty-first centuries banking world.

Special Features

All Branches are computerized
99% of the bank’s work is automated using latest technology
BRAC Bank is a member of SWIFT community
Intercity Branches are connected via optical fiber backbone network

2.14 Branches:

BRAC Bank Limited is fast growing commercial banks in our country. Bank has established a good operating network throughout the country. It has 26 branches throughout the country till December 30, 2006

2.15 Performance of BRAC Bank Limited:

BRAC Bank Limited will be the most successful private sector commercial bank in our country, though it started its operation few years back. It has achieved the trust of the general people and made reasonable contribution to the economy of the country by helping the people investing allowing credit facility.

2.16  Capital Fund:

The authorized and paid up capital of BBL is TK.1000 million and TK.500 million respectively.  The paid up capital is one of the strongest in the banking industry. The bank is going to raise its paid up capital in the month September, 2006 by TK.500 million with issuing public share of 5, 00,000 of TK.100 each.

Internal and External source of cash

(Amount in Taka)

 Activities of AOD

Activities of AOD (Asset operations department)

Formerly known as the Loan Administration Department, Asset operations department tries to mitigate all loan portfolio risks and also tries to ensure effective control and monitoring securities and documentation process. It has started its operations with retail and corporate loan portfolios of Gulshan Branch in May 2003. The loan portfolios of remaining branches were brought under its control in June 2003. Finally in July 2003, the SME division also came under its control. Today, the Asset Operations Department of this bank is playing an enormous role risk mitigation as well as smooth disbursement and monitoring of loans initiated by all its three business divisions: SME, Retail and Corporate.

The flow chart below shows where exactly asset operations stand in the course of a loan disbursement:

Figure: position of AOD

As can be seen in the process illustrated above, the Asset operations department acts as the last frontier in the disbursement process. After the clients have been reviewed and recommended by the appropriate business divisions and approved by the credit committee, the files are then sent to asset operations where the disbursement is initiated after proper scrutiny of all documents and securities.

In this way, the asset operations department provides the much needed back office support to the business divisions in disbursing the loans marketed by them to actual customers. It is the last check-point to mitigate all loan related risks before disbursement of a loan and performs in line with the Credit Risk Management Guidelines of Bangladesh Bank. All its activities and responsibilities fall under two broad categories as tabulated below:

Disbursement and Monitoring Custodian and Compliance
Disburse (also review) loans after obtaining clean CIB reports of the clients, checking all documents and collecting securities after proper lien and charges creation as per terms of approval.
Periodic review of the conditions, covenants and monitoring of past due loans, limit, expiry and document deficiency etc. Ensure safe-keeping of securities and all other charge documentations in a locked archive as per a checklist for ready references in future.
Prepare and submit central bank returns and other MIS reports and assist (external & internal) and ensure due compliance of all audit queries in a timely manner.

In addition to the activities mentioned above, Asset Operations Department also prepares all legal documents in cooperation with the bank’s legal consultants and for settling other legal disputes of the bank if any.

The AOD has been structured according to the support it provides to the different business divisions as shown below:

3.01 SME Asset Ops:

This segment deals with approved SME loan files for checking and disbursement. SME Asset Ops consist of three segments:

Documentation team
This team receives approved SME loan files from SME unit offices as well as from SME head office and Credit department. Members of this team check these files to make sure that all the required documents and securities are in order. For any missing documents, the help desk team informs the respective Customer Relation officers (CRO). Files are delivered to Disbursement team after checking.

Disbursement team
This team starts to work on the loan files if all the documents of the files are in order. They create the loan account, collect necessary charges and disburse the loan amount to the client’s account.

Help Desk team
SME help desk deals with loan files that have some missing documents in them. All the CROs of BRAC bank all over Bangladesh makes their queries here for any type of assistance.

Repayment Team
The repayment team collects repayment of SME loans.

SME Asset Ops is also responsible for loan account closing, rescheduling, and issuance of No Liability Certificates of all SME loans.
3.02 Retail Asset Ops:

Approved Retail loan files are received by this team for checking and disbursement. This team comprises of two segments:

Documentation Team
This team receives approved Retail loan files from our credit department, obtains CIB report from CIB team, and Checks files to make sure that all the required docs and securities are in order. If any documentation deficiency is found, respective Direct Sales Executives (DSE) or Branches are informed through our lotus mail.

Disbursement Team
This team receives files from the documentation team and disburses the loan after taking all necessary charges.

Retail Asset Ops is also responsible for loan account closing, rescheduling, renewal, enhancement and issuance of No Liability Certificate of Retail loans.

3.03 Corporate Asset Ops:

The Corporate wing of AOD (Asset Operations Department) is serving the back office activities for the Corporate Division of the Bank. The structure of the department is formed according to the CRM (Credit Risk Manual). This wing has the following main functions:
Checking the required documents of the loan takers.
Sending all the documents to the legal advisers for verification
Receiving the CIB report
Disbursing the loan (account entries) and taking necessary charges
Receiving the repayment and follow up ( accounting entries)
Keeping the documents in safe custody

The facilities offered by corporate asset ops is f two categories: Funded facilities and Non Funded facilities.

3.04 Asset Monitoring and Control:

The main responsibility of this team is to review and re-check all the loan files that were disbursed by SME, Retail, and Corporate Team to minimize our risk. Other tasks involve collecting CIB reports from Bangladesh Bank, internal and external audit compliances, preparation and submission of all reports to Bangladesh Bank, safe custody of loan files and securities and vault management. AMC is a combination of four teams:

Post Disbursement Review Team
CIB Team
Vault Management Team
Insurance Management Team

Overview on SME Loan

Overview on SME loan

The most valuable natural resource of Bangladesh is its people. As a nation we struggled for our independence and now the attainment of economic uplift is the main goal. Micro lenders are working here in the financial field, providing very small amount and on the other hand regular commercial banks have been providing bigger amount of loans to larger industries and trading organizations. But the small and medium entrepreneurs were overlooked. This missing middle group is the small but striving entrepreneurs, who because of lack of fund cannot pursue their financial uplift, as they have no property to provide as equity to the commercial banks. With this end in view-BRAC Bank was opened to serve these small but hard working entrepreneurs with double bottom line vision. As a socially responsible bank, BRAC Bank wants to see the emancipation of grass-roots level to their economic height and also to make profit by serving the interest of missing middle groups. 50% of its total portfolio usually collected from urban areas, are channeled to support these entrepreneurs who in future will become the potential strength of our economy. Brac Bank is the market leader in giving loans to Small and Medium Entrepreneurs. They have been doing it for the last five years.

4.01 Why SME Loan?

The main focus of BRAC Bank is to develop human and economic position of a country. Its function is not limited only to providing and recovering of loan but also try to develop the economy of a country. So reasons for this program from the viewpoint of BBL:

4.01.01 Support Small Enterprise:
The small enterprise, which requires 2 to 30, lacks Tk. loan, but they have no easy access to the banks/financial institutions. For example: In case of Anonno loan, an amount of 3 to 8 lacs is provided without any kind of mortgage.
a. Economic Development
Economic development of a country largely depends on the small and medium seal enterprises. Such as, if we analyze the development history of Japan, the development of small & medium scale enterprises expedite the development of that country.
b. Employment Generation
The bank gearing employment opportunities by two ways: Firstly, by providing loan to the small enterprises expanding, these businesses require more workers. Secondly, Small & Medium Enterprise (SME) program requires educated and energetic people to provide support to entrepreneurs.
c. Profit Marking
SME program is a new dimensional banking system in the banking world. Most of the CROs are providing door-to-door services to the entrepreneurs. Entrepreneurs are satisfied by the service of the bank and make profit.
d. Encourage Manufacturing
The focus of BRAC Bank is to encourage manufacturing by the entrepreneurs who produce by purchasing various types of materials. CRO try to educate them to produce material if possible because if they can produce in line of purchase profits will be high.

e. Spread the experience
Another reason of BRAC Bank is to spread the knowledge on the importance of SME banking regarding various businesses. The customer services officer share their knowledge from various businesses and tries to help the entrepreneurs who have shortage of the gathered knowledge. CRO’s who are the driving force of SME division of BRAC Bank also gather knowledge about various businesses and make stronger knowledge base.

4.02 SME Network coverage:

SME Network Coverage

4.03 Security Documentation against Loan:

A document is a written statement of facts and a proof or evidence of particular transaction between parties involved. While allowing any disbursements against credit facilities to borrowers, it should be ensured that prior to any disbursements; security documentation is fully and properly completed.

4.03.01 Purpose of Decorate Documentation and its Importance:

Documentation is necessary for the acknowledgement of a debt and its terms and conditions by the borrower and the creation of charge on the securities in favor of the bank by the borrower. Correct and proper documentation allows a bank to take legal measures against the default borrowers.
If filing a suit with the courts against a default borrower becomes necessary, the court will first review all documents. If any of the documents is found to be defect or incomplete, the purpose of security documentation will be defeated and a court ruling in favor the bank cannot be expected. Proper care should, therefore, be taken while completing security documentation.

4.03.02 Type of Securities:

The following listed securities may be obtained from borrower against loan to enterprises, either individually or in a combination.
It is really up to the bank what they would like to accept as security from the borrower as not all the securities stated below are suitable:

Mortgage of loan and other immovable property with power of attorney to sell
Lien of Fixed Deposits receipts with banks and other non-banking financial institutions, lined, these have to confirm by the issuer.
Lien of Pratirakshay sanchay patra, Bangladesh sanchay patra, ICB unit certificates and wage earner development bond, all considered Quasi or Near cash items
Lien of shares quoted in the stock exchange (This is rarely accepted)
Pledge of goods (Banks are akin to stay away from such securities now a days)
Hypothecation of Goods, Book Debt & Receivables, Plant & Machineries
Charge on fixed assets of a manufacturing enterprise
Lien of cheque, Drafts and order
Lien of work orders, payment to be routed through the bank and confirmed by the issuer.
Shipping documents of imported goods

4.03.03 Land Related Securities Documentation Process:
Each SME unit offices are lilies with at least two local lawyers who will work on behalf of the bank. These always will be employed whenever a borrower and where the security will be landed and immovable property accept a loan sanction. Any one of the lawyers will be provided with photocopies of all the relevant land related documents and while handing over show the original documents to them, the lawyers will carry out checks of the originals and if satisfied returned to the borrower. The documents generally provided are:
Title Deeds or Deed of conveyance otherwise known as ‘Jomeer Dalil’ which signifies ownership of a particular land.
Baya Dalil or Chain of Documents, which signifies that the conveyance of titles has been proper and legal.
Mutation Certificate if Khatian which signifies that the title if the land has been duly registered in the Government/Sub-registrar’s records.
Duplicate Carbon Receipt or DCR
Latest Khajna or land rent receipt
Purchase such as CS Khatian, SA Khatian and BS Khatian
Mouja Map
Municipal rent receipts if the land falls within a municipal area

The lawyer will then carry out a search at the Sub-registrar of land’s office to check if the proffered land is actually registered in the name of the proposed mortgagor and whether the said land is free from any encumbrances. The Sub-register’s office, which means that the land or immovable property can be mortgaged to the bank, then the lawyer will provide his own opinion on the acceptability of the property, whether it is legally held and explain the chain of ownership. If all is acceptable, the lawyer will draw up the Mortgage Deed that will be registered, the irrevocable power if attorney to sell the land and the Memorandum of Deposit of Title Deed. The lawyer will have the borrower or the Mortgagor, if different or 3rd party, sign the documents in front of the Sub-registrar of land to register the mortgage, The CRO must ensure that the receipt for the original Mortgage deed must be signed off (Discharged) at the back of the receipt so that the bank may obtain the originals in the future. The borrower will bear all the charges and will pay directly at the Sub-Registrar’s office including the cost of the stamp paper required. The cost of the lawyer will also be realized from the borrower be an account payee cheque in favor of the lawyer and handed over to the lawyer straight away.
The charges related to the creation of mortgages and other associated costs are incorporated in a separated sheet and are attached herewith. The CRO will have all other security documents, as sent by SME HO, signed by the borrower and hand carry all the security documents including all the original land documents and deliver those to the credit administration officer who will check the list of documents and receive those through a check list in writing. The credit administration officer once satisfied will prepare the disbursement memo to disburse the loan.

4.03.04 Mortgage:

I) Equitable Mortgage or Memorandum of Deposit of Title Deeds

It is created by a simple deposit of title deeds supported by a Memorandum of Deposit of Title Deeds along with all the relevant land documents. All the searches and verification of documents as stated above must be carried out to validate the correct ownership of the property. This deed also provides the bank power to register the property in favor of the bank for further security, if needed.

ii) Registered Mortgage
It is created by an execution of a Mortgage Deed registered irrevocably in favor of the bank at the Sub-Registrar of land’s office. This virtually gives the bank the right to posses and self if accompanied with a registered irrevocable power of attorney to sell the property executed by the owner of the property, in case of default.

4.03.05 Basic Charge Documents:

i) Sanction Letter

Once a loan is approved, the borrower is advised by a ‘Sanction or offer letter’ which states the terms and condition s under which all credit facilities are offered and which forms an integral part of there security documentation. If the borrower accepts, then a contract between the bank and the borrower is formed and which both party are obligated to perform. Accordingly, all other charge documents and securities are drawn up and obtained. A standard sanction letter is attached herewith. All documents shall be stamped correctly and adequately before or at the time of execution. An un-stamped or insufficiently stamped document will not form basis of suit. Stamps are of 4 (Four) kinds. These are Judicial, Non-judicial, Adhesive and embossed impressed. Documents to be executed (Signed) by the borrowers concerned must be competent to do so in official capacity.

Following precautions should be taken at the time of execution of the security documents:
The signature on the documents should be made in the presence of the CRO. The CRO should sign as witness on all charge documents.
The document are to be filled in with permanent ink or typed
If the document consist more than I page, the borrower should sign on each page
If the signature of any third party is required to be obtained whose specimen signature is not available, then the main applicant should verity the specimen signature of the third party
No document or column in any document should remain blank
As far as possible there should be no erasure, cancellation or alternation in the document. If, however, there is any correction, overwriting or alteration, then that must be authenticated by a full signature of the signatory.

After stamping and execution of documents, the question of registration comes up. However, not all documents are required to be registered.
For the extension of any type of credit/loan facility, the following loan documents, which are considered basic, should be obtained from all borrowers:

Demand Promissory Note
Letter of Continuity (This is not always taken if there is only loan disbursement)
Letter of Arrangement
General Loan Agreement
Letter of Disbursement
General Loan Agreement
Letter of Disbursement; Basically a letter requesting disbursement of the loan
Letter of Installment, in case the facility is to be repaid in installment

4.03.06 Other Basic Charge Documents:

i) Demand Promissory Note (DP Note)

It is a written promise by a borrower to pay the whole amount of existing or future loans/credit facilities on demand. It also gives the banks power to ask the borrower to repay the loan amount with interest without any prior notice. Section 4 of the Negotiable Instrument Act 1881 defines a promissory note as an instrument in writing, signed by the maker, to pay a certain sum of money only to, or the order of, a certain person, or to the bearer of the instrument, following precautions are to be taken while preparing a promissory note. Type the amount of the credit facility/loan in words and in figures. Type the rate of interest for the loan, which the borrower will subject to verify the signature of the borrower.

ii) Letter of Continuity

This instrument is used in conjunction with the demand promissory note. This is to secure rights of recovery for existing and future credit facility, which are advanced in parts or on a recovery basis. Loan accounts may from time to time be reduced or even the balance in the said loan account may be in credit so this instrument, validates the said D.P Note, for making further drawings under the facility continuously possible.

iii) Letter of Arrangement

This is a right given by the borrower to the bank to cancel the facility at any time without having to assign any reason. This is also an acknowledgement by the borrower that the credit facility has been approved in his favor and the borrower has to execute all necessary documents to avail credit facility.

iv) General Loan Agreement

A loan agreement is an agreement of contract stating the general terms for the extension of a loan or credit facilities. The General loan agreement sets out the general standard terms and conditions governing the existing or future extension of loan or erudite facilities to the borrower.

v) Letter of Disbursement

This is simple a letter requesting disbursement of the loan/credit facilities at the agreed rate of interest.

4.03.07 Other Security Documents:

i) Letter of Undertaking
This is a Deed of agreement executed by the borrower agreeing to commit to carry out any or a particular obligation to avail of loan/credit facility.

ii) Letter of Hypothecation of Goods & Stocks and Book Debt and Receivable:
These letters Hypothecation are actually two different sets of documents but because of their similarity, these are being explained together. These documents create an equitable or floating charge in favor of the bank over the goods and services and/ or book debts and receivables that are being financed where neither the ownership nor the possession is passed to the bank. Under this agreement, the borrower undertakes to keep the percent stock of goods and that, which may increase from time to time in good condition in future, in good condition. This hypothecation gives the bank the power to possesses and sell the mentioned goods and stocks or claims the book debts directly from the debtors in order to settle the borrower’s dues to the bank.

iii) Letter of Hypothecation of Plant & Machinery
Under this agreement, the Borrower undertakes to keep the present plant and machinery at the present location in good condition and which gives the bank the power to posses and sell the mentioned plant and machinery to meet the borrower’s dues to the bank. In case of limited company, both private and public, these Letters of Hypothecation with schedules are usually registered with the Registrar of Joint Stock of Companies (RJSC) that provides more security to the banks.

iv) Letter of Lien
A lien the right of one person to retain property in his hands belonging to another until certain legal demands against the owner of the property by the person in possession are satisfied. Thus a bank or a creditor who has in its possession a lien over the goods in respect of the money due by the borrower, as a general rule has the right to exercise certain powers to hold on to the security. In addition, if the bank has right to set off the value of the said goods or instrument in its possession, then the bank can sell the goods or encase the instrument to liquidate the dues by the borrower.

V) Right to Set Off
This deed of agreement gives the bank the right to offset the value of the goods or financial instrument in its possession and which has been discharged by the owner of that asset, against dues owned by the borrower.

vi) Letter of Disbursement
This agreement gives the bank the right to possess goods and other assets in rented or leased premises of the borrower despite the fact that owner or the premises may be unable to realize dues from the borrower himself.

vii) Personal Guarantees
This is a guarantee of a person or third who is not the direct beneficiary of the loan/credit facility but is equally liable for the loan. The involvement of a 3rd party creates additional pressure on the borrower to minimize the risk. The guarantor is the person who has to pay the entire outstanding loan and interest if the borrower fails to pay for any reason.

4.04 Selection of Potential Enterprise for SME:
4.04.01 Enterprise Selection Criteria:

The success of SME will largely depend on the selection of a business and man behind it. In terms of the business (Enterprise), the following attributes should be sought:

1. The business must be in operation for at least one year
2. The business should be environment friendly, no narcotics or tobacco business
3. The business should be legally registered, i.e., valid trade license, income tax or VAT registration, wherever applicable.
4. The business should be in legal trade, i.e.; smuggling will not be allowed or socially unacceptable business will not be entertained.
5. The business must have a defined market with a clear potential growth
6. The business must be located ideally close to the market and the source of its raw materials/suppliers. It should have access to all the utilities, skilled manpower’s that are required.
7. Any risk assessed by the management in turn will become a credit risk for the bank. So effort should make to understand the risk faced by the business.

4.04.02 Entrepreneur Selection Criteria:

In order to understand the capability of the management behind the business, the following should be assessed:
1. The entrepreneur should be physically able and in good health, preferably between the age of 25-50. If he/she is an elderly person closer to 50, it should be seen what the succession process will be and whether it is clearly defined or not.
2. The entrepreneur must have the necessary technical skill to run the business, i.e. academic background or vocational training, relevant work experience in another institution or years of experience in this line of business.
3. The entrepreneur must have and acceptable social standing in the community (People should speak highly of him), he should possess a high level of integrity (Does not cheat anyone, generally helps people), and morally sound (Participates in community building)
4. The entrepreneur must possess a high level of enthusiasm and should demonstrate that he is in control of his business (Confidently replies to all queries) and has the ability to take up new and fresh challenges to take the business forward.
5. Suppliers or creditors should corroborate that he pays on time and is general in nature
6. Clear-cut indication of source of income and reasonable ability to save.

4.04.03 Guarantor Selection Criteria:

Equally important is the selection of a guarantor. The same attribute applicable for an entrepreneur is applicable to a guarantor. In addition he should posses the followings:

1. The guarantor must have the ability to repay the entire loan and is economically solvent (Check his net worth)
2. The guarantor should be aware about all the aspect of SEDF loan and his responsibility
3. Govt. and semi-govt. officials can be selected as a Guarantor such as schoolteacher, college teacher, doctor etc.
4. Police, BDR and Army persons, political leaders and workers, and Imam of mosque cannot be selected as a guarantor.
5. The guarantor should know the entrepreneur reasonable well and should preferably live in the same community

4.05 Terms and Conditions of SME Loan:

The SME department of BRAC Bank will provide small loans to potential borrower under the following terms and condition:
The potential borrowers and enterprises have to fulfill the selection criteria
The loan amount is between Tk. 2 lacs to 30 lacs.
SME will impose loan processing fees for evaluation / processing a loan proposal as following;

Loan Amount Loan Processing Fee
2 lacs to 2.99 lacs Tk. 5000
3 lacs to 5 lacs Tk. 7500
5.01 lacs to 15 lacs Tk. 10,000
15.01 lacs to 30 lacs Tk. 15,000

Loan can be repaid in two ways:
a) In equal monthly loan installment with monthly interest payment, or
b) By one single payment at maturity, with interest repayable a quarter end residual on maturity

Loan may have various validates, such as, 3 months, 4 months, 6 months, 9 months, 12 months, 15 months, 18 months, 24 months, 30 months and 36 months.
The borrower must open a bank account with the same bank and branch where the SME has its account
Loan that approved will be disbursed to the client through that account by account payee cheque in the following manner: Borrower name, Account name, Banks name and Branch’s name
The loan will be realized by 1st every months, starting from the very next months whatever the date of disbursement, through account payee cheque in favor of BRAC Bank Limited A/C. With Bank’s named and branches name
The borrower has to issue an account payable blank cheque in favor of BRAC Bank Limited before any loan disbursement along with all other security.
The borrower will install a signboard in a visible place of business of manufacturing unit mentioned that financed by “BRAC Bank Limited”.
The borrower has to give necessary and adequate collateral and other securities as per bank’s requirement and procedures.
SME, BRAC Bank may provide 100% of the Net Required Working Capital but not exceeding 75% of the aggregate value of the Inventory and Account Receivables. Such loan may be given for periods not exceeding 18 months. Loan could also be considered for shorter periods including one time principal repayment facility, as stated in loan product sheet.
In case of fixed asset Financing 50% of the acquisition cost of the fixed asset may be considered. While evaluating loans against fixed asset, adequate grace period may be considered depending on the cash generation after the installation of the fixed assets. Maximum period to be considered including grace period may be for 36 months.

4.06 Monitoring:

Monitoring is a system by which a bank can keep track of its clients and their operations. So monitoring is an essential task for a CRO to know the borrowers activities after the loan disbursement. This also facilitates the build up of an information base for future reference.

4.06.01 Importance of Monitoring:

Through monitoring a CRO can see whether the enterprise invested the sanctioned amount in the pre-specified area of his business, how well the business is running, the attitude of the entrepreneur, cash credit sales and purchase, inventory position, work in process and finished goods etc, This information will help the CRO/BRAC Bank to recover the loan accruing to the schedule and to take the necessary decisions for repeat loans. Moreover, monitoring will also help to reduce delinquency. Constant visit over the client /borrower ensures fidelity between the bank and the borrower and tends to foster a report between them.

4.06.02 Area of Monitoring:

The purpose is to know the entire business condition and all aspects of the borrowers so that mishap can be avoided.

a. Business Condition
The most important task of the CRO to monitor the business frequently, it will help him to understand whether the business is running well or not, and accordingly advice the borrower, whenever necessary. The frequency of monitoring should be at least once month if all things are in order.

b. Production
The CRO will monitor the production activities of the business and if there is any problem in the production process, the CRO will try to help the entrepreneur to solve the problem. On the other hand the CRO can also stop the misuse of the loan other than for the purpose for which the loan was disbursed.

c. Sales
Monitoring sales proceed is another important task of the CRO it will help him to forecast the monthly sales revenue, credit sales etc. which will ensure the recovery of the monthly loan repayments from the enterprise as well as to take necessary steps for future loans.

d. Investment
It is very important to ensure that the entire loan has been invested in the manner invented. If the money is utilized in other areas, then it may not be possible to recover the loan.

e. Management of raw materials
In case of a manufacturing enterprise, management of raw materials is another important area for monitoring. If more money is blocked in raw materials then necessary, then the enterprise may face a fund crisis. On the other hand the production will suffer if there is not enough raw materials.

4.06.03 Monitoring System:

a. The CRO can consider the following things for monitoring
The CRO will monitor each business at least once a month. He/she will make a monitoring plan/ schedule at beginning of the month
During monitoring the CRO must use the prescribed monitoring from and preserve in the client file and forward a copy of the report to SME head office immediately.

b. An SME branch will maintain the following files
The file will contain-
Purchase Receipt,
Delivery Memo’s,
Quotations
In addition, all other papers related to furniture and fixture procurement

c. Other fixed assets and refurbishment
All fixed assets and refurbishment related papers such as purchase receipt, Delivery memo’s, Quotation, Guarantee and Warrantee papers, Servicing related papers and any other paper related to fixed assets are refurbishment will be in this file.
d. Lease agreement file
This file will contain all papers related to lease agreement between the SESDS office and owners of the leased premises.

e. Individual client file
Individual files are to be maintained for each borrower and will hold loan application, Loan Proposal, Copies of Loan Sanction Letter, Disbursement Memo, Monitoring Report, CIB application and Report, Credit report from other bank and all other correspondents including bank receipt.

f. Statement file
All types of statement sent to SME head office will be kept in this file chronologically

g. Office instruction file
All kind of office instruction regarding administration should be kept in this file.

h. Operating instruction and guideline files.
All kind office instruction and guidelines related to operating should be kept in this file
i. New forms introduction file
All minutes of meeting, whenever held, should be kept in this file.

j. Security documents and legal aspect file
One set of security documents and lawyer’s opinions and suggestions regarding issue will be kept in this file. The original should be send to SME head office on a weekly basis

k. Survey form file
After conducting survey, all survey will be kept in this file chronological.

4.07 5.8 SME Banking System:

Every SME unit office will have a current account with a designate bank in the area of a unit office. This bank account will be opened and operated by SME head office.
To meet petty expense such as stationary, entertainment and other incidental expense, all unit office will be allowed patty cash of Tk. 2000/=
The cheque of this patty cash will be issued from SME head office in the beginning of the month. All vouchers relating to such expenses should be send to the accounts from SME head office
All the clients must open their account with the same bank account on the same day after receiving those from the borrowers, who should given a received as prescribed.
Cheques should be deposited to the SME unit office bank account on the same day after receiving those from the borrowers, who should given a receipt as prescribed.
Any loan installment credit should be transferred to the SME head office account in Gulshan, Dhaka on the same day as per agreement with bank.
Every CRO should have an individual account in the same bank branch for their personal use and to receive their salaries and other benefits.
Payment of lease rentals, utility bills and cheque drawn on the SME unit office bank account and issued by SME head office should pay other expenses (Large amount). If these bills are small amount, they should be paid from the patty cash and replenished later.
All the financial accounting entries will be passed at the SME head office and will maintain separately on the basis of the unit office.

4.08 Economic Mapping Survey:

After starting a SME, unit office in a new area the CRO will conduct a survey of the business. The objective of the survey is to collect relevant information about the business, which will help to select potential business for SME loans.

4.08.01 Mapping and Survey Method:
To conduct the economic mapping and survey properly, the following process should be followed:

The CRO will prepare a physical map of his working area showing main roads, businesses, markets, and industrial locations. In this map, the CRO will show different kinds of business in different colors. This map will show the approximate location of all kinds of business within the area and it will be kept on the display board at the SME unit office.
The CRO will drive his total working area into several clusters, if possible, after that he will conduct the survey cluster wise. After completing one cluster, the CRO will start surveying another cluster.
At the beginning of the survey, the CRO will screen out business that does not need loans over 2 lacs.
After the survey, CRO will preserve the survey form cluster wise in a separate file. Based on the survey, the CRO will identify the potential businesses to pursue those for SME loans.
Therefore, CRO will approach the potential borrowers immediately to process loan application
For initial assistance, CRO may approach
BRAC office
Trade Associations and Chambers
Local govt. office like UNO and Municipal office
Once potential borrower is formally approached, then all details should be incorporated in the client register as per the prescribed format.

Procedure of SME loan

Procedure of BRAC bank SME loan

5.01 Loan Sanction activities:

Select potential enterprise: For SME loan, in this step the CRO conduct a survey and identify potential enterprise. Then they communicate with entrepreneurs and discuss the SME program.
Loan Presentation: The function of CRO is to prepare loan presentation based on the information collected and provided by the entrepreneur about their business, land property (Where mortgage is necessary)
Collect confidential information: Another important function of a CRO is to collect confidential information about the client from various sources. The sources of information are suppliers regarding the client’s payment, customers regarding the delivery of goods of services according to order, various banks where the client has account, which shows the banks transactions nature of the client.
Open clients accounts in the respective bank: When the CRO decided to provide loan to the client then he/she help the client to open an bank account where BRAC bank has a STD a/c. BRAC bank will disburse the loan through this account. On the other hand the client will repay by this account. Although there is some exception occur by the special permission of the authority to repay by a different bank account.
Fill up CIB form: CRO give a CIB (Credit Information Burue) form to the client and the client fill and sign in it. In some case if the client is illiterate then the CRO fill the form on behalf of the client. Then CRO send the filled and signed form to the SME, head office.
Sending CIB to Bangladesh Bank: The SME, head office collects all information and sends the CIB form to Bangladesh Bank for clearance. Bangladesh Bank return this CIB form within 10-12 days with reference no.
CIB report from Bangladesh Bank: In the CIB report Bangladesh Bank use any of the following reference no:
NIL: if the client has no loan facility in any bank or any financial institution then BB (Bangladesh Bank) use ‘NIL’ in the report
UC (Unclassified): if the client has any loan facility in any bank or financial institution and if the installment due 0 to 5.99 then BB use UC in the report
SS (Substandard): if the client has any loan facility in any bank or financial institution and if the installment due 6 to 11.99 then BB use SS in the report
DF (Doubtful): if the client has any loan facility in any bank or financial institution and if the installment due 12 to 17.99 then BB use DF in the report
BL (Bad lose): if the client has any loan facility in any bank or financial institution and if the installment due 18 or above then BB uses BL in the report. This report indicates that the client is defaulter and the bank should not provide loan the client.
Loan decision considering CIB report: Considering CIB report, BRAC bank decide whether it will provide loan the client or not. If the bank decides to provide loan then the SME of head office keep all information and send all papers to the respective unit office to apply with all necessary charge documents.

5.02 Loan Sanction:

The respective unit office sanctions loan to the client if it is 2 to 5 lacs, and then sends the sanction letter including all necessary charge documents to the loan administration division for disbursing the loan. If the amount is higher than 5 lacs then the respective unit office sends the proposal to SME, head office for sanction. The head of SME sanctions the loan and sends the sanction letter including all documents to the loan administration division for disbursement and inform the respective unit office regarding sanction of the loan.

5.03 Disbursement of SME loan:

Pre Disbursement Manual Activities
Prepare loan file: Receiving all documents, Loan Administration Division prepare a loan file with all documents received from the unit office.
Charge documents checking: The loan administration division checks all charge documents. Following charge documents are checked:
Money receipt (Risk fund).
Sanction letter.
Demand promising note (With stamp of Tk 20/=)
Letter of arrangement (With stamp of Tk 150/=)
General loan agreement (With stamp of Tk 150/=)
Letter of undertaken (With stamp of Tk 150/=)
Letter of stocks and goods (With stamp of Tk 150/=)
Letter of hypothecation book debt and receivable (With stamp of Tk 150/=)
Letter of disbursement
Photocopy of trade license (attested by CRO)
Insurance (Original copy)
Blank claque with signature (one cheque for full amount and others same as no of installment on Favor of BRAC bank, no date, no amount)
Two guarantors (one must be Spouse/parents)
If the loan provide for purchase of fixed assets or machineries and if the loan amount is over Tk 50,000/= then the stamp of a certain amount is require)
Documents deficiency and problem resolving: If there is any error found then it informed to the respective CRO. If the application form is not filled properly then the file send to the CRO to fill the application properly. If any document error found then the loan administration division asked the CRO to send the require documents and the file stored to the loan administration division.
Prepare disbursement list: The loan administration division lists all new sanctioned clients’ details and send a request to the treasury through internal mail.
Disbursement of the amount: Sending the list to the treasury of BRAC bank for disburse the amount, the treasury disburse the amount to the client through the mother account of the clients bank. BRAC bank disburse amount through any of the following banks corporate branch nearer the BRAC bank head office and the corporate branch of the respective bank send the amount to the client account in the respective branch. These banks are:
BRAC Bank Limited
The City Bank Limited
Janata Bank
Bangladesh Krishi Bank
Pubali Bank
Agrani Bank
Message sent to the unit office: Completing the disbursement, loan administration division sent a SMS to the respective CRO informing the disbursement of the sectioned loan.
MBS entries for loan disbursement
Initial ID generation: After sending the list to the treasury, the loan administration division generates an initial ID against the borrower. Entering required information, the banking software MBS automatically provide a ID no for the borrower.
Loan account opening: According to the ID, the loan administration division opens a loan account in MBS against the borrower. Entering all required information, the MBS automatically give an account no. For the borrower.
Cost center assign: The loan administration division enter the following information in MBS:
Security details set-up
Guarantor details set-up
Loan other details set-up
Risk fund collection: The loan administration division opens a different account risk fund of the client. This is known as loan processing fees. Receiving the risk fund, the loan administration division prints voucher and posting the voucher in the MBS. The amount of risk fund is not refundable.
Activision of the loan: Loan administration division do the following tasks to activate the loan
Loan sanction details set-up
Repayment schedule set-up and printing
Loan activation
Disbursement and CC wise voucher print
Disbursement voucher posting

Post Disbursement Manual Activities

Repayment schedule sent to unit office: Completing the disbursement of the sanctioned amount the loan administration division prepare a repayment schedule in MBS and send it to the unit office. CRO from the unit office collect it and reached to the respective client. The client repays the loan according to this schedule.
Loan details MBS entry: The loan administration division enters details information regarding the loan in MBS. Each officer has an ID no in MBS and if there is any error found then the respective officer would be responsible for it. So every body remain alert at the time of MBS entry.
Document stamp cancellation: The loan administration division cancels all document stamps. In future if any client found defaulter and the bank file sued against him then stamps of these document help to get the judgment favor of the bank. But If these stamps are not canceled then the judgment may not on favor the bank.
Send the loan file to archive: completing all activities, loan administration division sends the loan file to the archive for future requirement. In future if any document of the loan account requires then the bank can collect the file from archive and get the necessary document. If the clients take repeat loan then it is not require applying all documents because his all documents stored to the bank.

5.04 SME Loan Recovery Procedures:

The repayment process starts immediately after one month of the loan taken. Suppose if a loan is taken in July 7, 2007 then the repayment process will be started from August 7, 2007 and the borrower will pay his/her first installment in that date. Before that date, the borrowers will be informed about the number of installments and amount of each installment. He can deposit the installment by himself or by the Customer relationship officer (CRO). Again they can deposit the installments either in any branch of Brac Bank or in any correspondence bank (where Brac Bank has no branch). If the borrower cannot pay the installment in the stipulated date, interest will be charged for each day before they pay that installment. Again interest will be reduced if the borrower pays the installment before the date of repayment. Interest will be charged and added to the principal amount for every month or every 3 three months depending on the policy for each loan disbursement.
How ever, after the borrower repays the loan installments there are number of steps done in the repayment procedure of SME loan. These steps are:

Receive SMS/Fax for installment deposits
When the borrower repays any installment of the loan then he/she informs it to the unit office/CRO. Then the unit office/CRO sends an SMS through mobile phone or a Fax to the loan administration division informing the repayment. A loan administration division collects these SMS /Fax and takes a paper print of these SMS.

Entry the installment information to MBS
Loan administration division entries the repayment installment information to the banking software MBS.

Print Vouchers
Completing the entry, the loan administration division takes paper print of all vouchers in a prescribed yellow paper.

Check SMS/Fax and solve problems (If any)
The loan administration is responsible for all entry in MBS. If there is any error found in future then the respective officer who is entering this information in MBS will be liable for it. User ID will easily identify it. So they are always aware of to ensure the correct entry. Completing the entry of information, they print a hard copy and check it with the SMS/Fax. If there is any error found then it is solved and ensures the correct information entry.

Repayment voucher check and posting
If it confirmed that all entering information is correct and there is no error, then the responsible officer of the loan administration division posts it to MBS. If one time posted, it is not rectifiable without permission of the higher authority. So the loan administration is always aware of regarding the recovery procedures of SME loan.

5.05 Closing procedures of SME loan:

Pre-closing manual activities
Receive SMS/Fax requesting for closing: The borrowers repay the loan as per repayment schedule. When the repayment is being complete the borrower request the unit office/CRO to close his loan account. The unit office/CRO sends a SMS/Fax the loan administration division requesting to close the loan account of the respective borrower.
Print the SMS/Fax: Receiving the request from the respective unit office/CRO, the loan administration division takes a paper print and takes necessary steps to close the account.
Bring the loan file from archive: The loan account file of the respective borrower is brought from the archive. And the documents of file are checked with MBS record.
Obtained approval from the concern authority: it is require the permission of concerned authority to close the loan. If concerned authority approved the closing of the loan account then next initiatives are taken.
Checking in MBS: The loan administration division checks the loan status in MBS. If there is any difference found with the SMS/Fax from unit office and MBS then deposits sleeps are re-checked. Then the loan administration division calculates the total balance of the loan account (Ledger balance + buffer interest +Excise duty)
SMS sent to concerned CRO: Loan administration division sent an SMS to the concerned CRO informing the current balance of the requested loan account.
Receive and print closing SMS/Fax checking & freezing: The concerned CRO send a final SMS to loan administration division informing that the respective borrower cleared all his liabilities regarding the loan. The loan administration division takes paper print of the SMS, check it and finally close the loan account.

MBS entries for loan closing
Pre closing data entry: Completing the manual activities, the loan administration division enters some information to MBS for future requirement and complete following tasks:
Interest/provision charging & print voucher
Charges collection & print voucher
Final repayment entry & print voucher
Final repayment entry checking
Repayment voucher posting
Activate account closing in MBS: Completing above mentioned tasks, the loan administration division finally close the requested loan account in MBS.

Post closing manual activities:
Re-checking with deposit slip: Completing MBS activities, the loan administration re-checks all deposit sleeps of the loan account. If there is any error found then it is immediately resolved, otherwise the file sends to the archive for future requirements. The client may take repeat loan in future and then information from this file will help to approve and disburse loan, which will minimize risk. If the client asks to return security then the loan administration releases security completing following tasks:
Documents photocopy before security release
Closing certificate issuing and security release
Daily MIS updating for loan closing: Finally the authorized officer of the loan administration division update the banking software MBS (Millennium Banking System) by closing the respective loan account.

Loan Repayment Behavior

Analysis of loan repayment behavior

SME loan in fact, a small loan ranging from 2 lacks to 30 lacks given to small or medium enterprises not for initiating the business but for the purpose of working capital management or for purchasing any long term asset. Any sound organization after one year of their starting of business can apply for this loan. It almost a rare case for Brac Bank that an SME borrower will default to repay the loan he/she has taken even the loan is given without taking any collateral. There are several reasons for which the SME loan borrowers hardly default. These reasons may like:
The loan amount is not as large as it would be difficult to repay it.
Mediocre entrepreneurs hardly default to repay loans. They are very conscious about their reputation in the market.
As the loan is taken for meeting up of working capital, it can be easy to repay after the sales revenue is collected from respective customers.

However, from the observation of 37 SME loan borrowers’ personal and repayment information we find the following results:
Average age of SME borrowers is 39
Average education of most of the SME borrowers is Class IX or X.
Average Experience (As a promoter of the business) is 11 years (along with some extreme values.
Average Experience(As an employee of the same business) is 8 years
Monthly income and expenditure of the Entrepreneur is around TK. 30000 and TK. 23000 respectively.
Average personal and family assets are around TK. 150000 and TK. 240000 respectively
Almost all of the borrowers are 55% retailer and 45% whole seller
Average number of employees they have is 3
Average Amount of loan taken by them is around TK. 379729.7

Average time period of loan they take to repay is 26 months
Average amount of loan suppose to be paid is 275314.47

Average amount of loan currently repaid is TK. 286847.62 per person.

Average amount of loan due for recovery is TK. 6679.62 per person.

We have gathered 8 variables to analyze the relationship of each variable with recovery rate. These variables are:

Age of the borrowers
Education of the borrowers
Experience of the borrowers related to their business.
Amount of loan taken by the borrowers
Term of loan
Income of the borrowers
Personal Asset of the borrowers
Nature of business

We can analyze the relationship sequentially:

6.01 Relationship of recovery rate with age of the borrowers:

The relationship of recovery rate with the age of the customers can be described from the following charts:

Age group Frequency Recovery rate(%)
21-25 1 80%
26-30 4 96%
31-35 9 100%
36-40 9 98%
41-45 7 98%
46-50 4 96%
51+ 3 100%

From the above chart we can see that recovery rate increases as the age of the borrowers increases. Here the recovery rate is lowest at the age group of 21-25 for the lacking of experience and knowledge in the related business. They can’t make the proper use of funds. And that’s why their business fails. At the age of 31-35 recovery rate is 100%. At that age group people like to behave professionally and control everything with strict discipline. They are highly concerned about their career which brings success to their business. So at that time recovery rate is the highest. Again at the age of 50 and above recovery rate is also 100% because of their huge experience and success in business.

6.02 Relationship of recovery rate with education of the borrowers:

Education Frequency Recovery rate(%)
Alphabetic-5 8 97%
6 to 10 20 98%
11 to 15 9 96%

From the above chart we can see that Small and medium businesses are not highly affected with the educational background of the borrowers. That’s why recovery rate also is not much affected with the education of the borrower. There should be some other variables affecting it as well.

6.03 Relationship of recovery rate with experience of the borrower:

Experience(year) Frequency Recovery rate(%)
1 to 5 13 94%
6 to 10 9 100%
11 to 15 5 100%
16-20 6 100%
20 above 4 99%

From the above graph we see that recovery rate is highly affected with the experience of the borrowers in the business he is engaged with. In fact, it is all out true that a business and its success is greatly affected by the experience the entrepreneur have on the same line of business. At the initial periods of the business lack of experience can cause the business to fail which ultimately results in the default of loan repayments. So Brac Bank is always concerned about the related experience of the entrepreneur. They don’t give SME loan to anybody having no experience or for initiating any business. And here also we see that recovery rate is lowest at the experience of 1 to 5 years.

6.04 Relationship of recovery rate with amount of loan taken:

Amount of Loan Frequency Recovery rate(%)
200,000 4 95%
250,000 1 100%
300,000 12 97%
350,000 2 100%
400,000 6 100%
450,000 1 94%
500,000 10 97%
850,000 1 100%

From the above chart we see that its tough to make a relationship with both the recovery rate amount of loan taken by the borrowers. But still it can be said that loan amount ranging from 250000 to 400000 have a good recovery rate on an average. That’s why maximum amount or size of SME loan the authority like to disburse is 300000.

6.05 Relationship of recovery rate with term of loan:

Term Of Loan(Month) Frequency Recovery rate(%)
15 3 98%
18 3 100%
21 10 100%
24 11 98%
27 1 94%
36 5 94%
48 4 91%

The above graph shows that, as the loan duration increases the rate of recovery decreases. This may be the inherent reason of why the authority of Brac Bank likes to disburse loan at a shorter term of 18 to 24 months.

6.06 Relationship of recovery rate with income of the borrower:

Income group Frequency Recovery rate(%)
1000-10000 5 94%
10001-20000 15 98%
20001-30000 8 96%
30001-40000 1 100%
40001-50000 3 100%
50000 above 5 100%

In fact, income of a borrower can be a vital factor to repay his loan. And the above graph is a replica of this truth. Here we see that people with higher income group like 30000 to 50000 or above have the highest recovery rate. Entrepreneurs having a good skill, knowledge and experience in business can make success in their business which ultimately increases their income as well. So their recovery rate is good than those group of people who have lower income.

6.07 Relationship of recovery rate with the personal asset of the borrower:

Personal asset Frequency Recovery rate(%)
100000-500000 9 94%
500001-1000000 14 98%
1000001-1500000 5 99%
1500001-2000000 3 100%
2000000 above 7 97%

Entrepreneurs who have sufficient personal assets and mortgage them for taking the loan have the record of higher recovery rate. They don’t have the tendency to make a default in paying the installments. Brac Bank likes to pay SME loans after collecting title deeds of those personal or family assets. People who don’t have much personal asset must show that they have sufficient family asset. Here from the above chart we see that entrepreneurs having lowest personal asset have the lowest recovery rate of 94%.

6.08 Relationship of recovery rate with the Nature of business:

Nature of business Frequency Recovery rate(%)
Whole sale 13 98%
Retail 21 92%

From the above chart we see that entrepreneurs having retail business have a less recovery rate than the entrepreneurs having whole sale business. This may happen because whole sale business transactions happen at a large scale. So they can convert their stocks as well as accounts receivables into cash very quickly before the occurrence of any misfortune. On the other hand, retail business transactions happen at a small lot. So they cannot make swift conversion of their current asset in to cash.

Findings

Findings

Brac bank, as we know, is one of the fastest growing banks in Bangladesh. SME banking which has made the performance of this bank so enlightened is its core product to offer to the small and mediocre business entrepreneurs. In fact no businessman could think ever before that they could take loan so easily, without any collateral and without going to bank. But Brac Bank has made this improbable process so successfully through SME banking.
How ever from the analysis of SME loan repayment behavior I can make the following findings:

Age have a significant impact on the recovery of SME loan. Young entrepreneurs have a lower rate of recovery. On the other hand as middle aged and experienced entrepreneurs are very loyal with their loan repayment they can make proper and timely repayment of their loans. And that’s why most of the SME loan borrowers age rages from 30 to 40.

Education does not have any direct relationship with the recovery rate. In fact, Most of the entrepreneurs of retail and whole business (small or medium in size) are not highly educated. Most of them studied up to class 9 or 10. Sometimes there are some entrepreneurs who have only alphabetic knowledge or who can give their signature only. But still they are running their business so well for many years. In this case experience makes them successful in their business. So, education does have much impact on these small and medium enterprises and also on the recovery rate of SME loans.

Experience is the most significant variable which has a great impact on any kind of business and recovery rate as well. Experienced entrepreneurs run their business so tactfully, identify the exact time what is their pick time of sales and when they need fund. They take the loan in the pick season when they have excess demand but short of capital. Then they ensures the best use of the loan and finally they reach to success and make the dully installments. So their recovery rate is good and that’s why Brac bank looks always for experienced entrepreneurs.

Number of installments (term of loan) and amount of loan taken do affect recovery rate slightly. But trends show that BRAC bank prefers to disburse loan of an amount of 300000 and at a term of 18 to 24 months.

Another variable affecting recovery rate very much is the income of the borrowers. The higher the existing income of the borrowers, the lower the rate of default. Higher income groups make the best use of the loan they have taken and get success. On the other hand lower income group may misuse the loan and ultimately may default in paying installments.

Personal or family asset might have some impact while sanctioning the loan as well as when recovering the loan installments. Suppose if a borrower fails to pay one of his installments, bank can find his personal assets as back up for the recovery of the installments.

Retail business and whole sale business both types of businesses get loans from Brac Bank but whole sellers have a higher recovery rate as their business transactions occur at lot size and their collection is much quick.

Finally we can say that SME loan is a loan given especially to entrepreneurs who are experienced small or medium businessmen, more or less middle aged, at least moderate income generated and who have reasonable personal or family asset. That’s why their recovery rate is so high that is 97%. And their default rate is so small compared to other loan categories. Sometimes borrowers go for early settlements of their loans.

SWOT Analysis

SWOT Analysis

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.

8.01 Strengths:

Company reputation: BRAC 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, BBL has already established a firm footing in the banking sector having tremendous growth in the profits and deposits. All these have lead them to earn a reputation in the banking field

Sponsors: BBL has been founded by a group of eminent entrepreneurs of the country having adequate financial strength. The sponsor directors belongs to prominent resources persons of the country. The Board of Directors headed by its Chairman Mr. F H Abed. Therefore, BBL has a strong financial strength and it built upon a strong foundation.

Top Management: The top management of the bank is also major strength for the BBL has contributed heavily towards the growth and development of the bank. The top management officials have all worked in reputed banks and their years of banking experience, skills, expertise will continue to contribute towards further expansion of the bank. At BBL, the top management is the driving force and the think tank of the organization where policies are crafted and often cascaded down.

Facilities and equipment: BBL 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. Counting machines in the teller counters have been installed for speedy service ant the cash counters. Computerized statements for the customers as well as for the internal use of the banks are also available.
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Impressive branches: This creates a positive image in the minds of the potential customers and many people get attracted to the bank. This is also an indirect marketing campaign for the bank for attracting customers. 13 branches of the bank are impressive and are compatible to foreign banks.

Interactive corporate culture: BBL, has an interactive corporate culture. Unlike other local organization, BBL’s work environment is very friendly, interactive and informal. There are no hidden barriers or boundaries while interacting among the superior or the subordinate. The environment is also lively and since the nature of the banking job itself is monotonous and routine,BBL’s likely work environment boosts up the spirit and motivation of the employees.

Team work at mid level and lower level: At BBL’s mid level and lower level management, there are often team works. Many jobs are performed in groups of two or three in order to reduce the burden of the workload and enhance the process of completion of the job. People are eager to help each other and people in general are devoted to work.

8.02 Weaknesses:

Advertising and promotion of SME loan: This is a major set back for BBL and one of its weakest areas. BBL’s adverting and promotional activities are satisfactory but it SME loan is not advertised well. It does not expose its SME product to general public and are not in lime light. BBL does not have neon sign or any advertisement for SME loan in the city. As a result people are not aware of the existence of this bank.

NGO name (BRAC): BRAC is one of the largest NGO of the world and it is operating its activities in Bangladesh. BRAC bank is not a NGO bank but many people of them country consider it as a NGO bank like Grameen bank which is not correct.

Low remuneration package : The remuneration package for the entry and the mid level management is considerably low. The compensation package for BBL entry level positions is even lower than the contemporary banks. Under the existing low payment structure, it will be very difficult to attract and retain higher educated employees in BBL. Specially CRO’s are not satisfied with compensation package provided to them.

8.03 Opportunities:

Diversification: BBL 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, BBL can reduce their business risk.

Product line proliferation: In this competitive environment BBL must expand its product line to enhance its sustainable competitive advantage. As a part of its product line prolification, BBL can introduce the following products.

ATM: This is the fastest growing modern banking concept. BBL should grab this opportunity and take preparation for launching ATM. Since BBL is a local bank, they can form an alliance with other contemporary banks in launching the ATM.

8.04 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 is now pursuing an aggressive branch expansion strategy. This bank is establishing more branches countrywide and already launched is SME operation. 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 BBL. 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.

Contemporary banks: The contemporary banks of BBL such as Dhaka bank, prime bank and Dutch Bangla are its major rivals. Prime bank and other banks are carrying out aggressive campaign to attract lucrative clients as well as big time depositors.

Default culture: This is a major problem in Bangladesh. As BBL is a new organization the problem of non-performing loans or default loans is very minimum or insignificant. However, as the bank becomes older this problem arises and the whole community suffers from this chronic diseases. BBL has to remain vigilant about this problem so that proactive strategies are taken to minimize this problem if not elimination.

Conclusion & policy Implication

Conclusion and policy implication

In fact, Brac bank promotes broad-based participation in the Bangladesh economy through the provision of high quality and modern banking services. SME loan is one of such quality product through which they offer the small and mediocre entrepreneurs a quality banking services and earn the maximum profit as well. The recovery rate of this loan is 97% which is extremely good in comparison to any other bank’s recovery rate. Brac Bank has made it possible as the loan is given to experienced, small and mediocre entrepreneurs most of whom are middle aged, slightly educated and having moderate income and this class of people is very loyal. But they can serve this class of customers with more commitment and loyalty and they can turn the recovery rate to 100%. For this they can make the following policy implications:
• Redefine mission/vision towards achievement of “Double Bottom-line”
• Commit resources specifically for growth of SME business.
• Implement strict and continuous monitoring system of the whole recovery process.
• Train the Customer Relationship officers more comprehensively and realistically so that customers may not face any trouble while getting and repaying the loan.
• Analyze customers’ behavior that what type of customer makes default and stop giving them SME loan.
• Risk Management department’s audit report should be more strict and reliable so that possible defaulter may not get the loan.
• Whether the borrowers are utilizing the loan on the right purpose should be ensured.