SME Loan Lending Activities and Reconciliation Process

Main purpose of this report is to analysis SME Loan Lending Activities and Reconciliation Process, here focus on BRAC Bank Limited, Head Office. other objectives are find out basic appraisal of SME loan and know the enterprise selection criteria to provide SME loan. Report also focus on to know the disbursement and recovery procedures of SME loans. Finally analysis the work process and monitoring system of Central Support, Operation Help Desk and Reconciliation and make some recommendations on the basis of relevant findings.

Objective of the Report

The objective of the report is categorized into two parts, one is board objectives and the other is specific objectives. These are given below:

 Broad Objectives

• To know SME loan lending activities.
• To study the reconciliation process.

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 know the work process and monitoring system of Central Support, Operation Help Desk and Reconciliation.
• To make some recommendations on the basis of relevant findings.

Methodology

To perform the study, the data sources were to be identified and collected, to be classified, analyzed, interpreted and presented in a systematic manner and key points were to be found out. The overall process of methodology has been given below-

Nature of the study

This is a descriptive type of research that’s why I would mainly take an analytical approach on my report. Both primary and secondary sources have been used for data collection.

Sources of data

Primary data sources

The primary sources of data are given below-

All officers, executives and customers of BRAC BANK LTD, Head office as well as all employees and customers of seven unit offices located in Naogaon, Jaypurhat,Chokoria, Khagrachori, Rangamati,Rajshahi, Porsha.

Methods of Primary data collection

• Interview with Customer relationship officers (CROs) and customers
• Direct observation.
• Discuss with Executives, officers
• Visit in different unit offices located in different districts in Bangladesh.

Background of BRAC BANK Limited

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. BRAC Bank will be a unique organization in Bangladesh. 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 importance of financial intermediaries in the development of the overall economy of country cannot be described in short. From the inception of the civilization the banking sector dominate the economic development of a country by mobilizing the saving from the general people and channeling those saving for investment and thus economic development and growth. In ancient time, the importance of commercial banks after the ravage of the liberation war to develop a better economy was severally needed and it is needed now and will be required in future also. In time-to-time Government of Bangladesh agreed to permit the private commercial banking in the country. BRAC bank will be knowledge-based organization where the BRAC Bank professionals will learn continuously from their customers and colleague’s world wide to add value. It will work as a team, stretch, they will innovate and break barriers to serve customers and create customers loyalty through a value chain of responsive and professional delivery. The bank promotes broad-based participation in the Bangladesh economy through the provision of high quality banking services. BRAC Bank will do this by increasing access to economic opportunities for all individuals and business in Bangladesh with a special focus on currently under-served enterprises and households across the rural – urban spectrum. BRAC Bank believes that the pursuit of profit and developmental goals is mutually reinforcing.

Increasing the ability of under – served individuals and enterprises to build their asset base and access market opportunities will increase the economic well being for all Bangladeshis at the same time, this will contribute significantly to the profitability of the Bank. BRAC Bank intends to set standards as the Market leader in Bangladesh. It will produce earnings and pay out dividends that can support the activities of BRAC, the Bank’s major shareholder. Development and poverty alleviation on a countrywide basis needs mass production, mass consumption and mass financing. BRAC Bank goal is to provide mass financing to enable mass production and mass consumption, and thereby contribute to the development of Bangladesh.

BRAC Bank intends to set standard as the market leader in Bangladesh by providing efficient, friendly and modern fully automated online service on a profitable basis aiming at offering commercial banking service to the customers’ door around the country, BRAC Bank limited establishing branches. This organization achieved customers’ confidence immediately after its establishment. Within this short time the bank has been successful in positioning itself as progressive and dynamic financial institution in the country. It is now widely acclaimed by the business community, from small entrepreneur to big merchant and conglomerates, including top rated corporate and foreign investors, for modern and innovative ideas and financial solution. Thus within this short time it has been able to create an unique image for itself and earned significant solution in the banking sector of the country as a bank with a difference.  The emergence of BRAC Bank Limited is an important event in the country’s financial sector at the inception of financial sector reform. The authorized capital of BBL is Tk. 1000 million and paid up capital of the same bank is Tk. 500 million.

A fully operational Commercial Bank, BRAC BANK LIMITED focuses on pursuing unexplored market niches in the Small and Medium Enterprise Business, which has remained largely untapped within the country. In the last five years of operation, the Bank has disbursed over BDT 32,188.26 million in loans to nearly 67047 small and medium entrepreneurs in 2009. The management of the Bank believes that this sector of the economy can contribute the most to the rapid generation of employment in Bangladesh . The Bank’s footprint has grown to 71 branches, 429 SME unit offices and 225 ATM booths, 30 cash deposit machines, 1558 POS terminals, 19 utility services bill payment booths, 1900 remittance delivery points across the country. In the years ahead BRAC BANK LIMITED expects to introduce many more services and products as well as add a wider network of SME unit offices.

Objective 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.

Products and services

The bank has wide range of Product line to suit the need of the people of all strata. In addition to convention product both Asset and liability sides the Bank offers special credit products for its customer. These are:

• Consumer financing
• Lease Financing
• Small Loan
• Festival Loan
• Housing Loan
• Long-term & Short term loan financing
• Syndication
• Real Estate and Civil Constriction
• SME and Agro Based
• Brokerage House service under the central depository with membership of bourse
• Foreign Currency Remittance
• Representative service
• Consultancy

Departments of BRAC Bank Limited

If the jobs are not organized according to 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 efficiency of particular department will decline. BRAC Bank Ltd. has does this work properly. There are 20 departments in BRAC Bank Ltd. These departments are as follows:

1.  Human Resources Department
2. Financial Administration Department
3. Central Support, operation help desk and reconciliation
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

Small & Medium Enterprise (SME)

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.

SME is an additional and specialized horizon of the bank which serves the bank’s special focus in promoting broad based participation by catering to the small and medium entrepreneur. The network of SME has already been established through out Bangladesh.

For SME loan operation,

BRAC BANK LIMITED has in total 429 unit offices, 67 Zonal office, 14 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 2009, AOD has processed 67047 files amounting Tk. 32188

Reasons of SME Banking

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

Support Small and Medium Enterprise: To support small and medium enterprise, which requires not more than BDT 30 lacs. But in the market, small and

medium entrepreneurs do not have easy access to get loans from the commercial banks/ financial institutions. But BRAC Bank Ltd. Provides loans ranges between BDT 3 to 8 lacs without any kind of mortgage.

Economic Development: Economic development of a country largely depends on the small and medium sized enterprises. Such as, if we analyze the development history of Japan, the development of small & medium size enterprises expedite the development of that country.

Employment Generation: To create employment opportunities in the market. The bank gearing employment opportunities by two ways: Firstly, by providing loan to the small enterprises. Expanding, these businesses require more workers. Secondly, small and medium enterprise (SME) program requires educated and energetic people to provide support to entrepreneurs.

Profit Making: 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 making profit with guidance of the bank.

Encourage Manufacturing: The focus of BRAC Bank Ltd. is to encourage manufacturing by the entrepreneurs who produce by purchasing various types of materials. CRO’s try to educate them to produce material if possible because if they can produce in line of purchase profits will be high.

Spread the Experience: Another reason of BRAC Bank Ltd. is to spread the knowledge on the importance of SME banking regarding various businesses. The customer service officer shares 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 Ltd. also gather knowledge about various businesses and make stronger knowledge base.

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 BDT 2,000
• 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.

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:

Table –: loan processing fees

Loan can be repaid in two ways:

• In equal monthly loan installment with monthly interest payment Or
• 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.

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.

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.

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

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.

Mortgage

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.

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.

Basic Charge Documents

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

Other Basic Charge Documents

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.

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.

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.

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.

Letter of Disbursement

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

Other Security Documents

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.

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.

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.

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.

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.

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.

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.

Selection of Potential Enterprise for SME

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.

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.

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. 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

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.

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.

Area of Monitoring

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

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.

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.

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.

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.

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.

Monitoring System

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.

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

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.

Lease agreement file

This file will contain all papers related to lease agreement between the SESDS office and owners of the leased premises.

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.

Statement file

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

Office instruction file

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

Operating instruction and guideline files

All kind office instruction and guidelines related to operating should be kept in this file

New forms introduction file

All minutes of meeting, whenever held, should be kept in this file.

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

Survey form file

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

Procedure of BRAC bank SME loan:

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 sends 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 shoul 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.

 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.

 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 BDT 20)
• Letter of arrangement (With stamp of BDT 150)
• General loan agreement (With stamp of BDT 150)
• Letter of undertaken (With stamp of BDT 150)
• Letter of stocks and goods (With stamp of BDT 150)
• Letter of hypothecation book debt and receivable (With stamp of BDT 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 BDT 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

SME Loan Recovery Procedures

The repayment process starts immediately after one month of the loan taken. Suppose if a loan is taken in January 7, 2008 then the repayment process will be started from February 7, 2008 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.

Closing procedures of SME loan

Pre-closing manual activities

1. 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.
2. 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.
3. 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.
4. 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.
5. 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)
6. SMS sent to concerned CRO: Loan administration division sent an SMS to the concerned CRO informing the current balance of the requested loan account.
7. 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.

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.

Strengths

Goodwill: BRAC bank LTD 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 belong 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.

Efficient 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.

Weaknesses

Lack of 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. As a result large numbers of 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.

Remuneration: 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 difficult to attract and retain higher educated employees in BBL. Especially CROs are not satisfied with compensation package provided to them.

Opportunities

ATM: BBL always tries to provide excellent services to its customers. By considering this thing BBL provides ATM card to its customers and also provide available ATM booth in different locations in whole country.

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.

Available Branches: With its proper and useful operational network, there is and opportunity for IFIC to further expand its branches in many remote and new location of the country which will deliver services to customer and earn a healthy profit for the bank.

Threats

Competition: Competition is the threat of any business. At the age of modern business the competition is increasing. Every banks has an intention to provide better services compared to others for capturing the customers.

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 bank 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.

Findings

• CRO’s are not getting enough time to monitor of loan utilizing. Every CRO has to fill up the individual target which is given by the head office.
• The SME head office collects all information and sends the CIB form to Bangladesh Bank for clearance. Bangladesh Bank returns this CIB form to the respective SME head office by requiring long time ranging 10-12 days. It kills time.
• The respective unit office sanctions loan to the client if it ranges between BDT 2 to 5 lacs, and then sends the sanction letter including all necessary charge documents to the Asset Operations Department (AOD) for disbursing the loan. If the loan amount is higher than BDT 5 lacs, only the SME head office has the authority to sanction.
• 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 AOD informing the repayment. The AOD collects these SMS /Fax and takes a paper print of these SMS. But there is no monitoring system if CRO fails to send SMS to the head office.
• When all payments made by the borrower the unit office send request to head office for loan closing. But head office takes more time to close the account.
• CRO’s are the key indicator of SME banking division. But their training facilities are limited and they are not satisfied about their remuneration.
• Executives of Central Support and Operations Helpdesk Department have to perform long time duties. They have to start at 10 am and stay until 7 pm. They are not satisfied about their remuneration.

Recommendation

• SME head office sanction the loan by obtaining CIB form from Bangladesh Bank. SME head office should try to collect CIB form with shortest possible time from Bangladesh Bank.
• Implement strict and continuous monitoring system of the whole recovery and repayment process.
• Train the Customer Relationship officers more comprehensively and realistically so that customers may not face any trouble while getting and repaying the loan. Make continuous performance evaluation of the CROs.The CROs should give higher remuneration.
• The bank should effectively monitor the loan utilization of borrower and also CRO’s when they send SMS to head office about repayment of the loan amount.
• Analyze customers’ behavior that what type of customer makes default and stop giving them SME loan.
• SME unit office waits for closing confirmation from head office. Because they can not disburse the repeat loan until getting the closing confirmation from head office. So head office should give closing confirmation with shortest possible time.
• Executives of Central Support and Operations Helpdesk Department should pay more salary so that they can work with higher satisfaction.

Conclusion

BRAC bank Limited 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. There are number of commercial banks operating their activities in Bangladesh. The BRAC Bank Limited is a promising one in them.  Especially the SME division of BRAC Bank Limited has an important contribution of Bank’s overall profit. SME business of BBL has expanding dramatically which creates a large employment opportunity for our country. Banks always contribute towards the economic development of a country. BBL compared with other banks is contributing more by investing most of their funds in fruitful projects and risk free individual. It is obvious that the right thinking of the bank including establishing a successful network over the country and increasing resources, will be able to play a considerable role in the portfolio of development of financing in the developing country like ours.