1

CHAPTER-1 BRIEFING OF THE STUDY

1.1 Introduction to SME:

Small and medium enterprises (SMEs) are the spirit of national economy for any developing country. So development of SMEs is an important component of overall economic policy of a developing country. Moreover, Least Developing Countries (LDCs) in the East have started refocusing their role in bringing about structural change in their economics. As a developing country, Bangladesh has paid much attention to rapid industrialization through development of SMEs. This report attempts to evaluate the present scenario of SMEs in Bangladesh and in this regard we will consider SME financing by NCC Bank Ltd. In Bangladesh SMEs provide over 87% of total industrial employment and are contributing toward the creation of over 33% of industrial value added good. Based on new definition of SMEs, which includes industries with investments up to Tk. 5 million, around 95% of the existing industries in Bangladesh can be classified as SMEs. SMEs are predominantly important for export trade and as well as for the domestic market of our country. It is contributing significantly toward the growth of national economy through supporting industrialization process, revenue generation, poverty reduction, employment creation, output and value addition. For this, the government of Bangladesh has undertaken aggressive steps for providing all possible assistance and co-operation to business community for development of SMEs.

In past bank had avoided SME financing for risk, cost considerations and large banks lacked in aptitude and expertise to finance SMEs. So bankers in Bangladesh traditionally used to asset based lending, were hesitant to make loans to SMEs. Development and growth of Small and Medium Enterprises is vital for national development. Such type of beneficial enterprising borrower cannot go a long way for want of financial support because they have no access to institutional credit facilities, as they cannot provide collateral security as demanded for such credit facility. But today all banks are committed to support SMEs for overall socioeconomic development of the country.

1.2 Objective of the Study:

The objective of my study can be divided into two segments. These are given below:

Primary Objective: The primary objective of this report is to meet the requirements of the Research Project, MBA Program.

Secondary Objective: The secondary objectives are: To find out the importance of providing loans and advances to the small and medium enterprises. Entrepreneurship development situation through SME banking Importance of SME banking in context of Bangladesh To be familiar with SME loan procedures To understand the terms and conditions of SME loan To study the SME loan products. To earn knowledge regarding repayment system of SME loan. To understand the credit risk grading system of NCC Bank Limited To suggest some recommendations for development of SME loan products

1.3 Methodology of the study:

The present study is based on empirical as well as theoretical analysis. Collected data and information were processed and analyzed critically in order to make the report informative. The sources of primary and secondary data may be shown as under. Population: All the SME borrowers of NCC Bank Ltd located in Chittagong will be considered as population. Data collection: Sources of data of this report are divided into two categories:

1) Primary Sources: Practical Deskwork. Opinion Survey. Interview of the personnel. Face to face contact with the officials. Face to face conversation with the client.

2) Secondary Sources: Manuals of NCCBL. Different publications on banks. Annual Report of the bank. Past research books & journals. Documents of Loans and advance department.

1.4 Scope of the study:

This study mainly concern about SME banking of NCC Bank Ltd, Agrabad Branch, Chittagong. The report covers the SME functions performed by the Credit Division, rules and regulations related to SME Credit, procedure of Sanctioning SME Credit, credit grading system of NCCBL, Monitoring, and various analyses related to this particular arena etc. It focuses on different product and services provided to the borrower, different procedure associated with it, different problems associated with SMEs etc. The study also covers the overall performance of the bank comparing to previous years.

1.5 Limitation of the study:

To make a report various aspects and experience are needed. But I have faced some barriers for making a complete and perfect report. These barriers or limitations, which hinder my word, are as follows: Time limitation is the main barrier for this study. Lacking of proper assistance, due to working pressure of the officers. Lack of my experience in data collection. Client and customer are also busy and not always helpful. Inadequacy and lack of availability of required current data. Changing environment from the educational area to the professional area. My personal limitations also contributed greatly in making the study.

Chapter-2 Company Profile

2.1 Profile of National Credit and Commerce Bank Ltd:

National Credit and Commerce Bank Ltd. is one of the established and faster growing bank in Bangladesh. Its ongoing financial liberalization program, make it as a fast growing leading and prominent bank in the private sector to operate on the commercial arena of Bangladesh. The bank has been sponsored by a group of renowned personalities from the field of trade, commerce and industries including some eminent entrepreneur. Highly skilled professionals having wide experience in domestic and international banking manage the bank. The NCC Bank Ltd has already occupied a challenging position among its competitors after achieving success in all areas of banking operation. It offers all kind of commercial, corporate and personal banking services covering almost all segments of the society. To serve the customers through capacity building across multi delivery channel is one of the main strategies of the NCCBL. The bank is gradually expanding branch for coming nearer to its customers for providing various convenient services. Thus, in the local market the operation of the NCCBL is highly appreciated for its customer oriented focus,

2.2 Historical Background:

NCC Bank is one of the well known Banks among all Private commercial Banks (PCBs) in Bangladesh. Before 1993 NCC Bank was not scheduled commercial bank. It was incorporated as a Public limited investment company on 18th November 1985, named National Credit Ltd (NCL). In 25th November 1985) it started its operation on its registered office & first Branch at 7- 8, Matijheel Commercial Area, Dhaka-1000. The initial authorized capital of the company was 30 crore consisting of 30 Lac of ordinary shares of Tk. 100 each. In 17th May, 1993, NCL was emerged as a Bank and renamed as NCC Bank Ltd (National Credit and Commerce Bank Ltd). The initial authorized capital of the Bank was Tk. 750 million and paid-up capital Tk. 390 million. At the end of first year of Banking Operation in 1993, total deposit was 1.650 million, advance was 1.050 million. The comprised the first Board of Directors. Over

the years, the bank has been expanding its service coverage through introduction of new branches at different strategically important areas of the Country. It is sponsored by a number of entrepreneurs representing various business groups with exposure in Garments) Textile, Steel & Engineering, Financial, Insurance, Electronics, and Cement and Construction Sectors. Mr. Yakub Ali is the present Chairman of the bank. The bank went for lPO on December 1999 and raised Tk. 195.00 million from the offer. The NCCBL got enlisted with Chittagong Stock Exchange on May 16th 2000 and with Dhaka Stock Exchange on May 28th 2000. The authorized of capital of bank is Tk. 500.00 Crore and paid up capital is Tk. 228.49 Crore on August 31, 2009. NCCBL is the member Investment Promotion and Financing Facility (IPFF) launched by the World Bank enable in Co-financing private infrastructure development companies and Foreign Remittance Payment Project (FRPP), co-funded by DFID, UK to dispense foreign remittance in every corner of the country. The Bank has a network of 74 branches&1592 employees as on August 31, 2010.

2.3 Total Equity of the Bank: (As at June 30, 2010) Shareholders Equity Paid up capital Statutory reserve revaluation General reserve Other reserve Surplus in profit and loss account Total Shareholders Equity

June 30,2010 4,501,253,300 2,198,785,974 67,162,348 679,959,752 807,475,702 8,254,637,076

December 31, 2009 2 ,284,900,200 1 ,893,817,316 67,162,348 668,191,610 1 ,120,377,433 6 ,034,448,907

2.4 Mission of NCCBL: Anticipating business solutions required by all customers everywhere and innovatively supplying them beyond expectation. Setting industry benchmarks of world class standard in delivering customer value through our comprehensive product range, customer service and all our activities. Building an exciting team-based working environment that will attract, develop and retain employees of exceptional ability who help celebrate the success of our business, of our customers and of national development. Maintaining the highest ethical standards and a community responsibility worthy of a leading corporate citizen Continuously improving productivity and profitability, and thereby enhancing shareholder value.

2.5 Vision of NCCBL: To be in the forefront of national development by providing all the customers inspirational strength, dependable support and the most comprehensive range of business solutions, through our team of professionals who work passionately to be outstanding in everything we do. 2.6 Objectives & Goal of NCCBL: To share a significant portion of the banking sector by utilizing available manpower and state of the art technology for maximizing the shareholders wealth. To maximize shareholders wealth. To earn satisfactory rate of return on investment by providing wide range of banking services.

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2.7 Organization structure of NCCBL:

Managing Director (MD) Deputy Managing Director (DMD) Senior Executive Vice President (SEVP) Executive Vice President (EVP) Senior Vice President (SVP) Vice President (VP) Senior Assistant Vice President (SAVP) Assistant Vice President (AVP) Senior Principal Officer (SPO) Principal Officer (PO) Senior Officer (SO) Officer (G-1) Junior Officer (JO) Assistant Officer (AO)

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2.8 Organizational structure of Agrabad Branch:

Executive Vice President (EVP)

Senior Assistant Vice President (SAVP)

Assistant Vice President (AVP)

Senior Principal Officer (SPO)

Principal Officer (Po)

Officer (G-1)

Junior Officer (JO)

Assistant Officer (AO)

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2.9 Departments of Agrabad Branch:

Departments of Agrabad Branch

General Banking

Loan and Advance

Foreign Exchange

Accounts Opening

Accounts

Import

Remittance Clearing

Ledger & Deposit Cash

Export

Foreign Remittance

Fixed Deposit Receipt (FDR)

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2.10 Products & Services offered by NCCBL: Deposit Products: Fixed Deposit Receipt Foreign Currency Deposit Instant Earning Term Deposit Money Double Scheme Premium Term Deposit Special Deposit Scheme Special Saving Scheme Wage Earners Welfare DPS Loans & Advances: Agro Based Loan: Agro-Credit Agro-Industries Corporate Service: Project Finance Short& Long Term Loan Syndicate Loans Trade Finance Transport Loan Working Capital Loan Housing Loan: House Building Loan House Renovation Loan SME: Consumer Finance Festival Business Loan Festival Personal Loan Lease Financing Personal Loan Small Business Loan

Remittance: Foreign Remittance Inland/Local Remittance

Card Service: ATM Service Credit Cards Local Credit Card International

Others: Bonds & Guarantees Consultancy Issuance of TO (Foreign Currency) Locker Facilities On Loan Banking Utility Service (Payment of Bills)

Brokerage House: Consultancy Credit Facility under Margin Rules Trading

Specially: International Trade Service: IPFF Member Bangladesh Bank Export L/C V lmport L/C Service Pre & Post Shipment Finance Primary Dealer for Treasury Subsidiary: Bonds/Bills Equally Participation in Venture Investment
Proteins CTD Bangladesh (VIPB).

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2.11 Financial Highlights of NCC Bank Ltd.

2.11.1 Balance Sheet

At June PROPERTY AND ASSETS 30,2010 Taka Cash In hand (including foreign currencies) Balance with Bangladesh Bank and its agent bank (s) (including foreign currencies)
Balances with other Banks and Financial Institutions

At December 31, 2009 Taka

553,742,945 5,320,538,275

447,864,005 3 ,201,373,908

1,241,423,364 1,108,465,565 132,957,799 -12,297,655,404 11,785,773,713 511,881,691 56,125,592,614 53,623,522,459 2,502,070,155 956,336,016 1,240,335,776 --

623,905,934 445,746,061 178,159,873 -9 ,671,530,054 9 ,188,182,140 483,347,914 50,387,683,203 48,530,225,335 1 ,857,457,868 849,103,581 756,030,778 --

In Bangladesh Outside Bangladesh Money at call and short notice Investments Government Others Loans and advances Loans, cash credits, overdraft, etc. Bills purchased & discounted
Fixed assets including premises, furniture and fixtures

Other assets Non-banking assets Total Assets

77,735,624,394 65,937,491,463

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At June LIABILITIES AND CAPITAL 30,2010 Taka Liabilities Borrowings from other Banks, Financial Institutions and agents Deposits and other accounts: Current deposits and other accounts Bills payable Savings Bank Deposit Fixed Deposit Term Deposit Bearer Certificate of Deposit Other liabilities Total Liabilities Shareholders Equity Share capital Paid up capital Statutory Reserve General reserve Other reserve Surplus in profit and loss account Total Shareholders Equity Total Liabilities and Shareholders Equity 4,501,253,300 2,198,785,974 67,162,348 679,959,752 807,475,702 8,254,637,076 1,995,293,182

At December 31, 2009 Taka

1 ,822,696,932

63,476,084,912 53,900,150,635 6,008,940,500 2,109,313,868 6,581,137,241 5 ,390,299,730 685,406,946 6 ,134,648,381

35,461,459,462 32,267,274,574 13,315,233,841 -4,009,609,224 9 ,422,521,004 -4 ,180,194,989

69,480,987,318 59,903,042,556

2 ,284,900,200 1 ,893,817,316 67,162,348 668,191,610 1 ,120,377,433 6 ,034,448,907

77,735,624,394 65,937,491,463

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At June 30, CONTRA ENTRIES

2010

At December
31, 2009

Taka
Off balance sheet items: Contingent liabilities Acceptance and endorsements Letter of guarantee Irrevocable Letter of credit Bills for collection Other contingent liabilities: Claims against the bank not acknowledged as debt Capital Commitments Export Development Fund (EDF) Total Off Balance Sheet Items ---5 ,296,674,684 4 ,936,623,000 5 ,353,061,185 10,089,274

Taka

3 ,596,232,028 4 ,132,262,543 3 ,460,600,081 3,708,113

----

15,596,448,143 11,192,802,765

2.11.2 Graphical view of profit position of NCC Bank Ltd.

Millions
1200 1045.552961 1000 890.412657 800 685.003526 600 489.532021 400 366.339315

200

0 2009 2008 2007 2006 2005

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2.11.3 Comparative Financial Highlights (between 2009-2008) Of NCCBL:

Si. No

Particulars

At August 3l, 2009(BDT)

At Dec, 31, 2008(BDT)

1. 2. 3. 4. 5. 6. 7. 8. 9.

Paid up capital Total Capital Capital Surplus/Deficit Total Assets Total Deposits Total Loans and advances Total Contingent Liabilities Credit deposit ratio Percentage of classified loan against total Loans and advances

2,284900,200 5,794,408,347 1,347071,347

1757,615,600 4,440,255,205 255385,205

64,147269,693 57,365,523,726 51,888,193,858 46,904,663162

47,793,768,267 46,332,688,464 10,813377,301 10,940,927,647 0.92:01 4.39% 0.98:01 4.14%

10. Profit after tax & provision 11. Amount of classified loan during current year 12. Provision kept against classified loans 13. Provision Surplus/Deficit 14. Cost of fund (%) 15. Interest earning Assets 16. Non-interest earning Assets 17. Return on Investment (ROl) 18. Return on Assets(ROA) 19. Income from Investment 20. Earnings per share (Tk.) 21. Net income per share (Tk.) 22. Price Earnings Ratio (Tk.)

1,040,216,691 2055,918,000

882,277833 1,902,927,647

1025,628838 -11.60% 57,550638,822 6,596,630,871 6.76% 1.62% 588,259,885 45.53 45.53 7.80

91 2904000 -11.64% 53,077,596228 4,287,927,498 9.77% 1.54% 638,069,608 50.20 50.20 7.29

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2.12 Philosophy of NCC Bank Ltd. At present, the bank has as many as 64 branches across the country and it is committed to become equal service providers compatible with the norms of commercial schedule bank. It renders all types of personal, commercial and corporate banking services to its customers within the purview of the Bank Companies Act, 1991 and in line with the directives and policy guidelines laid by down, by Bangladesh bank, 2.13 SWOT Analysis of NCC Bank Ltd.: SWOT stands for Strength, Weakness, Opportunity and Threat, The SWOT of NCCBL has been shown below: Internal factors Strengths Existence of strict and standard credit management. Harmonious lender (bank) borrower (Client) relationship. Experienced manpower in advance/loan department. Decreasing trend of classified loan. Existence of some new & attractive credit scheme. Weaknesses Lack of trained and highly educated officers. Lack of modern equipment. Lack of proper office space. Absence of Islamic Banking System. Lack of proper advertisement of the products and services of advance. External factors Opportunities Can introduce more new Threats

and Govt. policies are not in favor of the private banks. attractive credit scheme. Competitors done the credit services Can set a competitive interest rate. to customers more effectively. Competitors offer low interest rate on Can recruit young, energetic and loan. talented officers, Entrance of highly equipped and modern banks & intense competition Can take initiative for introducing in the credit market. Islamic Banking system.

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CHAPTER-3 OVERVIEW OF SME

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Overview of Small and Medium Business enterprises (SMEs)

3.1 Concept of SMEs: The Small and Medium Enterprises worldwide are recognized as engines of economic growth. In recent days the Small and Medium Enterprise (SME) Financing has become an important area for Commercial Banks in Bangladesh. To align its corporate policy with the regulation of Central Bank, banks have become more concerned about SME and opened windows to conduct business in this particular area. As per Industrial Policy-2005, Small and Medium enterprises are categorized as follows:

(a) Manufacturing enterprise Small enterprise: An enterprise should be treated as small if, in current market prices, the replacement cost of plant, machinery and other parts, fixtures, support utility and associated technical services by way of capitalized costs (of turn-key consultancy services, for example), etc. excluding land and building were to be up to TK 1.5 crore. Medium enterprise: An enterprise would be treated as medium if, in current market prices, the replacement cost of plant, machinery and other parts, fixtures, support utility and associated technical services by way of capitalized costs (of turn-key consultancy services, for example), etc. excluding land and building were to be up to TK 10 crore.

(b) Non- Manufacturing enterprise Small enterprise: An enterprise should be treated as small if, it has less than 25 workers. Medium enterprise: An enterprise would be treated as medium if; it has between 25 and 100 workers.

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Bangladesh Bank defines SME as:

Nature of enterprise Small enterprise

And/or total Nature of Loan Total Assets (at cost) number of employees Service concern Tk.50,000 to 50 Lac (excluding land & building) Trading concern Tk.50,000 to 50 Lac (excluding land & building) Manufacturing concern Tk.50,000 to 1.5 Crore (excluding land & building) Tk.50,000 to 10 Crore (excluding land & building) Trading concern Tk.50,000 to 10 Crore (excluding land & building) Manufacturing concern Tk.50,000 to 20 crore (excluding land & building) Not more than

persons 25 Not more than

persons 25 Not more than

persons 50 Not more than

Medium enterprise

Service concern

persons 50 Not more than

persons 50 Not more than

persons 150

3.2 Booster Sectors (Proposed Industrial Policy-2005): Specialized Textiles (including Garments). Backward Linkage (Garments). Hand-driven welding. Basic Metal engineering. Small Fabrication units. Paper, Printing & Publishing. Handicraft, Electronics. Small scale Chemical industry, Poultry farming. Rubber, Battery and Silk. Food/fruit processing and food allied, Fisheries. Leather, Ceramic. Light engineering, etc.

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3.3. SME Financing by Banks in Bangladesh: The National Commercial Banks (NCBs) are disbursing significant amount of credit under various programs like Small Enterprise Development Project, Self-help Credit Program, and Projects for Small Entrepreneurs, Special Investment Program and Agro-based Supervisory Industrial Credit etc. for the promotion and development of SMEs. The investment of private sector banks in financing SMEs remains insignificant in Bangladesh. Of all the private sector banks, BRAC Bank, AB Bank Limited. (ABBL) Eastern Bank Ltd. (EBL), Prime Bank Ltd, Dhaka Bank Ltd, Mercantile Bank Ltd, Dutch-Bangla Bank Ltd, Islami Bank Bangladesh Ltd, IFIC Bank Ltd. National Credit and Commerce Bank Ltd. (NCCBL) have the leading role in SME financing. Bank of Small Industries and Commerce Bangladesh Ltd. (BASIC) are entrusted with the responsibility of providing medium and long-term loans for promotion and development of small-scale industries. The memorandum and Articles of Association of the bank stipulates that 50% of loan able funds shall be used for financing small scale and cottage industries.

3.4 What makes SMEs sustainable? There are some factors that make SMEs sustainable, thats are Flexible and Credible policy environment. Political and economic stability. Cost-efficient labor. Availability of raw material and technological knowhow. Good infrastructure. Investment incentives. And last but not least, positive social attitude toward entrepreneurship.

3.5 Problems encountered by SMEs: There are some problems which reducing the growth of SMEs. The problems to expending credit facilities can be described from two points of view. 1) From demand side constraints i.e. from borrowers point of view. 2) From supply side constraints i.e. from the bankers point of view.

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3.5.1 Demand side constraints of SME financing (from borrowers point of view) a) Collateral: The kind of collateral such as land and building that many SME entrepreneurs cannot because they work from rented property. Banks considered land owned within the municipal area as collateral security. Banks undervalued the collateral resented. Sometimes it is assessed to 50% or less for banking purpose. Insurance of collateral security from borrowers end. b) Procedural complexities and delays: Potential borrowers are rarely given written guidelines clarifying the eligibility and terms and conditions for different loans scheme. Documents are huge. Documentation is time consuming process. Standardized banking norms and procedures are usually applied strictly. Low literacy level of many entrepreneurs makes the understanding of the forms and procedures more difficult. Banking language is often difficult for the laymen to group. Most banks require a guarantor for sanctioning the loan. c) Bribes: Many bankers delay the loan application in order to frustrate the applicant and ultimately providing bribes to facilitate the process. Bankers can be bribed to overlook a number of procedural difficulties (land documents are not actually in the borrowers name, guarantors and over valuation of collateral). The key to minimizing the opportunities for bribery to supply bankers and consumers with clear information on the documents required, the processing stage and the maximum time required for each step.

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3.5.2 Supply side constraints of SME financing (from the bankers point of view): Lack of knowledge I information about the profitability of purpose of SME borrowers. High risk involved in SME project due to lack of data. High administration cost. Lack of prior business relation of SME borrowers with financial institutions. High level of default in commercial banks. Slow and costly judicial recovery process. Shortage of manpower and logistics. Lack of bankable clients. Monitoring and supervision problem.

3.6 Suggestions for facilitating the growth of SMEs:

To overcome the barriers following steps should be taken: Suitable policy incentives. Financial services. Marketing services. Creation of Entrepreneurship Development Institution (EDI). Role of Information Technology (IT) sectors. Providing incubator treatment initially.

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CHAPTER- 4 SME BANKING OF NCCBL

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SME Banking of National Credit and Commerce Bank Ltd.

4.1 Objective of SME financing scheme: To provide credit facilities to Small and Medium size entrepreneurs located in urban and sub-urban areas which are easily accessible. To flow credit for creation of employment and generation of income on a substantial basis through development of SMEs. To give assistance to potential entrepreneurs to take part in economic activities. Reduce dependence on moneylenders. To make Small and Medium enterprises self-reliant. 4.2 What NCC Bank Ltd. Considers as Small and Medium enterprise? Small and Medium enterprise refers to those enterprises (other than Public Ltd. Company) as per the guideline of Bangladesh Bank: a) Where goods are produced, recycled, repaired or traded and rending service in traditional way. b) Small enterprise: Nature of enterprise Total Assets at cost excluding land and building Service concern Trading concern Manufacturing concern c) Medium enterprise: Nature of enterprise Service concern Trading concern Manufacturing concern Total Assets at cost excluding land and building Above TK 30.00 Lac to TK 1.00 Crore Above TK 50.00 Lac to TK 2.00 Crore Above TK 1.00 Crore to TK 5.00 Crore Total number of employees Less than 50 persons Less than 50 persons Less persons than 100 Tk 50,000-to TK 30.00 Lac Less than 30 persons Tk 50,000-to TK 50.00 Lac Less than 20 persons Tk 50,000-to TK 1.00 Less than 60 persons Total number of employees

Crore

For NCC banks purpose Private Ltd Company shall also be excluded for financing under SME scheme.

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4.3 SME Products of National Credit and Commerce Bank Ltd.

SME products SBLS

Purpose of loan

Loan ceiling

Period of Interest loan charge 17%

For shops

small

retail/wholesale Up to Tk. 5 lac

5-Years

HRRLS

For

repairing,

decoration, Up to Tk. 5 lac

10-Years

17%

painting etc. PLS This is sanctioned for personal Up to Tk. 1 lac purpose not for business use & the individual must have a permanent job. At least 6 17% month but not than years. FSBLS This is sanctioned for particular Up to Tk. 5 lac festival (Eid, Fair, Puja etc.) purpose& for business use. FPLS This is sanctioned for particular Up to Tk. 5 lac festival (Eid, Fair, Puja etc.) purpose& for personal use. CFS The Scheme aims at improving Up to Tk. 1 lac the standard of living of the fixed income group. Under the scheme the clients may secure loan facilities to at easy procure 2-Years 17% 1-Years 17% 1-Years 17% more 3

installments

household amenities. It meets household needs of service holders: Furniture/ & TV/ others

Refrigeration

household durables

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4.4 Eligible criteria for SME loans: I. The borrower shall maintain a savings/current/STD account with NCC Bank Ltd. II. III. IV. The entrepreneurs must be literate i.e. capable of reading and writing. The entrepreneurs should be skilled in managing his/her business. If the applicant is an individual, the borrower must be a permanent resident of Bangladesh. If the borrower is a firm or other business entity it must be in Bangladesh. V. The entity of applicant must be 100% privately owned, controlled and operated. VI. If acceptable collateral security cannot be provided, the borrower should arrange for two guarantors acceptable to the bank. The type of guarantors depends on size of the loan and business. In accepting a person as guarantor his social standard, income and asset shall be considered. Any default loaner or unreliable person shall not be acceptable as guarantor. VII. VIII. IX. X. The project shall be financially viable and socially desirable. The person shall have reputation in society. The innovative projects, manufacturing enterprise shall get preference. Proper utilization and timely repayment of previous loan will be considered as proven track record of the applicant for renewal & enhancement of credit facility.

4.5 Documents required for SME loan: For execution of any loan, bank usually used two types of documents. One is application from and other one is charge document. Details of these documents are given below.

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Application form: The contents of application form for loan of different banks are almost the same and these are as follows: Personal Details of Application(s): Applicants personal information is written down here. Loan Details: Amount of loan, period, interest, equity, mode of repayment, security and other charges are to be mentioned. Financial Details: Total assets, total liabilities, monthly income, monthly expenses and all other financial details of the applicant have to be mentioned Particulars of Guarantors: Details of Guarantors with their job details are stated here. Quotation: Quotation contains the details descriptions of the goods, brand, model, size, manufacturer, price and details of supplier. Letter of Assurance: This is the assurance of the working organization of the client to pay the installment on behalf of the client in case of the client fails to repay. Declaration: This the declaration of the borrower that all the information regarding the quotations o goods is correct and he agrees with all terms and conditions of the bank Certification of the organization: in this section the working organization will certify that the borrower is the employee of the organization. Photograph: Two copies of photograph are required for each client.

Charge documents: Charge documents are set for documents that contain different rules, terms and conditions. If the, borrower of loan agrees with all these terms and conditions regarding the loan he needs to sign all the documents. If any disagreements or irregularity occurs in the future, these documents will be exercised to suit against the borrower. Before the disbursement of loan, the following documents must be signed by clients. The stamps needed for these documents are paid by the clients.

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Letter of Guarantee: This letter of guarantee is two sided. One is borrower side guarantee and another one is guarantor side guarantee. Borrower side guarantee consists of agreement of all terms and conditions of bank as well as assurance of proper repayment of installment. Guarantor side guarantee is the undertaking by the guarantor to pay the installments in case of failure of the client. Letter of Hypothecation: It signifies that the goods items are hypothecated to the bank. Demand promissory note: It is the promise of borrower to pay on demand to the bank the overdue or total outstanding if necessary. Letter of installment: In this document borrower promises to pay all regular and irregular installments in the due time. Letter of disbursement: This is the agreement that the borrower is bound to pay all dues together with all other charges and the borrower gives the bank the authority to discharges the agreements any time due to the fault in borrower side Letter of authority: Through this the borrower gives the bank the authority to debit the account if necessary.

4.6 Mode and period of finance under SME scheme: a) Cash credit (H) for maximum one year period. b) Lease finance for used! reconditioned machinery/vehicle maximum three years and for new maximum five years. c) Term loan for business maximum five years. 4.7 Loan Ceiling: For SME working capital Nature of enterprise Borrower exposure(for all items) For Lease financing Small enterprise Minimum Tk. 2.00 Lac & maximum Tk. 20.00 Lac For SME term loan Medium enterprise Above Tk. 20.00 Lac & maximum Tk. 50.00 Lac

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4.8 Procedure for application: The following papers will have to be submitted by the prospective borrower while applying for loan under SME: a) Application in prescribed form duly filled in and signed by the applicant. b) Two passport size photographs duly attested by an officer of the branch. c) Recommendation by the head of Local Chamber of Commerce and Industry or related Business Association or Society or Malik Samity/ similar body (Where applicable) 4.9 Interest and other charges:

I.

For working capital (cash credit, Hypothecation, pledged): a) Interest @ 16% at quarterly rest subject to change from time to time. b) Penal interest @ 2% to be charged on overdue amount.

II.

For lease financing: a) Interest @ 16% at quarterly rest subject to change from time to time. b) Supervision and monitoring charge 1% per annum. c) Project examination fees minimum Tk.2,500/- to Tk. 10,000/- to be realized. d) Risk fund @ 1% on acquisition cost to be realized before disbursement of loan. e) Disposal of the lease item @ 1% on acquisition.

III.

For term loan (Business): a) Application fees Tk. 500/b) Interest @ 16% at quarterly rest subject to change from time to time. c) Penal interest @ 1% per month will be charged on default amount (minimum Tk.100/). d) Service/Processing charge @ I % of the amount of loan sanctioned to be recovered at the time of disbursement. e) Risk fund @ 1%, minimum Tk. 500/-, shall be realized once at the time of disbursement.

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4.10 Securities taken for SME Loan: a) For cash credit & lease finance registered mortgage of land & building as collateral is required. b) For business term loan more than Tk. 5.OOLac, registered mortgage of land & building as collateral is required. c) Mortgage/Assignment of possession right. d) Assignment of security money, advance rent if any. e) Assignment of trade receivables not older than 90 days. f) Hypothecation of machineries, vehicles, stock in trade raw materials, works in process and finished goods. g) Personal guarantee from persons acceptable to the bank. h) Post date checks. i) Lien on deposit/saving certificate/financial obligations. j) Any other securities to be deemed suitable by the bank depending on the situation like insurance guarantee, corporate guarantee, assignment of contract, security money etc.

4.11 Restricted Business: Manufacturing, distribution or servicing alcoholic beverages. Un-manufactured tobacco, tobacco reuse, manufactured tobacco (whether or not containing tobacco substitutes), and tobacco processing machinery. Radioactive and associate materials, nuclear reactors & parts thereof, nonirradiated for nuclear reactors and fuel elements (cartridges). Goods intended for a military or paramilitary purpose, environmentally hazardous goods, and personal or consumer loans including house-building loans. Crop and fish production. Production and trading of any item banned by government or any activity not permissible by the law of the land.

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4.12 Process of loan sanction followed by NCCBL:

Step-I: Loan interviewing! Selection of borrower. Step-2: Loan application submitted by borrower. Step-3: Collecting & correlating the information about the borrower. Step-4: Preparation of credit report. Step-5: Mangers decision about the suitability of proposed loan/advance. Step-6: Assessment. Step-7: Recommendations. Step-8: Sanction. Step-9: Sanction advice, other terms &conditions. Step-10: Repayment & repayment schedules. Step-11: Settlement of Interest rate, etc.

4.13 Disbursement of loan: I. Branch manager will disburse the loan after sanction and completion of all formalities and documentation will be as per sanction letter of Head Office. II. The following documents must be obtained as per sanction letter before disbursement of the loan. A. For working capital (CC, HY, PI): a) D.P note. b) Letter of continuity. c) Letter of arrangement. d) Letter of disbursement. e) Registered mortgage and registered irrevocable general power of attorney as per Artha-Rin Adalat act-2003. f) Letter of guarantee. g) Letter of hypothecation of goods/pledge letter. h) Letter of authority to debit the account with incident and other bank charge.

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i) Letter of acceptance of the terms and conditions of the loan. j) Hypothecated stock should be insured against, fire, flood and cyclone cover in joint names of the bank and the borrower covering full value of stock plus 10%. B. For lease financing: a) D.P note. b) Letter of continuity. c) Ownership of the vehicle/original purchase receipt in favor of the bank. d) Lease item(s) shall have to be duly insured under banks mortgage clauses throughout the lease term and insurance premium to be borne by the lessee. e) Lease arrangement& letter of acceptance of the terms and conditions of the loan. f) Letter of authority to debit the account with incident and other bank charges. C. For Term loan(business): a) D.P note. b) Letter of arrangement. c) Letter of disbursement. d) Registered mortgage and registered irrevocable general power of attorney as per Artha-Rin Adalat act-2003. e) Simple deposit of original Title Deed of the ownership of the shop or possession deed/agreement or lease deed of agreement with personal guarantee of the landlord in case of rent premises. f) Guarantee Bond on Tk. 150/- Non-Judicial stamp as per approved format from the guarantor acceptable to the bank. g) Acceptance of the terms and conditions of the loan. h) Letter of authority to debit the account with incident and other bank charge. i) Up to date trade License. j) Letter of Hypothecation. k) Post dated cheques for all installments.

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4.14 SME loan monitoring and review: This is a supervising credit scheme. The success depends on the extensive and intensive post disbursement supervision, follow up & monitoring. a) Regular checking the balance of SB/CDISTD accounts of the borrower. b) Regular communication with the defaulter customer and guarantors physically! over telephone. c) Issuance of letter to customer immediately after dishonor of cheque. d) Issuance of letter to defaulter customers and respective guarantors. e) Issuance of legal notice to the defaulter customers and guarantors prior to classification of the loans (after three overdue installments). f) Issuance of appreciation/greetings letter to the regular customers. g) Periodical visit with the customer to maintain relationship and supervision of supplied articles. h) Legal action to be taken after failing all possible efforts to recover the banks dues. i) 4.15 Lending Risk Analysis (LRA) of SME Loan: Lending itself is risky and no lending is possible without risk. Any bank has to analyze the risk so that the risk can be covered. LRA is one of the new management and operational tools for calculation of credit risk. Bangladesh bank made it mandatory for commercial banks to exercise it for granting loans for. It focuses on determination of degree of risk of non-repayment by a particular loan and thus has been helping the bank management in taking loan decisions on the basis of risk scores.

4.15.1 Credit risk: Credit Risk is the possibility that a borrower or Counterparty will fail to meet obligation. Credit risk arises from the banks dealings with or lending to the corporate, individual and other bank or financial institutions. To minimize losses banks should management policies and procedures. have comprehensive credit risk

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Credit risk can be classified into following parts:

Credit Risk

Financial Risk

Business/ Industry Risk

Management Risk

Security Risk

Relationship Risk

4.15.2 Credit Risk Grading: Based on Pre-specified scale reflecting the credit risk for an exposure. Number! Alphabet! Symbol as Summary indicator of risk. Credit Risk (with assigned weight) Financial Risk (50%) Business/lndustry Management risk (18%) risk (12%) Security Risk (10%) Security coverage (4%) Collateral coverage (4%) Support (2%) Relationship Risk (10%)

Leverage (15%)

Size of Business (5%)

Experience (5%)

Account Conduct (5%)

Liquidity (15%)

Age of Business (3%)

Succession (4%)

Utilization of limit (2%)

Profitability (15%)

Business outlook (3%)

Teamwork (3%)

Competition of convents/conditions (2%) Personal deposits (1%)

Coverage (5%)

Industry Growth (3%) Market Competition (2%) Entry/Exit barrier (2%)

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4.16 Statement of Monthly Position of SME Loan Scheme (figure of Jun 30, 2010 Agrabad branch): (Figure in Lac)
Nature of Loan Total Budget approved including enhancement Total amount sanctioned Total amount disbursed Total amount recovered Overdue installments Total present outstanding

SBLS HRRLS PLS FPLS CFS Total

200.00 55.00 45.00 ---

300.00 79.00 65.60 ---

300.00 79.00 65.60 ---

240.00 59.50 60.15 ---

13.42 3.63 0.15 --Tk.17.20

60.00 19.50 5.45 --Tk.84.95

Tk.300.00 Tk.444.60

Tk.44.60 Tk.359.65

350 300 250 200 150 100 50 0 To. Budget App. To. Disburse Overdue SBLS HRRLS PLS

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4.16.1 Percentage of Total SME Loan recovered (Jun 30, 2010)

PLS, 92%

SBLS, 80%

HRRLS, 75%

4.17 Porters Forces of Model:

There is a constant threat of the emergence of new SME banking sector which can satisfy the same SME banking needs offered by the National credit commerce Bank Ltd. If we analyze the scenario of last 4 to 5 years we can see that trend of many Banks coming up in SME section during this period. Some of the banks like Mercantile Bank Ltd, Prime Bank Ltd, Export Import Bank of Bangladesh Ltd have shown huge growth rate. On the other hand, some foreign banks like HSBC, Bank Al-Falah, Citi Bank N.A, Commercial Bank of Ceylon, Standard Chartered started their operations in Banglades hoping to grab a large share of this growing Market. However as Company name has already won customers preference in the market and have been very successful in creating great brand loyalty among its target market through a very aggressive marketing strategy using the tools like promotion, product innovation, and high service quality.

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Bargaining power of the customers:

The extent of bargaining power is different for the individual customers. This is due to the fact that the deposits of an individual customer id very insignificant compared the total deposits thus they possess very low bargaining power. At the same time some corporate entities have very large deposits in National credit commerce Bank so they posses strong bargaining power in terms of deposits only and they get special rates from the Bank. So their choice is limited and bargaining power of the customers are not very strong.

Bargaining power of the suppliers:

Since suppliers are limited but company unlimited, so their bargaining power is high. But, at the same time, suppliers are getting some extra benefits (Festival bonus, opportunities) from our company. So, their Bargaining power is limited. The biggest suppliers for a bank are the customers of the bank. They accumulate for much of the required funding the banks need to reinvest though loans in order to earn a profit. The customers coming to National credit commerce Bank are able to afford the high charge rates applicable to them compared to the other commercial bank. So the bargaining Power of suppliers, if united, is extremely high unless the bank can understand their needs, and offer them proper value-added services for which the customers are paying fees, the depositing customers can leave the bank, putting the bank in a financially involvement position.

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Threats of Substitutes:
As new banks with SME positions are coming up they are constantly trying to beat N.C.C Bank at its own game. BRAC Bank is already considered a huger competitor of the N.C.C Bank as they growing at a phenomenal rate. Being a commercial bank it apparels to the customer base. Other banks like Prime Bank Ltd, DBBL are offering competitive products which were previously offered by EBL alone. These Banks are taking away the market share from the EBL. As the number of competition are growing the threat of substitutes are increasing.

Intensity of Rivalry among Existing Firms:

Fierce competition is going on among the Existing company for increasing their respective market share. Market of the Existing company limited in our country because some people or organizations will not come to the due to various reasons. On the other hand, these banks are sometimes not able to meet the large credit requirements of some big corporate clients. All in all, the intensity of rivalry in the banking sector is increasing, also the new banking regulations imposed by the Bangladesh Bank is making it difficult for banks perform its business.

4.18 Gaps Model:

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Customer Gap Gap between customer expectation and perception. The provider Gaps The provider gaps are the underlying causes behind the customer gaps. Gap 1 Not knowing what customers expect. Gap 2 Not selecting the right service designs and standards. Gap 3 Not delivering to service standards. Gap 4 Not matching performance to promises.

Expectation: 1) Customers want loan without Bank statement. 2) They want loan only with trade license. 3) Most of the customers demand 100% debt Barden Ratio (DBR) 4) Low interest rate by comparing other commercial Banks which are provisionary SME loans. 5) Monthly installment should start six months, after getting the loan. 6) Better service. 7) Customers want load without business security. 8) Without land/building mortgage security. 9) Quick barking throughout the country. 10) Easy repayment system of monthly installment or single installment. 11) They expect loan with minimum documents. 12) Bank should follow discounting system. 13) Company name should provide adequate amount, considering the business trends. 14) Low cost and quality product. 15) Post purchase evaluation.

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Perception:
1) Without Bank statement and trade license, customers on are not allowed to receiving loan. 2) Debt Barden Ratio 60%. 3) Low interest rate by comparing other commercial Banks which are Providing SME loans. 4) After getting the loan, monthly installment starts from next month. 5) Better service and easy repayment. 6) They are getting loan without land/building mortgage security. 7) N.C.C Bank providing SME loan, without business security. 8) Easy repayment system of monthly installment or single installment. 9) No discounting system is allowed. 10) Sometimes the queue of company name is too long. 11) High cost but quality product. 12) Post purchase evaluation.

Gap Minimization:

1) To educate the customer in company name so that customer enhances. 2) To educate the company official so that they could provide better service. 3) Plan for effective recovery. 4) Sometimes for electricity problems, expert, manpower, Bank cant provide their service accurately. So to minimize this problem respected officer should tell the provider. 5) Help employees cope with problem customers. 6) To monitor and teach service performance. 7) To forecast future expectations of customer. 8) To develop and test new service ideas.

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4.19 Results of consumers opinion survey: We took fifteen SME loan borrower of NCC Bank Ltd. (Agrabad Branch) as sample. Our findings of responses shown in percentage figure:

a) Expected SME loan duration

50% 40% 30% 20% 10% 0% For 3-months For 6-months Seasonal For 1-year 0% 20% 47% 33%

Comment: Out of fifteen consumers, three SME loan borrowers wanted to take SME loan for three months, seven for six months and five for year. No one is interested to take seasonal loan.

b) Types of collection like to provide

27% 0%

33%

Lands & buildings Stock Sanchypatra Others

40%

Comment: Five SME loan borrowers liked to give lands & buildings as collateral, six borrowers wanted to give stock and four borrowers wanted to give other things as collateral against SME loan.

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c) Repayment system
50% 40% 30% 20% 10% 0% Installment basis Arbitrarily Others 47% 33% 20%

Comment: Seven SME loan borrowers wanted to repay the loan in installment basis, five of them wanted to repay arbitrarily and three borrowers wanted to follow other system to repay the loan.

Sixteen Percent

6% Sixteen Percent Fifteen Percent Fourteen Percent Thirteen percent

Fifteen Percent

20%

Fourteen Percent

47%

Thirteen percent

27%

Comment: Out of fifteen consumers, four liked to take SME loan against 13% interest, seven for 14%, three for 15% and one consumer wanted to take SME loan against 16%.

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CHAPTER- 5 FINDINGS & RECOMMENDATIONS

5.1 Findings of the study

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NCC Bank Limited provides the SME loans and advances to the borrower through their different branches in all over the country. Though every branch is not best in all respective area of the program but in a particular area a bank can be best. The major point that I have identified in credit policy in procedure of giving SME loan & advances of NCC Bank Limited is given below:

The SME loan procedure is complex and time consuming in NCC Bank. The interest rate is high i.e. 17%. Lack of professionalism in handling the SME loan. Only 3% fund is sanctioned for SME in Agrabad branch. Lack of knowledge/information about SME financing. SME is highly risky and administrative cost is also high. Lack of monitoring and supervision of SME loan. Lack of professionalism among SME loan seekers. Loan payment system is complex. Cauterization of loan sanctioning power. Lack of proper financial incentive for the employers. Lack of Government support.

5.2 Recommendations for successful SME financing: Due to availability of a large number of actual and potential consumers and adequate raw materials, there is greater scope of developing SMEs in Bangladesh. There are

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two potentialities of developing SMEs in our country. Firstly, huge amount of raw materials and human resources. Secondly, a big market for it both in Bangladesh and outside Bangladesh. However attempt has been made to put some suggestions for successful SME financing. Allowing completion of paper works within short possible time. Loan application forms and procedure for application should be easy. Terms and conditions for SME Loan should be simple. Ensuring flexible conditions regarding collateral security. Fixing lower interest rate. Entrepreneurship development training should be arranged. Advertising the SME loan products, provide proper information to SME entrepreneurs. Computerized MIS is necessary as number of loans is high. Loan repayment system and mode of repayment should be specified. Sanctioning power should be decentralized and should be more open. Incentives should be given to the deserving employees for excellent performance in SME financing. Government support for marketing of products of SMEs through EPB and Bangladesh embassies would be required. Punishment for bank employees indulged in unfair practices.

Chapter-6: Conclusion:
SMEs have been widely recognized for their important role in promoting economic growth, generating employment, and contributing to poverty reduction. SMEs contribute substantially to economic growth and employment. As a developing

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country Bangladesh has paid such attention to rapid industrialization particularly in the development of small and medium business enterprises. There are many small and medium business enterprises in our country that have innovative idea, spirit and potentiality to do something productive for local consumers as well as export abroad. So, development of small and medium business enterprises is the demand of time. This study was conducted to understand the SME banking and the problems of providing credit facilities to small and medium business enterprises (SMEs) of Chittagong city. In this regard we focus on SME banking of National Credit and Commerce Bank Ltd. The study also focuses the nature and extent of particular sector of small and medium business enterprises (SMEs) of some selected industry. Furthermore, if any financial institution would like to invest in this sector, or try to do further study they can take help of this report. Besides, small and medium size informal organization can be benefited from this study.

Chapter- 7: References
Books NCC Bank Training Book - NCC Bank Ltd Credit Policy manual - NCC Bank Limited.

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Managing Core Risk in Banking, Credit Risk Grading Bangladesh Bank Rose Peter S. Commercial Bank Management 5th Edition. Valarie A. Zeithaml, Mary Jo Bitner Services Marketing 4 th Edition, 2008

Publications: BIBM reading material on financing SMEs Annual Report 2008- NCC Bank Ltd Right Share Offer Documents 2010- NCC Bank Ltd

Articles: Abdul Awal Mintoo, (SMEs in Bangladesh), CACCI Journal, Vol. 1, 2006 Chowdhury, Saiful Karim, Demand And Supply side constraints of SME financing Alam, Zahurul, SMEs in Bangladesh: A Roadmap Development, Journal of Bangladesh Accountant. for Economic

Websites: www. nccbank-bd.com www.weekly-industry.com www.bangladesh-bank.org

Chapter- 8: Appendix
SME= SmaII & Medium Business Enterprise. SBLS= SmaII Business Loan Scheme. HRRLS= House Repairman and Renovation Loan Scheme.

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PLS= PersonaI Loan Scheme. FSBLS= Festival Small Business Loan Scheme. FPLS= Festival Personal Business Loan Scheme. CFS= Consumer Financing Scheme. STD= Special Transaction Account. EPB= Export Promotion Bureau. LRA=Lending Risk Analysis. CRG=Credit Risk Grading module. CC=Cash Credit. (Cash Credit is a continuous type of short-term advance. Under this system, the banker specifies a limit, called the cash credit limit, for each customer, up to which the customer is permitted to borrow against the security of tangible assets or guarantees.) HY= Hypothecation. (It is the charge against property for an amount of debt where neither ownership nor actual possession is passed to the bank. But constructive possession remains with the bank as per deed of hypothecation.) PL= Pledge. (It is Bailment of goods as security for payment for a debt or performance of a promise. The possession of security is passed to the bank.) PAD= Payment Against Document.

Appendex-1: Questionnaire.

Questionnaire
1. Name: 2. Address: 3. Age: a) Below 20 year. b) Between 20-30 year. 4. Education: c) Between30-40 year. d) Above 40.

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a) Between SSC-HSC. b) Degree. 5. Experience in business: a) Below 2 years. b) 2-5 years. 6. Kinds of Business: a) Manufacturing. b) Shops (Retail). 7. Monthly income: a) Below 5000. b) Between 10000-1 5000.

c) BBA-MBA. d) Others. c) 5-10 years. d) 10 years or above. c) Agriculture. d) Other. c) Between 15000-40000. d) Above 40000.

8. What is your expected duration of SME loan? a) For 3 months. c) Seasonal. b) For 6 months. d) For 1 years. 9. What type of collateral do you like to provide? a) Land& buildings. c) Sanchypatra. b) Stock. d) Others. 10. Which type of repayment system do you like? a) Installment basis. c) Others. b) Arbitrarily. 11. What is your expected rate of interest for SME loan? 12. Do you face any problem in getting loan? 13. What is your suggestion to overcome the problem?

Thank you