Demographic Characteristics of SME Customers of SME Financing in NBL

Demographic Characteristics of SME Customers of SME Financing in NBL

Prepared for
Ms. Sumaiya Zaman Lecturer ULAB School of Business

Prepared by
Kamrun Naher ID# 051011026 ULAB School of Business

University of Liberal Arts Bangladesh (ULAB)

Aug27, 2009

August 27, 2009 Ms. Sumaiya Zaman Lecturer ULAB School of Business University of Liberal Arts Bangladesh. Dear Madam, The report entitled Review on SME Finance in NBL and Its Performance Analysis is submitted as a requirement for the partial fulfillment of internship of BBA program at ULAB. I would like to thank you with deep gratitude and cordial respect for your warm co-operation to prepare this report. Your advice and direction are really praise worthy which helped me a lot to learn about the techniques of making a good report. In my view, this report paper will help me to enrich my knowledge about the credit function and operation in Financial Banking Institution of Bangladesh. I have carefully used the information from annual report, web site and from office sources. I tried my best and worked with utmost sincerity to make this report paper. It would be kind of you, if you please accept this report paper. Thanking you. Sincerely yours,

_____________ Kamrun Naher

ACKNOWLEDGMENT
To accomplish the objectives of the report, the assistance and contributions of a multitude of people need to be acknowledged. Firstly, I am highly grateful to NBL Limited for allowing me to work on their company and access to different information. Secondly, I am greatly thankful to Ms Sumaiya Zaman, Lecturer, ULAB School of Business for assisting me in understanding the internship report procedure and for her valuable guideline.

Special thanks to Mr. Md., Kabir VP, Head of SME,NBL Ltd. for his kind and invaluable support. I would like to thank Mr.Mamunur Rahman , Senior principal Officer, NBL Ltd., my institutional supervisor for his advice, ideas and guidelines regarding selection of the topic and organization of the project work. Lastly, I would like to thank all the Deputy Managers and Officers in SME Division, NBL Ltd. for their great support and help in making my report.

Contents
Chapter & Title Page

Letter of Transmittal Acknowledgement Executive Summary ... 1.0 Introduction 1.1 Title. 1.2 Background. 1 . 3 Objective... 1.3.1 Broad Objectives 1.3.2 Specific Objectives 1.4 Scope of the Study 1.5 Methodology... 1.5.1 Sources of Information.. 1.5.1.1 Primary Data 1.5.1.2 Secondary Data.. 1.6 Limitations of the Study 2.0 Organization Part a. 2.1 Overview of Industrial and Infrastructure Development Finance Company (NBL) Limited i. 2.1.1 The journey of NBL... i. 2.1.2 NBL at Present.. i. 2.1.3 Departments of NDL. i. 2.1.4 NBL-At a Glance i. 2.1.5 Shareholding Structure i. 2.1.6 Services Offered by NBL. i. 2.1.7 Comparative Performance (as on 31.12.2008).. a. 11. 3.0 Project Part

I II IX 1 1 1 1 1 2 2 2 2 3 3

2. 4 3. 4 4. 5 5. 5 6. 9 7. 10 8. 11 9. 16 10. 12.

3.1 Definition of Small and Medium Enterprises (SMEs) 3.2 An Overview On SME Finance In Bangladesh. 3.3 An Overview on Services of SMEs in INBL. 3.4 Scenario of SMEs Division in NBL 3.4.1 Places of Business that SME Division in NBL providing facilities 3.4.2 Age limit of the SMEs clients.. 3.4.3 Forms of Business that SME Division in NBL providing facilities 3.4.4 Scenario of SMEs Products in NBL... 3.4.5 Purpose of having SME facilities fromNBL.. 3.4.6 Nature of Business that SME Division in NBL provides Finance 3.4.7 Years of Startup of the Business.. 3.4.8 Total Revenue (Yearly) of the Clients Business.. 3.4.9 Total Asset (Excluding lands & buildings) of the Business 3.4.10 Number of Employees in Clients Business 3.4.11 Clients having Loan from any other organization. 3.4.12 Clients having any other Sources of Income 3.4.13 Reasons of having finance from SME in NBL 3.4.14 Ranking between NBL, AB, ULC, BRAC Bank & Eastern Bank according to their SME Service............................................ 3.5 Recovery Performance of SMEs in NBL 3.5.1 Reasons for Overdue and Default 3.5.1.1 Change in Local & Foreign Policy 3.5.1.2 FINANCIAL PERFORMANC .. 3.5.1.3 Poor Performance in Business. 3.5.1.4 Political Instability... 3.5.1.5 Insufficient Fund. 3.5.1.6 Clients Relation with the Organization 3.5.1.7 Clients Unwillingness

3.5.2 Yearly Recovery Performance SMEs in NBL. 3.5.2.1 Lease Finance 3.5.2.2 Term Finance.. 3.6 Sector-wise Recovery of lease finance and term loan 04. Findings & Recommendations 4.1 Findings.. 4.2 Recommendations. 05. Conclusion. References

38 38 39 41 42 42 43 44 45

LIST OF TABLES
Table 1 Table 2 Table 3 Table 4 Table 5 Table 6 Table 7 Table 8 Table 9 Table 10 Table 11 Table 12 Table 13 Table 14 Table 15 Table 16 Table 17 Table 18 Table 19 Table 20 Table 21 Table22 : : : : : : : : : : : : : : : : : : : : : : NBL at a glance 9 Shareholding Structure of NBL.. 10 Main Players of SME Finance Providing Organizations in Bangladesh .. 22 Places of Clients Business .. 26 Age Limits of Clients. 26 Forms of Business . 27 SME Products in NBL 27 Comparison of Factoring Charges between NBL, AB& ULC.. 28 Purposes of having SME facilities. 29 Nature of Clients Business 29 Startup year of Clients Business 30 Total Yearly Revenue of Clients Business 31 Total Assets Value of Clients 31 Number of Employees in Clients Business 32 Loans from other Organizations 32 Other Sources of Income... 33 Type of Sources of Income .. 33 Reasons of having loan from SMEs in NBL 33 Ranking between NBL,AB , ULC, BRAC Bank, Eastern Bank. 34 Yearly Recovery Rate of Lease Finance 39 Yearly Recovery Rate from Term Loan 40 Sector-wise Annual Recovery Rate of NBL ... 41

LIST OF FIGURES
Figure 36 Figure 1 Figure 37 Figure 2 Figure 38 Figure 39 Figure 3 Figure 40 Figure 4 Figure 41 Figure 5 Figure 6 Figure 42 Figure 7 Figure 8 Figure 9 Figure 10 Figure 11 Figure 12 Figure 13 Figure 14 Figure 15 Figure 16 Figure 17 Figure 16 Figure 19 Figure 20 Figure 21 Figure 22 Figure 23 Figure 24 Figure 25 Figure 26 Figure 27 Figure 28 Figure 29 Figure 30 Figure 31 Figure 32 Figure 33 Figure 34 Figure 35 : Any other loan from other organization.. 32 :: Other source Of income... 33 Departments of NBL 07 :: Type of IncomeNBL 33 Organogram of Source... 08 :: Shareholding Structure of NBL 11 Why NBL. 34 :: Deposit composition of NBL.................................... 14 Ranking between NBL, AB, ULC, BRAC Bank & Eastern Bank... 34 :: Investment Mix of NBL... 14 Yearly Recovery Rate Lease Finance. 39 :: Yearly Recovery Rate from Term Loan.. 40 Sources of Funds of NBL. 14 : Sector wise Portfolio of NBL.. 15 : Profit after tax ... 16 : Profit after tax of NBL. 16 : Paid-up Capital .. 16 : Paid-up Capital of NBL.. 16 : ROE. 17 : ROE of NBL......................................................................................... 17 : ROA 17 : ROA of NBL. 17 : EPS.. 18 : EPS of NBL.. 18 : Total Assets 18 : Total Assets of NBL 18 : Total Debt... 19 : Total Debt of NBL 19 : Total Debt to Asset Ratio 19 : Total Debt to Asset Ratio of NBL 19 : Commencement of the Operation Years 20 : Domestic factoring Process 25 : Places of Business... 26 : Age limit of the clients 26 : Forms of Business... 27 : Proportion of SME Products... 27 : Purpose of the facilities.. 29 : Nature of Clients Business.. 30 : Startup year of Clients Business. 30 : Total Yearly Revenue of Clients Business. 31 : Total Asset (Excluding lands & buildings) of the Business.. 31 : Number of Employees in Clients Business 32

Appendix
Appendix A Appendix B Appendix C Appendix D : Questionnaire : Annual Reports of NBL(2006, 2007, 2008 ) : Annual Reports of NBL(2006, 2008) : Performance at a Glance (NBL)

EXECUTIVE SUMMARY
Financial Banking Institutions are a new dimension for Bangladeshs economic growth. Efficient services from these companies can push up the industrial growth. SME financing provides the industries a scope to invest with Collateral. As all FBIs are providing SME facility by borrowing fund from Commercial banks, the cost of financing facility is higher than direct borrowing. Only for this reason many firms are not stepping forward to avail lease facilities, event though in all other manners it is convenient. In this situation some FBIs enjoy the low cost funding from institutions like CBSF, Bangladesh Bank and are providing relatively cheaper financing facilities to the SME clients. Lease financing is a very enormous step in industrial growth. Government support and proper knowledge and information will help the citizens to avail lease facilities from these established financial companies. In developed countries the lease financing has a major contribution in the industrial as well as economic growth. So for the growth of the country, FBI can play a vital role in the future.

The purpose of the report is to obtain an overview of the SME Financing Process of NBL and analyze its effectiveness. For that Leasing Process of NBL needs to be compared with other Financial Banking Institution(s) specifically with IDLC, IPDC and ULC (United Leasing Company). The execution of SME financing process differs from FBI to FBI depending on the organizational structure and Credit Policy of respective FBI or financing Company. The execution of the financing process may differ in involvement of different departments. But in any case the whole process has to go through 14 elementary steps based on component activity of the Leasing Process. They are Preliminary Contact and Inquiry, Application for Lease Facility Visiting the borrower and Discussion, Analyze the Application, CIB Report and Bankers Report, Prepare and Submit Credit proposal for the Board, Approval of Credit Proposal, Sanction of Lease, Documentation, Security & Payments, Procurement of Lease Equipment, Installation and Delivery, Disbursement and Execution (commercial operation), Monitoring. The client applies for required facility through letter. These required facility can vary from different sort of equipments for manufacturing their products to vehicles or expansion projects. The letter generally consists of brief description about the asset to be procured, its price and reason for procurement along with its lease period. NBL collect necessary information to analyze the proposal prepare the Board Memo for approval by the Board members. After approval NBL sends an offer letter to the client. The offer letter contains acquisition cost, lease period, per month rental and other terms & conditions to be applied if the agreement is done. The client accepts the offer and submits an accepted offer letter. If the client agrees to the terms & conditions of the offer letter, they sign & seal the offer letter as accepted and send it back to NBL. Then Agreement and necessary documents are prepared and duly signed. After that lease asset is procured by NBL and given to the client for delivery, installation, and trial run after that disbursement and execution is done and commercial operations begin. In NBL from preliminary contact and Inquiry to initial monitoring is done by Department execute and all the steps after that monitoring take the responsibility. In ULC Relation ship Manager is involved in marketing. Their responsibility is limited

up to approval of the credit proposal. Then Operations department carry out Documentation and final execution. Monitoring department maintains the rental payments. After approval process time of NBL is competitive and shorter in most cases than the average. But before approval NBL requires more time in 4 activities than the average. Approval of proposal is showing the largest difference and apply, visit and memo preparation is showing fairly same amount of deviation from average in a significant level. IDLC possess the shortest length of the process. Most of its activity requires less time than other to be completed. In case of ULC and IPDC, they are also lacking in few activities. But in total they have shorter process length than NBL.

1.0 Introductory Part

1.1 TITLE
Review on SME Finance in NBL and Its Performance Analysis

1.2 BACKGROUND
This report is a requirement for successful completion of the Internship of BBA program. Exposure to the business world and acquiring practical work experience was the primary objective of this assignment. I was attached with Industrial and Infrastructure Development Finance Company Limited (NBL) for my internship. The topic was selected and approved by Ms. Sumaiya Zaman.

1.3 OBJECTIVES
The basic purpose of the report is to see the overall SME Finance and its performance of NBL

1.3.1

Broad Objective:

The broad objectives of the report are-

To understand and reveal the steps of processing of SME finance of NBL. To show the overall picture of recovery management of SME of NBL.

1.3.2

Specific Objectives:

The Specific objectives are

Analyze yearly recovery performance of SME products. Identify classified and unclassified clients for SME of NBL. Analyze sector wise client overdue and recovery rate for SME products. Recommend some effective steps for better performance through improved recovery system.

1.4 SCOPE OF THE STUDY

The report is on the lending process, criteria for sanctioning lease, term loans and other products of SME as well, and sector wise recovery performance of lease, term loans and other products of NBL. It is beyond the scope of the report to look into all the financial services of Lease finance and Term loan provided by SME of NBL. So the report has chosen only some of the selected activities and recovery process of SME of NBL. To understand the entire process thoroughly, the report has also looked into the selected sector wise investment and recovery rate of Lease finance and Term loan activities of NBL.

1.5 METHODOLOGY

1.5.1 Source of Information 1.5.1.1 Primary Data

The report will be based on primary data collected from NBL. Primary data will be collected to draw the procedural workflow of SME operation. The following instruments will be used: Interview: Interview of the assistant mangers and officers of NBL will be undertaken to draw the procedural workflow of lease finance and term loan. Officers from the monitoring and recovery department will also be interviewed for collecting information regarding the overdue rates and recovery performance of NBL. Survey: A questioner was prepared to collect information about SME service in NBL from clients. Observation: Observation technique is going to be used to perform SWOT analysis and to follow & draw the procedural workflow of Lease finance and Term loan operation

Analysis: Only the files of selected individual clients (case Files) will be chosen randomly from the stock of files of NBL, which will be examined and analyzed to find out the number of Lease finance and Term loan approved by the departments and the related data to carry on the project part.

Information Collected from NBL Financing process Financial Statement Total Investment Sector wise investment Recovery Rate Annual Report SME Division Fin. & Acc. Dept. Fin. & Acc. Dept. Fin. & Acc. Dept. Monitoring and Recovery Dept.

Collection of Information

1.5.1.2 Secondary Data

Some of the data and information will be collected from the secondary sources. These sources are the audited financial statements of NBL for the year 2006, 2007, and 2008 respectively. Web site of NBL will also be used to collect data and information.

1.6 LIMITATION OF THE STUDY

The following limitations are apparent in the report: Source of information may be confidential. Thats why I could not compare the recovery process of NBL with other leasing company, as collection of information was quite difficult from other companies. Clients did not provide all the information and they fill up the questioner properly which made me difficult to collect information properly.

2.0 Organization Part

2.1 OVERVIEW OF INDUSTRIAL AND INFRASTRUCTURE DEVELOPMENT FINANCE COMPANY (NBL) LIMITED 2.1.1 The journey of NBL

The National Bank Limited (NBL) has a prolonged and glorious heritage in the banking industry in Bangladesh. It is the pioneer in the local private commercial was inaugurated on March 1983 under the supervision of Bangladesh Bank. A glorious fact of the National Bank Limited is its approval as first private commercial bank from Bangladesh Bank in our country. Economic development activities in the post liberation period required service from private commercial Banks. To fulfill this demand as well as to improve the commercial banking ser-vice in Bangladesh, the National Bank Limited emerged as a private limited company. The National Bank Limited is a remarkable addition to the private sector branch banking in Bangladesh. Aiming at offering commercial banking service to the customer's door around the country, the National Bank Limited established 105 branches up to this year. This is the highest number for any private commercial bank operating in Bangladesh. This organization achieve customer's confidence immediately its establishment in domestic and international markets. NBL took participation in Nepal Arab Bank Limited; Nepal in 1995. Under a technical service agreement, NBL is extending management services to NBIL, in 1997. Bank opened a representative office in Yangoon, Myanmar. NBL is proud to be, first private Bank in Bangladesh who introduce credit card (Master Card) both local and international. The Bank has made agreement with Western Union Remittance services for speedy transfer of money allover the world. The National Bank limited provides financing in capital market, Credit line and project financing, investment counseling, Underwriting any guarantee, Port folio management etc along with traditional banking service, Sanchay Prokalpo and Bonus Deposit scheme are- - praiseworthy banking service for the middle and lower income group. Recently, this organization has taken operational decision of two projects: Consumer Credit scheme and Credit Card marketing to widen its service and customer base. The National Bank Limited is always emphasizing the improvement of banking service and betterment of living standard of the general people of Bangladesh.

2.1.2 NBL at present

NBL has been able to create a special image at home & abrode by introduction different banking products, at the infancy of our garments Industry during the Eighties. NBL pioneered allowing the entrepreneurs back to back LC facility without any margin, thereby helping the Industry thrives to its present position. This foolhardy but unique & generous endeavor of the bank has not only paved the way for enrichment of the Countrys foreign exchange. In the history of development & expansion Of garments Industry in Bangladesh, NBL name will remain engraved in Golden letters.Presently, NBL is working with an efficient and active management team. The management team is headed by the Managing Director of the company. The major activities of NBL are divided into three distinctive departments. They are Operations, Structured Finance and Finance & Accounts.

2.1.3 Departments of NBL

Operations Department: The operations department is being headed by the Executive Vice President of the company. This department is responsible for attracting new clients, maintaining the existing ones, providing the desired financial services to the clients and monitoring the progress of the services as well. The operations department is divided into three distinctive branches. They are Corporate Finance, SME and Monitoring & Recovery. The Corporate Finance department is headed by an AVP (Assistant Vice President) and the AVP is the only person in this sub wing who reports directly to the EVP (Executive Vice President) Operations and also to the Managing Director. The other members of the department are two Managers, one Deputy Manager, four Assistant Managers and four Management Trainees. Normally, there are team consisting of two persons in the corporate finance department and each team is responsible for attracting new clients, maintaining the existing ones, providing the desired financial services to the clients and monitoring the progress of the services as well. NBL started SME financing in the year 2006. This department is headed by an AVP and the AVP directly reports to the Head of Operations. There is also a

Recovery and Monitoring wing and it is headed by a Manager. He directly reports to the Head of Operations. Structured Finance: Structured Finance department is headed by a Vice President and the VP is directly responsible to the Managing Director. NBL is active in syndication market and has acted as lead arranger to a number of syndication facilities for large loans arranged by it. Structured Finance encompasses syndicated fund arrangement including cross-border syndication and other financial advisory services. Finance & Accounts: Finance & Accounts department is being headed by an Assistant Vice President of the company. He is also the Company Secretary of NBL. This AVP is directly reportable to the Managing Director. Though this department is very thinly staffed the activities are not that simple. To ensure coordination and avoid any kind of conflict within, the department has been divided into two separate sections. The Head of Operations is the center of most of the activities in NBL. Since treasury, recovery and monitoring, corporate finance, SME finance all these departments is directly under him/her, the Head of Operations basically directly responsible to carry out the mandate given by the board of directors regarding policy and guidelines of providing credit facilities to the clients. Even though there is a structured finance department, the operation department also arrange syndicated credit facilities for its corporate clients.

DEPARTMENTS OF NBL

NBL

OPERATIONS

STRUCTURED FINANCE

FINANCE & ACCOUNTS

CORPORATE FINANCE

SME

MONITORING & RECOVERY

TREASURY

NBL

OPERATIONS

Board of Directors STRUCTURED FINANCE Managing Director CORPORATE FINANCE

FINANCE & ACCOUNTS

Head of Operations EVP

Head of Structured Finance (VP)

Head of Accounts & Admin (AVP)

SME
Head of SME Financing (AVP) Head of Corporate Finance (AVP)

Head of Treasury (0)

Head of Recovery & Monitoring (0) MONITORING

Manager (1)

Manager (0)

& RECOVERY
Deputy Manager(2) Deputy Manager (1)

Manager (0)

Manager (1)

Manager (0)

Manager (0) TREASURY

Deputy Manager (3)

Deputy Manager (1)

Deputy Manager(1)

Deputy Manager(1) Figure 01 (Source: internal)

Assistant Manager (2)

Assistant Manager(4)

Assistant Manager(1)

Assistant Manager (0)

Assistant Manager (3)

Assistant Manager (1)

Management Trainee (0)

Management Trainee (0)

Management Trainee (3)

Sr. Officer (1)

ORGANOGRAM OF NBL
Sr. Officer (0) Officer (0)

Officer (5)

Figure 02 (Source: internal)

2.1.4 NBL at a glance Name Registered Office Authorized capital Paid up capital Operating revenue (2007) Operating profit (2008) Net profit (2008) Book value per share EPS
National bank limited
48, Dilkusha Commercial Area, Dhaka - 1000

Tk. 1,000,000,000.00 ( 10,000,000 shares of Tk. 100 each) Tk. 256,496,000.00 ( 2,564,960 shares of Tk. 100 each, fully paid up in cash) Tk. 772.07 million Tk. 142.37 million Tk. 84.44 million Tk. 170.35 Tk. 32.88

Table 01: NBL -At a Glance (Source: http://www.nbl.com)

2.1.5 Shareholding Structure

NBL is being represented by various institutional shareholders except for one. Among the 15 shareholders there is only one individual shareholder who is Md.Matiul Islam,

the present Chairman of the company. Apart from this individual, rests of the shareholders are various financial institutions both from the public and private sector. The shareholding structure of NBL is shown below:

Name Of The Shareholder Public Sector Janata Bank Sonali Bank Investment Corporation of Bangladesh Private Sector Arab Bangladesh Bank Limited Bank Asia Limited BRAC Bank Limited The City Bank Limited Mutual Trust Bank Limited Dhaka Bank limited One Bank Limited Southeast Bank Limited Eastland Insurance Co. Limited National Life Insurance Co. Limited Pragati Insurance Co. Limited Md. Matiul Islam

Percentage 21.2766% 7.0992% 7.0992% 7.0992% 78.7234% 7.0992% 7.0992% 7.0992% 7.0992% 7.0992% 7.0992% 7.0992% 7.0992% 7.0992% 7.0992% 7.0992% 0.7092%

Table 02: Shareholding Structure of NBL (Source: Annual Report of NBL2008)

Figure 03
(Source: Annual Report of NBL2008)

2.1.6 Services Offered by NBL

NBL started its journey with an enriched package of diverse financial services. The company is aware that in financial markets different clients demand for different types of financial services. Therefore to attract new clients and retain the existing ones NBL offers a broad array of financial services. NBL realizes very well that unless it can quickly respond to the assorted needs of the customers it will be hard to maintain substantial profit margin in this era of severe competition.

 Lease Finance: The leasing provides financial flexibility to enterprises for procurement of capital assets without blocking their own funds. NBL procures the necessary machinery and equipment used by the clients under leasing arrangement. Lease rentals which include both interest and principal payments are tax deductible expenditure. The documentation requirement also is simple, convenient and less time consuming. Term Loan: NBL provides both short term and long term loans for capital expenditure. The longer maturity loans can reduce the size of installment payments and help improve the cash flow of the enterprises. Fully amortized equal payment or decreasing payment schedule can also be arranged to ease repayment of debt obligations. NBL also provides loan facilities to meet working capital requirements. Structured Finance: NBL is active in the syndication market and has acted as lead managers to a number of syndication facilities for large loans arranged by it. With 10 Banks as promoter-shareholders & with a Board of Directors comprising of the Chief Executive and policy makers of these financial institutions, NBL is in a unique position to arrange syndication facilities by tapping the resources of its own promoters. NBLs professional staff members have the expertise and capability of providing best advice & services on the financial viability of projects, and the credibility of the project sponsors. NBL, as a lead arranger, does all the necessary documentation and execute & administer the syndicated finance SME Finance: NBL promotes small and medium entrepreneurs in manufacturing and service industries through its SME Finance Scheme. The aim is to provide quality service to the entrepreneurs with potential and innovative ideas.

 Home Loan: NBL provides Home Loan for the middle and lower income people to purchase or construct flat/apartment for personal living only in 6 city corporation area including Tongi, Gazipur, Savar and Narayangonj. Deposit Scheme: NBL encourages Term Deposits for a period of 6 months (institutions only) or one year and/or above. It offers attractive terms and returns to the depositors as well as total security. The minimum amount of deposit is Tk.50, 000/- and there is no maximum limit. The depositors will be
Deposit Composition allowed to take loans & advances against deposits. The fund raised from
1.62% 10.90% deposits is prudently utilized in6.57% various financial activities.

Advisory Services: NBL has a management team with Professional Bankers, 80.91% Chartered Accountants, Banks Financial Institutions MBAs, Engineers, Economists and Financial Customer Deposits Insurance Companies Analysts. The expert team provides consultancy services and carries out feasibility studies, technical and financial evaluation, market research, market risk analysis etc. if necessary NBL may also appoint well reputed professional from the market for this purpose.
Investment Mix

Other Financial Services: It basically includes Bill discounting, Work order finance, Underwriting and mutual fund etc.
66.10% 33.86%

0.04%

Direct Finance

Factoring & Investment in shares Lease

Sources of Funds
0% 1%

Deposit composition of NBL

39%

34%

2% 16% 6%
Long Term Loans Lease A dvance & Security Deposit Refinance Bangladesh Bank M oney M arkte Borrowing Zero Coupon Bond Long Term Deposit M oney M arket Borrowing Short Term Deposit

1%

Figure 04 Investment Mix of NBL

(Source: Annual Report of NBL2008)

Sources of Funds of NBL Figure 05

(Source: Annual Report of NBL2008)

Figure 06(Source: Annual Report of NBL2008) Industry wise loans &Advance

Agriculture, 3.58% Air/Water Transport, 1.92% Trading & Manufacturing, 13.64% Bank/Fis, 1.10% Cement Industries, 2.34% Chemical, 11.78% Commercial &Road Transport, 4.86% Construction & Development, 1.81% Tele Communication & Infrastructure, 2.44% Consumer Finance, 0.16% Engineering, 7.30%

Textile & RMG, 14.40%

Spinning & Weaving and Dying etc., 3.34% Professional & Self employed, 1.12% Printing, Packaging, Publishing, 0.32% Power & Electricity Co., 6.26% Paper and Plastic products, 6.01% Other Local, 3.60%

Entertainment, 2.97% Food & Beverage, 4.17% Glass Industry, 3.75% Housing, 0.19% Ispat Industry, 1.10% Marbel Industries, 1.62% Information Technology, 0.22%

(Source: Annual Report of NBL 2008)

2.1.7 Comparative Performance (as on 31-12-2008)

In this section the performance of the Industrial and Infrastructure Development Finance Company Ltd (NBL) is compared with that of ILFSL, Premier Leasing BIFC and IPDC, IDLC as on 31-12-2008.

Profit after tax:

Profit after Tax

350 Name of the NFBI 300 250 200 150 100 50 0 NBL ILFSL Premier Leasing BIFC IPDC IDLC 84 117 46 77 133 Series1 303
90 80 70 60 50 40 30 20 10 0 84 Profit (BDT in Million)

Profit after Tax

60% 50% 40% 30% 20% 10% 0% -10% -20% -30%

47% 59 49 17% 72 -17% 1 2 Years Profit after Tax Growth 3 4 18%

profit(BDT Million)

Figure08 (Source:http://www.dsebd.org/ipo/NBL.pdf)

Figure09(source:Annual
of NBL2004,05,06,07,08)

Among the 5 NBFIs IDLC has the highest profit and NBL is in 4th position. But if we see the last 4 years profit of NBL, it increased 47% in 2007 and 17% in 2008 comparing previous year
P a id u p c a p ita l
70 0 60 0 BDT in million 50 0 40 0 30 0 20 0 10 0 0 NB L ILF S L P rem ier B IF C L ea s ing NFBI IP D C ID LC 3 71 230 30 5 2 93 648 20 0 S e rie s 1

Figure10 (source:http://www.dsebd.or/ipo/NBL.pdf)

Figure11(source Annual Report of nbl)

Comparing with other 4 NBFIs NBL is in the 2nd position in case of paid-up capital and IPDC in 1st position and comparing with last 4 years paid-up capital of NBL increased every year.

Return on Equity:
ROE
30% RATIO 20% 10% 0% NBL Premier Leasing 24% 25.00% 19.00% 17.00% 11.00% 8.00% IPDC

Series1

NBFI

Groeth Rate (%)

Figure12 (source:http://www.dsebd.org/ipo/NBL.pdf) Figure 13

(Source: Annual Report of NBL

A measure of a corporation's profitability that reveals how much profit a company generates with the money shareholders have invested. That means the percentage of profit that the company earned with the money shareholders has invested on it. Here IDLC & NBL has more percentage than others represent that they are relatively good for both the company and shareholders and the last four years ROE of NBL was able to generate more profit with invested money.

Return on Asset:
ROW
2 .3 7 % 2 .5 0 % 2 .0 7 % 1 .8 5 % 2 .0 0 % 1 .3 9 %1 .5 4 % 1 .5 0 % 1 . 28 % 1 .0 0 % 0 .5 0 % 0 .0 0 % BIFC ILFSL Premier Leasing IPDC IDLC NBL

Ratio

S e rie s 1

NFBI

Figure(source:http://www.dsebd.org/ipo/NBL.pdf

Figure 15
(source:Annual Report of NBL)

Earnings per Share:

ROA gives an idea as to how efficient management is at using its assets to generate earnings. Here BIFC and IDLC had a highest and NBL had lowest percentage of ROA in year 2008 compared to others. The last four years ROA of NBL shows that last year there was no growth. It is important to the total assets is increasing. The

company acquiring more assets but it is probably reluctant to use assets for increasing its profit.
EPS
160 140 120 100 P rice p e r 80 sh e r(B DT ) 60 40 20 0 152

51 33 15 26 21 S eries 1

N B L ILF S P rem ier IF C IP D C ID LC L B Leas ing NFBI

Figure16 (source:http://www.dsebd.org/ipo/NBL)

Figure17 (source:Annual Report of NBL2004,05,06,07,08)

The portion of a company's profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company's profitability. Here, IDLC is in an advantageous position with having highest EPS among the six companies and NBL is in 3rd position but from last four years its EPS increases.

Total Assets:
T o ta l A s s e ts (T k . in m illio n )B D T (m illio n )
16 00 0 14 00 0 12 00 0 10 00 0 8 000 6 58 9 6 000 4 000 2 000 0 NBL 1442 4

BDT IN Million

8 48 2

7 195 2925 26 04

S e rie s 2

IL F S L P re m ier B IF C Le as in g NFBI

IP D C

IDL C

Figure 19 (source: Annul Report of NBL)

Figure18(source:http://www.dsebd.org/ipo/NBL.pdf) Comparing with the other companies NBL is in 4th position but comparing with last four years asset of NBL it increased.
7000 6000 BDT (Million) 5000 4000 3000 2000 1000 0 1 2 Years Total Debts Growth 3 4 3677 -49% 63% 54% 2389 4657 6011

total Depts of IIDFC

138% 150% 100% Growth 50% 0% -50% -100%

Total Dedts
14000 12000 BDT(Million) 10000 8000 6000 4000 2000 0 NBL ILFSL Preming BIFC Leasing NFBI IPDC IDLC 3012 2533 2189 552 7792 Series2 12916

Figure20
(source:http://www.dsebd.org/ipo/NBL.Pdf) Figure21

(source:Annual Report of NBL) One of the most important factors of a company is how much debt the company is carrying. Less debt of a company indicates that it can afford the debt if it runs into financial trouble. Comparing to the competing companies IIDFC had 3 rd highest number of debt and in past four years its debt increased.

Total Debt to Total Assets Ratio

Total Debt to Total Assets Ratio
95.00% 90.00% 85.00% 80.00% 75.00% 70.00% 65.00% 91.23% 91.86% 86.56% 84.10% 76.74% Series2 89.54%

Ratio

L Le as in g

C IP D

IL FS

re m

in g

NFBI

Figure22
(Source:http://www.dsebd.org/ipo/NBL.pdf

ID LC

N B

IF C

Figure23 (source:Annual Report of NBL)

Debt ratio is used to measure a company's financial risk by determining how much of the company's assets have been financed by debt. Its better to have a position of debt ratio near 0.5. If a company has less debt than its equity it can utilize its equity to pay its debts in future and there is an opportunity of getting loans easily. From the above

table we can say that all of the three companies are having more or less very high percentage of debt ratio and also NBLs ratio increased comparing last four years.

Findings:
If we see the commencement year of NBL, IDLC, IPDC, BIFC, ILFSL and Premier Banking Company NBL started its journey in 2001 and IPDC in 1983 and IDLC in 1985. As a new member of the NBFI industry NBL is doing better job.
commence ment of operation Year
2005 2000 1995 Year 1990 1985 1980 1975 1970 NBL ILFSL Premier Leasing BIFC IPDC IDLC 1983 1985 Series2 2001 1996 2001 1998

NFBI

Figure 24
(Source:http://www.dsebd.org/ipo/NBL.pdf)

3.0 Project Part

3.1. Definition of Small and Medium Enterprises (SMEs)

There is no indefinite definition of SMEs. It depends on investment level and number of workers, technologies and technical complexities of production, degrees of skills demanded from workers and managers, end use of products and so on, which varies

from country to country. According to the definition of Bangladesh Bank circulation published on 26/05/2008 Small Enterprises are those enterprises which maintain/follow the following criteria: Service Concern: The range of the total fixed asset has been set at Tk 50,000 to Tk 5.0 million, excluding land and building, and the number of employees less than or equal 25. Trading Concern: A small enterprise in trading should have a total asset worth Tk 50,000 to Tk 5.0 million, excluding the value of land and building, and the number of employees less than or equal 25. Manufacturing Concern: The total asset for a small enterprise in the manufacturing sector has been set at Tk 50,000 to Tk 15.0 million, excluding land and building, and the number of employees less than or equal 50. According to the same circulation of Bangladesh Bank circulation Medium Enterprises are those enterprises which maintain/follow the following criteria: Service Concern: The range of the total fixed asset has been set at Tk 5.0 million to Tk 10.0 billion, excluding land and building, and the number of employees less than or equal 50. Trading Concern: A small enterprise in trading should have a total asset worth Tk 5.0 million to Tk 10.0 billion, excluding the value of land and building, and the number of employees less than or equal 50. Manufacturing Concern: The total asset for a small enterprise in the manufacturing sector has been set at Tk 15.0 million to Tk 20.0 billion, excluding land and building, and the number of employees less than or equal 150.

3.2 AN OVERVIEW ON SME FINANCE IN BANGLADESH

SMEs more or less start their operations using their own funds or family finance. Normally these firms face significant problems in operating their operations, and often lose their investment in the past. But now a day, SMEs can secure their investment by getting loan easily from Banks and NBFIs. At present 38 commercial and specialized banks and NBFIs provide SME Financing facilities at 10%-16.5% interest rate. The main players of SME Finance providing organizations are: Banks AB Bank Ltd Bank Asia Ltd Brac Bank Ltd BASIC Bank City Bank Ltd Dhaka Bank Ltd Dutch Bangla Bank Ltd Eastern Bank Ltd Mercantile Bank ltd. National Credit and Commerce Bank Ltd Prime Bank Ltd Premier Bank Ltd Pubali Bank Ltd Shah Jalal Bank Ltd South East Bank Ltd Standard Bank Ltd Sonali Bank Ltd Janata Bank Ltd Agrani Bank Ltd NBFIs Industrial Promotion and Development Company of Bangladesh Ltd. (IPDC) IDLC ULC Phoenix Uttara Finance and Investment Ltd. GSP Finance Company (Bangladesh) Ltd. Prime Finance ltd. Bay Leasing and Investment Ltd. Peoples Leasing and Financial services Ltd. Bangladesh Industrial Finance Company Ltd. Midas Financing Ltd. Bangladesh Finance and Industrial Company Ltd. NBL Ltd Islamic Finance and Investment Ltd. Fareast Finance and Investment Ltd. Premier Leasing International ltd.

Table 03: Main Players of SME Finance Providing Organizations in Bangladesh

(Source: http://www.bangladesh-bank.org)

3.3 AN OVERVIEW ON SERVICES OF SMEs IN NBL

NBL at present provide different types of lease and loan facilities to its clients. The principal focus of the Company is on business of lease financing of capital goods for industries such as plant, machinery, equipment, office equipment, power and energy equipment etc. but they also provide short, medium and long term loans to its clients as well. Though NBL provide other services to its clients but the main focus of the project is on Lease finance and term loan procedures and their recovery management. The different types of lease finance and term loan provided by NBL is given below: (1) Lease finance: A lease is a contract. By its terms the owner of an asset (the lessor) gives another party (the lessee) the exclusive right to use the asset, usually for a specified period of time, in return for the payment of rent. Under the lease finance scheme the obvious advantage to the lessee is the use of an asset without having to buy it. For this advantage, the lessee incurs several obligations. First and foremost is the obligation to make periodic lease payments, usually monthly or quarterly. Also the lease contract specifies who is to maintain the asset. There are two types of lease facilities that are financed by SME Division. They are: o Direct Lease: Under direct leasing, a company acquires the use of an asset it did not own previously. Terms and Conditions for Direct lease are:: Tenure: 3-5 years for lease Ownership of the leased asset should be in the name of NBL Insurance should be first party insurance (cover all the risks associate with the leased asset). o Sale and lease back: Under the sale and lease back agreement a firm sells an asset to NBL, and after that NBL lease it back to the specific firm. Usually the asset is sold at approximately its market value. The firm receives the sales price in cash and the economic use of the asset during the basic sales period. In return, it contracts to make periodic lease payments and give up title to the asset. As a result, the lessor realizes any residual value the asset might have at the end of the lease period, whereas before, this value would have realized by the firm. The terms and conditions are the same as direct lease. The sale and lease back mechanism may be understood from the following diagram:

Ownership of Lessees existing machinery Price of machinery in cash Lessee Lease agreement Monthly lease rentals (2) Loan finance: Loan financing is another lucrative product offered by NBL. It provides both long and short term financing to its prospective clients. NBL provides two types of loan. They are:

NBL

Term loan: It is basically given to the client to meet capital expenditure as well as working capital requirement. In case of term lending SME provide three types of loan based on the duration. Those are: Short-term loan is for Less than 1 year years. Mid-term loan is for 1 to 3 years. Long-term loan is for 3 and above years.

Time loan: The functions of time loan are as it is term loan but basically it is taken only for 1 to maximum 2 years. The client of term loan paid IDCP (Interest during Construction Period) instead of installments. The IDCP is usually paid quarterly and after the end of the lending period the principal amount will be paid fully by the clients.

(3) Factoring: Factoring of Accounts Receivable is a mode of financing receivables arising out of supply of goods or delivery of services on credit. This revolving financing facility enables the suppliers/service providers to realize the maximum portion of the payment soon after the delivery is made to the buyer.

FINANCIAL PERFORMANCE

Commercial banks should maintain a minimum capital adequacy ratio of 8%, the established specialized banks at least 10%, but new specialized banks and those with not very satisfactory performance at least 20%. 2005 Capital Adequacy Ratio (%) Loan loss provision to Total Loan Ratio
9.21

2006
9.44

2007 2008
9.43 11.18

1.77%

1.07%

0.74%

0.35%

Capital Adequacy ratio

2008 2007 2006 2005 0 2 4 6 8 9.43 9.44 9.21 10 12 11.18

This ratio expresses capital as a proportion of total risk-weighted assets. Both capital and assets should be fairly stated with the appropriate loan loss provisions and intangible assets having been deducted. As a commercial NBL, NBL maintain more than 8% capital adequacy ratio for last few years. From 2005 to 2008 it exists from 9.43% to 11.18%.

Loan loss provision to total loan Ratio

1.50% 1.00% 0.50% 0.00% 1.07% 0.74% 2006 0.95% 0.35% 2007 2008

2005

Loan Loss provision decreases from last few years. In 2005 it was 1.77% but in 2008 it was .95%. Though Loan loss provision decreases, in 2008 it increase compared with last two years. The growth of assets is good for NBL Average growth is more than 20% over last five years.

Growth of Assets
30% 20% 10% 0% 2006 2007 2008 20% 22% 27%

In 2008 total assets was Tk. 191,362,349,717 and in 2006 it was Tk. 150,252,820,801. Growth was 27% and 22% consequently.

2005 Profit Expense ratio (%) Earnings per Share (Tk.) Efficiency Ratio (%) Profit After Tax(Tk. In mn)
63% 519 35.65 1013.65

2006
61% 488 38.99 1125.82

2007
52% 368 44.92 1400.59

2008
66% 43.14 37.72 2049.05

NBL management team tries to minimize their operating expense and maintain the quality management team for better service provide.NBL tries to increase their profit by reducing operating cost. In 2008 profit expense ratio was 66% which was 30% in 2003. For increasing the bank branches and business as well operating expense also increases. But a certain level of operating expense helps to organization to make profit.

Profit Expense Ratio

100% 50% 0% 2005 2006 2007 2008 63% 61% 52% 66%

Earning per share is Tk. 43.14 in 2008, but in 2006 and before 2006 it was around Tk. 300 to 500. In 2008 authority divides their share into 10 times, for that reason and also for unpleasant economic condition EPS is Tk. 43.14. Efficiency ratio is 37.72% in 2007 and 44.92% in 2006.NBL holds almost 9% market share with 40% average efficiency ratio. NBL team incurred Tk. 2049.05 million in the FY 2008. And companys average performance is better over last few years.

Efficiency Ratio
2008 2007 2006 2005 32.00% 34.00% 36.00% 36.65% 38.00% 40.00% 42.00% 44.00% 38.99% 37.72% 42.92%

6.1.4 Earnings Ability Earnings are the first line of defense against the risks of losses in banking; as well as losses arising from credit risk, interest rate risk, liquidity risk or currency risk.

2005 Return on assets (%) Return on equity (%) ROI (%) Net income per staff
1.1 15.15 9% 191,038

2006
1 13.51 9% 181,526

2007
1.03 13.42 10% 187,772

2008
1.2 13 10% 243,182

The ratio (ROA) of profit before tax to average total assets essentially is an indication of management ability to generate income and its ability to control expenses. The variations in this ratio could be due to a number of factors including a portfolio shift to higher or lower yielding assets, an increase or decrease in the level of interest rates, or an increase or decrease in fees and other income not related to the employment of assets. NBLs ROA increases over last few years. From 2005 to 2008 it increased from .53% to 1.2%.

16 14 12 10 8 6 4 2 0

15.15 13.51 13.42 13 ROA ROI ROE 1.1 0.09 2005 1.03 0.1 2007 1.2 0.1 2008

1 0.09 2006

ROE also increases during last few financial years. Average ROE is almost 13% over last five years. This ratio ROI relates interest earned on securities to total book value of securities held by a bank. Government securities are held primarily for liquidity purposes while other securities are held for getting benefit from their tax-free status. Net Income per staff shows the NBL market position and management performance. It also shows the earning capability of the company. Net income per staff comes from Tk. 83759 to Tk. 243182 from FY 2005 to FY 2008.

Net incme per staff(TK.)

300,000 200,000 100,000 2005 2006 2007 2008 243,182 191,038 181,526 187,727

6.1.5 Liquidity Risk The acquisition of deposits and other funds is a necessary condition for the expansion of loans and investments beyond the amount permitted by the use of equity only. Maintaining adequate liquidity is a key constraint on the bank's profit-making capacity.

2005 Cash ratio Investment to deposit ratio (%)

16.78% 86.36

2006
16.99% 86.89

2007
17.76% 85.77

2008
10.27% 87.13

A Bank always has to maintain liquid money for meet up their customer obligation. Though Bank is a service company, and most of the dealing related with people and money so management should reserve enough liquid money for emergency customer requirement.

Cash Ratio
20.00% 15.00% 10.00% 5.00% 0.00% 16.78% 16.99% 17.76% 10.27%

2005

2006

2007

2008

Cash ratio shows the liquidity position of the bank. The more percentage of ratio the less liquidation of the company.

Investment to deposit ratio

87.50% 87.00% 86.50% 86.00% 85.50% 85.00% 86.89% 86.36% 85.77% 2005 2006 2007 2008 87.13%

In 2008, cash ratio of NBL is 10.27%. And in 2005 it was 22.68%. For decreasing the result of ratio shows the good liquidity of the company. Investment Deposit also show the companys cash position. The result of this ratio shows that, MBL invest more than 85% from their deposit.

3.4 Scenario of SMEs Division in NBL:

3.4.1 Places of Business that SME Division in NBL providing facilities:
Place of Business
80% 70% 60% 50% 40% 30% 20% 10% 0% 73%

6%

3%
ind hi

Na ra ya ng on j

Dh ak a

Sa va r

No rs

Place Name

Figure26 (source survey) Interpretation: Mainly NBL is providing SME Finance facilities to those businesses which are located in Dhaka, Narayangonj, Gazipur, Savar, Norshindhi and Chittagong. Through out the survey I have found that they mainly provide finance to those businesses in Dhaka city.

3.4.2 Age limit of the SMEs clients:

Age Limits 21-30 31-40 41-50 51-Above Percentage 7% 60% 23% 10%

az ipu r

Place Dhaka Narayangonj 9% 9% Norsindhi Savar Gazipur

Percentage Place Percentage 73% Dhaka 73% 6% Narayangonj 6% 3% Table04:place of 9% Table04: 9% clients Business

Table 05: Age Limits of Clients

Figure 27 (Source: survey) Interpretation: From this figure I have been found that most of the SMEs clients are in the age limits of 31-40 which represents that in Bangladesh people around 31-40 involve in various business activities.

3.4.3 Forms of Business that SME Division in NBL providing facilities:

Form of the business s

Forms Proprietorship Partnership Private limited Company

Percentage 53% 10% 37%

37%

Proprietorship Partnership Limited Company

53%

Table 06: Forms of Business

10%

Figure 28 (Source: survey) Interpretation: From this figure, it can be said that SME Division in NBL provides finance mostly proprietorship business which is 53% of total clients, then partnership which are 37% and 10% is partnership.

3.4.4 Scenario of SMEs Products in NBL

Table 07: SME Products in NBL

Facility Lease Finance Term Loan & Time Loan 39% Factoring Total

No. of Projects Proportion of SMEs Products 125

4%

Disbursement Amount Lease Finance 153,318,000.00 103,773,312.00 Factoring 11,125,230.00 268,216,542

57% Term Loan

Percentage 57% 39% 4% 100%

41 02 168

Figure 29

(Source: survey) Interpretation: Lease Finance: Lease finance is a popular financial facility among small and medium enterprise. SME authority gives lease finance to procure machineries, generator, delivery van, private car for purpose etc. According to the chart, 57% of total investment has been disbursed as lease finance. The number of projects of lease finance is 125 among 168 projects. Apparently, SME authority is used to providing lease facility in a larger scale. Here, any security is not required because NBL keeps the ownership of the leased asset. And the client takes insurance policy covering all risks. In case of car and delivery van, the registration is held in the name of NBL. At the end of the maturity,NBL transfers ownership of the leased asset to the client. Term & Time Loan: Basically term loans are given to various small and medium enterprises to meet working capital requirement. Often enterprise needs money to purchase raw material, construction of factory or office building, expansion of business, meeting various expenses etc. There are three types of term loan in the SME division, short term, medium term and long term. Maturity 1-2 years is short term, 3-4 years is mid term and 5 years is considered as long term. According to the chart, 39% of total investment has been given as term loan and the number of term loan projects is 41 among total 168 projects. It is necessary to mention that SME authority demands security to give term loan. They ask the client to mortgage his land, building or apartment as security. Without mortgage SME division of NBL does not provide any term loan. Factoring: NBL is providing factoring facilities through SME Division since 2008. At present two clients namely Spirited Associates Ltd. And Electrocom Ideas & Technologies Ltd are enjoying this facility. Factoring services are also being provided by other NBFIs like IDLC, ULC, Lanka Bangla Finance Company etc. Comparison of interest rate and other charges among NBL, ULC & IDLC is given below:
Company Name NBL ULC IDLC Interest Rate 18% 15%-16% 14.5%-15.5% Service Charge (on bill amount) 0.5% 0.25%-0.3% 0.25%-0.40% VAT (on service charge) 15% Nill Nill

Table 08: Comparison of Factoring Charges between NBL, IDLC & ULC

(Source: Internal) To cope up with the current competition and also to grab more market share in factoring services, NBL needs to restructurise its existing charges of factoring. To cope up with the current competition and also to grab more market share in factoring services, NBL needs to restructurise its existing charges of factoring.

3.4.5 Purpose of having SME facilities from NBL:

Purpose To manage your working capital To buy transports/ machineries for your business To expand your business To start up a new business Others Percentage 38% 47% 0% 0% 15%

Table 09: Purposes of having SME facilities

Interpretation: Most of the clients come to have finance to buy vehicles or machineries capital.
an ag

Purpose of the Facility

50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
ca

47% 38%

and

to

manage

working

0%
pi ta l s hi ne rie si ne ss

0%
si ne ss

15%

bu

w or ki ng

ac

bu

/m

pa nd

le s

ne

V eh ic

ex

Figure 30(Source: survey)

3.4.6 Nature of Business that SME Division in NBL provides Finance:

a. b. c. d. e. f. g. h. i. j. k. Nature of Business Light engineering Plastic Manufacturing Food processing Garments & Textile Knitting & Embroidery Garments Accessories Handicrafts Printing & Packaging Poultry Clinic & Diagnostic center Hotel & Restaurant Percentage 0% 3% 3% 7% 11% 10% 0% 18% 3% 3% 7%

bu

st

ar tu

Pupose

th er s

l. Educational institution m. Others

Nature of business
a b 0% 3%

0% 35%

c 3%

d 7%

a b c e 11% d e f g h f 10% i j k l m

m 35%

l 0% k 7% j 3% h 18%

g 0%

i 3%

Figure 31 (Source: survey) Interpretation: Basically SMESs in NBL provides finance Light engineering, Handicrafts, Plastic Manufacturer, Printing & Packaging, Food processing, Poultry, Garments & Textile, Clinic & Diagnostic center, Knitting & Embroidery, Hotel & Restaurant, Garments Accessories, Educational institution and many more like distributors, shipping, courier services etc. According to my survey I have found that SMEs in NBL prefers providing finance to printing and packaging industries.

3.4.7 Years of Startup of the Clients Business:

Years of Startup 1991-1995 1996-2000 2001-2005 2006-2008 Percentage 14% 10% 48% 28%

Table 11: Startup year of Clients Business

Figure 32 (Source: survey) Interpretation: From this figure it is clear that SME Division in NBL provides finance to those businesses which has experience of business for at least 2 years. But

it gives importance to those businesses which had experience of business for last 5 years.

3.4.8 Total Revenue (Yearly) of the Clients Business:

Total revenue (BDT Lac) 4-23 24-53 54-73 74-93 94-113 114-500 Percentage 32% 18% 11% 4% 14% 21%

Table 12: Total Yearly Revenue of Clients Business

Figure 33 (Source: survey) Interpretation: 32% clients of the total number of clients have revenue between 4-23 lac which shows that to get finance from SME in NBL you must have 4 lac revenue yearly.

3.4.9 Total Asset (Excluding lands & buildings) of the Business:

Asset Value (BDT) 2-61 lacs 62-121 lacs 122-181 lacs 182-241 lacs 242-300 lacs Percentage 56%
20% 7% 7%

10%

Table 13: Total Assets Value of Clients

Figure 34(Source: survey) Interpretation: As the figure shows that the asset value of SMEs in NBL clients are minimum Tk. 2 lac and maximum 3 corers. So, for being a SMEs client in NBL one must have at least asset valuing 2 lac Tk.

3.4.10 Number of Employees in Clients Business:

Number of Employee s
5-25 26-50 51-Above 20% 10% 70% Percentage
%

Number of Employess In Clients Business

70% 60% 50% 40% 30% 20% 10% 20% 10% 70%

0% Table 14: Number of 5-25 Employees in Clients Business 26-50 51-Abov e Number of Employees

Figure 35 (Source: survey) Interpretation: To being the client of SMEs you must have at least 5 employees in your organization. In NBL most organizations have 51-750 employees. The survey represent that most clients of SMEs in NBL are medium enterprises.

3.4.11 Clients having Loan from any other organization:

Any other loan from other organization Yes No Percentage 37% 63%

Table 15: Loans from other Organizations

Interpretation: organization.

Figure 36 (Source: survey)

Most of the clients of SMEs in NBL do not have any other loan from other

3.4.12 Clients having any other Sources of Income:

Other source of income Yes No Type of Income Source
Business Service

Percentage
37% 16%

Table 16: Other Sources of Income

Type of Income source of the Client:

Percentage 45% 55% Figure 37 (Source: survey) Interpretation: Most of the clients of SMEs in NBL have other Figure 24 Figure 24 sources of income. Their income source is mainly from service.

Table 17: Type of Sources of Income

Figure 38(Source: survey)

3.4.13 Reasons of having finance from SME in NBL:

Priorities Reasons Friendly & fair environment Simple & quick processing Continuous service Flexible terms & conditions If others please mention
1 1 17 0 13 0 2 3 8 10 11 0 3 7 5 12 4 0 4 19 0 8 2 0 5 0 0 0 0 30

Table 18: Reasons of having loan from SMEs in NBL

20 18 16 14 12 10 8 6 4 2 0 Reasons Continuous service 1 1 1 0 2 2 3 8 13 11 10 17

Why NBL

19

12 8 5 3 4 4 2 0 3 4 0 0 0 0 5 Simple & quick processing 5

Friendly & fair environment Flexible terms & conditions

Interpretation: Most of SMEs clients in NBL came here because of the simple & quick processing and flexible terms & conditions of loan.

3.4.14 Ranking between NBL, IDLC, ULC, BRAC Bank & Eastern Bank according to their SME Service:
Priorities
Name of the Organizations NBL IDLC ULC BRAC Bank Eastern Bank Ltd. 1 26 1 2 1 0 2 4 7 9 10 0 3 0 16 6 5 2 4 0 3 10 12 6 5 0 3 3 2 22

Table 19: Ranking between NBL, IDLC, ULC, BRAC Bank, Eastern Bank

Interpretation: 26% of the total ranked SMEs of NBL at number 1. Those who are new with NBL they prefer it as number 2. According to the survey NBL is in 1 st position.
Ranking between the following organiz ation
30 25 20 % 15 10 5 0 0 1 10 16 10 12 Series1 Series2 Series3 0 2 0 3 0 4 0 5 6 26 22

NBL,ulc,Ea stern BankLtd,BRAC Bank

BRAC Bank 2nd, IDLC 3rd, ULC 4th and Eastern Bank is in 5th position

3.5 Recovery Performance of SMEs in IIDFC

Although the company selects its clients very carefully, but some of them are not regular in their payments. As a result the monthly overdue occur and recovery rate decreases. Recover rate fluctuates month to month because some clients fail to pay monthly rentals on time. The recovery rate stays below 100% because of two reasons, these are:

Overdue
Overdue rentals directly reflect on monthly financial report NBL faces overdue when there is insufficient fund in the clients account. Before avail lease/loan facility the Lessee/borrower provides required number of post-dated cheques to the lessor/lender. In due date the account department place the cheque to designated bank and transfer the amount from clients (Lessee/borrower) account to NBL (Lessor/lender) account. But some time because of insufficient fund the rentals are not collected or transferred to lessors/borrowers account. Due amounts sometime collected consecutive month.

Default
When the lessor/lender is sure that the lessee/borrower will not pay the overdue as well as future rentals that is called default.NBL faced 3 (Three) default case till today. At present NBL is taking legal actions against the lessee/borrower. Some agreements are predicted as default in near future.

When clients who have taken loan show reluctance to repay their monthly installments, recovery team of credit administration department follow them up in different ways by: Writing letter Calling over the telephone or mobile phone Visiting clients office or home Engaging recovery agent Sending legal notice

Writing letter and calling over phone to the clients are frequently done by the monitoring department. If the clients can not be reached over phone, monitoring department send someone to visit the clients office or home. By informing the clients about the current status of their account, this department often writes letter to them. But those clients who have doubtful (12-17 nos. over due) and bad loss (more than 17 nos. over due) account are pursued by Managing Director himself with the help of legal advisor. But very fortunately NBL does not have any client who has doubtful and bad loss account. In case of Standard (1-2 no. Overdue), SMA (3-5 no. Overdue) and Substandard (6-11 no. Overdue) if the clients intend to come in to a mutual understanding and again want to reschedule agreement, the monitoring team of the institution is flexible enough to settle the overdue account of those clients without trying to make any hassle.

3.5.1 Reasons for Overdue and Default

If the lessee/borrower fails to pay the monthly rentals or fully fail to repay all dues to the lessor/lender, the lessor/lender can claim the assets. But most of the time lessor/lender prefer and asked for monthly rentals rather than the leased/loan assets. This psychology leads to lower recovery rate. Although NBL is very selective about their clients, but the organization does not achieved 100% recovery rate because of monthly overdue payments. There are different reasons for any leasing company fail to achieve 100% recovery rate.

The reasons are mentioned below: Change in Local & Foreign Policy Poor Sectors Performance Poor Performance in Business Political Instability Insufficient Fund Clients Relation with the Organization Clients Unwillingness

3.5.1.1 Change in Local & Foreign Policy

Bangladesh has trade relationship with other foreign countries. Some major businesses are directly related with outside world. Foreign policies play a direct role deciding the performance of a company trading doing business with that particular country. Policies taken by a foreign country, which will not favor trade; will surely hinder the financial performance of that company which will result in not paying the rentals. Local policies like taxes, Interest rate etc. affect the business in the same way. Readymade Garments would be the precise example here. Withdrawal of quota, quota for the other countries, has already affected the RMG sector. Withdraw of governments incentive to the textile industries has also hindered the expansion of the industry. As the SME Division of NBL is providing a large amount of lease facilities in Textile and RMG industries any regulation change or other undesirable policies directly influence the recovery rate.

3.5.1.6 Clients Relation with the Organization

Some clients acquired because they have strong reference and have strong relation with the top management. In this cases some clients does not have fully sound position in the market and in future they fail to pay the rentals in time.

3.5.1.7 Clients Unwillingness

The unwillingness to repay is another reason for declining recovery rate. Some clients do not pay their monthly rentals until the lessor reminds them. This is the notion of some people and this is one of the major obstacles in recovery.

3.5.2 Yearly Recovery Performance SMEs in NBL: 3.5.2.1 Lease Finance

Lease finance is one of the major products of SME. Past 5 years data of recovery from lease finance shows that year-to-year fluctuation of recovery is very little and recovery rate is satisfactory in the past five years. From 2003 to 2004, the recovery rate decreased from 88% to 86%. Again, from 2005 to 2006, the recovery rate increased from 86% to 93%. But from 2007 to 2008, the recovery rate has started to decrease. In 2006 the recovery rate has significantly decreased from 93% to 81%. So the 2006 and 2007 is the worst year of recovery from lease finance in the history of the past five years. Election, political instability, clients reluctance and the transition period of management may be the reasons of this dissatisfactory performance of recovery in the 2007 and 2008. SME department always try hard to recover the overdue amount. We can see the trend of recovery rate of past five years through the following table and graph.

Year

Yearly Recovery Rate Lease Finance Opening Accrual Accrual + Closing Recovery Receivable Receivable Opening Receivable (Taka) (Taka) (Taka) Receivable (Taka) E =C-D A. B. (Taka) D C=A.+B.
29016450 43837752 206693107 293469691 235709557 337307443 43837752 64116090 191871805 273191353

Recovery Rate (E/C)*100

2007 2008

81% 81%

Table 20: Yearly Recovery Rate of Lease Finance (Source: internal)

3.5.2.2 Term Finance:

Term Loan is the second major products of SMEs. Past 5 years data of recovery from term finance shows that year-to-year fluctuation of recovery is high and recovery rate is not satisfactory like lease finance. It is comprehensible that in 2004 the yearly recovery rate was significantly high rather than the other four years. In 2005 it decreased from 95% to 77%. After 2005 the recovery rate of term loan gradually started to decrease. In 2007 the recovery rate has significantly decreased from 69% to 43%. If we do comparative analysis between lease and term finance, it is noticeable that recovery from lease finance is far better than that of term finance. I have found a significant reason behind it. Whenever a customer takes loan under lease operation, he or she is not the owner of the asset. So the customer always tries to pay the monthly rental regularly lest his or her assets should be repossessed by the company. But the customer who takes term loan by giving mortgage does not have this fear. That is why; repayment performance of the clients of the term loan is less satisfactory than that of the clients of term loan. We can see the trend of recovery rate of past four years through the following table and graph. Yearly Recovery Rate from Term Loan Opening Receivable
25523643 99829056

Year

Accrual (Receivable for the Relevant Year)

148886487 313571980

Opening Recovery Closing Receivable+ Recovery Receivable Rate Accrual

174410130 413401036 74581074 277202061 99829056 136198975 43% 67%

2007 2008

Table 21: Yearly Recovery Rate from Term Loan _ (Source: internal)

3.6 Sector-wise Recovery of lease finance and term loan

In some sectors the leasing firms are achieving 100% recovery rate but some sectors are not regular in their payment. This reason the overall rate decreases. Total recovery rate does not provide any clear scenario of the organization. To analyze the recovery management sector-wise information is more reliable. Following table display the sector-wise recovery rate from year 2007 to year 2008 of NBL.

Sectors 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Services Distribution Processed food & allied Pharmaceuticals Individual Textile Readymade Garments Engineering & Workshop Publishing & Newspaper Cement Medical & Diagnostics Other Toiletries Poultry Education

2007 (%) 99.84 99.87 99.80 100 94.26 98.78 N/A 97.25 93.91 27.41 100 74.92 100 100 98.44

2008 (%) 100 100 100 100 98.66 98.77 N/A 98.39 100 0 100 100 N/A N/A N/A

Table 22: Sector-wise Annual Recovery Rate of NBL

(Source: internal) Above table shows that some sectors like Marine Transport, Process Food and Allied, Pharmaceuticals, Medical and Diagnostics and Poultry sectors are very much regular in their payments. End of each year above mentioned sectors recovery rate was around 100% to 99.50%.

Moderate rated sectors are Road Transport, Services, Textile, Individual and Education. Annual recovery rates of these sectors stay between below 100% to 90%. Very volatile sectors are those have recovery rate in below 90%. Readymade Garments, Engineering and Workshop, Publishing and Newspaper, Cement, Toiletries and others recovery reached to 80%. Some of above-mentioned sectors often achieved 100% recovery rate also. In Cement the rate is lowest at 44%.

04. Findings & Recommendations

After analyzing all the information some facts are exposed and some effective recommendations are proposed.

4.1 Findings
Although NBL and other selected organizations are engage in lease financing, but there is also some dissimilarities in management activities. The findings from the analysis are discussed below: IPDC is in the leasing business from 1981 and ULC is in from 1989. Compare to them NBL is a popular company and have less experience in Bangladesh market. Besides leasing IPDC and ULC offer other products and services in large scale the market. NBL has Merchant Banking and Money Market Operation but in very big scale. The net profit of NBL in 2008 was 12% higher than the previous year and the growth rate was 17%. The growth of net profit of ULC was 20%. The yearly rate of disbursement NBL is higher than ULC. In 2000 the rate was 53.76% and 7.23% respectively. In 2001 NBL take a giant leap, which gave the company to capture a strong market position. In 2002 the rate of disbursement was 27% for NBL and 19% for ULC. All 3 (three) organizations provide lease facilities to different sectors of the country. As the titles do not match with each other it is difficult to identify all the sectors where they are investing. IPDC invest in Agro Based Projects and in Infrastructure Development, which are absent in NBLs portfolio. The amount of total leased asset of NBL is 50% less than ULC. The reason is ULC is in the business for 12 years where as NBL is in for 9 years. The overall recovery rate does not reflect the actual scenario as some sectors achieved the 100% recovery rate. The total recovery rate close to each other. NBLs recovery rate range from 93% to 89%, where as ULC has ranged 91% to 92% and IPDC has ranged from 92% to 95%.

Sector-wise recovery helps to identify the poor performance and also indicate the economic condition of the country. Sector-wise recovery rate can focus on different sectors and identify the position in the economy by indicating the nature of payments. IPDC has separate recovery cell lead by General Manager (GM) and the rate of recovery is the highest among 3 (three) organizations. ULC has a recovery division under Marketing Department and the recovery rate is not around 91% but the rate is almost stable for last 3 (three) years. NBL does not have any recovery division or cell and the recovery rate is fluctuating from 93% to 89%. As NBL does not have separate recovery division or cell, for that it is very lengthy process to take actions to collect overdue. And the problems arise that who will take the responsibility to make liaison between the client and the company.

By recovery division management can held responsible the designated person for un-recovered payments. Recovery cell or division can provide extra effort to the un-recovered payments and take necessary actions promptly to collect the dues.

4.2 Recommendations
By analyzing 6 (six) different Non-banking Financial Institutions some

recommendations are point out to make the NBLs recovery management system effective. The recommendations are stated below: Separate recovery department or cell is essential for increase the recovery rate. The recovery division must involve a person from Marketing Department and one from Accounting Department. The Manager of Internal Control Department. Should supervise the division. The division must report to top management regularly. Beside CIB and Bankers Report,NBL should collect report on payment nature from the clients suppliers and other who are directly related with clients business. Industry analysis should be done during the lease processing. NBL must collect past data related to different industry and analyze the present situation as well as predict the future. Because most of lease are long term (2-5 Years).

Although the clients are regular in their payment, a continuous close monitoring must be carrying on to eliminate the default risk. Every month before payment date a person from recovery division must inform the clients by writing or through phone or e-mail. If the client fails to pay 3 (three) consecutive payments, the recovery cell should inform the top management to take corrective actions.

05. Conclusion
Financial Bank Institutions are a new dimension for Bangladeshs economic growth. Efficient services from these companies can push up the industrial growth. Lease financing provides the industries a scope to invest without acquiring any liability.

As all NBFI is providing SME facility by borrowing fund from Commercial banks, because of that the cost of lease facility is higher than direct borrowing. Only from this reason many firms are not step forward to avail lease facilities, event though all other manner it is convenient. In this situation some NBFI enjoys the low cost funding from Commercial Bank, Bangladesh Bank and providing relatively cheaper lease facilities to the clients. Lease financing is a very enormous step in industrial growth. Government support and proper knowledge and information will help the citizens to avail lease facilities from these established financial companies. In developed countries the lease financing has a major contribution in the industrial as well as economic growth. So for the growth of the country NBFI can play a vital role in the future

References
Websites: 1. Anonymous; http://www.iidfc.com/; February 15, 2009 2. Anonymous;http://papers.ssrn.com/sol3/papers.cfm?abstract_id=928139; February 17, 2009 3. Anonymous; http://www.dsebd.org/ipo/NBL.pdf; February 20,2009 4. Anonymous; http://www.bangladesh-bank.org/, March 01, 2009 5. Anonymous; http://www.ulc.com.bd/; April 05,2009 6. Anonymous; http://www.idlc.com/; April 05, 2009 Report: 1. Annual Reports of NBLLtd (2005, 2006, 2007, 2008) 2. Annual Reports of IDLC Ltd (2006, 2008)

Appendix: A Questionnaire Dear Sir / Madam: I am a student of University of Liberal Arts Bangladesh (ULAB), assigned to do my internship project report on SME Finance in NBL. To help me getting more information, I need to know more about you and your opinions about the NBL's SME Division. I would appreciate it if you would complete this questionnaire. All the information will be treated as completely confidential and used for academic purpose only; it will not be possible for anyone to identify the information you give me when I write up the project report.

Thank you. Kamrun Naher (Intern) Name & Designation Name of the Business Place of the business Age : ................................................................................. : ................................................................................. : ................................................................................. : A. 20-30 B. 31-40 C. 41-50 D. 50 and above. Forms of the business : A. Proprietorship B. Partnership C. Limited Company D. 50 and above.

(1) Which facility you are / going to enjoy from NBL? a. Direct Lease Finance. b. Sale or Lease Back. c. Factoring d. Term Loan e. Time Loan (2) For what purpose you need lease finance/ term loan? a. To manage your working capital b. To buy transports / machineries for your business c. To expand your business d. To start up a new business

e. If others, please mention ....................................................................... (3) Types of business for which you need lease finance / term loan? a. Light engineering b. Plastic Manufacturing c. Food processing d. Garments & Textile e. Knitting & Embroidery f. Garments Accessories g. Handicrafts h. Printing & Packaging i. Poultry j. Clinic & Diagnostic center k. Hotel & Restaurant l. Educational Institution

(4) When did you start your business? (Mention the year only).................................. (5)Annual Revenue of your business ........................................................................... (6) Total asset value of your business excluding land and building ............................. (7) Number of employees of your organization ............................................................ (8) Do you have any other loan from other organization? Yes _______ No ______ If yes mention the name of the organization only ........................................................... (9) Do you have other source of income? Yes _______ No ______

If yes mention the source (name of the organization and your designation) ..................................................................................................................... ..........................

(10) Why NBL? (Please prioritize your answer) PRIORITY a. Friendly & fair environment b. Simple & quick processing c. Continuous service d. Flexible terms & conditions e. If others please mention ......................................................... ................. ................. ................ ................. .................

(11) Please rank the following organizations from 1 to 5 according to your priority (1 = best, 2 = good, 3=ok, 4=bad, 5=worst) a. NBL b. IDLC c. ULC d. BRAC Bank Ltd e. Eastern Bank Ltd. (12) If NBL is your priority no. 1 then please go to question no. 13. If NBL is not your priority no. 1 then please mention the reason for choosing NBL for SME loan. ........................................................................................................................................ (13) What more benefits for you went from SME Division in NBL? a. b. c. d. ............................................................. ............................................................. ............................................................. .............................................................