3.2 Conceptual Framework: SME Financing:
In recent times, Small and Medium Enterprises (SMEs) have come into the forefront of development agenda due to the recognition of their contribution in fostering growth, sustaining global economic recovery, generating employment & reducing poverty. Growth of SMEs can reduce poverty through acceleration of economic growth, removal of biases against labor incentive production, creation of employment opportunities for the low-skilled workers & formation of linkages with small supplies.
Since Small and Medium scale entrepreneurs (SMEs) represent the individual & community level initiative & contribution towards the greater national economy, poverty alleviation models pursued by the government & non-government bodies consider SMEs development as one of their major area of intervention.
SMEs are in general labor–intensive industries with relatively low capital strength. As such Bangladesh being a labor abundant & capital scare SMEs have a natural comparative advantage. In recognition of the strategic importance of the development of the SMEs in promoting economic –growth, employment generation & poverty alleviation the SME sector has been declared as a priority sector in the Government’s industrial policy 2005 & various measures have been initiated to help maximize the SMEs growth potential.
3.3 Definition of SME:
There does not exist any unanimous and universally acceptable definition of SMEs in Bangladesh. The practice of different institutions/agencies is to define SMEs keeping their own perspectives and strategies in view. Conceptually the main difference among the alternative definitions arises in terms of number of employment and volume of invested capital.
I.Small Enterprise means an entity, ideally not a public limited company and also fulfills the following criteria:
|Nature of enterprise||Total assets at cost including land & building||Total number of employees|
|Service concern||Tk. 50,000 to Tk. 50 lac (excluding land and building)||Not more than 25 persons,|
|Trading concern||Tk. 50,000 to Tk. 50 lac (excluding land and building)||Not more than 25 persons,|
|Manufacturing concern||Tk. 50,000 to Tk 1.50 lac (excluding land and building)||Not more than 50 persons,|
II.Medium enterprise on the other hand:
|Nature of enterprise||Total assets at cost including land & building||Total number of employees|
|Service concern||Tk. 50 lac to 10 crores (excluding land and building)||Not more than 50 persons,|
|Trading concern||Tk. 50 lac to 10 crores (excluding land and building)||Not more than 50 persons,|
|Manufacturing concern||Tk. 1.50 crores to 20 crores (excluding land and building)||Not more than 150 persons,|
Characteristics of SME:
- Mostly proprietorship.
- Informal nature of process & procedure.
- Owner does multifunction.
- Family member involvement.
- Minimal recording keeping.
- Cash based transaction (minimal bank involvement).
- Cash flow of business intermingled with family cash flow.
- Avoid government (minimal permit, license).
- Do not have access to formal credit because they lack collateral mostly depend on friendly & family and informal source for capital.
- Fast growing business without sufficient resources to invest in R & D and process technology.
3.4 Objectives of SME:
- To provide credit facilities to the small and medium entrepreneurs located at urban and sub-urban areas and easily accessible by our branches.
- To floe credit for creation of employment and generation of income on a sustainable basis through development of small and medium enterprises.
- To assist potential entrepreneurs to take part in economic activities so that they can improve their living standard.
- To reduce dependence on moneylenders.
- To make the small and medium enterprises self reliant.
- To develop saving habit and making acquaintance with banking facilities.
- To inspire for undertaking small projects for creation employment through income generation activities.
3.5 Background of SME:
SME policy was developed in 2005 by the Ministry of Industries. SME Foundation is an apex body of SME development. The prime vision of the SME Foundation is to ensure welfare of the young & innovative entrepreneurs of small & medium enterprises with a view to mainstream them in the economic activities. Some other policy guideline like The Prudential Regulation for SME Financing of Bangladesh Bank-2001 and Micro Credit Regulatory Act-2006 was introduced for a full fledged foundation for SME growth, support & competitiveness under the ministry of Industries.
3.6 Support of Bangladesh Bank in SME financing:
Bangladesh Bank as the central bank of the country is playing an important role regarding SME financing in issuing circular from time to time for increasing access to finance. This will ensure growth, economic development, enhance employment and empower people to rise above the poverty.
Moreover, Bangladesh Bank (BB) created special fund known as ‘Small Enterprise Fund (SEF)’ amounting TK 100.00 crore set forth in BB’s ACSPD Circular No. 01 dated 02-05-04 and has introduced a Refinance Scheme for Small Enterprise Sector to provide 100% refinance facilities to support the development of the small enterprise sectors through banks and financial institutions at a concessional rate of interest that is prevailing bank rate. Recently, under BB, ACSPD Circular No. 03 dated 12.06.2008 Bangladesh Bank raised Tk. 300.00 to TK 500.00 crore (hereinafter called SEF) to meet refinance facilities to meet growing demand of banks and financial institutions. Lastly, in 305th meeting dated 29.03.2009 of BB Board of Directors raised the fund of TK 500.00 crore to TK 600.00 crore.
It is required to enter into a participation agreement between BB and the lending banks and financial institutions interested to avail of the refinance facilities from BB’s SEF through ACSPD Circular No. 02 dated 19.07.2005.
BB shall provide refinance facilities against the loans made by the participating bank/financial institution to the small entrepreneurs the amount of which in individual case shall range from Tk. 2.00 lac to Tk. 50 lac and tk. 1.00 lac to Tk. 50.00 lac for women entrepreneur.
A small enterprise development fund of US$ 10.00 million made available to BB by International Development Association (IDA) under the Development Credit Agreement, dated 03.06.2004 between the IDA and the Govt. of the Peoples Republic of Bangladesh, the proceeds of which will be pooled with the BB’s SEF for refinancing the small enterprise lending of banks and financial institutions. The annually disbursed of total loan able fund 40% for small entrepreneurs & rest 60% for medium enterprise.
In order to mobilize, extend and strengthen the SME sector a participation agreement of US$ 30 million between ADB & BB and regarding its refinance BB ACSPD circular No. 02 dated 19.07.2005 was issued.
3.7 Why SME are languishing?
If the SME case is so good, why aren’t the SMEs of Bangladesh doing better? Neither the Bangladesh Bureau of Statistics nor the Annual Economic Review of the Ministry of Finance shows industrial statistics segregating data for SMEs. The coverage id restricted to large & small industries, whatever might be the definitions of these two categories.
4.1 SME Financing in NCC Bank Limited:
There are many small and medium entrepreneurs in the country that have innovative idea, sprit and potentiality to do something productive for local consumers as well as export abroad. They can generate income and contribute to the GDP. They may also provide employment. Development and growth of small and medium enterprise 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.
National Credit and Commerce Bank Limited is committed to play positive role in the overall socioeconomic development of the country. In view of the above a credit scheme titled “Small & Medium Enterprise Financing Scheme (SME)” has been formulated. Taking this aspect into consideration and with a view to expanding our bank’s investment base and to associate us more effectively with a profitable, socially desirable and economically viable investment area, the board of directors of the bank has approved introduction of SME Financing Scheme.
4.2 Target Group:
- Small and medium entrepreneurs.
- Located at urban and sub-urban areas.
- Easily accessible by our branches.
- Profitable business or viable business plan.
4.3 Criteria for loans:
- The bank shall maintain savings/current/STD account with the concerned branch of our bank.
- 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 national or permanent resident of Bangladesh. If the borrower is a firm or other business entity it must be in Bangladesh.
- The entity of the applicant must be 100% privately owned, controlled and operated.
- If acceptable collateral security cannot be provided, the borrower should arrange for 02 (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 standing, income and asset shall be considered. Any default loanee or unreliable person shall not be accepted as guarantor
- The project should be financially viable and socially desirable.
- The sponsors/applicant shall have reputation in the society.
- The innovative project, 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.
4.4 Purpose of SME Finance:
- Working capital business.
- Import and installation of capital machinery.
- Acquisition of delivery van/ transport for business purpose.
- Work order finance.
- Post import finance.
4.4.1 Mode & Period of Finance:
- Cash credit (H) for maximum of 1 year period.
- Lease finance for used/ reconditioned machinery/vehicle maximum 3 years and for new maximum 5 years.
- Term loan for business, maximum 5 years.
- Secured Overdraft (General) against work order.
- Loan against Trust Receipt (LTR) for maximum of 1 year.
- Letter of Credit (L/C).
- Bank Guarantee (Bid & Performance.
4.5 Loan Ceiling:
|Nature of enterprise||Borrower exposure (for all terms)|
|Small enterprise||Minimum Tk. 2.00 lac & maximum Tk. 50.00 lac|
|Small enterprise||Above Tk. 20.00 lac & maximum Tk. 80.00 lac|
For SME working capital, Lease Financing and SME Term Loan:
For allowing CC (H), Lease Financing & Term Loan under SME Financing should be followed/ observed the concept as mentioned under SL#3 in addition to the existing securities, terms and conditions of CC (H), Lease Financing & Term Loan.
4.7 Interest & Charges:
|Interest||17.00% p.a.(subject to change from time to time)|
|Other charges||Other charges to be realized as per prevailing rate of particular area of financing.|
4.8 Restricted Business:
- Manufacturing, distributing or servicing of alcoholic beverages.
- Un-manufactured tobacco, tobacco refuse, manufactured tobacco (whether or not containing tobacco substitutes), & tobacco processing machinery.
- Radioactive and associate materials, nuclear reactors and parts thereof, non- irradiated for nuclear reactors and fuel elements (cartridges).
- Goods intended for a military or parliamentary purpose, environmentally hazardous goods, and personal or consumer loans including house building loans.
- Crop and fish production.
- Production and trading of any time banned by the government.
- Any activity not permissible by the law of the land.
4.9 Loan Exposure in SME:
National Credit & Commerce bank limited has disbursed about Tk. 855.79 crore in Small & Medium Enterprise sector up to the year 2009 out portion of its total loans and advances figure of Tk. 4633.27 crore. The portion invested in SME sector is about 18.4% of the total loan exposure. Of the total SME loan figure of Tk. 855.80 crore, major concentration was given in working capital finance. About 90.17% of the SME loan was disbursed in this mode. Less concentration was given to Term Loan & Demand Loan in the form of Small Business Loan & Festival Loan, Loans amount in the area is Tk. 42.42 crore & 11.69 crore respectively.
The following table depicts the category of loans disbursed under SME Finance along their percentage.
|Small & Medium Enterprise||Total Exposure||Sector %|
|Working Capital [CC (H) <50 lac]||771.69||90.17%|
|Small Business Loan, Term Loan||72.42||8.46%|
|Festival Small Business Loan||11.69||1.37%|
|Total SME Finance||855.80||100.00%|
The following pie chart shows that of the total loans and advances only 18% was disbursed in
Small & Medium Enterprise sector and rest of the 82% were disbursed in other areas like agriculture, industry, construction, housing & others.
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