Introduction

This term paper is prepared with an intention to meet partial requirement of the course "Financial Institutions". We have chosen Dutch-Bangla Bank Ltd for this purpose. We performed an analysis on the SME division of the bank and tried to evaluate its justification with the acquired knowledge from the course.

Objective of the Study:

The main objective of the study is to gather knowledge regarding the SME division of DutchBangla Bank Ltd. More precisely, the objective can be pointed out as follows: To know briefly about Dutch-Bangla Bank Ltd. To know about the SME products and services of the bank. To know about the industry diversification and credit process of SME loans of the bank. The Challenges that Dutch-Bangla Bank face regarding SME Banking. To suggest to overcome the challenges of SME banking.

Methodology of the Study:

For the study, secondary data for Dutch-Bangla Bank have been collected from various sources like website of the bank. For more authentic SME related information, we have taken a short interview of the Deputy Managing Director of the bank. Moreover, different websites and SME related articles are also been researched to get further information.

Scope of the Study:

Scope of the study is quite clear. SME Department is dealing with all types of Small and Medium loan activities in the bank, opportunities are there to learn other aspects of SME matters. The impact of SME banking in the banking sector of Bangladesh. The industries that DBBL is providing SME loans. 1

The growth factors of the banks through SME banking. The Challenges that the banks faces in conducting SME banking. The credit process that DBBL follows to give away SME loans.

Limitations of the Study:

Several problems have been faced while conducting the study and it is pointed out as follows: Discussion about SME is a vast subject but due to time constrains, only some selected areas are covered. We have face difficulties in getting the appointment of the executives of the bank. We were unable to give full concentration in this regard due to continuous pressure of other courses. We had limited time for group study because of the political hazards. The main constraints of the study are insufficiency of information, which was highly required for the study. Every organization has their own secrecy that is not revealed to others. While collecting data through interviewing the employees, they did not disclose much information for the sake of the confidentiality of the organization.

Brief Profile of Dutch-Bangla Bank Ltd.

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Dutch-Bangla Bank is a scheduled commercial bank set up as a joint venture between Bangladesh and Netherlands. The bank was established under the Bank Companies Act 1991 and incorporated as a public limited company under the Companies Act 1994 in Bangladesh with a the primary objective to carry on all kinds of banking business in Bangladesh. The bank has been incorporated on 4th July, 1995 and is listed with Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE). Presently the bank has 55 branches spreading over the country. It conducts all types of commercial banking activities and renders all types of personal and corporate banking services to the customers of all layers of the society within the framework of Bank Companies Act 1991 and rules and regulations laid down by Bangladesh Bank from time to time. The core business of the bank is trade financing. DutchBangla Bank (DBBL) is rendering customer services related to local and foreign remittances such as issuance and encashment of travelers cheque, demand draft, telegraphic transfer etc. It also extends short and medium term loans to the industrial undertakings. As per charter Dutch-Bangla Bank can also go for lease financing merchant banking, offshore banking, retail banking etc. The bank participates in fund syndication with other banks. Dutch-Bangla Bank is part of its increasing customer service benefit allowed commission fee TT, DD and PO facilities.

Mission:
Dutch-Bangla Bank (DBBL) engineers enterprise creativity in business and industry with a commitment to responsibility Profits alone do not hold a central focus in the banks operation because man do not live by bread and butter alone.

Vision:
Dutch-Bangla Bank dreams of better Bangladesh where arts and letters, sports and athletics, music and entertainment, science and education, health and hygiene, clean and pollution free environment and above all a society based on morality and ethics male all our lives worth living. Banks essence and ethos rest on creativity and the marvel magic of a charmed life that bounds with spirit of life and adventures that contribute towards human development.

Core Objectives:
Dutch-Bangla Bank believes in its uncompromising commitment to fulfill its customer needs and satisfaction and to become their first choice in banking. Taking indication from its pool 3

esteemed clientele, Dutch-Bangla Bank intends to pave the way for a new era in banking that upholds and represents its promoted marques Your Trusted Partner. Some of their core objectives are as follows: To establish relationship banking and improve services quality through development of strategic marketing plans. To remain one of the best bank in Bangladesh in terms of profitability and asset quantity. To introduce fully automated systems through integration of information technology. To ensure adequate rate of return on investment. To keep risk position at an acceptable range (including any off-balance sheet risk). To maintain adequate liquidity to meet maturing obligations and commitments. To maintain adequate control system and transparency in procedures. To maintain a healthy growth of business.

SME Products and Services

Knowing the importance of SME in our country, Dutch-Bangla Bank has divided their SME schemes into 03 (Three) parts which are discussed below: Smart SME Cash-Credit:

Purpose

To meet up working capital requirement of Business. 4

Target Customers

Small or Medium Entrepreneur like: an entity, ideally not a public limited company, does not employ more than 150 persons (if it is manufacturing concern) and 25 persons (if it is trading concern) and 25 persons (if it is service concern) and also fulfills the following criteria: o A service concern with total assets at cost excluding land and building from TK. 50,000/to TK. 10 crore. o A trading concern with total assets at cost excluding land and building from TK. 50,000/to TK. 10 crore. o A manufacturing concern with total assets at cost excluding land and building from TK. 50,000/- to TK. 20 crore.

Loan Amount

o Minimum: TK. 100,000/o Maximum: TK. 5,000,000/-

o Clean: Up to TK. 500,000/o Collateralized: Up to TK. 5,000,000/-

Interest Rates (Floating)

o Clean: @17.00% o Collateralized: @16.00% o Collateralized with 30% Cash Security: @15.00% o 100% Cash Security: @TD+2% spread (considering DBBL TD) and @14% p.a (considering other cash security/ other bank TD)

Processing Fee Renewal/Enhanceme nt Fee Tenure Overdue Charge

1% of the Sanctioned Limit 0.50% of the Sanctioned Limit

1 year Renewable (if total credit turnover is at least 4 times of existing limit) Additional 3% p.a No EOL to be allowed without approval of the Head Office.

Stamp Charges and

All relevant Stamp charges and VAT (as per Govt. 5

VAT Eligible Entrepreneur/Owner

rules) o Nationality: Bangladeshi by birth o Experience: As an entrepreneur must have experience at least 2 (Two) years o Age: Minimum 21 years to maximum 65 years For renewal purposes maximum age may be considered up to 70 years

Smart SME Term-Loan:

Purpose Target Customers

To meet up working capital requirement of Business. Small or Medium Entrepreneur like: an entity, ideally not a public limited company, does not employ more than 150 persons (if it is manufacturing concern) and 25 persons (if it is trading concern) and 25 persons (if it is service concern) and also fulfills the following criteria: o A service concern with total assets at cost excluding land and building from TK. 50,000/to TK. 10 crore. o A trading concern with total assets at cost excluding land and building from TK. 50,000/to TK. 10 crore. o A manufacturing concern with total assets at cost excluding land and building from TK. 50,000/- to TK. 20 crore.

Loan Amount

o Minimum: TK. 100,000/o Maximum: TK. 5,000,000/-

o Clean: Up to TK. 500,000/o Collateralized: Up to TK. 5,000,000/-

Interest Rates (Floating)

o Clean: @17.00% o Collateralized: @16.00% o Collateralized with 30% Cash Security: @15.00% o 100% Cash Security: @TD+2% spread 6

(considering DBBL TD) and @14% p.a (considering other cash security/ other bank TD)

Processing Fee Renewal/Enhanceme nt Fee Tenure Overdue Charge

1% of the Sanctioned Limit 0.50% of the Sanctioned Limit

1 year Renewable (if total credit turnover is at least 4 times of existing limit) Additional 3% p.a No EOL to be allowed without approval of the Head Office.

Stamp Charges and VAT Eligible Entrepreneur/Owner

All relevant Stamp charges and VAT (as per Govt. rules) o Nationality: Bangladeshi by birth o Experience: As an entrepreneur must have experience at least 2 (Two) years o Age: Minimum 21 years to maximum 65 years For renewal purposes maximum age may be considered up to 70 years

Small-Shop Financing Scheme:

Purpose

The purpose of the loan may be Seasonal Financing of inventory or Trade Receivable or both to business entity. Wholesalers, Manufacturers / Assemblers and Retailers of machinery, accessories, agriculture items etc. Maximum TK. 500,000/@ 17% p.a with quarterly rests @ 0.5% of the loan amount but not less than TK. 1,000/1 year renewable 7

Target Customers Loan Amount Interest Rate Processing Fee Tenure

Primary Security Establishment Lease Agreement Location Govt. Recognition

Secured by marketable stocks Must have Shop Establishment. Minimum 3 (Three) years of unexpired lease agreement of the shop. Within the command area of the branch of DBBL. Trade License and TIN

Account Relationship Satisfactory deposit account with DBBL for maximum 06 months or account with any other bank for 1 (one) with DBBL/other year or more. Bank(s), if any Business Experience Average Inventory/Stock
At least 3 (Three) years of experience in this line of trade. Value should be at least twice the proposed loan amount.

Tripartite Agreement Landlord has to be agreeable to sign tripartite agreement

and comply other required formalities in case of leased property / position holding.

Industry Diversification of SME Loans

Figure: Industry Divessification of SME Loans of Dutch-Bangla Bank Ltd. 8

In the SMEs sector wise distribution we see that, Dutch-Bangla Bank gives much more emphasize on the trading sector because the traders take the big amount of loan and at the same time it is less risky from other business sector and the percentage of new traders are increasing in our country day by day. The manufacturing sector is in the second position of SME loan and this type of loan is for making the old industries large or to increase the production amount. Apart from these two industries, they emphasize on agricultural industries as Bangladesh is mostly dependent on agriculture and lastly they provide a very less percentage of SME loans to the service sector such as doctors, lawyers etc.

SME Credit Process

A credit policy includes all rules relating to loans and advances made by the bank to the borrowers. It includes types of credit extended by banks, method of judging the creditworthiness of the borrowers, the collateral or securities that are accepted by the banks eligibility criteria and so on. The policy guidelines refer to all credit facilities extended to customers including placement of funds on the inter-bank market or other transactions with financial institutions. DBBL Credit Policy contains the views of total macro-economic development of the country as a whole by way of providing financial support to the Trade, Commerce and Industry. Throughout its credit operation, DBBL goes every possible corner of the society but the bank gives more emphasis on corporate sector than consumer loan. In SME, they are financing a medium and small scale business house and industry. At the same time they also takes care entrepreneur through its operation of Lease Finance and some Small loan Scheme etc. As a part of its Credit Policy DBBL through its credit operation maintains commitment for social welfare.

Eligibility Criteria:
For an Enterprise: 9

The enterprise has to be an SME according to the definition of Bangladesh Bank. The business should be legally registered. The business should be environment friendly. The business should have a defined market with a clear potential growth. The business must be located ideally close to the market and the source of its raw materials or suppliers. Any risk assessed by the management in turn will become a credit risk for the bank. So effort should make to understand the risk faced by the business.

For an Entrepreneur: Age of the entrepreneur needs to be within 21 years to 65 years. Needs to have at least 02 (Two) years of business experience. The entrepreneur must have the necessary technical skills to run the business. The entrepreneur must possess high enthusiasm and should demonstrate that he or she is in control of the business and has the ability to take up new challenges to take the business forward. Suppliers or creditors should corroborate that he or she pays on time and is general in nature. Clear-cut indication of source of income and reasonable ability to save.

Analyzing Creditworthiness of the Borrower:

In Dutch-Bangla Bank, the creditworthiness is analyzed under the following heads: Profitability: In SME division, all credit facilities granted to the banks customers must produce profit, either directly or indirectly. Spreads are normally associated with the element of risk undertaken and the period and nature of the facilities. When judging a credit proposal, concerned officer takes a comprehensive 10

view of other allied business that will be received by the branches. Generally, the Head office will advise the rates of interest to be charged on various types of credit facilities. The branch manager would determine market conditions and keep the Head Office informed. Cases for charging interest lower than the stipulated rate should be supported by sound of business considerations. Source of Repayment: After satisfying that the transaction will be profitable, next attention is given to the cash flow situation of the borrower. Before granting a facility, it is ensured that a reliable source of repayments exists and that the loan will be paid within the agreed period. When considering the period of repayments, required margin should be provided for unforeseen circumstances such as downward market trend or the general economic condition of the country. Besides, payment of interest and installments and other charges, the fund generated by the business should preferably leave adequate margin for meeting needs for future expansion or other business possibilities. Character and Ability of the Borrower: The branch manager evaluates his customer and also judges his intentions and ability to use the credit facilities to his advantage. SME loan is granted only to those borrowers in whom the branch manager has full confidence. Integrity of the borrower and his ability to conduct business are given high importance. The directors or partners of limited companies or partnerships should be men of integrity, experience and drive. Assessment of the companys operations and information about the directors can be gained by studying the past records, its general reputation in business circles and by reference to the companys bankers. Purpose of the Facility: The purpose of the loan is studied with a view to understanding whether it is within the policy of the bank or not. Each proposal is considered on its merits. Consideration is given to the nature of business and certainty with which the business or the project will yield results. Safety: To safeguard banks interest over the entire period of the loan a comprehensive, capacity and integrity of the borrower, capability and nature of security agreement with all legal formalities, completion of all documentation and finally a constant watch on the account are called for all SME loans will be against 11

adequate security. Advances are granted against the guarantee of a third party and that party is subject to the same credit assessment as made for the principal borrower. In case of property, valuation is done by enlisted surveyor of the Bank. Inventory valuations is taken at the balance sheet values shown in unqualified audited accounts after the branch manager has carried out his own investigation into the composition of the inventory. Rating the Borrower: Bank keeps record of the borrowers who takes loan from their bank. The rating is done based on the calculation of number of loans that an individual or a business takes. The bank gives 60%, 80% and even up to 100% loan to this specific borrowers if the calculations and other factors of judgment are satisfactory. Investment of the Borrower in the Business: To borrow SME loan from Dutch-Bangla Bank, the borrower is required to invest a certain percentage amount of fund which will make him or her eligible to take the loan form the bank. A Borrower must contribute at least 20% of the total investment in the business. Analyzing the Risk Factors: Bank analyzes the risk factors before giving advances to the borrowers such as, supply, sales, performance of the investors and business, need access, working capital, management competence and integrity, security control etc. The risk factors is basically analyzed to estimate the condition of the business and also to fix an interest rate of the loan. This means, after analyzing all the factors, if the investment of the bank is risky, they will charge a higher percentage of interest from the borrower to cover the risk.

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Challenges of SME Banking

In Bangladesh, banks like DBBL do face a lot of challenges to conducting SME banking as it is still a growing sector here. The major challenges that banks and entrepreneurs face in SME banking are given below: Challenges from a Banks Perspective: Financial Literacy Problem: Financial literacy problem defines about the business people who have lack of proper knowledge about financing. They end up investing the money in an area which proves to be an unprofitable project. As a result, the borrowers cannot repay the money in time which creates problem for the bank to run their functions properly. Business Readiness: General business skills and sophistication are severely lacking among small enterprises in particular the inability to formalize a solid business plan. This is one of the main reasons reported by DBBL that SMEs battle to access finance. Business Record Keeping: Most often SMEs do not provide relevant information about their business such as category of the business, profit-loss of the business etc. which creates problem for the bank to keep proper records. Furthermore, information is often seized by the borrowers because of tax obligations. Matching Offer and Demand: There is a fundamental information irregularity between the financial community and SMEs as the entrepreneurs always knows about the state of his or her enterprise than the investor. There is also a knowledge gap about the proper finance, equity, loans or other forms etc. among the entrepreneurs. Absence of Appropriate Legal Framework: Most banks like DBBL do not have appropriate legal framework in order to recover the disbursed credit. Their recovery framework is not clear-cut and as a result they fail to control the servicing of loan. 13

Challenges from the Borrowers Perspective: Lack of Experience: SMEs have lack of experience in the business field. They do not have any training programs and they do not have any business exposure in Bangladesh. As a result, they cannot follow the right way of entrepreneurship in their related field and incur loss in many cases. Collateral: SMEs do not have enough collateral for getting fund from the bank. Banks have some regulation of taking a minimum amount of collateral against credit but most of the SMEs cannot fulfill this requirement. That is why banks are also reluctant to provide credit to them as it would be a violation of their policy regulation. Longer Loan Processing Time and Associate Cost of

Uncertainty: In this sector, credit requires longer processing time. Though it is small and medium enterprise sector, processing time for loan is not short. As a result, banks are unwilling to enter in this sector. Moreover, associate cost of uncertainty is also another issue as banks do not want their funds to be invested in an area where the recovery of the fund is uncertain. Delayed Payment: Delayed payment is one of the biggest challenges that smaller business is facing in our country which affects their attempts at maintaining the cash flow properly.

Prospects of SME Banking

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Although SME banking is still new in Bangladesh, banks are now realizing the importance of it as the day passes. It is true that there are lots of challenges that banks are facing in conducting SME banking but still there are getting interested towards it as it started to make a huge impact in their financial growth. Some of the growth factors are mentioned below: Impact on the Profit of the Bank: In SME banking, the bank is giving away loans to SMEs and for that they are receiving an interest rate which is increasing the banks income. As a result, the profit and the yearly capital of the bank are increasing. Structured SME Banking: When a particular bank is conducting a structured SME banking, SMEs will make an indirect promotion of the bank. As a result, more SMEs will take loan from that bank and the number of investment and the income of the bank will increase. Corporate Level Investment: To reach the rural level customers, banks are investing in different NGOs through a contract to reach the rural people and to offer attractive SME schemes to the small entrepreneurs. As a result, the number of borrowers is gradually increasing for the bank and which will eventually increase their profit. Multi-Currency Transactions: Some of the entrepreneurs may need to make a transaction in different currencies. Banks offer that service to the SMSs to make transactions in different currencies. It allows the bank to charge a higher rate of interest from the SMEs. Consumer Level Loan: SME loans are basically for consumer level. Banks offer loans to small or medium level entrepreneurs from this consumer level. This means the banks are targeting a new segment of customers apart from their usual customers and offering them different schemes of loans which results in expansion of the banks services and the overall cash flow will increase.

Recommendations
The methods that Dutch-Bangla Bank should follow to reduce the challenges related to SME Banking is given below: 15

Proper Strategy: DBBL should follow a proper SME banking strategy to develop this sector and to hold the relation continually with the borrowers. This strategy will include the overall SME banking business model, customer segmentation, product and channel strategies as well as credit risk management, technology, customer service standards and organizational setup etc.

Make A Research: DBBL should conduct a research on the SME banking potentials, current status of supply of SME banking (including conducting mystery shopping of their banks on their specific SME offerings) to identify potential gaps in the market.

Provide Guidelines: Bangladesh Bank has made a proper guideline for the SME banking sector which includes minimum requirements, pre-operations, operations and disclosure etc. Dutch-Bangla Bank should follow those guidelines while providing loans and also they should let the borrowers know about the guidelines so that they may not have any hesitation or doubt while exchanging money.

Secured Record Keeping: DBBL needs to ensure that the information that they are taking from their clients will be kept safely and the bank authority will not disclose those information to others without permission.

Mentioning about the required information: The Bank should discuss more with their clients about the information and documents that are needed to get SME loans.

Proper Training: The employees should be given proper training to handle their SME clients properly. The Bank should also provide the guidelines about their technologies so that they may not face problems while giving away the loans.

Enriching the Website: DBBL should provide sufficient amount of information about their SME products and services in their website so that the interested clients can get information easily.

Appropriate Framework: Dutch-Bangla Bank should make the whole work done under an appropriate framework through strategy development and it must be reflected through their services to the SMEs. 16

Conclusion
Dutch-Bangla Bank Limited is a strong and effective player in the financial system. It is a solid, forward-looking, modern local bank with a record of sound performance. It is committed to provide high quality financial products and services to contribute to the growth of GDP of the industrialization, boosting up export, creating employment opportunity for the educated youth, rising standard of living of limited income group and overall sustainable socio-economic development of the country. The bank has the vision to be the best Private Commercial Bank in Bangladesh in terms of efficiency, capital adequacy, asset quality, sound management etc. It is now one of the top most profitable private sector commercial banks. As concluding remark we can say that DBBL has started to work on SME banking. Although they are offering only a few schemes for SMEs but they are determined to improve their position in SME banking for the growth and welfare of the small and medium entrepreneurs 17

as well as to compete with other existing banks. They should work on the challenges that they are facing in SME banking as well as to give proper training to their employees to handle their SME clients well. They should improve their offers and reduce the interest rates so that SMEs can borrow loans from them pretty easily.

References
Retrieved from Dutch Bangla Bank Ltd.: http://www.dutchbanglabank.com/sme_banking/cash_credit.html

(2011). Retrieved from Docstoc: http://www.docstoc.com/docs/72426659/SWOT-Analysisof-Dutch-Bangla-Bank-Limited-%28DBBL%29

(2010). Retrieved from bankinfobd: http://bankinfobd.com/banks/17/Dutch_Bangla_Bank

Pathak, A. (2013). Retrieved from Scribd: http://www.scribd.com/doc/16733174/Case-Studyon-SME-Banking

Shakil, S. S. (2013). Retrieved from Scribd: http://www.scribd.com/doc/78179280/Internship-Report-on-Credit-Policy-of-DutchBangla-Bank-Limited 18

(2012, June). Retrieved from Bangladesh Economy News: http://bangladesheconomy.wordpress.com/2008/05/11/dbbl-to-offer-collateral-freeloan-to-smes/

Retrieved from Dutch Bangla Bank Ltd.: http://www.dutchbanglabank.com/about_us/brief_history.html

(2013, January 20). Retrieved from Assignment point: http://www.assignmentpoint.com/business/finance/sme-banking-scope-in-bangladeshpart-7.html

Rahman, Q. M. (2009). A comparative study on the loan products "Life Line". BRAC University, BBA, Dhaka.

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