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Performance Analysis of SME: A Study on IDLC Finance Limited
Performance Analysis of
Small & Medium Enterprises
(SME):
A Study on IDLC Finance Limited
1
Performance Analysis of SME: A Study on IDLC Finance LimitedPerformance Analysis of Small & Medium
Enterprises (SME):
A Study on IDLC Finance Limited
Prepared For:Ms. Samia Sultana Tani
Assistant ProfessorDepartment of Finance
Leading University
Prepared By:
Md. Sajjad HossainRoll no: 0702010048
BBA 16th BatchDepartment of Finance
Leading University
2
Date of Submission: 20th May, 2011
Performance Analysis of SME: A Study on IDLC Finance LimitedSupervisor’s Certificate
This is to certify that the internship report on “Performance Analysis of Small
Medium Enterprises (SME): A Study on IDLC Finance Limited” is the bona fide
record at the report is done by Md. Sajjad Hossain as a partial fulfillment of the
requirement of Bachelors of Business Administration (BBA) degree from the
Department of Finance, Leading University.
The report has been prepared under my guidance and is a record of the bona
fide work carried out successfully.
--------------------------------
Signature of the supervisor
Date:
3
Performance Analysis of SME: A Study on IDLC Finance LimitedDeclaration
I do hereby solemnly declare that the work presented in this internship report has
been carried out by me and has not been previously submitted to any other
university/college/organization for an academic qualification/certificate/diploma or
degree.
The work I have presented does not breach any existing copyright and no portion
of this report is copied from any work done earlier for a degree or otherwise.
I further undertake to indemnify the department against loss or damage arising
from breach of the foregoing obligations.
---------------------------
(Md. Sajjad Hossain)
Roll No: 0702010048 (BBA)
16th Batch
Date: ……………....
4
Performance Analysis of SME: A Study on IDLC Finance LimitedLetter of Transmittal
May 20, 2011
Ms. Samia Sultana Tani
Assistant Professor
Department of Finance
Leading University
Subject: Submission of internship report on “Risk Management of Small Business
Financing (SBF): A Study on IDLC Finance Limited”
Dear Madam,
It gave me an immense pleasure in presenting this internship report titled “Risk
Management of Small Business Financing (SBF): A Study on IDLC Finance Limited”
which was assigned to me as partial fulfillment of my Bachelors of Business
Administration (BBA) degree requirement. In this paper, I have tried my level best to
make this report as effective as possible.
I hope that the report serves the purpose that it was assigned for. I shall be pleased to
answer any sort of query you think is necessary, as now and when needed.
Sincerely
Md. Sajjad Hossain
Roll No: 0702010048 (BBA)
BBA 16th Batch
Department of Finance
Acknowledgement
5
Performance Analysis of SME: A Study on IDLC Finance Limited
I would like to express my deepest gratitude to my Internship Supervisor Ms. Samia
Sultana Tani, Assistant Professor, Department of Finance, Leading University, for her
heartfelt supervision, co-operation and advices. I also like pay my appreciation to our
chairman sir for arranging our internship program. I also thank all the staffs of this
department for their sincere support.
This internship report might never have been completed without the necessary practical
knowledge, assistance of many books, articles, websites, and primary data. It enhanced
my knowledge on SME activities as well as banking business. Thanks to all those
persons, who have assisted me, providing me co-operation, books and articles.
The members of IDLC Finance Ltd. management were very co-operative and helpful.
They helped me through providing various data, guidance and direction. I am grateful to
Mr. Kazi Mahmood Hossain, Head of Small Business Financing (SBF) of IDLC Finance
Ltd. for his cooperation and necessary support.
Finally I want to express my special thanks to Mr. Enayetur Rahman, Junior Officer of
CRM of SBF, under whom I have completed internship report. I am also grateful to all
other employees of Sylhet Branch Office for their support and assistance.
6
Performance Analysis of SME: A Study on IDLC Finance LimitedTable of Content
Chapter No.
Particulars Page No.
- Executive Summary viii
1.0 Introduction
1.1 Origin of the report O1
1.2 Objectives of the report O1
1.3 Scope of the report 02
1.4 Methodology of the report 02
1.5 Limitations of the report 03
2.0 Organizational Overview
2.1 The pioneer 04
2.2 Shareholding Structure 05
2.3 Guiding Principle 06
2.4 Product and Service 07
2.5 Subsidiaries 09
2.6 Financial Performance 09
2.7 Operational performance 11
2.8 Ratio Analysis 12
2.9 SWOT analysis 13
3.0 SME in Bangladesh
3.1 Current Conditions of SMEs in Bangladesh 17
3.2 Constraints on SME growth 19
3.3 Governments role towards SME 20
3.4 Levels of employment 21
3.5 Contribution of SME to GDP by sector 22
3.6 Major banks/FIs financing SME sector 22
3.7 Performance of banks and NBFIs 23
4.0 SME in IDLC
4.1 SME financing of IDLC 24
4.2 Rationale for SME financing at IDLC 24
4.3 Bangladesh bank refinancing 25
7
Performance Analysis of SME: A Study on IDLC Finance Limited 4.4 Customer segment 28
4.5 Products offered under SME financing 30
4.6 IDLC – commitment to SME sector 31
5.0 Managing Credit Risk in SME
5.1 Principles of sound lending 33
5.2 SBF financing schemes 34
5.3 Mandatory and discretionary verification of information for SBF proposals
36
5.4 Credit approval and service delivery process 38
5.5 Authority delegation under SME 39
5.6 Credit terms and conditions 40
5.7 Appraisal procedure of SME client 48
5.8 Sectoral exposure 50
6.0 Non Performing Loan & Overdue Analysis
6.1 Regression Analysis: Overdue versus Total Portfolio of Loan
52
6.2 Regression Analysis: Overdue Loan versus NPL 56
6.3 Trend Analysis for OD 60
7.0 Findings & Conclusion
7.1 Findings 61
7.2 Conclusion 62
- Appendix
8
Performance Analysis of SME: A Study on IDLC Finance Limited
List of Tables
Table No. Particulars Page No.
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10
11
Shareholding Structure of IDLC as of December 31,
2009
IDLC’s Capital Structure as of December 31, 2009
Growth of the company’s different sectors
Sources of revenue
Operational revenues
Ratios
Stock Information
SBF Financing Scheme
Sectoral Exposure
Overdue and Total Portfolio of loan
Overdue Loan versus NPL
05
05
09
10
11
12
12
34
50
53
57
List of Graphs
9
Performance Analysis of SME: A Study on IDLC Finance LimitedFigure No. Particulars Page No.
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
SME loans as percentage of total loans
Distribution of Employment
Institutional share of SME loan disbursement
Sectoral Exposure of SME Financing of IDLC
Scatter Diagram
Fitted Line Plot
Scatter Diagram
Fitted Line Plot
Trend Analysis Plot
18
21
23
51
53
53
57
57
60
Executive Summary
IDLC Finance Ltd. is the leading non-banking financial institution of Bangladesh. It
offers wide range of financial services with four major departments named 1) Corporate
services, 2) Capital Market services, 3) Personal Financial services and 4) Small &
Medium Enterprise (SME) financing. It has been providing loan facilities to small and
medium trading, manufacturing and service oriented enterprises all over the country for
more than 5 years. IDLC is playing a very commendable role in developing economic
condition of the country with excellent financial expertise. So it provides loan facility of
BDT 0.3 million to BDT 7.5 million to that small and medium enterprise who has no easy
access to banks/financial institutes.
The success of SME largely depends on the selection of a business and man behind the
business. IDLC provides this facility to those whose business operation is minimum one
year and environment friendly business. The business should be legally registered and
must have valid trade license. The entrepreneur should be physically able, preferably
between Customer relation officers search new potential customer by providing door-to-
door service. They talk with clients and monitor their manners, activities of their business
and provide the loan to the potential customers. SME, IDLC may provide 100% of net
required working capital but not exceeding 75% of the aggregate value of the inventory
10
Performance Analysis of SME: A Study on IDLC Finance Limitedand account receivable. Normally, organizations meet their working capital from over
draft loan but IDLC designed the loan to meet working capital but as term loan which is
repaid in installment. The customer relation officers also monitor the borrowers’
activities after the loan disbursement. Monitoring also facilitates the build up of an
information base for future reference.
SME loan can be repaid in two ways, 1) In equal monthly loan installment (EMI) with
monthly interest payment. 2) By one single payment at maturity, with interest repayable a
quarter- ends residual on maturity. Customer relation officers search new potential
customer by providing door to door service. Normally, organizations meet their working
capital from over draft loan but IDLC designed the loan to meet working capital but as
term loan which is repaid in installment. The customer relation officers also monitor the
borrowers’ activities after the loan disbursement. IDLC is very much conservative in
providing loan facilities to its client in order to ensure quality of the loans. For this reason
it emphasizes on the Credit Risk Management (CRM) - the team responsible for ensuring
quality of the loan and minimizing the number of NPL or Non-Performing Loan.
Basically the officers of CRM analyze the different aspects of potential clients using both
objective and subjective judgment.
The core competence of the IDLC is to provide the fastest and quality loans to the clients
in this country. To retain this competitive advantage IDLC would provide all sorts of
facilities whether they can give fastest services to clients than other banks. Also to
convey the customer focus, IDLC is trying to reduce collateral securities than its
competitors. Regarding the services by the CRO and CRM officers, almost all clients are
satisfied by getting these quick facilities from them. Though it is pioneer division of this
institute, I tried to give an in-depth analysis for every factor, which relates the credit risk
management of SME division.
Finally, regression analysis and trend analysis has done. The data of 18 months (from
January 2009 to June 2010) is used to analyze the overdue and NPL position of IDLC. By
analyzing the variable overdue loan and total portfolio of loan a significant negative
11
Performance Analysis of SME: A Study on IDLC Finance Limitedrelationship is found using simple regression analysis. Again analyzing the variable
overdue loan and non-performing loan no relationship has found. By trend analysis it has
found that overdue loan will be lower in the following months.
12
Performance Analysis of SME: A Study on IDLC Finance Limited
13
Chapter - 01
Performance Analysis of SME: A Study on IDLC Finance Limited
IntroductionIntroduction
1.0 INTRODUCTION
1.1 Origin of the Report
14
Performance Analysis of SME: A Study on IDLC Finance LimitedThe internship paper is a requirement to complete the BBA program of Department of
Finance, Leading University. I have joined the Small Business Finance (SBF) Team of
IDLC Finance Limited, Sylhet Branch, in February, 2011. Then I decided to do my
project paper on “Risk Management of Small Business Financing (SBF). As a part of the
internship program, the internship supervisor has assigned me to assess the credit and to
evaluate the loan and lease finance at IDLC Finance Limited. Organizational supervisor
Kazi Mahmood Hossain, Senior Manager of Credit Risk Management Division of IDLC
Finance Limited also approved the proposal. My honorable academic supervisor Ms.
Samia Sultana Tani has also approved the project proposal. As a financial institution
IDLC Finance Limited is very much looking forward to taking substantial exposure on
the Small and Medium Enterprises (SME). In this connection, this report has been
designed to analyze the current credit assessment procedure towards SME financing and
also term loan and lease finance opportunities to the end clients.
1.2 OBJECTIVES OF THE REPORT
The eventual purpose of the study is to increase real life experience in any kind of service
sector and to get a clear idea about the importance of training programs which consumes
valuable time and resources. The report encompasses a brief rundown on the various
functions and operations of the Credit Risk Management of Small Business Finance of
IDLC.
Apart from this, the report contains some specific objectives :
To know about the current practice of the assessing credit risk management of
small business financing of IDLC.
To construct a tentative suggestion to the SME about the loan and lease financing
advantages.
To focus on overdue loan, non-performing loan and total portfolio loan, to
measure the relationship between these variables using regression analysis.
15
Performance Analysis of SME: A Study on IDLC Finance Limited1.3 SCOPE OF THE REPORT
I have been working at the CRM of SBF of IDLC Finance Ltd and thus give me the way
to get myself familiarized with the non-banking environment for the first time indeed. I
have had an opportunity to gather experience by working in the different desks of the
department. SME financing is a relatively new concept to the financial institutions of
Bangladesh. Most of the Banks and Financial Institutions are involved in financing this
segment now a day. This segment is highly encouraged to be financed by the central bank
because the development of the country is indulged in the development of SMEs. Readers
can get help from this report because whole section is about SME financing. Lease and
loan are the core products of SME financing of IDLC Finance Limited. Readers will be
known about the alternatives between these two products. The area of concentration of
this report is confined in investigating different aspects of credit risk management of
small business financing, problems, prospects.
1.4 Methodology
The subject matter of this report is based on primary and secondary sources of data and
information. Here the regression and trend analysis is done to access the current position
of overdue and NPL of IDLC in SBF financing.
A. Primary Sources:
Face-to-face conversation with the respective officers and staffs of IDLC.
Practical work exposure from the different desks of the three departments of
the branch.
Study of the relevant files as instructed by the officers concerned.
Some opinions and ideas have been incorporated in the paper through
interactive sessions and interviews with the top management and mid level
executives of the organization
B. Secondary Sources:
Annual reports of IDLC Finance Ltd.
16
Performance Analysis of SME: A Study on IDLC Finance Limited Total overdue and NPL record in SBF System
Website of IDLC Finance Ltd.
Various books, Training articles, compilations etc. regarding credit risk and
risk management.
Prospectus
Different sites related to SME Financing.
1.5 Limitation
During my orientation I was able to learn a lot of things but still it was not enough. There
are some limitations that I can’t ignore. Data unavailability was the constraint. Official
documents on the detail activities of the department were not available. This report is
based on the whole process of credit assessment and evaluation of the term loan and lease
finance. SME Banking is a relatively new concept to the financial institutions of
Bangladesh. Most of the Banks involved in SME Banking are still in its rudimentary
stage. As a result, secondary data was fairly unavailable in this connection due to
insufficient research work conducted in this sector. Further it is added that the collection
of exact information is difficult because maximum information is confidential and those
information are modified before presenting in this report
17
Performance Analysis of SME: A Study on IDLC Finance Limited
18
Performance Analysis of SME: A Study on IDLC Finance Limited
Organizational Organizational ReviewReview
19
Chapter - 02
Performance Analysis of SME: A Study on IDLC Finance Limited2.1 THE PIONEER
IDLC Finance Ltd commenced its journey, in 1985, as the first leasing company of the
country with multinational collaboration and the lead sponsorship of the International
Finance Corporation (IFC) of The World Bank Group. Technical assistance was provided
by Korea Development Leasing Corporation (KDLC), the largest leasing company of the
Republic of South Korea.
IDLC, as a multi-product financial institution, offers a diverse array of financial services
and solutions to institutional and individual clients to meet their diverse and unique
requirements. The product offerings include Lease Finance, Term Finance, Real Estate
Finance, Short Term Finance, Corporate Finance, Merchant Banking, Term Deposit
Schemes, Debentures and Corporate Advisory Services.
IDLC's vision is to be Bangladesh’s best multi-product financial institution. In achieving
this vision and goal, we realize the importance of taking due care of all of
our constituents, particularly the share-holders, customers and workforce.
IDLC’s unique institutional shareholding structure, compromising mostly of financial
institutions, helps the company to constantly develop through sharing of experience and
professional approach at the highest policy making level. The company has authorized
capital of Taka 1,000,000,000 (10,000,000 shares of Taka 100 each) and paid up capital
of Taka 300,000,000 (3,000,000 ordinary shares of Taka 100 each). IDLC has also
established two wholly owned subsidiaries, IDLC Securities Limited and I, Cons Limited
to provide customers with security brokerage solutions and IT solutions, respectively.
20
Performance Analysis of SME: A Study on IDLC Finance Limited2.2 SHAREHOLDING STRUCTURE & CAPITAL STRUCTURE
IDLC was incorporated as a joint venture public limited company in the year 1985.
Among two foreign and two local financial institutions foreign institution holds 30% of
IDLC shares. Local sponsors and general public hold the rest 70% of the shares.
Institutional share holding comprising of financial institution helps development through
sharing of experience and professional approach at the highest policy making level. Brief
profile of share holding institutions is given below:
Table: Shareholding Structure of IDLC as of December 31, 2009
Sponsors 47.3%
Foreign Sponsors 30.00%
Korea Development Financing Corporation (KDFC), South
Korea
20.00%
Kookmin Bank, South Korea 10.00%
Domestic Sponsors 17.3%
The City Bank Limited 9.70%
Sadharan Bima Coporation 7.62%
General Public 52.7%
Mercantile Bank Ltd. 7.50%
Eskayef Bangladesh Ltd. 8.00%
Reliance Insurance Ltd. 7.00%
Other institutions 14.20%
Individuals 16.00%
Source: Annual Report of 2009, IDLC
Table: IDLC’s Capital Structure as of December 31, 2009
Authorized Capital BDT 1,000.00 Million
Paid-up Capital (including share premium) BDT 300.00 Million
21
Performance Analysis of SME: A Study on IDLC Finance LimitedSource: Annual Report of 2009, IDLC
2.3 GUIDING PRINCIPLES
IDLC is a multi-product financial institution offering an array of diverse financial
services and solutions to institutional and individual clients to meet their diverse and
unique requirements. Following are the guiding principles that shape the organizational
practice of IDLC
Customer first: IDLC has grown with its customers, who are believed to be the center
of all actions. As the crux of IDLC’s corporate philosophy, customer service gets the
highest priority.
Innovation: IDLC has continuously introduced new financial products for meeting the
needs of the entrepreneurs in a complex & challenging business environment. The
concept of innovation is in-built into the working culture.
Professional Knowledge: IDLC is staffed with qualified professionals and innovative
minds in the country. Years of operational experience, large industrial database and
competent workforce have gives them unparalleled advantages.
Professional ethics: The professional at IDLC maintain the highest degree of financial
and business ethics in all transactions with the clients. Over the last two decades, IDLC
have put in bets efforts to meet the expectations of the clients and investors.
One stop solution: Work at IDLC begins with the idea generation, and then goes on into
the feasibility study followed by arrangement of financing to implement the project.
IDLC advises the clients, finance them and even arrange financing for them via different
financing modes, namely: lease financing, term loan, bridge loan, syndication, bridge
loan, syndication, ordinary shares, preferred shares and debentures.
22
Performance Analysis of SME: A Study on IDLC Finance LimitedVision: Become the best performing and most innovative financial solutions
provider in the country
Mission: Create maximum possible values for all the stakeholders by adhering to
the highest ethical standards
For the Company: Relentless pursuit of customer satisfaction through
delivery of top quality services.
For the Shareholders: Maximize shareholders’ wealth through a
sustained return on the investment.
For the employees: Provide job satisfaction by making IDLC a center of
excellence with opportunity of career development.
For the society: Contribute to the well-being of the society, in general, by
acting as a responsible corporate citizen.
Goal: Long term maximization of Stakeholders’ value.
Corporate Philosophy: Discharge the functions with proper accountability for all
actions and results and bind to the highest ethical standards
2.4 PRODUCTS AND SERVICES
Name of Product Line Product Name
Structured Financing SyndicationAdvisory ServicesMerger and AcquisitionSecuritizationLocal Enterprise Investment Center
Real Estate Financing Real Estate FinanceHome Loan
23
Performance Analysis of SME: A Study on IDLC Finance LimitedReal Estate Developer FinanceHome Loans with Home Loan ShieldHome Equity Loans
Lease Financing Machinery Loan
Short Term Financing Factoring of Accounts ReceivableWork Order Finance
Deposit Schemes Cumulative Term DepositAnnual Profit Term DepositMonthly Earner DepositDouble Money DepositInter Corporate Deposit
Merchant Banking Services Issue ManagementUnderwritingPrivate PlacementPortfolio ManagementTrusteeship ManagementBridge Loan FinancingInvestment AdvisoryPlacement of Equity, Debentures and Bonds
Personal Loan Car LoanPersonal LoanFestival Loan
SME Loan Lease Finance & Term FinanceProfessional supports to SMEs
Source: Annual Report of 2009, IDLC
2.5 SUBSIDIARIES
IDLC Securities Limited, a fully owned subsidiary of IDLC, offers full-fledged
international standard brokerage service for retail and institutional clients. It has seats on
both the Dhaka and Chittagong Stock Exchanges. It is also a Depository Participant (DP)
of Central Depository Bangladesh Limited (CDBL).
24
Performance Analysis of SME: A Study on IDLC Finance LimitedI.Cons Limited, a fully owned subsidiary of IDLC provides world class IT solutions
starting from financial applications to IT infrastructure development and consultancy
services.
2.6 FINANCIAL PERFORMANCE
During the last five years IDLC major financial performance are presented here. This information is collected form the annual reports of the company.
Table: Growth of the company’s different sectors
(Tk. in Million) 2005 2006 2007 2008 2009 Growth
Lease and term loans executed 2,564 2,875 2,977 3,412 3750 9.9%
Housing finance disbursement 898 1,205 1,255 1,612 1839 14.08%
Short Term finance portfolio 355 326 213 336 317 -5.65%
Lease Finance portfolio 4,711 5,001 4,571 4,734 4383 -7.41%
Housing finance assets 1,643 2,441 3,065 3,915 4789 22.32%
48.52Total assets 8,800 11,680 15,056 17,442 2268
1
30.79%
Long term liabilities 6,605 8,099 11,103 12,115 1879
2
55.11%
Term deposit balance 4,487 5,610 8,257 8,249 9780 18.56%
Net current assets (237) (959) 1,401 1,559 1003 -33.66%
Shareholders' equity 851 950 1,247 1,611 2393 48.52%
Source: Annual Report of 2009, IDLC
This data shows stable growth of the company’s different sectors. Only the short term
financing portfolio decreased during this time due to diversifying into other product line.
It started personal loan, car loan scheme and SME loan separately.
From the very beginning of its operation, IDLC shows growing trends. Last few years its
assets i.e. investment on different sectors increased a lot. Although its shareholders’
equity do not increased significantly, it has a stable growth rate.
25
Performance Analysis of SME: A Study on IDLC Finance LimitedAnother important point to be noted here is that in recent years the difference between the
asset and debt increased. This indicates the financial strength of the company.
Since the capital market if growing for the last two decades, each product line of IDLC
shows increasing trend. Revenues from each product line are separately presented here.
Table: Sources of revenue
(Tk. in Million) 2004 2005 2006 2007 2008 Growth
Lease Finance 4,174 4,711 5,001 4,571 4,734 3.57%Term Loan 2,030 2,564 2,875 2,977 3,412 14.61%Real Estate Finance 519 898 1,205 1,255 1,612 28.45%
Source: Annual Report of 2008, IDLC
The revenue growth for lease financing significantly increased in last one year. Same is
for real estate finance, term loan, and merchant banking. This indicates that IDLC is now
more investing these products as these are comparatively more profitable. On the other
side, structured finance decreased a little due to huge competition and introduction of
separate product line i.e. personal loan respectively.
26
Performance Analysis of SME: A Study on IDLC Finance Limited2.7 OPERATIONAL PERFORMANCE
At the end of the day the final result depends on how much profit the company is generating
through investment in different sectors. Thus like any financial institution, IDLC sincerely
evaluate its operational performance to find the profitability of each segment and products.
Table: Operational revenues
(Tk. in Million) 2004 2005 2006 2007 2008 Growth
Operational revenue 859 1,008 1,291 2,023 2,618
29.41%
Operational expenses 612 747 1,059 1,655 2,022
22.17%
Financial expenses 418 536 815 1,246 1,552
24.56%
General and administrative expenses
95 135 167 225 294 30.67%
Profit - before tax 247 265 234 475 708 49.05%Net profit- after tax 134 153 155 303 406 33.99
%
Source: Annual Report of 2008, IDLC
During the last five years its operational revenues almost doubled. Although during the same
time period its operational expenses increased a lot, but this is mainly due to expansion of
activities, diversifying product line and investment in new fields. Thus the return is expected
to be multiplied in upcoming years. Particularly in 2008 the reason for increase of financial
expenses is liquidity crisis during the first half year that resulted in the high rate in the call
market.
This graph shows the comparative growth of operational revenue and net income after tax.
Since the company invested in new fields for last few years, its income was not increased like
its revenues. In 2008 its revenue increased by 29.41% but expenses increase by 22.17%. As a
result net income increased 33.99%.
27
Performance Analysis of SME: A Study on IDLC Finance Limited2.8 RATIO ANALYSIS
Ratio analysis used for actual performance analysis of the company. To evaluate IDLC’s
performance last five years data are used here to find out some important ratios.
Table: Ratios
2005 2006 2007 2008 2009 Growth
Current ratio 1.6 0.96 1.2 1.2 1.04 -
14.05%
Debt equity ratio 8.0 9.3 9.54 8.32 8.48 1.92%
Financial expenses coverage ratio 1.5 1.3 1.43 1.56 1.75 20.53%
Net asset value per share (Tk) 340 381 499 645 797 48.52%
Return on shareholders' equity 19.0
%
17.1
%
27.59
%
28.43
%
41.05
%
44.39%
Source: Annual Report of 2008, IDLC
Increasing trend in current ratio indicates company has less current liability than current
assets, which is not good. Decreasing debt equity tells that debt is decreasing compared to the
investment. Financial expenses coverage ratio is quite stable, which is a good sign. Increasing
net asset value per share directing strong confidence of shareholders although return on
equity increased a bit during this time period. This is mainly because of re-investment and
business expansion.
Table: Stock Information
2004 2005 2006 2007 2008 Growth
Earnings per share 53.59 61.20 62.80 121.33
162.55
33.97%
Price earnings ratio 13.9 9.9 7.6 10.02 14.08 40.52%
Dividend per share (%) 35 37.5 38.33 40 35 -12.5%
Market price (Tk) per share (Year end)
1,245 1,007 784 1220 2288 187%
28
Performance Analysis of SME: A Study on IDLC Finance LimitedDividend yield / return 2.81
%3.72%
4.89%
2.63 1.53 -41.8%
Source: Annual Report of 2008, IDLC
All the market ratios sign good position of shares of the company in the market.
Company gives increased dividend, both cash and share, each year except 2008 because
it re-invests a lot. All these ultimately increased the share price in the market.
Increase earnings per share also resulted due to proper and regular dividend. Increased
price earnings ratio also supports the trend. The last year it took a hike due to year end
market price rise. At that time share market was suffering because of political violence
and uncertainty.
All the above calculations and information provide explanation to the financial strength
of the company. Still the company has various fields to explore in the capital market of
Bangladesh.
2.9 SWOT Analysis
The SWOT analysis for IDLC can be described as follows:
Strengths
I. Reputation and brand imageII. Product portfolio
III. Quality Customer PortfolioIV. Human ResourcesV. Operational efficiencyVI. Employee Empowerment
Weakness
I. High Cost of fund II. More Focus on Volume
III. Too Much Diversification IV. Less People in Liability Marketing
Opportunity
I. Continuity of LiberalizationII. Foreign Investment in Prospective
Threats
1. Threat from banks2. Number of FI’s
29
Performance Analysis of SME: A Study on IDLC Finance LimitedSectors
III. Local banks inefficiency3. Regularity control of government
30
Performance Analysis of SME: A Study on IDLC Finance Limited
SME in SME in BangladeshBangladesh
31
Chapter - 03
Performance Analysis of SME: A Study on IDLC Finance Limited3.0. SME in Bangladesh
There are so many definitions of SMEs in Bangladesh. Industrial Policy document from
the Ministry of Industries defines a small enterprise as a registered enterprise with less
than 50 workers, excluding the cottage units, and with a fixed capital investment of less
than Taka 100 million. A medium enterprise is defined as a registered enterprise with
between 50 and 99 workers, and/or with a fixed capital investment between Taka 100
million and Taka 300 million (between USD 1.8 million and USD 5.4 million).
Under yet another definition the World Bank estimates that Bangladesh has
approximately 27.000 medium-scaled enterprises (here defined by the Government of
Bangladesh as registered enterprises with assets larger than USD 600.000 equivalent) and
150.000 small-scale enterprises (registered enterprises with assets of less than USD
600.000 equivalent). The small and medium scale enterprises (SMEs) are mainly found
within the industry and services sector. In 2000 the service sector represented about 51%
of Bangladesh GDP, while the industry sector represented 24.4%. SMEs represent
roughly 82% of the total industrial labor force and 23% of the total labor force.
Agriculture accounted for 24.6% of GDP in 2000, down from 40% in the 1980’s. Still,
agriculture is the primary occupation of about 70% of the population. These figures are,
like most other Bangladeshi statistics highly uncertain. Furthermore they reflect the fact
that most economic activities in the rural areas take place in the informal sector.
Agriculture therefore has a much larger share of the country’s “real” economy than is
reflected in the GDP figures.
SMEs are a very heterogeneous group in Bangladesh, comprising a wide variety of firms
of village handicraft makers, small machine shops, restaurants, printing presses, bicycle
rickshaw assembly, cartwheels, electrical goods, engineering workshops, footwear,
plastic products, plastic spectacle frames, print shops, specialized silk weaving, tailoring
shops owned by women, building material supply, food preparation, small grocery stores,
waste paper collection, etc. In the context of Bangladesh, a portion of readymade
32
Performance Analysis of SME: A Study on IDLC Finance Limitedgarments manufacturing enterprises also falls under SME sector. A typical SME in
Bangladesh requires on average investment of only Taka 36,000 compared to Taka
1,338,000 required by a large-scale industry in generating one unit of employment.
Small & Medium Enterprise (SME) plays a pivotal role in the economic growth and
development of a country. Actually, SME works as the platform for job creation, income
generation, development of forward and backward industrial linkages and fulfillment of
local social needs. SMEs occupy a unique position in the economy of Bangladesh.
Mainly private sector development depends on them.
The research findings of “National Private Sector Survey Of Enterprises In Bangladesh-
2003” (a study conducted by USAID, DFID and CIDA) indicates that SMEs contribute to
the extent of 25% of the GDP in Bangladesh, about 40% of the Gross Manufacturing
Output, 80% of Industrial Jobs and around 25% of the total Labor Force and the total
number of SME Entrepreneur is about 06 Million. Among other findings, the study
concludes that SME sector is significantly a rapid growth oriented sector to flourish in
Bangladesh.
Table 3.1: Definition of SME
Industry Classification
Manufacturing (based on value/replacement cost of durable resources other than land and factory buildings)
Service & Trading (based on number of workers)
Large > BDT 100 mln (US$ 1.5 mln) > 100
Medium BDT 15-100 mln (US$ 0.223-1.5 mln)
25-100
Small <BDT 15 mln (US$ 0.223 mln) <25
Cottage Industry in which members of a family are engaged part-time or full-time in production and service-oriented activities
Source: The definition is as per the Industrial Policy 2005 of the Ministry of Finance
Bangladesh Bank (BB) has set a new definition of the Small & Medium Enterprise (SMEs)
for commercial banks and financial institutions (non bank) to follow in case of sanctioning
33
Performance Analysis of SME: A Study on IDLC Finance Limitedloan or other banking services. Under the new definition, the small and medium enterprises
are in principle, not public limited companies and fulfill the following criteria
Table 3.2: Definition of SME
Sector SMALL MEDIUM
Service and Trading Total Fixed Assets worth BDT
0.05 mln to BVD 5 mln excluding
land and building and or
No. of employees not more than
25.
Total Fixed Assets worth
BDT 5 mln to BDT 10 mln
excluding land and building
and/or
No. of employees not more
than 50
Manufacturing Total Fixed Assets worth BDT
0.05 mln to BDT 15 mln
excluding land and building
and/or
No. of employees not more than
50
Total Fixed Assets worth
BDT 15 mln to BDT 20 mln
excluding land and building
and/or
No. of employees not more
than 150
Source: Monthly Business Review Vol: 4 Issue : 5, published by Industry and Equity Analysis Team, CRM
Department of IDLC Finance Ltd
In spite of their employment generating role SMEs in Bangladesh, as in the rest of South
Asia, do not realize their potential as significant contributors to sustainable growth and job
creation - both of which are particularly needed in this region to offset deep persistent
poverty levels. Global trade liberalization, perhaps above all other forces, is reshaping the
economies, bringing new possibilities, but also presenting new challenges. This applies to
Bangladesh SMEs as well.
3.1 Current Conditions of SMEs in Bangladesh
34
Performance Analysis of SME: A Study on IDLC Finance Limited
This was revealed in the released Bangladesh Bank annual report for fiscal 2006-07.
The report said, the key reasons behind the SMEs are not entering into
manufacturing are financial constrains, dismal state of utilities, technology and
policy discriminations. On the others hand, Bank and others financial institutions
generally prefer large enterprise clients because of lower transition costs, and
greater availability of collateral.
The SMEs also fall outside the reach of micro finance schemes, and thus
compelled to depend on formal sources of funds at much higher interest rates, the
Bangladesh Bank report said.
The BB report, however, said that other interrelated problems like shortage of
short and long term finance, lack of modern technology and lack of promotional
support services are major obstacles in the way of development of the SMEs
sector. Higher growth of the Small and Medium Enterprises (SMEs) can help cut
poverty to a satisfactory level by eliminating various prejudices against labour
intensive and creating jobs for the skilled manpower in the SME sector.
Considering these obstacles, the report said, Bangladesh Bank has adopted a
preferential lending policy to promote the SME sector in line with the government
development policies.
An amount of Taka 2.27 billion was refinanced through different banks and
financial institutions under some schemes during the fiscal 2006-07.
In the country, the annual report said, financing small and medium enterprises
(SMEs) from banking sector is a long-standing demand that has been high on the
agenda of the economists and the policymakers.
In Bangladesh the SMEs account for about 45% of manufacturing value addition.
They account for about 80%of industrial employment, about 90% of total
industrial units and about 25% of total labour force. Their total contribution to
export earnings varies from 75- 80% based on the Economic Census 2001-2003.
The total number of SMEs is estimated at 79754 establishments, of which 93.6%
are small and 6.4% are medium.
35
Performance Analysis of SME: A Study on IDLC Finance LimitedSME Scenario December 2008 December 2009 Change
Investment in SME
by Banks (Tk.)
43,439,53,00,000 51,147,59,00,000 (+) 18 %
% of SME in Total
Inv. By Banks
19.84 % 19.91% (+) .07 %
% of SME in Total
Inv of SOB
30 % 34 % (+) 4 %
% of SME in Total
Inv of PCB
18 % 16 % (-) 2%
% of SME in Total
Inv of NBFI
12 % 15 % (+) 3 %
% of SME in Total
Inv of FCB
6 % 10 % (+) 2%
SME loans as percentage of total loans
3.2. CONSTRAINTS ON SME GROWTH
36
Performance Analysis of SME: A Study on IDLC Finance LimitedThe lack of growth of SMEs in Bangladesh can be attributed to several factors, including:
Persistent low levels of national income that have precluded construction of efficient
physical infrastructure needed to grow competitive businesses;
Historical governance structures that have allowed the few well-connected to harvest
and keep the majority of economic resources, and restricted access for the majority;
Fairly long histories of government ownership/control of most productive, non-farm
resources, control that is only now being transferred partially to private sector.
Evolving but still highly fragmented policy/regulatory frameworks that have yet to
create the low-level barriers to business entry, operations, and trade that support SME
growth;
Underdevelopment of core market support institutions that supply essential public
and private services, including many government, financial and education services;
Unduly restricted access for private SMEs to credit services of banks, due in large
part to government-dominated financial sectors and politically motivated credit
policies, whether lending targets or directed subsidies;
Immature business development services (BDS) such as information, training, and
consulting services. This is due to general constraints to private sector development,
to government dominance of the marketplace. In some places it is also due to large
donor flows of subsidized funds that have distorted markets and crowded out
sustainable private sector provision of BDS.
37
Performance Analysis of SME: A Study on IDLC Finance Limited3.3.GOVERNMENTS ROLE TOWARDS SME
Industrial development has been attempted in the past under widely divergent policy regimes.
The early phase of industrialization was characterized by an import substitution strategy and
a strong regulatory role of the Government. Later the governments have turned, although not
always wholeheartedly, to market oriented deregulation. Significant achievements in
population control, food production, infrastructure development and stabilization of the
macro-economy have not been accompanied by sufficiently faster economic growth and the
employment generation needed to alleviate poverty by enhancing the role of the private, i.e.
SME sector.
The Government has recognized in the Industrial Policy document adopted in 1999, that the
industrial policy should be updated to achieve the objective of accelerating industrial growth
and to gain a greater industry share of the GDP. Support of small and medium enterprises is
part of this policy.
The World Bank states in its Bangladesh Country Strategy document that the Government’s
first priority must be to raise investment by giving the private sector the reform confidence
necessary to invest in export oriented manufacturing activities and by urgently and
substantially improving implementation of public investment in infrastructure and human
resource development. The Government’s second priority should be to make the deregulation
of the private sector much more effective, while third priority should be to enter into long
term arrangements with domestic and overseas investors. The World Bank emphasizes
completion of the long delayed privatization program.
38
Performance Analysis of SME: A Study on IDLC Finance Limited3.4 Levels of Employment
There are some 78,440 private-sector establishments of various sizes in
Bangladesh with some 3.5 million workers employed in the sector.
The size of the private-sector SMEs’ number which is based on this table.
Urban Bangladesh accounts for some 60% of units and 76% of employment
overall in the private-sector enterprise sector, with rural Bangladesh accounting
for the rest.
Ninety-three point three (93.6%) of all units in Bangladesh belong in the SME
category; have between 20 and 99 employees.
However SME Account for only 44% of total employment of the enterprise
sector.
Contribution of SME to Employment
Distribution of employment of SMEs & large industries, 2007/2008 (% of total
employed)
Distribution of Employment
36%
9%
55%
small medium large
39
Performance Analysis of SME: A Study on IDLC Finance Limited3.5 Contribution of SME to GDP by sector
3.6. MAJOR BANKS/FIs FINANCING SME SECTOR
Table 3.3: Major Banks and FI’s in SME Sector
IDLC Focusing strongly in the SME sector since 2005
BRAC Bank Most aggressive bank in the SME sector and leading financial
intermediary in terms of asset booking
Prime Bank The leading private sector bank in the country
Eastern Bank Opening SME kiosks in various parts of the country for
extending finance to the SME sector
Dhaka Bank Have recently started focusing in this sector
United Leasing
Company Limited
Has been concentrating mainly in the SME sector since
inception in 1989
Source: Monthly Business Review Vol: 4 Issue : 7, published by Industry and Equity Analysis Team, CRM Department of IDLC Finance Ltd
40
Performance Analysis of SME: A Study on IDLC Finance Limited3.7 Performance of Banks and NBFIs
Both banks and NBFIs are increasingly coming forward to provide finance to the
SME sector in order to uphold financial strength and increase technical capacity,
productivity, and contribution to industrial performance.
At the end of September 2008, specialized banks (SBs) distributed 48.1 percent
of their total disbursed loan to the SME sector but its share was only 3 percent of
the total SME loan
On the other hand, 18.1 percent of the total disbursed loan of private commercial
banks (PCBs) went to SME financing that constituted 48 percent of the total
institutional loan to SMEs.
There exist, however, considerable variations among the banks and NBFIs in
terms of their performance in SME financing.
Among the PCBs, Dhaka Bank Limited and BRAC Bank Limited distributed
83.9 percent and 75.2 percent respectively of their total loans to SMEs whereas
the BASIC Bank Limited was the leading performer among the SBs (88.6
percent).
The NBFIs are also emerging as important players in enhancing the accessibility
of formal financial services to the SME sector.
The MIDAS, Prime Finance and Investment Limited and IDLC are pioneers in
this respect.
Institutional Share of SME Loan Disbursement
48%
4%3%4%
41%
PCB FCB SB NBFI SOB
41
Performance Analysis of SME: A Study on IDLC Finance Limited
IDLC in SMEIDLC in SME
42
Chapter - 04
Performance Analysis of SME: A Study on IDLC Finance Limited4.1. SME FINANCING OF IDLC
Small & Medium Enterprise (SME) plays a pivotal role in the economic growth and
development of a country. Actually, SME works as the platform for job creation, income
generation, and development of forward and backward industrial linkages and fulfillment
of local social needs. SMEs occupy a unique position in the economy of Bangladesh.
Mainly private sector development depends on them.
There are many small and medium entrepreneurs in the country that have innovative idea,
spirit 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 to other people also. Development and growth of Small and Medium
Enterprise is vital for national development. Such type of beneficial enterprising
borrower can not go a long way for want of financial support because they have no access
to institutional credit facilities, as they cannot provide collateral security as demanded for
such credit facility. IDLC Finance Limited is committed to play positive role in the
overall socioeconomic development of the country.
4.2. RATIONALE FOR SME FINANCING AT IDLC
a) The scope of investment of NBFI is gradually going to be limited due to stiff
competition and small economy compared to large numbers of Financial Institution.
But the SME segment is still almost virgin, untapped and uncovered by institutional
finance and as such there is ample scope and good opportunity for investment so as to
take the advantage to increase the portfolio providing a viable and vast lending outlet
for IDLC. BRAC Bank the leading player in SME Financing claims that there are
almost 6 mln SME clients all over the country and they have financed 0.1 mln clients
so far and disbursed only BDT 5,000 crore since its inception.
(Source: News at The Daily Star).
43
Performance Analysis of SME: A Study on IDLC Finance Limitedb) Effective rate of return on SME Financing is comparatively higher over the large loan
because of lower bargaining strength of the customers. The large customers are
generally price sensitive and hard bargainers. As such the earning rate from SME
Financing is higher.
c) Large customers do not usually offer tangible securities and if given, very
insignificant compared to the credit volume to cover the risk. Thus the credit risk is
very high in case of Large Loan because of the big exposure without any tangible
security. Hence, IDLC is put into serious trouble in case of default making recovery of
the loan. But in case of SME, the risk is comparatively low as the loan amount is
small / moderate and in most cases is covered by security. Above all, lending risk of
IDLC is minimized, as the portfolio is diversified with small credit size.
d) Under SME it is easier to recover IDLC’s money by selling / foreclosing the security
as the customers have not that much strength to face court case unlike big customers.
e) Government and Bangladesh Bank provide very high incentives in financing SME
Clients. Bangladesh Bank provides refinancing to the FIs who finance in compliance
with the refinancing guidelines of Bangladesh Bank. BB provides refinancing @ 5%.
4.3. BANGLADESH BANK REFINANCING
Earlier vide a circular dated May 02, 2004, Bangladesh Bank (BB) launched Small
Enterprise Refinancing Scheme to promote SME sector with financial assistance from
IDA. After the complete use of this BB-IDA fund by participating Banks and Financial
Institutions, with financial assistance from ADB, BB has reintroduced the Small
Enterprise Refinancing Scheme vide a circular dated July 19, 2005. With the goal of
flourishing small and medium enterprises, in the second phase, under the Small
Enterprise Refinancing Scheme, BB will provide refinance facility to participating Banks
44
Performance Analysis of SME: A Study on IDLC Finance Limitedand FIs against their lending to small and medium enterprises. The Agricultural Credit &
Special Programs Department (ACSPD) of BB is implementing the scheme on behalf of
BB like the first phase. The refinancing interest rate to be charged by BB is prevailing
Bank rate, which is 6.00% at present.
Eligibility to Participate:
The following criteria are to be met by the participating FI for refinancing-
Percentage of classified loan against disbursed loan amount within the
range of Tk. 5,000,000.00 has to be below 10.00%.
Adequate capital as per BB guideline has to be maintained.
Adequate provisioning against classified loan as per BB guideline has to be
maintained.
Maintenance of Proper risk management and Anti-money Laundering rules
and regulations has to be ensured.
Rules and regulations as regards maximum exposure limits to any single or
group borrower have to be maintained.
Eligibility of Projects:
Participating FI can submit only those projects to BB for refinancing, which
have fixed assets not exceeding Tk. 10.00 million.
Refinancing will be provided against lease/loan within the range of Tk.
0.20 million to Tk. 5.00 million to small and medium enterprises in
individual case.
Lease/loan for BMRE to small enterprises engaged in manufacturing or
service will be eligible for refinancing.
Lease/loan for crop & fish production, consumer loan and personal loan
will not be eligible for refinancing.
45
Performance Analysis of SME: A Study on IDLC Finance Limited Lease/loan to small enterprises engaged in manufacturing, distributing and
servicing of alcoholic beverages, tobacco processing, radioactive and
associate materials, nuclear reactors, goods intended for military or
paramilitary purpose and other environmentally hazardous goods will not
be eligible for refinancing.
To encourage women entrepreneurship, 10.00% of total fund is kept aside
by BB for refinancing against lease/loan to enterprises run by women.
Refinancing Scope:
Refinancing will be available for working capital and term finances having following
maturity-
Short-term (working capital): Up to and including 12 months
Medium Term: More than 12 months and up to and including 36 months.
Long Term: More than 36 months and up to and including 60 months.
Loan Repayment:
Refinanced loan will be repaid in accordance with fixed repayment schedule prepared by
BB. Repayment schedule for refinanced loans of different maturity are as under-
Short Term (working capital): Repayable within one year from the date of
disbursement by BB in two equal half yearly installments with interest.
Medium Term: Repayable within three years including six (6) months grace period from
the date of disbursement by BB in five equal half yearly installments with interest.
Long Term: Repayable within five years including one year grace period from the date
of disbursement by BB in eight equal half yearly installments with interest.
46
Performance Analysis of SME: A Study on IDLC Finance Limited 4.4. CUSTOMER SEGMENT
Initially, small entrepreneurs located within the accessible area of our branches will be
the targeted areas under this program. The entrepreneurs should have an existing
profitable business or a viable business plan. Currently IDLC Finance is running its SME
operation in Dhaka, Chittagong, Sylhet, Narayangonj, Savar and Bogra. In 2010 IDLC
will expand its operation in some other districts like Comilla and Narshingdi by
inaugurating unit office in the vicinity.
4.4.1 Borrowers Selection
i) Small Enterprise financing, like other credit facilities must be subject to the
Bank's risk management process setup for this particular business. The process
may include, identifying source of repayment and assessing customer' ability to
repay, expected future cash flows, his/her past dealings with the bank, the net
worth and information obtained from a Credit Information Bureau of Bangladesh
Bank. The bank must be able to identify the key drivers of their borrowers
businesses, the key risks to their businesses and their risk mitigates.
ii) At the time of granting facility under various modes of Small Enterprise
financing, a written declaration shall be obtained from the borrower divulging
details of various facilities already obtained from other institutions to ensure that
the total exposure in relation to the repayment capacity of the customer does not
exceed the reasonable limits as laid down in the approved policies of the bank as
well as to help avoid exposure having multiple facilities.
iii) The borrowing company/firm must be registered in Bangladesh and shares
owned by Bangladeshis. The applicant must be 100% privately owned, controlled
and operated. The applicant’s principal place of business must be in Bangladesh.
47
Performance Analysis of SME: A Study on IDLC Finance Limitediv) The age of the proprietor / partners / directors must range between 21 years to
55 years. Age limit is flexible when succession proposition is strong or the
business is a partnership or Private Limited Company.
4.4.2 Purpose
SEs have vast jurisdiction covering food, leather, electronic, light engineering, agro-
based industries, garment industries, trading, service industries etc. The SEs also do a
good deal of subcontracting jobs for large and medium scale industries, especially in
the garments sector. It simultaneously covers the areas of manufacturing, trading and
services. IDLC Finance Ltd disburses loan in the SEs to meet the following
requirements:
i) Working capital, ii) Purchasing of capital machinery; iii) Delivery Van /
Transport for business purpose, iv) Refurbishing office/Business premises, v) Other
eligible portfolio of the bank, vi) Purchase of commercial land, possession for new
venture.
4.4.3. Mode of Financing
Credit facilities available at IDLC for the SME clients are:
I) Any type of Term Loan II) Lease Facility.
4.4.4 Per Party Exposure Limit
The minimum and maximum exposure of IDLC Finance Limited on a single Small
Enterprise shall remain within the range of TK 2.00 lac and TK 50.00 lac respectively.
The minimum and maximum exposure of IDLC of Bangladesh Limited on a single
Medium Enterprise shall vary on case-to-case basis depending on the size of business,
48
Performance Analysis of SME: A Study on IDLC Finance Limitednature of business, growth potentiality, repayment capacity etc. But, all Small and
Medium Enterprise (SME) financing must comply the followings:
a) In case of working capital finance – Maximum up to 100% of the net required
working capital or 75% of the sum total of inventory and receivables whichever is
lower.
b) In case of fixed assets purchase – Maximum up to 80% of the purchase price.
c) In case of total exposure - Total exposure will not exceed 50% of the total assets.
4.5. PRODUCTS offered Under SME Financing
Small Business is a loan facility designed to finance small scale trading, manufacturing
and service ventures, especially to help small and medium entrepreneurs to meet their
short-term cash flow shortages and bridge the fund-flow gaps.
Eligibility
Entrepreneurs with minimum 2 years experience in the same line of business
Business must be a going concern with at least 2 years in operation
Loan Limit:
From BDT 3 lac to BDT 75 lac
Key Features
Loan without any collateral up to BDT 15 lac
For partly cash security loan up to BDT 35 lac
Loan for Working Capital Finance and/or Lease finance for business
Borrower having loan with other financial institute can also avail Small Business
Convenient repayment options of Equated Monthly Instalment and Customized
Repayment Schedule
Quick, quality door step customer service
49
Performance Analysis of SME: A Study on IDLC Finance LimitedABASHAN Loan
"ABASHAN" is loan facility for small business that will construct or already have
permanent structure for commercial rent (popularly known as mess rent) located
surrounding the industrial areas and EPZs across the country.
Eligibility
Entrepreneurs with minimum 1 year experience in the same line of business
Business must be a going concern with at least 1 year in operation
Monthly income from rental and other sources must be minimum TK. 50,000
Loan Limit:
From BDT 3 lac to BDT 20 lac
Key Features
Loan without any collateral up to BDT 15 lac
Borrower having loan with other financial institute can also avail Abashan Loan
Convenient Equated Monthly Instalment repayment system
Quick, quality door step customer service
4.6. IDLC – COMMITMENT TO SME SECTOR
A separate SME Division is in operation since early 2005 for extending finance
and support to SMEs
Around 78% of IDLC’s clients belong to the SME segment, based on fixed capital
investment size
SME clients share around 65% of our total loan portfolio
SME operations playing an increasingly important role in overall IDLC
operations:
50
Performance Analysis of SME: A Study on IDLC Finance Limited Total team members of SME Division has grown from 6 in 2005 to 60 at
present ( Including 26 contractual employees)
Disbursement target of BDT 3.0 billion for 2010 up from BDT 1.90 billion in
2005
In October 2005, IDLC launched three SME Small Business Finance schemes
ranging between BDT 0.3 - 7.5 mln (US$ 4,000-12,000) for facilitating the
growth of small businesses:
Business Loan
Machinery Loan
Double Loan
Business Loan is collateral free up to BDT 1mln (US$ 15,000)
If a business is feasible, no collateral may be necessary
Opened a dedicated SME Branch in Bogra, at the beginning of 2006, to
accommodate the SME clients in the Northern region of the country
Introduced Festival Loan product for financing seasonal increase of inventory of
SME businesses during the peak season
Recently launched a loan product for women entrepreneurs
Apart from the SME Finance schemes, IDLC offers Lease finance and Factoring
to the SME sector
We have plans to open a number of SME branches in other parts of the country in
the near future
Average credit size for small clients is around BDT 1,000,000 (US$ 15,000)
51
Performance Analysis of SME: A Study on IDLC Finance Limited
Managing Credit Risk in SME at IDLC
52
Chapter - 05
Performance Analysis of SME: A Study on IDLC Finance Limited5. CREDIT RISK MANAGEMENT IN SME
Institutions involved in lending, including SME Financing, carefully assess credit risk,
which is the possibility that borrowers will fail to pay their loan obligations as scheduled.
The judgments of these institutions affect the incidence of delinquency and default, two
important factors influencing profitability.
To assess credit risk, lenders gather information on a range of factors, including the
current and past financial circumstances of the prospective borrower and the nature and
value of the property serving as loan collateral. The precision with which credit risk can
be evaluated affects not only the profitability of loans that are originated but also the
extent to which applications for mortgages that would have been profitable is rejected.
For these reasons, lenders continually search for better ways to assess credit risk.
This discussion focuses mainly on the role of credit risk assessment in the approval
process rather than on its effects on pricing. Although the market for SME Financing is
characterized by some pricing of credit risk (acceptance of below-standard risk quality in
exchange for a higher interest rate or higher fees), applicants in general are either
accepted or rejected on the basis of whether they meet a lender’s underwriting standards.
5.1. PRINCIPLES OF SOUND LENDING
The principle of sound lending that is followed in the banking industry and in IDLC is
common to all conventional and unconventional interest free banking system. Some of
the principles are given as follows:
53
Performance Analysis of SME: A Study on IDLC Finance Limited1. Safety: By safety is meant that the borrower is in a position to repay the loan, along
with interest, according to the terms of the loan contract. The repayment of the loan is
depends on the borrower’s capacity to pay and willingness to pay. The former depends on
his tangible assets and the success of the business. The willingness to pay depends upon
the honesty and character of the borrower.
2. Profitability: Commercial banks are profit-earning institution. So they must invest
their fund in profitable sectors.
3. Liquidity: Bankers are essentially financial intermediaries for short-term funds. The
banker must ensure that the borrower is able to repay the loan on demand or within the
short period of time.
4. The principle of Diversification of Risks: A prudent banker always tries to select the
borrower very carefully and takes tangible assets as security to safeguard his interest.
5. The purpose of the loan: While lending his funds, the banker enquires from the
borrower the purpose for which he seeks the loan.
5.2 SBF FINANCING SCHEMES
The following are the key features of IDLC SBF scheme
TABLE : SBF FINANCING SCHEMES
Particulars General Product FeatureMinimum loan tenure 13 monthsMaximum loan tenure 48 monthsMinimum Track Record of Business
2 years
Validity of sanction 2 months from date of sanctionProcessing Fees (% of finance amount)
To be fixed at 1.00% of loan amount
Cheque dishonoring charge BDT 250 per dishonoring VAT on processing fees To be collected from client(15.00% of Processing fees)
54
Performance Analysis of SME: A Study on IDLC Finance LimitedParticulars General Product Feature
New financing to a client when a loan is already outstanding(Repeat Financing)
Minimum of six (6) months between consecutive financing subject to satisfactory repayment behavior and fulfilling maximum exposure and cumulative DSCR criteria.
Limiting criteria No government employee is eligible for loan. Employees of private organizations are eligible. However, employment must be verified.
Maximum financing/exposure criteria
50% of existing total asset or100% of existing equity, whichever is lower
Maximum exposure limit with a particular concern(amt. in BDT)
BDT 7,500,000
No. of third party personal guarantors (other than proprietor and spouse)
Two (2) out of which one (1) has to be a non relative.
Limiting Criteria of guarantors
The maximum number of loans against which an existing borrower can provide personal guarantee should be limited to one (1). Similarly a personal guarantor of an existing loan with IDLC can himself avail a loan from IDLC provided that he has not provided personal guarantee against more than one(1) loan with IDLC
Registered mortgage Required for loans above BDT 1.50 mln on a net exposure basis
Requirement of reporting third party guarantors to the CIB
Should be reported to the CIB
Fixed Asset Criteria Any client with more than BDT 10.00 mln of fixed assets(land, building and machinery) will not be eligible for availing financing under the Small Business Financing scheme
Interest rate to be provided against cash security :
(at present rates usually decline with increase in tenure)
Source: IDLC Product Program Guide
55
Performance Analysis of SME: A Study on IDLC Finance Limited5.3 MANDATORY AND DISCRETIONARY VERIFICATION OF
INFORMATION FOR SBF PROPOSALS
Under the Small Business Financing Scheme we provide lease and term loans
amounting from BDT 0.30 mln to BDT 7.50 mln to small business houses that are
either in Trading, Manufacturing or the Service sector. As part of the due diligence
process the credit team visits the client premises in order to assess & verify the
applying client’s business information that is provided by the marketing team.
However, due to practical constraints it was not always possible to verify the
personal information of the client as well as the third party guarantors
In order to complement, as well as strengthen, the due diligence process required for
performing credit investigation the Management approved the appointment of Prime
Asset Management Consultants (PAMC) for verifying the personal information of
all personal guarantors namely the client, spouse and two third party guarantors.
Client and third-party guarantor information that needs to be verified includes, but is
not limited to, the following:
matching of photograph and signature
verifying residential address, business address and phone numbers
verification of bank statement
We started outsourcing the guarantor information verification services thorough
PAMC from March 01, 2007. From analyzing the feedback report submitted by
PAMC as well as from discussions with them it became clear that in cases where
the third party guarantors are businessmen it is quite difficult and time
consuming to obtain the business related information like valuation of inventory
& machinery , verification of receivables and payables, and other assets.
56
Performance Analysis of SME: A Study on IDLC Finance LimitedMandatory Information Verification Requirement through PAMC
For Applying Business Concern:
Verification of Bank Statement
For Client & spouse:
Verification of residential address
Verification of status of residence (rented or owned)
Verification of phone number (fixed phone or mobile)
Photograph and National ID matching,
Signature matching
For Third party guarantor (businessman):
Verification of business name, business address and nature of business
Verification of phone number (fixed phone or mobile)
Signature matching
Photograph and National ID matching
For Third party guarantor (non-businessman):
Verification of residential address
Verification of status of residence (rented or owned)
Verification of phone number (fixed phone or mobile)
Photograph and National ID matching,
Signature matching.
Note: It needs to be mentioned that Items under the mandatory information verification
requirement is necessary for all cases and any deviation thereof needs to be approved by
the Management.
57
Performance Analysis of SME: A Study on IDLC Finance Limited5.4. CREDIT APPROVAL AND SERVICE DELIVERY PROCESS UNDER SME
DIVISION
The Marketing Manager-Retail Products and his team of CREs are responsible for
Business Development, Relationship Management, Service Delivery, Collection and
Follow-up.
The Marketing Manager-Retail Products does the initial screening of the Financing
Proposals generated by the CREs and send the Appraisal Form along with the terms
and conditions for financing and other necessary documents to the Credit Risk
Manager-Retail Products.
The Credit Risk Manager-Retail Products, upon his satisfaction that the Financing
Proposal complies with all the lending policies of IDLC, initiates the credit appraisal
of the Financing Proposal. However, if the Financing Proposal does not comply with
the IDLC lending policies the Marketing Manager-Retail Products will be informed
of the non-compliance and the reason thereof.
The sanction of any financing proposal is given to the client within seven (7)
working days of the receipt of any compliant proposal by the Credit Risk Manager-
Retail Products. The Credit Risk Manager-Retail Products review the Compliant
Proposal and undertake the risk assessment, client visit and credit investigation. Upon
finding of satisfactory business standing of the prospect a Credit Appraisal Report is
prepared and placed online before the Approving Authority.
Upon online approval of the Proposal the Credit Risk Manager-Retail Products signs
the Appraisal Report and send it for signing by the respective Sanctioning Authority
as delineated above.
After the Operations Division has received a copy of the signed Appraisal Report
prepares the Sanction Letter and all necessary Documents and forwards the
documents to the Marketing Manager-Retail Products for signing by the client. The
sanction letter is issued jointly by the Credit Risk Manager-Retail Products and any of
58
Performance Analysis of SME: A Study on IDLC Finance Limitedthe following persons: the Marketing Manager-Retail Products, the Senior Manager-
SME Division or the Head of SME Division. The completed Documents along with
the Client File is maintained by the Operations Division at the Corporate Head Office.
The Credit Risk Manager-Retail Products prepares and sign the Disbursement Memo
and send the Memo for approval by the Head of SME Division. The original
approved Memo is sent to the Operations Division for keeping in the Client File. The
Disbursement Voucher is prepared by the Operations Division and sent to the
Accounts Department for Cheque preparation.
The Operations Division is the custodian of all the Documents and Client Files.
5.5 AUTHORITY DELEGATION UNDER SME
Table 5.6.: Authority Delegation under the SME Division
Tasks Proposed delegation
Approving authority
Tier I: Up to 5 lacs, approval from HoCRM
Tier II: Above BDT 5 lacs – up to BDT 10 lacs, joint approval from HoSME and HoCRM
Tier III: Above BDT 10 lacs approval from CEO & MD, after clearance from CEC
Appraisal Report Up to 5 lacs, report to be signed by Credit Officer, Head of Credit - Small Business Finance (under CRM), and HoCRM.
Up to BDT 10 lacs, report to be signed by Credit Officer, Head of Credit - Small Business Finance (under CRM), HoSME and HoCRM
Above BDT 10 lacs, report to be signed by Credit Officer, Head of Credit - Small Business Finance (under CRM), HoCRM, HoSME, DMD, and CEO & MD.
Sanction LetterTo be signed by Head of Credit - Small Business Finance (under CRM) & HoSME
Disbursement As existing, to be approved by the Head of SME, in case of no
59
Performance Analysis of SME: A Study on IDLC Finance LimitedApproval
deviation. The Deputy Managing Director may approve any deviation, other than security and regulatory related deviation(s).
(Ref: Directive Directory 2007/002, ‘Delegation of post-approval disbursement’ dated May 7, 2007)
Source: IDLC Product Program Guide
5.6 CREDIT TERMS AND CONDITIONS
5.6.1. Medium and Short Term
Medium and Short-Term facilities mean facilities with maturities of more than one
year but not exceeding ten years and Short Term Facilities mean with maturities up to
one year. In 2007 IDLC started it’s short term facility in the form of Festival Loans.
The loans are provided for tenure of 3 to 5 months meet up the seasonal demand.
5.6.2 Per Party Exposure Limit
The minimum and maximum exposure of the bank on single SE shall remain within
the range of TK 3 lac and TK 75 lac respectively subject to the following:
d) In case of working capital finance – Maximum up to 70% of the net required
working capital or 75% of the sum total of inventory and receivables whichever
is lower.
b) In case of fixed assets purchase – Maximum up to 80% of the purchase price.
5.6.3. Security Requirement
Limit on Clean Facility for Tk. 3 lac to Tk 10 lac:
In order to facilitate growth of smaller loans clients are allowed Collateral free loan
up to BDT 10 lac. But security and documentation procedures remain as per standard.
60
Performance Analysis of SME: A Study on IDLC Finance Limited For loan amounting TK. 10 lac to TK 50 lac
On case-to-case basis depending on Banker-customer relationship.
i. Hypothecation on the inventory, receivables, advance payments, plants &
machineries;
ii. Registered mortgage over immovable properties with registered power of
Attorney and Disclaimer from the mortgagor(s);
iii. Personal Guarantee of Spouse / parents / other family members;
iv. One third party guarantee from a person acceptable to the Bank;
v. Post dated cheques for each installment and one post dated cheque for full
loan value including full interest.
5.6.4 Common Information Checklist
For all facilities, banks must obtain (as applicable) and not limiting to following com-
mon documents before disbursement of loan can be made:
Loan Application Form duly signed by the customer. Loan Application From
should be accompanied by a ‘Borrower’s Basic Fact Sheet’ under the seal and
signature of the borrower.
A written declaration shall be obtained from the borrower divulging details of
various facilities already obtained from other institutions.
Acceptance of the terms and conditions of Offer Letter.
Up to date Trade License
Photographs & photocopy of passport/any other ID of the proprietor /partners
/directors duly attested.
Personal net worth statement of the proprietor /partners / directors.
Copy of TIN Certificate.
Short description of the products of the enterprise.
Project Profile (if new project).
Quotation/Intent / Pro-forma Invoice etc (as applicable).
Marketing distribution system of the company.
61
Performance Analysis of SME: A Study on IDLC Finance Limited Short profile of the proprietor / partners / directors mentioning their business
experience/education etc.
Brief description of the management of the company mentioning their educational
& professional experiences.
Name and address of the sister/allied concerns.
Group Brochure
Name and address of present bankers
A latest liability statement of all the other business concerns of the Group with
other Banks/Financial Institutions (Mentioning – name of business concern, name
of bank and branch, nature of facility, limit amount, outstanding. overdue if any
etc.)
Credit Information Bureau (CIB) report from Bangladesh Bank
Wherever practical, insurance policy for 110% of the stock value covering
potential risks with IDLC’s mortgage clause in joint name of the bank and client.
ADDITIONAL INFORMATION CHECKLIST FOR PROPRIETORSHIP
FIRM:
Copy of financial statements for at least 01 year for analysis and record. However,
financial statements signed by the borrower will suffice where the exposure is fully
secured by liquid assets.
ADDITIONAL INFORMATION CHECKLIST FOR PARTNERSHIP FIRM :
a) Copy of Registered Partnership Deed duly certified as true copy or a Partnership
Deed on non-judicial stamp of TK. 150 denomination duly notarized.
b) Copy of financial statements for at least 01 year, for analysis and record.
However, financial statements signed by the borrower will suffice where the
exposure is fully secured by liquid assets.
ADDITIONAL INFORMATION CHECKLIST FOR LIMITED COMPANY :
62
Performance Analysis of SME: A Study on IDLC Finance Limited Copy of Memorandum & Articles of Association of the company including
Certificate of Incorporation duly certified by Registrar Joint Stock Companies
(RJSC) and attested by the Managing Director accompanied by an up-to-date list
of Directors (Form-XII).
Copy of Board Resolution of the company for availing credit facilities and
authorizing Managing Director / Chairman / Director for execution of documents
and operation of the accounts.
An Undertaking not to change the management of the company and the
memorandum and articles of the company without prior permission of the IDLC.
Copy of financial statements for at least 01 year for analysis and record. However,
financial statements singed by the borrower will suffice where the exposure is
fully secured by liquid assets.
5.6.5 Common Charge Documents applicable for Proprietorship/
Partnership/Limited Company
Demand Promissory Note.
Letter of Hypothecation on stock-in-trade, raw materials, work in process
and finished goods.
Letter of Hypothecation on plant, machineries, equipments, vehicles etc.
Assignment of receivables, lease rentals, contract receivables etc.
Assignment of security money, advance rent, if any
Personal Letter of Guarantee from the Proprietor / Partners / Directors
Personal Guarantee from any other persons acceptable to the Bank.
Post dated cheques for each installment and one undated cheque for full
loan value including full interest.
Lien on deposits/financial instruments (FDR, shares of companies listed in
stock exchange, ICB Unit certificates etc with perfected lien) observing
necessary formalities.
63
Performance Analysis of SME: A Study on IDLC Finance Limited Any other documents as expedient/ deemed necessary by the branch/bank
depending on the nature of security such as, -Insurance Guarantee, Cross
Corporate Guarantee, Assignment of Contract, Security Money etc.
All security documents pertinent to the mortgage of properties to be examined by
the Panel Lawyer of the bank along with legal opinion.
5.6.6 Credit Information Bureau (CIB) Clearance
While considering a proposal, banks should give weight age to the Credit
Information Bureau (CIB) Report of Bangladesh Bank relating to the borrower &
his group. For financing CIB is a must and the CIB report must not be older than
3 months from the date of disbursement.
5.6.7. Mode of Repayment
a. For continuous loan credit turnover must be equal to the limit amount in a
quarter and full and final adjustment within the validity period.
b. For term loan, repayment to be made by monthly installments and full and
final adjustment within the validity period.
5.6.8. Minimum conditions for taking exposure
i. It is recognized that a large number of enterprises other than limited
companies (i.e., sole proprietorship/partnership firms etc) may not have proper
books of accounts including balance sheet, profit & loss account and they may
not be able to prepare current and future cash flows due to lack of
sophistication and expertise.
ii. It is expected that in such cases, banks shall assist the borrowers in
obtaining/developing such books of accounts as per forms/formats prescribed
by each bank and no SE shall be declined access to credit merely on this
ground. The rationale and parameters used to project the future cash flows
64
Performance Analysis of SME: A Study on IDLC Finance Limitedshall be documented and annexed with the cash flow analysis undertaken by
the branch.
iii. Bank/FI’s shall not approve and/or provide any exposure (including
renewal, enhancement and rescheduling) until and unless the prescribed Loan
Application From is accompanied by a ‘Borrower’s Basic Fact Sheet (refer
Appendix XIII) under the seal and signature of the borrower.
5.6.9 Restriction on facilities
Banks shall not take any exposure on a SE (Small Enterprise) in which any of
its directors, shareholders, employees or their immediate family members are
holding 5% or more of the share capital of the SE.
5.6.10. Delegation for sanction of loan under SE Scheme
i) The Head of Branches shall exercise their existing financial delegation
authorized by Head Office for sanction of credit facilities under small enterprise
fulfilling lending and security criteria i.e., 1.25 times collateral security in the
form of Registered Mortgage. Credit limit beyond delegation of the branch to be
sent to Head Office.
ii) Head of branches may also be authorized to sanction SE Loan (Term Loan)
obtaining security in the form of FDR up to 50% of the loan amount and doing
due diligence.
iii) SME Credit Unit at Head Office shall also directly handle the SE portfolio.
5.6.11. Sales team
The sales team / branch staff responsible for loan sales and should be the owner of
the customer relationship, and must be held responsible to ensure the accuracy of
the loan application submitted for approval. They must be familiar with the bank’s
Lending Guidelines and should conduct due diligence on new borrowers, purpose
of the loans and guarantors.
5.6.12 Approving of credits – by Credit Unit
65
Performance Analysis of SME: A Study on IDLC Finance Limited Applications are received at Credit Approval unit as per delegation of power. The
credit approval team will be independent from the sales team who will evaluate and
approve the loan. On receipt of the Applications it will be evaluated / assessed by
Credit Analysts / Managers on the basis of a fully documented Loan Presentation
Forms (LPF).
5.6.13 Disbursement – by Credit Administration
After approval, Credit Team will send / forward the Sanction Advice to the
operation unit for completion of documentation and disbursement of the loans
having disbursement authority from Credit Administration Unit. This will ensure
the better control of the bank asset and mitigate the risk of compromise of the
duties.
5.6.14. Classification and provisioning
Provision should be made on the basis of credit worthiness of the borrower, its cash
flow, operation of the account, adequacy of the security, inclusive of its realizable
value and documentation covering the advances for different categories of Loans
provision to be made as under:
Special Mention Account (SMA-overdue 90 days), no provision is required ii)
Unsatisfactory (overdue 120 days), provision 10%, iii) Substandard (overdue 180
days), provision 20%, iv) Doubtful (overdue 270 days), provision 50%, iv) Loss
(overdue by 12 months or above), provision 100%.
Branches shall observe the prudential guidelines given at Appendix X in the matter
of classification of their SME asset portfolio and provisioning there-against
(enclosed).
Apart from specific provisioning branches will create adequate general provision
over the entire credit portfolio of Small Enterprise business. Therefore, they should
maintain at all times a general provision of 5% of SE assets outstanding in its
books.
66
Performance Analysis of SME: A Study on IDLC Finance Limited Timing of creating provisions
Branches shall review, at least on a quarterly basis, the collectibility of their loans
/advances portfolio and shall properly document the evaluations so made. Shortfall
in provisioning, if any, determined, as a result of quarterly assessment shall be
provided for immediately in their books of accounts by the branch on quarterly
basis.
Reversal of provision
The provision held against classified assets will only be released when cash
realization starts exceeding-
a) In case of loss category the net book value of the assets;
b) In case of doubtful category 50% of the net book value of the assets; and
c) In case of sub-standard category 25% of the net book value of the assets.
Further, the provision made on the advice of Bangladesh Bank will not be reversed
without prior approval of Bangladesh Bank.
Transfer of files to Special Asset Management (SAM)
Any SBF contract that has accumulated more than six (6) overdue instalments will
automatically be transferred to the Special Asset Management team for further
follow-up and recovery:
- Approval, as per the existing tier of sanctioning authority of SBF loans, will be
required for transfer of client accounts that has accumulated more than six (6)
overdue instalments to SAM:
Table 5.6.: Authority Delegation under the SME Division
Finance Amount Approval authority
Upto BDT 500,000 Ho SBF
From BDT 500,001 to BDT 1,500,000 HoCRM & HoSBF
67
Performance Analysis of SME: A Study on IDLC Finance LimitedFrom BDT 1,500,001 to BDT 3,500,000 HoCRM, HoSME
Above BDT 3,500,000 HoSME & DMD
Source: IDLC Product Program Guide
- The approval memo should contain details explaining the financing rationale, the
reasons for default, the actions adopted so far to regularize the account as well as
the proposed course of action.
- A quarterly report regarding the transfer of SBF accounts to SAM will be
prepared and circulated for the review of the top Management.
- Any problematic contract that is yet to accumulate more than six (6) overdue
installments may also be transferred to the Special Asset Management upon
approval if it is deemed necessary.
5.7 APPRAISAL PROCEDURE OF SME CLIENT
After the marketing stage, appraisal procedure starts. In appraising, a comprehensive
report has been prepared on the business performance of the client. The whole procedure
is carried out through the following step by step procedure:
Collecting preliminary information regarding the client: to collect the preliminary
information, IDLC maintain a standard formatted checklist. This checklist is
designed to collect the information regarding the necessary legal documents of the
company, owners liability position, financials of the business and its sister
organization and other necessary information. A sample checklist format is
attached at the Appendix-1for better understanding
Collecting CIB report of Bangladesh Bank to know the liability status of the
client: before any loan disbursement, Availing report from Credit Information
Bureau (CIB) of Bangladesh Bank regarding the liability status of the client is
mandatory.
68
Performance Analysis of SME: A Study on IDLC Finance Limited Writing the main report: ECD follows a standard format to write the appraisal
report on its client. This report format contains the following part to investigate
the credit worthiness of the client:
Client’s name, address, business type and other preliminary information
In case of an existing client, the exposure status of the client with IDLC
Description of the financing proposal in details and client’s previous track
record (in case of an existing client)
Financing rationales on client from different aspects like:
Background of the business and the main sponsors of the
business
Analyzing the market potentials of the product client deals with
Analyzing the shareholding structure of the company to reveal
whether any problem lies with it.
Keenly analyzing the previous 3 to 4 years financials of the client
and make different comments on the changes he faced over the years
Analyzing the business and financial condition of the sister
concerns, if any and its impact on the said concern.
Detail liability position of the client
Projection regarding the income statement and cash flow of the
client at post financing period and calculating the Debt Service Coverage
Ratio.
In case of lease, brief description of the leased equipment and its
price verification
5.8. SECTORAL EXPOSURE
69
Performance Analysis of SME: A Study on IDLC Finance LimitedSector wise distribution of the SME portfolio of IDLC is given below. This distribution shows the distribution pattern of some of the important sector.
Table: Sectoral Exposure
Name of Sector Exposure % ExposureDecember 31,
2009
Agro Based Industries 3,000,000.00 0.92%
Apparels & Accessories 81,245,000.00 25.04%
Automobile Spare Parts 17,400,000.00 5.36%
Building & Construction Materials 31,550,000.00 6.64%
DVD, VCD & CD 1,900,000.00 0.59%
Education 1,200,000.00 0.37%
Engineering 21,750,000.00 3.62%
Food & Beverage 4,150,000.00 1.28%
Furniture & Related Products 3,775,000.00 1.16%
Healthcare Service(Pharmacy) 12,100,000.00 2.50%
Healthcare Service(Diagnostic Centre) 12,700,000.00 3.91%
Home Appliances and House Hold Items 29,400,000.00 5.98%
Information Technology 13,000,000.00 4.01%
Mobile Handset & SIM, Accessories 3,850,000.00 1.19%
Packaging 9,215,000.00 2.84%
Paint & Hardware 7,950,000.00 1.22%
Printing 4,375,000.00 1.35%
Power & Energy 800,000.00 0.25%
Professional Services 3,600,000.00 1.11%
Service Others 34,550,000.00 10.65%
Washing Plant 1,170,000.00 0.36%
Textile - Local 69,200,000.00 15.16%
Leather & Leather Products 2,400,000.00 0.74%
Paper & Paper Products 4,800,000.00 1.48%
Pharmaceutical & Healthcare Products 800,000.00 0.25%
Iron & Steel 2,500,000.00 0.77%
Chemicals 800,000.00 0.25%
Telecommunication 2,000,000.00 0.62%
70
Performance Analysis of SME: A Study on IDLC Finance LimitedBooks & Stationery 1,300,000.00 0.40%
Total Exposure 65,480,000.00 100.00%
Source: IDLC Database, 2009
Fig: Sectoral Exposure of SME Financing of IDLC
Sectoral Exposure
6.6%
0.6%
3.6%1.3%
3.9%6.0%
4.0%
1.2%
2.8%
1.2%1.3%
0.2%
10.6%
0.4%
25.0%15.2%
2.5%
0.0%
0.4%
1.2%
0.8%
1.5%
0.6% 0.2%0.4%
0.9%
0.2%0.7%
1.1%
5.4%
Name of SectorAgro Based IndustriesApparels & AccessoriesAutomobile Spare PartsBuilding & Construction MaterialsDVD, VCD & CDEducationEngineeringFood & BeverageFurniture & Related ProductsHealthcare Service(Pharmacy)Healthcare Service(Diagnostic Centre)Home Appliances and House Hold ItemsInformation TechnologyMobile Handset & SIM, AccessoriesPackagingPaint & Hardw arePrintingPow er & EnergyProfessional ServicesService OthersWashing PlantTextile - LocalLeather & Leather ProductsPaper & Paper ProductsPharmaceutical & Healthcare Products Iron & SteelChemicalsTelecommunicationBooks & Stationery
Source: IDLC Database, 2009
71
Performance Analysis of SME: A Study on IDLC Finance Limited
Non Performing Loan (NPL) & Overdue Analysis
72
Chapter - 06
Performance Analysis of SME: A Study on IDLC Finance Limited6.1 Regression Analysis: Overdue Versus Total Portfolio of Loan
Table: Overdue and Total portfolio of loan
Date OD(Y) Total Portfolio(X)
Jan-09 56610332 1136423518
Feb-09 57508013 1109473716
Mar-09 53917301 1125634679
Apr-09 48728380 1159991736
May-09 54737690 1097568788
Jun-09 37436737 1186635920
Jul-09 43453112 1127228218
Aug-09 54117763 1177819529
Sep-09 65851402 1171491354
Oct-09 58855920 1075660250
Nov-09 60447107 1134291797
Dec-09 54117763 1187748043
Jan-10 49137108 1216491782
Feb-10 47792238 1226100444
Mar-10 34773251 1218822262
Apr-10 39589932 1286218030
May-10 35965944 1323332263
Jun-10 31366343 1382683804
From the table it appears that Y and X have a definite relationship. As X rises, Y tends to
decrease. By observing the data, it might be tempting to conclude that as the total
portfolio increases, lower will be the OD. These 18 data points are plotted on the
following two dimensional scales, with values of X along the horizontal axis and values
of Y along the vertical axis.
73
Performance Analysis of SME: A Study on IDLC Finance LimitedRegression Analysis: OD versus Total Portfolio
The regression equation is
OD = 158583751.5 - 0.0923 Total Portfolio
Figure 5Figure 5 illustrates an imperfect negative linear relationship. As X increases in these
scatter diagrams, Y decreases but not in a perfectly predictable way. Thus, Y might be
slightly higher or lower than expected. That is, the X-Y points do not lie on a straight
line.
Figure 6
74
Performance Analysis of SME: A Study on IDLC Finance Limited
ANOVA
df SS MS F P
Regression 1 9.39253E+14 9.39253E+14 20.03 0.0003
Residual 16 7.50169E+14 4.68856E+13
Total 17 1.68942E+15
Coefficients Standard Error
t Stat P-value Lower 95%
Intercept 158583751.5 24506888.75 6.470986717 7.72E-06 106631468.6
Total Portfolio (X)
-0.09230 0.020622859 -4.476 0.0003 -0.1360
Interpretation of the result:
1. Regression coefficient (Coef) =-0.09230. This value is the change in Y when X
increases by 1. It means when the total portfolio amount increases by TK. 1 the overdue
amount decreases by TK.0923.
2. Computed t value= -4.476.The computed t value is used to test whether the regression
coefficient ßi is significantly different from zero.
3. Constant = 158583751.5 .This value is the Y intercept.
4. The p value in the analysis of variance table (0.0003) indicates that the relationship
between OD and Total portfolio is statistically significant as p value is too small. This is
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.745627976
R Square 0.556
Adjusted R Square 0.528
Standard Error 6847302.546
Observations 18
75
Performance Analysis of SME: A Study on IDLC Finance Limitedalso shown by the p-value for the estimated coefficient of total portfolio, which is
0.0003.
5. R squared = .556. The fitted regression line explains 55.6% of the variance in OD
indicating that the model fits the data well.
7. Hypothesis testing:
Ho: ßi =0 (no linear relation)
Vs Hi: ßi ≠ 0 ( a linear relation)
F = MSR/MSE with df = 1, n-2.
Rejection region = F> Fα
Analysis of F ratio: The F ratio is 20.03 in this ANOVA table tests the null hypothesis
that the regression is not significant, that is, Ho: ßi =0. A large F value will allow
rejection of this hypothesis, suggesting a significant regression. In this case the tabulated
F value (df = 1, 16 α = .01) is 8.53.
Thus the hypothesis of no significant regression is rejected at the 1% significance level
since F = 20.03 > 8.53.
76
Performance Analysis of SME: A Study on IDLC Finance Limited6.2 Regression Analysis: Overdue Loan versus NPL
Table: Overdue Loan versus NPL
Date NPL OD
Jan-09 1.22% 56610332
Feb-09 0.95% 57508013
Mar-09 0.77% 53917301
Apr-09 0.99% 48728380
May-09 1.04% 54737690
Jun-09 1.02% 37436737
Jul-09 2.67% 43453112
Aug-09 2.01% 54117763
Sep-09 1.97% 65851402
Oct-09 2.01% 58855920
Nov-09 1.13% 60447107
Dec-09 1.09% 54117763
Jan-10 1.73% 49137108
Feb-10 1.72% 47792238
Mar-10 1.21% 34773251
Apr-10 1.12% 39589932
May-10 1.14% 35965944
Jun-10 1.13% 31366343
From the table it appears that Y and X have a definite relationship. As X rises, Y tends to
rise also. By observing the data, it might be tempting to conclude that as the OD
increases, more will be the NPL. These 18 data points are plotted on the following two
dimensional scales, with values of X along the horizontal axis and values of Y along the
vertical axis.
Regression Analysis: NPL versus OD
The regression equation is
NPL = 0.00967 + 0.000001 OD
77
Performance Analysis of SME: A Study on IDLC Finance Limited
Figure 3
Figure 3 illustrates an imperfect positive linear relationship. As X increases in these
scatter diagrams, Y increases but not in a perfectly predictable way. Thus, Y might be
slightly higher or lower than expected. That is, the X-Y points do not lie on a straight
line.
Figure 4
78
Performance Analysis of SME: A Study on IDLC Finance LimitedSUMMARY OUTPUT
Regression Statistics
Multiple R 0.166027267
R Square 0.0278
Adjusted R Square -0.033212131
Standard Error 0.005164314
Observations 18
ANOVA
df SS MS F P
Regression 1 1.2096E-05 1.2096E-05 0.456 0.510
Residual 16 0.000426722 2.66701E-05
Total 17 0.000438818
Coefficients Standard Error t Stat P-value
Intercept 0.009672 0.006292241 1.538182085 0.143544372
OD (X) 8.46161E-11 1.25645E-10 0.67 0.510
Interpretation of the result:
1. Regression coefficient (Coef) =.000001.This value is the change in Y when X
increases by 1.
2. Computed t value= 0.67.The computed t value is used to test whether the regression
coefficient ßi is significantly different from zero.
3. Constant = .009672. This value is the Y intercept
4. The p value in the analysis of variance table (0.510) indicates that the relationship
between NPL and Total portfolio is not statistically significant as p value is not too small.
This is also shown by the p-value for the estimated coefficient of OD, which is 0.510.
79
Performance Analysis of SME: A Study on IDLC Finance Limited5. R squared = .0278. The fitted regression line explains 2.8% of the variance in NPL
indicating that the model does not fits the data well.
7. Hypothesis testing:
Ho: ßi =0 (no linear relation)
Vs Hi:ßi ≠ 0 ( a linear relation)
F = MSR/MSE with df = 1, n-2.
Rejection region = F> Fα
Analysis of F ratio: The F ratio is 0.456 in this ANOVA table tests the null hypothesis
that the regression is not significant, that is, Ho: ßi =0. A large F value will allow
rejection of this hypothesis, suggesting a significant regression. In this case the tabulated
F value (df = 1, 16 α = .01) is 8.53.
Thus the hypothesis of no significant regression can not be rejected at the 1%
significance level since F = .456 < 8.53.
6.3. Trend Analysis for OD
80
Performance Analysis of SME: A Study on IDLC Finance LimitedUsing the data of the overdue loan (OD) of IDLC Finance ltd. from the month January
2009 to June 2010 a forecast is made for the next five months. The forecasted OD is
shown below:
Month July 2010 August
2010
September
2010
October
2010
November
2010
Overdue
Loan (Y)
39257884 38218326 37178768 36139210 35099652
Fitted Trend Equation
Yt = 59009487 - 1039558*tFrom the trend equation it is clear that, as time passes the overdue amount will decrease it other things remain unchanged. It is expected, next month the overdue loan amount will decrease by TK. 1039558.
Figure 5: Trend Analysis Plot
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Performance Analysis of SME: A Study on IDLC Finance Limited
Findings & Findings & ConclusionConclusion
82
Chapter - 07
Performance Analysis of SME: A Study on IDLC Finance Limited7.1 Findings
The core competence of the IDLC is to provide the fastest and quality loans to the clients
in this country. To retain this competitive advantage IDLC would provide all sorts of
facilities whether they can give fastest services to clients than other banks. Also to
convey the customer focus, IDLC is trying to reduce collateral securities than its
competitors. Moreover the Non-performing Loan (NPL) of IDLC compare to other
financial institution is very low. The NPL of IDLC-SME varies from 1.5 to 2.5 on an
average over the months. Whereas the NPL of BRAC Bank the major player of SME loan
is almost 9.
Finally, regression analysis and trend analysis of overdue analysis has done. By analyzing
the variable overdue loan and total portfolio of loan a significant negative relationship is
found using simple regression analysis. Again analyzing the variable overdue loan and
non-performing loan no relationship has found. By trend analysis it has found that
overdue loan will be lower in the following months.
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Performance Analysis of SME: A Study on IDLC Finance Limited7.2 Conclusion
IDLC Finance Ltd. promotes broad-based participation in the Bangladesh economy
through the provision of high quality and modern services. IDLC is proving itself as the
fastest growing non-banking financial institution and showing remarkable progress of its
financial position with the mission of being countries leading financial solution provider
in a cost effective manner. SME loan is one of such quality product through which they
offer the small and mediocre entrepreneurs quality financial services and earn the
maximum profit as well. The recovery rate of this loan is 98% (approx.) which is
extremely good in comparison to any other FI’s recovery rate. IDLC has made it possible
as the loan is given to experienced, small and mediocre entrepreneurs most of whom are
middle aged, slightly educated and having moderate income and this class of people is
very loyal. But they can serve this class of customers with more commitment and loyalty
and they can turn the recovery rate to 100%. Credit risk management practice in this
organization is really a role model for other players in the SME sector of Bangladesh.
The government is very much positive to provide all sorts of facilities for ensuring the
growth of this sector. So potential of this sector from business perspective for the
specialized financial institutions is very high. To grab the opportunity in stepping further
depends on ensuring quality service with quality portfolio and IDLC is in a leading
position in this perspective. So ensuring the efficiency and smooth growth of over all
SME sector needs more prudential players like IDLC.
84
Performance Analysis of SME: A Study on IDLC Finance LimitedReferences
1. Annual report 2008 of IDLC Finance Ltd.2. Database of IDLC Finance Ltd.3. http://www.idlc.com 4. Different booklets and papers of IDLC Finance Ltd.5. World Bank Board Paper 05.08.2001-MA.
Bangladesh, Country Commercial Guide 2001-2002; US Embassy; Dhaka; October 2001.
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