Overview of Bangladesh Shilpa Rin Sangstha

Historical Background:

Bangladesh Shilpa Rin Sangstha is one of the Development financing Institutions in Bangladesh. It is a specialized or development bank. It is a nationalized scheduled bank. Bangladesh Shilpa Rin Sangstha is working relentlessly for the industrial development of Bangladesh. Besides industrial baking it has also merchant and commercial banking.

The Bangladesh Shilpa Rin Sangstha came into existence under the Bangladesh Shilpa Rin Sangstha Order, 1972 known as Presidential Order No. 128 of 1972 by combining the assets and liabilities of three organizations-

Pakistan Industrial Credit and Invested Corporation Limited (PICIC), which was called Bangladesh Industrial Credit and Invested Corporation Limited from 16th December, 1972. Investment Corporation of Pakistan (lCP), which was called Investment Corporation of Bangladesh from 7th January, 1972.

National Investment Trust Limited (NITL) in Bangladesh.

The order was promulgated on 31st October, 1972 and given immediate effected. Then at 16thMarch in 1987, Investment Advisory Center of Bangladesh (IACB) merged with BSRS.BSRS has one commercial branch and one corporate branch. Pursuant to Memorandum of Understanding(MOU) between The Government of Bangladesh(GOB) and the donor agencies (IDA, ADB, KFW, and UNDP) signed on March 02,1985 the activities of BSRS were limited to providing financial assistance mainly for Balancing, Modernization, Replacement and Expansion(BMRE)of the industrial units in the portfolio and recovery of loan. The Government subsequently lifted up in 1995 the embargo on the new financing allowing BSRS to carry on its activities as a full-fledged development financing institution with resumption of lending to new projects. BSRS has also been accorded permission to start commercial banking operation. BSRS has its own order which is the operational guideline for BSRS named "Bangladesh Shilpa Rin Sangstha Order1972".

Objectives of BSRS: BSRS is one of the important nationalized Development Financial Institutions in Bangladesh. Like all other Development Financial Institutions its main objective is to provide credit facilities and other assistance to industrial concerns and encourage and broaden the base of investment in Bangladesh. The major objectives of the Sangstha have been given bellow:

01.To stimulate the development of the country by providing credit facilities and other assistance for establishment of new industries as well as for balancing, modernizing, replacement and expansion of existing industries in the public & private sectors. 02. To provide financial assistance in both local & foreign currencies for projects which are economically viable, technically feasible and financially sound and socially desirable. 03. To assist prospective entrepreneurs in identification of projects and formulation of project proposals with a view to promoting export-oriented and import-substituting projects. 04. To accord priorities in the financing of projects in less developed areas of Bangladesh.

05. Participate in industrial development of the country by providing credit facilities to the public & private sector. 06. Make the base of investment in Bangladesh. 07. Give all types help, assistance and advice to industrial sectors. 08. Increase the investment at Bangladesh. 09. Give technical & financial facilities to the industrial sectors. 10. Try to set up industries in developed and non-developed areas in Bangladesh. 11. Help to eradicate unemployment from the society by creating entrepreneur ship 12. Play a great role in economic development. 13. Contribute to GDP of the country. 14. Modernizing the industrial sectors of Bangladesh.

Organizational Structure of BSRS:

The board of directors of BSRS is appointed by the government of Bangladesh which includes Chairman, Managing Director and Three Directors. The Managing Director (MD) and the General Managers (GM) who are also appointed by the government are responsible for running day to day activities of the bank. The MD acts as the Chief Executive Officer (CEO) of the bank and four GMs are in charge of four divisions:

Project Approval & Implementation DivisionRecovery & Law DivisionFinance & Accounts Division Human Resources & Service Division.These four divisions has 18 departments with 6 DGM .At present total number of employees stand at 239 of which 117 arc officers and 122 arc staffs/non officers.

Management Hierarchy of BSRS:

ChairmanGeneral ManagersDeputy General ManagersAssistance General ManagersSenior Principal OfficersPrincipal OfficerSenior OfficersJoint Officers

Training of Personnel:BSRS emphasizes on participation of its employees on various training program for the improvement of their skill and professional competence. During the FY 2004-2005, 22 officers and BSRS executives attained different courses organized by various local training institutions.

Committee and Group Decision Making Process:

There are two committees functioning in BSRSPolicy CommitteeExecutive Committee

Policy Committee:Committee members are the Board of Directors. The general policy, direction and administration of the affairs and business of the Sangstha are vested in the Board of the Directors.

Executive committee:

The executive committee consists of the senior Executive of the Sangstha. The Managing Director is the Chief Executive Officer and conducts the day to day business of the Sangstha.

Functional Structure of BSRS:

BSRS has 17 operational departments under 4 divisions at its head office in Dhaka. It has one commercial banking branch at Motijheel Commercial area, Dhaka and a corporate branch in Karwan Bazar Commercial area at BSRS own building. Motijheel commercial branch has started its ooperation on May04 in 1997 and Karwan Bazar corporate branch has started its operation from October 29, 2000. However each operational department is headed by one Assistant General Manager. These departments are

Human Resource DepartmentService and Real Estate DepartmentProject Approval DepartmentProject Implementation DepartmentLaw Department-1Law Department-2Recovery Department-1Recovery Department-2Loan Classification cellLoan Account DepartmentInvestment Banking DepartmentCentral Account DepartmentAudit and Inspection DepartmentPublic Relation DepartmentBoard DepartmentManagement Information System and Computer DepartmentBranch Control and International Department

Operational Activities of Sangstha:

Bangladesh Shilpa Rin Sangstha is one of the specialized banks in Bangladesh. It is a Development Financial Institution(DFI). It was established on October31 in 1972 under the BSRS Order 1972 to provide credit faci1ities and other assistance to industrial concerns and encourage and broaden the base of investment in Bangladesh. This Sangstha is deemed to be a banking company. At present Bangladesh Shilpa Rin Sangstha is dealing with major three activities as operation which are treat as three wings are mentioned below: Industrial Banking Merchant & Investment Banking Commercial Banking

A. Industrial Banking:

Bangladesh Shilpa Rin Sangstha(BSRS), as state owned DFI, is guided by national policies likes Industrial policy. Main function of Bangladesh Shilpa Rin Sangstha is to give loan and other assistance to industrial concerns. BSRS gives term loan to the sponsors by different forms. The forms are -

Medium or Long Term Loan:

Bangladesh Shilpa Rin Sangstha gives medium and long term loan to the borrowers. Loan may be for five years or more than five years. IfTime of Loan ≥ 5 years then Long term Loan or Time of Loan ≤ 5 years then Mid term Loan.BSRS does not give short term loan to the sponsors. For these loan the terms & condition for sanction, disbursement and repayment are made between the sponsors and BSRS.

Giving Whole Amount or in Consortium:From the beginning BSRS gives loan to the concerns alone. Here whole amount of loan is given by the bank. So the lending bank bears all the risks. To diversify the risk Bangladesh Bank gives permission to make Consortium Banking. BSRS is the pioneer of this Consortium Banking. According to Bangladesh Bank policy BSRS now is giving loan with other banks. This process is called Syndicate Financing / Club Financing / Consortium Banking. Here BSRS is co-financier with other Development Financial Institutions / Banks. Here one bank will be the lead bank and other banks & financial institutions will give loan to sponsors at a proportionate rate. They will get back the principal and interest at that proportionate rate. In case of own financing agreement is made between the bank & sponsors. But in case of syndicate financing agreement is made between the banks & the lead bank and the sponsors: When the loan amount is more than tk.100.00 million, then banks may make consortium financing. For monitoring of all banks here risk is low for all the banks. At now BSRS has four(04) consortium projects.

New Loan or BMR&E Loan:Bangladesh Shilpa Rin Sangstha gives loan for setting up a new concerns. With this it also gives Balancing, Modernization, Replacement and Expansion( BMR&E) loan to existing concerns on selective basis. B. Merchant and Investment Banking: To develop capital market by encouraging small investors and also by assisting the issuers of securities, the bank undertakes Merchant Banking Operation. By Investment Banking BSRS becomes an intermediary between the investor and the issuer. The activities of this section are - Direct underwriting of shares Underwriting bridge loan Debenture loan Banker to public issue Mutual fund

Investment Banking Activities:

BSRS is an active member of Dhaka Stock Exchange Limited. The Sangstha has been playing important role to develop the capital market in the country as an institutional investor. During 2005-06 the Sangstha invested tk.182.43 million by purchasing shares of 85 companies from Primary & Secondary market. At the same time the Sangstha sold shares of 10 listed companies amounting to tk.35.11 million in the secondary market and shares of one Non-listed company amounting to tk.1.11 million out of the stock exchange. The Sangstha earned tk.27.71 million as capital gains and dividend from investment.

Investment Portfolio:At the beginning of the FY 2005-06 BSRS had securities of 196 companies costing tk.460.26million in its investment portfolio. As on 30th June, 2006 investment of the Sangstha in securities of 208 companies stood at tk.565.33 million. It is mentionable that the investment in shares of listed companies was tk.489.24 million as on June 30, 2006 the market value of which was tk.758.48 million indicating capital appreciation by tk.296.24 million.

Mutual Fund Activities:BSRS floated a" closed end" Mutual Fund in 1996 with a paid-up capital of tk.50.00 million. The Fund is a regular source of steady income for the certificate holders. The Fund declared 7% dividend for the year 2004-05.

C. Commercial Banking:

Bangladesh Shilpa Rin Sangstha started its Commercial Banking Operation in May, 1997. With a view to mobilize funds to augment its income through a wide range of activities. Currently the commercial banking operation are directed towards deposit mobilizationissue of pay orderfixed deposit receipt sale and purchase of ICB Unit Certificates, Saving Certificates, prize bonds etc. Moreover consumer credit and SOD facilities are provided through commercial banking branches. In addition to that foreign exchange business is carried out in a limited scale by Motijheel branch. It may be mentioned that customers deposit of the two commercial banking branches stood at tk.250.64 millions as on June 30, 2006 The Sangstha is playing its role as banker to the public issue through its commercial banking branches.Current Deposit and other account for last two year are:

Particulars June30, 2006 (TK.)

June30, 2005 (TK.)

Current deposit 2270668 575021Deposit pension scheme 6433062 8275085Security deposits 3954542 3960791Sundry deposits 268535 1890744L/C margins deposits - -Margin on Bank guarantee 412068 412060Investor’s deposits 6877086 6646259Earnest money 72200 343627Total 20288161 22103587

Financial Position of BSRS

Capital and Resources:At present the resources of BSRS consist of local currency funds only. Since 1985, BSRS has not received any foreign currency fund. Prior to 1985, foreign currency funds were the lines of credit channeled by the Government from various international and regional lending agencies. The foreign currency resources were also augmented by negotiating direct credit lines from different foreign countries and but borrowing foreign currency from the Government or any bank or financial institution. The local currency fund of BSRS consists of paid up capital, reserves created out of profit, customer’s deposits and borrowings from Government.

Authorized capital and paid up capital of BSRS are Tk.2000.00 million and Tk.700.00 million respectively. Total equity of BSRS as on June 30, 2006 stood at Tk.2382.59 million including reserves and surplus.The resources position of BSRS as on June 30, 2006 is shown below:

Resources As on 30 June, 2006 (Tk. In million)

Source 2006 2005 2004Paid up Capital 700.00 700.00 700.00Reserves 1682.59 1566.70 1492.95Borrowings 65.70 73.00 80.30Deposits 317.87 393.78 153.94Total 2766.16 2733.48 2427.19

Highlight of BSRS’ Activities: ( Tk. In million )

Particulars Year Cumulative(since inception)

2005-06

2004-05

2003-04

2002-03

2001-02

ApprovalTerm loan 241.60 75.00 - - 11.50 5511.68Underwriting Advance & Debenture Loan

- - - - - 132.31

Investment in Shares

182.43 28.12 70.06 85.23 34.73 625.34

Investment in Debenture

- - - - - 51.97

DisbursementTerm Loan 74.20 51.50 - - 46.40 5071.59Underwriting Advance & Debenture Loan

- - - 2.25 5.00 123.10

Investment in Shares

182.43 28.12 70.06 85.23 34.73 625.34

Investment in Debentures

- - - - - 51.97

Recovery 313.21 289.48 298.01 468.93 322.38 9128.53Economics HighlightsGross Investment

- 598.64 - - 29.70 11486.52

Job creation - 223 - - 73 31636Financial HighlightsPaid up Capital 700.00 700.00 700.00 700.00 700.00 700.00Reserves 1682.60 1566.70 1492.95 1313.20 1143.76 -Borrowing/Term Debt

65.70 73.00 80.30 82.19 333.88 -

Total Assets 4493.21 4954.45 7725.20 8420.37 17724.28 -Total Income 301.91 222.34 233.53 224.56 263.54 8450.94Total Expenses 196.06 192.30 147.37 142.03 143.88 6329.18

Net Income Before Tax

105.85 30.04 86.16 82.53 119.66 2331.33

Net Income After Tax

85.85 - 86.16 82.53 92.66 1194.59

Tax Paid 35.41 6.94 16.97 22.44 47.95 1778.79DSL payment to Govt.

10.27 10.11 21.68 288.61 174.03 5956.64

DSL Payment to Other Loan giving Agencies

- - - - - 350.07

Dividend to Govt.

- - 10.00 10.00 10.00 198.18

Debt Equity Ratio

0.6:1 0.21:1 0.11:1 0.26:1 -

Debt Service coverage(times)

21.56 8.67 8.39 1.78 1.73 -

Capital Adequacy Ratio(%)

119 97 84 24 10.98 -

Financial Highlights:

Serial No

Particulars 30.06.2006 30.06.2005

01. Paid up capital 700,000,000 70000000002. Total capital(as per capital

adequacy1,800,723,000 1542133000

03. Capital surplus 800,723,000 54213300004. Total assets 4,493,205,612 4954449356

05. Total deposits 317,868,307 39378369606. Total loan advances 2,324,574,656 295102576407. Total contingent liabilities

and commitments33,974 4195599

08. Loan deposit ratio(%) N/A N/A09. Percentage of classified loan

against total loans and advance

54 61

10. Profit after tax and provision 85,854,425 -11. Amount of classified loan

during the current year124,184,346 516031479

12. Provision kept against classified loans

417,989,000 535739000

13. Provision surplus 49,999,000 2700014. Cost of fund(%) 7.48 5.3515. Interest earning assets 2601295767 219500961016. Interest non-earning assets 1891909845 275943974617. Return on Investment(ROI) 3.98 6.3118. Return on assets(ROA) 2.36 0.6019. Income from Investment 22886633 3155861420. Earning per shares(Taka) 122.65 -21. Net income per share(Taka) 122.65 -22. Price earning ratio(times) N/A N/A

Profit/Loss of BSRS:

During the FY2005-06 BSRS earned a pre-tax profit of tk.105.85 million as compared to tk.30.04 million in the preceding year. It may be mentioned that the profit was earned taking into account interest on project loans and dividend on cash realization basis. During the year no dividend was paid to the government as the entire amount of the pretax profit provided for the prior year’s tax purpose.

Total Income, Total Expenses and Total profit of last Five Tears: (Taka. in million)

Years Total Income Total Expenses Total Profit2001-02 263.54 143.88 119.662002-03 224.56 142.03 82.532003-04 233.53 147.57 86.162004-05 222.34 192.30 30.042005-06 301.91 196.06 105.85

Figure 1: the graph shows total income, total expenses and total profit over five years

Figure 2: the graph shows the trends between profit and expenses over five yearSWOT ANALYSIS

SWOT Analysis of BSRS:

In order to develop marketing strategy SWOT analysis is very vital. In the process of making a SWOT, marketer identifies the Strengths and weaknesses of the organization and also the Opportunities and Threats of the organization. The SWOT analysis of BSRS is given below:

STRENGTHS

Strong employee bonding and belongings Employees of BSRS are the major assets of the Sangstha, they also feel proud and have a strong sense of commitment towards the Sangstha. The strong Organizational culture of BSRS is the main reason behind this strength. Efficient performance BSRS provides hassle free customer service to its client comparing to the other Development Financing Institutions (DFI) in Bangladesh.Young enthusiastic work force The selection and recruitment of BSRS emphasizes on having the skilled graduates and postgraduates who have little or no previous experience. This type of work force stimulates the whole working environment of BSRS.

Good interpersonal relation In BSRS there is no bossing relation between superior and the subordinates. A good interpersonal relation exists between the officers and staffs. Companionable environment The work environment of BSRS is sophisticated. The whole office is well furnished. It provides canteen facilities for lunch to its employees.

WEAKNESSES

Narrow operating span Now BSRS has a very narrow operating span in the country. It has only two branches situated at Dhaka. Absence of strong marketing activities BSRS currently does not has any strong marketing activities through mass media e.g. Television. TV ads play a vital role in image building which is necessary for BSRS in its image crisis situation. More innovative product must be offered In order to sustain in the competitive environment, BSRS should come up with more new Attractive products. This is one of the weaknesses that the Sangstha is currently passing through. Lack of customer confidence BSRS is known to the public as a loosing concern. So, average customers lack the confidence in BSRS and judge the Sangstha as an average OFI. Absence of foreign exchange service BSRS does not provide foreign exchange service though it starts commercial banking activities. It should provide foreign exchange service as it is both a DFI and a commercial bank. OPPORTUNITIES

Contribution to industrialization As BSRS is a Government bank it has a wide area of opportunities to create base of industrialization in the country than private banks. Because through privatization industrialization is not possible nationally. Experienced manager One of the key opportunities of BSRS is it has efficient managers. They facilitate the operations of BSRS. These managers have already triggered the business of BSRS in the market. Huge population Bangladesh is a developing country. To satisfy the needs of huge population, a large amount of investment is required. On the other hand building EPZ areas and other government policies easing foreign investment in the country made it attractive to the foreigners to invest in our country. So BSRS has a large opportunity in this situation.

THREATS Upcoming banks The upcoming private, local and multinational bank posses a threat to BSRS.Default culture

This is the major threat of BSRS. Because of loan default culture it is known to the public as a loosing concern by this time. Similar product are offered by all banks Nowadays different foreign and private banks are offering similar type of product with an almost similar profit margin which results decline in profit. Industrial downward trend due to recession, inflation & unemploymentBangladesh is economically unstable country. Flood, draught, cyclone and newly added terrorism have become an identity of our country. Along with inflation, unemployment also creates industry wide recession. These cause downward pressure on the capital demand for investment.

CHAPTER FOUR: LOANS AND TYPES OF LAON

4.0 Definition of Loan:

According to Bangladesh Shilpa Rin Shagstha Order, 1972 “Loan” includes guarantee or indemnity which, the Shangstha may give on behalf of an industrial concern and any liability which the Sangstha may incur on behalf of an industrial concern. However BSRS provides loan and advances in all sectors which are given below: Bangladesh Shilpa Rin SangsthaSector-wise Loan and Advances as on 30 June 2006 (Amount in ‘000 Tk)

Industrial sector Long Term Loan Debenture & underwriting Loan

Total

Food and allied 267394 5908 273302Jute and allied 660527 9172 669699Textile and allied 614906 12597 627503Paper and printing - - -Chemicals and pharmaceuticals

385570 40404 425974

Tannery, leather and rubber

58125 8913 67038

Transport 35668 2 35670Services 582 2889 3471Engineering 1587 11340 12927Miscellaneous 61680 - 61680

2086039 91225 2177264OthersCommercial loan - - 9319Loan under investors’ scheme

- - 2429

Staff loan - - 135563Sub-total - - 147311Total 2089039 91225 2324575

Types of Loan And Advance: Depending on the various nature of financing, all the lending activities of Bangladesh Shilpa Rin Sangstha (BSRS) can be brought under following two heads:

1. Long Term Loan 2. Short Term Loan

1. Long term loan:

Loans, which are given for more than five years, are brought under this head. Loan and advance up to June30, 2006 as per geographical location-Division wise:

Division On June 30, 2006 (tk.) Dhaka 903059 Chittagong 740040 Rajshahi 608205 Khulna 43281 Sylhet 19657 Barissal 10333

Figure 3: pie chat shows division wise long term loan in 2006

a) Long term project loan: Long term project loans in foreign currency and local currency is provided by BSRS for setting up of new industries and or for Balancing, Modernization, Replacement & Expansion (BMR&E) of enterprises on selective basis. In case of very large project, BSRS may co-finance with other DFls or Banks, local and/or foreign. BSRS has provided up to June 30, 2006 tk.2086039285 where as it was tk.2668213156 on June 30 in 2005. BSRS’ long term loan is in details for the last two years:

Long Term Loan June30, 2006 June30, 2005Foreign currency loan 415835409 550218133Local currency loan 437366895 461106408Interest free loan 132619303 142422097Working capital loanInterest during construction period and deferred interest loans

51266691 62918419

Interest receivable 1037289517 1419059355Others charge receivable 7004342 6426038Penal interest receivable 1590751 16495418Exchange risk premium and penal exchange risk premium

3066377 9567288

b) Bridge loan and Debenture loan:

Bridge loans or underwriting advances may be made against the public issue of shares underwritten for enabling companies to go into commercial production before floating the shares for public subscription. Moreover BSRS issues debentures for giving loan facilities to industrial concern. On June 30, 2006 debenture and underwriting loan was tk.91224455 where as was tk.143517389 on June in 2005.

c) Staff loan:

BSRS gives its employees loan facilities. There are various loan programs for staffs of BSRS. These are

House building loan,Motor cycle loan andLoan against provident fund. BSRS has sanctioned total tk.135562891 up to June 30, 2006 and this amount was tk.128580547 till 30.06.2005. 2. Short Term Loan

In addition with long term loans, BSRS may also provide short-term advances and loans for the purpose of working capital of industrial concerns as per BSRS Order. It also provides short term loans and advances under commercial banking operation. Short term loans are given for less than or up to five years. Commercial branches provide the following two loans: a) Secured over draft (SOD):

Advances allowed against different financial obligations and it has increased to tk.682170 on June 30, 2006 from tk.462246 on 30.06.2005.

b) Consumer credit:

BSRS plays a vital role in providing necessary finance to the fixed income group for buying items that are necessary for raising the quality of living standard through the consumer credit scheme. Through this special scheme BSRS offer Necessity, Convenience and Comfort. There was an slight increase in consumer credit/cash credit amounting to tk.8636493 in 2006 from tk.7820837 in 2005.

PROJECT FINANCING REQUIREMENT

Project Financing Criteria:

In selection of projects, BSRS will be guided mainly by commercial considerations keeping however, in view the overall framework of government policies and socio-economic imperative of industrial development. In order to have financial support of BSRS, a project is required normally to meet the following criteria It should be technically sound and technologically appropriate for Bangladesh and environment friendly. It should be financially feasible and offer an Internal Rate of Return(IRR) not less than 15%. It should be economically viable which would be measured by Economical Rate of Return (ERR) being not less than 15%. In general it should give a minimum 15% per annum after tax return on paid up capital from the 3rd year of operation.The project’s debt-service coverage should not be less than 1.50 times and the current ratio should not be bellow 1.5:1. Total financing a project should be raise up maintaining a debt/equity ratio at a level of 60:40 in case of public limited companies while that of 65:35 in case of private limited companies. BSRS may require, as a loan condition, that the sponsors' stake i.e. equity capital may vary corresponding to- the degree of risk inherent in the project known debt-equity ratios for successful units in the same sector. The experience, credit reports, track records/performance and competence of the sponsors to manage the project. Fixed Assets Coverage Ratio (FACR) during the tenure of the loan will be at least 1.5 times. However, the Sangstha may claim additional collateral security to the extent which will be required to the FACR of 1.5times.

Ineligibility for Loans:

For ineligibility of loans BSRS will not consider loan proposal of applicants if-

The applicants for loan are in arrears or defaulting on payment of BSRS’s dues in respect of existing loans sanctioned for their earlier projects unless and until satisfactory arrangements are made by the sponsors with BSRS to repay the amount in default. The applicants are already involved in any other projects financed by any other banks/DFIs whose loan accounts are in arrears. The applicants are involved in any other banks or DFIs financed projects under implementation stage excepting where the projects are linkage projects and the sponsors have not adequate net worth and those sick or stuck-up cases have decided for rehabilitation where by the government. The proposal relates to a sub-sector, where production capacity is in excess of market demand in the opinion of BSRS.

The applicants whose track records with regard to management of existing/other enterprises including repayment of loans to BSRS or to other institutions, if any, are not satisfactory.

Lending Limits: BSRS's total commitment (loans, debentures, equity-investment, bridge finance and guarantee) to a single enterprise whether in the public sector or in the private sector shall not ordinarily exceed 15% of BSRS's total equity. BSRS's total exposure (loans, debentures, equity-investment, bridge finance and guarantee) to more than one enterprise where one or more sponsors is\are common will not ordinarily exceed 25% of BSRS's total equity. Concentration of loans & equity investments within a single industrial sub-sector shall not ordinarily exceed 20% of BSRS's total loan portfolio. BSRS's equity investment (including bridge finance) in a single enterprise, whether in the public sector or in the private sector shall not ordinarily exceed 1% of BSRS's total equity subject to a maximum of 20% of the paid up capital of such enterprise. The above limits may be relaxed by the Board of Directors from time to time.

Lending Rates:

The rates of interest on the foreign currency loans and local currency loans will be determined by BSRS in line with lending rates prevailing in the country; interest spread would be sufficient to cover the operating expenses and creation of adequate reserves. The interest on foreign currency loans provided out of various foreign loans/credits may be charged in accordance with the re-lending terms specified for each foreign credit line under which a particular industrial project is accommodated. For the purpose of appraisal of industrial projects for sanctioning foreign currency loans, the rate of interest to be applied would not be less than the rates applicable to the local currency loans. BSRS may establish a fund to be called the Special Assistance Fund (SAF) for providing concessional loans and advances to persons dealing with invention and innovations in such sectors and on such terms and conditions as BSRS may decide. In case of rescheduling/ restructuring of loans, a new rescheduling agreement will be prepared and the rate of interest, mode of payment and all other conditions will also be changed or retained same as per the existing loan a will dependent on rescheduling agreement. The rate of interest on the Interest During Construction Period (IDCP) of a project would be as per interest rates on the seed loans or the rate specialized in the re-lending terms of the credit line under which the foreign exchange loan and local currency loans will be accommodated. BSRS will charge liquidated damage on the loans in arrears at such rates as may be determined from time to time by BSRS. The rate of interest on underwriting -cum-bridge financing to the projects would be determined by BSRS from time to time.

The above lending rates are subject to change from time to time by the BSRS.

Security for Loans:

BSRS obtains adequate security for its loans to any project value of security against the loan is ordinarily 1.5 times of the loan. Loans will usually be secured by first mortgage and hypothecation of the existing and future assets of the project/company. In the case of co-financing first charge ranking pari passu may be acceptable to BSRS. In case of project to be set up in rented premises and any transport project, additional collateral security in the form of bank guarantee, urban property or any other tangible assets acceptable to BSRS to the extent as may be determined by the Board is to be obtained. Mortgage assets of the project/company shall be fully insured by the borrowers.

Repayment Period of Loan:

1) The repayment period of both local and foreign currency loans is 12.5 years including grace period. Repayment period of loans will vary depending on the debt-servicing capability and type of the projects. 2) The repayment of foreign currency, local currency and IDCP loans will start no later than thirty months of opening of first letter of credit or twelve months after the unit goes into commercial operation, whichever is earlier, in case of manufacturing projects & transport projects repayment would start after 30 months of opening of the first letter of credit or six months after the unit goes into commercial operation, whichever is earlier.

CHAPTER SIX: LOAN SANCTION, DISBURSEMENT, RECOVERY, AND PROGRAM FOR RECOVERY

Loan Sanction:

BSRS gives medium & long term loan to the industrial concerns. For sanctioning loan it has Project Approval Department. With a defined procedure,Management AspectTechnical AspectFinancial AspectEconomical Aspect and Social AspectFor example the Sangstha sanctions the loans to the sponsors. In brief the procedures are:Loan Application from the Borrower with their Feasibility Report▼Discussion at Top Management Committee for decision▼Making Appraisal Report by BSRS & checking CIB report from Bangladesh Bank▼Approved at Project Appraisal Committee▼Sanction with terms & condition

For the last Ten years, statistics about loan sanction is below: ( Currency in million )

Financial Years SanctionLocal currency Foreign currency Total

1996-97 38.69 187.92 226.611997-98 39.93 182.82 222.751998-99 26.79 70.38 97.171999-00 - 47.70 47.702000-01 11.42 12.05 23.472001-02 11.50 - 11.502002-03 27.47 - 27.502003-04 10.20 - 10.202004-05 75.00 - 75.002005-06 241.60 - 241.66Total 482.60 500.87 983.47

Loan Disbursement:

Disbursement of both foreign currency and local currency will be made as per terms and conditions of loans. Disbursement will be made as per draw down schedule of funds stipulated in the loan sanction latter. After documentation loan amount is disbursement. Close monitoring and supervision are undertaken to ensure that the projects are implemented on schedule.Sanction

Documentation Disbursement of loan Loan Disbursement: During the last Ten years ( currency in million )

Financial Years DisbursementLocal currency Foreign currency Total

1996-97 114.18 - 114.181997-98 45.46 185.15 230.611998-99 56.12 184.16 240.281999-00 72.24 78.83 151.072000-01 47.44 24.46 71.902001-02 11.43 40.00 51.432002-03 27.21 - 27.212003-04 10.20 - 10.202004-05 57.20 - 57.202005-06 74.20 - 74.24Total 515.68 1028.32 1028.32

Loan Recovery:

From banker point of view recovery means the repayment of loan which is schedule to repay the due/overdue of loan within a specific time period. Repayment is done by the installment. Installment refers to the part of principal amount together with the interest and service charges become due for a particular date.

Due/overdue loans for recovery received priority during FY 2005-06 as it is done in the previous year. BSRS provided a number of incentives, rebates and wavers, concessions, for example to the borrowers for repaying the dues on or before scheduled dates. During the FY 2005-06 BSRS recovered a total amount of Tk.313.21 million in cash. It includes Tk.226.16 million from long term loans disbursed in foreign and local currency and tk.87.05 million on account of other operations like underwriting advance/debenture loan, staff advance, consumers credit etc.

Details of loan recovered during the FY 2005-06 are as follows:

Category of loan

Amount recovered (Tk. In million)2005-06 2004-05 2003-04

A) Long term loanLong term project loan 226.16 207.93 254.10Bridge/debenture loan 71.71 70.67 25.14Staff loan 7.87 5.41 7.14Sub total(A) 305.74 284.01 286.38

B) Short term loanSecured overdraft(SOD) 1.68 0.76 7.44Consumers credit 5.79 4.71 4.19Sub total(B) 7.47 5.47 11.63Grand total(A+B) 313.21 289.48 298.01

Sector wise recovery position (Tk. In million)

Sector

Year

Private Public Total amount

Target Amount Percent

ageAmount Percentage

2005-06 313.21 100 - - 313.21 280.00

2004-05 289.48 100 - - 289.48 325.00

2003-04 298.01 100 - - 298.01 400.00

For loan recovery BSRS has three departments. Recovery-l works for small amounted loan sectors like food, transport, cold storage, shipping, hotel & services etc. Recovcry-2 works for big amounted loan sectors like jute, carpet, textile, chemical etc. loan classification cell classified the loans according to Bangladesh Bank rules & regulation. By using different

procedures, these departments make a team work to recover the loan amount. They make monitoring, supervision and a follow up of a project loan. Process are- Disbursement of loanSupervision & Follow UpRecovery of Loan

Short summary of loan section, disbursement and recovery (Currency in million)

Financial Year Sanction Disbursement Recovery 1996-97 226.61 114.18 291.031997-98 222.75 230.61 302.851998-99 97.17 240.28 261.521999-00 47.70 151.07 278.132000-01 23.47 71.90 351.512001-02 11.50 51.43 322.382002-03 27.50 27.21 468.932003-04 10.20 10.20 298.012004-05 75.00 57.20 289.482005-06 241.66 74.24 313.21Total 983.47 1028.32 3177.05

* Sanction and disbursement and recovery include local and foreign currency.Loan Drain:

Loan Classification:

Recovery

Loan able Fund

Disbursement

Loan Section

Refund to Depositor or Refinancing Agency

Loan classification is a process by which the risk or loss potential associated with the loan accounts of the sangstha on a particular date is identified and quantified by loan classification department. It is done to determine the level of reserves to be maintained by the sangstha for the probable loss on that risky loan account. In order to strengthen credit discipline and improve the recovery position of loans and advances by the banks, Bangladesh Bank vide BCD Circular No.34/1989 introduce new system covering loan classification, the suspension if interest due, and the making of provisions against potential loan loss. As part of the process i.e. regarding the changes, it needs to be mentioned here that Bangladesh Bank has already introduced ‘Special Mention Account’ vide BRPD Circular No. 02/2005 and 09/2005 for banks to raise early warning signals for accounts showing first signs of weakness and making appropriate provisioning therein.

At the end of FY 2005-06 total outstanding loan stood at tk. 2322.16 million as against tk.2951.03 million as on June30, 2005. Among the loan outstanding the provable sector accounted for tk.2321.26 million and the public sector accounted for tk.0.90 million. In order to ensure credit discipline, BSRS strictly followed the credit guidelines of Bangladesh Bank to classify its loan accounts in order to make necessary provision. Classified loan accounted for 57.41% of the industrial term loan portfolio at the end of FY 2005-06 as against 61.13% on 30 June 2005.provisions against classified loans maintained were 61.45% and 61.56% of total loan portfolio for the respective years. There was no provision shortfall on account of loan portfolio as per Bangladesh Bank guideline.

According to Bangladesh Bank Master Circular No.05, there are Criteria for loan classification:

Objective Criteria Qualitative Judgment

First all loan are classified into two group such as Unclassified loan Classified loan Again all types of classified loans are classified into following four scales, Classified:

Substandard: Repayment is stopped or irregular but has reasonable prospect of improvement. Doubtful debt: Unlikely to be repaid but special collection efforts may result in partial recovery. Bad/loss: Very little chance of recovery. Classification procedure:

The loan classification procedure for all types of loan is governed by the guidelines of Bangladesh Bank given through BCD Circular No.05 times to times. BSRS has two types of loan according to present circular.continuous loan: secured over draft(SOD) falls in this category.fixed term loan

According to the present circular if any borrower fails to pay installment within the following time then it will fall under the following classification status:

Classification Types of loanContinuous loan Term loan

Up to 5 years Above 5 yearsUnclassified/ regular

Less than 3 months Less than 6 months Less than 12 months

Substandard 3 months or more than 3 months but less than 6 months

6 months or more than 6 months

12 months or more than 12 months

Doubtful 6 months or more than 6 months but less than 12 months

12 months of more than 12 months

18 months or more than 18 months

Bad/loss 12 months or more 18 months or more than 18 months

24 months or more than 24 months

Classification of no. of projects as on June30, 2006

Sector name of projects No. of Projects classifiedJute 06Textile 06Cold storage 07Comical 07Engineering 01Fishing 02Food 01Hotel/cinema 01Transport 04

Total 35

Classification status of loan and advance:

Particular 30.06.2006 (TK.)

30.06.2005 (TK.)

Unclassified 1067569000 1147007633Substandard 85116000 118160816

Doubtful 63079000 229005Bad/loss 1108810656 1685628310

2324574656 2951025764

Required provision( Tk. in ‘000)Unclassified 11323 10104Substandard 101 10Doubtful 12113 115Bad/loss 405775 535614Total required provision(including 1% general provision)

429312 545843

Actual provision made 479311 545870surplus 49999 27

Segmental classification:

Particulars June30, 2006 June30, 2005In Bangladesh 65700000 73000000Outside Bangladesh - -

Provision for classification:

BSRS triggers to follow the below provision according to Bangladesh Bank Circular which is Types of classification Rate of provision Unclassified 1% Substandard 20% Doubtful 50% Bad and loss 100%

Program for Loan Recovery:

Bangladesh is agricultural country has been stepping back for the poor industrialization. So the republic government of Bangladesh has been encouraging entrepreneurship through offering credit facilities by state owned DFIs as well as private DFIs. From the independence state owned DFIs have financed different projects according to national industrial policy. Nevertheless recovery performance is not up to expectation by stated owned DFIs which as triggered as threat to macro economic as well as banking sector. As the recovery performance of BSRS gradually has been deteriorating over the times, government as well as the Board of Directors of BSRS have taken program for loan recovery. Bangladesh Shilpa Rin Sangatha's five departments are specifically responsible to deal with the recovery of long-term project loan. Short term loans are recovered through two commercial branches.

These departments are:

I. Recovery Department-1II. Recover/ Department-2 III. Law Department-1 IV. Law Departrnent-2 V. Investment Banking Department

Moreover recovery activities have been segmented according sector wise for efficient recovery by Board of Director of BSRS.

Recovery Department-1 has four sectors of recovering loan Cold Storage SectorTransport (shipping, road) SectorEngineering SectorHotel & Service Sector

Recovery Department-2 has also four sectors of recovering loan. Textile Sector Chemicals / Pharmaceuticals Jute Sector Food Sector However Recovery departrnent-1 and Recovery department-2 are responsible for mainly three types of activities. These are

I. Super vision work of loan II. Follow-up of advances III. Monitoring of advances

When loan disbursement is completed or project is implemented the project implementation department sends the file of the project to recovery department and the functions of recovery department starts to recover the loan.

Function of Recovery Departments

Simply an appraisal of loan is not a guarantee against risk of nonpayment by the borrowers. This is only a part of the job. The other and equally important responsibilities of the lending banker are to follow-up and supervise the use of advances. A banker should make sure that the loan disbursed will go to the genuine borrower for genuine economic purposes and the money lent will be properly utilized for fund generation through production activities. Banker should also make sure that the loan disbursed is recovered in time. All these can be ensured through an effective supervision and follow-up system of the advances.

1. Supervision work of loan:

Supervision work of loan starts right from the stage of selection of borrower. It gives more emphasis on proper end-use of advances. By supervision it means to have a proper control over the borrowers' operation to ensure the end use of funds, it includes adequate arrangement by the Sangstha for maintaining close contact with the borrower and his

activities in order to remain well informed about the position and progress of the proposed financed project and to offer appropriate guidance to the borrower, where necessary.

2. Follow-up of loan:

Follow-up of loan starts immediately after disbursement of loan. It gives more emphasis on timely recovery of advances. Follow-up includes efforts to ensure that the terms and conditions of the advance at pre-disbursement, disbursement, post-disbursements and recovery stages are compiled with and money lent is repaid as per schedule of repayment. It also includes efforts to regularize the irregular advances. Recovery of advances largely depends on effective 'follow-up. It is a systematic process through which these activities are earned out. BSRS will closely follow-up it's financed projects through- a)Regular periodical inspections; b)Collection of regular information including financial statements, operational data etc; c)Discussions with the borrowers; d)Relevant information/documents/statements received from borrowers are analyzed and is communicated to the borrowers for taking remedial measures for problems which have traced.

The basic objective of supervision and follow-up system is to ensure that the advances granted by the Sangstha are safe. These are the direct responsibilities of the recovery departments. The borrower maintains his account with BSRS, operations are conducted through the account, reports and returns are submitted by the borrower to BSRS. So success on loan recovery depends on how effectively these departments can make sound supervision and follow-up of advances. Recovery departments responsible for supervision and follow-up have to follow the under noted common methods: Keep watch over the inflow and outflow of fund. Production and sales record. To verify proper end-use of funds for the purpose for which loan was given Watch progress made in construction & operations.Inventory position and tern over. Ensure that security/collateral's have been obtained as per terms of sanction. Ensure that the valuation of security assessed correctly. Position regarding insurance of goods. Ensure that the documents have been obtained as per terms of sanctions. Regular inspection of the security and verification of document. Find out any reasons for default or delayed payment of loan installments. Appropriate actions are taken in time of regularize the irregularities and recover as per schedule. Keep regular contract with the borrower. To keep a watch on safety of funds. Ascertain financial positions of the borrowing concern from time to time through the study of audited financial statement. Obtain stock statement as per terms of sanction against hypothecation and pledge of goods.Non-compliance of any terms and conditions of the loan. Daily notes. Other account of the borrower. Visit the project as and when require by the officers and prepare an overall report on their visit and submit it to the management of BSRS.

3. Monitoring of advances:

Monitoring is a process of ensuring that performance takes place in conformity with the plan. Case of project loan starts from the selection of the borrower and remains to live throughout the life of the loan. It is in fact, an action including efforts, meaning thereby that it would ensure the commitment made by various agencies are followed up by action. Monitoring basically involves three steps which are measuring, reviewing and reporting. Moreover the reasons for monitoring are return flow of funds, problem solving and feedback.

Method of obtaining information: Reports Visit Discussion Nominee directors Financial Statement, Monitoring when- During implementation stages During operation stage During implementation stage: To see that the project is carried out as it was intended or modified in the light if changing circumstances. To see that the condition of lending complied with the borrowers. To see that the proceeds of the loans and ingestible funds are made available to the borrower according to project need and to see that the fund so realized is utilized for the intended purpose. To see that the funds provided to the borrower are adequately safeguarded (such as security and insurance coverage.) To synchronize the interest of client with that of the lending institution it is necessary to assist the borrower in obtaining infrastructure I facilities and government concessions and approval. To ensure adequate feedback to management and appraisal team in matters of cost over-runs, financing deficiencies and project implementation delays, if any.

During operational stage: To see that the operations of the project are carried out as was intended or modified and that the terms and conditions of lending are complied with. To attend to the distressed accounts as long as the unfavorable conditions/genuine problem exists. To obtain payment of installment promptly and to prevent occurrence of arrears in the normal course.

Rescheduling of due and overdue loan:

Due or outstanding of loan is the amount is not yet expired the date to pay by borrowers. On the other hand overdue of loan does mean that the expiration of installment of loan. However the outstand and overdue position of BSRS for the last eleven years are:

Outstanding and overdue loan of BSRS During last eleven years

As on Overdue as

June30 Loan outstanding overdue % of outstanding

Year Private Public Total Private Public Total1996 8058.25 344.10 8402.35 4388.18 127.97 4516.15 53.751997 15249.02 391.58 15640.60 12987.76 203.55 13191.31 84.341998 16513.44 396.60 16883.04 14271.06 219.63 14490.69 85.831999 17865.91 353.98 18219.89 15141.05 230.87 15371.92 84.372000 17578.73 274.86 17853.59 15517.55 207.00 15724.56 88.072001 17244.02 221.10 17465.12 15232.47 207.00 15439.47 88.402002 16318.73 207.00 16525.73 14511.83 207.00 14718.83 89.072003 6983.06 56.83 7039.89 5559.88 56.83 5616.71 79.782004 6122.31 56.87 6179.18 4724.93 56.87 4781.8 77.392005 2950.13 0.90 2951.03 1197.80 0.90 1198.70 40.622006 2323.68 0.90 2324.58 784.37 0.90 785.27 33.78 *Excluding write off amounting to Tk.13016.54 million

According BRPD No.01 on 13 January, 2003, in order to help in genuine problems, which are faced by the borrowers at repayment scheduled, the bank allows rescheduling of the repayments as per agreed terms & condition. However, the central bank advises the banks not to accede to request for rescheduling for more than two occasions in a single loan case. It is important to note that in the event of proper rescheduling allowed by the bank, the classification is changed and the loans again become unclassified.

For rescheduling of term loan the following terms should be uphold by all schedule bank:First rescheduling would be entitled if cash payment is made of 15% of overdue installment or 10% of total due of loan which one is lower. Second rescheduling would be entitled if cash payment is made 30% of overdue installment or 20% of total due of the loan which one is lower of the two.Rescheduling would be entitled more than two if cash payment is made 50% of overdue installment or 30% of total due of loan which one is lower of the two.

For rescheduling of continuous loan the following terms and condition should be maintained:

Overdue Amount of loan Rate of down paymentUp to 1 crore 15%Between 1 and 5 crore 10%( not less than 15 lakhs)More than 5 crore 5%( not less than 50 lakhs)

Legal Actions:

BSRS resorts to legal actions under BSRS Order, 1972 against the borrowers who fail to come up with ant satisfactory arrangement for settlement of their dues after exhausting all normal processes for recovery of such dues. During the FY 2005-06 legal notices were issued to 3 defaulting companies. Besides, sale notices were published in the various news papers to sell the project assets of 6 defaulting companies. At he same tine settlement of disputes with the sponsors of projects were not done outside the court.

During the FY 2005-06 the loan liabilities of 8 companies were liquidated and loan liabilities of 6 companies were restructured/rescheduled.

Project loan liquidated and rescheduled(No. of projects)

Financial Year Liquidated Rescheduled2005-2006 08 062004-2005 13 082003-2004 09 04

Functions of Law Department-1:

Law department-1 deals with normal project to recover by legal action which is not write off project. BSRS has 14 paneled lawyers and 1 legal advisor. When BSRS has to implement the article 33, 34, 35 of Bangladesh Shilpa Rin Sangstha Order, 1972 and all other types of legal action, it has to go to these 15 persons. Functions of law department are

1. Documentation:

Main activity of law department-1 is made documentation. After sanctioning the project loan, the project approval department provides the sanction latter to law department to prepare and preserve all documents in the volt of this department. Documentation is done with prescribed format and checklist. The Board of Directors of BSRS approves documents.

2. Taking legal action in case of default:

When Recovery department fails to recover any project loan then they submit the project to Law department-1 and these department applies article 33, 34, 35 of Bangladesh Shilpa Rin Sangstha Order, 1 972 or other legal action to recover project loan. Legal procedure or negotiation is done through this way At first legal notice to the borrower to submit a specific proposal to Law Department-1If proposal submitted then no legal proceedings. Only negotiationIf no negotiation then sue against the companyWhen suit against the company and the company does not repay the loan then this department goes to open tender to sell the projectIf highest bid < loan due but not less than the principal amount of loan due then further tender will call. It may be for ten times to sell the project.

Law department-1 used article 34 of Bangladesh Shilpa Rin Sangstha Order, 1972 to sell the project. And if there is residual amount of loan after sell the project then they used article 33 to recover that amount.

Steps in Legal Action:

Legal proceedings start from;

District Court Division Court High Court Supreme Court.

Functions of Law Department-2:

This department deals with write-off project. A project will be write-off after five years of becoming classified as bad and loss. Write-off means eliminated totally from BSRS's loan accounts but claim against the borrower will be retained. Another pro-forma ledger account is maintained separately for such project. Law department-2 has two functional units. These are-

Debt collection unit Monitoring cell

This department also deals with documentation and legal action for recovery of Loan.a) Clauses 32, 33, 34 & 35 of BSRS Presidential Order, 1972. b) Money Loan Court Act, 2003. c) Bankruptcy Act. d) Civil Act. e) Criminal Act. f) District Judge Court Act. g) Certificate Court Act. h) Negotiable Instrument Act. i) Civil Jail.

Highlight of Article 33, 34 and 35 Of Bangladesh Shilpa Rin Sangastha Order, 1972.

Article 33:

Where the Sangstha becomes entitled to require the immediate payment of any loan before the due date under Article 32 or by reason of the breach of any condition of any agreement between the Sangstha and an industrial concern to which any loan has been granted or any person liable for payment of that loan or where an industrial concern to which any loan has been granted or any person liable for payment of that loan fails to repay the loan by the due date or In compliance with the notice under Article 32, an officer of the Sangstha generally or specially authorized by the Board in this behalf.

Article 34:

Article 34 is used for sale of project. Sales are of two types-

1. Project take over and sale. 2. Open sale through tender by daily Newspaper.

Article 34 is treated as more than law for sale of project by BSRS to recover its dues. It is a dangerous power of BSRS. This article says;

Where the Sangstha takes over the management and administration of an industrial concern under clause (1) or transfers any property in exercise of its powers of sale or realization under that clauses, such taking over or transfer shall not be called in question in or before any Court: and no Court shall-

a) Entertain any suit, application or other legal proceeding-

I. for a declaration that such taking over or transfer is illegal, ineffective or void; or

II. for setting aside or annulling any order or decision of the Sangstha relating to such taking over or transfer;or

III. for an order of injunction or any other order prohibiting or restraining the Sangstha or any of its officers from such taking over or transfer; or

b) Issue, make or pass any order of ad interim or temporary injunction or any other order prohibiting or restraining the Sangstha or any of its officers from such taking over or transfer.

Article 35:

Without prejudice to the provisions of Article 33 and 34, all sums due to the Sangstha shall be recoverable as arrears of land revenue.

BSRS mainly takes legal action for recovery with clause 33 & 34. By clause 34, BSRS can sale the defaulter's assets or projects. BSRS can takeover the assets or can sale directly with tender. Clause 34 is very much powerful act. Money Loan Court Act is nom1ally used for the company which has merit, assets & personal property. This Act gives quick response. District Judge Court Act is nom1ally used for the company which has no property, no merit. This project was sold and legal actions are taken to recover the outstanding amount. For small amount loan clause 32 of the BSRS order is used. Clause 35 is used for Certificate Court Act. Criminal Act is used in check default, not maintaining the terms & condition of agreement or Sponsors remove assets from the production. NIA-1880 is used when check of the sponsors is dishonored by banks.

Write off of loan:

During FY 2005-2006 Tk.340.33 million were written off. Cumulative amount of write off by the Sangstha stood at Tk.13016.54 million at the end of FY 2005-06. As per Bangladesh Bank circular #02 dated 13 January 2003 and Bangladesh Bank letter # BRPD(P)661/13/2003-2230 dated 01 June 2003 loan and advance of 127 companies amounting to Tk.13016540496 were written off from the books as on 30 June 2006 in the following manner:

Particulars No. of Projects

Principal Interest Penal interest

Other charge

Total Taka

A.TERM LOAN

Balance as on 01 July 2005

92 1482777788 9324750770 1779291644 72268210 12659088412

Add: amount written of during the year

12 87810109 237198123 14744149 580015 340332396

Less: amount recovered during the year

- 7021720 4166592 - 343388 11531700

Balance as on June 30 2006(a)

104 1563566177 9557782301 1794035793 72504837 12987889108

B. UNDERWRITING LOANSBalance as on 01 July 2005

23 691000 27938990 - 21371 28651361

Add: amount written of during the year

- - - - - -

Less: amount recovered during the year

- - - - - -

Balance as on June 30 2006(b)

23 691000 27938990 21371 28651361

Total (a+b) 127 1564257177 9585721291 1794035793 72526208 13016540469

CASE STUDY

Case study -1:Name: Bangladesh German Latex Group Com. Limited .Location: At EPZ, Savar, Dhaka.Paid up capital: 360 lakh.Criteria: Public Limited Company.Product: birth control condom. Capacity of production: 100% production capacity yearly 600 lakh ton birth control condom.Rate of interest: 10%At present situation: company is in production to fulfill the delivery order got from buyer. Commercial production: Commercial production started as February 2003.Security: 90% Land.

Loan section: (Tk. In lack)

Name Date FC IDCP TotalBSRS 27-12-1998 400 33 433Jonota Bank - 300 25.50 325.50South-East Bank

- 200 17 217

Total 900 75.50 975.50

Loan disbursement:

Name Date ( tk. In lac)BSRS 27-12-1998 400

Jonota Bank - 300South-East Bank - 200Total 900

Loan recovery:

Particular Amount(Tk.in lac)Up to 05-03-2007 130.71Total 130.71

Classification of the project loan: on 30-06-2006 Bangladesh inspection team declared it as Band/loss.Rescheduling and write off: First reschedule was on 29-05-2005 Second reschedule was on 05-03-2007.Write off: No write offOutstanding amount:Up to 20-12-2006

Particulars Tk. In LakhOverdue:Principal 58.00IDCP 12.48Interest before reschedule 16.18Interest 67.77Total 154.43Due:Principal 342.00IDCP 62.37Interest before reschedule 64.70Total 469.07

Legal action: no legal action has been taken.Cause of overdue of loan:According to the sponsors:Main reason for delay payment of installment was because of lost of market by the company.Commitment was made by Government during the feasibility reporting was not kept the word by Government.

Case study-2:

Name: BA Silk Mills Limited.Location: At Barisal.Criteria: Private Limited Company.Product: Warp knitting. Capacity of production: 1.350 million yards in 300 days.

At present situation: Mill is closed and sold by BSRSCommercial production: Commercial production started as March, 1977Security: Company did not have any collateral securityLoan section:

Particulars Date Amount(Tk. In lac)Foreign currency 29-06-1974 $19.66Local currency 29-06-1974 07.50Total 27.16

Loan disbursement:

Particular Date Amount ( tk. In lac)Foreign currency 1974 to 1975 46.06Local currency 7.50Total 54.56

Loan recovery:

Particular Amount(Tk.in lac)Up to now 1.83Machine sold in 1998 4.00Land & building sold in 2002 4.00Total 9.83

Classification of the project loan: As on june30 IN 1997 the company was classified as bad/loss according Bangladesh Bank Circular.Rescheduling and write off: As there was no down payment by company, the loan of the company was not rescheduled.Outstanding amount:

Outstanding amount as on June 30 in 2005 was as per ledger

Particulars Amount (Tk. In lakh)Principal -Interest 81.66Others 10.71Total 92.37

Legal action: Leagal action was taken first at 24-06-1992 by exercising clause 33 of Bangladesh Shilpa Rin Sangstha ordinance 1972.

Cause of default:

According to the sponsors:

Project was not established in developed area where there was weak infrastructure.The environment was not congenial for project nevertheless natural calamities easily destroyed or heat the factoriy. Skilled workers were not available in that area.Initial sponsor died, so management was embroiled among them.Transportation facilities of carrying raw material and finished goods was on time because of communication system resulted increase in cost of production.

According to BSRS:

Initial director died so control system was not good as well efficient.Next director was not responsible to commitment.

Case study-03:

Name: Nipun International Private Limited.Location: In Chittagong.Criteria: Private Limited Company.Paid up capital: 10.36 lakhs.Interest Rate: 10%Product: Cargo Shipping named M.V.Rupia. Capacity of production: having capabilities of 205 metric ton weight of cargo.At present situation: still working cursorily.Commercial production: Commercial production started as on September, 1993.Security: Company did not have any collateral securityLoan section:

Particulars Date Amount(Tk. In lac)Previous local currency 30.09.1980 19.20Current local currency(BMR&E)

22.11.1990 13.50

Total 42.70

Loan recovery:Up to 31.01.2007 total recovery was tk. 28.73Security: ship plus a land in Dhaka.

Classification of the project loan: project was classified as bad/loss according Bangladesh Bank Circular.Rescheduling and write off: on 28.02.2006.Write off: as on 01.07.2006

Particulars Amount Tk. in lakhAllowance for bed dept 12.56

Interest suspense 26.28Total 38.84

Legal action: Legal action was taken by exercising clause 34 of Bangladesh Shilpa Rin Sangstha ordinance 1972.Cause of default:According to the sponsors:First owner of project died.Fuel price went up, fuel price was 1.5 higher than engine cost.Old engine in the cargo ship, nearly 21 years.Maintenance cost is very high.

Case study-4:

Name: Eco Cotton Mills Limited.Location: At Gazipur, Dhaka.Criteria: Private Limited Company.Product: cotton. Capacity of production: project is able to produce total 34.27 lakhs kg different count cotton in 345 days yearly.At present situation: it is working in full fledge.Commercial production: Commercial production started as on 01-07-1997Security: no information.Rate of interest:

Name of Bank Rate of interestBSRS 10%Sonali Bnak 11%Jonota Bank 10%

Loan section: ( tk. In lakh)Name ofBank

PrincipleLoan

AdditionalLoan

Total

Date Amount Date AmountBSRS 09.04.94 544.30 16.06.97 &

01.11.98403.41 947.71

Sonali Bank 21.03.94 500.00 - 200.00 700.00JonotaBank

29.03.94 500.00 16.10.97 243.07 743.07

Total 1544.30 846.48 2390.78 Loan disbursement: (tk. In lakh)

Name of Bank Principal Loan

Additional Loan

Total Percentage

BSRS 543.59 412.20 955.79 39.87%Sonali Bank 500.00 200.00 700.00 29.20%Jonota Bank 498.42 243.07 741.49 30.93%

Total 1542.01 855.27 2397.28 100% Loan recovery:Up to 26.12.06 company has paid total 1310.29 lakhs taka.Classification of the project loan: NoRescheduling and write off: NoOutstanding amount:

On 31.03.09 IDCP installment

Due Total

15.52

Principal Non interest loan

ICDR Total

485.93 51.66 201.72 723.79 739.31

Legal action: No legal action was taken.Cause of overdue: No

FINDINGS

Positive outcomes of the study:

During conducting this study, following findings are obtained: 1) The main aim of BSRS is to stimulate industrialization throughout the country. 2) Loans are given to sponsors through preparing appraisal report. 3) The nature of credit shows that it mainly grants long & medium term loan. 4) Adequate attention is given to social benefits. 5) High educated personnel are in the management. 6) There are some fringe benefits to the employees with cash benefits. 7) Social benefits are high from the banks to the people in various ways such as infrastructure facilities, security etc. 8) Though BSRS help in financial condition, it helps in various social, cultural development of the country. 9) There some extra benefit is given by BSRS for establishment of a project that is not given by other banks such as training of employees from abroad etc. 10) Sometimes BSRS helps more by giving more additional financing, prospective project. 11) Project rehabilitation is one of the criteria of BSRS that revive the sick project. 12) Contribution to the GDP is remarkable through industrialization process. 13) Help in implementing the projects. 14) Giving advice the projects for their future success. Problems in recovery of loan and advance(Findings):

Problems have burst out during the internship in light of in main three categories in regards of recovery which are given below:

Problems within BSRS Problems beyond BSRS

A. Problems within BSRS:

There are problems which are looked over sometimes are focused below:

Appraisal reports which are made by project approval department depending of secondary information may not become true.Training is not arranged in regarding specially for loan recovery in BSRS.Not following international bench mark of loan recovery by BSRS.Prediction are made in appraisal of project may not become true.Political pressure may come to BSRS in case of recovery of loan.As stated owned DFIs are not beyond of corruption so there is more likely to corruption in BSRS in respect of loan recovery minimally.Lack of knowledge in exercising power of governmental rules and regulation as well as acts, there are, in personnel.On interest wavers for regular payee.No other incentive is offered by BSRS to Unclassified loan’ borrowers.Lack of motivation and spread in works.Lack of proper placement of officers for right jobs.Making delay in settlement and negotiation stage.Lack of understanding of fake securities statements.Fail to manage or collect accurate and up dated data and information.Inadequate attention is given to analyze risk and uncertainties associated with the projects.

B. Problems beyond BSRS:

Technological problemsUnavoidable circumstances Problems made by borrowers (Willful defaulter)Technological Problems:

Technological problems which are in Bangladesh is very common phenomenon may cause either increase of production or prohibit timely delivery to buyers and which in turn become sick projects and become defaulter to BSRS by not paying installment regularly.

All the technological problems are:

Frequently power cut in industrial, EPZ as well as in suburban area is a common phenomenon. However use of generator for power in factories may rocket up cost of production.Lack of technological support in establishment and set up imported plant and machinery.Lack of support in technology arena by government to make research and development among the tortures.Maintenance of imported plants and machineries is expensive in Bangladesh.Unavailability of expert technician in Bangladesh which may kill time in regard of timely delivery and could maintain up cost of production.Non availabilities of skilled manpower for lately imported plant and machineries.Supply of fuel, gas, water, coal etc is hampered sometimes because of lack of technologies.Import of obsolete, defective machineries by borrowers is made with a view to over invoicing.

Delay implementation of project because of not having proper equipment for setup of machineries which is a result of the economic feasibilities of the projects decreases.

2. Unavoidable circumstances:

Unavoidable circumstances in developing countries like Bangladesh is part of days which more likely may increase cost of production, may hamper lime delivery which all are collectively threat of losing the market forever which in result is not paying installment to BSRS by borrowers. Problems beyond the borrowers are triggered out below:

Political unrest, labor unrest, hortal, strike, street procession, vandalize of factories, misused of rumor are the main stem of political parties.Delay implementation of project for delay import of machineries or delay unboard of plants and machineries which is in result delay going to production.Lot of competitors could come in market.Borrower may not manage working capital as gave commitment during the implementation stage form other commercials banks.Bayer may lose the market as International market are dictated by some develop countries.Unavailability of raw material any more that was projected earlier.Delay execution of cases by court.Changing Government’s rules and regulation may affect the financed projects by BSRS.Natural calamities, disasters may moreover affect bolt facedly to projects.Lack of co-ordination in exchange of transferring information associated with the projects.

3. Problems made by borrowers (willful defaulter)

This is all about ethical, so the recovery of loan depends on the ethic of the people of a nation. Bangladesh, the list developing country is intoxicated with this problem is beyond BSRS for recovery of loan. And the willful defalcation is because of the followings:Embroiled among the management.Corrupted people may be involved in projects whose main intention is to embezzled money. So no low may be able to chase ethics.Lack of experience of borrowers of projects may be morbid the projects.Shortage of required equity by borrowers which was given commitment.Lack of sincerity, problems regarding decisions and poor managerial talent, managerial efficiency as well of borrowers which were not noticed by BSRS.Willfully diversion of sectioned money to others business by borrowers.Over invoicing technique is used by borrowers for embezzlement of money.Borrowers may place petition to High court against BSRS. Impunity by court to sponsors.Lack of financial commitment by sponsors.Fake securities are stated by the borrowers during appraisal of projects.

Recommendations:

Recommendation means to give suggestion about the BSRS. It is very difficult to give suggestions to BSRS. BSRS being one of the prime DFIs has to continue its efforts to make an effective contribution towards expansion of industrialization process of the country. By mobilizing local resources, the bank is emphasized on long term lending to the viable new projects comparatively advantageous, export oriented, forward and backward linked, agro-

based, local technology and raw-material based projects. With keeping this view, BSRS is sanctioning loan to the sponsors in the procedure of BSRS. In addition this, I give some suggestions about BSRS to have an efficient loan recovery system. They are as follows -

Sanctioning loan to the sponsors carefully through making proper feasibility report. Central observation committee can be established to analyses, evaluate and solute proper loan recovery. Political pressure should be in lower interference in sanctioning loan for establishment of the project. Experienced and motivated entrepreneur should be allowed for sanctioning the loan. Separate bench for Money Loan Court should be established. , The promotion and recruitment should be fair. Service rule should be followed. New and energetic employees arc essential. Honesty, morality, responsibility and patriotism of employee should be enhanced.Working capital should be provided by BSRS. Works should be equally distributed among the employee. Benefits and incentives should provide to the employees on the basis of market rate. Employee's performance should be related with bank's performance to gear up its operation. All information should be collected by cm of Bangladesh Bank about the loan default culture. Encouraging the borrowers to repay the loan timely. Training supervisor should be smart who can able to give dynamic and timely training to the employees. 5 C's (character, capital, capacity, collateral and condition) must be considered for giving loan. The project which is profitable should be identified and sanctioned loan to those projects. Computer system has already been installed but more internet facilities to be introduced. Preserving of documents of different departments should be kept separately. The policy made for implementation should be made until project is completed. Mortgaged of loan should be sufficient to recover the sanctioned money. The time to prepare a feasibility report should be followed strictly. Risk adjusted discount rate method, program evaluation and review technique (PERT) and probability analysis should be introduced. Both primary & secondary database of the BSRS should be improved and strengthen. A co-ordination cell should be established for sharing information among various institutions. More emphasis on the effect of a project to measure socio-economic cost and benefit (SCBA) should be taken into consideration. Responsibility should be established to all according to their involvement in appraisal of project. Market research institution should be established for proper market survey. Not privatization , keeping in hand of government, strict supervision. Monitoring and follow-up has to be made by government. Govel11ment must give enough fund to the development financial institutions. For the entire development, way of promotion & distribution channel should be made. Government gives waiver to huge defaulter. But it should give facilities to regular reapers. For taking legal actions time should be limited. For recovery agent may be appointed. Regular bank should visit the project. Bank has to give BMR&E loan to sick project. We have to make social awareness to remove the loan default culture.

Conclusion:

The three month internship program in Bangladesh Shilpa Rin Sangstha gave me opportunity to have practical knowledge on banking system of Development Financial Institution(DFI) as well as the financial spheres of the Sangstha. My successful completion of the internship program is of the contribution of the concerned officers of BSRS. Because of their co-operation and friendly attitude felt quite easy during my internship period. The officers of recovery department helped me, supported me and guided me to understand the function of recovery department.At first I would like to thank our placement officers of giving me the opportunity to complete my internship program in a Development Financing Institution in our country.In my three month internship program in the Sangstha, I have understood that the main crisis of BSRS is image crisis. BSRS is known to public as a losing concern because of its substantially lower collection ratio before 1990. The reason is that BSRS has sanctioned loan in post war situation . At that time they provide loan according to the decision of the government. The mission of the government at that time was to encourage and broaden the base of investment in Bangladesh, to make national industrialist, to create employment opportunity for the people as a rehabilitation program after Independence. As a result who came to take loan could get loan easily without any cautious verification. Government made generous loan program by BSRS after Independence to year 1985. BSRS mainly provides loan to first generation industrialist to establish the base of industrialization. Most of them have lack of knowledge, experience to do business, managerial talent. So the project became loosing concern. Another problems was when disbursement of the project arises consequently the project did not economically viable and ultimately BSRS cannot recover its loan. Policy changed by government have also affect the BSRS financed project. Government gas reject its ration program consequently rice, flourmills become sick projects. BSRS mainly provide loan to Jute carpet project, silk industries. When it has given loan to this project the whole market has been captured by the Acrylic carpet. As a result jute carpet has failed to retain its market share and the loan has become stuck up. In case of silk industries willful wrong estimation by the management of the proposed project at time of appraisal made BSRS loosing concern. They have intentionally over estimated the production capacity of silk and showed it to BSRS but actual production scenario is totally different. Real production of silk is much lower than estimation and the loan has become stuck up.BSRS does not provide working capital loan. So there arises forecasting gap between BSRS and the other banks that have given loan for working capital. Consequently the project does not economically viable which affects loan recovery ratio of BSRS. In case of Textile mills production of lower loom than the demand is the reason for the project becomes sick. Another reason is management of the project uses old techniques of production and in other operations. They do not use sophisticated technique which hampers the market demand of the textile mills in the competitive environment. For the above reason the collection ratio of BSRS becomes lower.

It seems to people that BSRS takes money from government to operate itself. But this is not true. Actually BSRS operates through its own revenue. Within three years it repays the credit of tk. 1080 million to the government. BSRS has no loan liability to the government and other institutions on payment of balance liabilities by May 2007. There is 100% provision against the loan and advances of the Sangstha. So now the amount which is recovered is directly treated as income in the income statement.

As the student of Accounting of Information System I have learnt the accounting treatment of loans and advances. I have also learnt about loan appraisal procedure, sanction procedure, about documentation of loan, disbursement of loan and mainly the recovery process. From the Sangstha I have also learnt about commercial banking system, which is an extra advantage to me.

Working atmosphere of BSRS is very cordial, friendly, cooperative. All the officers of the Sangstha received me as their one of officers. The officers of recovery department help me most. When I was interested to learn something new they helped ignoring their business. I did not felt any type of fear or hesitation in my working because of their appreciation and cordial, friendly and cooperative attitude.

During my studies I have learnt the theories and in my internship period I noticed the application of them to some extent. It was a great experience to learn the application of my knowledge and to do as one of the members of the Sangstha.

Most of the banks of Bangladesh are offering a wide array of financial service including new types of loans and advances and some whole new services are launched every year. As a DFI, BSRS also has to discover new avenues to reach its goal. It is a government bank. For this reason it should go to people heart through various schemes. It should follow a mix lending policies designed to improve the quality of its portfolio and reduce its risk exposure so that in near future when competition among banks will save more it can stand with its own entity. Now BSRS is trying to operate its business successfully in the country. The success has been resulted from the dedication, commitment and dynamic leadership of its management. For success BSRS has to consider the behavioral issues of bank customers. By proliferation of new advance services, expanding use of automated equipment and electronic transfer of financial information. BSRS can be a truly fascination institution in the near future. The institutional future of the Sangtha depends on its ability to achieve a substantially higher collection ratio and profitability in future. And this achievement will help BSRS to overcome its image crisis.

BIBLOIGRAPHY

Annual report 2006, Bangladesh Shilpa Rin SangsthaAnnual report 2005, Bangladesh Shilpa Rin SangsthaAnnual report 2004, Bangladesh Shilpa Rin SangsthaBangladesh Shilpa Rin Sangstha Order, 1972Credit Proposal and AppraisalBSRS’s Operating Policies and StategiesSemiannual Annual Budget of BSRSProject Appraisal and Management – Iterature of BIBM by M.D. Nurul Haq Majumder, Sk Harun-ar-ashid.Gordon, E. and Dr.K. Natairanjan. Banking Theory, Law and Practice, Himalayan Publishing House.Rese Peters. 1995, Commercial Banking Management, Third Edition, Irwin, USA.Sethi, T.T. 1996, Money, Banking and International Trade. New Delhi, D Chand & Company Ltd. Ramnagar.BRPS Circulars, Bangladesh Bank.