The Process Of Banks And Financial Insistutions Finance Essay - Free Essay Example

Sample details Pages: 10 Words: 2989 Downloads: 6 Date added: 2017/06/26 Category Finance Essay Type Research paper Did you like this example? Introduction The financial system of Bangladesh consists of Bangladesh Bank (the central Bank of country), Schedule banks, financial institutions (Non-banking), various co-operative societies, insurance companies, microfinance institutions (MFIs) and non-government organizations (NGO). Direct regulation and supervisory responsibility over the system rests with Bangladesh Bank. Among the 48 schedule banks, there are 4 state owned commercial banks, 5 state owned specialized banks, 30 domestic private commercial banks, 9 foreign commercial banks and 29 non-bank financial institutions. Don’t waste time! Our writers will create an original "The Process Of Banks And Financial Insistutions Finance Essay" essay for you Create order Financial institutions represent one of the most important segments of the financial system and play a very important role in mobilizing and channeling resources in Bangladesh. Financial system of the country is either bank or market based. Since bank based systems are good at mobilizing savings and providing payment services and liquidity, they are constrained in providing store of value services. By adding liquidity, divisibility, informational, efficiencies and risk pooling services, non-bank financial institutions play a major role in the development of financial sector by broadening the spectrum of risks available to investors. Objective of the project: To discuss process of Banks and FIs or NBFI To show what are the sources of their funds To show the difference in their lending segment on the prospect of SME To watch carefully the degree of difference and similarities between the real life and theory. Scope: This study revolves basically around Banks and Financial Institution in Bangladesh. This study includes an analysis of their lending pattern on the prospect of SME. And what possible steps should be taken to improve facilities. Methodology: For preparing this report we will gather information from the following sources: Secondary data: This report will base on only secondary data like-Official website of the company, journal, newspaper etc. Limitation: In preparing this report certain limitations were faced: This report may suffer from statistical error due to the fact that all data used were Secondary. Lack of sufficient alternative sources prevented verification of information. The analysis presented here may vary with opinions of experts in this field. Overview: Structure and component of the financial sector in Bangladesh: The financial system of Bangladesh consists of Bangladesh Bank (BB) as the central bank, 4 State Owned Commercial Banks (SCB), 5 government owned specialized banks, 30 domestic private banks, 9 foreign banks and 29 non-bank financial institutions. Moreover, MRA has given license to 298 Micro-credit Organizations. The financial system also embraces insurance companies, stock exchanges and co-operative banks. NBFI: Non-Bank Financial Institutions are an important part of financial system in Bangladesh. NBFIs operations are regulated under the Financial Institutions Act, 1993. The NBFIs consist of investment, finance, leasing companies etc. There were 29 financial institutions operating in Bangladesh as of 31 December 2006. Of these one is government owned, 15 are local (private) and the other 13 are established under joint venture with foreign participation. Banks: In the banking subsector, there are 4 SCBs, 5 governments owned specialized banks dedicated to agricultural and industrial lending, 30 domestic PCBs, and 9 foreign commercial banks. The specialized banks are often called development finance institutions (DFIs). Out of the five specialized banks (enjoying 10% of the total industrys assets), the Bangladesh Krishi Bank and Rajshahi Krishi Unnayan Bank were created to meet the credit needs of the agriculture sector, while the Bangladesh Shilpa Bank and Bangladesh Shilpa Rin Sangstha were set up to extend term loans to industry. Defining SME: Small and medium enterprises (SMEs) are clearly defined by the Ministry of Industry of Bangladesh. Small businesses in the manufacturing industry are defined as those having fixed assets valued at less than BDT 15 million ($220,000), 50 excluding the value of land. Nonmanufacturing businesses with fewer than 25 workers are also considered small businesses. Current Situation of SME in Bangladesh: Small and medium enterprises (SMEs, industry and service) sector has been treated as a thrust sector and expected to play an important role in healthy performance of industry and service sectors in FY10. At the end of September 2009, banks and NBFIs distributed Tk.248.8 billion to the SME sector which is about 21.9 percent of their total disbursed loan. For promoting small enterprises, BB has directed the banks and NBFIs that at least 40 percent of their total targeted loan for the SME sector should be earmarked for financing small entrepreneurs but at the end of Q1FY10 only 29.2 percent of their SME loan went to small enterprises. Recently Bangladesh Bank (BB) has opened SME and Special Programs Department to help the sector and its clients. As the state owned banks have wide banking network with their large number of branches throughout the country, BB particularly urged the state owned banks together with other banks, to develop area-based lending network where a bank can help e ntrepreneurs directly and timely. Given the prospect of growing domestic demand, regained momentum in export demand, rising trend in capital machinery import and industrial loan disbursement and positive prospect in construction and SME sector activities, the overall growth outlook for industry sector output for FY10 seem reasonably encouraging. According to data of 2008, the total market size for loans to SMEs is estimated to be nearly BDT 400 billion ($5.7 billion). The total amount of SME loans increased by BDT 100.2 billion ($1.4 billion), or 40 percent, to BDT 350.4 billion ($5 billion) at the end of June 2008, in comparison to BDT 250.2 billion ($3.6 billion) at the end of June 2007. In terms of institutional categories, loans extended to SMEs increased from June 2007 to June 2008 among private banks (53.5 percent), nonbank financial institutions (43.4 percent), state-owned banks (32 percent) and specialized banks (15.1 percent). But, SME loans extended by foreign banks are decreased by 20.5 percent. Microenterprise loans range from BDT 20,000 to BDT 500,000 ($287-$7,170), but most such loans range from BDT 20,000 to BDT 50,000 ($287-$717). Very few microenterprises receive loans greater than BDT 50,000. Maturities range from six months to two years. The average SME loan sizes by type of lender are as follows (figures are provided from the period 2003-2006): ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Average bank loan: 408,081 BDT ($5,851) ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Average MFI loan: 38,250 BDT ($548) Banks are the largest source of funding for SMEs. As of March 2008, private banks accounted for 54 percent of SME financing and state-owned banks, 30 percent, followed by specialized banks (10 percent), other financial institutions (4 percent) and foreign banks (2 percent). BRAC Bank and the state-owned BASIC Bank are the key players in SME finance in the country. The South Asia Enterprise Development Facility, SEDF, has also facilitated the a ccess of SMEs to formal financial services. The total SME loan portfolio reached BDT 350.4 billion ($5 billion) in June 2008 (provisional), representing growth of about 15 percent over the six-month period, January through June of that year Table 1:SME loan portfolio 2007-2008 June 2008 (provisional) December 2007 SME Loan (BDT Billions) SME Loan (% of Total Loan Portfolio) SME Loan (BDT) SME Loan (% of Total Loan Portfolio) Private Banks 198.90 19.7% 16248.61 18.2% State Owned Banks 99.19 33.3% 9577.60 22.7% Specialized Bank 32.50 22.9% 3050.38 23.3% Foreign Banks 6.12 6.5% 427.00 5.1% Nonbank Financial Institution 13.68 19.7% 1279.37 18.7% Source: Bangladesh Bank SME Finance As noted above, little data exists on the retail market for SME finance; even less data is available for the refinancing market, making the refinancing gap impossible to quantify. Table 2 presents the most recent available information from Bangladesh Bank on its SME refinancing facility, which is supported by the World Bank and the Asian Development Bank. Three banks-BRAC, Eastern, and Dhaka-accounted for more than 50 percent of the facility. Beginning in July 2008, the facility (called the SME Foundation) planned to disburse an additional BDT 2 billion in refinancing for SME lending, 80 percent of which was targeted at small businesses. Despite these funds, Bangladesh Bank has issued a clear call for additional support, noting that its current resources are not sufficient to close the gap in SME financing. Table 2: Bangladesh SME Refinancing Facility Name of banks or Fis Amount refinanced (BDT millions) No. of beneficiaries Average amount refinanced per enterprise (BDT millions) Working capital Medium term Long Term Total Banks NCC/Bank Ltd. 21.6 155.00 14.8 191.4 796 0.2 Jamuna Bank Ltd. 164.8 29.3 15.4 209.5 152 1.4 National Bank Ltd. 15.1 0.0 0.0 15.0 4 3.8 ONE Bank Ltd. 197.1 141.8 14.8 353.7 445 0.8 Premier Bank Ltd. 239.0 24.5 9.3 272.8 227 1.2 BRAC Bank Ltd. 48.6 637.8 0.0 686.4 1736 0.4 Southeast Bank Ltd. 81.2 3.2 3.5 87.9 86 1.0 Dutch Bangla Bank Ltd. 100.8 1.3 0.0 102.1 56 1.8 Mercantile Bank Ltd. 0.8 34.2 0.0 35.0 344 0.1 Eastern Bank Ltd. 113.8 262.1 243.0 616.2 581 1.1 Dhaka Bank Ltd. 326.5 149.8 0.0 476.3 553 0.9 Trust Bank Ltd. 17.6 0.4 0.6 18.6 15 1.2 Prime Bank Ltd. 198.1 10.7 6.9 215.7 234 0.9 Bank Asia Ltd. 0.3 10 0.0 10.3 21 0.5 Bank subtotal 1,525.2 1,460.1 305.6 3,290.9 5,250 0.6 Financial institutions Uttara Finance Investment Ltd. 8.7 123.1 360.5 492.3 279 1.8 Prime Finance Investment Ltd. 22.5 19.0 14.3 55.8 31 1.8 MIDAS Financing Ltd. 0.7 325.7 168.0 494.4 776 0.6 IDLC of Bangladesh 7.7 317.9 82.9 408.5 348 1.2 Phoenix Leasing Co. Ltd. 11.6 54.1 71.7 137.4 129 1.1 United Leasing Co. Ltd. 60.1 124.9 140.4 325.4 209 1.6 Vanik Bangladesh Ltd. 0.3 0.5 0.0 0.8 2 0.4 Bay Leasing 2.5 5.1 4.7 12.3 8 1.5 Fidelity Assets Securities Co. Ltd. 0.0 9.0 243.5 243.5 143 1.7 Islamic Finance and Investment Ltd. 6.1 120.7 23.2 150.0 125 1.2 Peoples Leasing and Financial Services Ltd. 4 28.9 196.1 229.0 123 1.9 Bangladesh Finance and Investment Ltd. 0.0 12.6 59.3 71.9 25 2.9 IIDFC 17.0 29.3 58.9 105.2 67 1.6 GSP Financing 5.0 0.0 20.8 25.8 6.0 4.3 National Housing Ltd. 4.0 7.6 9.1 20.7 12 1.7 Oman Bangladesh 0.0 1.2 4.0 5.2 21 0.2 International Leasing 4.6 31.8 24.3 60.7 26 2.3 Union Capital 5.0 3.5 9.5 18.0 7 2.6 Fareast Finance and Investment Ltd. 0.0 1.3 0.0 1.3 2.0 0.7 Premier Leasing 0.0 11.4 6.7 18.1 9 2.0 FI subtotal 159.8 1227.6 1488.9 2876.3 2348 1.2 Grand total 1685.0 2687.7 1794.5 6167.2 7598 0.8 During Q4 FY09, the disbursement of term lending by banks and NBFIs increased by 21.85 percent and stood at Tk. 67.96 billion which was Tk.55.78 billion in Q4 FY08. Between Q4 FY08 and Q4 FY09, term lending by PCBs increased from Tk.38.63 billion to Tk.48.12 billion due to their higher activities to increased industry share in lending, SCBs term lending increased also from Tk. 2.10 billion to Tk. 3.17 billion, while term lending by FCBs increased moderately from Tk. 7.51 billion to Tk. 8.12 billion. Term lending by NBFIs also increased moderately from Tk.6.72 billion to Tk. 7.12 billion Unfolding the Findings: SME financing is a new product in the range of services provided by banks. SME loan is different from other loans, not only because this is small in size, but also because its modalities are different. Nevertheless, to foster the growth of SME sector, various financial institutions now offer a wide range of products and services to SMEs in many countries. Unfortunately Bangladesh still has a scarcity of SME financing institutions or SME financing products and services. For example, two banks namely BASIC Bank (SME financing covers almost 100% of the loan portfolio) and BRAC Bank Limited (extends over 50% of the loan portfolio) are specifically devoted to SME financing. Other commercial banks are also open for SME finance, though their coverage is low. However, commercial banks should not be the only source of SME financing. There are other financial institutions, which finance SMEs worldwide, such as the SME Department of International Finance Corporation (IFC), World Bank Group. To enquire about the availability of SME financing products and services, we have surfed a number of commercial banks Website as well as the websites of other financial institutions, such as IDLC of Bangladesh and IPDC of Bangladesh. We have found that some of them do provide some innovative Products or services solely targeting SMEs, while others have repackaged some of their existing products as SME products. Banks SME Products/Services Standard Chartered Orjon Business Installment Loan Trade Finance Auto Loans Working Capital Foreign exchange BRAC Bank Anonno The City Bank Ltd Cash Credit (Hypothecation), Cash Credit (Pledge), Secured Overdraft, SOD Against Work Orders Dutch Bangla Bank Ltd Small Shop Financing Scheme Overdraft, Cash Credit (Hypothecation) Prime Bank Ltd Small Medium Enterprise (SME) Cell Pubali Bank Ltd Term Loan Social Investment Bank Ltd Special Credit Line for Small and Medium shop owners South East Bank Ltd Term Loan Among the non-bank financial institutions (NBFIs), IDLC of Bangladesh mainly focus on SME financing by providing business solutions through financial products like business loan, machinery loan, double loan and lease finance. They have introduced .factoring. first in the country. Among other sophisticated SME financing instruments, Industrial Promotion and Development Company (IPDC) of Bangladesh has introduced the first asset securitization in Bangladesh in 2004, followed by IDLC of Bangladesh with Asset Backed Securitized Zero Coupon Bonds of BDT 190 million in 2005 Non Banking Financial Institution SME Products/Services IDLC Factoring Asset Backed Securitized Zero Coupon Bonds IPDC First asset securitization in Bangladesh in 2004 IFC Leasing, SME Risk Capital, Equity Funds and services like Credit lines, Credit bureaus DBH Home Loan There are many constraints in developing the SME sector in Bangladesh. Several studies have identified different constraints, ranging from access to credit to marketing their products and services. However, access to credit is considered as the main constraint. Commercial banks are found reluctant to extend credit to the SME sector. The main reasons are high risk and monitoring cost. To meet the challenge and reduce the perceived risk in lending to SME sector, the Bangladesh Bank has embarked on a program to expand and redesign the existing refinance window of Bangladesh Bank into Small Enterprise Fund (SEF). However, it was thought that the introduction of .Credit Guarantee/Insurance Scheme or adequate refinancing facilities. By the Bangladesh Bank may be of substantial help in increasing the participation of the commercial banks in SME financing. Private Banks cannot be expected to undertake this type of financing as additional costs and high risk involved. On the ot her hand, NCBs that cater to a variety of sectors, from large industries to SMEs will not also be expected to give special attention that SME financing calls for. Problems That FIs are facing: Unlike banks, FIs have limited scope of mobilizing both public and private deposits due to some restricted policies of the government. In absence of mobilizing funds at comparatively moderate cost, FIs have to procure funds from commercial bank at higher rate of interest to run their investment portfolio. Delay in legal procedures in recovering the non- performing leased assets. corporate tax rate for FIs since they have to pay tax at the rate of 45% p.a. same rate as banks and other financial organization have to pay though the earning spread of FIs is in the range of 2-3% and that of banks 7-8%. Allowing financial institutions to claim depreciation on leased assets as an allowable expense for tax purpose which the government has withdrawn. Banks by offering leasing services are distorting the market on account of their lower cost of funds. Absence of established secondary market to dispose of the repossessed lease assets in case of default cases. Cash credit (CC) and Hypo loans are very secured products of banks that are not allowed for NBFIs. Despite all these constrains FIs should take immediate measures to correct them in their favor and look for diversifying their product ranges along with efficient management practices that can play a greater role in the countrys financial sector and meet the long term investment demand of the country. Major constraints of SME financing: The major constraints of SME financing by banks and FIs can be summarized as: Inadequate knowledge and ability to formulate proper project proposals for seeking institutional finance; Collateral based lending procedures of banks and FIs that are not suitable for SMEs; Complex bureaucratic procedures and corruption; Limited availability of information on technical and marketing aspects of SMEs; Inadequate and ineffective coordination among concerned government agencies; Lack of a functional definition of SMEs that can characterize their unique positions; Absence of proper criteria for selecting potential SME entrepreneurs by the promotional institutions. Initiative Taken by Bangladesh Bank: To address this problem Bangladesh Bank took some initiative; relevant aspects of banking and NBFI regulation are summarized below: ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Refinancing from offshore investors Banks and NBFIs may borrow in foreign currency, providing the effective interest rate does not exceed LIBOR plus 4 percent and the maturity of the facility does not exceed 7 years. NBFIs face additional restrictions. Specifically, the repayment of interest in foreign currency is prohibited for NBFIs (the repayment of the loan principal in foreign currency is allowed). These restrictions may impede banks and NBFIs from accessing important potential sources of international financing-and thus from expanding their SME loan portfolios, given the reported dearth of SME refinancing facilities reported by Bangladesh Bank. ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Transformation Transformation of a bank into an NBFI requires a capital increase from BDT 100 million ($1.4 million) to BDT 2 billion ($28.7 million), and eventually to BDT 4 billion ($57.4 million), beginning in June 2009. ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Foreign direct investment There are no significant hurdles to foreign direct investment in existing banks and NBFIs in Bangladesh. Regarding greenfield operations, foreign investments may be made independently or through joint ventures, although a license must be received for any greenfield operation. Bangladesh Banks reform agenda in the banking sector and NBFI subsector is focused on strengthening competitiveness, specifically, resolving the sectors maturity mismatch and nonperforming loan problems. Items on the reform agenda include restructuring the specialized banks to improve their operational efficiency and alleviate their portfolio quality problems; improving the functioning of the secondary market for bonds and securities; and generally strengthening regulation and supervision. The central bank recently provided updated guidelines to banks to promote SME lending. These guidelines include requiring banks to inform the central bank of the target SME loan portfolio each year; dedicating a minimu m of 40 percent of the targeted amount to small businesses; establishing a dedicated SME function; and reporting on the SME portfolio on a quarterly basis. Conclusion Emergence of NBFIs has created a new avenue in our bank dominance traditional financial system. Traditionally banks are doing such businesses that they are not supposed to do. Long term lending of banks is mostly unfamiliar product for them, and has created a serious distortion in the financial market. Rather than gaining any benefit from such types of activities, the society is now carrying the load of overwhelming default loans. As leasing is considered as an alternative of long term financing many NBFIs have strong performance in leasing business. We found that financing the small scale industries in Bangladesh is the much-talked about, but less implemented issue. Government of Bangladesh has already taken some important steps to patronize the sector including allowance and pension and insurance fund to invest in the capital market, reduction of stamp duties and taxes of issuing cost of bonds and imposition of 10% tax on interest income arising from national savings certificate. Government has already initiated to build a secondary bond market with IMF assistance. It will be better for NBFI sector if the secondary bond market could be established on an urgent basis. In Bangladesh, the limited access to finance is one of the major areas of concern for SME development. Institutions to serve this sector need to have the financial capacity to accept the lending risks along with access to appropriate funding which matches the clients requirements. The financing approach of the commercial and development banks in the country is largely traditional that does not suit the special characteristics of SMEs. They mostly subscribe to the view that collateral and third party guarantee minimize risks for the lenders.