CHAPTER ONE: INTRODUCTION

Background of the Study:

Industries play a pivotal role in the economic development of every country. This is why industrialization has been adopted as a vital instrument of economic development in many developing countries. Realizing this, Govt. of Bangladesh has a Development Financing Institution (DFI) named Bangladesh Shilpa Bank (BSB) on 31^st December 1972 under the president Order No. 129 of1972 with a mission of “accelerating the process of industrialization of the country by providing financial assistance and equity support.”

Problem Statement:

For a developing country like Bangladesh a huge amount of capital investment is very much needed both in private and public sectors. In order to get maximum benefits from such capital investment the project appraisal is very important. Any error in appraisal will have an adverse impact on capital structure of the country.

Project appraisal means the examination of project before the project is undertaken. It refers to the evaluation of projects and selection between alternatives. Project appraisal report is prepared by Loan Operation Department. The project has been appraised by an appraisal team consisting of engineer, economist and financial analyst. This report critically evaluates the proposed project through technical analysis, economic analysis and financial evaluation. When the project is found to be technically feasible, financially rewarding and economically & commercially viable only then that project is financed by BSB. This study will make an attempt to the project Appraisal Practice of BSB (a case study of M/S ETTADE PLASTIC LTD.).

Objectives to the Study

This report examines the project appraisal procedure of BSB. To do this it examines how BSB appraises project what information it deeds from the entrepreneur & what aspects of a project need to scrutinize & evaluate of its particular project M/S Ettade Plastic Limited & Solaiman Textile Mills Limited.

The objectives are summarized as follows:

Ä To get an overall idea about the existing projects appraisal procedure;

Ä Evaluate the particular project regarding the appraisal;

Ä To determine the limitations or problems (if any) of the project appraisal;

Ä To recommend necessary steps to over come such limitations.

Scope of the Study:

This report will mainly focus on the project appraisal of Bangladesh Shilpa Bank. The proposed study will cover the appraisal practice, procedures and technique followed by the Loan Operation department (LOD) in the preparation of appraisal report. Moreover the evaluation of its procedure to a particular project named M/S ETTADE PLASTIC LIMITED.

Methodology of the Study:

Correct and smooth completion of research work requires adherence to some rules and methodologies. Rules were followed to ease the data collection procedure. Accuracy of study depends on the information and data analysis.

STUDY AREA:

The area of my study has been encompassed the operation area of Bangladesh Shilpa Bank Head office and the Dhaka Commercial Branch of Shilpa Bank.

TARGET GROUP

To accumulate the required data I have contacted with each departmental head along with other concerned executive of Bangladesh Shilpa Bank. In case of industry diagnosis I have got in close with the responsible personnel of Project Implementation Department of BSB to collect the information.

TYPES OF RESEARCH

In this study the descriptive type of research has undertaken to gain insights and understanding about overall operation of BSB and the sick industry.

SOURCE OF INFORMATION.

The data will be collect from both primary and secondary sources.

Sources of Primary Data

The sources of primary data are:

Ä Face to face interview.

Ä Official records & documents of BSB.

Ä Communication with other respective personnel of BSB.

Ä Expert opinion.

Secondary sources

The sources of secondary data are:

Ä Annual report & appraisal manual of BSB

Ä Project appraisal report of M/S Ettade Plastic Limited & Solaiman Textile Mills Limited

Ä Journals and relevant books

Justification of the Study:

This study will have both practical and academic value. It will help to get a clear idea about the project appraisal practice of BSB. On the other hand, the findings of this study will help to take appropriate actions and steps for the betterment of the existing practice which basically help the industrial development of the country.

Limitation of the Study:

This Internship Report is my first assignment outside our course curriculum in the practical life. I, the students of “Department of Management Studies”, just have completed our formal education stage. After completing the institutional experience, Practical performance in the formal stages become difficult. So in performing this report our lack of proper knowledge greatly influenced in this performance.

Besides above, have to face some other limitations are:

Lack of availability of data
Many personnel of BSB were reluctant to provide useful information.
Improper combination among various departments
They are in government employee so have no eagerness to supply more because of extra hardness.
Up-to-date information were not available

Sufficient records, publications, facts and figures are not available. These constraints narrowed the scope of the real analysis.
For the reason of confidentiality, some useful information cannot be expressed in this report.
Time is a limitation that would mostly with stands a comprehensive study on the topic selected.
Finally this is my first job Experience. So my knowledge especially in such a research study is limited.

CHAPTER TWO: LITERATURE REVIEW

A project is a proposal for an investment to create, expand and/or develops certain facilities in order to increase the productions of goods and/or services in a community during a certain period of time. For the purpose of BSB, project means a scheme for capital investment to develop facilities to provide goods and services. BSB’s main function is to extend financial assistance to industrial project. It basically needs to be satisfied about the overall viability of a project to be financed. For this purpose, an objective assessment of the viability of the project is required to be examined by BSB from various points of view. Project appraisal coyer five different aspects of a project: Management and Organization, Technical, Market, Economic, and Financial.

An assessment of the promoters in respect of their integrity, experience and capabi1ities to implement and run the project is of prime importance before extending credit facilities to them. There are no set rules to find out if the borrowers or promoters are the men of integrity. It is to be done by direct and indirect investigation. The borrower’s experience .and capabilities can, on the other hand, be assessed in terms of his educational background, spatial qualifications, practical business experience, receptiveness to new ideas, or good advice, the general reputation and above all his potentiality to learn new things and adaptability to new and changing situation.

The technical aspects of in industrial project are appraised to determine whether the project is sound with regard to every engineering and technological consideration, including product specification, process, size, internal balance, suitability and availability of physical facilities, designs and layouts of equipment and buildings etc. In a developing country like Bangladesh, where there is hardly and indigenous technological base to support the industrialization process the industr1al undertakings have to be conceived on the basis of know or borrowed technology until such time as the development of local technology is sufficient. The basic aspects to be analyzed in the course of technical appraisal are – Products/ Service; Raw materials; Skills and technology required for manufacture/ service; Testing and analytical report; Labor; Transporting; Work Schedule; Estimation and evaluation of cost. The relative importance of these aspects will, however, vary from project to project.

An industrial project is to bring in some goods ‘or services for a community. But the community does not need them infinitely. Their demand is of course finite and at given prices. For appropriate marketing objective, it is necessary to look at depth into the – macro/micro demand/ supply situation for specific products in the market; Existing and expected competition in local and foreign markets; the market share, etc. While appraising industrial projects, the Bank is required to analyze these factors and to bring out the objective in quantitative terms-Product identification; Nature of Demand; Type of Demand: there are various types of demand for the product/service in question. These are direct, derived, new, replacement demand, Size and Composition of the Present Demand etc.

Ineconomic appraisal, the project is looked at from the national or social point of view and the economic cash flow is constructed on the basis of “true or real prices”, commonly known as accounting or shadow prices. Economic appraisal should cover both quantifiable and non-quantifiable benefits (where applicable). Such benefits are Economic Rate of Return (ERR), Bruno Ration! Domestic Resource Cost, Contribution of Gross Domestic Product, and Employment Generation and Cost per employment. The term non-quantifiable refers both (1) to effects that are known to arise but which cannot be measured in physical terms and (2) to effects, which cannot be valued. Difficulties in quantification and valuation will often go together. Quantification problems often are data problem a certain effect could not be measured, but has not been.

The main purpose of financial appraisal is to assess if the proposed project is viable in term of its operation in the future years and its financial soundness. The financial analyst should have a clear idea as to what is intended to be achieved through the financial appraisal. The financial appraisal is directed to examine mainly the following two aspects: Fund requirement to bring the project in to existence and the probable sources from which the required funds will be mobilized; and Prospects of adequate revenue generation by the project when it goes into operation and the likely position of the concern with regard to its actual cash generation (liquidity) and its probable impact upon the financial condition (solvency) The first aspect deals with the estimation of total of the project (fixed cost + net working capital) and a suitable financial arrangement (debt-equity relation). The second aspect relates to the analysis of production-cost profit at different volume of production carried up to the year the project attains its normal capacity operation.

Sources of Information:

Bangladesh Shilpa bank, 2003 annual report 2002-2003: 2-18.

Bangladesh Shilpa bank august 1984.manual of, project appraisal

Project Management-The managerial process

-Clifford F. Gray

-Erik W. Larson

CHAPTER THREE: OVERVIEW OF BANGLADESH SHILPA BANK

Introduction

Bangladesh Shilpa Bank (BSB), once a leading developed financing institutional (DFI) established in 1972 with a mission of accelerating the process of industrialization of the country by providing financial assistance and equity support. After getting liberation a newly born country required rapid financial assistance and advisory services to industrialize the nation and BSB supposed to bolster in this regard. It has been extending long and medium term loan facilities in local and foreign currencies to industrialize projects (both new and BMRE) in the private and public sectors. With the passage of time due to mismanagement of loan distribution and ill motive of borrower left he sector derelict.

Institutional overview of BSB

Established October 31, 1972

Organization Head office Dhaka

Division 5

Department 21

Zonal Office 3

Branch Office 15

Personnel 856

Capital structure and sources of fund

Authorized capital : Tk 2000million

Paid up capital : Tk1320 million

Other sources of bank’s fund are the government, Bangladesh Bank, Commercial Bank, Local/Overseas financial institutional and suppliers’ credit.

Ownership of BSB

At least 51 percent of the Authorized capital of BSB be subscribed by Bangladesh government and remaining 49 percent be subscribed by Bangladesh nationals or by financial institutions local or foreign. Presently, 100 percent ownership of the Bank belongs to the government.

Mission

Accelerating the process of industrialization of the country by providing financial assistance and equity support.

Management

The overall policy formulation and the general direction of Banks operation vest on a board of directors appointed by the government. The board of Directors consists of nine (9) members including the chairman and the Managing director. Non government shareholder subscribing to the capital of the Bank shall eventually elect four (4) Directors from amongst themselves. The Managing Director is the chief conducting the overall Banking business.

Function of BSB

BSB extends long and medium term loan facilities in local and foreign currencies to industrial projects (both new and BMRE) in the private and public sectors Besides the Bank also performs the following activities.

Provide working capital loans to industrial project. Assist in the form of underwriting and bridge finance to public limited companies as equity support. Issues guarantees for repayment of loan on behalf of borrowers, Extends commercial Banking services along with deposit mobilization. Purchases and sells shares / securities for BSB and on behalf of customers as a member of Dhaka Stock Exchange (DSE) Ltd. and Citation Stock Exchange (CSE) Ltd. for capital market development and Conduct project promotional activities with preparation of various sub-sect oral study reports.

Operational Activities of the Bank

Bangladesh Shilpa Bank being the prime development financing institutional continued its effort to make on effective contribution towards expansion of industrialization process of the country. It emphasized on long term lending to the viable new projects having comparative advantages, export prospects, forward and backward linkage and local technology as well as raw materials based projects. Top priority has been given for realization of its loans towards augmenting and recycling of the invertible funds and maintaining satisfactory loan portfolio for increasing profitability. With this end in view the Bank has undertaken some realistic steps towards replacement. Rescheduling and liquidating of loan accounts of sick / closed / stuck-up projects with waiver facilities where deemed appropriate.

Strength of BSB

BSD is a development finance institution. It plays significant role in the industrial development of Bangladesh. Its untiring endeavor is remarkable. As a finance institution it has both strength and weakness. All the contribution of BSB is the consequences due to its strength. On the other hand failure ness of BSB is for unconsciousness and unauthorized exercise of power. It is indeed that the contribution of BSB is below the expectation. It fails to achieve the target because a great portion of loss is compensated against its contribution. Many experts tell BSB fails to use his resources successfully as a result it is a loosing concern. It is true but some external interfere also responsible for unfortunate losses. Although there are some drawbacks, BSB has some strong side that may ensure future achievements. These are the following:

BSB has some skill manpower such as Engineer, Economist, Business executives, lower and so forth. Their capabilities are deteriorating for lack of proper working environment and unexpected political pressure. In some cases they are not able to work independently. If BSB can use his personnel sufficiently, it will be profitable in future.
BSB has greater capacity to collect money from foreign countries. It may come through loan aid, grant etc. and BSB has many potential sectors where it can disburse more money as loan. If BSB able to merge between two (resource mobilization and loan disburse), it will give good results for the economy as well.
BSB is only one industrial bank of our country. All industrial must have to go BSB for industrial loan. They can take these opportunities through their willingness and service mentally.
BSB has luxurious building which is situated a commercial area in the center of Dhaka city. Suitable location is increasing its popularity within the country and abroad.
BSB has goodwill in the market. All the businessmen know BSB. BSB acquires this reputation through his thirty years service life. We expect BSB is able to maximum use of its resources and will be profitable thereon.

I hope that our government will help BSB to perform his duties independently. There is no alternative way of employment generation of our country without industrialization, which is essential for poverty alleviation.

Weakness of BSB

The weaknesses that I found in the operational activities are as follows:

Weak internal control and working environment. Many people are working in a big room. As a result office room has converted into a noisy place.
As a big organization has limited publication even they have no particular books on BSB that may cover everything.
Lack of co-ordination in the policies or directives.

CHAPTER FOUR: ACTIVITIES OF BANGLADESH SHILPA BANK

ACTIVITIES OF BANGLADESH SHILPA BANK

Bangladesh Shilpa Bank encompasses various department and zonal offices to discharge its activities. To perform efficient and effectively BSB in its board meeting has determined the schedule activities of various departments and zonal offices and they supposed to perform the task accordingly and the respective employee have to repot according to organizational hierarchy.

Activities of some important department are enumerated below.

Loan Operation department

Bangladesh Shilpa Bank (BSB) grants loan on the basis of certain criteria. The first Activities of loan granting are done by the loan operation department. Any entrepreneur who wants to borrow money, from BSB must fulfill at first bank standard questionnaire from (BSQF) terms of Tk 1000.These processes are as follows:

At first an application form is supplies to the entrepreneur.

After filling up the application from it is submitted by the Entrepreneur.

A project appraisal letter is supplied by the entrepreneur.

After analyzing the project appraisal, the board decides the loan should be sanctioned or not.

If the loan is sanctioned it is forwarded to the project implementation department.

Documentation and Machinery Procurement Department

After sanctioning loan by loan operation department, it issues a letter to documentation department, parties and after concerned departments. The documentation department issues a letter to the parties to produce necessary documents. Those documents are:

ü Memorandum of Association Articles of Association

ü The land upon which the project will be established, document of this land must be produced.

ü Receipts of rent

ü Documentation fee

ü Mouja Map

ü The document that reveal that the land were not sold within preceding two years.

Then a form is filled up. These documents are sent to lawyer. It every thing is ok it is transferred to project implementation department.

In the documentation process the borrowers are required to submit a copy of memorandum of association and articles of association. It is returned after the conflation that in has been submitted according to the rules the borrower company must submit it after the authorization by direction of registration of Joint Stock Company and firm. The following activities are performed during the time of documentation process:

The borrower company must submit necessary documents

Verification of documents by documentation and machinery department and law department.

Preparation of all documents of the borrower company director.

Project implementation department

When the loan is sanctioned by the loan operation department it is forwarded to project implementation department (PID) performs the following activities:

³ Undertaking necessary initiative after granting loan in favor of the project.

³ Taking necessary action to make the factory layout.

³ Making necessary adjustment, in case of change of the project place, change of board of directions and change/ extension product mix etc.

³ Making necessary attempt to give the loan a stage by stage after the loan granting

³ To ensure that necessary capital has been supplied by the entrepreneur and to ensure its proper utilization.

³ To give necessary assai stance in the case of Bridge loan from any financial instep tuition.

³ Taking necessary initiatives to contact the lay-out of the project according to construction cycle.

³ Monitoring the machinery of the project, inspection and taking any kind of advice regarding to any machine related problem from machinery department.

³ Verification of new material process of project ensuring the cash capital according to the loan terms and condition and providing necessary assistance in this matter.

³ Inspection and monitoring experimental production and extension of loan period.

³ Making the final construction report (FCR) and transferring it to central recovery department (CRD) and concerned department/ authorities.

³ Determination of the construction period of the project preparing loan repayment schedule and taking after necessary action regarding this.

³ Monitoring and inspecting the project to see whether the project is implementing according to time schedule and taking necessary initiatives to solve any kind of problem arising out there from and providing necessary advice to the entrepreneur.

³ Receiving insurance letter against the predetermined risk implementation priest assets and ensuring its deposit to bank

Central recovery department

Project implementation department makes a repayment schedule and given it- to the borrower. Nominally the interval is 6 months. This department inspects the project after every 6 months to see whether there is any leakage. If the borrower fails to repay the loan as the application of the borrower it is rescheduled. Sometimes a portion or interest is exempted. If the borrower fails to repay the loan, than it is transfer to law department to take legal action. On the application of the borrower sometime the project is transferred to project rehabilitation department to restore the project.

Loan Accounting Department

Loan accounting department is the department which centrally maintains all loan accounts of the bank. There are 4 sections which performs the activities of the department.

1. Not due section.

2. Amount due section overdue section

3. Replacement section

4. General and policy section

Description:

I. Not due is the installment not yet due for payment in schedule time fixed by the Project department/ Branch officer.

II. The payment of installment and interest in not paid cleared in time is overdue.

The functions of this section are:

a) Accurately list of balance preparation.

b) Advice sending to borrower.

c) Quarter/ half year by interest charge.

Ill. When the overdue is rephrased or waived then the replacement section will do the needful activities.

IV. General and policy section do the following:

a) To prepare the monthly Trial Balance.

b) Monthly recovery statement.

c) Monthly disbursement schedule

d) To make entry all the transaction as per daily statement received from the branch officer.

e) All list of balances of not due send to the Head Office and Branch Office.

f) To prepare distribution of work among the officers and staff as specific guidelines of the authorities.

Not Due Section:

I) Quarterly/ half yearly installment and interest charge and transferred it to amount due section.

2) The rate of interest is fixed by the prevailing interest at the time of execution of loan document.

3) Foreign currency installment and interest will full as foreign currency loan agreement as per contract of overseas donor agency.

Project Rehabilitation department (PRD)

The objective of BSB is to make industrialization of the country. But many of the projects, which are loaned by BSB, become sick and cannot carry on their projects. There are many reasons, so government tries to revive the proposed project for greater advancement of the country.

The main activities and responsibility of Project Rehabilitation department are as follows:

1) When files are transferred to Project Rehabilitation department, it traces the cause of sickness and Recommend to take initiative to rehabilitate a project. The rehabilitation process starts after the recommendation of the advisory committee formed by the General Managers.

2) The files of the projects are transferred to Law Department to take necessary actions, which are deemed not rehabilitate. Again if there is no opportunity to rehabilitate any it also rejected.

3) Verification of the proposal regarding rehabilitation recommendation preparing the implementation schedule and taking necessary initiatives to take care the project and deciding the single or joint management of the bank over the project if necessary.

4) Taking rehabilitation program controlling projects management and monitoring and ensuring the management system taken over by bank and performing other activities regarding these.

5) Production of the rehabilitated project, making of the products analyzing the targeted loan recovery and actual situation and taking necessary initiates regarding these.

6) Retraction of bank participation stage by stage from the project, which is profitable

Law Department

In the Shilpa Bank fails to recover its loan in the normal way, it must under taken alternative action and file case in the court. The causes which Shilpa Bank tiles cases are:

I. Recovery case : – Section 33

II. Financial Loan Case : – Section 5(a)

III. Certificate Case : – Section 35

IV. Bankruptcy Case : – Section 9(1)

V. Case if check is not cashed : – Section 198

(Petition case)

VI. Case if machinery of project

is transferred from the project

without permission : – Section 37

VII. Case if false properties are

mortgaged : – Section 40

I. Recovery Case:

Case is filed with the court of District Judge or Sub Judge the concerned company and its director such case filed according to Bangladesh Shilpa Bank ordinance 1972 section 33.

II. Finance Loan Case:

Such case is filed against the concerned company and its directors to recover the loan which is due.

III. Certificate Case:

Thus case is filed against the loan de/twit company and its director according to public demand Recovery Act 1913 with the court of respective General Certificate Officer.

Iv. Insolvency Case:

Bankruptcy case can be riled if at least Tk 5 lacks is due. This case if filed according to insolvency Act1997.

V. Case if check is not cashed:

This case if filed in any check is dishonored. It is done according to the Negotiable Instrument Act, 1994

Human Resource Management Department (HRD)

The department of human resource management was not same name as now. Modernizing the structure of the administration of the bank and Development the skill of the human resources and reducing operating cost of the organization. The director’s 244th meeting was conducted on 23rd April 1996. In this meeting, rename of the Administration department as “Administration and Human Resource Department” and Department of labor as ‘department of Human resources Management’.

Sections of this department:

There are five sections in this department

Function of the Human Resources Management Department

1. To give medical facilities to the stuff.

2. To maintain relationship with retired or dead stuffs and their families to know

their condition.

3. To maintain and grant leaves without regular leave.

4. To coordinate and evaluate the branch and regional stuff activities.

5. To step and implement for opening new branch office.

6. To maintain relationship with government and other institution

7. To prepare and implement policy about human resources and related activities.

8. To control the activities the staff of the banks and take proper. Step to

implement computer technology.

9. To perform the activities assigned by the departmental head.

10. To control the administration of human resources of the bank.

11. To give loan for house building, by cycle. Motorcycle, and ensure their proper utilization.

12. To assess and collect compatible personnel who will be perfect for the bank.

13. To take program and implement for developing human resources.

14. To make appointment, promotion and appraising skill of officer and stuff.

15. To make service rules, correction, expansion, administration rules, sub rules, orders, notice etc for controlling and stuff.

16. To give scholarship to the brilliant student of the university for appointing andfinding skilled officer.

17. To give general scholarship to the brilliant and daughter of stuff.

18. To communicate with trade union scrutinizing their demands, open discuss Developing the relationship with administration proper implementation of labor law.

CHAPTER FIVE: PROJECT APPRAISAL PROCEDURE

INTRODUCTION

The aim of project appraisal is to examine the need, which a project is designed to meet and to ‘” judge whether the project is likely to meet this need in an efficient way. Project appraisal provides a rational basis for decision-making. In case of short-term lending, it is not usually necessary to make expensive study of the customer’s future potential Examination of general creditworthiness of a customer and his current financial position is adequate.

There can be no fixed or standardized approach to project appraisal. Numerous and diverse elements enter into the process of appraisal. It is difficult to have a cut and dried formula with the help of which a proposal for financial assistance can be adjusted straightway as acceptable or unacceptable. While broadly the same set of factors is taken into consideration in the scrutiny of individual applications, the weight age given to the factors varies from project to project. In practice, project appraisal coyer five different aspects of a project, viz.

(1) Management and Organization

(2) Technical

(3) Market

(4) Economic, and

(5) Financial.

MANAGEMENT ASPECTS

The extent to which crucial probing with regard to these aspects may be necessary depends on the type of the project and the background of promoters. If, for example, a project incorporating a relatively complex technique and process is promoted by an entrepreneur with proven abilities and experience, the crucial areas to be probed may be, among others, the competence of the managerial and technical executives likely to be in charge of the project. But if such as the competence and previous experience of the promoter, their collaboration tie-up arrangement, the technical and managerial backing he has already line up, their financial resource, etc. may have to be thoroughly scrutinized.

ORGANIZATIONAL ASPECTS

Closely related to the management is the type of organizational structure necessary to carry out and operate the project successfully. So far as organization is concerned, there are two basic queries; what organization is needed to bring the project to the operating stage and what organization will be needed thereafter. In the operating phase, one of the most common questions is the extent to which responsibility and authority should be centralized or delegated. The answer depends on the scale of operation, its geographical dispersion, the degree of specialization of personnel, and the number of persons to whom responsibility can be delegated. Internal controls should also be reviewed. These are basic to sound organization. For a management to function efficiently, the organization should be able to provide prompt reports on current performance that can be checked against both past performance and previous projections of future trends so as to bring problems to light as they arise. It is equally important that the organization should be able to put the decisions of management into effect without delay. Besides, sound budget and inventory control are needed

CREDIT INVESTIGATION

Appraisal of management and organization of project cannot be dined adequately without undertaking methodical credit investigation. The following two broad objectives are intended to be realized through the credit investigation.

(1) Proper identification of the application, and

(2) Degeneration of their ability and willingness to abide by their agreement with the Baric In order words, whether they can and will live up to their commitments in a nominal way. Through an organized credit investigation answers to the following specific questions are sought:

(a) Who are the applicants?

(b) What are their present professions or vocations?

(c) Are they persons of proven honesty and recognized integrity? (d) Are they persons of proven honesty and recognized integrity?

(e) What is the extent of their financial worth?

(f) How much they can and are willing to invest from their own resources?

(g) How far they are capable of implementing and running the project.

SOURCE OF CREDIT DATA

For the purpose of evaluating the credit worthiness of the applicants, particulars and information are necessary about their character (honesty and integrity), capital (properties and possessions), capacity (entrepreneurial and managerial ability), liquidity (cash and nark cash assets), etc. Information necessary for evaluating these traits and qualities can be obtained from a number of Sources. There are several methods like written requests, telephone conversation, meeting information at social gatherings, etc. which may be jointly or severally adopted to obtain the required information. The usual sources of information can be broadly divided into internal sources and external sources. The external sources can again be sub-divided into personal contacts and indirect investigation

INTERNAL SOURCES

In case the applicants are exiting borrowers of the Bank, the internal records and behavior of respective loan accounts will reveal great deal of information about their bank-ability. Details of past borrowings/equity-support such as amount, date of sanction, amount repaid, amount outstanding and overdue, together with comments on aspects like replacements, moratorium, etc, if any, should be incorporated in the credit report.

EXTERNAL SOURCES

For the new applicants, the credit investigator has to depend primarily on the external source to verify the statements and declarations made in the loan application. The main external sources are.

(a) Credit Information Bureau (CIB) Report. If the corn report indicates that the proposed sponsors are defaulters to any Bank/OFI, their proposal should be turned down as per decision of the GOB,

(b) Interview with the applicants,

(d) Inspection of the apple incants, place of business and properties, and

(e) Other sources like commercial bankers of the applicants, business firms, trade circle, friends and associates, Registrar of join Stock Companies/Firms, District Registrar Sub-registrar, Local periodicals, Government Publications, etc.

APPLICANTS-THEIR HONESTY AND INTEGRITY

The main task of the credit investigator is to ascertain the real identity of the applicants with regard to their honesty, integrity and their legal authority to borrow or to raise institutional equity. The starting point for him is the loan application and specifically the declaration of the personal assets of the applicants. On this basis, he should have a threadbare discussion with the applications.

The credit investigator should keep it in mind that the applicants should not only be citizens of Bangladesh, but they must also not be minors, bankrupts or persons of unsound mind. He should also be well aware of the legal status of proprietorship concerns, partnership firms and limited liability companies with regard to membership, capital, objectives, borrowing capacity and tax obligations.

PROPERTIES AND POSSESSIONS OF THE APPLICANTS

The financial standing of the applicants is judged by means, of direct reference to their movable and immovable properties. The value’ of total assets minus corresponding borrowings, if any, would indicate the net worth. Although the assets free from encumbrances should from the basis of assessing the financial standing, the details of the existing borrowings from different sources should be stated in the credit report to throw light on the borrowings from different sources should be stated in the credit report to throw light on the borrowings habits of the applicants. There are compelling reasons for which the credit investigator has to be satisfied about the ownership and real value of the declared assets.

LIQUIDITY STATUS OF THE APPLICANTS

The credit investigator must be satisfied that the applicants are financially capable of undertaking a project of the contemplated size. This calls for determination of the sources and the extent of funds that the applicants are capable of mobilizing and also the extent they are ready to invest. The liquid funds necessary for investment in the project may be mobilized by the applicants from one or more conventional sources.

CAPACITY OF THE APPLICANTS

Because of the complexity involved in setting up and ensuring profitable operations of an industrial project, the most important pre-requisite that the Bank expects the applicants to possess is the capability to manage and supervise. The success of a project depends primarily on this trait of the sponsors. Its presence blooms a project and its absence dooms the same. Unfortunately this is most difficult to judge. As indicated in the proceeding paragraph, the entire credit analysis is directed to point up this qualitative characteristic of the sponsors. Individual, capability is reflected in the conglomeration of skill and resourcefulness, education and. experience, age and personal health, etc. The first consideration for the credit investigator is to ascertain how successful the applicants are in their present trade and profession. The second consideration is to judge whether they are financially and managerially competent to undertake implementation of the project. The thing consideration is to forecast ability to run the project successfully upon implementation. Analysis of the past operations, opinion of the commercial bankers, independent opinion from outside sources, etc. would be useful in assessing the capability of the applicants. It may be mentioned here that while “assessing the sponsor’s capability, the following point should be examined.

* Past repayment performance of existing loans.

TECHNOLOGICAL ASPECTS

The second important aspect of technical study includes evaluation of resources to be used for setting up the project as well as operating it subsequently. The physical resources to be used are to be transformed into financial tens. Hence, the task of the engineer is to evaluate quantitatively the resources such as project land, building materials, machinery, equipment, stores and spares, raw materials, labor, power, fuel, etc. Then he is to work out the cost of, these resources. In monetary tens to determine the capital cost of the project and also it’s operating cost after implementation. While evaluating the capital outlay and physical facilities, the engineer will have to determine the production cycle and also the time schedule for implementing the project.

In the case of a project involving technical collaboration or borrowed technology, the project engineer has to examine various facets of technology transplant and its adoption to suit the local conditions including the terms and conditions of technology transfer and financial and economic implications of such transfer of technology. Although basically, technology transfer takes place between two systems, namely, the domestic acquisition system (the sponsors) and the delivery system (foreign collaborations), the development bank which acts as a gate-keeper between the two systems has a vital role to play in determining the suitability of the borrowed technology, the terms and conditions of technology transfer and its impact on the project as a whole. The ultimate aim of project appraisal by a Development bank is to determine the profitability of the project both from commercial and social points of view.

This cannot be undertaken unless through technical studies and cost analysis have been made a related technical problems solved. Thus, the technical studies and cost analysis provided the basis both for the initial estimates of the profitability of an investment during the initial stages and for the final decision to implement the project or not. The technical appraisal, therefore, constitutes the foundation of the entire super-structure of project appraisal.

A development Bank may need to consult or contact with specialized engineering services from outside for specialized matters, particulars relating to projects to be based on complex technology. However good an engineer of Development Bank may be in studies or specific operations, he cannot be expected to be expert in all fields of specialization. This point is of great practical significance while dealing with a project in which the country has no previous experience. In such a situation, particularly in the case of a project involving large capital outlay, it is advisable to find out best advisors (consultants) from outside. For because any defect in the project design and formulation will eventually affect the enterprise adversely.

BASIC ASPECTS OF TECHNICAL APPRAISAL

The basic aspects to be analyzed in the course of technical appraisal are –

(A) Preliminary investigation

(a) Products/ Service;

(b) Raw materials;

(d) Testing and analytical report.

(B). Selection of production process

(a) Choice of alternative and selection criteria;

(b) Wastage in manufacturing process;

(d) Disposal of wastes and effluents and

(e) Environment and pollution control.

I Machinery and equipment for production/service

II. Productive capacity and efficiency. Site selection

III. Site selection-

(a) Technical factors;

(b) Cost factors of production;

(d) Administrative and housing factors; and

(e) Transportation factors.

IV. Layout plan-

(a) Site;

(b) Building;

(d) Supplementary Installations.

V. Analysis and evaluation of utilities and supplies

(a) Raw materials;

(b) Stores and spares;

(d) Transfer of technology;

(e)Power, Fuel, Water, Steam ere;

(f) Labor; and

(g) Transporting.

VI. Work Schedule.

Estimation and evaluation of cost.

The relative importance of these aspects will, however, vary from project to project.

MARKETING APPRAISAL

An industrial project is to bring in some goods ‘or services for a community. But the community does not need them infinitely. Their demand is of course finite and at given prices.

CONCEPT OF MARKET

Ordinarily, the market means a precise place where commercial transactions occur. In a broader sense, however, it is termed as the sum of contacts between buyers and sellers of a product or service, the price and quantity exchanged of which are detonated by the forces of demand and supply. Market, in this sense, may be formally organized and geographically centered or it may, be either. The market includes the whole environment in which the enterprise is to live and to which it must adapt itself: consumers, suppliers, competitors and all kinds of technical, material, political, legal and administrative restrictions. Market analysis is the first “screening” stage in the project appraisal, at which projects that cannot expect satisfactory market acceptance shall be rejected.

MARKETING PLAN

A: Marketing Objective:

Marketing plan, as in’ the case of production and financial plan, should have objective in the backdrop; and the objective is what is wanted to be achieved. The objective may be more than one and quantifiable. For appropriate marketing objective, it is necessary to look at depth into the –

(a) macro/micro demand/ supply situation for specific products in the market.

(b) existing and expected competition in local and foreign markets,

While appraising industrial projects, the Bank is required to analyze these factors and to bring out the objective in quantitative terms.

(a) Product identification:

The study of this environment should begin with proper identification of the goods or services to be exposed to the environment. One way of identifying them is in term of their complementarily and Competitiveness. Complementary goods are used together in a single consumption activity. Cameras, films and developing instruments and chemicals constitute a set of such complements. Complementary goods may be sold together or separately.

Another way of distinguishing goods and services is in terms of their consumers. These are: Final goods, Intermediate goods and Investment Goods. Lastly, the goods and services may be either new or existing in the market.

(b) Nature of Demand.

(c) Type of Demand:

(I) There are various types of demand for the product/service in question. These are direct, derived, new, replacement demand, etc. The market analyst should identify the type of demand be created for the product(s)/ services.

, (II) Size and Composition of Present Demand: Market Size:

METHODOLOGY:

The initial objective of demand analysis is the determination of current effective demand. Effective demand represents the total quantity of a specific product purchased at a given price in a particular market over a given period. The base for estimation is the actual consumption figure during the relevant period.

The equation of apparent consumption is as follows:

C=P+ (M-X) + X

Where,

C = Consumption

P = Domestic production

M = Imports

X = Exports

S = Changes in Stock

Once current demand has been estimated foe the entire market, it becomes necessary to segment the market to make future projections.

Effective market segmentation will therefore:

– help to understand better market behavior and responses,

– enable the concentration of efforts on promising market segments,

– enable the fine tuning of marketing strategy to the needs of target segments,

– increase total sales, reduce costs and step up profits.

The most typical variables, by which markets can by segmented are as follows”

A: Consumer Markets

(1) Geographic:

– Administrative regions

– Geographic regions

– Climate

– City-size

– Rural-district cut-size.

(2) Socio-economic:

– Income (level, dynamics, distribution)

– Age

– Sex

– Occupation – education

– Family size

– Religion

– Income elasticity of demand

– Prices and availability of complimentary goods

– Govt. policies – nationality

– Social class

– Culture

(3) Personality and behavior:

– Life style

– Leadership

– Ambition

– Conservatism

– Buying motive – loyalty

– Extroversion and introversion

– Service sensitivity and introversion – service sensitivity

– Promotional sensitivity

B: Industrial Markets:

(1) Number and types of industrial users:

– Size

– Ownership

– Age of equipment

– Regional concentration

– Vertical vs. horizontal markets- technological progress.

(2) Buying power:

– Number of employees

– Value-added.

The market analyst should collect and analyses the following data for export market:

(I) World Trade:

– Names of the countries to which the product will be exported

– How these countries are at present meeting their demand. If through import, what are the countries of their origin?

– Time series data regarding export and import.

(ii). Characteristics of Specific Intermediaries (Exporter, Importer):

– General description of types available

– Margins

– Effectiveness

– Regulation

– Contacts in export market

– Marketing tasks they are able and prepare to carry.

(iii) Transport and Insurance:

– Traditional transportation means

– Costs of freight and insurance – timing of delivery

– Delivery terms, DIF, FOB, etc.

(iv) Market Accessibility:

– Tariffs and fees

– Non-tariff barriers

– Quality standards

– Health, medical and safety requirements

– Package standards

– Import quotas

– Customs regulations

– Political and administrative barriers:

– Trading habit

– Comparative advantage

(v) Terms and conditions of sales and distribution arrangement

(vi) Export incentive available

(vii) Past export trend/ performance of the product(s)

SUPPLY ANALYSIS:

Local producer’s past and present output, together with capacity utilization review provides a convenient departure point for an analysis of supply situation and outlook, which combined with combined with demand estimates, will determine the project’s position in the market and thus expected.

Compared with the variety of methods applicable for demand forecasting, projecting the future supply position in the market is a rather unassuming task. Availability of the production in the market is a function of:

-domestic producers present and projected capacities

-new projects being under construction present and projected export volume

-foreign manufacturer’ capacities, marketing strategies and development plans,

– Government policies.

SUPPLY GAP:

Considering the future demand for the product and total potential supply of the same, the analyst should, estimate the projected supply gap. It is to be examined how the supply gap justifies the setting up of the project under consideration.

MARKET SHARE:

Having estimated the supply hap, the market analyst should calculate the project’s contribution towards the reduction of this gap. In fact, market share is the marketing objective.

MARKETING INFORMATION

The procedure ofmarket analysis, outlined above, call for systematic collection of information about the market for the goods and services to be considered. Some of this information is quantitative while other is qualitative.

QUANTITATIVE INFORMATION

The following quantitative information is to be collected in physical on a national basis:

Consumption Data:

1. Production

2. Imports

3. Exports

For international comparison, such data for comparable foreign countries are also to be collected.

Industrial census:

1. Number of productive units

2. Distribution of productive units by location.

3. Installed production capacity.

Demographic Data:

1. Distribution of population by age, sex, marital status, religion, literacy, income, occupation and region.

2. Average size of a family

3. Rate of population growth

4. Rate of organization.

The following quantitative data, express in terms of value, are also be collected on a national basis:

Prices:

1. F.G.B. price of exports

2. C.LF. price of imports.

3. Ex-factory price of products and services.

4. Wholesale price annual average.

5. Consumer’s price index

6. Cost of living

The requirement information relating to tax expressed in rates/ values age:

1. Customs duty.

2. V A T.

3. Import license fee.

4. Others.

The above quantitative data should be collected for several for several years in the past so as to constitute historical series.

QUALITATIVE INFORMATION:

The qualitative information, which may be required for market analysis, is:

1. Location information-Transport and communication facilities, water and power facilities, nearness to the market, etc.

2. Possibilities of continued supply of inputs.

3. Attitude of customers.

4. Climatic characteristics.

5. Methods of distribution-market and non-market

6. Government policies:

(a) Economic Development objectives.

(b) Health and safety standards.

(d) Taxation policy.

(e) Export policy.

(f) Monetary policy.

(g) Labor policy.

(h) Others, if any

ECONOMIC APPRAISAL

Economic analysis of a project aims at determining whether that project is consistent with overall national and sector- wise objectives arid’ whether the investment proposed is the best means of achieving the intended objectives. It involves a systematic evaluation of a range of options for achieving the intended objectives. It involves a systematic evaluation of a range of options for achieving a state set of objectives. Allocating resources to a sector or specific purposes reduce reduces the resources available for other sectors and purposes. Therefore, it is essential that the allocation of investment resources be efficient among sectors. Economic appraisal is the primary means of determining whether a proposed investment is worthwhile. It should determine whether a project is acceptable and, if it is, whether it is the best alternative.

Economic appraisal should cover both quantifiable and non-quantifiable benefits (where applicable). Such benefits are described ad-seriatim.

QUANTIFIABLE BENEFITS:

Following are the quantifiable benefits of economic appraisal:

(a) Economic Rate of Return (ERR),

(b) Bruno Ratio/ Domestic Resource Cost,

(d) Employment Generation and Cost per employment.

(a) ECONOMIC RATE OF RETURN (ERR):

ERR measures the potential earning power of the social resources used in the project and thus help the assessment of investment proposal. It is worked out at which the present value of costs becomes equal to the present value of benefits. Net present value (NPV) is the net value or net benefit of a project when all costs have been discounted to the present at the accounting rate of interest.

After working out the ERR, it should be compared with the Accounting Rate of Interest (ARI).The ARI is nothing but the opportunity cost of capital which is supposed to maximize the use and productivity of invest-able resources in the country. The broad decision criterion is that, other things being equal, the project whose ERR is les than the ARI should ordinarily be rejected unless other unquantifiable benefits are adequate or the project can be qualitatively justified: Detern1ining the opportunity cost of capital for a society is difficult, but economists generally consider it to be 15 percent in most developing countries. The planning Commission of Bangladesh has estimated the ARI at O. 15 (or 15 percent).

(b) BRUNO RATIO/ DOMESTIC RESOURCE COST (DRC):

An industrial project will either be import substitute or export oriented or combination of both in nature. In developing country, development of industrial projects, normally involves substantial amount of scarce foreign exchange. On the basis of more absolute amount of saving and/or earning of foreign exchange of an investment proposal, the optimal allocation of scarce resources (both domestic and external) may not be achieved, the implicit foreign exchange. In other words it indicates the domestic resource cost involved in foreign exchange to be saved/ earned by a project.

The domestic resource cost (DRC) involved in saving/ earning foreign exchange by a project is normally worked out by dividing the real domestic cost in Taka by real net foreign exchange to be saved/ earned. It is normally expressed as Taka cost per unit off foreign exchange (i.e. $ or) saved/ earned i.e. the amount of Taka required to save earn a Dollar or Pound Sterling. If domestic resources are expressed in domestic currency and foreign exchange is expressed in dollars, a DRC of less than the (Shadow) exchange rate is considered quite acceptable.

(c) CONTRIBUTION TO GROSS DOMESTIC PRODUCT (GDP)

Contribution to GDP of a project is estimated from sales value and inter-firm transactions. Data regarding sales value is taken from the calculation of sales estimate of the financial appraisal. Sales value of fourth year is taken. Similarly data estimate of the financial appraisal. Sales value of fourth year is taken. Similarly, data relating to inter-firm transaction of fourth year is collected from the calculation sheet of cost of goods sold and General Administration and selling expenses of the financial appraisal.Detail calculation of contribution to GDP of a project may be worked out as per the following format:

A. Sales (4^th year)

B Less: – Inter-firm Transaction (4th year)

– Raw and packing materials

– Stores and spares

– Water, Power and Fuel – Repair and maintenance

– Rent, Tax and insurance – postage, telephone, fax etc.

– Stationery and printing

– Traveling and conveyance

– Advertisement.

– Contribution to GDP (A-B)

BSD has meaningful contribution to GDP. In the year 1994-1995 GDP was 8.6%, which is higher than that of previous yea. I observed that in the year 1996-97 was too lower than last two years. But in the year 1997-98 GDP contributions was 8.1%, which is 4.6% greater than that of last year. Another depression was come in the industrial sector in the year 1998-99; only contribution was 2.5%, which is lower contribution after liberation to date. After the year 1999 GDP contribution is more or less equivalent over the years. In the year 1999-2000, 2000-01 and 2001-02 were 5.7% and 5.0% respectively. The growth rate of gross domestic product of Bangladesh decreased to 4.80% in 2001-02 as against 5.30% in the previous year. The overall growth in the sector of agriculture and forestry declined to 3.00% in 2001-02 from 5.50% during the preceding year. On the other hand the rate of growth in the industrial (manufacturing) sector during the year under report declared to 5.00% from 6.70% in the previous year. The rate of domestic savings as percentage of GDP in 2001-02 reminded at 18 percent as in financial year 2000-01. The rate of total investment to GDP increased marginally from 23.09 percent in the preceding year to 23.1 percent during in the under report.

Table 1 – GDP contribution of Industrial Sector on Overall GDP of the economy

So from the above discussion we could easily say that the rehabilitation department is not successful enough.

(d) EMPLOYMENT GENERATION AND COST PER EMPLOYMENT:

The number of full-time and part-time jobs measured in man-years expected to be created both during construction and during operation of the project should be estimated separately. If data are available, these estimates should be related to Regional, sectoral and national levels of unemployment and under employment and under employment. Where possible, the degree of labor intensiveness (i.e. the number of workers employed per unit of investment) of the project should also be estimated.

Non-quantifiable/ Intangible Benefits/ Externalities:

The term non-quantifiable refers both (1) to effects that are known to arise but which cannot be measured in physical terms and (2) to effects, which cannot be valued. Difficulties in quantification and valuation will often go together. Quantification problems often are data problem a certain effect could not be measured, but has not been.

FINANCIAL APPRAISAL

(a) Fund requirement to bring the project in to existence and the probable sources from which the required funds will be mobilized; and

(a) Prospects of adequate revenue generation by the project when it goes into operation and the likely position of the concern with regard to its actual cash generation (liquidity) and its probable impact upon the financial condition (solvency).

The first aspect deals with the estimation of total of the project (fixed cost + net working capital) and a suitable financial arrangement (debt-equity relation). The second aspect relates to the analysis of production-cost profit at different volume of production carried up to the year the project attains its normal capacity operation.

COST OF THE PROJECT

The cost of a project represents all capital expenditure to be incurred for acquisition of its fixed assets plus the nit contribution of long-term resources in the proposed current assents. In other words, the fixed cost of the project plus the net (or permanent) working capital requirement to run the project will comprise its total cost.

FIXED COST OF THE PROJECT

The requirement of physical assets for a project is essentially an engineering estimate. The analyst should, however, recheck the various cost items detailed in the fixed cost statement given in the technical report. The idea is to see that all costs are included and the cost estimates are realistic. The analyst should go through item by item and also look in to their ramification. Individual item of tangible assents will have a required quantity (Q) and a price (P). The Q indicates any quantity in area, number, volume, or any other suitable unit of measurement. The P indicates the price for a specific unit of Q. The fixed cost of a project is the aggregate of cost of land, building construction, plant, and machinery and equipments preliminary and are expenses (capitalized) and a margin for contingencies (any or may not be considered).

WORKING CAPITAL

Apart from investment in the fixed assets, liquid funds are, necessary for investment in current assets like stocks of ram materials, good-in-process, finished goods, ‘stores and spares, debtors, etc. The portion of fund, which remains invested in current assets of a concern, is called its working capital. Such assets are characterized by their tangibility and short-liveliness. It is worthwhile to mention here that Bangladesh Bank issues some policy guidelines from time to time as to what will be the tied up period while calculating working capital requirement pending on the nature of the project, which should be followed during appraisal.

MEANS OF FINANCE

A project may be financed in the following two ways:

Ä The entire finance may be provided by the sponsors; or

Ä Part of the finance may be provided by the sponsors and the rest by the Creditors.

The following are the usual sources of funds:

(I) Equity Capital

(a) Paid-up share capital;

(b) Reserves and surplus (for an existing concern); ,

(d) Other sources such as loans from Directors, friends, relatives, associates, etc.

(II) Loan Capital:

(a) Long-term borrowings (both secured and unsecured); and

(b) Interest During Construction Period (IDCP).

ANALYSIS OF FINANCIAL STATEMENT

Proper interpretation of data presented by financial statements helps in;

(i) Judging the profitability of operation during the past periods;

(ii) Indicating the trends which may reveal future probabilities;

(iii) Determining the financial condition at a specified date

(iv) Predicting the future ability to meet the existing or anticipated credit obligations;

(v) Judging the capability of the management in meeting the changing conditions arising out of implementation of the proposed project or on-set of a bad business time.

After estimating the cost of the project, means of finance, sales and cost of sale, the financial statements of an existing concern should be analyzed through calculation of a number of financial ratios.

RATIO ANALYSIS

Despite various approaches to financial analysis, the ratios can be classified into the following four fundamental categories:

i) Liquidity Rations (These are also called Loan Safety Ratios);

(ii) Leverage Ratios

(iii) Activity Rations (Management Efficiency Ratios);and

(iv) Profitability Ratios.

Liquidity Ratios are designed to measure the ability of the concern to meet its immediate and maturing debt obligations.

Leverage Rations measure the extent of funds contributed by the owners of the project as capital compared to the funds provided by its long-term creditors.

Activity Ratios measure how effectively the project is employing its resources.

Profitability Ratios show the management’s overall effectiveness as revealed by the returns generated on sales and investment.

FINANCIAL PROJECTIONS

Financial projections are final translation of plan for a project in monetary terms. In other words, projections reflect in concrete terms the anticipation of the analyst regarding the future income and expenditure and their probable impact upon the assets, liabilities and equity of a proposed project. Through financial projections, answers are sought to the following questions:

(i) What it should cost to produce and sell the product? and

(ii) What it should sell for?

PRESENTATION

The third basic requirement of financial projections is a suitable technique for calculation and presentation. The analyst will have to utilize his knowledge of accounting. The financial projections are prepared and presented within the accounting framework. The quality of the projections would, therefore, depend upon the analyst’s knowledge of accounting. The financial projections involve working out the following three interrelated statements for a number of years in respect of a project:

(i) Forecast of earnings this will measure the cost of production and profitability;

(ii) Fund flow statement which will indicate major or prominent fund inflows and outflows;

(iii) projected Balance Sheets which will depict the capital structure and assets spread at the and of periods used in (i) and (ii) above.

COST OF PRODUCTION

Once the computation of future sales is completed, the next step .is to calculate the relevant cost of sales. This process involves preparation of some sort of expenses budgets for the relevant years for which sales have been calculated. All the expenses can be broadly divided into the following three categories:

(i) Cost of goods sold;

(ii) General, Administrative and selling expenses; and

(iii) Financial expenses.

CHAPTAR SIX: PROJECT MONITORING PRACTICE OF BSB

(A Case Study)

For illustrating the monitoring practices of BSB I choose a case named M/S Ettade Plastic Ltd. which dictates the actual performance of Project Monitoring department of BSB.

NAME OF THE PROJECT:

M/S Ettade Plastic Ltd.

Location: Char Ramjan, Meghnaghat, Sonargaon, Narayangonj.

CAPACITY OF THE PROJECT:

The annul rated capacity of the project has been estimated on the basis of three shifts operations of eight hours per day and three hundred working days in a year.

Loan operation department issues a sanction letters pointing out the total mount of loan, which sanctioned in favor from of the M/S Ettade Plastic Ltd.

In the sanction letter, LOD offers brief description about the following-

Ä Cost of the project,

Ä Means of finance,

Ä Capital structure,

Ä Amount of loan,

Ä Purpose of loan,

Ä period of loan,

Ä Rate of interest and other charges,

Ä Disbursement schedule,

Ä Repayment schedule,

Ä Security of loan,

Ä Special conditions, And so on

IMPLEMENTATION

A sum of the 98800000 and 83000 sanctioned in favor of M/S Ettade Plastic Ltd. to be repaid 24 (Twenty four) quarterly installments, Repayment shall commence after commence after eighteen months from the date of opening of letter of credit (L/C) orsix months after the project goes into commercial operation, whichever is earlier. The interest is to be accrued on the outstanding loans amount after the expiry of the grace period shall be charged as usual on quarterly basis.

LOAN SANCTION & EXPENDITURE

Task of the main project Implementation department of BSB is to disburse the sanctioned loan in accordance with Loan Operation Department .The disbursement schedule of total loan amount is given below:-

1^st Installment =743.18 lac

2^nd Installment =195.65 lac

3^rd Installment =50.00 lac

Total =988.83 lac

First installment money will allow for importing machinery and equipment, 80% of machinery cost will be paid out of BSB loan, 20% machinery cost will be paid out of sponsor’s equity.

M/S Ettade Plastic Ltd.

List of Imported Machinery

Table-2

Others import machinery

Laboratory equipment, power supplies and control system, water supply system.

2nd installment was to be disbursed for the constructions were opening of letter of credit for import of machinery and equipment through BSE.

3rd installment was to be disbursed towards reimbursement of net working capital. Third installment was allotted on basis of utilization of second installment of loans and producing documentary evidence other than availing of required working capital from sponsor’s designated commercial bank.

The Project Implementation Department of BSB inspects the M/S Ettade Plastic Ltd. before final production time to time. The principal objective of such types of inspection is to avoid fraudulent activity and to maintain proper distribution of loan. BSB provides Final Construction Report (FCR) in inspection form-II in regular interval basis. It contains an inspection team. The report to the higher authority of BSB on inspection form-I provide the construction and engineering timetable and progress made.

On 20th August 2003, inspection was made on reconstruction of land and building. Company’s engineers, site engineer and other executives were presented at that time. Inspection team compared the actual activity with the master layout plan. According to sketch construction work was for Circular loan Section (party). Yarn making section and raw material store. Total investment for reconstruction became Tk-367.97 lack.

After completion of inspection work, inspection term provided some suggestions on basis of improvement of reconstruction work Layout plan of machinery.

On 29th November 2002, another inspection was made on imported machinery. At that time, another construction work (main gate establish) was ongoing. Foreign exporter Mr. Peter Zhou was set up machinery within three months. Result of this inspection shows: at total investment e TK 380.92 lack on reconstruction project.

INSPECTION TEAM SUGGESTIONS

Inspection team suggestions– For reconstruction work TK- 155.26 lac was distributed on 6^th June 2002 to M/S Ettade Plastic Ltd. Manager D.M Md. Mafizuddin & senior officer Md. Rakib Hossain of PID suggested that rest amount (40.39Iac) of installment will be distributed on basis of work in progress of establishment of imported machinery’ and completion of reconstruction work. Project Implementation Department of BSB regularly monitors the work in progress of M/S Ettade Plastic Ltd. As a part of monitoring system, another inspection was made on 2^nd march 2003. At the time, company’s engineer, site engineer and other executives were present there.

At that time of inspection, inspection term observed the experimental production of imported machinery.

Besides, they watch the imported raw materials, which were imported for production. Entrepreneurs of M/S Ettade Plastic Ltd. sent to PDI, pointed out the price of raw materials. From the list it is clear that,

-Entrepreneurs opened up letter of credit (L/C) of TK 202.95 lac

-Deposit margin of TK 84.00 lac against L/C

-Unloading the goods from port by investing TK 141.51 lac in the sector of L/C commission, and insurance.

-Collected raw materials of TK 344.46 lac for commercial production.

-Completed the construction of guardroom and main gate.

– Completed 210 meter brick wall out of 818 meters.

Inspection team suggestions-For 2nd installment, total TK 195.65 lac was distributed to M/S Ettade Plastic Ltd. on 06/06/2003 and 18/12/2003 for project rebuilding. According to sketch) 93% of reconstruction work was completed. Manager D.M. Mafizuddin and senior officer Md. Rakib Hossain of PID suggested that rest amount (50.00 lac) of 3rd installment will be distributed on basis of fulfillment of net working capital.

Project implementation department disbursed the loan to M/S Ettade Plastic Ltd. according to different installments. On other hand it can be said that loan disbursed on basis for works completed. But some tasks were performed / completed slowly by company. It is tolerable because many hindrances came out due to the construction period. Practically it is not possessive to complete 100% work according to sketch.

Project Implementation Department of BSB regularly monitors the specific project and disburses the total loan amount through different installments.

The entrepreneurs provided its information about the requirement of bridge loan. The projects maintained strictly its annual capacity of production. The authority of BSB disbursed the total loan amount by installment, which is also precondition of disbursing Loan amount. I think M/S Ettade Plastic Ltd. completely fulfilled most of the requirements. As a result, they received the sanctioned amount on due date.

The company shared so for product diversification commercially by producing and selling high quality of bag. Monitoring Department has to take creative actions to use loan in full volume. BSB shared diversify its service and add new features is to service so that it can attract new entrepreneurs how all of people. ESB can use internet for both local and international correspondence. E-mail can reduce the telex cost substantially. Bank should take intelligent decision to create own web page in Internet so that it can communicate with entrepreneurs a branches very quickly. BSB should increase its number of monitoring team to investigate very quickly.

CHAPTER SEVEN: SICK INDUSTRY

Precautions about Sick Industry:

Sick situation arises in an industry in some abnormal period. But if the rate of sickness is overwhelming then it becomes a matter of fact. So before providing loan importance must be given on evaluation. If the evaluation procedure is correct, sick industry situation may avoid quite easily. So at pre-investment stage the following things must be considered-

Examine the project is done appropriately.
The project cost is calculated in a proper way.
The proper place is selected.
Defect machineries must not be purchased.
Ensure that skilled and experienced personnel are easily found.
Proper stapes are taken to protect uneven breakdown of electricity.
Ensure that proper people are involved in the managing committee.
Ensure the financial capability of the initiator.
Ensure the procedure of makeup the preliminary cost and the doubtful loss.
Ensure the quality of the produced product.
Ensure the proper way to marketing the produced products.
Consider the change of test of customer.
Proper plan is taken to implement the project.
Steps are taken to avoid the potential conflict

The Symptoms of Sick Industry:

The symptoms of sick industry are as follows-

The initiator is unable to pay sufficient money at the implementation stage.

The delay of implementation increases the project cost. It also creates many problems and the burden of loan interest is increased.
Lack of full production or frequent obstruction of industry.
The initiator is unable to pay the loan installment and other liability.
The failure in payment of loan installment in time increases the burden of loan.
Inability to submit the financial statement in time.
Increase the tendency of undertaking unfair means in preparing the papers of stock materials.
Profit from investment is decrease gradually.
The project faces loss gradually.
The production level decreases gradually.
Taking loan from various sources at a high rate.
Applied for a large amount of loan.
Non-cooperating tendency with the loan providing bankers.
Lacking of perfection in the market.

Sick Industry Classification:

The Ministry of Finance and the Ministry of Industries co-operate to provide debt relief and other financing assistance to bail out failing firms in a specific industry that has been identified by the government as a “Sick Industry”. Assistance may include waiver of interest, reduction in principal, repeated rescheduling of overdue loans, of combinations of these. A “Sick Industry” classification may be purchased with a suitable bribe to the appropriate ministry, Ministries, the PMO, and the Standing committee of Parliament on Finance may be lobbied and bribed to obtain such a classification. Billions of BDT of NCB loans are written down using this technique.

Causes of Sickness:

Bangladesh Shilpa Bank undertakes various projects by providing finance, machinery and other aids, some projects are implemented and successful and some projects are failed to attain the goal and these firms are called sick firm. There are various reasons of sick firm. But to discuss it easily I classify it in two classes. They are-

The reasons that are beyond die control of the project owner; and
The reasons that arc under control of the project owner

The above causes are further divided into seven (7) causes. The causes are discussed below according to their importance though all of the causes are important.

Financial Problems/Shortage of Working Capital

The shortage of working capital is the most acute problem for majority of the sick industries. Working capital is required to finance purchase of required raw materials and other short term needs of a project after it is implemented. A survey shows that 17% of the projects suffered due to shortage of capital. The problems, which lead an industry towards sick, are as follows-

Measurement of investment outlay and cost of the project are not appropriate.
When the means of financing is not available.
When the project is not profitable.
When the production is not reached at the break-even point.
Loan application with insufficient amount of money that would not meet fixed and operation cost.

When they can’t calculate appropriate risk level of sick.

Cash flow of the project is not available.
If actual cost of the project is more than the budgeted cost.
Shortage of working capital, i.e. if they do not manage the sufficient working capital.

If market interest rate increase, cost of working capital increase as a result the project may become in sick.

Lack of operating capital.
Higher fixed cost, i.e. increase fixed cost as a result of increasing of the price of machinery, land or any other fixed items.

When variable cost increase.
Does not ensure sufficient mortgage.
Improper inspection of Bank financed project.
Insufficient insurance facility.
Economic problem comes from the social cost benefit analyses.

Marketing Problem:

Marketing problems are the next serious problem. This problem occurs due to a large number of similar industries and the availability of the products in the secondary market by unauthorized import of such products. A survey reveals that 24% of the projects are suffered due to marketing problem. The marketing problems, which lead an industry towards sick, are as follows-

The aggregate demand of the proposed project is not possible to fill up.
When the market share of project is under low appraisal
When change the consumption trends in the past and present consumption level
If the changes occurred in the import and export policies
Change of customer behavior, intention, attitude, motivation, preferences,

requirements, distribution channel and marketing policy.

Administrative problems and legal constrains.
Introduction of new brand of product
Wrong forecasting about the market. smuggling of substitute goods
If the raw material of the product is not purchase at appropriate time
If the market is not monitor properly
Improper market justification
Lack of market expansion and product diversification
High competition in the market
If income level of the people in a society is decrease then demand of the

product will be decrease

Cheap price of the foreign product
Cost of production is high.

Technological Problem:

Machinery imbalance causing lower capacity utilization is the major technical problem of many projects. Some are also suffered for faulty technical design. A survey reveals that 13% of the projects are suffered due to technological problem. The technological problems, which lead an industry towards sick, are as follows-

Whether the preliminary lest and studies are not appropriate.
Availability of raw materials, powers and other infra-structural facilities have not been established.

The selected scale of operation is not optimal.
The production process chosen is not suitable.
The equipment and machine chosen are not appropriate.
Lack of modern technology, like incapable to use the computer and modern machinery.

If the selection of machinery becomes faulty, it will not ensure the achievement of objectives.

Wrongly or inappropriate selection of the machinery.
Lower capacity of the machine resulting price will be higher, ie. Production cost high.

Inconsistency between the origin of raw materials and the factory location, production of products and final consumption adversely affect the business.

Lack of communication system.
Lack of infrastructure facilities.
In availability of supply of gas, electricity and water etc.
Selection of old and backdated technologies to be used in production.
Delay of machinery procurement & rapidly change in technological environment.

Administrative and Managerial Problem:

There are also some internal conflict between the worker and manager. A survey reveals that 22% of the projects are suffered due to administrative and managerial problem. The administrative problems, which lead an industry towards sick, are as follows-

> Success of the firm largely depends on management. When the management is not capable to manage all the managerial aspect, management should have proper planning, organizing, controlling, administrating and monitoring.

> Weak management of the project.

> Lack of efficiency of employment as well as management.

> Conflict and also death of management partner’s.

> Death of main entrepreneur of the project.

> Insufficient appointment of employee

> Unskilled human resources

> Corruption and intentional misuse of organizational assets.

> Lack of proper planning, organizing, controlling, administrating and monitoring.

Economic Problem:

The economic problems, which lead an industry towards sick, are as follows-

> Economic problem comes from the social Cost Benefit Analysis.

> It docs not impact of the project on the distribution of the income in the society as well as the level of saving and investment.

Political Problem:

The political problems, which lead an industry towards sick, are as follows-

> Political pressure

> Political instability which the production

> Insufficient facilities provided by govt. to industrialist like tax rebel etc.

> Political problem like worker unrest, hartal etc.

> Political pressure to loan procurement

> In appropriate action taken by govt. to protect smuggling

> Political terrorism

Other reasons of sickness:

Except the above problems there are also some problems, which lead an industry towards sick. A survey reveals that 10% of the projects are suffered due to other problem. They are as follows-

> Selection of in appropriate industrial unit which is not financial and logically

viable in concerned country

> Delay of loan application

> Internal delay of industries construction after loan sanction

> If a portion of loan amount used for personal use

> Delay of operation start

> Over estimation of mortgage value

> Delay of loan procurement and sanctioning process

> Delay of documentation formalities in respect of loan

> Causing of rehabilitation measures

> Insufficient enforcement of law for recovery of loan

> Inappropriate location of industries

> Insufficient infrastructure facilities

> Natural disaster that hampered production

> Terrorism that hampered to establish an industry

> Delay of implementation

Sick Situation:

Normally, BSD meets the long term credit needs for implementation of its projects. BSB charter provides for extending working capital to its financed projects only to a limited scale. While sanctioning loans by BSB, provision is made for commercial banks to provide 70% of the working capital needs. But in most cases, it is found that the project management cither can’t al all raise the required working capital from the commercial banks, or they can’t raise required amount in due time. As a result these projects could not go into operation on schedule time and they were unable to pay the interest and the principal amount. At last they are treated as sick industry.

According to the bank statement, BSB has so far financed about 459 projects. In which-

The running projects : I 76

In the implementation stage : 09

Stuck-up :214

Existence less : 26 Sick Industries

Sold projects : 34

Sick Industries:

In Bangladesh there are so many sick industries. The sick industry concept is not the newest one. It is occurring from the pre-independence of Bangladesh and Bangladesh inherent some sick industries from its birth. After independence this is also continuing. The exact figure of sick industry is not identified. There 274 sick industries that are financed by BSB. Some of them are stated below:

Table-3: Some of Sick Industries Financed by BSB

From the above statistics it is clear that there are so many projects in Bangladesh are sick.

An analytical discussion makes it clear to us that the reasons of their sickness and which projects are sick for which causes although the general causes of sickness are stated earlier.

Table-4 Causes of Sickness

If we further analyze it we will find a clear picture of the sick projects and their relevant causes. These things are explained below under a table.

Table – 5 Causes of Sickness of BSB Financed Projects

Impact of Sick Industry in Bangladesh or BSB:

Increase of non-performing assets in organizational level as well as national level.
Decrease in productivity at national level.
Decrease contribution in GDP and GNP.
Adverse effect in banks profitability.
Increases the classified loan.
Increase the lending rate of interest, which adversely affect the new and regular borrowers.

Affects adversely in the economic growth rate of the country.
Creates adverse psychological impact on the prospective entrepreneurs.

Case Study about Sick Industry

Location of the Project:

Solaiman Textile Mills Ltd.

Rupgang,

Narayanganj.

7.8.2 Board of Directors:

Board of director & Explanation of share of the company are given below:

Table- 6

Project Execution & Implementation:

Bangladesh Shilpa Bank distributed TK 53.54 lacks from 1983 to 1986 in a cotton-weaving project having 18 looms at Kaligang of Jinaydaha districts. The project wanted to go in production in November 1983. The loan was sanction and distributed in this project with the objective of manufacturing cotton textile. But because of non-availability of sizing machine in adjacent areas the entrepreneur fails to manufacture cotton textile.

According to the loan receivers this project become a sick industry because of one way production, increase in the price of raw materials, decrease in the selling price of manufacturing goods, etc. Therefore in 1993 the project was refinance under the rehabilitation scheme and on 29-08-1995 in response to the application of the loan receiver the permission was granted to shift the industry from the Kaligang to Rupgang under Narayanganj districts.

According to the terms of loan sanction a period of ten-month time from the date of opening of LC was approved for implementation of the projects. LC was open on 29-03-1995 for importing machinery/ import of machinery under the rehabilitation scheme. Accordingly the project was supposed to be implemented by January 1996. But the project, after installing the newly imported and partly old machineries, wanted to go in production on 01-07-1997. The implementation of the project was delayed because of the shifting of the project to the present site of Rupgang from Kaligang of Jinaydaha, shifting of the machineries and reinstallation, installation of the imported new machineries, reconstruction of the industry, failure of the entrepreneurs to provide timely supplying of capital, and failure to supply the workings capital, etc.

According to the information provided by the company, although being able to go for commercial production, the company was not successful to export their goods for not being of export quality and they failure to sales their products in local market because of limited market opportunity.

List of the Loan Sanction & Payment:

Table-7

Capacity of the Project:

The annual production capacity of this weaving and sizing project is follows:

Bed sheet and bed cover 7.56 lack meters

Different type of shirting 3.36 lack meter and

Thread sizing 1.60 lacks Kg.

Mortgage against Loan:

A) Assets of the project:

Table- 8

B) Co-mortgage Assets:

Mortgage against Long Term Loan:

Table-9

Steps Taken to Recover the Loan by BSB:

> To recover the loan the bank will exert continues pressure on all companies director.

> The old discarded machineries of this project were sold under the bank’s approval and the sale price amounting to Tk 2 lacks was directly deposited by the purchase to the bank as the company’s debt.

> On the recommendation of the special committee constituted by the bank am bank’s authority directed the loan receiving company to make a down payment o Tk 12.95 which is 10% of the time expired loan. The company paid Tk 4.80 lack: on 29-04-2001, as down payment. The company also promised to pay the remaining Tk 7 lacks within 30-05-2002 by selling the land and building a Kaligang of the project. But despite constant pressure the company fails to refund the promised amount.

> Because the loan receiving company was not sincere the refunding loan a notice was serving on the company on 21-12-2003 under Article 12 of the Artho Rin Adalot 2003. After the service of the notice the loan receiving company submitted a proposal for compromise.

Refund of Loan:

Out of Tk 203.35 lack the loan receiving company refunded Tk 16.36 lack as term loan. Out of the refunded amount Tk 2.86 lack has been adjusted and (he remaining Tk 13.50 lack is deposited in sundry accounts.

Down Payment:

The loan receiver’s company paid Tk 13.50 lack against Tk 21.50 lacks as down payment that is 10% of total loan. Thy proposed to pay the remaining Tk 8.00 lack by selling the discarded land and building of the project at Kaligang.

Statement of Outstanding Loan:

The loan receivable amount till 31-12-2002 is Tk 513.00 lack as in temporary accounts. The division of which is given as follows.

Table- 10

Out of the above assets and liabilities the amount of distributed loan is Tk 203.35 lack. If the loan reschedule is violated then the amount of interest will stand and Tk 309.62 lack.

Provision for Loan Account (up to 31-12-2003):

Table-11

Appeal/Application from Loan Receiving Company:

The loan receiving company in their letter dated 12-01-2004 stated that although as per the govt. decision a 18 loomed textile weaving factory was established at kaligang of Jhenaidah district in 1980, the project become a sick industry because of Electricity Problem, unskilled labor and no access in the market wooing to the availability of tax free garments cloth in the market, etc.

Under the rehabilitation scheme, the industry was shifted from kaligang to Rupgang. But unfortunately a robbery was committed and yarn amounting to Tk 15 lack was stolen immediately after implementation/ inauguration of the company at Rupgang. In addition the factory was damaged by floodwater during 1998.

The project could not overcome the sickness for non-procurement of loan of working capital despite repeated effort. Stating the above mention problems the loan receiving company made the following proposal-

Exemption of 100% interest and penalty interest on up to date loan receipt.
Supply of working capital or supply of NOC for procurement of working capital and to allow interest free six monthly installment for the refunded of the principal loan amount so that the loan can be refunded with in seven years time.
To take into consideration the already deposited Tk 15 lack in different accounts. For loan rescheduling and to allow the company to sell the discarded land and building of the project at kaligang at a price specific by the bank (BSB). In order to arrange the remaining sum.
To stop/ withdraw all legal step taken against the company.

Causes of Sickness:

According to the recommendation of special committee and to the Loan receiver company, this project became a sick industry because of the following reasons-

Insufficiency of working capital
Delay of implementation of the project
Actual production cost is greater than the expected budgeted production cost.
Weak management of the project.
Per unit production cost is greater than per unite selling price.
Lack of electricity, gas and other power.
Unskilled labor of the project.
Available access of tax-free garments cloth in the local market.
Unfortunately a robbery was committed and yarn amounting to Tk 15 lack.
High rate of gas and electricity.
The factory was damaged by floodwater during 1998.
Producing the one-way product.
Increasing the price of raw material.
Decreasing the selling price of the manufacture goods.

Advantage Provided by BSD under Rehabilitation Program:

In addition to Tk 163.00 lack as long-term loan and Tk 25.56 lack as working capital loan in favor of the company under the rehabilitation scheme, the following benefit they also provide to loan Receiver Company.

In addition to Tk 25.41 lack of the accumulated penalty interest of the existing loan up to 30-06-1992 and 50%, i.e. Tk 71.94 lacks of simple interest and interest during construction totaling Tk 97.35 lack have been exempted and remaining 50%, i.e. Tk 71.94 lacks of the simple interest and construction period interest have been transferred and reschedule as interest free block.
The remaining portion of expired loan up to 30-06-1992, Tk.42.67 lack and unexpired local currency loan of the 11096 lack totaling Tk 54.60 lack and the interest on it from 01-07-1992 to 31-12-1993 amounting to Tk 11.47 lack. The total figure being Tk 66.10 lack with this amount an interest bearing account is to open which is to be refunded by 20^th equal six monthly installments from six monthly after the commencement of the commercial production till 10 years period.
The Board of Director of BSB approved the shifting of the project from one place to another under self-financing and initiative by the entrepreneur under the following terms and conditions among others. “After shifting the project the existing land and building shall remain mortgage under the bank.”

After shifting of the project from kaligang, Jhenaidah the existing land and building shall remain mortgage under the bank. In favor on approval of the bank the said land and building will be sold and the amount received will be adjusted against the long-term loan from the bank.

Recommendation of the Special Committee of BSB:

The loan account may be reschedule subject to the acceptance of the following terms by the company 50% interest of loan may be exempted according to the Govt. roles and regulation and the remaining 50% interest may be transferred as block and the total liability is to be refunded within 10 years.
In order to increase the income of the company, it may directly export its gods for which it may avail back-to-back L.C. facilities from any bank or financial institution for which the BSB will give NOC.
The loan receiving company has to pay 10% of the total loan receipt as downPayment

No additional charge shall be created on the properties mortgage with the BSB in regards to the NOC provided by BSB for back-to-back L.C. facilities.

The machinery, which the entrepreneur’s installed later, shall be has to be mortgage with the bank.

If the loan receiver’s do not agree to the above proposal than as an alternative arrangement the loan account may be closed down after refund of the total loan with exemption of the total interest.

Should the above mentioned proposal are not complied with by theentrepreneur, arrangement has to be made for taking legal action against the entrepreneur’s and sell the properties of the project in order to realized the loan.

Recommendation to Resolve Sickness from my Point of View:

Profitable project should be identified and loaned.
Proper policy to e adopted and implemented.
Real entrepreneur should be given loan.
Political pressure should be ignored if not possible should communicate with respective higher authority.

Encouraging the borrower to repay the loan in proper time.
Preserving documents need to be computerized instead of filing.
National observation committee can be established to analyze, evaluate and solute proper loan recovery.
Employees who are directly involved in loan recovery should be motivated. & 5C’s must be considered when selecting borrower, i.e. Capital, Capacity,
Character, Condition and collateral.
Proper communication should be established with the clients.
Number of trained supervisor to be revised.

CHAPTER EIGHT: LOAN RECOVERY

Central Recovery department (CRD)

Hierarchy of management of Central Recovery Department

Now total staff 23, Approved 29, Vacant 6

Principles of classification of loan and provisioning:

For the purpose of classification all loans and advances are divided into 4 categories.

(a) Continuous loan,

(b) Demand loan,

(d) Short-term agricultural and micro-credit

a) Continuous loan: The loan which can be granted and recovered without any repayment schedule but have an expiry date and maximum limit are called continuous loan.

b) Demand loan: The loan which must be repaid as the bank calls it is called demand loan.

c) Term loan: The loan which must be repaid as the banks calls it is called term loan.

Objective criteria: –If any continuers loan is not repaid within the expiry date that it is called irregular loan. The classification of loan is as follows:

6 months> continuous loan> 3 months=sub stopped

12 months>continuous loan>6 months=doubtful

Continuous loan> 12 months=bad

If any installment of any tern loan is not repaid within specific date it is treated installment default.

Maintenance of Provision:

1. On the basis of the equity of the Joan the following precession are maintained:

A. Substandard 20%

B. doubtful 50%

C. Bad debt 100%

2. On short tern agricultural and micro-credit the following provision to be kept:

A. on all other than bad debt 5%

B. on bad debt 100%

Rescheduling Procedures

(a) On the application of loan rescheduling the bank inspects reason of the loan default. If it is revealed that the borrower has spent the money in another way instead of the specific investment than such application will not be considered. In this case legal action will be taken.

(b) The position of liabilities of borrowers to other bank is to be considered

(c) The bunk will analyze the cash flow statement audited Balance sheet, Income statement and other financial statements.

(d) If necessary, the bank will inspect the business of the borrower to ensure that he will be able to repay the rescheduled loan.

Rescheduling of Term Loan

(a) A term loan may be rescheduled if 15% of expired installment or 10% of total due which ever is lower is paid in cash at first.

(b) A term is considerable to be rescheduled for the second time if 30% of expired installment or 20% of total due which ever is lower is paid in cash.

(c) To reschedule term for the third time or more 50% of expired installment or 30% of due which ever is lower must be paid in cash.

Demand and Continuous Loan Rescheduling

(a) To reschedule the Demand Loan and Continuous Loan the rate of down payment are as follows-

Table-12

(b) To reschedule the Demand Loan and continuous loan which has been converted into term loan 30% of expired installment or 20% of total clues which ever is lower must be paid in cash.

(c) If the loan is required to reschedule again 50% of expired installment or 30% of total dues must be paid in cash at first.

Loan Recovered:

Loan Recovered is a crucial index to measure the success of a lending organization. Like previous year, this year too, the Bank strengthened its recovery drive for realizing loan and dues from its borrowers and significant success was achieved. Total recovery target loans during financial year 2002-2003 was TK 1600 million against which actual cash recovery was TK 1316 million constituting 82% of the target

Recovery of Loans

Table-13

Year-wise recovery position of Term Loan

Crore taka Table-14

Dr. Md. Jahirul Haque, Professor Dept. of accounting, university of Chittagong (1988) observed similar problems of project appraisal by BSB more than fourteen years ago. This indicates that proper attention has not been given to the removal of these bottlenecks.

Legal Actions Taken for Recovery of Loans:

The Money Loan Court Act 2003 has been enacted in the year 2003 with effect from May01, 2003 in order to streamline the process of realization of loans and advances by the banks and financial institutions. Provisions have been made in this Act for realization of the banks dues by selling of properties held as security without filing suits before the court. The bank initiated legal actions against those loans defaulting and recalcitrant borrowers who fail to come up with any satisfactory settlement of banks dues after all normal recovery efforts have been exhausted.

Legal Actions Taken

Table-15

In FY 2002-03, legal notices were issued against 28 defaulting companies for recovery of Banks dues while law suits were filed against 15 Companies. Besides, 30 sale notices were published in the national dailies for auction. At the same time efforts were made for settlement of disputes outside the court through negotiation. As a result, 31 litigated companies settled the lawful disputes outside the court and assets of 10 projects have been sold through auction during the year.

Loan Written off:

During FY 2002-03, the Bank has written off TK 3520million as loan liability of 70 projects under Bangladesh Bank’s guide- lines.

Sometimes the justify that for various reason loan amount would not be paid because of various reasons such as –

• Default Culture

• Due to change in technology

• With the passage of time

• Due to change in fashion of human beings

• Due to change in demands of people

• Tuff competition among the same type of companies

• Intention of theft

• Lack of morality

• Inefficiency management of the organization for which the organization can not survive success fully.

Some of the reasons out of the total problem, BSB rescheduled the undue amount. The bank always try to receive the project but if the authority think that this reasons is faulty of the sponsors then it is transferred to law department to take legal action. Sometimes, the project is transferred to project Rehabilitation department to restore the project.

The Bank has total operating assets of TK 22,307,237,590 as of 30 June, 2003 of Which TK16432, 857,959 has been invested as loans and advances. This represents 73.67% of the operating assets. And an amount of TK. 3,800,938,043 has been invested in shares, debentures and others which are fully recoverable. Loan amount of Tk, 6,765,627,000 representing 41.12% of total loans which is considered good and fully secured. On examination, it revels that the bank advanced new loan of TK 280,000,000 in the current year as against TK 80,000,000 in the last year Recovery made in the current year was TK 1,320,000,000 as against TK1,080,000,000 during the last year.

Table-16

Limited factors of CRD

· Highly political pressure for recovery of loan.

· The steps for recovery of loan are not satisfactory.

· The authorized persons who are employed for recovery of loan are not free from biasness.

· The authorized persons who are employed are not efficient and skillful.

· The management is not professional for recovery of loan.

· Legal action procedure for recovery of loan is not so strong.

· Lack of motivation to collect the old loan.

· Lack of coordination with other departments.

Recommendation factors of CRD

· New technique should be applied for recovery of loan.

· The management for recovery of loan should be free from biasness.

· Political pressure the recovery of loan should be stopped.

· Proper action should be taken for recovery of loan.

· CRD should be employed experience, skillful and professional manpower.

· Coordination with other department should be increased.

· To declare some incentives for recovery of loan.

CHAPTER NINE: FINDINGS, CONCLUSIONS & RECOMMENDATIONS

Internship program is an essential requirement for completion of MBA program. To fulfill this requirement, I was assigned to BSB. I worked there for three months from July1, 2004 to September 30, 2004. During that period I learned the activities of eleven departments of BSB. The names of the departments are Loan operation department, documentation and machinery procurement department, project implementation and supervision department, loan recovery department, loan accounting department, rehabilitation department and law department.

I have prepared report on the activities of loan operation department. The main task of the department is to appraise projects. They appraise projects mainly under five aspects such as management and organizational, technical, marketing, economic and financial. Each of above aspects has been described in this report. I have found some problems regarding the project appraisal by BSB, which are stated in the next paragraph.

Findings:

[

There are some problems involved in the project appraisal practice of BSB. Some of them relate to BSB’s own institutional weaknesses and some of them relate to the borrowers’. During the internship program the following findings are obtained:

1) Sometimes improper feasibility reports are submitted by sponsors, which do not contain adequate and reliable information.

2) Lack of business experience of the entrepreneurs.

3) Lengthy procedure and long time (more than three months) involved in the appraisal of project.

4) Lack of financial commitment on the part of the borrower, the result being the failure of mobilization of equity by them in future means they divert their equity in other purpose after getting the loan amount.

5) Some feel that of absence of an up-to-date project appraisal manua1, because the present manual was designed 18 years ago. So many aspects should consider whichdo not cover by the existing manual.

6) Dependence on imported technology and non-availability of adequate information about that from local source. Lack of adequate, updated and accurate information in the country. Both primary and secondary data are not readily available.

7) Inadequate attention is paid to analyze risk and uncertainties associated with the projects, means only sensitivity analysis is done to analyze risk.

8) Lack of co-ordination among various financial institutions in exchange ofinformation.

9) Inadequate attention to social cost and benefits.

10)-There is no system of accountability of the appraisal team if the approved project fails due to their improper appraisal.

11) Unstable tariff and fiscal policy, political instability of the country, resulting in poor project appraisal especially from the economic viewpoint.

12) The main aim of BSB is to stimulate industrialization throughout the country.

13) Loans are given to sponsors through preparing appraisal report.

14) The nature of credit shows that it mainly grants term loan.

15) Sometimes inefficient allocations of resources have created a huge amount of bad debt.

16) There are some sick industries are in the BSB

17) Political interruption in sanctioning loan.

18) Unstable policy of management due to political changes over time.

19) If bank make the procedure of keeping up-do-date information but in some case there some case of rescheduling the total procedure is reversed so it’s high to maintain current and updated system of accounting.

20) Lacking of co-ordination among the various departments.

21) Lacks of eagerness to devote themselves for bank because of lower benefits are given to employees.

22) Despite of BSB’s problem in financial condition, it helps in various social, cultural development of the country.

23) Sometimes BSB help[s more by giving more additional financing to project.

24) Project rehabilitation is one of the criteria of BSB that revive the sick project.

25) Complex judiciary systems.

26) Contribution to the GDP is remarkable through industrialization process.

27) Help in implementing the projects.

28) Giving advice about the projects function for their future success.

29) Contribution of BSB is highest in the industrialization of Bangladesh though there’s some problem.

Conclusions:

I believe & hope that this report will offer a number of benefits to improve and update the loan sanction procedure for its smooth operation and will cooperate in redesigning the system and atmosphere of the department. If a small portion of sickness of the projects is reduced it would be a great benefit to the bank as well as to the whole nation. I put here some recommendations it would help in selecting appropriate, socially contributable and more employment opportunity creatable projects in true sense. If this report can improve the existing condition of sanctioning procedure, and is implemented, my little initiatives will get a breathed satisfaction.

SUGGESTIONS TO OVERCOME THE MAJOR PROBLEMS INVOLVED IN PROJECT APPRAISAL PROCEDURE:

In order to improve the existing project appraisal practice of BSB, the following possible measures need to be undertaken:

1) Ensuring proper feasibility study, the responsibility of feasibility report should be imposed, to some extent on the entrepreneurs.

2) Steps should be taken for developing entrepreneurial skill and ability of the sponsors. Training of the entrepreneurs should be arranged before sanctioning loan against projects,

3) The fixed time of three months for processing of project application should be strictly following; sometime it takes more than ten months to appraise a project.

4) Equity share should be raised so that the entrepreneurs have more participation in the project. Previously it was 80:20 at present it is either 70:30 or 60:40.

5) The project appraisal manual should be updated.

6) Steps should be taken to strengthen the existing feed back system, so that the problem of getting information about technology can overcome.

7) Both primary and secondary database of the country should be strengthened and improved.

8) Risk adjusted discount rate method, certainty equivalent method, program evaluation and review technique (PERT) and probability analysis etc. should be introduced to assess risk and uncertainties involved in the projects.

9) A co-ordination cell should be established for sharing information among various institutions.

10) More emphasis on the effect of a project to measure socio-economic cost and benefit (SCBA) should be taken into consideration.

11) A market research institution should be established for proper market survey and the assumptions should be more realistic.

12) Responsibility should be fixed to all according to their involvement in appraisal of projects.

13) Profitable project should be indefinite and lowered.

14) When appraise any 5c should be considered-character, capacity, condition, collateral and capital.

15) Regular communication should be maintained with the details.

16) Political pressure should be reduced.

17) National observation committee can be established to analyze, evaluate and verified the proposed project.

18} Law and order situation should be improved.

19) Physical verification should be incorrect when appraised any project.

20) The principles of accountability should be introduced in an effect.

References

1. Bangladesh Shilpa bank, 2003 annual report 2002-2003: 2-18.

2. Bangladesh Shilpa bank august 1984.manual of, project appraisal

3. Ettade Plastic ltd. March 2003. Appraisal report.

4. Bangladesh Shilpa Bank Ordinance 1972.

5. Bangladesh Institute of Bank Management

6. Website of Bangladesh Shilpa Bank.

7. Project Management-The managerial process

-Clifford F. Gray

-Erik W. Larson

APPENDIX

PROJECT APPRAISAL FORMAT OF BSB

I. Summary and recommendations

0 Name, Location and Capacity of the Project

0 Proposal for loan .

0 Status of the Government consent

0 Promoters and their background

0 Global network of the sponsors

0 Land, Building and Machinery

0 Raw materials

0 Utilities

0 Market aspects

0 Economic aspects

0 Financial aspects

0 Security of the Joan

0 Conclusions

2. Introduction, Management and Organization

0 Background of the project

0 BSB’s loan portfolio and sectoral performance

0 Background of the sponsors

0 History of past performance of the existing business 0 Income tax payment position

0 Bankers opinion

0 Source of fund mobilization

0 Cash availability

0 Corporate set up of the company

0 Management

3. Technical Aspects

0 project purpose and design

0 production capacity

0 technology and Manufacturing process

0 land and location

0 building and other civil works

0 machinery and equipment

0 furniture and fixture

0 instal1ation, technical services and quality control

0 raw and packing materials

0 utilities

0 store and spares

0 repair and maintenance .

0 safety provision

0 manpower requirement .

0 pollution

0 construction schedule

4. Market Aspects

0 Identification of product / service

0 Uses users of the product/ service

0 Analysis of the domestic demand and the sources of supply (1ocal and import) to meet the demand for the proposed product(s) during the last few years.

0 Analyses of the demand for the product (s) in the export market.

0 Projection of dem8nd

0 Assessment of existing and potential supply of the product in the market

0 Projected supply gaps and project’s contribution towards the reduction of this gap

0 Capacity utilization of the existing projects

0 Position of BSB financed projects

0 Analysis of product pricing, Government control and subsidy

0 Availability of required raw and packing materials and pricing thereof

0 Promotional strategies

0 Marketing budget

0 Product qualities

0 Location advantages considered from Marketing/distribution and infrastructural facilities point of view.

5. Economic Aspects

0 Economic rate of return .0 Foreign earnings/ savings 0 Value added

0 Employment generation

0 Linkage effects

0 Other socio- economic benefits

6. Financial Aspects

0 Cost ofthe project

0 Means of finance

0 Debt equity ratios

0 Fixed asset coverage

0 Break-even analyses

0 Cash flow statement

0 Projected balance sheets

0 Financial rate of return

0 Sensitivity analyses

0 Working capital estimate

0 Estimate of financial expenses

7. Status of Government Consent and security of loan

8. Conclusion Recommendations