Chapter – 1:Introduction

Background of the study:

This report has been prepared to fulfill the requirement for getting MBA degree. As part of our Masters of Business Administration (MBA), it is mandatory to acquire the practical knowledge.

Any academic course of the study has a great value when it has practical application in the real life. Only a lot of theoretical knowledge will be little important unless it is applicable in the practical life. So we need proper application of our knowledge to get some benefit from our theoretical knowledge to make it more fruitful. We engage ourselves in such field to make proper use of our knowledge in our practical life. Only when we come to know about the benefit of the theoretical knowledge, such an application is made possible through internship. My internship is on “A study on loan default of BSB”. That is to know about reasons of default loan to the sponsors, because this will in problem of BSB and all over the country.

As the level of industrial development increases in Bangladesh’s gives loan towards the advancement of various sectors for industrialization. It helps to manage all types of efforts from establishment to implement of its operation. There some accumulation of human capital and technological innovations will also facilitate the project implementation.

When theoretical knowledge is obtained from a course study it is only the halfway of the subject matter and procedure through which acquired knowledge of subject matter, which can be fruitfully applied in our daily life. Various case studies about various default project has given more realistic idea about the loan default that hamper the specific project and also the potential benefit driven from the project.

1.2 Objective of the study:

The objective of the study is to find out the reasons for loan default practices of BSB. The following are the objectives of the study:

• To know the overall function of Bangladesh Shilpa Bank (BSB) for the contribution of industrialization of our country.

• To enhance practical knowledge about a business organization.

• To highlight the credit and recovery procedures and evaluate performance.

• To develop knowledge about the reasons of making loan default by the sponsors.

• To get an idea about the condition loan default mechanism of BSB.

• To acquire knowledge about faulty and disorder loan payment by the sponsors.

• To know about why BSB is a losing concern?

• What’s the impact of loan default to the overall economy?

• Effects of loan default to the industrial sector of the economy.

• Consequence of loan default of financial condition of BSB.

• To suggest necessary steps for overcoming such problems of BSB.

Methodology of the study:

To prepare the report, I have collected data from the primary and secondary sources.   Data have been collected by oral interviewing the responsible officers. They also gave me annual report, annual budget granted through government of BSB and other documents. Different form of statistical configurations such as table percentages rates and rations has been used to make the study meaningful and realistic.

After collecting data from the interview and material, the data was first carefully scrutinized. Then the data was organized as required. In order to make the study effective and efficient, following two sources of data and information have been used widely.

I have analyzed these reports and document in the light of analytical review. I have used some statistical tools, graphical presentation, and table to find out the different types of analytical result. Those are given the overall picture of the BSB.

Limitations 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, every study has some limitations. When we conduct our study we have some problems. These are as follows:

q  Lack of sufficient knowledge.

q  Lack of available information and documents to support our study.

q  Up-to-date information was not available.

q  Improper combination among various departments.

q  Don’t give the data from their source document.

q  Unwilling to give information more because of extra harassment without their responsibility.

q  Being busy, also another reason of not giving more information.

q  Time is a limitation that would mostly with stands a comprehensive study on the topic selected.

q   They are in government employee so have no eagerness to supply more because of extra hardness.

q  Finally this is my first job Experience. So my knowledge especially in such a research study is limited.

1.5 Justification of the report:

This study will have both practical and academic value. It will help to get a clear idea about the role of BSB in the industrial sector of Bangladesh. 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.

Chapter – 2:Literature Review

While preparing report I was reviewed various books, Bank Parikrama, annual reports, project appraisal, BSB order 1972, and provided other related materials. I followed annual report of BSB and significant part of information coming from this report.

Sujit Saha & M. Saiful Karim Chowdhury (2000) said that the Bangladesh Shilpa Bank as the most important functionary of the financial system play a dynamic role in the economic development of a nation through mobilization of savings and allocation of credit to productive sectors. However, directed and inefficient credit allocation by the commercial banks of Bangladesh in various economic sectors without adequate credit appraisal and monitoring, ultimately led to the widespread loan delinquency, and deteriorating health of the entire financial system. BSB facing various problems such as mismatch of sources and uses of funds, extreme dependence on traditional collateral securities, politicization of credit delivery system, absence of sound legal system for recovery of loans, lack of government’s extension facilities in the form of data base, investment counseling, appropriate technology, infrastructure, marketing of products, etc, however, they should increasingly involve themselves in development financing in order to gain long-term viability benefiting themselves as well as the economy, but that should not occur at the cost of viability of the total financial intermediation process.

Mr. Alauddin A. Majid, Managing Director of Small Industries & Commerce Bangladesh Ltd. Said that Bangladesh Shilpa Bank’s role was like a catalyst. He argued on how much the CBs should finance in long term projects, as they have to maintain an adequate but required liquidity constantly.

Former Governor of Bangladesh Bank Dr. Mohammed Frashuddin (2000) said that the country was unable to establish growth with equity. He proposed to rejuvenate the banking sector in socio-economic perspective. According to him banking is for financial intermediation. There is no developed debt market in Bangladesh. Therefore, the right to differentiate the price in terms of lending and borrowing and the autonomy of the banking sector is a controversial issue.

The Emeritus Fellow of BIBM Mr. A.K.N. Ahmed (2000) pointed out some facts like it was written in the paper that private banks are now acquiring more healthy position than BSB, but no data has been presented for such remarks. He observed by going through the paper that PCBs as well as foreign banks have given insider loans violating their own charter. He made comment that the causal analysis of the failure of DFIs is essential. This would make easier for the CBs to put emphasis on financing in rural areas. He said that without having necessary training from financial, economic and technical angles, project approval and assessment of credit in terms of prospective borrowers and conducting end use supervision of loan is impractical but with these limitations CBs plunged themselves into the rural areas, while in other countries development finance by banks has succeeded because the banks in cooperation with central bank were able to institute strong system of surveillance.

Chairman of Bangladesh Shilpa Bank Professor Dr. Abu Ahmed (2004) said that BSB had a key role in the industrial growth of the country, despite many hurdles faced by it. Its present management including all officers and other employees are motivated enough and work accordingly to see that the bank plays its rightful role and it is hoped that by next 2/3 years it will come out with flying colors with the logistic support from the Government.

Hasan, M.Kabir (1993) viewed that the emergence of the independent Bangladesh in 1971 witnessed a major shift in the banking system in 1972 in terms of change of ownership i.e., establishment of social control over the banks through nationalization and change in objectives. The objectives were very clear – to expand the branch network in unbanked and under banked rural and semi-urban areas, to step-up monetization activities by having access to untapped savings and extend flow of credit to hitherto neglected agriculture and allied areas and small and cottage industries. As the commercial banks have structural limitations (short-term sources of funds, lack of adequately skilled man-power, etc.) in making an entry into term financing for financing agro-based and industrial projects, specialized financial institutions were created to fill the vacuum for financing agricultural and industrial development. These were also known as Development Financing Institutions (DFIs) e.g., Bangladesh Krishi Bank, Bangladesh Shilpa Bank, Bangladesh Shilpa Rin Sangstha, etc.)

Chapter – 3:About Bangladesh Shilpa Bank (BSB)

Establishment of BSB:

Bangladesh Shilpa Bank (BSB) was established on October 31, 1972 under a statue, called the Bangladesh Shilpa Bank Order, 1972. The (BSB) Order 1972 was amended subsequently by the Parliament to provide more operational autonomy to the management.

Institutional overview:

Established                                                      : October 31, 1972

Organization: Head Office                              : Dhaka

Division                                                            : 5

Department                                                     : 21

Zonal Office                                                     : 3

Branch Office                                                  : 15

Personal                                                            : 767

3.3) Capital Structure and Sources of Fund:

Authorized          : TK. 2000 million

Paid up               : TK. 1320 million

The sources of banks fund are the Government, Bangladesh Bank, commercial Banks, local/overseas Financial Institutional and supplier’s credit.

Ownership:

100 percent ownership of the bank belongs to the government of Bangladesh.

Mission:

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

Objectives of BSB

Bangladesh Shilpa Bank as the prime development financing institution (DFI) of the country extends financial assistance both in local and foreign currencies for settings up new industries. It accelerates the process of industrialization of the country by providing financial assistance equity support. It assists the existing industries and rehabilitation of sick industrious to boost up the industrial development of the country in conformity with the industrial policy and financial reform program’s of the government towards market economy.

A textile project financed by BSB

A Hospital financed by BSB

Management:

Board of Directors consists of 9 (nine) members including the Chairman and the Managing Director. The Managing Director is the Chief Executive Officer (CEO) of the Bank.

Functions:

BSB extends 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:

• Provides working capital loans to industrial projects;
• Provides equity support in the form of underwriting and bridge finance to public limited companies.
• Issues guarantees on behalf of borrowers for repayment of loan;
• Extends commercials banking services along with deposit mobilization;
• Purchases and sales shares/securities for BSB and on behalf of customers as member of Dhaka Stock Exchange (DSE) Ltd. and Chittagong Stock Exchange (CSE) Ltd. for capital market development; and
• Conducts projects promotional activities along with preparation of various sub-sectoral study reports.

Since Inception up to 30.06.2004

Operational activities of the bank:

Bangladesh Shilpa Bank being the prime Development Financing Institution continued its efforts in FY 2002-2003 to make an effective contribution towards expansion of industrialization process of the country. By mobilizing local resources, the Bank emphasized on long term lending to the viable new projects comparatively advantageous, exports oriented, forward and backward linked, agro- based, local technology and raw material based projects.

OPERATIONAL ACTIVITIES

Profit and Loss

The Bank has made a net profit (after adjustment) of Tk. 789.60 million during FY 2002-03 as against Tk.914.6 million (after adjustment) in the previous year.

Deposit Mobilization

During FY 2002-03, the Bank tried to meet its fund requirement from various sources for lending and investment. The Bank emphasized more on no cost and / or low cost deposit mobilization during the period. Total deposit was Tk. 540 million on June 30, 2003.

Loan Application Received

During the period under review, the Bank has accepted 31 new loan proposals after proper scrutiny.

Sanction of Term Loans

The Bank continued sanctioning of term loans during FY 2002-03. This year local currency loan of Tk 1418 million was sanctioned to 21 projects. Of the total sanctioned amount, Tk 1236 million was for 18 new projects and an additional loan of Tk 182 million for 3 on-going projects including 2 for BMRE purposes.

Commitment and Disbursement of Term loans

During FY 2002-03, the Bank made commitment of Tk 116 million in local currency to 4 projects. During the period, the Bank disbursed term loans of Tk 170 million in local currency to 11 projects as against the disbursement of Tk 84 million to 8 projects in the previous year.

Sanction and Disbursement of Working Capital

During FY 2002-03, the Bank sanctioned working capital loans of Tk 30 million to 3 projects and disbursed TK 9 million to 4 projects. The Bank sanctioned Tk. 4 million to 1 project and disbursed Tk 1 million to 2 projects in the last year.

Other Investments

During FY 2002-03 the Bank invested Tk 6.44 million to purchase shares from the primary and secondary market and the Bank earned an amount of Tk.5.82 million as capital gain, dividend and commission from share trading.

Project Implementation

The Bank intensively monitors and supervises implementation of its financed projects. During FY 2002-03, 2 projects commenced commercial production. Besides, 5 projects were under construction, 4 were documented and 23 were awaiting documentation.

Loan Recovered

[[[
Loan recovery is a crucial index to measure the success of a lending organization. Like previous years, this year too, the Bank has strengthened its recovery drive for realizing loans and dues from its borrowers and significant success was achieved.

Total recovery target of loans during FY 2002-03 was Tk 1600 million against which actual cash recovery was Tk 1316 million constituting 82 per cent of the target.

Legal Actions Taken for Recovery of Loans:

The bank initiates legal actions under the BSB Order those defaulting and recalcitrant borrowers only who fail to come up with any satisfactory settlement of bank’s dues after all normal recovery efforts have been exhausted.

Legal Actions Taken

Position of Projects Under Litigation

2001-2002

2002-2003

Number of ProjectsNumber of Projects

Legal Notice Issued

43

28

Filling of Suit

14

15Cases Settled Outside the Court2831

Other activities:

Advisory services

Apart from identification and development of viable projects, the bank assists the interested entrepreneurs in selecting industrial projects having appropriate technology and potential market by providing advisory services.

Training:

For upgrading the professional competence and skills of its employees, the bank is continually arranging training programs both at home and abroad. During FY 2002-03, 229 officers were provided in-house and local training. Besides, 6 officers were sent abroad for the purposes.

Computerization:

To improve the working efficiency and provide better customer service, computerization of bank’s activities is on. In this regard, the bank has undertaken a far-flung action plan. The Implementation of the first phase of network-based computerization is complete and the second phase of work is going on. Besides, from FY 2002-03 the Bank has introduced computer based one-stop service in its commercial banking operations.

Human Recourses:

As on June 30, 2003 total staff position of the bank stood at 794, of which 430 were officers and 364 were supporting staff.  This year, 10 supporting staff was promoted to the next higher position. During the period, 29 employees retired and 2 left the bank services.

Annual General Meeting:

The 17^th Annual General Meeting of the shareholders of the bank was held on November 12, 2003.The meeting, among others, approved the bank’s audited accounts for FY2002-03. It is mentionable that the audited accounts of FY 2001-02 were approved in the 16^th Annual General Meeting held on November 25, 2002.

Board news:

In FY 2002-03, 24 meetings of the board of Directors were held to consider and upon various financial, operational, administrative and policy matters.

Observance of National Days:

Important national days like National Martyrs and International Mother Language Day on February 21. Independence Day on March 26 and Victory day on December 16 were observed with due respect and solemnity. Floral wreaths were laid at the Shaheed minar and at national Martyrs Memorial to pay homage to the martyrs who made supreme sacrifices to uphold the dignity of the mother tongue and to achieve independence of the country.

Strength of BSB:

• As a prime DFI, it has a large number of qualified & experienced professionals.
• Structural set-up & business location is Strategic.
• BSB’s assets position is quite satisfactory and
• BSB has requisite strength and opportunity to sustain the challenge of the market economy.

To make the bank a vibrant one, a pragmatic business Programme is now under implementation. The main features of the plan are as under:-

• Gear-up recovery through setting up of pragmatic recovery targets.
• Expansion of new area of investment.
• Cleaning of loan ledger with exit facilities.
• All out efforts for deposit mobilization.
• Undertake need-based training Programme including computer training to all officers & develop a computerized data-base system and
• Full computerization of bank’s activities.

Sector- wise position of

Bank’s Loan Portfolio

As on 30-06-2003

Loan Recovered

Loan recovery is a crucial index to measure the success of a lending organization. Like previous years, this year too, the bank strengthened its recovery drive for realizing loans and dues from its borrowers and significant success was achieved.

Total recovery target of loans during FY 2002-03 was Tk 1600 million against which actual cash recovery was Tk 1316 million constituting 82% of the target.

Figure: 3.1

Figure Title: Loan Recovered

 List of Business Programs:

1. Industrial Credit Programs

Long term Finance (up to 10 Years & up to 10 crores)      Medium term Finance (up to 3 Years)       Short term Finance ( up to 1 Year) (working capital)       Syndication Finance (up to 10 Years & more than 10 crores)

• IRR : 15%
• ROI : 15%
• DSCR : 1.50 : 1.00
• Current Ratio : 1.50 : 1.00

D. Share Trading Service

BSB Provides Trading facility and client service as well of DSE (Dhaka Stock Exchange) at its share trading cell of head office with nominal commission 237 members are presently enjoying this facility here. No fees required to be a member of BSB share trading cell.

CDS (Central Depository System) Service initiated in the cell for providing online Delivery of Shares in both ways.

BSB’s Chittagong Branch office has started to provide share trading service to Chittagong people.

Deferred payment of IDCP (Interest During Construction Period) after some moratorium period in installments. Regular Loan Repaying Projects are honored with special certificates and BSB Crests. They are encouraged to take more loans / working capitals.BSB puts realistic efforts to rehabilitate its sick, problem ridden and stuck up projects by ways of: Rephasement and waiver of partial interest. Injection of additional funds. Balancing & Modernization of machinery. Product diversification. Strengthening or changing the project management. Restructuring of Loan Accounts with transferring part of loans / interest in interest free block account(s). G. Deposit Mobilization Programme

Bank tries to meet its fund requirement from various sources like private, government and non-government organizations for lending and investment. Interest package on the Deposits is as under :

Business policy of BSB:

A. Policy for BSB’s own investment:

• Debt equity Ratio ranging from 50:50 to 60:40 depending upon the nature of the project, repayment capability, sponsor credit worthiness etc.
• Investment Limit Taka 10 crores in a single project but above Taka 10 crores may be financed in syndication.
• Working capital loan for BSB-financed projects, especially, for operative and profitable projects under the branch offices of the bank.
• BMRE (Balancing, Modernization, Replacement and Expansion) facility given to regular good borrowers of the Bank.
• Reduction of 1.5% interest or 10% rebate of chargeable interest for regularly repaying borrowers.
• Reduction of rate of interest to attract prospective entrepreneurs.
• Introduction of lending facilities to proprietorship and partnership concerns alongside traditional financing of private and public limited companies.
• Reduction of time limit for processing of loan application from 90 to 60 days.
• Special emphasis to promote agro-based small industries.
• Sub-sectors selected by Bangladesh Bank under EEF (Equity & Entrepreneurship Fund) are encouraged for financing.
• Joint venture projects based on technical collaboration and foreign equity participation is given special preference.

B. Government Policy, Especially, for Foreign Investment:

B.1 Major Fiscal Incentives

• Generous Tax Holiday up to 12 years;
• Concessionary Tax for 5 years after completing initial 10 years;
• Duty free import of capital machinery and raw materials for export oriented industry and concessionary import for domestic industry
• Avoidance of Double Taxation;
• Tax exemption on royalties, technical know-how fees received by any foreign collaborator, firm, company and expert;
• 100% export-oriented industry outside EPZ will be allowed to sell 20% percent of their products in the domestic market on payment of applicable duties and taxes.
• Exemption of income tax up to 3 years for the foreign technicians employed in industries specified in the relevant schedule of income tax ordinance;

B.2 Major Non-Fiscal Incentives

• 100% foreign equity allowed;
• Unrestricted exit policy;
• Full repatriation facility of dividend, profit and invested capital;
• Complete legal protection for invested capital;
• Local and foreign borrowing allowed;
• Fund raising from local capital market allowed;
• Permanent residence permit and citizenship for foreign investors;
• Multiple Entry Visa for foreign investors and employees;
• One stop service for foreign investors by BOI/BEPZA;
• Permanent resident ship by investing a minimum of US$ 75,000 (non-repatriable);

C. Foreign investment is specially desired in the following categories:

• Export-oriented industries;
• To set up Industries in the Export Processing Zones (EPZs);
• Basic industries based mainly on local raw materials;
• Labor-intensive/technology-intensive/capital-intensive industries.
• High technology export-oriented or import substitution products;
• Quality enhancement, marketing and capacity building of existing industries;

D. Prospective Sectors for Foreign Investment in Bangladesh:

• Textile (Ready Made Garments, Textiles, Composite Textiles).
• Frozen Foods (Frozen Shrimp, Frozen Fish, Other Items).
• Leather (Finished Leather, Leather Goods).
• Electronics (Home Appliances, Telecommunication Equipment, Semi-Conductor).
• Agro-based Industry (Fresh Fruits & Vegetables, Cooked/Semi Cooked Food Items, Canned Juice, Dairy and Poultry, Livestock and Fisheries).
• Information Technology (Data Processing, Software Development, Hardware manufacturing.
• Ceramic (Tableware, Sanitary ware, Insulator).
• Light Engineering (Machinery Parts, Bi-cycle, and Other Consumer Items).
• Natural Gas-based Industries (Electricity, Fertilizer, Petrochemicals, CNG Distribution Network).
• Telecommunication.
• Export-oriented and Export-linkage Industries.
• Steel Industry in Bangladesh.

Significant Financial Indicator:

Chapter – 4:BRIEF DEPCRIPTION OF VARIOUS DEPARTMENTS OF BSB

Operations of Bangladesh Shilpa Bank

Bangladesh Shilpa Bank (BSB) is the prime concern of development financing (DFI) provides a various functions continued its efforts in fiscal year 2002-2003 to make an effective contribution towards expansion of industrialization process of the country. It emphasized on the long term lending to the viable new projects having comparative advantage, export prospects, forward and backward linkage &local technology as well as raw material based projects.

BSB operates its activities through 21 departments. Out of them, we inspected 8 departments and tried to find out their details operations. These 8 departments are as follows:

1. Loan Operation department (LOD)

2. Document and machinery Procurement Department.

3. Project Implementation department (PID)

4. Central Recovery department (CRD)

5. Loan Accounting department (LAD)

6. Project Rehabilitation department (PRD)

7. Law department

8. Human Recourses Management Department

Loan Operation Department (LOD):

LOD is the starting department of sanctioning loan to the sponsors and in this department various analysis are made for making decision whether the proposed projects are viable or not. Any entrepreneur who wants get loan from BSB, he has to fulfill certain criteria and is shown in flow chart forms are as follows:

Overview of Loan Operation Department

These steps included under the functional level and business level strategies.

Functions of loan operation department

• Issue of Loan Application form.
• Instruction &co-ordination to fill the form.
• Receive form (BSQF) along with 1/8^th of 1% project estimated cost & other necessary documents.
• Scrutiny of loan application and other papers for evaluation of loan proposal.
• Preparation of Appraisal Report.
• Granting /Rejecting loan application.
• Put-up loan appraisal is granted.
• Loan sanctioned with memorandum.
• Send information to PID, documentation &other department.

A. Documentation Department:

The activities of documentation department are started after completion of loan contract. Documentation department confirm whether all documents are properly maintained. After certify by the documentation department then finally loan is disbursed. The main activities of documentation department are the following:

• Documentation and contract completion with loan receiver after loan sanction.
• Document giver by company to bank or document of land evaluation and investigation of document is land sub-registration office.
• Site conformation about land/project according to document and making the law by govt. surveyor if necessary.
• Examination of project memorandum and statements of affairs
• Change filing at company register office of mortgage land.
• Re-newel of necessary document in time.
• Conformation of bank guarantee from debtor and keeping it properly and renewal before expired of due time.
• Accidental investigation of document kept in registrar’s strong room
• Actual document collection form registrar and act as custodian for that document.
• Other activities given by departmental head.

B. Machinery procurement Department:

Main function of machinery procurement department is to help the organization to acquire the machinery form local or foreign countries. Other functions are the following:

• Machinery schedule preparation / selection and approving for tender.
• Necessary advice given to investor’ entrepreneur about tender invitation to collect project machinery.
• Offered machinery and related document evaluation and necessary information collection about supplier.
• Comparative study of machinery, price justifications, selection and approval receiving of authority.
• Preparation of rules and regulation of related machinery procurement, and co-ordination of zonal and branch office’s activities and completion of other officers for the same.
• Information collection about different price of machinery of different capacity in industrial production.
• Recommendation about various project regulated by loan separating department and zonal office.

Project implementation department:

Project implementation department plays a crucial role for implementing the project. All sorts of monitoring activities performed by project implementation department, such as placement of machinery, technical and mechanical side, and acquiring new instruments. Some time this department investigates the viability of project.

• To take necessary action in favor of sanctioned loan to be implemented.
• To take steps to approve project layout plan.
• Changes of project location, board of director of company and producible goods and product mix.
• Take steps to disburse sanctioned loan step by step according to loan condition.
• Properly collection and disbursement of entrepreneur fund.
• Inter-organizational communication and support about bride loan against share underwriting of loan Holder Company.
• Completion of construction of project according to construction timetable.
• Proper monitoring of placement machinery in project area, monitoring to technical side and taking advice form instrument recruiting sub-division or department.
• Re-auditing of cost at project completion stage, re-examining of excess loan application and processing of loan application and sanctioning, disbursement and conformation of uses.
• Evaluation of project raw material receiving process, managing of cash flow according to loan agreement and giving necessary support
• Loan term reduce / accelerate and experimental production monitoring and supervision.
• Preparation of project completion report and sent if to loan recovery department and related sub-division of authority.
• Determination of construction period, schedule preparation of loan repayment and taking necessary action for the same.
• Smoothly supervision and monitoring of project at implementation time.
• Taking insurance scheme against risk of assets of implementing project and conformation of deposit of insurance premium to the bank.
• Time to time verification of latest rules and regulations about project completion and appropriate rule preparation.
• Final construction reports preparation and at least two installment of loan repayment conformation after project completion.
• Taking legal action, if loan receiver rare unable to repay loan’s two installment after remind him / them.
• Conversation of currency with local or foreign, if necessary.
• Propose for project BMRE processing and implementation.
• Re-evaluation of loan agreement after sanction, if necessary.
• Project agreement / statement up-dictation after disbursement of loan according to foreign loan giving authority’s requisition.
• In special circumstance, project construction re-scheduling after smooth examination, getting approval of proper authority and taking necessary steps for the same.
• Completion of duties giver by six supreme authority of departmental chief.

Central Recovery Department:

Central recovery department is responsible for recover money form Dhaka district. Success or failure of BSB is dependent on this department. The performance of central recovery department is not better today. The main function of central recovery department is the following:

• Make proper communication with loan holder to accelerate loan payment / recovery.
• Proposal for excess loan / BMRE to existing project and processing, sanctioning and implementation with the approval of loan operation department for that project.
• Processing and implementation of loan rescheduling.
• Information provide to branch central department about progress of loan repayment and other for the same.
• Observation of progress of project, investigation according to instructed schedule, maintaining, informed about arising problem and taking respective decision for the same.
• Arrangement of insurance policy against projects assets and to up date of insurance for the same.
• Interpretation of yearly financial statement of loan holder company and make advice about company’s problem.
• Make close communication with loan recovery department, other branch control department, project implementation, loan rehabilitation, advance department about preparation of rules and regulations of project management and loan recovery.

Loan Accounting Department:

Loan accounting department particularly covers accounting side of the BSB. The other function of BSB is the following:

Keep records of local and foreign loan affairs of bank financed project.

Loan classification / reclassification according to lean agreement prepared by loan operation, loan recovery, loan rehabilitation, zonal and branch and law department along with proper authority’s approval.

Provide information about project loan accounts to loan holder, related bank authority, departments, zonal and branch office regularly.

To provide relevant accounting information to project entrepreneur, related bank department, zonal and branch office about recoverable loan installment, interest of loan etc.

Keeping loan recovery statistics, submission of statistics to inform management authority and other related department.

Preparation of loan statement schedule and supply that information to various department and branch office is monthly and quarterly basis.

Make information about yearly loan statement and up dated loan statement to loan holder.

Loan account scheduling according to loan disbursement.

Keep all loan accounts and submit trial balance to central accounting department in monthly basis.

• Re-evaluation of existing loan accounting method and correction, refurnishing and to update the methods.

Computerization of bank loan accounting and loan management

Other activities given by department chief.

Project Rehabilitation Department:

Rehabilitation department mainly deals with sick industry. They find out the causes of sickness of a particular project. Some time they reschedule loan according to the capabilities of the project. If the project is not rehabilitable, send to the law department and finally sued against the project. The main activity of rehabilitation department is the following:

To take action to rehabilitate sick project after appropriate investigation, if any department or branch office seems the project become sick.

Document transmission to law department about the project that would not under rehabilitation.

To take steps about rehabilitation document examination, recommendation preparation, implementation, schedule preparation and activation of plan.

Rehabilitation program preparation, management control and ensuring of management of the project that could mange by bank.

Take necessary action about production, marketing of product and loan repayment.

Managing and directing recommendation preparation about take over project.

Conformation project profitability of joint project.

After successful managing of project, duties give up to third party previous management.

Conformation of insurance and updated of insurance of project.

Law Department (Law-1 & Law-2)

To take legal action against loan defaulter and declaration of legal notice for the same.

Suit against loan defaulter and arranging all necessary activities to final dismissal according to bank ordinance.

Monitoring the suit filling by branch office and branch related case filling in the high court and Supreme Court.

Managing the cases that filing by loan holder against bank with the help of law years.

Make communication with court of auction sale of machineries of that project which captured by court’s degree.

Managing case against advance defaulter and filling of case against them.

Preparation of Bank’s special consultant / legal adviser and panel lawyer’s schedule and make communicate with them to supervise suit and also monitoring and co-ordination of them work.

Rectification / recommendation to change work’s existing law to the govt. for loan recovery.

Keep Bank’s interest and provide legal advice.

Other activates given by departmental supreme authority.

Human Resource Department of BSB

Sections of this Department

There are five sections in this department

– Fixing principles relating to human
Resource activities/position,

– Fixing principles relating to organization.

-Fixing principles relating to delegation of power,

-Activities relating to trade union,

-Send statements relating to delegation of
power.2. Management section-Provide employment policy,

-Provide transfer policy,

-Provide promotion policy,

-Fixing pay scale.

-Fixing annual increment policy.

3. Disciplinary section-Mitigates the complaint against personnel.

4. Welfare section

-Provide scholarship policy,

-Assist the helpless personnel,

-Provide retirement benefit.

5. Leave & medical section

-Provide medical facility & allowances.

-Provide vacation opportunities,

-Provide conveyance facility & allowances;

-Provide house rent allowances.

-Provide cloths benefits.

Function of the Human Resources Management Department:

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

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

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

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

5. To make service rules, correction, expansion, administration rules, sub rules,

orders, notice etc for controlling and stuff.

6. To give scholarship to the brilliant student of the university for appointing and

finding skilled officer.

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

8. To communicate with trade union scrutinizing their demands, open discuss

Developing the relationship with administration proper implementation of labor

law.

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

utilization.

10. To assess and grant retirement facilities at the time of retirement.

11. To give medical facilities to the stuff.

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

their condition.

13. To maintain and grant leaves without regular leave.

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

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

16. To maintain relationship with government and other institution.

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

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

implement computer technology.

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

Chapter – 5:DISCUSSION ABOUT LOAN DEFAULT

Loan is amount of money that is given by the bank here (BSB) to sponsors for establishment of the country that adds to the social value. With keeping this view BSB gives term loans to sponsors that increase GDP in terms of employment generation, infrastructure development increasing standard of living etc.

But in some cases borrowers are not able to pay their loan amount to the bank is called loan default. In some cases, they willingly or unwillingly making loan default; willing default means not given money by them to the bank after establishment of the project. Unwillingness to pay means unable that means they haven’t in financial condition to repay the dues amount of money.

Loan default is an universal phenomena associated with banking institution all over the world.24% loan default rate generally all over countries in the world. Where in developed countries default rate is less but in our countries in Bangladesh like other developing or less developing countries default rate is more.

Currently the magnitude of loan default is quite enormous in the context of Bangladesh. It has been even threatened the existence of the banking system at this moment. It has been occurred experiencing widespread bank loan default following prolonged economic depression.

Although upswing and downswings of economic developments had impacts on the performances of the banks on the whole, the reasons for widespread loan defaults perceived in the BSB –were inherited in the characteristic operational mechanisms of the Industrial Development Bank of Pakistan (IDPB).

In this report I attempt to focus light on how the issue of loan default has magnified over time and what has been its impact on the overall economy of Bangladesh. In this context the historical background of the BSB has been traced and the developments leading to opening up of the mechanism have been pictured.

q  In order to facilitate systematic and orderly presentation, this report has been organized into different sections:

Section1: Default history of Bangladesh Shilpa Bank (BSB) since liberation.

Section2: Analysis of BSB’s 10 years loan sanction, recovery and default/repayment of 10 projects.

Section3: Enumeration of the Asset Management by the SBS.

Section4: Contains some observation, suggestions and concluding remarks.

5.1 Default History of Bangladesh Shilpa Bank (BSB):

BSB was established in terms of clause (2) of Article 30 of the Bangladesh Shilpa Bank Order 1972(President’s Order No129 of 1972). Before liberation the name of this bank was Industrial Development Bank of Pakistan (IDBP), after liberation it was renamed as Bangladesh Shilpa Bank with a view to make industrialization of Bangladesh.

• At that time major portion of people of management of IDBP was Pakistani people. So, there was no Bengali at the top-level officer of the bank. The control was under Pakistani government; total interference was under Pakistani government. So there was no scope of getting training of Bangladeshi officers who can take responsibility of managing BSB properly. So there is some problem at the initiation of Bangladesh Shilpa bank.

• After emergence of Bangladesh, BSB were under Bangladesh government. With the exodus of Pakistanis who manned the top and upper middle echelon of management, a sudden vacuum emerged in the effective top management of the banks. As a result, the bank had been put in the hands that had little experience of running banks. On the other hand, it had lost the privilege of enjoying the surveillance of the matured ideas and visions, instead the bureaucrats who had no experience to run any sort of financial institutions guided it.
• Further, these bureaucrats were entrusted with the responsibility of running the banks without asking them to take up banking as a career. So they took up it casually and of course with no professional zeal and earnestly. Bureaucrats continued to move in and out of banking orbit and off and thus contributed rather negatively towards his proper upliftment of the banking system.
• BSB was called by government to extend credits to revitalize war-torn and damaged industries and business establishments The basic concept centering around the commercial considerations were set aside and the social considerations to provide services prioritized from the angle of national development by the Bangladesh government because the key for decision making for enlarging credit toward the establishment of industries of the country.
• As the bank departed from following the standard norms and practices the state of affairs of the banks became vulnerable leasing to large scale loan defaults The loans taken by the public sector bodies like Bangladesh Jute Mills Corporation, Bangladesh Textile Mills Corporation and other state owned enterprises were stuck-up at these institutions used bank loans mostly for loss financing.
• As the bank was 100% owned by the government the bank management whose hiring authority was the government itself had to take the dictation of the government in making default loans to the defaulting public sector enterprises. As a result, non-performing assets swelled up with the passage of time. Further the top management of the banks neither possessed the maturity nor had the courage to pursue and make the Government to understand the actual rules of business of the banks.
• Since most of the public sector credit sanctions were at the hand of the government and in some cases had the guarantees provided by the government, these loan were not classified in the earlier period this in fact, gave wrong signal in the sense that these were not treated as non-performing assets and as such the banks appeared to have no worry about these non performing assets. Although Bangladesh tried to point out these weaknesses in the bank but its voices not heed to in proper spirit and action. Action a result the situation continued to worsens.
• As Bangladesh is an agriculture country, as to advancement of agricultural industries. Government extended loan for expanding irrigation and sponsors took loan for installing machines, with the passage of time transportation and electricity communication condition developed so this types machineries were no longer existence because they set motor trough connection of electricity and those machines were collapsed and operation was closed. Consequently didn’t pay their loaned money.
• They are some pressure of the power group in case of sanctioning loan. After taking loan through instruction of high channel but sponsors are not able to repay the loan because improper suggestion and improper use of the asset of sanctioned money. In some cases, sponsors took loan but as per condition money was given, but they didn’t use it properly or in according with the given suggestion. Sometimes, sponsors worked there in accord not even the suggested or the machines specified for proposed projects, they didn’t purchase or imported   from that country etc.

q  In 1980, Bangladesh government took decision to establish various industries all over the Bangladesh. So with keeping this view BSB gave loan to various sectors, and at that time industries were established but after these were not been long sustained because of different reasons problems. It is discussed chronologically was follows:

(1)

• Bangladesh is a revering country, it’s easy to transport all of the goods through water vessels and also cheapest in case of carrying goods and at that time roads and highways were not so developed. So river was the easy way for carrying goods.
• But now a way roads &highways are developed and transportation facilities are in good position. So people now are made ready to transport all the goods in the roads and &highways because of quicker transportation facilities and also less costly than before.
• The loan was given to make water vessels they made properly but they were not in good position. They are now in losing concern because of their business don’t run well. Sponsors fail to repay the loan.

(2)

• Another example of loan default is that Bangladesh Shilpa Bank gave loan to cinema industry for making recreation through cinema hall of the people in various urban areas with very rural areas.
• With the passage of time technology has been changed and also choices of people also been changed, today people hardly go to cinema hall for recreation because video disks are available and they can enjoy in easily with family members and low costs.
•  As much as business has to be continued but not so really and consequently earning power is less than before that means at the time of initiation or was estimated.

(3)

• Rice mills was also the same case, that means BSB gave loan for expanding this industry and gave loan to the sponsors and also they were successful at the primary stage.
• In case of changes of time automated systems machines are evolved and very easy way to grain the rice. People now go to easy way rather previous process.
• In same cases people who took loan and established rice mills are now in losing concern and not able to repay loan money.

5.2 Analysis of BSB’s 10 years loan sanction, recovery & default/repayment of 10 projects:

After discussion of loan default and history of loan default since 1972 then I go to data analysis through sanction, recovery and default amount of various sectors Here I take 10 sectors data and making trend analysis and tried to find out which sectors are in great default position and which are more better position.

10 sectors loan sanction money are as follows:

               Figure: 5.1 Sanction loan money of 10 sectors

10 sectors recovery of loan money are as follows:

Products201710461786219950181038947174013109267037Petro chemicals5311252726293101271174002468356134616554Rubber &Rubber4227511156597240341359411Service22526235293059935189230111993621459285662552535849Tannery10702148391656518928145071880026974150861868717325Water transport

50888927550810891709029843139261248952436

               Figure No: 5.2 Recovery loan money of 10 sectors

10 sectors default/repaid money are as follows:

Products-795-791-325-4991830-1604-304-803825-982Petro- chemicals-1589442270232-1636891100-587382328Rubber &Rubber51-68-30-122652658-13Service71312419-47864380124-5589-65543702304-5004Tannery1031690-13345111-7801511-80677418661816Water transport7013-1174-22201890-1007-1541-2027-906-11501592

               Figure No: 5.3 Default/Repayment loan money of the 10 sectors

After examining the data of the various sectors, an individual analysis of all the sectors are presented below:

10 Sector trend analysis of sanction loan money

 Figure No.: 5.4

v  Firstly, sanction of loan money in 385565 in year1993-94 but in next two years decrease, next increase and in 2002-03 amount is 685794; so ultimately an increasing trend.

Figure No.: 5.5

v  Electrical sector is much more likable to the people of Bangladesh. With the changes in time, its uses are increased day by day. From trend analysis, it is clear that in the year 1993-94 sanction of money is only 98  thousand but it is increasing so in the year 2002-03 is tk1009 thousand.

Figure No.: 5.6

v  Food &Allied sector is in increasing trend and also profitable for this reason its sanction of money is increased .In the year,1993-94 it was 14321 thousand there some decreasing trend but in 2003-04 is 22650 thousand.

Figure No.: 5.7

v  Machinery & Metallic is not in sound condition. It is in increasing trend from 1993-04 to 1998-99 but after this year it is decreasing trend but latter is straightly upward trend.

Figure No. 5.8

v  Jute & Allied is over ally upward trend in case of sanction of loan money.

Figure No.: 5.9

v  Petro- chemicals are in somewhat downward trend. Whereas in 1993-94 6900 thousand but later is decreasing in some extent both in up-down trend are in this sector.

Figure No.: 5.10

v  Rubber &Rubber is in upward trend in slightly from 1993-04 amount but in sanction of loan money is much increased up to 2002-03 is 398 thousand.

Figure No.: 5.11

v  In the service sector, theresome increasing trend where in 1993-04 15395 thousand but in 2002-03 is 30845 thousand. So, it can be said is a successful one in sanction of money.

Figure No.: 5.12

v  Tannery is almost same throughout the all ten years. In year, 1993-94 is 10599 thousand and in 2002-03 is 15509 thousand. So, in sanction of money in this sector, it is in fruitful in sanction of loan money.

Figure No.: 5.13

In sanctioning of money in the water transport is not well, in year 1993-94 12111 thousand but it is decreasing in the year 2002-03 is much lower than previous amount is 5028 thousand.

10 sectors default/repaid money are as follows:

Figure No.: 5.14

• In collection of loan money in cotton &woolen sectors is remarkably upward trend. In year,1993-94 collection of this money was 304980 thousand next year is 262979 is somewhat decreased then increase but in the year 1997-98 &1998-99 also downward then also increased next years and this amount in the year 2002-03 is 708763 thousand is much more than previous.

Figure No.: 5.15

• Electrical is not so recoverable of loan money .From the graph, we see that in year 2001-02 is 4193 thousand is the highest but others are in slow upward trend.

Figure No.:5.16

• Food & Allied sector in respect of collection of loan money from the sponsors is positive because it is also a positive sector of our country.

Figure No.: 5.17

• Jute & Allied is in case of recovery loan money is fully an exception one. In year1993 was 23819 thousand whereas declining year after year in down ward trend.

Figure No. 5.18

• This sector is in volatile position because increasing and decreasing pattern are in existed in this sector.

Figure No. : 5.19

• The highest recovery of this sector is 7400 thousand in the year 1998-99 and other years are medium position. In the year, 1993-94 collection of loan money is 5311 thousand and in the year 2002-03 is 6554 thousand.

Figure No.: 5.20

• Recovery of the loan money in the Rubber & Rubber sector is much more satisfaction able than others .Almost it is in upward trend.

Figure No.: 5.21

• Service sector is in upward trend almost all the year. In the year 1996-97 is 35189 thousand &2002-03 is 35849 thousand much more and others are near about to same.

Figure No.5.22

• Tannery sector is also an upward trend. In the year 1993-94 is 5088 thousand and increasing slightly year by year and highest in the year 1999-00 is 26974 thousand and next slightly decreased & in the year2002-03 is 17325 thousand.

Figure No.: 5. 23

• Water transport is not in good condition in respect of collection of money. In the year, 1993-94 the amount was 5088 thousand then increased slightly but later downward trend till 2002-03.

10 sectors trend analysis of default/repaid loan money

Figure No.: 5.24

      It is clear from the graph most of the year are in default position of this sector in the year 1993-94 is 80585 thousand & 2003-04 is 81366 thousand though there some recovery but is very less amount.

Figure No.: 5.25

      In the electrical sector is much default sector in case recovery of money. From the graph, most of the year are in default and in highest in the year 2001-02 is amount is 10074 thousand.

Figure No.: 5.26

      Food & Allied sector are in less default. In the year, 1993-94 the amount is 2020 thousand and 1995-96 the amount is 3493 thousand are default but most of the years money are paid by the sponsors within the schedule time.

Figure No.: 5.27

      Jute & Allied sectors are in downward trend is clear from the graph.

Figure No. : 5.28

Machinery & Metallic sector is also in downward trend because most of the year default the sponsor’s of their repayment money. The years 1997-98 the repayment money is 1830 thousand and 2001-02 the amount is 3825 thousand rest of the year are in default.

Figure No. : 5.29

      This sector’s repayment money is satisfactory because most of the year sponsor’s paid their money .Only two years, are in default position 1993-94 the amount is 1589 thousand taka and in the year 2000-01 is 587 thousand taka.

Figure No.5.30

      There is middle position in respect of repayment and default of loan money in this sector. In year 1999-00 in large default and in the year 2001-02 is in high recovery in this sector.

Figure No.5.31

q  Repayments are made by the service sectors sponsors are in positive, most of year they paid their dues money only in 1995-96, 1998-99 and 2002-03 are in default position.

Figure No.5.32

q  Tannery is in much well position than others. Most of the year sponsors paid their dues money and in two years in1995-96 and in 2000-01 are in default but others are in good position.

Figure No.5.33

q  Default loan money in this sector are the more than others sector. Except the years 1993-94, 1996-97 and in the year 2002-03, others are in default.

Comments on these Sectors:

The Discussion about the 10 sectors is Cotton and woolen, Electrical, Food and Allied Jute and Allied Machinery, Petrol-chemicals, Rubber & Rubber, Services, Tannery and Water Transport. Here, I tried to explain these sectors with sanction, recovery and default/repaid loan money along with presented data.

Although I discussed these sectors, now try to find out which sectors are in good position in case of loan default/repayment and which are in bad position. These are discussed are as follows:

v  Default amount of the Water Transport, Cotton and woolen, Electrical, Machinery and Metallic are in great default in respect of repayment of loan money because of changing of time, changes of fashion, changes of technology, development of transportation facilities are the main reason of default. This is because as follows:

• In the case of water communication, after liberation there were no developed transportation facilities so many of the case water vessels were the main instrument of transportation, government gave huge loan to this sector but with the passage of time transportation facilities are developed specially roads and highways; for this reason the sponsors of water vessels are problem and not able to repay on the right way.
• Bangladesh is an agricultural based country. So, most of the produced products are produced from agriculture, most of the cloths are made from the agriculture oriented goods. Cotton and woolen products are made from synthetic material which is imported from others countries. For establishing this industry government gave loan but with the increase of production of agricultural product, this sector is usually becoming losing concern.

• Electrical is also cases of loan default because of inexperienced and inefficient manpower of our country. This can be said in the way that the electric machines installed in our country with the help of foreign engineer but after installation though they gave instruction but our inexperienced workers are not able not maintain properly.
• Machinery and metallic also the same problem as like as electrical products. One of the practical example is that ZAHEED WIRE were was established with foreign machinery but Mr. Zaheed was an engineer for this reason he didn’t take help of foreign engineer and installed in his on accord and after installation till now there is no production from this machinery and now it is in default.

v  Repayment amount of money in the sectors of Food and allied, Tannery, Service and Petro chemicals are almost satisfactory because of the followings :

• Food and allied sector become interesting business of the people of Bangladesh and also profitable because of increasing of the demand of people they built firm for producing the food oriented products that helps to repay their installment money of the loan amount.
• Tannery sector is also near about to regular in repayment of loan money  this is that leather of the domestic products are cheap and the necessary instrument of processing this goods are available in our country and by exporting this goods Bangladesh earns a lot foreign currencies from abroad..
•  There some default of the Petro-chemicals sector but with the abundance of natural gas, there some sort of getting of this product so some industry built with the help of foreign oil country.
• Service sector in our country is much profitable though there some default. For expanding this industry, BSB gave loan such as tourism center, hotel, restaurant and service oriented activities.

• Another two sector Jute & allied and Rubber sectors are in medium position in case of repayment of loan money In case of Jute oriented products, raw materials are almost available in our country and rubber products are produced commercially in Chittagong, Khagrachori and in the hill- tracts area of our country.

5.3 Enumeration of the asset Management by the BSB:

Management of assets particularly the loan portfolio is the most vital function of the bank. Bank performances in terms of returns to investments ultimately centers around how well a bank distributes its risks in its loan portfolio. In terms of banking regulation, BSB maintains the sponsors give 40% and 60% will be given by the BSB for establishing a new project. Basically, making of profit depends of giving loan through proper making appraisal report of the proposed project. It is true that profit is not prime motive of BSB but to manage properly for contributing growing national GDP.

      The assets held in the investment portfolio by the bank are usually the gilt edged scurrilities, which fetch low yields but are much secured. As such, there occurred almost low cases of default. The classification of asserts as also provisioning there of in cases banks thus centered on loans and advances only. But in some cases, with the changes in time, changing of taste &fashion of human beings etc sponsors are not able to continue their business or continue with low profit; so as per requirement of desired function is not possible and installment due become default.

      The bank has separate departments which deals in sanctioning, disbursements monitoring and recovery of loans of given loan to various projects. Banks have separate set of rules enriched in the manual to process and finalize credit proposals. However, it is commonly reported that many important decisions with regard to sanctioning of loans and disbursements there to were made not on the strength of the factual position as revealed in the processing by the departments.

      BSB has separate inspection department, which carry out regular periodic and sometimes special inspection of the loan portfolios. Corrective measures are taken on the basis of findings of the inspection team. When carrying out inspection drills, special attention is given on the observation and comments made by the Bangladesh Banks inspection team. It may be specially mentioned that the initial classification of the assets of the individuals banks are performed by the bank officials Bangladesh Bank conducts its inspection mainly based on the findings of the of the BSB’s various departments.

      In addition to audit and inspection department, BSB has a vigilance team directly attached with top most executive. The main of the vigilance team is to attend the urgent cases of irregularities committed by the bank officials. Major lapses leading to big losses for the bank are investigated on an urgent basis by the vigilance tea. However, in most of the case the audit and inspection department carries out follow up investigations after the vigilance team submits the report.

      The board of Directors of the BSB is supposed to have the ultimate say in the mater of decisions on the loan cases; the board of course, is helped by the brief prepared by the credit department and top executives. The modern tools like LRA (Lending Risk Analysis), information gathered through CIB (Credit Information Bureau) of Bangladesh Bank is of immense help in taking the decision regarding sanction of credit by the different banks. However, as the dictation either of the high ups of the existing government has also the private banks have to play; it is difficult to have loan portfolio free of potential loan default culture.

      Until recently utmost emphasis was laid on the collaterals offered by the prospective loans in determining whether to sanction a loan case or not. The view is that in case of loan defaults the bank could readily fall bank upon the recourse through the disposal of the securities under lien. It immediately diverted the attention of the credit managers from properly analyzing such issues as the feasibility as the scheme, its cash flow status, repayment potentiality and the future business prospects. Rather they are happy with the assets available as collateral security.

      Indirect facilities in which in case of training facilities of the sponsor’s employee have no regard to requirement of making provision. Mainly because of fact no fund has gone out of the banks, any financial loss emanating of these transactions is not usually apprehended. However, there are good numbers of instances that the bank had to bear considerable financial losses, as the beneficiaries of the indirect facilities did not perform the way they are supposed to. It is clear that provisions are required even for the unclassified loan and advances.

      If there are some default if minor nature, the accounts may be classified. However the borrower may make good of the default by regularizing arrear installment payments and all other deficiencies at latter stage. In such event loan accounts are de-classified and these accounts again come to usual unclassified status.

      In order to help the genuine problems faced by the borrowers of the repayment schedule, the banks allow rescheduling of the repayments as per agreed terms and conditions. However, the central bank advises the banks not to accede to request for rescheduling for more than two occasions in a single loan case. It is important to note that in the event of proper rescheduling allowed by the bank, the classification changed and the loans again become unclassified.

5.4 Some observation, suggestions & concluding remarks:

♣ A vigorous effort was made by the central bank and the Government to recover bank default from the large defaulters. Bangladesh Bank takes some measure in order to create social pressure like 100 largest defaulters list was published in the newspaper; from taking this measure, there were some success but no real headway could be made in this sphere. It signals that once the loan have turned to be bad, it is quiet difficult to set those on right track.

♣ It is hard to believe that BSB is moving positively to deliver the nations when rampant cases of defaults of big amounts are being surfaced everyday. It is true that data as revealed in this paper or elsewhere may not prima-facie bear testimony to positive achievements of BSB. Though there some default from various projects, as a public bank loans are given to the sponsors for smooth industrialization of the country.

♣ The adverse picture regarding the loan default situation is one of the main culprits responsible for unhappy developments with regard to growth of savings of Bangladesh. As the BSB is plagued with bad debt expenses resulting from widespread loan default, have to keep attention for giving loan and take various pre-cautious measures so that the projects can be able to revive that contribute to social development of the country.

♣ Prevention is better than cure. This should be the watchword for monitoring and supervising loan accounts of a bank making classifications and pursuing borrowers to regularize the accounts rarely meet success. The cost of such exercise is also heavy so the BSB should evolve appropriate system to detect deficiencies in the management of credit operations well before its calls for classification. In this regard an effective on-side and off-side supervision system may be placed.

♣ BSB should attach special attention for supervising and monitoring the loan cases which have already been rescheduled. Since the borrower has already been proved to be vulnerable in this case, he needs to be specially censored for the better interest of the bank as well as customer.

♣ Provisions for unclassified loans should be prescribed; making provision against possible losses, which may arise out of indirect facilities, may be suggested. This is especially important since indirect facilities constitute more than 50% of direct facilities for most of the project’s sponsors.

♣ Efficient and intelligent officials should have BSB’s inspection department. It should be as exclusive department with promising career path for its members. Officers of these department should not be transferred to other departments because if the juniors have the fear that they might be put under the supervisory control of some senior officers of the credit department in course of time.

♣ Man behind the desk is equally important in a well-knit and efficient system. So personnel placed in the inspection departments of the bank and central bank should be quality and integrity. Proper and continuous training at appropriate levels should be imparted to keep them well equipped to face the difficult and complex challenge of modern day for bank supervision.

♣ A deeper look into the state of affairs relating to the nature and state of the assets of the bank prompts us to opine that a comprehensive survey based study on the loan default situation of the bank could be more revealing which might help the policy makers to formulate decisions to effectively minimize loan default in the long run; because of non-availability of segregated data series on loan default in the public sector.

♣ Basically BSB can be said as engine of development of industrial sector of the country and simultaneously in promoting contribution to the national Gross Domestic product (GDP) in terms of increasing employment, opportunity of transportation facilities, increasing earnings to people etc. So endeavors to stop erosion of its financial strength through of bad debt expenses must be attached the top most priority.

♣ Financing in the form of working capital; BSB is involved itself into the project loans the   particular enterprise for which it may sanction working capital. It will eventually facilitate simultaneous supervision of both the project loan and the working capital credit, which will ultimately lessen the possibility of loan default.

♣ BSB is the Development financial Institutions (DFIs) branded as specialized bank are mainly financed through government allocations. As such, they are not at per with scheduled commercial banks, which are absolutely deposit based. A uniform system of supervision therefore is not desirable in the same way for this institution. In this context, it may be mentioned that similar type DFI viz HBFC (House Building Finance Corporation) is out of the purview of Bangladesh Bank supervision.

♣ As the Bangladesh is agriculture based country. So BSB tries to initiate this type of industry that is supported that means raw materials from agriculture. But in some time, natural disaster affects this type of source of raw material ultimately causes loan default. So, Government should take initiative to overcome the problem.

Chapter – 6:Findings, Conclutions & Ecomendations

Findings:

As a student of M.B.A, Department of Management Studies, Faculty of Business Studies, University of Dhaka; I have to complete internship program. With reference to that I was referred to Bangladesh Shilpa Bank (BSB), &worked there near about 3 months of 8 departments.

The following findings are obtained from the study:

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

Loans are given to sponsors through preparing appraisal report.

The nature of credit shows that it mainly grants term loan, working capital loan and term loan.

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

There are some sick industries are in the BSB.

Lock of business experience of the entrepreneurs.

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

Sometimes pressure group’s involvement in sanctioning loan.

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.

Dependence on imported technology and non-availability of adequate information about that from local source.

Lack of adequate, updated and accurate information from the management information department (MIS).

Inadequate attention is given to analyze risk and uncertainties associated with the projects.

Lack of co-ordination in exchange of transferring information among various banks.

Adequate attention is given to social benefits.

Unstable policy of the government due to political changes over time.

High educated personnel are in the management.

There some fringe benefits to the employees with cash benefit.

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

Abuse of space of the bank say total space is 24floor but AB bank and IFIC bank operate their function consisting of only 2 and 4 floor respectively with profitable concern.

Lack of help of various departments among themselves.

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

Lack of motivation and team speed

Lack of proper allocation of Human Resources

Lack of morality and moral teaching

Political Trade Union

No strong parallel business

No use of latest technology and permanent IT specialist.

Weak Recovery trend due to corruption, negligence and political pressure

Projects become sick lack of working capital.

Delay in settlement of case

Social benefits are high from the banks to the people in various ways such as infrastructural facilities, security etc.

Though BSB’s help in financial condition, it helps in various social, cultural development of the country.

There some extra benefit is given by the BSB for establishment of the project not given by other banks such as training of employees from abroad, giving infrastructure facilities etc.

Sometimes BSB helps more by giving more additional financing to prospect project.

Project Rehabilitation is one of the criteria of BSB that revive the sick project.

Contribution to the GDP is remarkable through industrialization process.

Due to hartal activities are hampered the projects function.

Help in implementing the projects.

Giving advice about the projects function for their future success.

There some problem may arise but with the all officer walk in the same line and devote more for well-being of the bank.

Contribution of BSB is highest in the industrialization of Bangladesh through there’s some problem.

6.2 Conclusions:

Bangladesh in spite of a developing country much depends on agro-based products. In order to industrialization, the country should build up a strong base upon which industrialization will be grown up. For this reason Government should take forward steps considering all sorts of threats and opportunities.

Bangladesh Shilpa Bank can play a very important role in this respect, as it is the prime development financing institution of the country. Over the past the bank is showing a deteriorating trend in profitability. The cumulative loss of the bank stood at Tk 3,285.60 million in 2000. The main reason for losses is the huge amount of non-performing stuck-up loans for which the bank has to maintain large amount of provision from its profit each year.

Borrowed funds constitute a major source of the bank’s lending assets and posting of accrued interest in interest suspense account has lowered its net interest income. This is constantly creating a huge problem for bank’s overall operation and deteriorating performance.

While working in BSB I have discovered some major problems associated with different departments in this organization. These problems can be classified from bureaucratic, political as well as financial perspective. Since this organization is now fully owned by Government, political pressure is always hindering some problems against its smooth operation.

During the last three years a number of steps have been taken to strengthen the country’s banking system. These include improvement of the regulatory environment. Enforcement of loan classification guidelines and recapitalization of nationalized commercial banks. Over the past two years, there has been a massive infusion of taka 32,000 million in the NCBs in the shape of government bonds to make up for capital and provisioning shortfalls. BSB and BSRS (Bangladesh Shilpa Rin Shangstha) have been able to rehabilitate 471 sick industrial units which have created 21,000 new jobs.

The government is keen to correct and remedy failures and imperfection in the specialized banking operation including BSB. A small credit guarantee scheme has been introduced, to assist new entrepreneurs who can receive loan of taka 2.5 million without any collateral.

The transformation of finance priorities has brought with it problems in administration. No sound project-appraisal system was in place to identify viable borrowers and projects. Since BSB is owned fully by Government, it does not have adequate autonomy to choose borrowers and projects and is often instructed by the political authorities.

In addition, the incentive system for the bank stressed disbursements rather than recoveries, and the accounting and debt collection systems were inadequate to deal with the problems of loan recovery. It has become more common for borrowers to default on loans than to repay them; the lending system has been simply disbursing grant assistance to private individuals who have qualified for loans more for political than for economic reasons.

The rate of recovery on agricultural loans was only 47 percent in FY 2001, and the rate on industrial loans was even worse. As a result of this poor showing, major donors are constantly applying pressure to induce the government and banks to take firmer action to strengthen internal bank management and credit discipline. I have already given some recommendations for BSB that are attached with the report. If the recommendations are to be followed by the Government as well as BSB, we think this organization will be able to improve its performance which in turn will contribute to the industrialization and development of the country to a very great extent.

Suggestions & Recommendations:

Recommendation means to give suggestion about the BSB. As a student of MBA, it very difficult to give suggestions to BSB. Operational activity of the bank being the prime Development Financing Institution continued its efforts in 2000-2001 to make an effective contribution towards expansion of industrialization process of the country. With keeping this view, BSB sanctioning loan to the sponsors in the procedure of BSB; in addition to this, Though it is high, in spite of this I give some suggestions about BSB are as follows:

      Sanctioning loan to the sponsor’s carefully through proper making feasibility report.

      Central Observation Committee (COC) can be established to analyses, evaluate and solute proper loan recovery.

        Political pressure should be in lower interference in sanctioning loan for establishment of the project.

      Experienced and motivated entrepreneur should be allowed for sanctioning the loan

      Separate bench for Money Loan Court should be established.

The promotion and recruitment should be fair.

Service rule should be followed

New and energetic employees are essential

Honesty, morality, responsibility and patriotism of employee should be

enhanced

Working capital should be provided by BSB

Works should be equally distributed among the employee

Benefits and incentives should provide to the employees on the basis of

market rate.

Employee’s performance should be related with bank’s performance to gear up its operation.

All information should be collected by CIB of Bangladesh Bank to the default culture.

      Employees of all departments should be positive in terms of allowing bonus in several times.

      Encouraging the borrower to repay the loan in time.

      Training supervisor should be smart who can able to give dynamic and timely training to the employees.

       5 C’s i.e. (Character, capital, capacity, collateral and condition)must be considered for giving loan.

      The project which is profitable should be identified and sanctioned loan to those projects.

      Computer system has already been installed but more internet facilities to be introduced.

      Preserving of documents of different departments to be kept in separately.

      The policy made for implementation to be made until project is completed.

      Mortgaged of loan should be sufficient to recover the sanctioned money.

      The time to prepare a feasibility report should be followed strictly.

      Risk adjusted discount rate method, Program evaluation and review technique (PERT) and probability analysis should be introduced.

       Both primary secondary database of the BSB should be improved and strengthen.

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

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

      Responsibility should be established to all according to their involvement in appraisal of project.

       Market research institution should be established for proper market survey.

Bibliography:

1. Bangladesh Shilpa Bank, 2003.Annual Report 2002-03.

2. Bangladesh Shilpa Bank, August, 1984 .Manual of the project Appraisal.

3. Bangladesh Shilpa Bank Ordinance 1972.

4. B.N.Ghosh, Scientific Methods and Social Research, Sterling Publishers Ltd.

5. Fred N. Kerlinger, Foundation of Behavioral Research, Holt Rinehart Winston.

6. M/S Pack stone Ltd, March 2003.Appraisal Report.

7. Nabi, K.A, Eds. Nov 1992, Development Financing Institutions of Bangladesh; policy, performance problems and prospects, proceeding of a national seminar Dec, 1992:151-190.

8. T.S.Wilkinson and P.l.Bhandarkar, Methodology and Techniques of Social Research.

9. Bangladesh Shilpa Bank, 2002.Annual Report2001-02.

10. Bangladesh Shilpa Bank, 2001.Annual Report2000-01.

11. Bangladesh Shilpa Bank, 2000.Annual Report1999-00.

12. Bangladesh Shilpa Bank, 1999.Annual Report1998-99.

13. Bangladesh Shilpa Bank, 1998.Annual Report1997-98.

14. Chandra, Project Planning, Analysis Selection Implementation & Review.

15. Bangladesh Institute of Bank Management.

16. Web site of Bangladesh Shilpa Bank (BSB).

Appendix :Questionnaire

A study on Loan Default of Bangladesh Shilpa Bank (BSB)

• This questionnaire gives you an opportunity to evaluate your organization.

• Please give your honest opinion as your responses will remain anonymous.

Name of respondent ………………………………………………………………….

Designation…………………………………………………………………………….

Name of the organization…………………………………………………………….

Location………………………………………………………………………………..

Section – A:

General Information:

1)      Year of establishment …………………………………………………….

2)      Head Office………………………………………………………………..

3)      Number of Branch Office………………………………………………….

4)      Number of Zonal Office……………………………………………………

5)      Number of Total employee………………………………………………….

6)      Form of Ownership………………………………………………………….

7)      Nature of Service……………………………………………………………

8)      Total Investment…………………………………………………………….

9)      Profit/Loss (Last FY)……………………………………………………….

10)   Market Share……………………………………………………………….

11)   Major Competitors…………………………………………………………

12)   Number of Department……………………………………………………..

Section B:

Information about Loan Operation & Default:

1)      Who conduct the project appraisal? …………………………………………………

2)      In how conduct the project appraisal? ………………………………………………

3)      After analyzing the project appraisal, who decides the loan should be sanctioned or not?

……………………………………………………………………………………………

4)      In deciding loan sanctioning, do you face any problem? …………………………….

5)      If the loan is sanctioned, which department is it forwarded to? ………………………..

6)      Does the implementation department face any problem? ………………………………

7)      Who are the main borrowers of BSB? …………………………………………………

8)      Why them? ……………………………………………………………………………..

9)      What type of industrial credit program BSB offer? …………………………………….

10)   What type of incentive program BSB follow for loan recovery? ……………………….

11)   Now how many projects are conducted by BSB? ……………………………………….

12)   How many projects are successful now? …………………………………………………

13)   How many projects are sick now? ………………………………………………………..

14)  What is the total amount of loan now?

15)   What is the target for recovering loan?

a)      2001-2002 ……………………………………………(Crores Tk)

b)      2002-2003……………………………………………(Crores Tk)

c)       2003-2004……………………………………………(Crores Tk)

d)     2004-2005…………………………………………… (Crores Tk)

16)  What is the amount of recovery?

a)       2001-2002 …………………………………………… (Crores Tk)

b)      2002-2003………………………………………………(Crores Tk)

c)       2003-2004……………………………………………….(Crores Tk)

d)     2004-2005…………………………………………………(Crores Tk)

17)  What is amount of loan default?

a)      2001-2002 …………………………………………….  (Crores Tk)

b)      2002-2003……………………………………………… (Crores Tk)

c)       2003-2004……………………………………………….(Crores Tk)

d)     2004-2005…………………………………………………(Crores Tk)

Section C:

Problems and Recommendations of Loan Default:

1)      What are the major areas of problem?

a)      Policy level ……………………… (Micro/Macro)

b)      Firm level …………………………(Functional/External environment)

c)      Financial ………………………….. (Debt/Equity)

d)     External…………………………….

2)      What are the suggestions about regarding this problem?

a)       Policy level ………………………

b)      Firm level …………………………

c)      Financial …………………………..

d)     External…………………………….