Small and Medium Business Enterprise Loans by Premier Bank Problems and Prospects

Abstract

As the topic of my internship is Small and Medium Enterprise Loans by Premier Bank, this report focuses on various aspects of SME loans - its prospects in Bangladesh, problems faced by banks in giving these loans, the lending procedures, the condition of SMEs in Bangladesh overall etc. According to Bangladesh Bank, the recent definition for SME is: The companies which are not public limited and have total assets from BDT 50,000 to BDT 50, 00, 000 excluding building and land, and the total number of employees of the companies is highest 25 ,only then it will considered small business enterprise. The companies which are in industrial sector must have total assets BDT 50,000 to BDT 1,50,00,000 excluding building and land and the total number of employees of the companies must be highest 50 to be considered a small business. As Bangladesh is a developing country, the development of small and medium enterprises (SMEs) is a key element in it's economic growth ,so recognizing the demand in financing of the companies operating small and middle sized business,The Premier Bank Ltd. offers a simplified scheme to entrepreneurs for increasing SME finance. Small and Medium size industries which have total assets (excluding land & building) between TK. 50,0001- to Tk. 1 Crore are eligible under this scheme. The SMEs' contribution to GDP remained within the range of 4.4 percent to 4.7 percent during the last five years. Despite the great potentialities of the SMEs in our economy, 49 Commercial Banks of the country have not yet come forward with a definite vision to extend financial help to the millions of entrepreneurs of this sector. There are approximately 6,000,000 micro, small and medium enterprises in Bangladesh, which include up to 100 workers at most. These enterprises consist primarily of wholesale retail trade and repairs *(40 percent), production and sale of agricultural goods (22 percent) and manufacturing (14 percent). Out of these enterprises, 35 percent received credit from informal source and another 35 percent from formal source. Nongovernmental Organizations (NGOs) were the most common source of formal credit. The Premier Bank Ltd., like other private commercial banks, has already undertaken some projects of SMEs. Within these SME scheme Project Finance,Working Capital Finance, Lease Financier Purchase,Work Order Finance, Bai-Muazzal (Commercial), Bai-Muazzal ( Term Loan),Rural Credit Scheme (e.g. Goat fattening) are the most important .As a new bank the PBL mainly finances the Small and medium scale business enterprises because it is easier to finance and maintain the small and medium scale business enterprise than large scale industries because large industries are mostly failure because of poor technology or unskilled workers. Also the SMEs contribute nearly 85 per cent to the country's total export earnings and 87 percent of the country's total industrial workforce is employed in the SMEs with the sector creating over 33 percent of industrial value added goods, so financing these SMEs is vital if our economy needs to be flourished. But despite such immense contributions, the growth of SMEs in Bangladesh is being fostered by multi-various problems, both in micro and macro levels. Lack of material testing facilities required for quality production, inadequate skilled labor force, poor marketing, inadequate knowledge of many entrepreneurs about the existing lending system, absence of necessary training facilities for small enterprise, high hidden cost are just a few of them. . The SME entrepreneurs usually have a very good business sense but may be unable to communicate in the language of a financier. These are the reasons why a separate business process is required for Commercial Banks to successfully operate in this segment. The process need to be simplified and made friendly to needs of SMEs. A product-based solution, which meets SME needs, is required. For financing SMEs, PBL has already soft-launched a product-based solution offering loans of BDT 02 Lac to BDT 05 Lac targeting at the mid-market players. Market response has been quite good and customers have appreciated PBL's simple documentation requirement and swift loan processing. With time these customers will take to relationship-based banking (instead of product based one) that will give a further boost to the sector.