Supply of and Demand for Financial Products

Chapter 2 Supply of and Demand for Financial Products 2.1 Payment and Transaction Products Payment and transaction products play key roles in smoothing retail banking and settling payment obligations in business to business and business to customer activities. In Bangladesh, payment and transaction products fall into two broad categories: traditional products, and modern technology driven products and services. The traditional products came into existence since the inception of banking business in the region while modern technology driven products and services have been introduced in the 1990s. The traditional products and services cover a wide range such as cheques, bills of exchange, promissory notes, demand drafts, payment orders, mail transfers, and telegraphic transfers. Still, these are widely used especially by the rural customers. In addition to these products, banks especially working in the urban areas offer several modern technology driven products and services including debit cards, credit cards, ATM cards, POS, online, internet, tele-banking, SWIFT, and router. As the modern products require large investments in bank branches and IT literacy both on the part of the bank employees and bank customers, these products and services are mostly concentrated in the urban areas. The urban customers also prefer modern banking products and services as these are time saving, smart, and convenient. In order to support the increasing demand of different stakeholders and raise the banking services at par with international standards, Bangladesh Bank has taken several measures to modernize the national payment and settlement system. The Bangladesh Automated Clearing House (BACH) and Bangladesh Electronic Fund Transfer Network (BEFTN), two important means of e-banking, are currently under implementation that would bring about radical improvements in daily payment and transaction activities. Payment and Transaction Product: Cash At the end-september 2008, the amount of issued currency (notes and coins issued by the Bangladesh Bank and the Government of Bangladesh) stood at Tk.421.0 billion which was higher by 65.0 billion (18 percent) over Tk.356.0 billion in June 2008. The issuance of notes and coins recorded 24 percent growth in FY08 compared with 16 percent in FY07 and 22 percent in FY06 (Figure 2.1.1). The significant growth in issuance of notes and coins over the recent fiscals indicates that cash is still the dominant and popular payment and transaction product. 30

Figure: 2.1.1 Issuance and Growth of Notes and Coins Note: Bangladesh Bank notes and coins include notes of Tk. 5 and above and coins of Tk. 5 while Government notes and coins include notes and coins of Tk. 1 and Tk. 2. Source: Monthly Economic Trends, November 2008, Bangladesh Bank. Payment and Transaction Product: Non-Cash The non-cash payment and transaction products in Bangladesh cover traditional products and services as well as modern and innovative technology driven products and services. Cheques, demand drafts, and payment orders are widely used non-cash traditional products since the inception of banking business in the country. Modern technology driven products and services were adopted by the scheduled banks during late 1990s. Moreover, the banks have been extending their customer services through introducing new technologies on a regular basis. In addition to debit cards, credit cards, ATM, POS, individual bank on-line networks, tele-banking, limited internet facilities, SWIFT and router, few banks have recently adopted cash deposit machines (CDM) facilitating 24-hour cash deposit up to Tk. 20,000 and SMS banking allowing the customers with remote balance inquiry, mini statement of last three transactions, payment and due bill inquiry of credit card, and SMS alert system for deposits or withdrawals of Tk. 100,000 and above, and FDR maturity. Traditional products and services Among the traditional products, the cheque is still the dominant medium of transaction in terms of value of payment. During 2006, the clearing houses of Bangladesh Bank and Sonali Bank Limited together cleared and settled Tk. 4,095 billion against a total of 20 million payment instruments which increased to Tk. 4,381 billion against 25 million instruments during 2007. 7 During January-March 2008, the amount settled through clearing houses was Tk. 1,328 billion against a total of 6 million payment instruments. Thus the volume of transactions and the number of payment instruments used for transaction purposes show that non cash payment and transaction products are crucial to meeting payment obligations in Bangladesh. 7 See, Bangladesh Bank Bulletin, January-March 2008. 31

Figure 2.1.2: Clearing House Returns Source: Bangladesh Bank Bulletin, January-March 2008 Modern and innovative products and services: transaction volume Between end-december 2007 and end-june 2008, the volume of transaction through credit cards grew by 59 percent in which the PCBs are the major contributors (from Tk. 4.6 billion to Tk. 8.2 billion). Table 2.1.1: Payments and Transactions through Modern and Innovative Products and Services Modern and innovative products Modern and innovative services Credit card Debit card ATM POS SWIFT (Billion Tk.) Bank category Dec 07 Jun 08 Dec 07 Jun 08 Dec 07 Jun 08 Dec 07 Jun 08 Dec 07 Jun 08 SCBs 0.0 0.0 0.2 0.2 0.2 0.2 0.0 0.1 0.0 0.0 SBs 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 15.8 36.0 PCBs 4.6 8.2 4.6 7.0 14.2 17.8 1.3 1.4 241.4 261.5 FCBs 2.3 2.7 9.7 12.8 17.9 22.5 0.1 0.3 314.0 340.6 Total 6.9 10.9 14.4 20.0 32.3 40.6 1.4 1.8 571.1 638.2 Growth (percent) 59 39 26 23 12 Note: The data cover 2 out of 4 SCBs, 4 out of 5 SBs, 17 out of 30 PCBs, and 4 out of 9 FCBs. In total the coverage is 27 commercial banks out of a total of 48. Source: PAU Survey. The transactions through debit card increased by 39 percent between December 2007 and June 2008 mainly due to a significant increase in transactions by PCBs from Tk.4.6 billion to Tk. 7.0 billion; and by FCBs from Tk. 9.7 billion to 12.8 billion. The volume of transaction through ATM increased from Tk. 17.9 billion to Tk. 22.5 billion for FCBs which contributed significantly to 26 percent growth in ATM transactions. During the period, transactions through POS and SWIFT grew by 23 percent and 12 percent respectively (Table 2.1.1). 32

Modern and innovative products and services: market share Between end-december 2007 to end-june 2008, the market share in transactions through ATM remained unchanged at around 1 percent for SCBs, 44 percent for PCBs, and 55 percent for FCBs. The market share of SCBs remained unchanged at 1 percent in debit card transactions while the share of PCBs rose from 32 percent to 35 percent and declined from 67 percent to 64 percent for FCBs over the period. Table 2.1.2: Share in Payment and Transactions by Bank Category Products and % share of transaction in December 2007 % share of transaction in June 2008 Services SCBs SBs PCBs FCBs Total SCBs SBs PCBs FCB Total ATM 1 0 44 55 100 1 0 44 55 100 Debit card 1 0 32 67 100 1 0 35 64 100 Credit card 0 0 67 33 100 0 0 75 25 100 POS 2 0 89 9 100 4 0 78 18 100 Note: The data cover 2 out of 4 SCBs, 4 out of 5 SBs, 17 out of 30 PCBs, and 4 out of 9 FCBs. In total the coverage is 27 commercial banks out of a total of 48. Source: PAU Survey. In the case of POS transactions, FCBs and SCBs captured a part of the market share of PCBs over the period; increasing the share from 9 percent to 18 percent and 2 percent to 4 percent respectively while the share of PCBs declined from 89 percent to 78 percent. On the other hand, in credit card transactions, the market share of PCBs increased from 67 percent to 75 percent while the share of FCBs declined from 33 percent to 25 percent. The PCBs, on the other hand, showed better performance in capturing the market share through debit and credit card transactions (Table 2.1.2). With a view to enhance the efficiency of the payment and transaction system, Bangladesh Bank being the regulator of the country's banking and financial sector has taken several initiatives such as formation of the National Payment System Council (NPSC) and establishment of the Bangladesh Automated Cheque Processing System (BACPS) and Bangladesh Electronic Fund Transfer Network (BEFTN), along with creating necessary legal and regulatory frameworks. Successful implementation of these measures will contribute toward raising the standard and efficiency of banking services in the country. Moreover, increasing adoption of modern and technology driven payment system will cater to meeting the payment requirements of the increasingly complex financial transactions of the Bangladesh economy. 2.2 Saving Products In Bangladesh, deposit money banks (DMBs) act as major intermediaries of savings through using different saving products. The nominal growth rate of overall saving deposits increased from 15.7 percent at the end of December 2007 to 19.4 percent at the end of September 2008 reflecting rebounded economic activities after the floods and the devastating cyclone (Sidr). In addition, higher interest rates on deposits offered by the banks and opening up of new bank branches contributed to increased savings mobilization during the period. Deposit mobilization by type of banks shows that deposit growth of SCBs and PCBs is higher than that of FCBs and SBs (Table 2.2.1). The share of SCBs in total deposits fell in September 2008, while the share of PCBs increased (Figure 2.2.1). During the first three quarters of 2008, the number of bank branches increased by 149 of which 143 were opened by the PCBs both in rural and urban areas. 33

Table 2.2.1: Nominal Growth of Deposit by Bank Types (percent) Year SCBs SBs FCBs PCBs Total 2001 13.32 20.91 17.15 28.58 18.47 2002 9.81 16.91 8.47 25.10 14.95 2003 8.87 9.82 6.75 22.37 13.40 2004 8.29 21.74 10.37 25.61 16.27 2005 9.81 20.30 25.19 23.40 17.45 2006 5.64 10.81 17.09 30.03 18.09 2007 6.49 14.81 35.28 19.62 15.68 Q1 2007 4.10 13.30 25.51 28.24 17.65 Q2 2007 5.49 13.69 15.18 24.13 15.69 Q3 2007 3.65 16.83 36.47 23.23 16.56 Q4 2007 6.49 14.81 35.28 19.62 15.68 Q1 2008 5.46 14.92 41.00 25.06 18.76 Q2 2008 6.05 23.22 39.84 23.95 18.64 Q3 2008 10.65 14.30 24.19 24.62 19.42 Note: Quarterly figures refer to year on year growth. Source: Scheduled Banks Statistics, Statistics Department, Bangladesh Bank. Figure: 2.2.1: Share in Nominal Deposits by Bank Types, September 2008 Source: Scheduled Banks Statistics, Statistics Department, Bangladesh Bank. In all, the banks offered 14 different types of saving products during the period under review. 8 Among these, fixed deposits had the largest share (43 percent) in deposits, the growth of which increased from 16.4 percent at the end of December 2007 to 28.5 percent at the end of September 2008. Saving deposits accounted for about 23 percent; and its growth rate increased marginally from 10.1 percent to 11.8 percent over the same period. Short term deposits, though experienced a sharp growth in March 2008, declined to 21.0 percent at the end of September 2008. Other deposits growth rebounded to 10.9 percent in September 2008 from a negative growth of 1.2 percent in December 2007 (Table 2.2.2 and Figure 2.2.2). 8 Different savings accounts are current and cash credit deposits, deposits withdrawal on sight, savings deposits, convertible Taka account for foreigners, foreign currency account, wage earner s deposits, resident foreign currency deposits, fixed deposits, pension scheme deposits, margin deposits, special purpose deposits, negotiable certificates of deposits, promissory notes, and restricted deposits. 34

Figure 2.2.2: Share in Types of Deposits, September 2008 Year Saving deposits Source: Scheduled Banks Statistics, Bangladesh Bank. Table 2.2.2 Growth of Deposits Short term deposits Fixed deposits Pension scheme deposits Other deposits (percent) Total deposits 2001 14.4 7.8 16.9 18.0 15.5 14.9 2002 10.9 12.4 18.4 15.0 7.4 13.4 2003 8.0 17.9 18.5 11.9 6.5 12.8 2004 15.7 13.2 19.1 15.8 13.2 16.3 2005 12.2 23.0 19.0 16.2 20.3 17.4 2006 14.0-20.0 24.7 12.4 44.4 18.1 2007 10.1 80.6 16.4 4.6-1.2 15.7 Q1 2007 14.8 13.6 26.3-0.2 16.0 17.7 Q2 2007 13.7 71.5 21.2-2.6-9.1 15.7 Q3 2007 15.7 80.5 17.6-5.2 0.6 16.6 Q4 2007 10.1 80.6 16.4 4.6-1.2 15.7 Q1 2008 9.8 97.5 20.7 16.8-6.5 18.8 Q2 2008 12.2 20.0 23.3 11.3 20.3 18.6 Q3 2008 11.8 21.2 28.5 12.0 10.9 19.4 Source: Scheduled Banks Statistics, various issues, Bangladesh Bank. 35

The commercial banks mobilize savings from both urban and rural areas through their branches, which totaled 6,774 in September 2008 from 6,731 in March 2008. The increasing trend in the share of urban deposits in total deposits reversed in September 2008. The ratio stood at 86.8 percent in September 2008 falling from 87.0 percent in March 2008 thus raising the share of rural deposits marginally to 13.2 percent from 13.0 percent over the same period (Table 2.2.3). Table 2.2.3: Urban and Rural Deposits by Bank Types (percent) Year SCBs SBs PCBs FCBs All banks Urban Rural Urban Rural Urban Rural Urban Urban Rural 2001 72.09 27.91 57.83 42.17 93.22 6.78 100 80.39 19.61 2002 72.66 27.34 59.18 40.82 93.12 6.88 100 81.21 18.79 2003 76.44 23.56 58.36 41.64 93.04 6.96 100 83.87 16.13 2004 75.78 24.22 61.51 38.49 93.53 6.47 100 84.40 15.60 2005 77.14 22.86 64.05 35.95 93.85 6.15 100 85.73 14.27 2006 77.35 23.65 64.08 35.92 93.38 6.62 100 86.39 13.61 2007 78.13 21.87 66.12 33.88 92.35 7.65 100 86.77 13.23 Q1 2007 77.46 22.54 64.01 35.99 93.13 6.87 100 86.50 13.50 Q2 2007 78.23 21.77 64.46 35.54 92.90 7.10 100 86.57 13.43 Q3 2007 77.54 22.46 65.90 34.10 92.90 7.10 100 86.92 13.08 Q4 2007 78.13 21.87 66.12 33.88 92.35 7.65 100 86.77 13.23 Q1 2008 77.96 22.04 66.75 33.25 92.16 7.84 100 87.02 12.98 Q2 2008 77.91 22.09 67.94 32.06 92.05 7.95 100 86.88 13.12 Q3 2008 77.57 22.43 66.35 32.65 91.95 8.05 100 86.77 13.23 Note: Yearly figures refer to end of December. Source: Scheduled Banks Statistics, various issues, Bangladesh Bank Total deposit in the banking system as a share of GDP has been growing over time. The ratio was 29.6 percent in 1990 which grew to 50.9 percent at the end of September 2008 (Figure 2.2.3). 36

Figure 2.2.3: Trend in Deposit-GDP Ratio Source: Scheduled Banks Statistics, BB and BBS. The deposit-gdp ratios for selected South Asian countries are shown in Figure 2.2.4. Increasing trends are seen for deposit-gdp ratios in Bangladesh and Pakistan in 2007, while the trends are reverse for Sri Lanka and India. The ratios were higher for Bangladesh and India than those of Sri Lanka and Pakistan over the last five years. Figure 2.2.4: Deposit-GDP Ratios in Selected South Asian Countries Source: Publications of respective central banks and International Financial Statistics, (various issues), IMF. 37

2.3 Loan Products Bank Credit The disbursement of bank credit--comprising of advances and bills--picked up during the first three quarters of 2008 to meet higher credit demand in the private sector resulting mainly from rebounded economic activities, higher investor confidence, and rising commodity prices in the international market. Total bank credit in nominal terms grew by 22.1 percent during the first three quarters of 2008 compared with 12.4 percent growth during the same period of 2007. Credit disbursement by PCBs, FCBs, and SBs showed faster growth than that of SCBs (Figure 2.3.1). Figure 2.3.1: Credit Disbursement by Banks (billion Tk.) Source: Banking Statistics Division, Statistics Department, BB. Among various bank groups, the share of disbursed credit in total bank credit of PCBs has been increasing while the shares of SCBs and SBs are declining. Between September 2007 and September 2008, the share of PCBs increased from 52.8 percent to 60.1 percent. On the other hand, the share of disbursed credit by SCBs declined from 32.8 percent to 25.3 percent over the same period while in the case of SBs, the decline was from 7.8 percent to 7.0 percent. Figure 2.3.2: Share of Disbursed Credit in Total Credit by Bank Groups Source: Banking Statistics Division, Statistics Department, BB. 38

Bank Advances by Economic Purpose Bank advances by scheduled banks to agriculture, industry, construction, transport and communication, and trade showed increasing trends during the first three quarters of 2008 while advances to working capital financing showed lower growth. Total bank advances recorded a growth of 26.4 percent at the end of September 2008 which was 14.7 percent in September 2007 (Table 2.3.1). Table 2.3.1: Growth of Advances by Economic Purpose (percent) Year Agriculture Industry (excluding working capital) Working Capital Financing Construction 2004 11.13 9.02 31.40 7.58 9.72 2005 10.83 6.23 27.86 15.75 16.40 Transport and Communication Trade Others Total 2006 8.44 8.56 26.14 16.03 18.81 12.28 19.24 15.98 2007 0.32 23.85 6.79 8.48 51.79 15.29 21.36 14.74 2008Q1 5.41 23.07 16.77 7.42 50.48 21.34 30.46 19.93 2008Q2 12.13 22.44 15.16 11.06 37.78 31.73 32.59 23.86 2008Q3 16.98 23.03 10.11 22.59 60.35 36.23 35.00 26.43 Source: Scheduled Bank Statistics, BB. Consumer Loan In view of the growing demand for consumer loan, the commercial banks have come forward with such loans in different areas, such as purchase of flats and household durables, meeting educational expenses, and facilitating wider use of credit cards (Figure 2.3.3). The growth of credit for flat purchase was recorded at 35.9 percent at the end of September 2008 while consumer loans in consumer goods, credit cards, and educational expenses showed a growth of 76.8 percent (Figure 2.3.3). Figure 2.3.3: Specific Purpose Advances to Households (million Tk.) Source: Banking Statistics Division, Statistics Department, BB. 39

2.4 Specialized Loan Products: Term Lending Term lending generally refers to medium and long-term lending to the industrial sector. Different categories of banks as well as non-bank financial institutions (NBFIs) are engaged in term lending activities in the country. In view of the relatively low but rising share of the industrial sector in GDP, ensuring adequate flow of term lending is important for Bangladesh. Total disbursement of industrial term Figure 2.4.1: Disbursement of Term Lending lending in FY08 was Tk. 201.5 billion as against Tk. 123.8 billion in FY07 showing a robust growth of 62.8 percent. Of the total amount in FY08, Tk. 136.4 billion (67.7 percent) was disbursed by the private commercial banks (PCBs) alone. The PCBs have dominated the disbursement of term lending for the past few years. On the other hand, the disbursement of term lending by the state owned commercial banks (SCBs) was Tk. 9.9 billion in FY08 compared with Tk. 27.9 billion by the foreign commercial banks (FCBs) and Tk. 23.9 billion by the NBFIs. In FY08, total amount of recovery stood at Tk. 136.2 billion as against Tk. 90.5 billion and Tk. 67.4 billion in FY07 and FY06 respectively. This reflects improved recovery performance in volume terms especially led by the PCBs. At the end of FY08, total outstanding amount of term loans stood at Tk. 400.9 billion compared with Tk. 337.2 billion in FY07 and Tk. 273.7 billion FY06. For the SCBs, although the amounts of disbursement and recovery are relatively small, the amount outstanding remains high showing greater impact of non-performing loans in their term lending portfolios. Table 2.4.1: Term Lending: Recovery and Outstanding (In billion Taka) Recovery FY06 FY07 FY08 SCBs 5.8 6.4 9.8 PCBs 37.1 49.2 76.9 FCBs 8.1 13.7 24.7 SBs 3.3 4.3 4.2 NBFIs 13.1 16.9 20.6 Total 67.4 90.5 136.2 Outstanding SCBs 85.4 86.6 81.5 PCBs 115.2 164.7 217.3 FCBs 10.2 14.0 17.6 SBs 21.9 22.7 23.6 NBFIs 41.0 49.2 60.9 Total : 273.7 337.2 400.9 Source: Bangladesh Bank Quarterly, Bangladesh Bank 40

Infrastructure Financing Infrastructure financing covers a wide range of activities including financing of different industrial establishments, construction, and transport and communication related activities. Total outstanding credit to the above broad spectrum of infrastructure activities increased significantly during the last three years indicating rising demand for investment in such activities. At the end of FY08, total outstanding credit to industry, construction, and transport and communication increased to Tk. 516.2 billion from Tk. 423.7 billion in FY07 and Tk. 340.2 billion in FY06. Advances to small, medium, and large scale industries including power and fuel grew by 24 percent in FY08 to Tk. 360.8 billion from Tk. 291.0 billion in FY07. Advances for construction cover mainly urban and rural housing and road construction and repairing. Total outstanding amount of advances to construction stood at Tk. 116.6 billion in FY08 rising from Tk. 104.9 billion in FY07 showing a growth of 11.2 percent. On the other hand, advances to transport and communication cater to road, water, and air transports and other utilities such as telephones, post offices, telex, fax, and related services. Although the volume of advances to transport and communication is relatively small, it increased to Tk. 38.8 billion in FY08 from Tk. 27.8 billion in FY07 showing a growth of 39.6 percent. 2.5 Access to Finance by Small and Medium Enterprises Table 2.4.2: Infrastructure Financing (In billion Taka) Sector FY06 FY07 FY08 Industry (other than working capital) 235.9 291.0 360.8 Construction 86.1 104.9 116.6 Transport and communication 18.2 27.8 38.8 Total 340.2 423.7 516.2 Source: Scheduled Banks Statistics, Bangladesh Bank Small and medium enterprises (SMEs) are considered both the driving force and the pillars of pro-poor economic growth in Bangladesh. In the FY09 budget, the sector has been treated as a thrust sector with focus on deepening the SME sector activities along with ensuring their sustainability. A well developed SME sector is a pre-requisite to attaining higher productivity though building local capacity in Bangladesh. Moreover, as the economy opens up for integration with the regional and global economy, it is vital to develop better access to formal sector financing and ensure diversified financial facilities for the SME sector. In the context of financing, asymmetric information problems between firms and financing institutions strongly affect their relationship and shape the nature of their contract, such as the ratio between debt and equity, and for debt, the nature of collateral, covenants, and the maturity period. In this respect, SMEs distinctly face the problem of information opaqueness. Due to their organizational status and potentially high variability in financial returns, the financial institutions are likely to face more problems in evaluating their activity, and hence the cost of financing could therefore be higher for SMEs. Such asymmetric information problem could be higher for those SMEs which are involved in producing new and innovative products since such firms would like to maintain some secrecy about their activities in order to preclude others to imitate, 41

as knowledge is non-rival and other firms can use it when revealed. It is likely, therefore, that SMEs would find it more difficult to access institutional finance. Further, due to moral hazard problems and higher risks, SMEs are likely to depend more on equity than on debt. In this context, SMEs are also likely to face more problems in raising equity from the financial market in Bangladesh where venture and other segments of the capital market are not well developed. It is, therefore, more likely that under the prevailing conditions, SMEs would be forced to rely more on internally-generated funds which acts as a major constraint to developing the SME sector in Bangladesh. Funds under BB s Refinancing Scheme BB has arranged refinancing facilities for banks and NBFIs to accelerate credit flows to the SME sector. The refinancing scheme is conducted from the proceeds of BB s own fund and funds from IDA (under the Enterprise Growth and Bank Modernization Program), and ADB (under the Small and Medium Enterprise Sector Development Program). Table 2.5.1 shows the amount of refinance provided to different banks and NBFIs and the recovery and outstanding position up to 31 December 2008. Since the beginning of the refinancing schemes, Tk.10.19 billion were refinanced to 18 banks and 21 NBFIs till the end of December 2008. During the period, more than 60 percent of refinancing was provided from BB s fund, of which a significant portion (51.6 percent) went to the NBFIs. Table 2.5.1: Position of Refinancing Schemes for SMEs Taka in billion Name Refinanced Recovery Outstanding Banks NBFIs Total Banks NBFIs Total Banks NBFIs Total BB 2.97 3.17 6.14 0.76 1.02 1.78 2.21 2.15 4.36 EGBMP 1.13 0.53 1.66 0.70 0.22 0.92 0.43 0.31 0.74 SMESDP 1.85 0.54 2.39 0.65 0.17 0.82 1.20 0.37 1.57 Total 5.95 4.24 10.19 2.11 1.41 3.52 3.84 2.83 6.67 Note: Figures cover data up to 31 December 2008.EGBMP refers to the Enterprise Growth and Bank Modernization Program of IDA while SMESDP is the Small and Medium Enterprise Sector Development Program of ADB. Source: Agricultural Credit and Special Programs Department (ACSPD), Bangladesh Bank. The refinancing facility of the augmented fund has been availed by 21 out of 29 NBFIs, whereas only 18 out of 48 banks are using the facility. This shows that the BB's refinancing scheme has expanded the scope for the NBFIs to take up an important role in financing the SMEs. Of the disbursed amount, about 29 percent, 56 percent, and 34 percent of BB, IDA and ADB fund respectively have been recovered up to 31 December 2008. 42

Figure 2.5.1: Refinancing under Bangladesh Bank Schemes Category wise refinancing Number of Beneficiary Enterprises M illio n Ta ka 2800.0 2100.0 1400.0 700.0 Thousand 8.0 6.0 4.0 2.0 0.0 Banks NBFIs Working capital Mid term Long term 0.0 Banks NBFIs Industry Trade Service Note: Figures cover data up to 31 December 2008. Source: Agricultural Credit and Special Programs Department (ACSPD), Bangladesh Bank. Figure 2.5.1 shows the composition of refinancing under different types of financing to the SME sector and the number of beneficiary enterprises in terms of three broad categories (manufacturing, trade, and services). Whereas refinancing facilities for the banks mostly catered to working capital requirements, NBFIs availed the opportunity to provide mid term and long term financing for the SME sector. Although the number of beneficiary enterprises is somewhat evenly distributed across the three broad categories for NBFIs, about 70 percent of the bank clients are trading enterprises. For promoting women entrepreneurs, BB has introduced a special refinancing scheme for women small entrepreneurs from 2007. Under the scheme, more than Tk.47.9 million has been refinanced to different banks and NBFIs till 31 December 2008. Performance of Banks and NBFIs Both banks and NBFIs are increasingly coming forward to provide finance to the SME sector in order to uphold financial strength and increase technical capacity, productivity, and contribution to industrial performance. At the end of September 2008, specialized banks (SBs) distributed 48.1 percent of their total disbursed loan to the SME sector but its share was only 3 percent of the total SME loan (Figure 2.5.2). On the other hand, 18.1 percent of the total disbursed loan of private commercial banks (PCBs) went to SME financing that constituted 48 percent of the total institutional loan to SMEs. There exist, however, considerable variations among the banks and NBFIs in terms of their performance in SME financing. Among the PCBs, Dhaka Bank Limited and BRAC Bank Limited distributed 83.9 percent and 75.2 percent respectively of their total loans to SMEs whereas the BASIC Bank Limited was the leading performer among the SBs (88.6 percent). The NBFIs are also emerging as important players in enhancing the accessibility of formal financial services to the SME sector. The MIDAS, Prime Finance and Investment Limited and IDLC are pioneers in this respect. 43

Figure 2.5.2: Disbursement of SME Loans SME loan as share of total loan Institutional share of SME loan disbursement Percent 50 40 30 20 FCBs 4% SBs 3% NBFIs 4% SOBs 41% 10 0 SOBs PCBs FCBs SBs NBFIs PCBs 48% Note: Figures cover data up to 30 September 2008. Source: Agricultural Credit and Special Programs Department (ACSPD), Bangladesh Bank. Recent Developments In the FY09 budget, the government announced provisions to keep the income of manufacturing SME articles free from taxes and defined SMEs as entities having an annual turnover not exceeding Tk.2.4 million, which was 2.0 million earlier. The BB has also adopted a preferential lending policy to remove obstacles from the way of accessing needed finance by the SMEs. In order to ensure cost effectiveness, BB has given permission to the scheduled banks to open SME service centers to receive application and disburse, monitor, and recover loans to the SME sector. The banks have also been allowed to use the SME service centers to receive and deliver foreign remittances and open separate desks for women entrepreneurs in the SME sector. For promoting small enterprises, BB has directed the banks that at least 40 percent of their total targeted loan for the SME sector should be earmarked for financing small entrepreneurs. BB has also expanded its spectrum of SME financing by including broadband and IT having enormous possibilities within the services sector activities. Other Institutional Developments Several government, private, and international institutions are working for developing the SMEs in the country. The Bangladesh Enterprise Institute (BEI), a non profit research center, has special interest on SME development. To serve the SMEs, it produces SME related reports and publications and help SME sector growth through regular consultations, seminars, and dialogue sessions. Among others, the South Asia Enterprise Development Facility (SEDF) of the International Finance Corporation (IFC) of the World Bank Group has been working, in Bangladesh since 2002. The SEDF and BEI together instituted a BEI-SEDF SME Advisory Service (BSAS) in 2004 which has produced the 'Entrepreneur s Guide to Regulatory Process in Bangladesh'. Recently, SEDF endeavored to provide the framework for segmentation of the SME market in Bangladesh with a view to providing the banks and other financial institutions information on features and behavior of the SMEs, help in designing profitable SME strategies on particular sub-segments, and show the channels to deliver better financial services to selected 44

sub-sectors. The SME Foundation (SMEF), a public-private partnership based organization, has taken the initiative to arrange capacity building and efficiency development training programs and operate SME advisory service centers and SME product display and sales centers to accelerate the accessibility of institutional finance by the SMEs and promote SME products in domestic and international markets. All of the above institutions and the Bangladesh Women Chamber of Commerce and Industry (BWCCI) have special concern in enhancing participation of women in the SME sector. The BWCCI is working for development of skills and proper training of women workforce and better access of women SMEs to finance as well as to assure bigger market access of their products. The SME sector in Bangladesh holds enormous opportunities to contribute to economic growth, generate employment, and reduce poverty. The sector, however, has a very limited access to finance through the institutional sources. For boosting the development of the SME sector, new generation of financial institutions are needed along with financing mechanisms to provide access to appropriate finance and meet up the diversified needs of financial services of this potential sector. For developing the SMEs as a thrust sector for poverty reduction in Bangladesh, it is important to analyze the overall financial issues facing these enterprises and understand the specific features of SME firms. Because these firms are small, they find it more difficult to access institutional finance especially when they need it due to their specific information problems. Moreover, their only choice is bank loan, which is not the most suitable form of financing for them in all cases, and SMEs should be provided with access to equity rather than debt when the situation so demands. It is important, therefore, to set up the required capital market infrastructure that can create a vibrant debt and equity market in Bangladesh. The policies must also focus on developing a class of institutional investors who are capable of providing funds with relatively long term tenures. This will enable the households to get better returns for their savings along with creating wider choices for the institutional investors. The current reforms for developing the financial markets by the Bangladesh Bank and other authorities, although focus more on the government securities market, are no doubt important steps from the point of view of creating appropriate market infrastructure and should be taken forward toward creating a vibrant capital market having a growing non-government segment as well. 2.6 Micro Credit Operations Over the last few years, micro credit operations of large microfinance institutions (MFIs) show an overall satisfactory trend in terms of disbursement and recovery of loans (Table 2.6.1). On average, the growth of loan disbursement of the four large MFIs (Grameen Bank, BRAC, ASA, and Proshika), which together occupy more than 80 percent of microcredit disbursement and 70 percent of outstanding loans, was 25.8 percent during FY04-FY08. During the first half of FY09, total loan disbursement increased by 34.4 percent over the same period of FY08, much higher than the growth during the comparable period of FY08 and the average growth over the last few years. This higher growth was mainly due to higher growth of disbursement of ASA (36.8 percent), followed by BRAC (35.0 percent), and Grameen Bank (32.8 percent) while loan disbursement by Proshika showed lower growth (8.2 percent). 45

Table : 2.6.1 Microcredit Operations of Major MFIs Institutions FY04 FY05 FY06 FY07 FY08 (in billion Tk.) FY08 FY09 Jul-Dec Jul-Dec 1. Total disbursement 76.0 95.3 129.6 165.6 194.6 85.7 115.1 i) Grameen Bank 23.4 31.5 45.9 50.4 55.6 25.7 34.1 ii) BRAC 23.3 29.1 37.0 57.9 75.1 32.4 43.7 iii) ASA 26.1 31.9 43.6 54.2 61.0 26.1 35.8 iv) Proshika 3.2 2.8 3.1 3.2 2.9 1.5 1.6 2. Total recovery 69.9 85.8 116.4 148.6 180.3 83.3 111.3 i) Grameen Bank 19.8 25.5 37.7 48.0 54.6 28.2 28.9 ii) BRAC 23.2 29.4 37.5 52.5 72.7 32.3 46.9 iii) ASA 23.0 27.7 37.7 44.8 49.9 21.3 33.8 iv) Proshika 3.9 3.2 3.5 3.3 3.1 1.6 1.6 3. Loans outstanding 49.9 60.8 80.6 98.8 121.5 105.0 128.5 4. Loans overdue 2.4 3.1 3.3 3.7 5.5 4.2 6.7 5. Overdue as percent of outstanding 4.8 5.1 4.1 3.7 4.6 4.0 5.2 Growth in percent Disbursement 22.18 25.48 35.99 27.78 17.53 6.46 34.40 Recovery 19.61 22.75 35.62 27.68 21.33 8.39 33.53 Outstanding 22.51 21.84 32.57 22.58 22.93 21.19 22.38 Source: Bangladesh Bank Quarterly, various issues, Bangladesh Bank. In terms of loan recovery, the average growth over FY04-FY08 was 25.4 percent showing similar trend with respect to loan disbursement during the period. During July-December FY09, the growth of overall loan recovery was 33.5 percent; higher than the corresponding period of the previous fiscal. The growth reflected higher recovery rate of ASA (58.9 percent), followed by BRAC (45.3 percent), and Grameen Bank (2.7 percent) while the growth in the recovery rate was negative for Proshika. The flow of outstanding loans shows a growth of 22.4 percent at the end of December 2008 compared with the outstanding position of end December 2007. Overdue loan as percent of outstanding loan increased to 5.2 percent in December 2008 which was 4.0 percent at the end of December 2007. 46