'Financing SMEs is a good way to diversify loan portfolio'

What does your bank aim to achieve with its SME loans? Have SME loans been profitable for your organisation? How big is your SME loan portfolio at present? 

MSMEs are a vital engine of economic growth and job creation in many developing countries. By providing financial support to MSMEs, Dhaka Bank aims to help foster entrepreneurship, innovation, and overall economic development. Dhaka Bank is continuing to widen its CMSME portfolio by promoting fresh lending to new borrowers belonging to various CMSME business segments. 

Since the corporate segment has reached a level of saturation and strong price competitiveness, Dhaka Bank has begun diversifying its loan portfolio into SME and other emerging business segments. 

Nowadays, SME loans have become profitable and have the following benefits for banks in growing CMSME businesses: 

a) Provision benefit; For a standard CMSME loan general provision is 0.25%; but for other loans, it is 1% to 5%. 

b) Refinance benefits from the Central Bank and other bilateral local/international stakeholders. 

c) Portfolio diversification and lower concentration risk. 

d) Capital requirement for external credit rating, risk-weighted 75% is required for un-rated SME loans (Up to Tk 30.00 lac) but it is 125% for corporate loans. 

Being a second-generation bank, Dhaka Bank has recently focused on SME Business and has a plan to raise its SME portfolio to 25% of total loans and advances by 2024. Currently, SME loans contribute 13% of the bank's total loans and advances. 

What businesses in the SME sector have good potential for growth? 

The following businesses in the SME sector have good potential for growth. Dhaka Bank has taken the following sectors as preferential for SME Financing: cluster financing; agriculture and food processing; RMG; ICT; leather industries; light engineering; jute industries; plastic industries; tourism industry; home textile; renewable energy; automobile; handcraft; energy saving appliances; toy industry; furniture industry; cosmetics and toiletries industry; and electronics servicing.

Besides that, Dhaka Bank has introduced Supply Chain and Distributor Finance Business under the umbrella of the MSME and Emerging Business Division to cater to more SME Centric businesses.  

Would you please provide an overview of your experience in the banking industry, particularly in SME banking? How many years have you been involved in SME Banking? 

I have almost three decades of professional banking experience, I started my career with United Commercial Bank Ltd (UCBL) in Dhaka in 1993. Then joined Dhaka Bank in July 1995 and during this long tenure with Dhaka Bank, I served in various key positions which includes Chief Emerging Market Officer and also looks after SME and Retail Business Division, Branch Manager for various major corporate Branches of the Bank. During my tenure, I have also successfully led as Branch Manager of the Foreign Exchange Branch, Karwan Bazar Branch, Banani Branch and Gulshan Branch. I also worked in the Foreign Trade Department of the Local Office and the Banani Branch.

Besides, I have attended various professional banking training programs at home and abroad namely Germany, Italy, Thailand etc. For the last two years, I have been working as the DMD; Chief Emerging Market Officer and especially looking after the SME; Retail Business of the Bank with special emphasis on Agriculture, Distributor Finance and Supply Chain Finance of the Bank.

How would you say SME banking is different from traditional corporate banking?  

Corporate clients are more structured and organised than SME clients as corporations are mostly run by skilled staff. SME customers do not store their business data and documents properly. Their sales do not reflect accurately in banking transactions. 

Also, they maintain inventories/stocks and receivables in an informal manner compared to traditional corporate banking. 

What are the typical banking products and services offered specifically for SMEs? How many SME loan products does your bank offer? In your opinion, which financial products are most crucial for SMEs, and why? 

The typical banking products are Working Capital Finance (OD & CC loan), Trade Finance, Term Loan, Lease Finance, Bank Guarantee etc. We offer a wide range of SME products to our customers. We have both tailor-made and Product Program Guideline (PPG) based products which also include Cluster Financing, Supply Chain & Distributor Finance, Start-up Finance, Women Entrepreneurs Finance etc. 

Financial products depend on the nature of the business. For working capital financing to Micro and Small Segments of SMEs, we recommend providing Term Loans for 12- 24 months on an EMI basis to monitor the large customer base of SME customers. 

What is the rate of default loans from the SME sector in Bangladesh? How do banks assess the credit-worthiness of SMEs and what are some effective strategies for managing credit risk in SME banking? 

The rate of default loans in the SME sector is approximately 14%. Dhaka Bank has a separate MSME Credit Policy which contains proper guidelines on booking SME clients. Before approving a customer, we analyse the borrower's ability to repay and end with an arrangement of adequate security and covenants for the mitigation of risk. To effectively analyse the risk in a credit exposure, certain key parameters must be considered, such as: 

a) Financial Analysis 

b) Proper Utilisation of Fund 

c) Loan Repayment Trend Analysis 

d) Working Capital Assessment 

e) Collaterals 

f) Cash Cycle Analysis 

g) Debt Structuring 

h) Other Qualitative Factors 

What further policy support could the government provide to banks in terms of SME loan disbursement? What could help improve SMEs gain better access to finance? 

Bangladesh, like any other country in the world, has been focusing on the Cottage, Micro, Small & Medium (CMSME) sector for poverty alleviation, employment and domestic production growth. Bangladesh also considers the CMSME sector as an engine of growth. Bangladesh currently has about 78 lakh SME entrepreneurs. 

It is estimated that CMSMEs constitute a significant component of economic enterprises accounting for over 97% of all enterprises in Bangladesh. The sector employs about 25 million people. Expansion of the CMSME business portfolio would ensure sustainable profitability thus impacting the overall socio-economic scenario of the country. The following points might be considered for further policy support: 

a) As SMEs in Bangladesh are mostly traders the trading sector needs to be rearranged. 

b) SME Distributor clients from large corporations might be considered in the service sector as they are selling locally made products which also increase the country's domestic production. 

c) Actual SME data is missing. A separate government institute is necessary to register SMEs across Bangladesh. 

We need to address the following points for better access to finance: 

a) Financial and accounting literacy training 

b) Undertake appropriate supervision of financial products offered to social and micro-entrepreneurs 

c) Expand the Credit Guarantee Scheme to all SMEs where collateral is an issue. 

The SME sector accounts for over 50% of the GDP in most developed countries. The ratio is 60% in neighbouring India and 45% in Vietnam. In our country, however, SMEs constitute 25% to 27% of the GDP, although the sector holds 80% of total industrial jobs. What do you think holding SMEs back in our country? 

We personally think that the following major factors are holding SMEs back in our country: 

a) Informal activities account for a sizable portion of the role of SMEs in our economy. SMEs are also not properly included in the formal registration process. 

b) Many SMEs lack access to land, electricity, gas and other necessities required for running their businesses. 

c) The third factor to consider is skill development. SMEs generate ideas, but they frequently struggle to find the skilled manpower required to put them into action. 

d) Inclusion of technology in sales, stocks and receivables management. Lack of academic literacy among SME entrepreneurs is a challenge including technical and financial literacy. 

e) Entrepreneurship development mindset during academic curriculum (change in the education system) could encourage many young graduates to enter a business rather than rushing to the traditional job market.