Effectiveness of Project Financing Techniques in Specialized Banks of Bangladesh

Abstract

Specialized banks of Bangladesh consist of Bangladesh Krishi Bank (established in 1972), Rajshahi Krishi Unnayan Bank (established in 1987), BASIC Bank Ltd (established in 1989), and Bangladesh Development Bank Ltd (established in 2010 with the amalgamation of Bangladesh Shilpa Bank and Bangladesh Shilpa Rin Sangtha). These banks were established with an objective to provide long-term and midterm finance into agriculture, industry and SMEs sector for strengthening their capacity of production. These banks had huge volume of classified loans, and percentage of NPL to total loan for specialized banks was 23.92% & Tk. 3,230 crores had been written off as bad debts up to December 2012, and average profitability ratio for the banks in FY 2012 was 1.40%. Considering the aforesaid problems, the present study was planned to conduct. The objectives of the study are to know project financing techniques and to find out nature & extent of project financing, to measure overall performance, and to identify variations of such techniques in application towards project financing, and to find out SWOT Mix of the sample banks in Bangladesh during the period 2003-2012. The study approach is both quantitative and qualitative in nature. The sample of the study includes BASIC Bank Ltd and BDBL, out of four specialized banks in Bangladesh based on purposive sampling. One branch of BDBL and one branch of BASIC Bank Ltd of seven Divisional Headquarters totaling fourteen branches are selected for the study. One set of questionnaire is used to collect primary data covering 88 respondents (having 50 respondents of BASIC Bank Ltd and 38 of BDBL). Whenever a potential entrepreneur desires to avail project finance from a bank, the bank arranges a rigorous feasibility appraisal for the project to determine whether it is viable or not. If the bank is satisfied with feasibility appraisal, it releases funds to the project and observes & monitors the repayment status of the loan. Whenever the borrower could not be able to repay installment on due date, the bank exerts moral pressure, serves notice, sells the security to recover dues, and finally files a suit in district law court for legal settlement. The project financing scenario and operational performance of both BASIC Bank Ltd and BDBL varied largely in terms of classified loans, recovery of classified loans, and loans written off as bad debts, NPAT, and earnings & activity level during the year 2003-2012. Average amount of project loans of BASIC Bank Ltd & BDBL were Tk. 915 crores and Tk.1,042 crores respectively, and average number of projects entertained by BASIC Bank Ltd and BDBL were 760 units and 783 units respectively. Interest spread on BASIC Bank Ltd was lower (i.e, Tk. 38.50 crores on an average) and BDBL enjoyed high interest spread (i.e, Tk. 74.60 crores on an average). BASIC Bank Ltd and BDBL had earned Tk. (2.90) crores and Tk. 33 crores respectively as net profit after tax on yearly average. It is found that average percentage of NPL to total loans and average amount of written off loans as bad debts were 33.73% and Tk. 2,161 croes respectively for BDBL over the last three years. But in the year 2013, the percentage of NPL to total loans was 34.55% for the bank and the bank had written off Tk. 1,862 crores as bad debts. On the other hand, average percentage of NPL to total loans and average amount of written off loans as bad debts were 4.63% and Tk. 16 croes respectively for BASIC Bank Ltd over the last ten years. But in the year 2013, the percentage of NPL to total loans was 28.75% for the bank and the bank had written off Tk. 310 crores as bad debts. In the year 2012, BASIC Bank Ltd had made massive operational loss (i.e, net loss of Tk. 72.20 crores). So, the performance of project financing for BASIC Bank Ltd was better up to the year 2011, and its performance afterwards was rapidly declining & the performance of BDBL over the study period was not satisfactory. Both the banks conducted same interview procedures to assess the viability of a new borrower. BASIC Bank Ltd had appraised its project very successfully up to the year 2011 and did not appraise successfully afterwards. On the other hand, BDBL had not appraised the projects successfully over the study period and resulting in huge volume of classified loans. Lending interest rates of BASIC Bank Ltd are 11% for agriculture loans, 13.75% for agro-based industries, 13% for cottage (service & manufacturing), 14%-15% for other SMEs, 14.50% for large industry loans, 15% for consumer finance and 16% for real estate loans. On the other hand, the interest rates of BDBL are 10% for agriculture loans, 13% for agro-based industries, 14% for SMEs, 14% for large industry, 14.50% for consumer finance and 14% for real estate loans. Average interest earnings of BASIC Bank Ltd and BDBL were 12.82% and 10.23% respectively in the year 2012. The major five reasons for non-performing project loan of BDBL are as (a) inability of borrowers in equity mobilization, (b) fund diversification to other business, (c) wrong borrower selection/willful defaulter, (d) inability to raise sufficient working capital in need, and (e) lack of adequate infrastructural facility and interrupted utility supply. On the other hand, the major five reasons for non-performing project loan of BASIC Bank Ltd are as (a) political unrest and turmoil, (b) Fund diversification to other business and lack of experience of entrepreneurs, (c) natural disaster (d) fall of market demand of products & industrial slowdown, and (e) Wrong borrower selection/Willful defaulter. NPL decreases profitability and equity fund of a bank, and requires to appraise projects successfully not only to protect the financial health and sustainable growth & development of specialized banks but also to attain bank’s objectives and goals as a whole.