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INTRODUCTION
Project appraisal means the examination of project before the project is undertaken. It
refers to the evaluation of projects and selection between alternatives. Project
appraisal report is prepared by Loan Operation Department. The project has been
appraised by an appraisal team consisting of engineer, economist and financial
analyst. This report critically evaluates the proposed project through technical
analysis, economic analysis and financial evaluation. When the project is found to be
technically feasible, financially rewarding and economically & commercially viable
only then that project is financed by BSB. This study will make an attempt to the
project Appraisal Practice of BSB (a case study of M/S ETTADE PLASTIC LTD.).
CHAPTER TWO
LITERATURE REVIEW
LITERATURE REVIEW
A project is a proposal for an investment to create, expand and/or develops certain
facilities in order to increase the productions of goods and/or services in a community
during a certain period of time. For the purpose of BSB, project means a scheme for
capital investment to develop facilities to provide goods and services. BSB's main
function is to extend financial assistance to industrial project. It basically needs to be
satisfied about the overall viability of a project to be financed. For this purpose, an
objective assessment of the viability of the project is required to be examined by BSB
from various points of view. Project appraisal coyer five different aspects of a
project: Management and Organization, Technical, Market, Economic, and Financial.
An assessment of the promoters in respect of their integrity, experience and
capabi1ities to implement and run the project is of prime importance before extending
credit facilities to them. There are no set rules to find out if the borrowers or
promoters are the men of integrity. It is to be done by direct and indirect investigation.
The borrower's experience .and capabilities can, on the other hand, be assessed in
terms of his educational background, spatial qualifications, practical business
experience, receptiveness to new ideas, or good advice, the general reputation and
above all his potentiality to learn new things and adaptability to new and changing
situation.
Closely related to the management is the type of organizational structure necessary to
carry out and operate the project successfully. So far as organization is concerned,
there are two basic queries; hat organization is needed to bring the project to the
operating stage and what organization will be needed thereafter. In the operating
phase, one of the most common questions is the extent to which responsibility and
The technical aspects of in industrial project are appraised to determine whether the
project is sound with regard to every engineering and technological consideration,
including product specification, process, size, internal balance, suitability and
availability of physical facilities, designs and layouts of equipment and buildings etc.
In a developing country like Bangladesh, where there is hardly and indigenous
technological base to support the industrialization process the industr1al undertakings
have to be conceived on the basis of know or borrowed technology until such time as
the development of local technology is sufficient. The basic aspects to be analyzed in
the course of technical appraisal are Products/ Service; Raw materials; Skills and
technology required for manufacture/ service; Testing and analytical report; Labor;
Transporting; Work Schedule; Estimation and evaluation of cost. The relative
An industrial project is to bring in some goods 'or services for a community. But the
community does not need them infinitely. Their demand is of course finite and at
given prices. For appropriate marketing objective, it is necessary to look at depth into
the - macro/micro demand/ supply situation for specific products in the market;
Existing and expected competition in local and foreign markets; the market share, etc.
While appraising industrial projects, the Bank is required to analyze these factors and
to bring out the objective in quantitative terms-Product identification; Nature of
Demand; Type of Demand: there are various types of demand for the product/service in
question. These are direct, derived, new, replacement demand, Size and Composition of
In economic appraisal, the project is looked at from the national or social point of
view and the economic cash flow is constructed on the basis of "true or real prices",
commonly known as accounting or shadow prices. Economic appraisal should cover
both quantifiable and non-quantifiable benefits (where applicable). Such benefits are
Economic Rate of Return (ERR), Bruno Ration! Domestic Resource Cost,
Contribution of Gross Domestic Product, and Employment Generation and Cost per
employment. The term non-quantifiable refers both (1) to effects that are known to
arise but which cannot be measured in physical terms and (2) to effects, which cannot
be valued. Difficulties in quantification and valuation will often go together.
Quantification problems often are data problem a certain effect could not be
measured, but has not been.
The main purpose of financial appraisal is to assess if the proposed project is viable in
term of its operation in the future years and its financial soundness. The financial
analyst should have a clear idea as to what is intended to be achieved through the
financial appraisal. The financial appraisal is directed to examine mainly the
following two aspects: Fund requirement to bring the project in to existence and the
probable sources from which the required funds will be mobilized; and Prospects of
adequate revenue generation by the project when it goes into operation and the likely
position of the concern with regard to its actual cash generation (liquidity) and its
probable impact upon the financial condition (solvency) The first aspect deals with
the estimation of total of the project (fixed cost + net working capital) and a suitable
financial arrangement (debt-equity relation). The second aspect relates to the analysis
of production-cost profit at different volume of production carried up to the year the
project attains its normal capacity operation.
Sources of Information:
Bangladesh Shilpa bank, 2003 annual report 2002-2003: 2-18.
CHAPTER THREE
OVERVIEW OF BANGLADESH
SHILPA BANK
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3.1 Introduction
Bangladesh Shilpa Bank (BSB), once a leading developed financing institutional
(DFI) established in 1972 with a mission of accelerating the process of
industrialization of the country by providing financial assistance and equity support.
After getting liberation a newly born country required rapid financial assistance and
advisory services to industrialize the nation and BSB supposed to bolster in this
regard. It has been extending long and medium term loan facilities in local and
foreign currencies to industrialize projects (both new and BMRE) in the private and
public sectors. With the passage of time due to mismanagement of loan distribution
and ill motive of borrower left he sector derelict.
Organization
Head office
Dhaka
Division
Department
21
Zonal Office
Branch Office
15
Personnel
856
: Tk 2000million
Paid up capital
: Tk1320 million
Other sources of bank's fund are the government, Bangladesh Bank, Commercial
Bank, Local/Overseas financial institutional and suppliers' credit.
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Ownership of BSB
At least 51 percent of the Authorized capital of BSB be subscribed by Bangladesh
government and remaining 49 percent be subscribed by Bangladesh nationals or by
financial institutions local or foreign. Presently, 100 percent ownership of the Bank
belongs to the government.
3.4 Mission
Accelerating the process of industrialization of the country by providing financial
assistance and equity support.
3.5 Management
The overall policy formulation and the general direction of Banks operation vest on a
board of directors appointed by the government. The board of Directors consists of
nine (9) members including the chairman and the Managing director. Non government
shareholder subscribing to the capital of the Bank shall eventually elect four (4)
Directors from amongst themselves. The Managing Director is the chief conducting
the overall Banking business.
Citation Stock Exchange (CSE) Ltd. for capital market development and Conduct
project promotional activities with preparation of various sub-sect oral study reports.
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14
15
can disburse more money as loan. If BSB able to merge between two (resource
mobilization and loan disburse), it will give good results for the economy as
well.
BSB is only one industrial bank of our country. All industrial must have to go
BSB for industrial loan. They can take these opportunities through their
willingness and service mentally.
BSB has luxurious building which is situated a commercial area in the center
of Dhaka city. Suitable location is increasing its popularity within the country
and abroad.
BSB has goodwill in the market. All the businessmen know BSB. BSB
acquires this reputation through his thirty years service life. We expect BSB is
able to maximum use of its resources and will be profitable thereon.
I hope that our government will help BSB to perform his duties independently. There
is no alternative way of employment generation of our country without
industrialization, which is essential for poverty alleviation.
1.9
Weakness of BSB
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CHAPTER FOUR
ACTIVITIES OF BANGLADESH
SHILPA BANK
department,
parties
and
after
concerned
departments.
The
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Then a form is filled up. These documents are sent to lawyer. It every thing is ok it is
transferred to project implementation department.
In the documentation process the borrowers are required to submit a copy of
memorandum of association and articles of association. It is returned after the
conflation that in has been submitted according to the rules the borrower company
must submit it after the authorization by direction of registration of Joint Stock
Company and firm. The following activities are performed during the time of
documentation process:
The borrower company must submit necessary documents
Verification of documents by documentation and machinery department
and law department.
Preparation of all documents of the borrower company director.
Making necessary attempt to give the loan a stage by stage after the loan
granting
To ensure that necessary capital has been supplied by the entrepreneur and to
ensure its proper utilization.
To give necessary assai stance in the case of Bridge loan from any financial
instep tuition.
Monitoring the machinery of the project, inspection and taking any kind of
advice regarding to any machine related problem from machinery
department.
19
20
Description:
I. Not due is the installment not yet due for payment in schedule time fixed by the
Project department/ Branch officer.
II. The payment of installment and interest in not paid cleared in time is overdue.
The functions of this section are:
a) Accurately list of balance preparation.
b) Advice sending to borrower.
c) Quarter/ half year by interest charge.
Ill. When the overdue is rephrased or waived then the replacement section will do the
needful activities.
IV. General and policy section do the following:
a) To prepare the monthly Trial Balance.
b) Monthly recovery statement.
c) Monthly disbursement schedule
d) To make entry all the transaction as per daily statement received
from the branch officer.
e) All list of balances of not due send to the Head Office and Branch
Office.
f) To prepare distribution of work among the officers and staff as
specific guidelines of the authorities.
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There are many reasons, so government tries to revive the proposed project for greater
advancement of the country.
The main activities and responsibility of Project Rehabilitation department are as
follows:
1) When files are transferred to Project Rehabilitation department, it traces the
cause of sickness and Recommend to take initiative to rehabilitate a project. The
rehabilitation process starts after the recommendation of the advisory committee
formed by the General Managers.
2) The files of the projects are transferred to Law Department to take necessary
actions, which are deemed not rehabilitate. Again if there is no opportunity to
rehabilitate any it also rejected.
3) Verification of the proposal regarding rehabilitation recommendation preparing
the implementation schedule and taking necessary initiatives to take care the project
and deciding the single or joint management of the bank over the project if necessary.
4) Taking rehabilitation program controlling projects management and monitoring
and ensuring the management system taken over by bank and performing other
activities regarding these.
5) Production of the rehabilitated project, making of the products analyzing the
targeted loan recovery and actual situation and taking necessary initiates regarding
these.
6) Retraction of bank participation stage by stage from the project, which is
profitable
: - Section 33
: - Section 5(a)
: - Section 35
: - Section 9(1)
: - Section 198
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(Petition case)
: - Section 37
: - Section 40
I. Recovery Case:
Case is filed with the court of District Judge or Sub Judge the concerned company and
its director such case filed according to Bangladesh Shilpa Bank ordinance 1972
section 33.
4. Welfare section
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25
law.
CHAPTER FIVE
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PROJECT APPRAISAL
5.1. INTRODUCTION
A project is a proposal for an investment to create, expand and/or develops certain
facilities in order to increase the productions of goods and/or services in a community
during a certain period of time. For the purpose of BSB, project means a scheme for
capital investment to develop facilities to provide goods and services. BSB's main
function is to extend financial assistance to industrial project. It basically needs to be
satisfied about the overall viability of a project to be financed. For this purpose, an
objective assessment of the viability of the project is required to be examined by BSB
from various points of view. This is what can be called project appraisal.
The aim of project appraisal is to examine the need, which a project is designed to
meet and to '" judge whether the project is likely to meet this need in an efficient way.
Project appraisal provides a rational basis for decision-making. In case of short-term
lending, it is not usually necessary to make expensive study of the customer's future
potential Examination of general creditworthiness of a customer and his current
financial position is adequate.
There can be no fixed or standardized approach to project appraisal. Numerous and
diverse elements enter into the process of appraisal. It is difficult to have a cut and
dried formula with the help of which a proposal for financial assistance can be
adjusted straightway as acceptable or unacceptable. While broadly the same set of
factors is taken into consideration in the scrutiny of individual applications, the
weight age given to the factors varies from project to project. In practice, project
appraisal coyer five different aspects of a project, viz.
(1) Management and Organization
(2) Technical
(3) Market
(4) Economic, and
(5) Financial.
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current performance that can be checked against both past performance and previous
projections of future trends so as to bring problems to light as they arise. It is equally
important that the organization should be able to put the decisions of management
into effect without delay. Besides, sound budget and inventory control are needed
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which may be jointly or severally adopted to obtain the required information. The usual
sources of information can be broadly divided into internal sources and external
sources. The external sources can again be sub-divided into personal contacts and
indirect investigation
(d) Inspection of the apple incants, place of business and properties, and
(e) Other sources like commercial bankers of the applicants, business firms,
trade circle, friends and associates, Registrar of join Stock Companies/Firms,
District Registrar Sub-registrar, Local periodicals, Government Publications,
etc.
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specifically the declaration of the personal assets of the applicants. On this basis, he
should have a threadbare discussion with the applications.
The credit investigator should keep it in mind that the applicants should not only be
citizens of Bangladesh, but they must also not be minors, bankrupts or persons of
unsound mind. He should also be well aware of the legal status of proprietorship
concerns, partnership firms and limited liability companies with regard to
membership, capital, objectives, borrowing capacity and tax obligations.
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This cannot be undertaken unless through technical studies and cost analysis have
been made a related technical problems solved. Thus, the technical studies and cost
analysis provided the basis both for the initial estimates of the profitability of an
investment during the initial stages and for the final decision to implement the project
or not. The technical appraisal, therefore, constitutes the foundation of the entire
super-structure of project appraisal.
A development Bank may need to consult or contact with specialized engineering
services from outside for specialized matters, particulars relating to projects to be
based on complex technology. However good an engineer of Development Bank may
be in studies or specific operations, he cannot be expected to be expert in all fields of
specialization. This point is of great practical significance while dealing with a project
in which the country has no previous experience. In such a situation, particularly in
the case of a project involving large capital outlay, it is advisable to find out best
advisors (consultants) from outside. For because any defect in the project design and
formulation will eventually affect the enterprise adversely.
II.
III.
IV.
V.
VI.
Work Schedule.
VII.
The relative importance of these aspects will, however, vary from project to project.
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whole environment in which the enterprise is to live and to which it must adapt
itself: consumers, suppliers, competitors and all kinds of technical, material, political,
legal and administrative restrictions. Market analysis is the first "screening" stage in
the project appraisal, at which projects that cannot expect satisfactory market
acceptance shall be rejected.
The study of this environment should begin with proper identification of the goods or
services to be exposed to the environment. One way of identifying them is in term of
their complementarily and Competitiveness. Complementary goods are used together
in a single consumption activity. Cameras, films and developing instruments and
chemicals constitute a set of such complements. Complementary goods may be sold
together or separately.
Another way of distinguishing goods and services is in terms of their
consumers. These are: Final goods, Intermediate goods and Investment Goods.
Lastly, the goods and services may be either new or existing in the market.
(b) Nature of Demand.
(c) Type of Demand:
(I) There are various types of demand for the product/service in question. These are
direct, derived, new, replacement demand, etc. The market analyst should
5.5.3. METHODOLOGY:
The initial objective of demand analysis is the determination of current effective
demand. Effective demand represents the total quantity of a specific product
purchased at a given price in a particular market over a given period. The base for
estimation is the actual consumption figure during the relevant period.
Consumption
Domestic production
Imports
Exports
Changes in Stock
36
Once current demand has been estimated foe the entire market, it becomes necessary
to segment the market to make future projections.
- enable the fine tuning of marketing strategy to the needs of target segments,
- increase total sales, reduce costs and step up profits.
The most typical variables, by which markets can by segmented are as follows"
A: Consumer Markets
(1) Geographic:
- Administrative regions
- Geographic regions
- Climate
- City-size
- Rural-district cut-size.
(2) Socio-economic:
- Income (level, dynamics, distribution)
- Age
- Sex
- Occupation - education
- Family size
- Religion
- Income elasticity of demand
- Prices and availability of complimentary goods
- Govt. policies - nationality
- Social class
- Culture
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- Life style
- Leadership
- Ambition
- Conservatism
- Buying motive - loyalty
- Extroversion and introversion
- Service sensitivity and introversion - service sensitivity
- Promotional sensitivity
B: Industrial Markets:
(1) Number and types of industrial users:
- Size
- Ownership
- Age of equipment
- Regional concentration
- Vertical vs. horizontal markets- technological progress.
- Regulation
- Contacts in export market
- Marketing tasks they are able and prepare to carry.
(iii) Transport and Insurance:
- Traditional transportation means
- Costs of freight and insurance - timing of delivery
- Delivery terms, DIF, FOB, etc.
(iv) Market Accessibility:
- Tariffs and fees
- Non-tariff barriers
- Quality standards
- Health, medical and safety requirements
- Package standards
- Import quotas
- Customs regulations
- Political and administrative barriers:
- Trading habit
- Comparative advantage
[
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- Government policies.
The following quantitative data, express in terms of value, are also be collected on a
national basis:
Prices:
1. F.G.B. price of exports
2. C.LF. price of imports.
3. Ex-factory price of products and services.
4. Wholesale price annual average.
5. Consumer's price index
6. Cost of living
The requirement information relating to tax expressed in rates/ values age:
1. Customs duty.
2. V A T.
3. Import license fee.
4. Others.
The above quantitative data should be collected for several for several years in the
past so as to constitute historical series.
5.5.9. QUALITATIVE INFORMATION:
The qualitative information, which may be required for market analysis, is:
1. Location information-Transport and communication facilities, water and
power facilities, nearness to the market, etc.
2. Possibilities of continued supply of inputs.
3. Attitude of customers.
4. Climatic characteristics.
5. Methods of distribution-market and non-market
6. Government policies:
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ERR measures the potential earning power of the social resources used in the project
and thus help the assessment of investment proposal. It is worked out at which the
present value of costs becomes equal to the present value of benefits. Net present
value (NPV) is the net value or net benefit of a project when all costs have been
discounted to the present at the accounting rate of interest.
After working out the ERR, it should be compared with the Accounting Rate of
Interest (ARI).The ARI is nothing but the opportunity cost of capital which is
supposed to maximize the use and productivity of invest-able resources in the country.
The broad decision criterion is that, other things being equal, the project whose ERR
is les than the ARI should ordinarily be rejected unless other unquantifiable benefits
are adequate or the project can be qualitatively justified: Detern1ining the opportunity
cost of capital for a society is difficult, but economists generally consider it to be 15
percent in most developing countries. The planning Commission of Bangladesh has
estimated the ARI at O. 15 (or 15 percent).
(b) BRUNO RATIO/ DOMESTIC RESOURCE COST (DRC):
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.Detail
calculation of contribution to GDP of a project may be worked out as per the following
format:
A. Sales (4th year)
B Less: - Inter-firm Transaction (4th year)
- Raw and packing materials
- Stores and spares
- Water, Power and Fuel - Repair and maintenance
- Rent, Tax and insurance - postage, telephone, fax etc.
- Stationery and printing
- Traveling and conveyance
- Advertisement.
- Contribution to GDP (A-B)
BSD has meaningful contribution to GDP. In the year 1994-1995 GDP was 8.6%,
which is higher than that of previous yea. I observed that in the year 1996-97 was too
lower than last two years. But in the year 1997-98 GDP contributions was 8.1%,
which is 4.6% greater than that of last year. Another depression was come in the
industrial sector in the year 1998-99; only contribution was 2.5%, which is lower
contribution after liberation to date. After the year 1999 GDP contribution is more or
less equivalent over the years. In the year 1999-2000, 2000-01 and 2001-02 were
5.7% and 5.0% respectively. The growth rate of gross domestic product of Bangladesh
decreased to 4.80% in 2001-02 as against 5.30% in the previous year. The overall
growth in the sector of agriculture and forestry declined to 3.00% in 2001-02 from
5.50% during the preceding year. On the other hand the rate of growth in the
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industrial (manufacturing) sector during the year under report declared to 5.00% from
6.70% in the previous year. The rate of domestic savings as percentage of GDP in
2001-02 reminded at 18 percent as in financial year 2000-01. The rate of total
investment to GDP increased marginally from 23.09 percent in the preceding year to
23.1 percent during in the under report.
GDP (%)
1994-1995
8.60
1995-1996
5.30
1996-1997
3.50
1997-1998
8.10
1998-1999
2.50
1 999-2000
5.70
2000-2001
6.70
2001-2002
5.00
So from the above discussion we could easily say that the rehabilitation department is
not successful enough.
(d) EMPLOYMENT GENERATION AND COST PER EMPLOYMENT:
The number of full-time and part-time jobs measured in man-years expected to be
created both during construction and during operation of the project should be
estimated separately. If data are available, these estimates should be related to
Regional, sectoral and national levels of unemployment and under employment and
under employment. Where possible, the degree of labor intensiveness (i.e. the number
of workers employed per unit of investment) of the project should also be estimated.
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46
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(ii)
Leverage Ratios
(iii)
(iv)
Profitability Ratios.
Liquidity Ratios are designed to measure the ability of the concern to meet its
immediate and maturing debt obligations.
Leverage Rations measure the extent of funds contributed by the owners of the project
as capital compared to the funds provided by its long-term creditors.
Activity Ratios measure how effectively the project is employing its resources.
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(ii)
5.7.8. PRESENTATION
The third basic requirement of financial projections is a suitable technique for
calculation and presentation. The analyst will have to utilize his knowledge of
accounting. The financial projections are prepared and presented within the
accounting framework. The quality of the projections would, therefore, depend upon
the analyst's knowledge of accounting. The financial projections involve working out
the following three interrelated statements for a number of years in respect of a
project:
(i) Forecast of earnings this will measure the cost of production and profitability;
(ii) Fund flow statement which will indicate major or prominent fund inflows and
outflows;
(iii) projected Balance Sheets which will depict the capital structure and assets spread
at the and of periods used in (i) and (ii) above.
5.7.9. COST OF PRODUCTION
Once the computation of future sales is completed, the next step .is to calculate the
relevant cost of sales. This process involves preparation of some sort of expenses
budgets for the relevant years for which sales have been calculated. All the expenses
can be broadly divided into the following three categories:
(i)
(ii)
(iii)
Financial expenses.
CHAPTAR SIX
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department of BSB.
6.1 NAME OF THE PROJECT:
M/S Ettade Plastic Ltd.
Location: Char Ramjan, Meghnaghat, Sonargaon, Narayangonj.
6.2CAPACITY OF THE PROJECT:
The annul rated capacity of the project has been estimated on the basis of three shifts
operations of eight hours per day and three hundred working days in a year.
Loan operation department issues a sanction letters pointing out the total mount of
loan, which sanctioned in favor from of the M/S Ettade Plastic Ltd.
In the sanction letter, LOD offers brief description about the following Cost of the project,
Means of finance,
Capital structure,
Amount of loan,
Purpose of loan,
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period of loan,
Rate of interest and other charges,
Disbursement schedule,
Repayment schedule,
Security of loan,
Special conditions, And so on
6.3 IMPLEMENTATION
A sum of the 98800000 and 83000 sanctioned in favor of M/S Ettade Plastic Ltd. to
be repaid 24 (Twenty four) quarterly installments, Repayment shall commence after
commence after eighteen months from the date of opening of letter of credit (L/C) or
six months after the project goes into commercial operation, whichever is earlier. The
interest is to be accrued on the outstanding loans amount after the expiry of the grace
period shall be charged as usual on quarterly basis.
6.4 LOAN SANCTION & EXPENDITURE
Task of the main project Implementation department of BSB is to disburse the
sanctioned loan in accordance with Loan Operation Department .The disbursement
schedule of total loan amount is given below:1st Installment
=743.18 lac
2nd Installment
=195.65 lac
3rd Installment
=50.00 lac
Total
=988.83 lac
First installment money will allow for importing machinery and equipment, 80% of
machinery cost will be paid out of BSB loan, 20% machinery cost will be paid out of
sponsors equity.
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SL No.
Name of Machinery
Quantity
2 set
2 set
4 set
2 set
2 set
2 set
2 set
Circular Loom
Crane with single track
Hand Borrow
50 set
2 set
6 set
Laminating machine
Laminating machine (middle Sean)
Bag marking machine
Sewing machine
Bounding machine
Crane with single track
Air compressor
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1 set
1 set
30 set
2 set
2 set
3 set
2nd installment was to be disbursed for the constructions were opening of letter of
credit for import of machinery and equipment through BSE.
3rd installment was to be disbursed towards reimbursement of net working capital.
Third installment was allotted on basis of utilization of second installment of loans
and producing documentary evidence other than availing of required working capital
from sponsor's designated commercial bank.
The Project Implementation Department of BSB inspects the M/S Ettade Plastic Ltd .
before final production time to time. The principal objective of such types of
inspection is to avoid fraudulent activity and to maintain proper distribution of loan.
BSB provides Final Construction Report (FCR) in inspection form-II in regular
interval basis. It contains an inspection team. The report to the higher authority of
BSB on inspection form-I provide the construction and engineering timetable and
progress made.
On 20th August 2003, inspection was made on reconstruction of land and building.
Company's engineers, site engineer and other executives were presented at that time.
Inspection team compared the actual activity with the master layout plan. According
to sketch construction work was for Circular loan Section (party). Yarn making
section and raw material store. Total investment for reconstruction became Tk-367.97
lack.
After completion of inspection work, inspection term provided some suggestions on
basis of improvement of reconstruction work Layout plan of machinery.
On 29th November 2002, another inspection was made on imported machinery. At that
time, another construction work (main gate establish) was ongoing. Foreign exporter
Mr. Peter Zhou was set up machinery within three months. Result of this inspection
shows: at total investment e TK 380.92 lack on reconstruction project.
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was distributed on 6th June 2002 to M/S Ettade Plastic Ltd. Manager D.M
Md. Mafizuddin & senior officer Md. Rakib Hossain of PID suggested that
rest amount (40.39Iac) of installment will be distributed on basis of work in
progress of establishment of imported machinery' and completion of
reconstruction work. Project Implementation Department of BSB regularly
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(50.00 lac) of 3rd installment will be distributed on basis of fulfillment of net working
capital.
Project implementation department disbursed the loan to M/S Ettade Plastic Ltd .
according to different installments. On other hand it can be said that loan disbursed on
basis for works completed. But some tasks were performed / completed slowly by
company. It is tolerable because many hindrances came out due to the construction
period. Practically it is not possessive to complete 100% work according to sketch.
Project Implementation Department of BSB regularly monitors the specific project
and disburses the total loan amount through different installments.
The entrepreneurs provided its information about the requirement of bridge loan. The
projects maintained strictly its annual capacity of production. The authority of BSB
disbursed the total loan amount by installment, which is also precondition of
disbursing Loan amount. I think M/S Ettade Plastic Ltd. completely fulfilled most of
the requirements. As a result, they received the sanctioned amount on due date.
The company shared so for product diversification commercially by producing and
selling high quality of bag. Monitoring Department has to take creative actions to use
loan in full volume. BSB shared diversify its service and add new features is to
service so that it can attract new entrepreneurs how all of people. ESB can use internet
for both local and international correspondence. E-mail can reduce the telex cost
substantially. Bank should take intelligent decision to create own web page in Internet
so that it can communicate with entrepreneurs a branches very quickly. BSB should
increase its number of monitoring team to investigate very quickly.
56
CHAPTER SEVEN
SICK INDUSTRY
57
7.2
The symptoms of sick industry are as follows The initiator is unable to pay sufficient money at the implementation stage.
58
The delay of implementation increases the project cost. It also creates many
problems and the burden of loan interest is increased.
Lack of full production or frequent obstruction of industry.
The initiator is unable to pay the loan installment and other liability.
The failure in payment of loan installment in time increases the burden of loan.
Inability to submit the financial statement in time.
Increase the tendency of undertaking unfair means in preparing the papers of stock
materials.
Profit from investment is decrease gradually.
The project faces loss gradually.
The production level decreases gradually.
Taking loan from various sources at a high rate.
Applied for a large amount of loan.
Non-cooperating tendency with the loan providing bankers.
Lacking of perfection in the market.
The Ministry of Finance and the Ministry of Industries co-operate to provide debt
relief and other financing assistance to bail out failing firms in a specific industry that
has been identified by the government as a "Sick Industry". Assistance may include
waiver of interest, reduction in principal, repeated rescheduling of overdue loans, of
combinations of these. A "Sick Industry" classification may be purchased with a
suitable bribe to the appropriate ministry, Ministries, the PMO, and the Standing
committee of Parliament on Finance may be lobbied and bribed to obtain such a
classification. Billions of BDT of NCB loans are written down using this technique.
59
failed to attain the goal and these firms are called sick firm. There are various reasons
of sick firm. But to discuss it easily I classify it in two classes. They are The reasons that are beyond die control of the project owner; and
The reasons that arc under control of the project owner
The above causes are further divided into seven (7) causes. The causes are discussed
below according to their importance though all of the causes are important.
Measurement of investment outlay and cost of the project are not appropriate.
Loan application with insufficient amount of money that would not meet fixed
and operation cost.
If market interest rate increase, cost of working capital increase as a result the
project may become in sick.
60
Higher fixed cost, i.e. increase fixed cost as a result of increasing of the price
of machinery, land or any other fixed items.
7.4.2
Marketing Problem:
Marketing problems are the next serious problem. This problem occurs due to a large
number of similar industries and the availability of the products in the secondary
market by unauthorized import of such products. A survey reveals that 24% of the
projects are suffered due to marketing problem. The marketing problems, which lead
an industry towards sick, are as follows
The aggregate demand of the proposed project is not possible to fill up.
When change the consumption trends in the past and present consumption
level
61
Lack of modern technology, like incapable to use the computer and modern
machinery.
Inconsistency between the origin of raw materials and the factory location,
62
7.4.5
Economic Problem:
The economic problems, which lead an industry towards sick, are as follows> Economic problem comes from the social Cost Benefit Analysis.
63
> It docs not impact of the project on the distribution of the income in the society as
well as the level of saving and investment.
6.4.6
Political Problem:
The political problems, which lead an industry towards sick, are as follows> Political pressure
> Political instability which the production
> Insufficient facilities provided by govt. to industrialist like tax rebel etc.
> Political problem like worker unrest, hartal etc.
> Political pressure to loan procurement
> In appropriate action taken by govt. to protect smuggling
> Political terrorism
64
According to the bank statement, BSB has so far financed about 459 projects. In
whichThe running projects
: I 76
:214
Existence less
: 26
Sold projects
: 34
Sick Industries
65
United Company
Oriental Foundry
66
Uttaran Engineering
Complex
Bancharampur Textile
From the above statistics it is clear that there are so many projects in Bangladesh are
sick.
An analytical discussion makes it clear to us that the reasons of their sickness and
which projects are sick for which causes although the general causes of sickness are
stated earlier.
No. of
Projects
Problems
Technical Management Marketing Working Others
capital
71
15
14
13
24
17
Textile
61
11
30
Metal products
17
13
Jute
19
Engineering
14
11
Paper, printing
11
7
8
9
Service
Electrical
Petrochemicals
13
10
11
1
3
-
5
3
11
2
1
5
2
2-
1
-
10
Non-metallic
67
11
Chemicals
12
Pharmaceutica
ls
10
13
Tannery
13
14
Transport
274
48
59
56
64
46
18%
22%
21%
24%
17%
Total
Percentage
If we further analyze it we will find a clear picture of the sick projects and their
relevant causes. These things are explained below under a table.
Management (Man)
Marketing (Mar)
Working Capital(W/C)
Tech + Man
Tech + Mar
Tech + W/C
Man + Mar
Man + W/C
Mar + W/C
Others
Sectors
Technical (Tech)
19
13
Textile
33
Metal products
Jute
Engineering
Paper, printing
Service
Electrical
Causes of
Sickness
68
Petrochemicals
.Non-metallic
Chemicals
Pharmaceuticals
Tannery
Transport
25
31
51
46
11
18
13
11
33
Total No. of
Problems
Increase the lending rate of interest, which adversely affect the new and
regular borrowers.
69
7.8.2
Board of Directors:
Board of director & Explanation of share of the company are given below:
Table- 6
Sl No.
Managing
Director
40%
Director
30%
Director
30%
Total
7.8.3
100%
Bangladesh Shilpa Bank distributed TK 53.54 lacks from 1983 to 1986 in a cottonweaving project having 18 looms at Kaligang of Jinaydaha districts. The project
wanted to go in production in November 1983. The loan was sanction and distributed
in this project with the objective of manufacturing cotton textile. But because of nonavailability of sizing machine in adjacent areas the entrepreneur fails to manufacture
cotton textile.
According to the loan receivers this project become a sick industry because of one
way production, increase in the price of raw materials, decrease in the selling price of
manufacturing goods, etc. Therefore in 1993 the project was refinance under the
rehabilitation scheme and on 29-08-1995 in response to the application of the loan
receiver the permission was granted to shift the industry from the Kaligang to
Rupgang under Narayanganj districts.
According to the terms of loan sanction a period of ten-month time from the date of
opening of LC was approved for implementation of the projects. LC was open on 2903-1995 for importing machinery/ import of machinery under the rehabilitation
scheme. Accordingly the project was supposed to be implemented by January 1996.
70
But the project, after installing the newly imported and partly old machineries, wanted
to go in production on 01-07-1997. The implementation of the project was delayed
because of the shifting of the project to the present site of Rupgang from Kaligang of
Jinaydaha, shifting of the machineries and reinstallation, installation of the imported
new machineries, reconstruction of the industry, failure of the entrepreneurs to
provide timely supplying of capital, and failure to supply the workings capital, etc.
According to the information provided by the company, although being able to go for
commercial production, the company was not successful to export their goods for not
being of export quality and they failure to sales their products in local market because
of limited market opportunity.
7.8.4
Sl.
No.
Types of Loan /
Nature of Loans
Sanctions
Payments
Date
Amount
Date
Amount
Local Currency
31-08-1981
5.00
08-02-1983
To
12-08-1986
13.49
Foreign Currency
31-08-1981
32.27
14-04-1983
40.05
Local
currency 19-01-1993
allotted
under
rehabilitation scheme
163.00
09-08-1995
To
20-12-1995
149.81
Total
210.27
Term Loan:
Working
Loan
Capital 19-01-1993
Total (A+B)
26.56
236.83
71
203.35
-
20335
7.8.5
The annual production capacity of this weaving and sizing project is follows:
Bed sheet and bed cover 7.56 lack meters
Different type of shirting 3.36 lack meter and
Thread sizing 1.60 lacks Kg.
Explanation
Market Price
(27-11-1999
&
06-01-2002)
Sales Value
(27-11-1999
&
06-01-2002)
30.92
27.00
Building
22.00
18.00
Machinery
110.00
100.00
Others
Total
162.92
145.00
B) Co-mortgage Assets:
Mortgage against Long Term Loan:
Table-9
72
To recover the loan the bank will exert continues pressure on all companies
director.
> The old discarded machineries of this project were sold under the bank's approval
and the sale price amounting to Tk 2 lacks was directly deposited by the purchase to
the bank as the company's debt.
>
bank's authority directed the loan receiving company to make a down payment o Tk
12.95 which is 10% of the time expired loan. The company paid Tk 4.80 lack: on 2904-2001, as down payment. The company also promised to pay the remaining Tk 7
lacks within 30-05-2002 by selling the land and building a Kaligang of the project.
But despite constant pressure the company fails to refund the promised amount.
> Because the loan receiving company was not sincere the refunding loan a notice
was serving on the company on 21-12-2003 under Article 12 of the Artho Rin Adalot
2003. After the service of the notice the loan receiving company submitted a proposal
for compromise.
7.8.7 Refund of Loan:
Out of Tk 203.35 lack the loan receiving company refunded Tk 16.36 lack as term
loan. Out of the refunded amount Tk 2.86 lack has been adjusted and (he remaining
Tk 13.50 lack is deposited in sundry accounts.
7.8.8
Down Payment:
The loan receiver's company paid Tk 13.50 lack against Tk 21.50 lacks as down
payment that is 10% of total loan. Thy proposed to pay the remaining Tk 8.00 lack by
selling the discarded land and building of the project at Kaligang.
7.8.9 Statement of Outstanding Loan:
73
144.92
Expired Loan:
Principal
Interest
Others
168.55
199.50
0.03
368.08
Total
513.00
Out of the above assets and liabilities the amount of distributed loan is Tk 203.35
lack. If the loan reschedule is violated then the amount of interest will stand and Tk
309.62 lack.
Postpone interest
195.88
181.05
Total
376.93
74
Under the rehabilitation scheme, the industry was shifted from kaligang to Rupgang.
But unfortunately a robbery was committed and yarn amounting to Tk 15 lack was
stolen immediately after implementation/ inauguration of the company at Rupgang. In
addition the factory was damaged by floodwater during 1998.
The project could not overcome the sickness for non-procurement of loan of working
capital despite repeated effort. Stating the above mention problems the loan receiving
company made the following proposal
Actual production cost is greater than the expected budgeted production cost.
Per unit production cost is greater than per unite selling price.
75
The Board of Director of BSB approved the shifting of the project from one
place to another under self-financing and initiative by the entrepreneur under
the following terms and conditions among others. "After shifting the project
the existing land and building shall remain mortgage under the bank."
After shifting of the project from kaligang, Jhenaidah the existing land and building
shall remain mortgage under the bank. In favor on approval of the bank the said land
and building will be sold and the amount received will be adjusted against the longterm loan from the bank.
7.8.14 Recommendation of the Special Committee of BSB:
The loan account may be reschedule subject to the acceptance of the following
terms by the company 50% interest of loan may be exempted according to the
76
Govt. roles and regulation and the remaining 50% interest may be transferred
as block and the total liability is to be refunded within 10 years.
In order to increase the income of the company, it may directly export its gods
for which it may avail back-to-back L.C. facilities from any bank or financial
institution for which the BSB will give NOC.
The loan receiving company has to pay 10% of the total loan receipt as down
Payment
No additional charge shall be created on the properties mortgage with the BSB
in regards to the NOC provided by BSB for back-to-back L.C. facilities.
If the loan receiver's do not agree to the above proposal than as an alternative
arrangement the loan account may be closed down after refund of the total
loan
the
above
mentioned
proposal
are
not
complied
with
by
the
entrepreneur, arrangement has to be made for taking legal action against the
entrepreneur's and sell the properties of the project in order to realized the loan.
7.8.15
77
Employees who are directly involved in loan recovery should be motivated. &
5C's must be considered when selecting borrower, i.e. Capital, Capacity,
CHAPTER EIGHT
78
LOAN RECOVERY
79
DGM
AGM-2
AGM-1
SM-1
SM-1
SM-3
SM-4
SM-5
Vacant
Seminar
Office
Seminar
Office
Manager
80
Seminar
Office
Manager-1
Seminar
Office
Manager-2
20%
B. doubtful
50%
C. Bad debt
100%
81
Unto 1 core
15%
1 to 5 crores
(b) To reschedule the Demand Loan and continuous loan which has been converted
into term loan 30% of expired installment or 20% of total clues which ever is lower
must be paid in cash.
(c) If the loan is required to reschedule again 50% of expired installment or 30% of
total dues must be paid in cash at first.
82
Recovery of Loans
Table-13
Category of Loans
2002-2003
1000
989
Bridge Loan
Staff Loan
33
34
Administered Loan
118
137
1153
1161
Sub-Total:
B) Short Term Loans :
25
23
Others (Debentures/shares/Loans
against FDR)
20
132
45
155
1198
1316
Sub-Total :
Grand Total (A+B)
83
Food-9%
Service-7%
Jute-5%
Leather-5%
Metal-3%
Paper-2%
Others-12%
Leather
Food
Textile
Paper
Service
Metal
Jute
Others
Chemical
84
Table-14
Outstanding
Overdue (%)
Target
Recovery
1996-97
1606
--------------
160
113
1997-98
1685
61.5
165
96
1998-99
1836
63.3
200
99
1999-00
1948
57.6
125
122
2000-01
1921
55.3
165
140
2001-02
1860
57.4
170
120
2002-03
1767
53.3
160
70
GRAPH
85
Dr. Md. Jahirul Haque, Professor Dept. of accounting, university of Chittagong (1988)
observed similar problems of project appraisal by BSB more than fourteen years ago.
This indicates that proper attention has not been given to the removal of these
bottlenecks.
2001-2002
2002-2003
No. of Projects
No. of Projects
43
28
Filing of Suit
14
15
28
31
86
result, 31 litigated companies settled the lawful disputes outside the court and assets
of 10 projects have been sold through auction during the year.
Default Culture
Intention of theft
Lack of morality
Inefficiency management of the organization for which the organization can not
87
Table-16
2002-03
2001-02
(Taka in million)
Opening balances
19,860
20,720
279
80
1,448
1,370
21,587
22,170
1,315
1,08 0
20,272
21,090
3,839
1,230
16,433
19,860
The authorized persons who are employed for recovery of loan are not free
from biasness.
The authorized persons who are employed are not efficient and skillful.
88
CHAPTER NINE
89
departments of BSB. The names of the departments are Loan operation department,
documentation and machinery procurement department, project implementation and
supervision department, loan recovery department, loan accounting department, rehabilitation
department and law department.
I have prepared report on the activities of loan operation department. The main task of
the department is to appraise projects. They appraise projects mainly under five
9.1 Findings:
[
There are some problems involved in the project appraisal practice of BSB. Some of
them relate to BSBs own institutional weaknesses and some of them relate to the
borrowers'. During the internship program the following findings are obtained:
1) Sometimes improper feasibility reports are submitted by sponsors, which do not
contain adequate and reliable information.
90
manual was designed 18 years ago. So many aspects should consider which do not
cover by the existing manual.
6) Dependence on imported technology and non-availability of adequate information
about that from local source. Lack of adequate, updated and accurate information in
the country. Both primary and secondary data are not readily available.
[
7) Inadequate attention is paid to analyze risk and uncertainties associated with the
projects, means only sensitivity analysis is done to analyze risk.
8) Lack of co-ordination among various financial institutions in exchange of
information.
9) Inadequate attention to social cost and benefits.
10)-There is no system of accountability of the appraisal team if the approved project
fails due to their improper appraisal.
11) Unstable tariff and fiscal policy, political instability of the country, resulting in
poor project appraisal especially from the economic viewpoint.
12) The main aim of BSB is to stimulate industrialization throughout the country.
13) Loans are given to sponsors through preparing appraisal report.
14) The nature of credit shows that it mainly grants term loan.
15) Sometimes inefficient allocations of resources have created a huge amount
of bad debt.
16) There are some sick industries are in the BSB
91
9.2 Conclusions:
I believe & hope that this report will offer a number of benefits to improve and update
the loan sanction procedure for its smooth operation and will cooperate in redesigning
the system and atmosphere of the department. If a small portion of sickness of the
projects is reduced it would be a great benefit to the bank as well as to the whole
nation. I put here some recommendations it would help in selecting appropriate,
socially contributable and more employment opportunity creatable projects in true
sense. If this report can improve the existing condition of sanctioning procedure, and
is implemented, my little initiatives will get a breathed satisfaction.
92
93
94
References
1. Bangladesh Shilpa bank, 2003 annual report 2002-2003: 2-18.
95
APPENDIX
PROJECT APPRAISAL FORMAT OF BSB
I. Summary and recommendations
0 Name, Location and Capacity of the Project
96
4. Market Aspects
0 Identification of product / service
0 Uses users of the product/ service
0 Analysis of the domestic demand and the sources of supply (1ocal and
import) to meet the demand for the proposed product(s) during the last few
years.
0 Analyses of the demand for the product (s) in the export market.
0 Projection of dem8nd
0 Assessment of existing and potential supply of the product in the market
0 Projected supply gaps and project's contribution towards the reduction of
this gap
0 Capacity utilization of the existing projects
0 Position of BSB financed projects
0 Analysis of product pricing, Government control and subsidy
0 Availability of required raw and packing materials and pricing thereof
0 Promotional strategies
0 Marketing budget
0 Product qualities
0 Location advantages considered from Marketing/distribution and
infrastructural facilities point of view.
5. Economic Aspects
0 Economic rate of return .0 Foreign earnings/ savings 0 Value added
0 Employment generation
0 Linkage effects
0 Other socio- economic benefits
6. Financial Aspects
0 Cost of the project
0 Means of finance
0 Debt equity ratios
0 Fixed asset coverage
0 Break-even analyses
0 Cash flow statement
0 Projected balance sheets
97
98