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How To Get More Of It
Banks' financing services
Khondkar Ibrahim Khaled
Intermediation for investment
Bank is a delicate financial institution. It deploys fund often more than hundred times of its paid-up capital! A bank with a paid-up capital of Tk 100 crore may have an investment portfolio exceeding Tk 10,000 crore! It is no mystry. Bank uses its own capital as well as borrowed money to lend to the borrowers. The bank actually acts as an intermediary between the depositors and borrowers. Bank acts as a symbol of confidence to both the groups.Money breeds money
Yes, money breeds money in the hands of capable entrepreneurs. Money may also squeeze in value in the hands of other groups of people. They may spend it or loose money in transactions. Hence money breeds money only through an effective process in the hands of visionary investors. The process is productive investment. People owning money from parental sources or by fortune may not always be a capable investor. Those people will better deposit their money in banks to earn a low but assured profit. Thus the fund is generated in the banks for onward investment. This is a very delicate, sophisticated and tricky job indeed! Bank must use funds profitably -- or it will sink. Hence a bank sweams or sinks and a continuously sweeming bank earn confidence of depositors.Range of services
Bank's range of services can be broadly divided into two types -- procurement of fund and deployment of fund. Modern banks have ancillary services to earn some extra profit by providing other services. Here we may identify and discuss about deployment of funds only. This is where lies the interest of the investors.Investment areas
Primarily a bank's consideration in the development of an investment product is the high probability (low risk!) of generating surplus in the investment process. This is the rationale of banks' all investment services. Products or services may, however, be categorised according to area of investment, nature of production or even size of investment. Banks dealing with development of special areas with generally long-term finance are known as development banks. Bangladesh Krishi Bank (BKB) is a development bank in the area of agriculture. Similarly Bangladesh Shilpa Bank (BSB) and House Building Finance Corporation (HBFC) are development banks in the fields of industry and housing respectively. On the other hand, commercial banks deal with corporate finance, retail banking, personal finance, small & medium enterprise (SME) finance, Micro-finance (MF), consumer finance, import and export finance, lease finance etc.Investment products
Banks name their investment products for easy identification and familiarity in the market. Some times, it is a generic name and sometimes it is a patent name. Mortgage loan is a generic name normally for housing finance. Apartment Purchase Scheme (APS) is a patent name of apartment purchase financing in a large private commercial bank in the country. Similarly, personal finance is a generic name and “Consumer Loan Scheme (CLS)” is the brand name of the same product in a local bank.Industrial finance
While Industrial Development Banks like Bangladesh Shilpa Bank (BSB) and Bangladesh Shilpa Rin Sangstha (BSRS) are typically industrial finance institutions, other commercial banks of the country are also involved in industrial financing in addition to commercial lending. This is a comparatively recent trend. Prior to independence, commercial banks used to shy away from industrial finance because these are of long-term nature. Commercial banks obtains short-term deposits, facilitating short term finance. This concept prompted Development Banks to provide long term loan to industrial units for developing infrastructure and procuring machinaries. Commercial banks used to provide short-term 'working capital' to the same industrial units, without syndicating with development bank. Such segmented and non-syndicated finance created problems. Industries used to suffer from short of finance due to non-co-ordination of banks and also face the consequence of differing views of financiers and dual supervision (or no supervision-one bank thinking that the other one is keeping watch!). For the last one decade or so, this problem has been solved as some commercial banks eyed on industrial long term finance with prudence. By intelligently allocating funds for long term finance, mismatch of funds has been taken care of. Initially, commercially banks lacked the expertise of appraisal of long-term loans. Now, quite a few commercial banks excell in such appraisal, facilitating their capturing a good share of industrial finance in the market.Co-operation is for sharing risk while dealing with high risk and competition is for sharing profit instead of keeping away from profit. Syndication is for mutual benefit of entrepreneurs as well as banks. Without syndication, entrepreneurs could not venture for long-term large investments. During the last 4/5 years, Bangladeshi commercial banks have been able to approve and operate about a dozen syndicated term loans, each exceeding Tk 100 crore. Syndication has widened the horizon of financing large industrial, commercial and even service sectors. Concentration of investment is high in the textile and garment sectors. During the last couple of years, banks invested mentionable funds in the health sector. Gradually, we are witnessing wide diversification of investment portfolio in our banks.
Commercial sector
Banks' finance to commercial sectors include trading both within the country and outside. Trading encompasses wide areas like whole-sale, retail, import, export etc. These involve normally short-term loans.
Can't afford to remain static
Banks provide a wide range of facilities to suit different purposes. To suit the purpose of working capital of industries, banks provide Cash Credit against pledge or hypothecation of raw materials and spares. Cash Credit facility is also suitable for whole sale and retail trade. Loan against imported merchandise (LIM) and Loan against Trust Receipt (LATR) are appropriate for importers. Exporters normally utilise facilities like Packing Credit (PC) and Foreign Bill Purchase (FBP). Credit facility is also available against supply order or work order against assignment of consequent bills.
Personal loans
Personal Loans are available in most of the commercial banks for purchasing items of house-hold and personal use like television refrigerator, washing machine, car, motor cycle, sofa set, dining table, furniture etc. Some banks have introduced special schemes for this purpose. These facilities are given brand names like Consumer Loan Scheme (CLS), Own or Car Scheme (OCS), Personal Loans Scheme (PLS), etc. All such schemes have common purpose with diverse modalities to suit different customer groups.Housing Loans
In advanced countries this is popularly known as mortgage loan with repayment periods ranging between 25 and 30 years with a low rate of interest. In our country, this facility is better known as House Building Loan (HBL) with a repayment period of a maximum of 15 years, baring normal interest rates as applicable to commercial or industrial loans. High interest rate and short repayment period are two stumbling blocks in popularising this type of loans, though housing is a basic need like food and clothing. We noticed some changes in this loan service after independence of Bangladesh. Prior to independence, housing loan was considered essentially a product of Development Bank only and commercial banks were restricted to offer such facilities. This is evident from Credit Restriction Circulars of Central Bank of those days. After independence, Dhaka City, being the national capital, witnessed a very high demand for housing and personal savings of entrepreneurs were too little to meet this demand. To meet this urgent need, central bank not only withdrew restrictions, but also fixed a target for the commercial banks to allocate at least 1% (later on increased to 1.5%) of their time and demand liabilities for housing loans.This is how a new product was added to the service range of commercial banks. Banks now provide large term loans to developers for constructing shopping or housing complex. These are Housing Development Loans. Personal housing loans are also available for purchasing apartments. Loans for purchasing shops may be termed as commercial loan. Hence, there exists a variety of loan products in the housing sector alone. In spite of dramatic change in the policy and outlook of banks, housing loan coverage is still very low. As the loan is highly secured by mortgage of property, banks are looking for opportunities to expand their market. Non-banking Financial Institution (NBFI) have recently entered into housing loan market.
Small & Medium Enterprise (SME)SME loan is a new product in the range of services provided by banks. SME loan is different from other loans, not only because this is small in size, but also because its modalities are different. Uniform definition of 'small' or 'Medium' is yet to emerge. However the loan size is never large and such enterprise may be a manufacturing/processing unit or a trading concern. In Bangladesh, two banks namely BASIC Bank and BRAC Bank are specifically devoted to SME Finance, which covers almost 100% loan portfolio of BASIC Bank and over 50% Loans of BRAC Bank. Other commercial banks are also open for SME finance, though their coverage is low. Small entrepreneurs have little or no collaterals to offer and the banks charge high rate of interest from SME loan because of high cost of supervision. Thus SME loan is a high risk service with low profit, discouraging the banks to venture into this area. But with industrialisation and commercialisation, SME sector is destined to grow and banks can not ignore the emerging market. Banks are continuously endeavouring to evolve appropriate model/s of financing SMEs. They are likely to break through the hindrances very soon.
Banks are not static
These are some of the popular services of banks... More investment services exist in their baskets. but more important is that banks' financing services are not static -- these are constantly changing, flexible and innovative, depending on the ever-changing needs of the people.............................................................
The author is MD, Pubali Bank.