Project Report

Small and Medium Enterprises Bank (SME Bank)

Quaid i Azam School of Management Sciences,

Quaid i Azam University,
Islamabad
 TABLE OF CONTENTS

1. INTRODUCTION ............................................................................ 1
2. OPERATION AREA ....................................................................... 3
3. PRODUCTS AND SERVICES ...................................................... 4
4. BRANCH OUTREACH ................................................................. 11
5. CREDIT ANALYSIS ..................................................................... 13
6. RECOVERY PROCESS ................................................................ 15
 INTRODUCTION

The SME Bank was formed and incorporated as a public limited company under the

Companies Ordinance 1984. The Government of Pakistan is the major Shareholder of

the bank. As part of financial sector restructuring program of Government of Pakistan,

Regional Development Finance Corporation (RDFC) and Small Business Finance

Corporation (SBFC) were amalgamated into SME Bank Ltd. effective January 01, 2002.SME

bank Ltd was established to exclusively cater to the needs of the SME sector. It was created

to address the needs of this niche market with specialized financial products and services that

will help stimulate SME development and pro poor growth in the country.

SME bank Ltd was established to exclusively cater to the needs of the SME sector. it was

created to address the needs of this niche market with specialized financial products and

services that will help stimulate SME development and pro poor growth in the country.

Corporate Objectives

The objectives of the SME Bank are as follow:

To support, develop and promote Small & Medium Enterprises (SMEs) by providing

them the necessary technical and financial assistance.

To concentrate on value addition and export oriented SMEs

To enable SMEs to play a vital role in stimulating GDP growth, create job opportunities

and reduce poverty

Mission Statement

TO SUPPORT AND DEVELOP THE SME SECTOR BY PROVIDING NECESSARY

FINANCIAL AND TECHNICAL ASSISTANCE ON A SUSTAINABLE BASIS.

1
 TO ENABLE THE SME SECTOR TO CONTRIBUTE TO ECONOMIC

DEVELOPMENT THROUGH VALUE ADDITION AND EXPORTS.

PROMOTE ENTREPRENEURSHIP AND CREATE EMPLOYMENT

OPPORTUNITIES.

The SME bank is different from other commercial banks as it is a specialized bank and it

mainly deals with clients of SME Sector. It offers loans of small amounts and at very

concessional rates due to which its profitability is very low. It is of great importance to the

economy due the role played by the SME sector in the development of the economy.

2
 OPERATION AREA

The SME bank was mainly created to cater the needs of the Small and medium enterprises.

According to SBP Small and manufacturing enterprises are those which have employees of

250 persons and assets of 100 million and sales of 300 M in manufacturing concern.

The SME bank is mainly dealing in small and medium enterprises. Mostly SME clients are

given loans but if a good large client approaches the bank, the bank also entertain those.

Sometimes the SMEs are graduated to corporate level and the bank then entertain those

clients.

The average loan size is about 1.2 Million. According to Medium Enterprises Regulations

SME bank can sanction up to 100 million. The profitability for SME Bank is very low as

they are providing loans at very low rates as compared to market rates. Commercial banks

dont entertain small loans as the administrative costs increases so SBP decided to cater the

needs to SMEs and make provision of loans of small amounts, so SME Bank was created.

SME Bank almost deals in all SMEs Sector of economy. Administration costs are high due to

which the profitability is very low.

If any large client approaches and it has good capability of surviving, SME Bank also

entertain those cases. Often most of SME Bank Clients are graduated to corporate level so

SME bank carries on catering their needs and providing them loans. So the domain of SME

bank is very large as they are providing services to every sector SMEs.

3
 PRODUCTS AND SERVICES

This bank provided these two types of products to the borrowers and the other institutions

which need financing or financial assistance from the bank or they need services of this bank.

1. Lending Products

2. Deposits Products

1. Lending Products

Loan Facilities

Running Finance
For working capital requirements e.g. purchase of stocks, raw material etc.
Existing Business for minimum of 2 years
Running Finance (RFF) Facility credit lines for 1 year.
Repayment monthly mark-up to be repaid; adjustable at the end of year or renewed.
Loan amount from 0.5 M to 75.0 M*
Mark-up; 1 year KIBOR + 6% to be reviewed annually.
Security; mortgage of urban property (Max. financing of 70% of Forced Sale Value of
the security & collateral}.
Cash/Near Cash Security with 10 to 20% margin, Hypothecation of movable assets

Medium Term Running Finance

For working capital requirements e.g. purchase of stocks, raw material etc.
Existing Business for minimum of 2 years
Medium Term Running Finance (MTRFF) Facility credit line for 3 years.
Repayment monthly mark-up to be repaid; adjustable at the end of year or renewed.
Loan amount from 0.5 M to 75.0 M*
Mark-up; 1 year KIBOR + 6% to be reviewed annually.
Security; mortgage of urban property (Max. financing of 70% of Forced Sale Value of
the security & collateral}.
Cash/Near Cash Security with 10 to 20% margin, Hypothecation of movable assets.

4
 Term Loan for Working Capital
For working capital requirements e.g. purchase of stocks, raw material etc.
Existing Business for minimum of 2 years
TLWC credit line for 3 5 years
Repayment monthly installments / quarterly to be repaid.
Loan amount from 0.5 M to 75.0 M*
Mark-up; 1 year KIBOR + 5% to be reviewed annually.
Security; mortgage of urban property (Max. financing of 70% of Forced Sale Value of
the security & collateral}.
Cash/Near Cash Security with 10 to 20% margin, Hypothecation of movable assets.

Term Loan for Fixed Assets

For fixed assets investment e.g. plant and machinery/equipment, purchase &
construction of land & building
Existing Business for minimum of 2 years
TLFA credit line from 1 year to 5 years
Repayment 12 to 60 flexible installments
Grace period; 3 12 months.
Loan amount from 0.5 M to 75.0 M*.
Mark-up; 1 year KIBOR + 5% to be reviewed annually.
Security; mortgage of urban property (Max. financing of 70% of Forced Sale Value of
the security & collateral),

Financing Facility for Storage of Agricultural Produce

For establishment, expansion, modernization and replacement of Steel/Metal/Concrete
Silos, Warehouses and Cold Storage facilities for storing agricultural produce.
Existing Business for minimum of 2 years
FFSAP scheme period from 3 year to 7 years
Mark-up; 8% 10%.
Security; mortgage of urban property (Max. financing of 70% of Forced Sale Value of
the security & collateral).

5
Tentative Lending Rates

S. No. Subject Lending Rates

1 Year KIBOR + 6% p.a

1. Medium Term Running Finance Facility
(reviewed annually)

2. Running Finance Facility 1 Year KIBOR + 6% p.a

1 Year KIBOR + 5% p.a

3. Term Loan for Fixed Assets
(reviewed annually)

1 Year KIBOR + 5% p.a

4. Term Loan for Working Capital
(reviewed annually)

Upto 3 yrs. 8%

Financing Facility for Storage of Over 3yrs. and upto 5yrs. 9%

5.
Agricultural Produce (SBP Line)
Over 5 yrs. and upto 7
10%
yrs.

2. Deposits Products:
Qatra Qatra Darya Daily Product

(Daily product basis: for Individuals and Business Concerns) Product Features
For Individuals, Proprietorship, Partnership and Limited Companies starting from Rs
25,000
profit rates upto 6.50 %
Free Online Transactions, PO s, DDs, TTs.
Free Issuance of ATM card.
Free Cheque books

6
 Free Life Insurance
Minimum account opening balance: Rs. 25,000
Monthly Average Balance Requirement Rs. 25,000
Minimum Balance fee: Rs 25 per month based on balances below Rs. 25,000

Saving Account

(Saving Accounts: for Individuals)

Product Features
profit rates upto 6.00 %
Free Life Insurance
Minimum account opening balance: Rs.10,000 (for insurance cover)
Monthly Average Balance Requirement: Rs.10,000
Profit Structure: 6.00 % per Annum
Special Privileges if monthly average balance Rs.10,000 or more

Current Account
(Current Account: for Individuals and Business Concerns)
Product Features
Free Online Transactions, POs, DDs, TTs.
Free Issuance of ATM card.
Free Cheque books
Free Life Insurance
Minimum account opening balance: Rs. 10,000 (for insurance cover)
Monthly Average Balance Requirement Rs. 10,000
Minimum Balance fee: Rs. 25 per month on balances below Rs.10,000
Special Privileges if monthly average balance Rs.10,000 or more.

7
Rozana Izafa Mahana Munafa

SME Rozana Izafa Aur Mahana Munafa

(Monthly Payment of Profit calculating on daily basis)

Profit Structure Rate of Expected Return

upto 9.999 M 6.00%

From 10.000 M to 49.999 M 6.00%

50.000 M and Above 6.50%

Current Account

Current Account

Profit Structure Rate of Expected Return

Current Account 0.00%

Basic Banking Account

Product features:
The minimum initial deposit will be Rs 1,000
No profit will be paid
No limit on minimum balance. In case where balance in BBA remains nil for a
continuous six months period such accounts will be closed
No fee (service charges) for maintaining BBA
Customers will be allowed a maximum of two deposit transactions and two cheques
withdrawals are allowed, free of charge, through cash/clearing per month
Statement of account will be issued once in a year

8
Term deposits

TDR Regular

SME Regular TDR

( Profit to be paid after maturity of the TDR )

Profit Structure Rate of Expected Return

7 Days Short Notice Deposit 6.00%

30 Days Short Notice Deposit 6.00%

Fixed Term Deposit Profit Payable on Maturity

SME Fixed Term Deposit

Profit payable on Maturity.

Profit Structure Rate of Expected Return

1 Month 6.50%

3 Months 7.00%

6 Months 7.75%

1 Year 8.50%

2 Years 8.75%

3 Years 9.00%

9
 Mahana Amadan Account

SME Bank brings to you the opportunity to maximize the utilization of your funds. SME
smart term deposit plans not only gives you flexibility of choices in term of selecting the
profit payment plan, but a high return as well, because we know that you only go for the best.
Have a look at our remarkable offer

Invest as low as Rs 100,000 for 1 Year and earn a profit of Rs. 667 per month, or

Invest as low as Rs 100,000 for 2 Years and earn a profit of Rs. 688 per month.

A rewarding profit is automatically credited to your Qatra Qatra Darya Account

month after month, which provides the flexible power to save with additional profit or
to spend as you like; with the benefit of free life insurance.

Premature encashment facility.

Quick processing time for borrowing against funds.

Free SME ATM Card.

10
 BRANCH OUTREACH

Due to privatization issues of SME Bank, it has not been able to expand its operations. As the
economic conditions have been getting worse, they have greatly dampened the activities of
the SME Bank. Due to arising financial constraints the SME is facing greater difficulties in
operating itself.

Currently the SME has 12 Operational branches, other include recovery offices, camp offices

and audit offices. The head office is located in Blue area. The branch network consists of the

following offices:

a) Business Operations

b) Recovery Offices

c) Camp Offices

d) Audit Offices

11
12
 CREDIT ANALYSIS

Requirements for application of loan

Copy of CNIC, Photograph & bank statement of sponsor.

Tax return & property documents offered as security

Audited accounts if loans 10 million

Detailed & valuation of stock plant and machinery

Personal guarantees

Credit Analysis Process

The credit analysis process starts with the loan application form. The SME bank offers

loans from amount 0.5 Million to 100 million and above 100 Million in some cases. For

amount above 10 Million, the bank requires audited account or cost amendment prepared

financial statements. For below 10 million credit officers conduct the analysis by

themselves. They prepare profit and loss statement, cash flow statements based on the

data provided and on assumptions. Other criterion is what they see physically. They go to

the site and judge the client ability e.g. if a manufacturing concern applies for loan the

credit officers may check their producing capabilities by seeing their utility bills. Other

thing could be seeing their sales, which is not very reliable. The credit officer may then

approach the clients supplier, how much raw material they buy. Another thing is visiting

the market and asking different people in factory areas about the client performance.

Score cards methods are also used. Profiling is done for the clients.

Then after all this process is done of collecting the data and verifying the data of client,

the decision for sanctioning the loan is to be taken. SME bank has decentralized its loan

facility approval for amount up to 2 Million rupees. Branches have branch credit

committees which include branch manager, credit risk manager and a senior credit officer

13
is included. The case is presented before them, they discuss the client, its ability and then

take the decision whether to approve the loan facility or not.

For amount above 2 Million the branch credit committee recommends that case to head

office. The case is presented to next higher committee which is central credit committee.

The case is processed further and is sent to credit risk management department in head

office. The case is further scrutinized by them. They further refine the case and take out

any information which could be more risky in a client proposal.

After all these processes the case is presented in front of central credit committee. The

central credit committee includes President of the bank, business development division

head, CFO and credit risk management head. Then they discuss the case and take the final

decision whether to approve the loan or not. The decision taken by central credit

committee is the final decision for approval of loan facility.

For amount above than 100 Million, the case after processing from credit risk department

and other department is presented in front of board of directors. They then take the final

decision to sanction the loan. This whole process is called credit life cycle, its start from

the loan application form to the decision taking by the bank. But the process doesnt end

here, after sanction the process of documentation starts. Then the case goes to credit

administration department. Their work is to do documentation according to terms and

conditions of the sanctioned loan. They prepare the loan agreements and after completion

the Credit administration department officer issues the loan for disbursement and then the

monitoring process starts.

14
 RECOVERY PROCESS
The Bank considered loan recovery operation as its full time professional/operational

responsibility.

Companys financial soundness and sustainability of future operations shall

depend on loan recovery.

Recovery of loans shall be assigned highest importance and responsibility.

Loan recovery strategy and modalities shall fall in line with borrowers category

level of repayment difficulty and loan security arrangement.

Loan recovery performance based criterion to be followed with Regions, Branches

and staff.

Loan recovery policies shall be reviewed and revised from time to time under instructions of

Government/SBP

The loan after sanction is started to be monitored by the monitoring team. Mostly recovering

procedures include persuasion. The recovering teams visits the clients and pursue them to pay

the loan.

The monitoring department doesnt wait for the default of clients. They start to see the signs

of clients defaults chances. They then categorize the clients into default categories. After 30

days the client is categorize as portfolio at risk. The period continues from 30- 89 days. After

90 days the classification categorized by the SBP starts, i.e. sub standard then doubtful and

then loss.

The SME bank then sees that whether the client is willful defaulter or circumstantial

defaulter. If the client is circumstantial defaulter the bank follows rescheduling policy to help

the client and offers him help that would be beneficial for both parties. If the client is not able

15
to pay repay the loan the bank then decides for legal option i.e. to register a case against the

client in the court. If the client is willful defaulter then the legal option case is used too.

The loans are continuously written off according to their policies but they continue to pursue

the clients for repayment of loans.

16