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Assignment
Subject:
Small & Medium Enterprises Finance
Topic:
SME Finance
Department:
BBA (Banking and Finance)
Submitted By:
MUHAMMAD WASEEM
Submitted To:
SIR. YASIR ALI RANA
GC University Faisalabad
Small and Medium Enterprises
A business can qualify as an SME if it meets either one of the two specified criteria, namely
sales turnover or full-time employees, whichever is lower.
Definition by Size of Operation
• Microenterprises across all sectors: Sales turnover of less than RM300,000 OR less than 5
full-time employees.
• the definition for the small and medium categories for the respective sectors.
If a business fulfills either one criteria across the different sizes of operation, then the smaller
size will be applicable. For example, if a firm’s sales turnover falls under microenterprise but
employment falls under small, the business will be deemed as a microenterprise.
Classification of Sectors
• Services’ refer to all services including distributive trade; hotels and restaurants; business,
professional and ICT services; private education and health; entertainment; financial
intermediation; and manufacturing-related services such as research and development (R&D),
logistics, warehouse, engineering etc.
• For statistical purposes, all business establishments including foreign businesses that fulfill the
SME definition will be classified as SMEs.
Scope of SMEs
In addition to the qualifying criteria i.e. sales turnover and full-time employees, there are
additional conditions that must be fulfilled to be classified as SMEs:
1. Types of Establishment
SMEs refer to only pure business entities registered with the following bodies:
Small and Medium Enterprises
2. Shareholding Structure
(i) Companies that are public-listed but are in the secondary bourses such as the ACE market,
Malaysia Online Trading Platform for Unlisted
Market (MyULM) or in secondary markets / SME exchanges / unlisted markets in other
countries will still be considered as SMEs for as long as they fulfil the qualifying criteria.
(ii) Subsidiaries of firms in (i) will also be considered as SMEs for as long as they fulfill the
qualifying criteria.
• Subsidiaries refer to entities where the parent company has controlling power over
the entities either via:
• The composition of its board of directors; or
• Has more than 50% of its voting power/ share capital (excluding preference shares);
or
• Indirectly, through another entity which is a subsidiary that is owned by the parent
company (two level subsidiary). For this, again the conditions in (i) and (ii) will apply
These are also pre-conditions to be eligible for Government assistance programmes. It is also
recommended that a minimum local equity of more than 50% be imposed depending on the
objectives of the programmes, in order to qualify for Government assistance.
Small and Medium Enterprises
According to Bangladesh
Definition of SME:
Existing definition of SME is recommended by Better Business Forum and accepted as a uniform one
by Ministry of Industry and Bangladesh Bank. Criteria of the definition of SME are given below:
Small Enterprise:
Small Enterprise refers to the firm/business which is not a public limited company and complies
the following criteria:
Serial Sector Fixed Asset Employed
No. other than Manpower
Land and (not
Building above)
(Tk.)
01. Service 50,000- 25
50,00,000
02. Business 50,000- 25
50,00,000
03. Industrial 50,000- 50
1,50,00,000
Medium Enterprise:
Medium Enterprise refers to the establishment/firm which is not a public limited company and
complies the following criteria:
Regulation SE-4: Repayment Capacity of the Borrower and Cash Flow Based Lending
Normally, Small Enterprises do not maintain proper financial accounts for the satisfaction of the
banks/DFIs. Their record generally contains sale/purchase books and cash received/paid records in a
rudimentary form. Banks/DFIs shall use relevant/practical cash flow estimation techniques and other
proxies to assess repayment capacity of SE borrower. To supplement, banks/DFIs are encouraged to
use the available sector/cluster specific financial models that can capture cost structure, revenue streams
and margins in the sectors. For program-based lending, banks/DFIs, as a substitute, may also use
Income Estimation Models to assess repayment capacity of the borrowers.
8. Banks/DFIs will make suitable arrangements for ensuring that FSV used for taking benefit of
provisioning is determined accurately as per guidelines contained in these PRs and is reflective of
market conditions under forced sale situations.
9. The external auditors as part of their annual audits of banks/DFIs shall verify that all requirements
as stipulated above and in Annexure II & III for classification and provisioning have been complied
with. The State Bank of Pakistan shall also check the adequacy of provisioning during on-site
inspection.
Where a borrower subsequently defaults (either principal or mark-up) after the rescheduled/restructured
loan has been declassified by the bank/DFI as per above guidelines, the loan shall again be classified
in the same category it was in at the time of rescheduling/restructuring and the unrealized markup on
such loans taken to income account shall also be reversed. However, banks/DFIs at their discretion may
further downgrade the classification, taking into account the subjective criteria.
At the time of rescheduling/restructuring, banks/DFIs shall consider and examine the requests for
working capital strictly on merit, keeping in view the viability of the project/ business and appropriately
securing their interest etc. All fresh loans granted by the banks/DFIs to a party after
rescheduling/restructuring of its existing facilities may be monitored separately, and will be subject to
classification under this Regulation on the strength of their own specific terms and conditions.
4. Banks/DFIs shall classify their loans/advances and make provisions in accordance with the criteria
prescribed above, and further stipulated in Annexure V & VI and also keeping in view the following:
a. Banks/DFIs may avail the prescribed benefit of FSV subject to compliance with the following
conditions:
I. The additional impact on profitability arising from availing the benefit of FSV against the pledged
stocks, plant & machinery under charge, and mortgaged residential, commercial & industrial properties
shall not be available for payment of cash or stock dividend.
II. Heads of Credit of respective banks/DFIs shall ensure that FSV used for taking benefit of
provisioning is determined accurately as per guidelines contained in PRs and is reflective of market
conditions under forced sale situations; and
III. Party-wise details of all such cases where banks/DFIs have availed the benefit of FSV shall be
maintained for verification by State Bank’s inspection team during regular/special inspection.
Small and Medium Enterprises
b. Any misuse of FSV benefit detected during regular/special inspection of SBP shall attract strict
punitive action under the relevant provisions of the Banking Companies Ordinance, 1962. Furthermore,
SBP may also withdraw the benefit of FSV from banks/DFIs found involved in its misuse.
Reversal of Provision
6. In case of cash recovery, other than rescheduling/restructuring, banks/DFIs may reverse specific
provision held against classified assets only to the extent that required provision as determined under
this Regulation is maintained. While calculating the remaining provision required to be held after cash
recovery and reversal of provision there-against, the bank/ DFI shall still enjoy the benefit of netting-
off the amount of liquid assets and FSV of collateral from the outstanding amount, in the light of
guidelines given in this regulation. Further, the provision made on the advice of State Bank of Pakistan
except where cash recovery is made shall not be reversed without prior approval of State Bank of
Pakistan.
2. Medium Enterprise (ME) is a business The National Australia Bank (NAB) referred
entity, ideally not a public limited to definition adopted by market researchers,
company which meets the following which define:
parameters: 'Medium business customers' as businesses
Number of employees with
• 20-250 (Manufacturing & turnover between $5 million – $50 million and
Service MEs) employees 20 to 199 people.
• 20-50 (Trading MEs)
Annual Sales Turnover:
• Above Rs. 75 million and up to
Rs. 400 million (All types of
MEs)
3. Subject to the relaxation for clean The Global Financial Crisis (GFC)
facilities up to Rs. 5 million for SEs demonstrated that a stable, prudent
and MEs, all facilities over and above banking sector is an essential part of a stable,
this limit shall be appropriately productive economy. Lenders, or
secured as per satisfaction of the 'authorized deposit-taking institutions (ADIs)',
banks/DFIs. do not have absolute discretion in
State Bank of Pakistan shall continue setting their lending policies but must comply
to exercise its powers for with the prudential regulatory
fixation/reinstatement of margin framework overseen by the Australian
requirements on financing facilities Prudential Regulation Authority (APRA). The
being provided by banks/DFIs for framework applies to all ADIs,
Small and Medium Enterprises
format given at Annexure-I and IV, at the The Enterprise shall file an application to Bank of
time of sanctioning fresh facility, or China with relevant certificates and documents as
enhancement, renewal and restructuring the case may require.
Bank of China shall review and examine the
of an existing facility. However, if the
application, certificates and documents provided by
Loan Application Form already contains the applicant. Upon its approval, Bank of China
all the information as required in BBFS, shall negotiate and sign loan agreement with the
then no separate BBFS shall be required. borrower
6. Proper Utilization of Loan Bank of China has the right to supervise the
The banks/DFIs shall ensure that loan has utilization of the loan by the Enterprise.
been utilized for the same purposes as
specified in the Loan Application Form. The Enterprise shall use the loan at the time, in the
amount and for the purposes as stipulated in the
In case of financing to Medium
loan agreement.
Enterprises, banks/DFIs shall develop
and implement an appropriate system for Before the loan is fully repaid, the Enterprise must
monitoring utilization of loans. Such periodically submit Bank of China reports,
system may include obtaining stock statements and other materials on the plans and
reports/position of current assets in case implementations about the construction progress,
of Working Capital Loans; and supporting production, sales and financial; status. If any
owner of the Enterprise is a separate legal entity, it
documents in case of Term Loans.
shall provide its annual financial statements to
About Small Enterprise Financing, Bank of China when the Bank of China deems it
banks/DFIs shall adopt the following necessary.
measures:
• In case of working When Bank of China effects its credit supervisions
capital/revolving credits, the and examinations, the Enterprise must provide
correct information and necessary facilities.
banks/DFIs will obtain a
declaration only from the
borrowing SE stating that it has
utilized the loan proceeds for the
intended purpose only.
Small and Medium Enterprises
Medium Enterprises
1. Banks/DFIs shall specifically identify
the sources of repayment and assess the
repayment capacity of the borrower based Any important resolution and decision on financial
on assets conversion cycle and expected matters made by the board of directors or the
future cash flows. Banks/DFIs may also owners of the Enterprise, and any personnel change
use Income Estimation Models specially of the board of directors shall be notified to Bank of
in program-based lending to assess China in time. Any material change, amendment
repayment capacity of the borrowers. and/or supplement to the joint venture contract or
2. The rationale and parameters used to co-operative contract as well as articles of
project the future cash flows shall be association of the Enterprise must be submitted to
documented and annexed with the cash Bank of China for comments in advance, if the
flow analysis undertaken by the Bank's interests may be affected thereby.
bank/DFI.
10. Borrowers Basic Fact Sheet and Monitoring by the Head Offices of the Banks for
e-CIB Report SMEs:
a. As part of their business strategy, higher
(i) Banks/DFIs are required to obtain authorities of banks must have clear vision and
Borrower’s Basic Fact Sheet (BBFS) from direction about disbursing SME credit.
their prospective borrowers as per format
Small and Medium Enterprises
given at Annexure-I and IV, at the time of b. Usually, credit disbursement is the affairs of the
sanctioning fresh facility, or enhancement, credit disbursing bank. The banks sanction credit in
renewal and restructuring of an existing favor of the customers after considering their credit
facility. However, if the Loan Application worthiness and other relevant matters. In addition to
Form already contains all the information comply with the existing credit norms, the banks will
as required in BBFS, then no separate take the following steps to ensure sincerity, efficiency
BBFS shall be required. and speed in sanctioning and disbursement of SME
loans.
(ii) Banks/DFIs shall obtain e-CIB Report • Simplifying of the SME credit Application
on the prospective borrower while Form;
considering proposals for any exposure • Guidance for filling up the application form
(including renewal, enhancement and and all other requirement should be advised at
rescheduling/ restructuring). Banks/DFIs the time of supplying the application form to
shall give due weightage to the credit avoid delay;
report relating to the borrower and his • Rationalizing the time line for credit
group obtained from e-CIB of State Bank processing and disbursement;
of Pakistan; however, they can take • the letter requesting the Credit Information
exposure on defaulters keeping in view Bureau (CIB) of Bangladesh Bank to verify
their risk management policies and criteria loan classification status of the applicant shall
provided they properly record reasons and have marked “SME, the priority” and CIB
justifications in the approval form. will provide the same on priority basis (within
minimum time);
• Quick settlement of borrowers complains.
c. Core Group or Cell must be established to monitor
SME credit disbursement activities, to take new steps
and solve problems surfaced at the field level rapidly.
d. SME credit related item may be included in the
agenda of annual/half yearly managers’ conference.
e. The officials in the regional/branch level may be
rewarded based on performance of SME credit
disbursement and recovery.
f. Required training may be arranged for the officials
related to SME for their capacity building.
g. Modern information technology especially Mobile
Phone, E-mail etc. may be used to monitor the
activities of the regional offices and branches
intensively.
banks/DFIs are encouraged to assess identify the key drivers of their borrower’s businesses,
conditions prevailing in the sector/industry the key risks to their businesses and their risk
they are lending to and its prospects. The mitigates.
banks/ DFIs should be able to identify the
key drivers of their borrowers’ businesses, The rationale and parameters used to project the future
the key risks associated with their cash flows shall be documented and annexed with the
businesses and their risk mitigates. cash flow analysis undertaken by the bank.
Banks/DFIs may also use Income
Estimation Models specially in program-
based lending to assess repayment capacity
of the borrowers.
2. The rationale and parameters used to
project the future cash flows shall be
documented and annexed with the cash
flow analysis undertaken by the bank/DFI.
Small and Medium Enterprises