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Small and Medium Enterprises

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

According to Malaysia SMEs


Since 2005, a common definition for SMEs endorsed by the National SME Development Council
(NSDC)1 has been adopted across Ministries and agencies, financial institutions and regulators
involved in SME development programmers. The definition is as follows:
• Manufacturing (including agro-based) and Manufacturing-related Services: Sales
turnover of less than RM25 million OR full-time employees of less than 150
• Primary Agriculture and Services (including ICT): Sales turnover of less than RM5 million
OR full-time employees of less than 50
New SME Definition
Given that there have been many developments in the economy since 2005 such as price inflation,
structural changes and change in business trends, a review of the definition was undertaken in 2013
and a new SME definition was endorsed at the 14th NSDC Meeting in July 2013. The definition
was simplified as follows:
• Manufacturing: Sales turnover not exceeding RM50 million OR full-time employees not
exceeding 200 workers
• Services and other sectors: Sales turnover not exceeding RM20 million OR full-time
employees not exceeding 75 workers

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.

Category Small Medium


Manufacturing Sales turnover from Sales turnover from
RM300,000 to less than RM15 million to not
RM15 million OR exceeding RM50 million
full-time employees from OR full-time employees
5 to less than 75 from 75 to not exceeding
200
Services & Other Sectors Sales turnover from Sales turnover from RM3
RM300,000 to less than million to not exceeding
RM3 million OR full- RM20 million OR full-
time employees from 5 to time employees from 30
less than 30 to not exceeding 75

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

• ‘Manufacturing’ refers to physical or chemical transformation of materials or components


into new products.
Small and Medium Enterprises

• 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.

• Others’ refer to the remaining 3 key economic activities, namely:

(i) Primary Agriculture


• Perennial crops (e.g. rubber, oil palm, cocoa, pepper etc.) and cash crops (e.g.
vegetables, fruits etc.)
• Livestock
• Forestry & logging
• Marine fishing
• Aquaculture
(ii) Construction
• Infrastructure
• Residential & non-residential
• Special trade
(iii) Mining & quarrying
Classification of economic activities for purposes of definition will be based on the Malaysian
Standard Industrial Classification (MSIC) 2008 codes as per Annex 1. This is to ensure comparability
of data from various sources and to facilitate data harmonization across the various providers of SME
statistics. However, the list of activities is not exhaustive and may be subject to amendments from time
to time.

Details of Qualifying Criteria


• Sales turnover refers to total revenue including other incomes.
• Full-time employees include all paid workers working for at least 6 hours a day and 20 days
a month; or at least 120 hours a month. Full-time workers also include foreign and contract
workers. However, the definition excludes working proprietors, active business partners and
unpaid family members or friends who are working in the business and do not receive regular
wages.
• ‘OR’ basis means that a business will need to satisfy either one of the two criteria used in the
definition (whichever is lower).

• If a business exceeds the threshold set under both criteria for 2 consecutive years (based on
its financial year/ accounting period) then it can no longer be deemed as SMEs. Similarly, a
business that is previously large can become an SME if it fulfills the qualifying criteria of SMEs
for 2 consecutive years.

• 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

• Companies Commission of Malaysia (SSM) either under the Registration of Business


Act (1956) or Registration of Company Act (1965) or Limited Liability Partnerships
(LLP) Act 2012; or

• Respective authorities or district offices in Sabah and Sarawak; or

• Respective statutory bodies for professional service providers.

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:

Serial No. Scoter Fixed Asset Employed


other than Manpower
Land and (not
Building above)
(Tk.)
01. Service 50,00,000- 50
10,00,00,000
02. Business 50,00,000- 50
10,00,00,000
03. Industrial 1,50,00,000- 150
20,00,00,000
Small and Medium Enterprises
Target for SME Credit:
A total target of SME credit worth Tk. 23,995(Twenty-three thousand nine hundred ninety-five)
crore has been set by the banks and financial institutions for the first time in 2010 considering SME
development as one of the important development agenda of the country. According to the target, SME
loan shall be disbursed to the small, medium and women entrepreneurs. In future, banks/financial
institutions will send their target to the SME and Special Programmed Department as well as branch
offices of Bangladesh Bank fixing their target of SME loan sector wise, region wise and branch wise.
Grace Period:
The entrepreneurs often raise complaints regarding short duration of grace period for repayment
of SME loan. Therefore, banks and financial institutions will consider the reasonable grace/moratorium
period at the time of formulating credit policy for SME sector.
Eligibility of the Borrower:
Real entrepreneurs who are directly involved in SME sector will be considered eligible for
SME credit. Generally, loan defaulters will not be entitled to get new loan.

Interest Rate on SME Credit:


Banks/financial institutions shall fix up the interest rate on small and medium loan for the
respective sector/sub-sector. The operating cost of the banks is high for the small entrepreneurs.
Reasonably, the rate of interest in this sector is somewhat higher. Banks are being given directions to
keep the interest rate within a tolerable limit. Bangladesh Bank is providing refinance facility to banks
and financial institutions at bank rate (at present 5%) in SME sector. The fund obtained at bank rate
through BB refinance window should be disbursed at bank rate + not more than 5% interest to the client
level (in case of women entrepreneurs).
Small and Medium Enterprises

The rules and regulations about SMEs in Pakistan

Chapter No: 01 Prudential Regulations - General for Small & Medium


Enterprise Financing
Regulation SME-1: SME Specific Credit Policy
Banks/DFIs shall prepare a comprehensive SME Specific Credit Policy duly approved by their Board
of Directors. The Credit Policy shall give special mention to the Small Enterprises Financing keeping
in view their specific characteristics and business conditions. The Credit Policy shall, interalia, cover
the following for SME financing:
i. Clearly laid down procedures on Loan administration, disbursement, monitoring, and recovery
mechanism.
ii. Specification of main functions, major responsibilities of various staff positions, as well as their
powers/authority relating to approval/sanction of financing limits.
Additionally, for the SE Financing, the Credit Policy shall cover the following minimum points:
iii. Clearly devised plan regarding the frequency of visits to their SE borrowers’ business site keeping
in view their human resource limitations and the amount of exposure taken by them, subject to the
condition that the banks/DFIs shall visit the borrower’s site at least once in a year.
iv. In case the finance is secured against hypothecation of stock, the banks shall obtain stock report at
least semi-annually.
v. For loan size up to Rs 1 million in case of Small Enterprise only, it will be at the discretion of the
banks/DFIs to obtain Insurance Cover of hypothecated stock/other securities, keeping in view the
creditworthiness of the borrower, his past experience and financial strength. Further, in case the banks
require the borrower for insurance cover, then the borrower shall not be forced to arrange such cover
only from an insurance company of the banker’s choice.
It may, however, be noted that for program-based lending, the banks/DFIs’ respective Product
Programs (approved by BOD) for each segment/area shall suffice. Such Programs may carry
objective/quantitative parameters for eligibility of borrower, beside standardization and simplification
of loan documents required from the borrowers under the subject Program.

Regulation SME-2: Borrowers Basic Fact Sheet and e-CIB Report


(i) Banks/DFIs are required to obtain Borrower’s Basic Fact Sheet (BBFS) from their prospective
borrowers as per format given at Annexure-I and IV, at the time of sanctioning fresh facility, or
enhancement, renewal and restructuring of an existing facility. However, if the Loan Application Form
already contains all the information as required in BBFS, then no separate BBFS shall be required.
(ii) Banks/DFIs shall obtain e-CIB Report on the prospective borrower while considering proposals for
any exposure (including renewal, enhancement and rescheduling/ restructuring). Banks/DFIs shall give
due weightage to the credit report relating to the borrower and his group obtained from e-CIB of State
Bank of Pakistan; however, they can take exposure on defaulters keeping in view their risk management
policies and criteria provided they properly record reasons and justifications in the approval form.

Regulation SME-3: Personal Guarantee


All facilities, except those secured against liquid assets, shall be backed by personal guarantees of the
owners of SMEs. In case of limited companies, guarantees of all directors other than nominee directors
shall be obtained.
Small and Medium Enterprises
Regulation SME-4: Limit on Clean Facility
Banks/DFIs can take clean exposure (facilities secured solely against personal guarantees) on an SME
borrower up to Rs 5 million. Before taking clean exposure, banks/DFIs shall obtain a declaration from
the SME to ensure that the accumulated clean exposure on an SME does not exceed the prescribed limit
mentioned above.
It may be noted that clean exposure limit shall not include the clean consumer financing limits (Credit
Card and Personal Loans etc) allowed to sponsor of the said SME under Prudential Regulations for
Consumer Financing.

Regulation SME-5: Proper Utilization of Loan


The banks/DFIs shall ensure that loan has been utilized for the same purposes as specified in the Loan
Application Form. In case of financing to Medium Enterprises, banks/DFIs shall develop and
implement an appropriate system for monitoring utilization of loans. Such system may include
obtaining stock reports/position of current assets in case of Working Capital Loans; and supporting
documents in case of Term Loans.
With regard to Small Enterprise Financing, banks/DFIs shall adopt the following measures:
i. In case of working capital/revolving credits, the banks/DFIs will obtain a declaration only from the
borrowing SE stating that it has utilized the loan proceeds for the intended purpose only.
ii. In the case of Fixed Assets/project financing, the bank/DFI will adopt the same process as mentioned
above in the case of Medium Enterprise Financing

Regulation SME-6: Restriction on Facilities to Related Parties


The banks/DFIs shall not take any exposure on an SME in which any of its director, major shareholder
holding 5% or more of the share capital of the bank/DFI or its Chief Executive, or an Employee or any
dependent family member of these persons is interested, except as specified in section 24 of the BCO,
1962. In this regard, it will, however, suffice if banks/DFIs obtain an undertaking from the Small
Enterprise stating that there is no existence of any interest between the borrower and the above-
mentioned related parties.

Regulation SME-7: Translation of Loan Documents into Urdu Language


To facilitate SMEs in better understanding important terms and conditions of loans, Banks/DFIs shall
translate and make available Loan Application Form, BBFS and other related documents, except charge
documents, in Urdu as well. Further, the banks/DFIs will also provide information on important terms
with brief explanation of each term for convenience and better understanding of the borrower. The
banks/DFIs will ensure compliance with this regulation by September 30, 2013.

Regulation SME-8: Securities and Margin Requirements


i. Subject to the relaxation for clean facilities up to Rs. 5 million for SEs and MEs, all facilities over
and above this limit shall be appropriately secured as per satisfaction of the banks/DFIs.
ii. Banks/DFIs are free to determine the margin requirements on securities against facilities provided
by them to their clients taking into account the risk profile of the borrower(s) in order to secure their
interests. However, this relaxation shall not apply in case of items, imports of which are banned by the
Government. Banks/DFIs are advised not to open import letter of credit for banned items in any case
till such time the lifting of ban on any such item is notified by the State Bank of Pakistan.
iii. Banks/DFIs shall continue to observe margin restrictions on shares/TFCs as per existing instructions
under Prudential Regulations for Corporate/Commercial Banking (R-6). Further, the cash margin
requirement of 100% on Caustic Soda (PCT heading 2815.1200) for opening Import Letter of Credit
as advised by the Federal Government and notified in terms of BPD Circular Letter No. 5 dated 4th
May, 2002, shall also continue to remain applicable.
Small and Medium Enterprises
iv. State Bank of Pakistan shall continue to exercise its powers for fixation/reinstatement of margin
requirements on financing facilities being provided by banks/DFIs for various purposes including
Import Letter of Credit on a particular item(s), as and when required.
v. In addition to above, the restrictions prescribed under paragraph 1.A of Regulation R-6 of the
Prudential Regulations for Corporate/Commercial Banking will also be applicable in case of financing
to Small and Medium Enterprises.

Regulation SME-9: General Measures


1. Pricing policy of banks/DFIs that include mark-up rates (including the IRR on the loan products),
processing & documentation fee, prepayment/late-payment penalties etc. shall be mentioned explicitly
in the loan agreements, i.e. the banks shall strictly avoid imposing any hidden charges in addition to
those explicitly stated in the loan agreement.
2. To minimize the occurrence of grievances to SMEs, the banks/DFIs shall make the Customers
Complaints Resolution System more transparent, customer focused and simple for effectively handling
their complaints.
3. Banks/DFIs shall put in place an efficient MIS for SME Finance to effectively cater to the needs of
SME Financing portfolio. The system should be flexible enough to generate necessary information
reports for the management, and shall generate at least the following periodical reports:
i. Delinquency reports (for 30, 60, 90 180 & 365 days and above) on monthly basis.
ii. Reports interrelating delinquencies with various type of customers and sectors etc to enable the
management to take important policy decisions and make appropriate modifications in the lending
programs
iii. List of SMEs having any kind of banking relationship with the bank/DFI with information on their
organizational structure (proprietorships, partnerships, limited company etc) and area of business
activity such as traders, service providers and manufacturers etc.
4. For successful SME lending, especially program-based lending, the banks/DFIs will develop
strategies that will elaborate measures on improving delivery channels (branchless banking, tele-
marketing etc.), adoption of credit scoring technology, improved understanding of the target market
through field work and research, and putting in place strong marketing and sales culture.
5. The banks/DFIs shall take measures for capacity building and training of SME banking staff in the
areas of product development, program-based lending techniques and risk mitigation etc.
6. Besides financing products, banks/DFIs are encouraged to leverage on the data base of their SME
depositors for possible sale of financing products to them, thus increasing their revenue base through
clients that have already a banking history with them.

Chapter No: 02 Prudential Regulations for Small Enterprise Financing


Regulation SE-1: Definition of Small Enterprise
A Small Enterprise (SE) is a business entity which meets both the following parameters:
Number of Employees Annual Sales Turnover
*Up to 20 Up to Rs. 75 million
*including contract employees.

Regulation SE-2: Per Party Exposure Limit


Small Enterprise can avail exposure up to Rs 15 million from a single Bank/DFI or from all Banks/DFIs.
Small and Medium Enterprises
Regulation SE-3: Requirement of Audited Accounts
Banks/DFIs are not required to obtain copy of audited accounts in case of lending to the Small
Enterprises. However, banks/DFIs may ask the borrower to submit financial accounts in some form,
signed by the borrower, to help banks/DFIs assess SEs cash flows or carry out counter verification etc.

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.

Regulation SE-5: Collateral Valuation


For valuation of securities against loans up to Rs. 5 million, banks/DFIs at their own discretion may
either use the services of their own evaluating staff or the services of PBA approved evaluator.
However, valuation of securities for loans above Rs. 5 million shall be done only by an evaluator on
the approved panel of PBA.

Regulation SE-6: Recovery of Outstanding Dues


To facilitate the recovery efforts, banks/DFIs are allowed to undertake cash collection/recovery at
places other than their authorized places of business as stipulated in the Fair Debt Collection Guidelines
issued by Banking Policy and Regulations Department. However, in order to prevent fraud and
misappropriation of collected cash, adequate security and risk management measures (including but
not limited to adequate insurance cover all the time) must be in place and this process should be
appropriately documented, and audited at the bank/DFI level. The banks/DFIs are also encouraged to
make use of mobile and wireless technologies/devices for instant updating of cash collection from field
into their books and accounts, and also sending confirmatory SMS/alert messages to borrowers.
Regulation SE-7: General Reserve against Small Enterprise Finance
The banks/DFIs shall maintain general reserve at least equivalent to 1% of the secured SE portfolio and
2% of the unsecured SE portfolio, to protect them from the risks associated with the economic and
cyclical nature of this business. The above reserve requirement shall, however, be maintained for the
performing portion only of banks/DFIs’ SE Portfolio.

Regulation SE-8: Classification and Provisioning for Loans/Advances


1. Banks/DFIs shall observe prudential guidelines given in this Regulation and at Annexure-II & III of
these Regulations in the matter of classification of their SE asset portfolio and provisioning there-
against.
2. In addition to the time-based criteria prescribed in Annexure-II, subjective evaluation of performing
and non-performing credit portfolio may be made for risk assessment purpose and, where considered
necessary, any account including the performing account shall be classified, and the category of
classification determined on the basis of time based criteria shall be further downgraded. However,
classification for program-based lending shall be done based on objective (time-based) criteria only,
though banks/DFIs at their own discretion may also classify such portfolio on subjective basis.
3. In case of revolving/running finance accounts, if the borrower pays mark-up regularly without
showing turn-over in the principal portion of his account, and the bank/DFI is satisfied with this conduct
and are willing to roll over the facility periodically; then such account will not attract ‘subjective
Small and Medium Enterprises
classification’ on the basis of lower/nil activity in the principal account. However, the bank/DFI, at
their discretion, can classify such accounts as per their own policy.
4. Banks/DFIs can avail the benefit of Forced Sale Value (FSV) of collateral held against loans/
advances, determined in accordance with the guidelines laid down in Annexure-III, before making any
provision.
5. Party-wise details of cases, where banks/DFIs have taken the benefit of FSV shall be maintained for
verification by State Bank’s teams during their regular/special inspection.
6. Banks/DFIs shall review, at least on a quarterly basis, the collectability of their loans/ advances
portfolio and shall properly document the evaluations so made. Shortfall in provisioning, if any,
determined, as a result of quarterly assessment shall be provided for immediately in their books of
accounts by the banks/DFIs on quarterly basis.
7. 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.

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.

Regulation SE-9: Restructuring/Rescheduling of Loans


1. The banks/DFIs may reschedule/restructure problem loans as per their own policy duly approved by
their Board of Directors. However, the rescheduling/restructuring of non-performing loans shall not
change the status of classification of a loan/advance etc unless the following minimum conditions are
met:
i. At least 10% of the outstanding loan amount is recovered in cash and the terms and conditions of
rescheduling/restructuring are fully met for a period of at least 6 months (excluding grace period, if
any) from the date of such rescheduling/ restructuring. However, the condition of 6 Months retention
period, prescribed for restructured/rescheduled loan account to remain in the classified category, shall
not apply in case the borrower has repaid or adjusted in cash at least 50% of the total restructured loan
amount (principal + mark-up), either at the time of restructuring agreement or later-on anytime before
the completion of 6 Months period as above mentioned.
ii. Rescheduling shall not be done simply to avoid classification.
iii. While reporting to the Credit Information Bureau (e-CIB) of State Bank of Pakistan, such
loans/advances may be shown as ‘rescheduled/restructured’ instead of ‘default’.
iv. Restructuring/rescheduling of a loan account shall not lead to disqualification of the borrower for
fresh credit facilities or enhancement in the existing limits. Such fresh loans may be monitored
separately, and shall be subject to classification on the strength of their own specific terms and
conditions.
v. Where a borrower subsequently defaults (either principal or mark-up) after the
rescheduled/restructured loan has been declassified by the bank / DFI, 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.
Small and Medium Enterprises

Regulation SE-10: Minimizing Turn-Around-Time


1) It has been observed that due to the cumbersome loan processes and high Turn-Around-Time, Small
Enterprises get discouraged to access formal sources of finance. To encourage
SEs to approach banks, there is high need to reduce the Turn-Around-Time for loan decision.
2) In this respect, banks/DFIs shall not take more than 30 working days for the credit approval process
(from the date of receipt of complete information). In this respect, the following minimum points shall
also be considered:
i. The Pre-approval requirements and post-approval requirements (security/collateral documentation
etc.) shall be advised preferably in one go.
ii. The facility shall be disbursed only after security documentation is completed by the customer.

Chapter No: 03 Prudential Regulations for Medium Enterprise Financing


Regulation ME-1: Definition of Medium Enterprise
Medium Enterprise (ME) is a business entity, ideally not a public limited company which meets both
the following parameters:
*Number of Employees Annual Sales Turn-Over
21-250 (Manufacturing & Service Above Rs 75 million and up to Rs 400
MEs) million
21- 50 (Trading MEs) (All types of Medium Enterprises)
*including contract employees.

Regulation ME-2: Repayment Capacity and Cash Flow Based Lending


1. Banks/DFIs shall specifically identify the sources of repayment and assess the repayment capacity
of the borrower on the basis of assets conversion cycle and expected future cash flows. In order to add
value, the banks/DFIs are encouraged to assess conditions prevailing in the particular sector/industry
they are lending to and its future prospects. The banks/ DFIs should be able to identify the key drivers
of their borrowers’ businesses, the key risks associated with their businesses and their risk mitigants.
Banks/DFIs may also use Income Estimation Models specially in program-based lending to assess
epayment 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.

Regulation ME-3: Per Party Exposure Limit


The maximum exposure of a bank/DFI on a single Medium Enterprise shall not exceed Rs 100 million.
The total exposure (including leased assets) availed by a single Medium Enterprise from the banks/DFIs
shall not exceed Rs 200 million. It is expected that Medium Enterprises approaching this limit should
have achieved certain sophistication as they migrate into larger firms and should be able to meet the
requirements of Prudential Regulations for Corporate/ Commercial Banking.

Regulation ME-4: Requirement of Audited Accounts


In case of lending to Medium Enterprises, banks/DFIs shall obtain a copy of financial statements duly
audited by a practicing Chartered Accountant, from the Medium Enterprise who is a limited company
or where the exposure of a bank/DFI exceeds Rs 10 million, for analysis and record. The banks/DFIs
may also accept a copy of financial statements duly audited by a practicing Cost and Management
Accountant in case of a borrower other than a public company or a private company which is a
subsidiary of a public company. However, banks/DFIs may waive the requirement of obtaining audited
copy of financial statements when the exposure net of liquid assets does not exceed the limit of Rs 10
million.
Small and Medium Enterprises
Regulation ME-5: Classification and Provisioning For Assets
Loans/Advances
1. Banks/DFIs shall observe the prudential guidelines given at Annexure-V & VI in the matter of
classification of their ME asset portfolio and provisioning there-against. In addition to the time-based
criteria prescribed in Annexure-V, subjective evaluation of performing and non-performing credit
portfolio may be made for risk assessment purpose and, where considered necessary, any account
including the performing account shall be classified, and the category of classification determined on
the basis of time based criteria shall be further downgraded. Such evaluation shall be carried out on the
basis of credit worthiness of the borrower, its cash flow, operation in the account, adequacy of the
security, inclusive of its realizable value and documentation covering the advances. However,
classification for program based lending shall be based on objective criteria; nevertheless, banks at their
own discretion may also classify such portfolio on subjective basis.
2. The rescheduling/restructuring of non-performing loans shall not change the status of classification
of a loan/advance etc. unless the terms and conditions of rescheduling/ restructuring are fully met for a
period of at least one year (excluding grace period, if any) from the date of such
rescheduling/restructuring and at least 10% of the outstanding amount is recovered in cash. However,
the condition of one year retention period, prescribed for restructured/rescheduled loan account to
remain in the classified category, shall not apply in case the borrower has repaid or adjusted in cash at
least 50% of the total restructured loan amount (principal + mark-up), either at the time of restructuring
agreement or later-on any time before the completion of one year period as above mentioned. Further,
the banks/DFIs may credit their income account to the extent of cash recovery made against accrued
markup on the restructured/rescheduled loans.
3. The banks/DFIs shall ensure that status of classification, as well as provisioning, is not changed in
relevant reports to the State Bank of Pakistan merely because a loan has been rescheduled or
restructured. However, while reporting to the eCIB of State Bank of Pakistan, such loans/advances may
be shown as ‘rescheduled/restructured’ instead of ‘default’.

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.

Timing of Creating Provisions


5. Banks/DFIs shall review, at least on a quarterly basis, the collectability of their loans/ advances
portfolio and shall properly document the evaluations so made. Shortfall in provisioning, if any,
determined, because of quarterly assessment shall be provided for immediately in their books of
accounts by the banks/DFIs on quarterly basis.

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.

Verification by the Auditors


7. The external auditors as part of their annual audits of banks/DFIs shall verify that all requirements
as stipulated above and Annexure V & VI for classification and provisioning for assets have been
complied with. The State Bank of Pakistan shall also check the adequacy of provisioning during on-
site inspection.
Small and Medium Enterprises

Classification of Small and Medium Enterprises Pakistan and Other


Different Countries
SMEs Regulations of SMEs Regulations of Japan
Pakistan
1. Definition of Small
Enterprise: Definition in the SME Basic Act
A Small Enterprise (SE) is a
business entity which both the
SME operators micro
following parameters: enterprise
Number of Annual s
Employees: Sales
Up to 20 Turnover Industry Type Stated Employee Employee
including Up to Rs. capita s s
contract 75 million l
employees.
Manufacturing ¥300 300 or 20 or
Medium Enterprise: millio fewer fewer
Medium Enterprise (ME) is a n or
business entity, ideally not a less
public limited company which
both the following Wholesale ¥100 100 or 5 or
parameters: millio fewer fewer
n or
Number of Annual
less
Employees Sales Service industry
21-250 Turn- ¥50 100 or 5 or
(Manufacturin Over millio fewer fewer
g & Service Above Rs n or
MEs) 75 million less
21- 50 and up to
Retail ¥50 50 or 5 or
(Trading Rs 400
millio fewer fewer
MEs) million n or
including (All types less
contract of Medium Definition in the Corporation Tax Act
employees. Enterprises Stated capital
) ¥100 million or less
Small and Medium Enterprises

General Measures Specific Measures


• Pricing policy of A lower corporation tax rate (called the “reduced tax rate”)
banks/DFIs that than that for large corporations is applied to SMEs.
include mark-up rates
(including the IRR on Normal Category Tax rate
the loan products), corporation
processing &
documentation fee, Large 30%
prepayment/late- corporations
payment penalties etc.
• the banks/DFIs shall (Stated capital of
make the Customers more than ¥100
Complaints Resolution million)
System more
transparent, customer SMEs Portion of annual 15%
focused and simple for revenue up to ¥8
effectively handling (Stated capital of million
their complaints. ¥100 million or
• SME Financing less)
portfolio
• Delinquency reports Portion of annual 19%
(for 30, 60, 90 180 & revenue over ¥8
365 days and above) million
on monthly basis.
• Reports interrelating Main functions
delinquencies
• Important policy Providing easily comprehensible information about support
decisions and make measures by the government and public institutions.
appropriate
modifications in the
lending programs
Small and Medium Enterprises

Regulation Small & Medium Regulation Small & Medium


Enterprise in Pakistan Enterprise in Australia
1. A Small Enterprise (SE) is a business The National Australia Bank (NAB) referred
entity which meets the following to definitions adopted by market researchers,
parameters: which define:
• Number of employees up to 20 'Small business customers' as businesses with
• Annual Sales turnover up to Rs. turnover between $1 million- $5 million and
75 million employees fewer than 20 people.

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

various purposes including Import


Letter of Credit on a item(s), as and
when required. Banks are free to
determining the margin requirement on
security against facility.
Small and Medium Enterprises

Regulation Small & Regulation Small & Medium Enterprise in China


Medium Enterprise in
Pakistan
2. Definition of Small Definition of SMEs in China
Enterprise:
A Small Enterprise (SE) is a Criteria Chinese Chinese The
business entity which both the MIIT CETC World
(2011) (2003) Bank
following parameters: (Meetin (Meeting Group
Number of Annual g 1 of 1 of the (Meetin
Employees: Sales the 3 3 g 2 of
Up to 20 Turnover criteria) criteria) the 3
including Up to Rs. criteria)
contract 75 million Small Medium Small Medium
Number <300 300~100 <300 300~200 <300
employees.
of 0 0
Medium Enterprise: Employee
Medium Enterprise (ME) is a s
business entity, ideally not a Total NA NA < RMB < RMB
public limited company which Asset RMB 40~400 100
both the following 40 million million
parameters: millio
n
Number of Annual
Total <RMB RMB < RMB < RMB
Employees Sales Annual 20 20~400 RMB 30~300 100
21-250 Turn- Sales million million 30 million million
(Manufacturin Over Revenue millio
g & Service Above Rs n
MEs) 75 million
21- 50 and up to
(Trading Rs 400
MEs) million
including (All types
contract of Medium
employees. Enterprises
)
Small and Medium Enterprises

1. Personal Guarantee Personal Guarantee


All facilities, except those secured against
liquid assets, shall be backed by personal The Enterprise shall submit Bank of China an
guarantees of the owners of SMEs. In case irrevocable letter of guarantee, issued by a financial
of limited companies, guarantees of all institution, enterprise and/or unit with good credit
directors other than nominee directors standing and debt service capability, for repayment
shall be obtained. of the principal and interest of the loan.

Subject to the relaxation for clean Mortgage


facilities up to Rs. 5 million for SEs and
MEs, all facilities over and above this The Enterprise may mortgage its properties, rights
limit shall be appropriately secured as and interests to Bank of China as securities for
per satisfaction of the banks/DFIs. repayment/payment of the principal and interest of
the loan. The following items are acceptable as
collaterals:

(a) House property, machinery and equipment;

(b) Marketable goods in stock;

(c) Deposits or certificates of deposit in terms of


foreign currencies;

(d) Negotiable securities and bills, and

(e) Equity shares and other transferable rights and


interests.

1. SME Specific Credit Policy: An enterprise is qualified to apply to Bank of


Banks shall prepare a comprehensive China for a loan, provided that:
SME Specific Credit Policy duly
approved by their Board of Directors. • It has obtained a business license issued by
The Credit Policy shall give special the Administration for Industry and
mention to the Small Enterprises Commerce of the P.R.C. and opened
Financing keeping in view their specific account(s) with Bank of China.
characteristics and business conditions. • It has fully paid up its registered capital at
The Credit Policy shall, interalia, cover the specified time which has been certified
the following for SME financing: according to relevant regulations;
• It has presented the resolution on and
• Clearly laid down procedures on power of attorney for the borrowing by its
Loan administration, board of directors;
disbursement, monitoring, and • Its capital construction project has been
recovery mechanism. approved by the planning authorities
• It can repay the loan and can provide
• Specification of main functions, reliable securities for repayment/payment
major responsibilities of various of the principal and interest.
staff positions, as well as their
powers/authority relating to
approval/sanction of financing
limits.
Small and Medium Enterprises

• In case the finance is secured


against hypothecation of stock,
the banks shall obtain stock report
at least semi-annually.

• loan size up to Rs 1 million in


case of Small Enterprise only, it
will be at the discretion of the
banks/DFIs to obtain Insurance
Cover of hypothecated
stock/other securities, keeping in
view the creditworthiness of the
borrower, his experience and
financial strength.
2. General Measures General Measures
Pricing policy of banks/DFIs that include The term of a loan shall start from the date the
mark-up rates (including the IRR on the loan agreement becomes effective and end on the
loan products), processing & date specified in the loan agreement whereby the
documentation fee, prepayment/late- principal, interest and charges are to be fully
payment penalties etc. shall be mentioned repaid.
explicitly in the loan agreements, i.e. the
banks shall strictly avoid imposing any
hidden charges in addition to those
explicitly stated in the loan agreement.

3. Business License of The Business License of The Enterprise


Enterprise The term of a fixed assets loan shall not exceed 7
N/A years. However, it can be extended approval of
Bank of China, provided that such an extension
shall end not later than one year before the
expiration of the business license of the Enterprise.
4. Renminbi Foreign Currency Renminbi Foreign Currency loan
loan: the interest rate shall be either the consolidated
N/A interest rate set by Bank of China or the rate agreed
upon between the lender and borrower in the light
of international market conditions. In case foreign
buyer's credit or other credit facilities are involved,
the interest rate shall be that as specified in the
related agreement plus a margin.
the interest period shall be set and interest
calculated according to the regulations of the
People's Bank of China. For foreign currency loan,
the same shall be affected in accordance with the
relevant provisions of the loan agreement.
5. Borrowers Basic Fact Sheet and Certificates and Documents Provided
e-CIB Report
(i) Banks/DFIs are required to obtain A loan shall be provided to the Enterprise by Bank
Borrower’s Basic Fact Sheet (BBFS) of China through the following procedures:
from their prospective borrowers as per
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

(ii) Banks/DFIs shall obtain e-CIB Report


on the prospective borrower while
considering proposals for any exposure
(including renewal, enhancement and
rescheduling/ restructuring). Banks/DFIs
shall give due weightage to the credit
report relating to the borrower and his
group obtained from e-CIB of State Bank
of Pakistan; however, they can take
exposure on defaulters keeping in view
their risk management policies and
criteria provided they properly record
reasons and justifications in the approval
form.

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

• In the case of Fixed


Assets/project financing, the
bank/DFI will adopt the same
process as mentioned above in
the case of Medium Enterprise
Financing

7. Repayment Capacity of the Retention Account


Borrower and Cash Flow Based
Lending SMEs Before the loan is fully repaid, all payments and
Small Enterprises do not maintain proper receipts of the enterprise in its operation must be
financial accounts for the satisfaction of settled through its account(s) maintained with
the banks/DFIs. Their record generally Bank of China, unless Bank of China otherwise
contains sale/purchase books and cash agrees, and the funds thereon mustn't be
received/paid records in a rudimentary transferred to any other bank or financial
form. Banks/DFIs shall use institution. Bank of China has the right to require
relevant/practical cash flow estimation the Enterprise open a "Retention Account" with it
techniques and other proxies to assess when it deems necessary.
repayment capacity of SE borrower.

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.

8. Translation of Loan Documents Language used in the loan agreement:


into Urdu Language Unless Bank of China otherwise agrees, Chinese
To facilitate SMEs in better shall be the prevailing language used in the loan
understanding important terms and agreement, its appendices and other legal
conditions of loans, Banks/DFIs shall documents related thereto, and the governing law
translate and make available Loan shall be the law of the People's Republic of China.
Application Form, BBFS and other
related documents, except charge
documents, in Urdu as well. Further, the
banks/DFIs will also provide information
on important terms with brief explanation
of each term for convenience and better
understanding of the borrower. The
banks/DFIs will ensure compliance with
this regulation by September 30, 2013.
Small and Medium Enterprises

9. Collateral Valuation Collateral Valuation


valuation of securities against loans up to
Rs. 5 million, banks/DFIs at their own Lack of effective collateral guarantees and SME
discretion may either use the services of customers with loans up to 3 million yuan.
their own evaluating staff or the services
of PBA approved evaluator. However,
valuation of securities for loans above Rs.
5 million shall be done only by an
evaluator on the approved panel of PBA.
10. Development Strategies Zhongguancun Model
successful SME lending, especially The Zhongguancun model, with its professional
program-based lending, the banks/DFIs and streamlined operation, met the financing needs
will develop strategies that will elaborate of the "short, frequent, and urgent" technology-
measures on improving delivery channels based enterprises to a large extent, and its richness.
(branchless banking, tele-marketing etc.), The product mix plan also fits the financial needs
adoption of credit scoring technology, of the development of science and technology
improved understanding of the target companies. The customer applied for a 50 million
market through field work and research, yuan working capital loan from the bank for daily
and putting in place strong marketing and business turnover, which laid a solid foundation for
sales culture. the development and growth of the SMEs.
The banks/DFIs shall take measures for
capacity building and training of SME
banking staff in the areas of product
development, program-based lending
techniques and risk mitigation etc.
Small and Medium Enterprises

Regulation Small & Medium Regulation Small & Medium Enterprise in


Enterprise in Pakistan Bangladesh
3. Definition of Small Enterprise: Definition of Small Enterprise:
A Small Enterprise (SE) is a business Small Enterprise refers to the firm/business which is
entity which meets both the following not a public limited company and complies
parameters: the following criteria:
Number of Annual Sales Serial Sector Fixed Asset Employed
Employees: Turnover No. other than Manpower
Up to 20 Up to Rs. 75 Land and (not
including contract million Building above)
employees. (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
4. Definition of Medium Definition of Medium Enterprise:
Enterprise: Medium Enterprise refers to the establishment/firm
Medium Enterprise (ME) is a business which is not a public limited company and
entity, ideally not a public limited complies the following criteria:
company which meets both the following Serial Scoter Fixed Asset Employed
parameters: No. other than Manpower
Number of Annual Sales Land and (not
Employees Turn-Over Building above)
21-250 Above Rs 75 (Tk.)
(Manufacturing & million and up to 01. Service 50,00,000- 50
Service MEs) Rs 400 million 10,00,00,000
21- 50 (Trading (All types of 02. Business 50,00,000- 50
MEs) Medium 10,00,00,000
including contract Enterprises) 03. Industrial 1,50,00,000- 150
employees. 20,00,00,000
5. Limit on Clean Facility: Target for SME Credit:
Banks/DFIs can take clean exposure an A total target of SME credit worth Tk. 23,995 crore
SME borrower up to Rs 5 million. Before has been set by the banks and financial institutions.
taking clean exposure, banks/DFIs shall According to the target, SME loan shall be disbursed
obtain a declaration from the SME to to the small, medium entrepreneurs. The SME credit
ensure that the accumulated clean target as fixed by the banks and financial institutions.
exposure on an SME does not exceed the
prescribed limit mentioned above.

6. Collateral Valuation SE: Collateral:


Small and Medium Enterprises

Valuation of securities against loans up to Lack of collateral of small entrepreneurs is deemed


Rs. 5 million, banks/DFIs at their own as a major hindrance to the expansion of SME credit.
discretion may either use the services of Collateral free credit for the share-croppers in
their own evaluating staff or the services agricultural sector is being disbursed. Banks/financial
of PBA approved evaluator. However, institutions may provide collateral free credit facilities
valuation of securities for loans above Rs. up to Tk. 25,00,000 against Personal Guarantee in
5 million shall be done only by an SME sector especially for small and women
evaluator on the approved panel of PBA. entrepreneurs. Credit can also be provided against
hypothecation of products and machineries, if needed.
However, banks and financial institutions shall follow
their own rules and banker-customer relationship to
determine collateral for credit facilities more than
Tk.25,00,000. Banks and financial institutions shall
apply their own due diligence method in selecting
clients/entrepreneurs. In this connection,
banks/financial institutions shall formulate them own
credit policy following the guidelines of the Central
Bank as minimum benchmark and inform SME and
Special Programs Department of Bangladesh Bank.
7. Grace Period: Grace Period:
At least 10% of the outstanding loan The entrepreneurs often raise complaints regarding
amount is recovered in cash and the terms short duration of grace period for repayment of SME
and conditions of loan. Therefore, banks and financial institutions will
rescheduling/restructuring are fully met for consider the reasonable grace/moratorium period at
a period of at least 6 months (excluding the time of formulating credit policy for SME sector.
grace period, if any) from the date of such
rescheduling/ restructuring. However, the
condition of 6 Months retention period,
prescribed for restructured/rescheduled
loan account to remain in the classified
category, shall not apply in case the
borrower has repaid or adjusted in cash at
least 50% of the total restructured loan
amount (principal + mark-up), either at the
time of restructuring agreement or later-on
any time before the completion of 6
Months period as above mentioned.

8. Eligibility of the Borrower: Eligibility of the Borrower:


the banks/DFIs’ respective Product Real entrepreneurs who are directly involved in SME
Programs (approved by BOD) for each sector will be considered eligible for SME credit.
segment/area shall suffice. Such Programs Generally, loan defaulters will not be entitled to get
may carry objective/quantitative new loan.
Small and Medium Enterprises

parameters for eligibility of borrower,


beside standardization and simplification
of loan documents required from the
borrowers under the subject Program.
9. Proper Utilization of Loan Methods of Monitoring of SME Credit:
The banks/DFIs shall ensure that loan has Monitoring in the Head Office of the Central
been utilized for the same purposes as Bank:
specified in the Loan Application Form. In Comprehensive monitoring strategies/procedures are
case of financing to Medium Enterprises, being adopted by Bangladesh Bank to monitor
banks/DFIs shall develop and implement the SME policy implementation more effectively.
an appropriate system for monitoring Meanwhile, an ‘SME Loan Monitoring Cell’ has
utilization of loans. Such system may been set up in the ‘SME and Special Programmed
include obtaining stock reports/position of Department’. To achieve the objectives of SME credit
current assets in case of Working Capital policy, the Monitoring Cell will comprehensively
Loans; and supporting documents in case monitor the SME credit management at the field level.
of Term Loans. In addition to the off-site & on-site supervision of
About Small Enterprise Financing, SME loan, the respective Cell will take necessary steps
banks/DFIs shall adopt the following against any complain regarding SME credit subject to
measures: investigation.
• In case of working • Submission of Information/Statements:
capital/revolving credits, the To review the annual implementation progress of
banks/DFIs will obtain a SME credit programmers, the respective banks/
declaration only from the financial institutions will submit accurate
borrowing SE stating that it has information/statements as per format at Annexure-D
utilized the loan proceeds for the & E regarding SME credit on quarterly basis to
intended purpose only. Bangladesh Bank within 15 days of the next month
• In the case of Fixed Assets/project following the quarter under reporting. Besides, the
financing, the bank/DFI will existing statements will be required to be continued as
adopt the same process as usual.
mentioned above in the case of • Monitoring in the Branch Offices of the
Medium Enterprise Financing Central Bank:
SME Credit Monitoring Cell will be established in
the branch offices of Bangladesh Bank like Head
Office. This Cell will take effective steps to monitor
the SME credit disbursement and recovery activities
by the banks/financial institutions of their respective
areas intensively.

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.

11. Personal Guarantee: Personal Guarantee:


All facilities, except those secured against All facilities to SEs shall be backed by the personal
liquid assets, shall be backed by personal guarantees of the owners of the SEs. In case of limited
guarantees of the owners of SMEs. In case companies, guarantees of all directors other than
of limited companies, guarantees of all nominee directors shall be obtained.
Small and Medium Enterprises

directors other than nominee directors shall


be obtained.
12. Per Party Exposure Limit SE Per Party Exposure Limit SE
Small Enterprise can avail exposure up to The minimum and maximum exposure of a bank on a
Rs 15 million from a single Bank/DFI or single SE shall remain within the range of Tk. 2 lac
from all Banks/DFIs. and Tk.50 lac respectively subject to the following:
Per Party Exposure Limit ME a) In case of working capital finance - Maximum up to
The maximum exposure of a bank/DFI on 100% of the net required working capital or 75% of
a single Medium Enterprise shall not the sum of inventory and receivables whichever is
exceed Rs 100 million. The total exposure lower. Please refer to Appendix XIV for calculation of
(including leased assets) availed by a net required working capital.
single Medium Enterprise from the b) In case of fixed assets purchase - Maximum up to
banks/DFIs shall not exceed Rs 200 90% of the purchase price.
million. Per Party Exposure Limit ME
No Mention

13. Repayment Capacity of the Source and Capacity of Repayment


Borrower and Cash Flow Based and Cash Flow Backed Lending SE
Lending SE It is recognized many SEs will not be able to prepare
Small Enterprises do not maintain proper future cash flows due to lack of sophistication and
financial accounts for the satisfaction of financial expertise. It is expected that in such cases
the banks/DFIs. Their record generally banks shall assist the borrowers in obtaining the
contains sale/purchase books and cash required information and no SE shall be declined
received/paid records in a rudimentary access to credit merely on this ground.
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.
14. Repayment Capacity of the Repayment Capacity of the Borrower and Cash
Borrower and Cash Flow Based Flow Based Lending ME
Lending ME
Banks shall specifically identify the sources of
1) Banks/DFIs shall specifically identify repayment and asses the repayment capacity of the
the sources of repayment and assess the borrower based on assets conversion cycle and
repayment capacity of the borrower based expected future cash flows. To add value, the banks
on assets conversion cycle and expected must assess conditions in the sector / industry they are
future cash flows. To add value, the lending to and its prospects. The banks must be able to
Small and Medium Enterprises

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

Regulation Small & Medium Regulation Small & Medium


Enterprise in Pakistan Enterprise in Malaysian
15. Definition of Small Enterprise: SME Definition
A Small Enterprise (SE) is a business entity A business can qualify as an SME if it meets
which meets both the following parameters: either one of the two specified criteria, namely
sales turnover or full-time employees,
Number of Annual Sales
whichever is lower.
Employees: Turnover Category Small
Up to 20 Up to Rs. 75
including contract million Manufacturing Sales turnover from
employees. RM300,000 to less
Definition of Medium Enterprise: than RM15 million
Medium Enterprise (ME) is a business OR
full-time employees
entity, ideally not a public limited company
from 5 to less than 75
which meets both the following parameters: Services & Other Sales turnover from
Number of Annual Sales Sectors RM300,000 to less
Employees Turn-Over than RM15 million
21-250 Above Rs 75 OR
(Manufacturing & million and up to full-time employees
Service MEs) Rs 400 million from 5 to less than 75
21- 50 (Trading (All types of
Category Medium
MEs) Medium
including contract Enterprises) Manufacturing Sales turnover from
employees. RM15 million to not
exceeding RM50
million OR full-time
employees from 75 to
not exceeding 200

Services & Other Sales turnover from


Sectors RM3 million to not
exceeding RM20
million OR full-time
employees from 30 to
not exceeding 75
Small and Medium Enterprises

16. Eligibility of the Borrower: Eligibility:


the banks/DFIs’ respective Product
Programs (approved by BOD) for each • SMEs incorporated under the Companies
segment/area shall suffice. Such Programs Act 1965 or Registration of Business
may carry objective/quantitative parameters Ordinance 1956.
for eligibility of borrower, beside • At least 60% equity held by Malaysians.
standardization and simplification of loan
• Possesses a valid premises license.
documents required from the borrowers
• SMEs with shareholdings not exceeding
under the subject Program.
20% held by public-listed companies
(only if applicable).

17. Limit on Clean Facility: Financing Amount:


Banks/DFIs can take clean exposure an
SME borrower up to Rs 5 million. Before • Minimum: RM50,000.
taking clean exposure, banks/DFIs shall • Project Financing - Maximum RM5
obtain a declaration from the SME to ensure million. Fixed Assets Financing -
that the accumulated clean exposure on an Maximum RM5 million.
SME does not exceed the prescribed limit • Working Capital Financing - Maximum
mentioned above. RM3 million. IT Hardware/Software -
Maximum RM5 million
• SMEs may obtain financing above RM5
million, however only the first RM5
million will be eligible for the 2% profit
rebate.

18. Grace Period: Grace Period:


At least 10% of the outstanding loan amount Fixed Assets/IT Hardware/Software: -
is recovered in cash and the terms and
conditions of rescheduling/restructuring are • Land & building – up to 25 years
including grace period of up to 2 years.
fully met for a period of at least 6 months
• Plant & machinery & equipment – up to
(excluding grace period, if any) from the date 7 years including grace period of up to 1
of such rescheduling/ restructuring. year.
However, the condition of 6 Months • IT hardware/software – up to 4 years
retention period, prescribed for including grace period of up to 1 year.
restructured/rescheduled loan account to
remain in the classified category, shall not Working Capital: -
apply in case the borrower has repaid or
• Purchase Revolving Credit & Sales
adjusted in cash at least 50% of the total Revolving Credit – up to 150 days for
restructured loan amount (principal + mark- each drawdown including an option to
up), either at the time of restructuring rollover for a period not exceeding 60
agreement or later-on any time before the days for eligible borrowers.
completion of 6 Months period as above • Term Financing - up to 3 years including
mentioned. grace period of up to 6 months.

19. General Measures Interest / Profit Rate:


Small and Medium Enterprises

Pricing policy of banks/DFIs that include


mark-up rates (including the IRR on the • 4% per annum on yearly rest.
loan products), processing & documentation • SMEs may obtain financing above RM5
fee, prepayment/late-payment penalties etc. million, however only the first RM5
shall be mentioned explicitly in the loan million will be eligible for the 2% profit
agreements, i.e. the banks shall strictly rebate.
avoid imposing any hidden charges in
addition to those explicitly stated in the loan
agreement.