Report No. 1162-BD

Appraisal of t:he BangladeshShilpa Bank Bangladesh

May 6, 1976

Agricultural Credit & Development Finance Companies DivisionSouth Asia Projects Department

FOR OFFICIAL USE ONLY

Document of the World Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may nototherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

The Bangladesh Taka (Tk) is floating with thePound Sterling at a rate of Tk 30.0 - iS 1.0

The following rates have been used in thisreport, except where otherwise specified:

Prior to May 1, 1975: Tk 8.0 - US$1.0After May 1, 1975: Tk 13.5 - US$1.0

MAIN ACRONYMS

ADB - Asian Development BankBSB - Bangladesh Shilpa BankBSRS - Bangladesh Shilpa Rin SangsthaBSIC - Bangladesh Small Industries CorporationEPF - Equity Participation FundEPSIC - East Pakistan Small Industries CorporationGOB - Government of BangladeshICP - Investment Corporation of PakistanIDBP - Industrial Development Bank of PakistanKfW - Kreditanstalt fuer WideraufbauNIT - National Investment TrustPICIC - Pakistan Industrial Credit and Investment

CorporationTCB - Trade Corporation of Bangladesh

FISCAL YEARS

GOB and BSB - July 1 - June 30

FOR OFFICIAL USE ONLY

APPRAISAL OF THE

BANGLADESH SHILPA BANK

Table of Contents

Page No.

BASIC DATA

SUMMARY AND CONCLUSIONS ..***.*........ * * ............. .. ...... i-i

Is INTRODUCTION .......... *.........*s..***** ............ 1

II. THE ENVIRONMENT ..................... ...... ...... 1The Industrial Sector ........ .. O..............settee. 2Industrial Policies ..... .................. ........ 3Industrial Finance *. ... oo.9o***o.oo*o .. ... *.... 5

III. BSB's ROLE .......... .***e*e*.................... 7Volume of Financing ..... **................. 7Characteristics of Financing .........sts.............. 7Quality of BSB's Project Work ........................... 9Resource Mobilization ......................... ..... . 9BSB's Future Financing Role ........................... 10

IV. BSB: ORGANIZATION .. **.*0*... ... .. *. . 11Board .. . . . . . . . ....... 11Autonomy ... ........... . 11Policies ................ 12IManagement and Staff ........... * ........ 12Departmental Organization and Procedures ... ........... 13

V. BSB: FINANCIAL POSITION ... * ......................... 15Loan Portfolio ............ 15Equity Investments ....... too. 18Provisions and Write-Offs ............................. 19Accounts and Audit Report ............................ 19Profitability ........... ....... ............. ses. 20Past IDBP Liabilities ............................... 21Debt Limit .... ............s. ............ 21

VI. PROSPECTS ......................... ..... . 21Investment Climate ........ ....... 21BSB's Strategy ................................ 22BSBts Forecast Operations ............................. 23Financing Requirements ................................ 24Objectives and Terms of a Proposed IDA Credit ......... 26Projected Financial Results .***,**,* .....**,*,***.... 26

VII. RECOMMENDATIONS ................... .. ............. , 27

This report was prepared by Messrs. W. Whitesell and N. Sukkar on the basisof their mission to Bangladesh in March/April 1975.

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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List of Annexes

1. BANGLADESH: Production and Capacity Utilization in Selected Industries

2. BANGLADESH: Interest Rates as of March 31, 1976

3. BSB: Summary of Operations

4. BSB: Sectoral Distribution of Loan Portfolio as of December 31, 1975

5. BSB: Equity Investments Held as of December 31, 1975

6. BSB: Resource Position as of December 31, 1975

7. BSB: Statement of Operating Policies

8. BSB: Organization Chart as of April 1, 1975

9. BSB: Age-wise Distribution of Arrears at December 31, 1975

10. BSB: Non-jute Arrears at December 31, 1974

11. BSB: Audited Income Statements, FY72-FY75

12. BSB: Audited Balance Sheets, FY72-FY75

13. BSB: Past and Projected Financial Ratios

14. BANGLADESI: Public Sector Industrial Investments in Plan

15. BSB: Strategy Paper

16. BSB: Pipeline of Projects, March 1975

17. BSB: Main Assumptions of Projected Operations and FinancialStatements, FY75-FY79

18. BSB: Forecast of Operations, FY75-FY79

19. BSB: Projected Income Statements, FY75-FY79

20. BSB: Projected Balance Sheets, FY75-FY79

21. BSB: Projected Cash Flow Statements, FY75-FY79

22. BSB: Estimated Disbursement Schedule for the Proposed IDA Credit

BAN}LADESH SHILPA BANK

BASIC DATA

1. Year of Fetablishment:/ 1972

2. Ownership: Government of Bangladesh - 100%

3. Bank Group Assistance:Anount utilized Liability accepted

Credit to IDBP Signed in Bangladesh by Bangladesh/2

US$ 20.0 2/11/70 US$ 1.3 US$ 1.5

4. Operations (in million Taka)

Approvals FY72 FY73 F4 F5

Local currency loans 4.7 16.8 18.9 66.7Foreign currency loans 10.4 - 56.8 201.2Investments 5.8 .5 .3

Total 20.9 17.3 75.7 268.2

Commitments

Local currency loans 5.1 8.1 11.1 24.9Foreign currency loans 1.2 - 4.4 67.5Investments 1.9 2.3 .1 .3

Total 8.2 10.4 15.6 92.7

Di sburs ement s

Local currency loans 12.8 13.5 15.2 11.4Foreign currency loans 22.7 - 2.0 23.9Investments 2.5 .9 .7-

Total 38.0 14.4 17.9 35.3

5. s Recordas % of average total assets:

Gross income 7.9 7.8 8.0 10.5Financial expermes 4.9 4.7 4.6 2.9Administrative and other expenses 1.0 0.8 0.9 0.9Interest income as % of average loan pwrtfolio 8.5 10.6 9.9 11.2Cost of tern debt as % of average ters debt n.a 6.7 7.6 6.5Insterest spread n.a 3.9 2.3 4.7

6. Financial Position

Total term debt and subordinated loan/equity 112.0 71.6 12.2 12.4Total term debt/equity and subordinated loan 112.0 71.6 2.6 3.4Debt Service Coverage n.a 3.5 3.4 2.7

7. Resource Available for Commitment (as on Decenber 31,1975) (Tk Million)

United Foreign Currency Resources 18.5/3Local Currency Resources 57.8

/1 BSB is the successor ofthe Industrial Development Bank of Pakistan (IDBP) abich was established in 1961.Z2 Amount includirg exchange adjutsaent. This amount has been conmolidated with otheisunder Consolidated Credit (BD-529)

for $31 million which was signed on February 14, 1975 and became effective on April 7, 1975.13 Represents loan from KfW which is not yet effective.

April 15, 1976

APPRAISAL OF THE

BANGLADESH SHILPA BANK

SUMMARY AND CONCLIUSIONS

i. The Bangladesh Shilpa Bank (BSB) is the successor to the formerEast Pakistan wing of the Industrial Development Bank of Pakistan (IDBP).An IDA Credit of US$20 million was approved for IDBP in 1970. AfterBangladesh became Independent, the Credit was reinstated in 1974 for IDBP-Pakistan alone. The Government of Bangladesh and BSB have requested a lineof credit for BSB.

ii. While industry represents only about 8% of GDP in Bangladesh,manufactured and semi-processed goods (predominantly jute) constituteroughly two-thirds of the country's export earnings. Although industryhas growth potential, it has yet to recover from the disruptions coincidingwith Independence, and new investment has been sluggish in sectors of higheconomic importance. Lack of foreign exchange for imported inputs hadcaused low capacity utilization among many import-substituting firms. TheGovernment has recently taken steps to remove some of the constraints onindustrial development (including the May 1975 devaluation of the Taka).

iii. BSB and the Bangladesh Shilpa Rin Sangstha (BSRS) provide nearlyall the medium- and long-term financing for industry in Bangladesh. BSBis also involved in financing small-scale industry along with the BangladeshSmall Industries Corporation (BSIC).

iv. As a result of war damages, a change of management, labor unrest,exchange losses, and the new country's shortage of foreign exchange for im-ported inputs, as well as deficiencies in BSB's own follow up work, over70% of BSB's loans (by amount) are affected by arrears. However, theGovernment of Bangladesh (GOB) has agreed to compensate BSB for default ofboth principal and interest on all BSB jute loans outstanding for both localand foreign currency at least until the financial position of the individualjute enterprises has been restored. BSB is in the process of reschedulingits jute portfolio loans on a case by case basis. Signed rescheduling agree-ment acceptable to the Association with each jute enterprise with outstand-ing loans to BSB will be a condition of effectiveness of the proposed credit.

v. GOB recently converted Tk 150 million of its subordinated loan toBSB into capital reserves to enable BSB to maintain a debt/equity ratio with-in the proposed 5:1 limit. In addition, GOB agreed to provide BSB an addi-tional Tk 50 million in equity as a condition of effectiveness of the pro-posed credit to provide BSB with a sufficient debt/equity margin during thedisbursement period of the credit.

vi. BSB's Board recently revised its Policy Statement to includeappropriate commitment limits; its policies are now satisfactory. Withinthe framework of the BSB Order, BSB has autonomy regarding its financingdecisions.

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vii. BSB urgently needs to fill its vacant post of Director of Opera-tions, and Chief Accountant which are conditions of effectiveness of theproposed credit. BSB also needs to recruit additional staff for itsappraisal and follow up work. The timing and effectiveness of BSB'srecruitment should be improved as a result of a recent Government decisionto give more autonomy to BSB in its selection of new staff. BSB has alsoagreed to have one expert to assist with economic appraisal of projectsand new project promotions, and a second to help improve accounting anddevise management information and control systems. UNDP will provide thetechnical assistance to BSB, with IDA acting as the Executing Agency. Theappointment of the two experts is a condition of effectiveness of the pro-posed credit.

viii. BSB has demonstrated a capability to perform thorough technical,financial, and economic project appraisals. Further improvements are pos-sible, particularly in deepening management and staff understanding ofeconomic analysis of projects, which BSB began only in 1974. BSB appreciatesthe importance of avoiding investment in sectors dependent on importedinputs where existing capacity is under-utilized. In a paper setting outits own intermediate term strategy, BSB has established an appropriate setof sectoral priorities for its future financing.

ix. BSB now has a backlog of over 150 project applications requiringfinance of nearly Tk 800 million. It expects to reject projects for nearlyhalf this amount. BSB is likely to approve financing of some Tk 550 mil-lion during FY76 and FY77, of which about IJSS34 million would be in for-eign exchange. BSB has fully committed a US812.6 million credit from theAsian Development Bank, and its only foreign resources are now a US$3 mil-lion equivalent tied credit from India, and a UTS$1.25 million credit fromKfW. In FY75, it approved two cotton spinning mills for US$10 millionin foreign exchange, but it does not have sufficient funds to commit theseloans. A US$25 million IDA Credit should meet BSB's import financingrequirements through 1977, when ADB is likely to make a second loan.

x. As a result of the improvement in the quality of BSB's portfolioon account of the special treatment for jute, strengthening of its capitalstructure, increased autonomy in the recruitment and appointment of seniorstaff, the expected appointment of senior staff and outside experts, im-provements in its operating procedures, and the existence of adequateprovisions for bad debts based on an acceptable long-form audit report,BSB can now be considered creditworthy. Thus, it is recommended that aUS$25 million Credit be approved for BSB.

xi. The objectives of the Credit include: (a) assisting industrialdevelopment, with its consequent favorable impact on employment, incomes,and foreign exchange earnings and savings, (b) helping to restore BSB'screditworthiness and to strengthen its soundness and effectiveness as adevelopment bank, and (c) in addition to recent GOB measures helping tocreate a more favorable policy climate for industrial investments, particu-larly for export-oriented industries.

APPRAISAL OF THE

BANGLADESH SHILPA BANK

I. INTRODUCTION

1.01 The Bangladesh Shilpa Bank (BSB) was established by PresidentialOrder on October 31, 1972 as a successor to the Industrial Development Bankof Bangladesh and the Equity Participation Fund. Nearly all BSB's staffand assets were formerly part of the Industrial Development Bank of Pakistan(IDBP). IDA approved a US$20 million Credit for IDBP in February 1970, ofwhich US$1.3 million was disbursed for two projects in Bangladesh prior toIndependence. The Government of Bangladesh (GOB) has assumed the obligationto repay IDA for funds disbursed to these projects under the ConsolidationCredit.

1.02 This report appraises BSB for a proposed IDA Credit of US$25 mil-lion, which GOB has requested. It would be the first IDA Credit to a devel-opment finance company in Bangladesh. There is one other development bank:the Bangladesh Shilpa Rin Sangstha (BSRS), which received a loan of US$15million from the Asian Development Bank (ADB) in 1975, and has no immediateneed for additional foreign exchange financing at present.

II. THE ENVIRONMENT

2.01 Bangladesh's present economic position is assessed in IDA'slatest economic report: "Bangladesh: Current Economic Performance andShort-Term Prospects," March 22, 1976 (No. 1038-BD). Bangladesh has some80 million people, with per capita annual income of about US$95. GDP grewat an estimated average annual rate of about 3% in the twenty-year periodending June 30, 1970. Disruptions over Bangladesh's Independence causedestimated declines of 5% and 14% in GDP in the following two years, but theeconomy recovered in 1972/73 and 1973/74 to 84% and 89% respectively ofits 1969/70 1/ output. Aside from extreme shortages of essential consumeritems like food and clothing, the country's major economic problems includeinsufficient foreign exchange earnings to finance much more than food importrequirements, and inadequate Government revenues. Until recently, priceinflation had been extremely rapid, leading to devaluations of the Taka inJanuary 1972 and May 1975. The Dacca Middle Class Cost-of-Living Indexincreased by 76% during 1974. However, recent anti-inflation measures ofthe Government appear to have been effective, and prices of some basicconsumer items have in fact fallen in recent months (para. 2.16). GOB ex-pects prices to have declined by 10% in 1975. As a result of the improvementin domestic output and a reduction in the rate of inflation. GOB expectsGDP to increase in real terms by about 12% and per capita income by about9% in 1975/76.

1/ Fiscal years ending June 30.

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The Industrial Sector

2.02 Agriculture dominates Bangladesh's economy and development pros-pects, accounting for about 55% of GDP and 75% of employment. Industry'scontribution is only some 8% of GDP. A 1968 estimate indicated that manu-facturing accounted for only about 5.5% of total employment in the thenEast Pakistan. However, the growth rate of industrial value-added has beentwice that of the economy as a whole, averaging about 6% per annum duringthe 1950s and 1960s. Manufactured goods account for roughly two-thirds oftotal export earnings. Industry has an increasingly important contributionto make to income growth, employment creation, and foreign exchange earningsand savings. It aids agricultural development through supplying inputsand processing and marketing outputs; it produces basic consumer goods andgenerates needed savings.

2.03 The disruptions of recent years have affected manufacturingmore than the economy as a whole; industrial value-added had only regained92% of its 1969/70 level by 1973/74. Industrial output actually fell in1974/75 by 2-3% over its 1973/74 level largely as a result of depressedexternal demand for jute manufactures and a severe shortage of foreign ex-change. Although the export sector has performed better in 1975/76 largelyas a result of the May 1975 devaluation, industrial output in 1975/76 isexpected to show only a small gain of 2-3% over the 1974/75 level due to alow level of demand in the domestic market.

2.04 Industrial structure. Data for 1969/70 1/ (the most recent avail-able) indicate industrial value-added 2/ of Tk 1,400 million, employment of200,000 3/, and fixed assets of Tk 1,700 million broken down into the follow-ing subsectors:

Percentages: 1969/70 DataValue-added Employment Fixed Assets

Jute manufacturing 33 50 45Food, beverage, tobacco 32 15 17Non-jute textiles, apparel 13 16 14Chemicals 10 7 5Metals, engineering 6 6 5Furniture, paper, printing 3 3 10Electrical products 1 1 1Leather 1 1 1Non-metalic minerals 1 1 2

Total 100 100 100

1/ Census of Manufacturing Industries, covering 1,491 enterprises whichrepresent 53% of all registered companies with ten or more employeesin the then East Pakistan.

2/ Including indirect taxes.

3/ Employment statistics have changed significantly since 1969/70; atpresent total employment in the jute industry alone is about 200,000.

Jute manufacturing dominates the sector, accounting for about one-third oftotal industrial value added, and about one-half of employment and fixedassets in industry. Cotton textiles is the next largest industry followedby cigarettes (which has since lost its supply of tobacco from West Pakistan),sugar, paper, and fertilizer production. Non-jute manufactured exports in-clude newsprint, fish and shrimp, and leather. The larger industries innearly every subsector are now GOB-owned and operated (para 2.07).

2.05 Constraints on industrial development. Bangladesh's major advan-tage for industrial development is its low cost labor. Domestic resourcesuseful as industrial inputs are limited; they include natural gas, timber,fish, and agricultural products (jute, tea, livestock, foodstuffs). Otherconstraints include a lack of foreign exchange to finance necessary im-ported raw materials and spare parts, deficiencies in power supply andtransportation facilities, poor labor relations, cumbersome control proce-dures for public sector enterprises, and shortages of experienced managerialand technical staff. In addition, certain GOB policies and proceduresimpaired the attractiveness of the investment climate to private investors,but measures announced in December 1975 are expected to improve this climate(paras 2.06-2.14).

Industrial Policies

2.06 Role of private sector. In early 1972, the new Government nation-alized all Jute, cotton textile, and sugar mills in the country, as well asseveral enterprises in other sectors with fixed assets valued over Tk 1.5million. Many of these enterprises were abandoned by previous Pakistaniowners; others were owned by Bangladesh nationals. Some large enterprises(e.g., in pharmaceuticals) were permitted to continue as joint venturesbetween foreign and domestic private investors.

2.07. In January 1973, in order to allay fears of further nationalizationsand to stimulate new investment, GOB formulated an Industrial InvestmentPolicy which limited the private sector to enterprises with fixed assets ofTk 2.5 million or less, and which declared a ten year moratorium on furthernationalizations of enterprises under that size. In July 1974, GOB revisedits policies to permit private sector investment in enterprises with up toTk 30 million of fixed assets, and extended the moratorium on nationaliza-tions to 15 years. A list of industries reserved for the public sector waspublished, including jute, cotton textiles, sugar, paper, heavy engineering,cement, petrochemicals, and forest extraction. New foreign investment waspermitted in collaboration with private domestic investors 1/. In December1975, the Government took further measures to stimulate private sectorinvestment. It raised the private sector fixed assets' ceiling to Tk 100million and deleted the 15 year moratorium on further nationalization ofenterprises from its industrial policy. It reiterated, however, that if

1/ Previously only minority shareholdings in public sector enterpriseswere permitted for foreign investors.

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any industry is ever nationalized, compensation will be paid on a fair andequitable basis. GOB decided in December 1975 to pay compensation for indus-tries nationalized immediately after Independence which will start in 1975/76and an Implementation and Payment cell has been established in the Ministryof Industries to deal with cases for payment of compensation. The Governmentalso expanded the scope of private-public sector collaboration in industrialventures. Furthermore, about 85 small enterprises currently administeredby public sector corporations are to be disinvested to private entrepreneurs.These measures will help the private investment climate considerably.

2.08 Investment incentives. Incentives to new private industries includea five year tax holiday (provided 50% of profits are reinvested), deferredpayment and partial rebates on custom duties on machinery and repatriationprivileges for foreign investors. For export industries, incentives includeincome tax concessions and additional raw material import licenses. Theconsiderable devaluation in May 1975 was a correction for the previousdisincentive to export inherent in an over-valued Taka.

2.09 Trade policy. Because of the critical shortage of foreign exchange,very few manufactured consumer goods are imported (other than foodstuffs andsome textiles). Domestic producers therefore have little competition, andscarcities of goods result in high prices which permit firms to operateprofitably even with low capacity utilization. The disadvantage of importcontrols for industrial enterprises is the difficulty such enterprises havein obtaining imported raw materials and spare parts. Foreign exchange isallocated to industry-groups on a six months basis. 1/ A particular enter-prise must obtain the approval of the Ministry of Commerce, and open a letterof credit through a designated bank that must finally be approved by theCentral Bank. Often this procedure itself takes up the entire six monthlicensing period, and actual imports (when they do arrive) are only afraction of requirements. The result is that many industries operate atless than 50% capacity utilization on a single shift basis (Annex 1). Inconnection with IDA's program credits for industry, which have providedforeign exchange for needed imports of industrial raw materials, GOBhas agreed to study measures which could be taken to liberalize importlicensing procedures. Financial assistance for the study is being providedunder the Technical Assistance Credit (409-BD).

2.10 At the time when most projects now in operation were being imple-mented, the country had not yet separated from Pakistan, and its extremeforeign exchange shortage was not foreseeable. Future industrial invest-ment must be carefully directed so that the problem of shortages of importedinputs is not exacerbated.

2.11 GOB had centralized importing activities through the TradingCorporation of Bangladesh (TCB) although many exceptions to this policy

1/ These are "entitlements" which are based on a proportion of require-ments at full capacity on a single shift.

have since been granted. Import contracts of public sector enterprisesrequire the approval of higher authorities, however. Managers of publicsector enterprises complain that this is an example of excessive controlswhich hamper effective management of enterprises. While proper auditing oftrade contracts is definitely needed, and controls on imports are a necessity,some decentralization of decision-making in the public sector is underconsideration by GOB.

2.12 Investment approval process. The process of approving privatesector investments is excessively cumbersome, and includes company regis-tration, appraisal and approval by a development bank, approval by theInvestment Board, approval by the Controller of Capital Issues, thenissuance of an import license for machinery. In particular, officialsof the Ministries of Finance, Industry and Commerce are involved inseveral of the above steps. During negotiations GOB agreed to make a studyof ways of combining or eliminating some of these numerous steps, especiallystreamlining procedures for export-oriented projects. IDA will comment onthe terms of reference for the study, and the draft report. GOB will submitto IDA a draft terms of reference for the study within three months and thedraft report should be completed within nine months of the signing of theproposed Credit.

2.13 Export processing zone. With IDA's encouragement, GOB is nowconsidering establishing export processing zones. Permitting unlimited dutyfree imports into such zones for processing and re-export could stimulatesignificant new investment, jobs and foreign exchange earnings, and helpreduce the constraint on industrial development posed by limited domesticresources. Labor intensive industries with high value low bulk products (tominimize transportation costs), such as textiles or assembly of electroniccomponents, might be most attracted. During negotiations, GOB agreed toinitiate a feasibility study for an export processing zone within ninemonths after signing of the proposed Credit.

2.14 Recent improvements in the policy environment for investment willhelp redirect funds to industry and away from less productive but "safer"sectors of trade and real estate. However, there are sizeable amounts of"black money" (unreported income, etc) which have been unutilized. Tohelp channel these funds to productive uses, the Government declared inDecember 1975 that those who disclose such funds will be allowed to retainthe same without any questions by Government, provided such funds are usedfor new investments or for purchase of disinvested units.

Industrial Finance

2.17 The financial sector is described in detail in "Bangladesh: Devel-opment in a Rural Economy" (IDA Report No. 455-BD). There are nine commer-cial banks (six of which are nationalized), and two specialized industrialfinancing institutions (BSB and BSRS). A third specialized institution (BSIC)

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extends limited financing to small-scale industries, being mainly concernedwith promotion work and technical assistance. There is also a specializedinstitution for agricultural finance (the Krishi Bank).

2.16 Commercial banks normally restrict themselves to short term loansfor working capital. Commercial banks' loans outstanding as on December 31,1974, were Tk 8.2 billion. Of this, Tk 2.4 billion, or 29%, was in themanufacturing sector (25% public and 4% private sector enterprises), whilethe largest portion was in trade and commerce (44%). In the two year periodbetween December 1972 and 1974, total commercial bank credit expanded rapidly(by 80%) mainly to meet GOB budgetary deficits and to offset losses of publicsector enterprises. Credit expansion, however, is believed to have sloweddown considerably as of the beginning of 1975, in response to selectivecredit controls introduced between September 1974 and early 1975. Thesemeasures included a prohibition of advances against certain commodities,a maximum financing of 50% for other commodities, and a reduction of com-mercial bank borrowings from the Central Bank. Another effective anti-inflation measure was the demonetization of the 100 taka note in April 1975.

2.17 Like BSB, BSRS came about as a result of a merger of institutionswhich already existed at Independence: the East Pakistan wing of the PakistanIndustrial Credit and Investment Corporation (PICIC), the National InvestmentTrust (NIT) and the Investment Corporation of Pakistan (ICP). BSIC is thesuccessor of the former East Pakistan Small Industries Corporation (EPSIC).In its joint programs with commercial banks, BSIC carries out the technicaland economic appraisals and commercial banks carry out the financial appraisaland extend the loans.

2.18 Medium and long-term industrial loan finance is provided mainlyby specialized institutions, while equity is mainly supplied by GOB, privatesponsors, or firms' own funds. BSB and BSRS provide the bulk of institutionalfinance to industry, and each have portfolios of about three-quarters of abillion Taka. BSIC provides some financing, but in the past it has mainlyarranged financing for its clients from commercial banks and BSB. IDA pro-vided a US$3 million Credit for commercial bank financing for BSIC-sponsoredprojects in FY73. From July 1971 to December 1974, these three institutionsapproved only Tk 240 million in new financing, of which BSB accounted for56%, BSRS 34%, and BSIC 10%. Equity participations were only 10% of totalapprovals. The stock exchange has been closed since nationalization of mostmedium and large-scale industries in March 1972, and unorganized trading ofstocks is very limited. Recently the Government announced its intentionto re-activate the stock exchange.

2.19 Interest rates. In July 1974, general interest rates were in-creased by about 3% following an increase in the Central Bank rate from5% to 8%. The lending rates of commercial banks and specialized institu-tions are now about 12%, and deposit rates range up to 9% depending on theterm (Annex 2). BSB and the Krishi Bank are allowed to pay one percentagepoint more than commercial banks on fixed deposits.

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III. BSB'S ROLE

3.01 The BSB Order and BSB's Policy Statement specify that it willmobilize resources to finance diversified industrial development and willprovide advice to industrial enterprises. A summary of BSB's financingactivities appears as Annex 3.

Volume of Financing

3.02 BSB provides roughly half the medium and long-term debt financingfor industry from institutional sources in Bangladesh. From the establish-ment of the Industrial Development Bank of Pakistan in 1961 through June 30,1970, that institution approved about Rs 1 billion of financing to over1,000 projects in what is now Bangladesh. New approvals fell from Rs 134million in FY70 to Rs 110 million in FY71 due to disturbances coincidingwith the Independence movement. About one-fourth of the approvals in thesetwo years were later cancelled for the same reason. Lack of foreign exchangeand re-organization difficulties led to low approval volumes of about Taka 20million in each of the following two fiscal years. BSB then received a US$12.6million credit from ADB in June 1973, and it approved Tk 76 million of loansin FY74, followed by Tk 268 million of approvals in FY75. By early 1975,its commitments had just begun to reflect its return to substantial approvallevels, but disbursement had not yet increased beyond a rate of Tk 35 millionper year.

Characteristics of Financing

3.03 A description of BSB's outstanding loan and equity portfolio atDecember 31, 1975 is given in Annexes 4 and 5. About three quarters of BSB'scumulative financing has been in foreign currency. Much of its lendingprior to FY72 was to enterprises in the private sector, but most havesince been nationalized. About 80% of BSB's outstanding portfolio atDecember 31, 1975, was in the public sector.

3.04 BSB invested Tk 13 million in equity through FY72 (net of cancel-lations), but it has since approved only one equity participation (in FY75),partly because most of its financing since then has been to public sectorprojects in which GOB has provided the equity.

3.05 Size of projects. The average size of BSB's loans has been aboutTk 920,000. Converting historical figures at prevailing exchange rates, thisamounts to an average loan of about US$180,000 to projects with average totalassets of about US$400,000. In the 20 months ending in March 1975, BSB'saverage loan size was higher at US$450,000 equivalent. Excluding four largepublic sector textile mills, however, the average was only US$150,000.

3.06 Small-scale industry lending. Although many of BSB's ordinaryloans have been to small enterprises, it has also financed them in coopera-tion with BSIC. Under this arrangement BSIC prepared feasibility studies,

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took responsibility for providing follow up technical assistance to proj-ects, and took 75% of the risk of loss. By December 31, 1974 BSB had lentTk 17 million under this scheme to 400 projects (3% of its total portfolioby amount and 54% by number). The division of labor envisaged under thisscheme has not worked out, however, and virtually no follow up has takenplace, with nearly all loans being in arrears. BSB decided to-discontinuethe arrangement in FY73, and now lends to small industries only through itsown operations. BSB should improve its follow-up work on existing small-scale industry loans (para 5.09). In December 1975 the Government directedindustrial finance institutions particularly BSB to provide equity supportin deserving cases to small industries particularly agro-based, agro-support-ing and export oriented industries.

3.07 Distribution by industrial subsector. BSB's portfolio reflectsthe concentration of industry in jute and cotton textiles. At-December 31,1975, 54% of its outstanding loans were in the jute industry and 21% innon-jute textiles. The balance was more evenly distributed among otherconsumer-oriented industries, including food and beverages (6%), paper andpaper products (4%), services, non-metallic minerals and metal products.BSB's recent approvals and pipeline of projects show a continuing concen-tration on cotton textiles, but no new investments in the jute industry areplanned. Applications to BSB for new investments in food processing andengineering industries, among others, indicate that its portfolio is likelyto have a better sectoral distribution in the future.

3.08 Geographic distribution. About 40% (by amount) of BSB's outstand-ing loans at December 31, 1974 were in the cities of Dacca, Chittagong, andKhulna (52% by number of projects). The remainder was concentrated in theDacca and Chittagong Divisions 1/ (34% and 16% by amount of the total port-folio). Only 10% of the portfolio was in the Rajshahi and Khulna Divisions(outside Khulna city). This geographical concentration is an industry-widephenomenon. BSB's recent approvals will help improve the geographic distri-bution of its portfolio, since they include several large textile projectsto be located in rural areas.

3.09 Economic performance. BSB did not begin economic analysis of itssubprojects until 1974. It has since made ex-ante economic rate of returncalculations on several of its past projects (based on data available atthe time of its appraisal reports), and ex-post economic return calculationsfor a jute mill and a cotton spinning mill. In every case, these have in-dicated favorable economic returns. About 54% of BSB's portfolio is in thejute industry, which accounts for about half of total exports. Due to inex-perienced management under public sector ownership, as well as inappropriateGOB pricing policies, many jute enterprises have been unprofitable and inef-ficient in recent years. A few tanneries and fish processing firms are BSB'sonly other export projects at present. The cotton textile industry hashigher capacity utilization than many others, although improvements are

1/ Until recently, Bangladesh was divided into four main administrativedivisions: Dacca, Chittagong, Khulna and Rajshahi.

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still possible. Helped by import restrictions, spinning mills have beenquite profitable. BSB recently calculated economic rates of return of over10% on several spinning mills, based on current operating data. The economicperformance of the balance of BSB's investments are not so clear. Most en-terprises are in arrears, but many of them appear to be profitable. Despitetheir profitability, many producing for the domestic market are likely to beinefficient users of capital; their prices often far exceed internationalprices due to domestic scarcity conditions. In some cases, inefficienciesare not the result of poor management, but are rather due to drastic changesin the availability of inputs following Independence.

3.10 Projects approved by BSB in the three years ending June 1974 werequite labor intensive; they were expected to create 7,500 jobs at an averagecost per job (including working capital) of about US$4,500.

Quality of BSB's Project Work

3.11 BSB has traditionally undertaken a thorough technical and finan-cial appraisal of the projects it has financed. In 1974, it began cal-culating economic rates of return on its projects, and net foreign exchangesavings and earnings. In addition to screening out unworthy projects, ithas caused several projects to be redesigned. Its lending conditions haveresulted in changes in installed capacity, price reductions through selec-tion of alternative suppliers, and strengthening of project management.Its appraisals have not included adequate analyses of capacity utilizationin existing domestic enterprises, however. BSB will remedy this by under-taking the necessary subsector studies. Also, its appraisals do not suffi-ciently examine assumptions critical for the success of projects (para 4.09).

3.12 BSB has not been very effective in assisting projects in operation.It has not adequately enforced its reporting requirements, and its supervisionvisits seldom result in recommendations to improve operations.

3.13 There is also much room for improvement in BSB's promotional work.Recently, BSB has been aggressive in seeking out new projects, and has pre-pared feasibility studies in several sectors for prospective project spon-sors. However, it has not yet helped to develop many new projects in non-traditional sectors. To do this, it needs more highly-qualified staff.Although project promotion will be a very important activity for BSB inthe long run, its immediate priority is to reduce the backlog of projectsin its pipeline awaiting appraisal.

Resource Mobilization

3.14 BSB's statement of resources appears as Annex 6. In addition toraising foreign and domestic resources for its own financing, BSB normallyrequires project sponsors to raise from other sources at least 60% of thetotal cost. However, BSB's disbursements do not yet reflect its returnto a normal level of operations; they have amounted to only Tk 85 millionsince June 30, 1971.

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3.15 Since Independence, BSB has received funds from the followingforeign sources: the Asian Development Bank (US$12.6 million in June 1973,of which $6.6 million is the re-activation of an earlier line of credit toIDBP), the Industrial Development Bank of India (US$2.5 million equivalentin May 1974, tied to procurement in India), and the Government of India(US$630,000 equivalent in May 1974 for purchase of textile machinery inIndia). In addition BSB recently received a loan of DM 3.0 million fromKfW which is not yet effective.

3.16 BSB's domestic resources, in addition to GOB loans and equitycontributions, include deposits from the public and one debenture issue(in 1974). On June 30, 1975, BSB held about Tk 14 million of current depositaccounts, Tk 6 million of savings deposits, and Tk 106 million of term depo-sits. Interest on savings accounts and term deposits varies from 4.25% to9.25% per annum depending on the term. Its total deposits have increased byabout 50% in the year ending June 30, 1975. While BSB cannot offer facilitiesas convenient as those of commercial banks, it has been able to attractdeposits by paying a slightly higher interest rate.

3.17 BSB's debenture issue totalled Tk 40 million and was for 20 yearsat 6.5% interest, 1/ guaranteed by GOB. The issue was subscribed in fullby commercial banks, who were entitled to count it as part of their reserverequirements, due to the GOB guarantee. At the new rates of interest commer-cial banks are willing to buy additional BSB debentures, and insurance com-panies have also expressed interest (although they would now require a 9%-10%interest rate). As yet, BSB has not required additional domestic resources,because of its low level of operations (until recently), and because it hasnot yet had to make payments on previous borrowings by IDBP.

BSB's Future Financing Role

3.18 GOB has decided against an alternative previously suggested byIDA, to merge BSB and BSRS. Instead, it prefers that these institutionscompete. Given recent improvements in the investment climate, there maywell be enough investment activity to justify having two development banks,and competition could provide incentives to improve their operations. Untilrecently, there were reports that Government may preclude BSB from certaintypes of financing but IDA has since been officially informed by Governmentthat BSB will continue in its present role whereby it may finance privateand public sector projects without any externally-imposed restrictions whichwas confirmed by GOB during negotiations.

1/ Tha Bank rate at the time was 5%.

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IV. BSB: ORGANIZATION

Board

4.01 BSB is wholly owned by GOB. Early in 1975, its first Board ofDirectors was established, and as of January 1, 1976 consisted of two re-presentatives from the Ministry of Industry (whose functions are primarilypolicy-oriented), one from the Ministry of Finance, BSB's Managing Director(who is Chairman of the Board), and one private sector representative.Another seat for the private sector is vacant. This is a small Board, whichshould be strengthened by filling the existing vacancy, and adding at leasttwo more Directors, who should be individuals with experience in implementingindustrial projects, BSB's charter, which was amended for other reasons 1/,was also amended in April 1976 for this purpose. Government has indicatedthat it is actively considering adding two more directors to BSB's Board,another representative from the Ministrv of Industries and a professionalbanker.

Autonomy

4.02 On project decisions. Although BSB has not yet rejected a publicsector project outright, it has caused changes to be made in the design ofsuch projects as conditions of its lending. Government had felt that aGovernment guarantee should be sufficient to ensure BSB's approval of anydoubtful project. However, this type of arrangement would be liable toabuse, would undermine BSB's autonomy and frustrate the positive role itcan play in resource allocation. Any doubtful public sector project shouldbe either revised to conform to BSB's appraisal standards, rejected, orfinanced directly by GOB (through its Annual Development Program). In arecent correspondence Government indicated that it has no intention torequire BSB to finance unsound projects and therefore the question ofextending a guarantee would not arise. This was confirmed by GOB though BSBmay agree to administer government loans in return for an administration fee,with no credit risk by BSB.

4.03 On staffing. Until recently BSB, like all other public sectorcompanies obtained approval from GOB of its general staffing plans, onindividuals to be recruited, on promotions, and on purchases (furniture,cars). BSB's senior staff salaries are soon expected to be cut to bringthem in line with the low and inflexible salary structures applicable tocivil servants. Also, a Public Service Commission selected BSB staff. BSB'sManaging Director sat on the Selection Board of the Public Service Commission,but had no veto powers. This system caused recruitment delays and preventedselection of suitable staff by those most able to judge their potential

1/ Inter alia, to permit extension of the maturity of its sub-loansbeyond 20 years, where necessary.

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performance. In some cases BSB has been compelled to accept new staff whomit did not deem up to standard. These recruitment procedures could seriouslyretard BSB's long-term development. During negotiations, measures to increaseBSB's autonomy in staff selection were outlined by GOB. GOB stated that therecruitment of lower grade BSB staff had now been exempted from the requirementof going through the Public Service Commission. A special Selection Boardincluding the BSB Managing Director would be responsible for recruitment/appointment of BSB staff for higher grades (other than the ManagingDirector, General Manager, and Deputy General Managers) which would besubject to approval of the BSB Board. The recruitment/appointment of theManaging Director, General Manager and Deputy General Manager would be madeby GOB, with the appointment of the Deputy General Manager being made uponthe recommendation of the BSB Board.

Policies

4.04 According to its Policy Statement (Annex 7), which was approved byits Board on April 25, 1975, BSB may engage in term loan and equity financing,underwriting, guarantees, and short-term lending to enterprises to whom ithas extended medium or long-term financing. BSB only finances projects whichits appraisals indicate to be technically, financially, and economicallyjustified. It attempts to diversify its portfolio geographically and byindustrial sector. Its Policy Statement prohibits it from taking exchangerisks and establishes a guideline maximum debt/equity ratio of 5:1. BSBwould not normally commit to a single enterprise amounts exceeding 15% ofits net worth. It would not take up more than 20% of the shares of anenterprise, except by conversion of its loans, but even then it would nothold more than 49% of a company's shares. BSB's aggregate equity investmentswould not exceed its own total net worth.

Management and Staff

4.05 BSB's previous Managing Director, Mr. Nurul Matin, was appointedDeputy Governor of the Central Bank in January 1975, and BSB's Board hasconfirmed Mr. A. Kamaluddin, previously General Manager, as the new Chair-man and Managing Director. BSB has also lost its Director of Operations,Mr. Fazle Husain. BSB has recruited a capable and experienced individualto fill the post of General Manager. The new General Manager is lookingafter the work of the Director of Operations, until this post is filled.BSB has also recently acquired the services of a senior economist (to workas an economic advisorY on a deputation basis from the Planning Commission.In addition to a new Director of Operations, other staff are also urgentlyneeded, including a Chief Accountant, additional financial analysts andeconomists to work on the backlog of projects in BSB's iipeline, togetherwith additional staff for follow up work. BSB would appoint a Director ofOperations and a Chief Accountant of suitable quality and experience as acondition of effectiveness of the proposed Credit.

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4.06 Technical assistance. Under the ADB credit to BSB, ADB suppliedtwo consultants to help improve appraisals, engineering work, and the organi-zation of operating departments, as well as to establish an internaltraining program. Their assignments were completed bv late 1975. BSB alsoasked for technical assistance from IDA to help establish a managementinformation and control system, improve accounting, and strengthen economicappraisals of projects. One expert to strengthen economic appraisals andassist in initiating new project promotions, and a second to improveaccounting and information systems appear sufficient at this time (paras.3.09-3.13, 4.08). During negotiations, agreement was reached with BSBand GOB on the recruitment of such advisors for an 18 month period withthe appointment as a condition of effectiveness of the Credit. UNDP hasagreed to finance the cost of such advisors with IDA acting as the ExecutingAgency. The foreign exchange cost of the two experts on an annual basiswould be US$121,000.

Departmental Organization and Procedures

4.07 BSB's organization chart is presented in Annex 8. BSB has fifteendepartments grouped under three senior officers: a Director of Operations,a General Manager, and a Financial Advisor. In addition, BSB has six branchoffices outside Dacca that are primarily engaged in collecting deposits, butin some cases also assist central office staff with follow up and (morerarely) appraisal activities.

4.08 The most serious organizational deficiency at present is the lackof a management information and control system. There is no systematic wayfor management to hold departments accountable for their activities. Allthose involved in project processing should produce regular reports to seniormanagement, which should review them in regular meetings. BSB will obtaintechnical assistance to help it devise and implement a management informationand control system (para 4.06).

4.09 Appraisals. Until recently, responsibility for appraisal wasdivided among the Loan and Equity, Engineering, and Economic Departments.In 1974, BSB transferred several engineers and economists to the Loan andEquity Department and gave that department full responsibility for apprais-als, which are now made by teams comprising an economist, an engineer, anda financial analyst. This change has improved coordination of the variousaspects of appraisals. In general, BSB's appraisals are thorough and well-prepared. However, appraisal reports still appear to be too routinelyprepared; they could be improved through preparation of a summary evalua-tion, including a discussion of assumptions critical for project success.A more integrated view of projects might result if BSB trained some of itsappraisal staff to undertake both financial and economic aspects ofappraisals.

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4.10 Follow-up. BSB's Engineering Denartment is responsible for followtip on projects under construction, and makes regular visits to project sites.The Loan Administration Department assists with disbursements and has fullresponsibility for projects in operation. Follow ulp on operating projectsis inadequate. Visits are infrequent (many projects have not been visitedfor more than two years), few progress reports and financial statements arereceived from clients, and corrective action is seldom recommended. Whilethe poor quality of BSB's portfolio has largely been the result of factorsbeyond its control (para 5.01), inadequate follow up work has also contri-buted to this situation.

4.11 The Loan Administration Department is divided into seven sections,five of which carry out routine desk work, one is for statistics, and onlyone (consisting of seven senior and two junior staff) is responsible foron-site inspections. In the nine months between July 1974 and March 1975,the latter section prepared 40 routine inspection reports and three in-depth evaluations based on such visits. However, this is only a fractionof the 700 projects in BSB's portfolio, of which most loans are in arrears.

4.12 To improve the effectiveness of its follow up work, BSB intendsto:

(i) increase the staff working on follow-up;

(ii) visit each project at least once a year and more frequentlywhen loans are in arrears;

(iii) intensify efforts to obtain regular information fromclients as required in its loan agreements;

(iv) prepare shorter reports on project visits, that shouldinclude specific recommendations for action by BSB andclients;

(v) establish an internal reporting and review procedure formanagement to check whether satisfactory action is beingtaken on problem projects; and

(vi) consider re-organizing the Loan Administration Departmentso that most of its sections undertake follow up visitsto project sites.

4.13 Procurement procedures. BSB requires its project sponsors tosecure competitive bids on machinery items and large construction contracts.In some cases, it seeks out quotations on its own to check those submittedby clients, and there have been cases where its efforts have resulted in sig-nificant reductions in project costs. Under the IDA Credit, BSB would berequired to submit with each of its subproject applications a description

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of the competitive quotations for equipment and contracts for constructionwhich were considered by project sponsors, together with reasons for thechoice of the particular supplier or contractor. BSB would also be requiredto judge the appropriateness of the technology for each project, given thelow social cost of labor-intensive production processes.

4.14 Disbursement procedures. BSB's disbursement procedures are alsogenerally satisfactory. Imports are normally financed through letters ofcredit, while payment for domestic equipment is usually made directly tosuppliers. BSB's engineers normally inspect projects regularly to ensuresatisfactory performance under construction contracts.

4.15 Legal. BSB employs an independent lawyer on a retainer basis toreview its loan contracts. At IDA's suggestion, BSB recently reviewed itslegal documentation requirements and found several ways it could speed upprocessing of legal papers and eliminate some of the unnecessary steps. BSB'sefforts to obtain legal remedies have not been very effective, as courtsuits initiated as early as 1965 have not been resolved. To improve thissituation, BSB recently hired additional lawyers. BSB should also insti-tute a regular formal review procedure for the work done by its lawyers.

V. BSB: FINANCIAL POSITION

Loan Portfolio

5.01 As with Bangladesh industry in general, BSB-financed projectssuffered damages and severe disruptions immediately prior to Independence.Many projects were abandoned by their Pakistani owners, and others hadchanges in management due to nationalization. Inefficiencies were boundto result under new and inexperienced management. Labor unrest was con-siderable during 1972 and 1973. In addition, Bangladesh's severe shortageof foreign exchange made the import of raw materials and spares difficult,while the 1972 devaluation raised the cost of imports and the debt serviceburden of BSB's clients, thereby adding to their difficulties. While mostfirms experienced genuine difficulties, others took advantage of the gen-eral situation and discontinued servicing their debts. Largely as a resultof these factors, which were beyond BSB's control and not foreseeable atappraisal, over 70% of BSB's portfolio (by amount) is affected by arrears ofthree months or more. By comparison, about one-fourth of IDBP's (BSB'spredecessor) portfolio in then East Pakistan on December 31, 1970 wasaffected by arrears. However, BSB is itself partly to blame because ofinadequate collection and follow up work (para 4.10).

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5.02 More than half of BSB's loans (55% of the total loan portfolio)have been in arrears for two years or more (Annex 9). A sectoral breakdownof BSB's loan portfolio is given in Annex 4. About 54% of BSB's loan port-folio is in the jute sector, 26% in other public sector companies (mostlytextiles) and 20% is in private sector companies. Each of these categoriesof loans require a different approach to their arrears problems.

5.03 Jute industry. At the end of December 1970, only 6% of IDBP'sloans to the jute industry were affected by arrears. At that time, theindustry was predominantly under private ownership. At June 30, 1975, allBSB's jute loans were in arrears, since the jute industry as a whole hadbecome unprofitable. In addition to war damage, inefficiency of new publicsector management, exchange losses, and shortage of foreign exchange, thejute industry also suffered from increasing raw jute prices at a time whendemand and prices for jute goods were declining in foreign markets. Thissituation was exacerbated by the over-valuation of the Taka, and led tomassive losses for the jute industry from FY73 through FY75. As a result,about half the jute manufacturers became insolvent.

5.04 Recognizing the financial crisis faced by the industry, in 1973GOB required commercial banks to accept 20 year debentures issued by juteenterprises, bearing interest at 4.5% per annum, to replace a portion oftheir short term loans to the industry. At the same time, GOB ordered amoratorium on payment by the jute sector on their long term loans (most ofwhich were owed to BSB and BSRS) and decided in principle that they wouldbe rescheduled through issue of additional jute industry debentures, redeem-able over 20 years (including a 5 year moratorium as of 1973). GOB alsogranted a Tk 75 million subsidy to the jute industry in FY74.

5.05 In March 1975, an IDA sector mission undertook an evaluation ofthe jute and cotton textile industries in connection with the Fourth ProgramCredit. During negotiations for the Program Credit, GOB agreed to implementan action program to improve the industry's efficiency, competitiveness,and financial position. The action program will include preparation byJune 30, 1976 of five-year forecasts and a strategy for restoring an adequatedebt/equity and debt servicing position for the industry.

5.06 In September 1975, the Government decided to reduce the intendedrescheduling of the jute mill loans from 20 to 15 years, requested the jutemills to pay their accumulated interest arrears and decided that the rateof interest in respect of the foreign currency loans would remain the sameas stipulated in the original loan agreements between BSB and the jute mills.These rates are in the range of 7-8% p.a., while the Government had earlierintended to reschedule the loans at 4.5% p.a. It was also decided that ajoint exercise would be undertaken by the BJIC and the financial institutions,including BSB, to determine which mills should be entitled to the 5-yearmoratorium. These measures constituted some progress towards a satisfactoryrescheduling of the jute mill loans, but further progress was considerednecessary. Terms of rescheduling, satisfactory to IDA, should be agreed be-tween BSB and its subborrowers as a condition of effectiveness of the proposedcredit. The terms should include the following provisions:-

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(i) no subsidization of the industry through lower interestrates;

(ii) GOB agreement not to call for payment by BSB on foreigncurrency borrowings used to finance the jute industryexcept in accordance with the new maturity schedulesof its loans to the jute industry; and

(iii) shorter rescheduling periods for any mills that can meet them.

5.07 The profitability and financial position of the industry now dependalmost entirely on GOB policies and management. Further, the security BSBheld on these loans (mortgages on private property) is no longer effective,since GOB owns these mills. In addition, the compulsory rescheduling hadended arms length relationships between BSB and jute enterprises. In viewof the above, and due to the importance of the jute industry for BSB'screditworthiness IDA considered it essential that special arrangements bemade to protect BSB from its existing jute sector loans made prior toDecember 16, 1971, at least for the time being, in order to improve itsoverall creditworthiness. As a result, it was agreed during negotiationswith GOB that in the event that a default (either principal or interest)occurred on a BSB foreign currency loan to a jute enterprise in anyfinancial year, GOB would reduce the amount of the next scheduledrepayments by BSB to GOB in the financial year subsequent to such defaultuntil the sum of such reductions equalled the amount of such default. Inthe case of local currency defaults (either principal or interest) on BSBjute loans, it was agreed that GOB would, in the year following the default,provide BSB with an interest-free loan equal to the amount of such default,convertible to a grant or a contribution to BSB's equity if BSB were unableto collect such outstanding debt from the defaulting enterprise withintwo ;.aars after the default has occurred. These arrangements, however,would cease to apply to any outstanding debt from an enterprise either ifBSB makes a new loan to such an enterprise or where BSB and GOB providesatisfactory evidence to IDA that an enterprise has become financiallysound and is expected to be able to service its debt obligation. Todetermine such financial soundness, IDA would not review individual juteenterprises more than once a year, and then only in connection with IDA'sannual review of the jute industry's action program. The above arrangementswould largely absolve BSB from the credit risks on its jute portfoliothough since as a result of the delayed timing of GOB compensation to BSBfor defaults, there would be some incentive for RSB to continue its collectionefforts to improve its liquidity position.

5.08 Other public sector projects. The prospects are good for clearingarrears on loans to cotton textile projects (21% of the portfolio), whichhave been quite profitable recently. By March 1975, BSB had met the TextileIndustry Corporation and established new repayment targets for BSB loans totextile enterprises. It subsequently met with other public sector corpora-tions (which account for 6% of BSB's portfolio), and agreed with them onsatisfactory target dates for collections or reschedulings. These targetsare indicated in BSB's strategy paper (para 6.04).

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5.09 Private sector loans. BSB's private sector projects include about400 small scale industry loans totaling Tk 16 million made through an arrange-ment with BSIC (para 3.06) and about 200 other loans aggregating Tk 130 mil-lion (also for rather small industries). While many of these projects areexperiencing serious difficulties, there are many willful defaulters as well.BSBts collection efforts have not been effective, and in many cases it isunaware of the status of the project. As is indicated by the number ofprojects not in operation or not paying within the last two years (Annex 10),corrective action on many of these problem projects should have been takenlong ago (para 4.15). To help remedy these deficiencies, BSB needs morestaff to work on follow up, and its management should institute a regularreporting procedure to ensure that effective and timely action is taken onproblem projects. Recently, on the recommendation of IDA, BSB visited itsprivate sector clients who did not make any payments during calendar 1973and 1974 and agreed with them on satisfactory collection targets of resched-uling arrangements. 1/ These are indicated in the strategy paper (para 6.04).No targets have been set for the small-scale industry loans mentioned above,as transferring BSB's liability on these loans to BSIC is being negotiatedwith the Government and BSIC. As of February 1976, BSB had collected Tk 38.9million (out of a target of Tk 42.4 million for FY 76 for both public andprivate sector projects excluding jute), or 91.7% of target. In addition,about 41% of rescheduling had been achieved.

Equity Investments

5.10 As of December 31, 1975, BSB had equity investments of Tk 12.7 mil-lion (valued at acquisition cost) in 40 companies (Annex 5). Of this, aboutTk 8 million was disbursed prior to Independence by the Equity ParticipationFund 2/. Included in the above are four equity investments totaling Tk 4.9million that were nationalized in March 1972. No compensation has yet beenpaid to BSB or other shareholders, and the value of these investments is thusunclear. The value of other investments is also uncertain, since there hasbeen virtually no public trading of stocks from 1971 on, and also because BSBhas not obtained regular financial statements from clients. Of eleven com-panies which submitted financial statements in FY73 and/or FY74, four were

1/ In general, BSB has been lenient about rescheduling loans (and has oftenwaived its 2% penalty interest rate on arrears). This is appropriategiven the extra-ordinary nature of the difficulties which have besetits clients. However, after the current round of reschedulings, itshould again become very strict about such matters, and should enforceand perhaps even raise its penalty interest rate.

2/ The Equity Participation Fund (EPF) was set up in 1970 (and adminis-tered by IDBP) to contribute to the share capital of small and mediumsize enterprises in East Pakistan and in the less developed areas ofWest Pakistan. The EPF's East Pakistan operations and BSB were mergedin October 1972.

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insolvent, only three reported profits, and only one paid a dividend. BSBis now taking a cautious approach to new equity investments that is appro-priate given its recent experience and its own difficult financlal position.

Provisions

5.11 The long-form audit report (para 5.12) prepared on BSB's FY75accounts indicates that on the basis of a case by case review of BSB's port-folio, Tk 178.9 million in provisions for principal and overdue interestwere required. However, this included Tk 134.9 million representing pro-visions for jute enterprises. Since the preparation of the audit, specialarrangements (para 5.07) have been made for the jute portfolio which havethe effect of largely absolving BSB from the credit risk for the time being.Thus it is estimated that BSB required Tk 44 million in provisions of princi-pal and overdue interest for non-jute loans at the end of FY75 whlle actualprovisions amounted to Tk 70.9 million. At the same time, the auditors alsorecommended that BSB make equity provisions of Tk 3.8 million which is morethan covered by the excess provision.

Accounts and Audit Reports

5.12 BSB's accounts are audited by two independent chartered accountantsselected by the Ministry of Finance from a short list of accountants recom-mended by BSB. The Bank Group reviewed BSB's audit report for FY73, andfound it unsatisfactory. Both auditing firms were then replaced, and thenew firms, Kashem & Co. and Islam & Co. issued their audit report on BSB'sFY74 accounts without qualification. However, the auditors informallypointed out to BSB's management a number of problems, the most serious ofwhich was insufficient information to determine the adequacy of provisions.This should have been a qualification of the official audit report. Theauditors also prepared a draft long-form audit report according to thespecifications of the Bank Group's, "Illustrative Form of Audit Reportfor DFC's," but this was also unsatisfactory. However, for the FY75accounts, BSB's auditors produced a long-form audit which was found accept-able to IDA. However, there are three main difficulties with BSB's accounts.First, uncertainty regarding BSB's responsibility for liabilities previouslyincurred by IDBP, but this cannot be fully resolved until the governmentsof Bangladesh and Pakistan agree on the matter (para 5.17). Secondly, BSBdoes not obtain sufficient information from its clients (para 4.10). Finally,BSB's accounting procedures and methods are deficient in many respects.Solving these problems will take time, and BSB is hampered by a shortageof qualified accounting staff. It is now recruiting individuals with thenecessary qualifications. Technical assistance could be useful to help im-prove accounting procedures and rationalize the division of work among theseveral departments that have accounting responsibilities (para 4.06).

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Profitability

5.13 BSB's financial statements from FY72 through FY75 are shown inAnnexes 11 and 12. Financial ratios are shown in Annex 13. BSB has shownmodest profits in the past three yeats. Its net income increased fromTk 2.6 million in FY72 to Tk 7.3 million in FY74, and Tk 13.8 millionin FY75 which was about 6% of equity plus subordinated loans. This increasein profits has not been due to an expansion in its volume of business. butrather an increase in interest charges (including penalties) on amountsoverdue. Because BSB had not made adequate provisions against interestreceivable and against its portfolio, its net income had been seriouslyoverstated, and its tax liability has been excessive. If it had madeadequate provisions, profits in recent years would have been eliminated,and BSB would not have been able to pay the Tk 2.5 million of dividendsdeclared on FY73 and FY74 results.

5.14 BSB enjoys an average spread on borrowed funds of over 4%. Interestcharges include imputed interest on past IDBP liabilities not yet recognizedby GOB. Administrative expenses are less than 1% of average total assets.In part, this reflects inflated asset values due to inadequate provisions,and a high proportion (33%) of liquid assets which are not costly to admin-ister. It also reflects that BSB does not have sufficient professional stafffor its appraisal and follow up work, although it probably has an excess ofsupport staff.

5.15 During FY73 and FY74 combined, BSB's collections of interest andloan principal amounted to only 23% of the total overdue at the beginningof the period plus that falling due during the period. However, BSB hasnot itself had to make any loan repayments or interest payments on pastIDBP borrowings. Also, its disbursements have been quite low. For thesereasons, liquidity has increased to a more than satisfactory level (para6.13).

Past IDBP Liabilities

5.16 At Independence, BSB informally assigned to itself the liabilitiesof IDBP that corresponded to assets in Bangladesh. It also indicated aspart of its liabilities IDBP shares held by Bengalis, and half of past Gov-ernment equity contributions to IDBP. However, this assignment was made byBSB itself, and has not yet been recognized by GOB. In FY74 GOB convertedthe domestic portion of these liabilities into Tk 49 million of equity andTk 167 million in an interest free loan, subordinated to equity (with nofixed maturity). However, in December 1974 GOB required BSB to recognizean additional domestic liability of Tk 47 million. BSB was permitted torecognize an asset of an equal amount in the form of Government bonds. 1/BSB had previously treated these assets as realizable from Pakistan, butGOB has recently accepted liability for them.

1/ These bonds were previously issued by the Government of Pakistan to IDBP.

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5.17 At June 30, 1975, BSB's balance sheets showed as a liabilityTk 588 million of IDBP's past foreign currency borrowings, responsibilityfor which is still the subject of negotiation between the governments ofBangladesh and Pakistan. BSB has not been servicing these debts, but ithas set aside from income imputed interest charges on them. During nego-tiations, GOB agreed to provide BSB with off-setting equity funds in caseany past liabilities of IDBP are assigned to it in excess of the amountsBSB has already set aside for these contingencies in its balance sheet.

Debt Limit

5.18 An appropriate limit on term debt to be incurred by BSB would befive times its equity. Since subordinated loans would not be permitted tobe included in equity, this would be a conservative limit and appropriate,given the condition of BSB's portfolio, and in any event BSB's own PolicyStatement limits it to this level of debt. At June 30, 1975, BSB's ratio ofdebt to equity plus subordinated loan was only 3.4:1. However, BSB wouldneed additional equity to remain within this limit during the disbursementperiod of the IDA Credit. During negotiations GOB agreed to provide BSBsufficient equity to enable BSB to stay within a 5:1 debt/equity limit.Thus, GOB converted the Tk 150 million in subordinated loan into BSB capitalreserves. Further, as a condition of effectiveness, GOB agreed to providean additional Tk 50 million in equity to BSB.

VI. PROSPECTS

Investment Climate

6.01 Private sector. The liberalization of GOB industrial policies inJuly 1974 (para 2.07), and recent improvements in industrial labor relationshave had a favorable impact on the climate for private sector investment.However, the response has not been as encouraging as might have been ex-pected; most new private sector projects have been small investments(US$400,000 and below) in traditional sectors (e.g.; specialized textiles,printing and packaging, soap production). The further liberalization ofpolicies in December 1975 is expected to give a boost to private investmentactivity in the next few years. Actual private sector investment is nowlikely to be closer to the Tk 280 milion per year average estimated for theFY74-FY78 Plan.

6.02 Public sector. A list of public sector industrial investmentsincluded in the FY74-FY78 Plan is given in Annex 14. The larger projectson this list (petrochemicals, fertilizer, an iron and steel complex, cement)would be beyond BSB's normal commitment limit (about Tk 35 million at present).Public sector investments are also likely to fall considerably behind Planestimates due to delays in project preparation and insufficient financing.

- 22 -

In addition, many of the new projects producing for the domestic market maynot prove to be economically justified during the Plan period, due to insuffi-cient effective demand or lack of foreign exchange for imported inputs. Ingeneral, the Plan does not give adequate importance to the need to developexport industries, and the emphasis given to new projects rather than bal-ancing and modernization seems inappropriate. Investments planned for thelargest export earner - the jute industry - do not appear justified becauseof limitations in the international jute goods market.

6.03 The May 1975 devaluation of the Taka will of course be a stimulusfor export industries (fish processing, tanneries, paper and wood products,and perhaps sugar). The devaluation will significantly raise the costs ofindustries producing for the domestic market from imported inputs (non-jutetextiles, iron and steel, some chemicals). The effect of increased ex-factory prices on demand is uncertain. Prima facie only a small decreasein quantities demanded might be expected, since present free market pricesreflect scarcity conditions and far exceed production costs.

BSB's Strategy

6.04 BSB has formulated a strategy (approved by its Board on January 14,1976) indicating its institutional objectives and priorities in the mediumterm future (Annex 15). This gives first priority to its own follow up workon projects already in operation. This is appropriate considering the capacityutilization problems of existing industry, and BSB's own need to increasecollections to regain financial health and soundness.

6.05 Aside from the provision of technical advice, BSB also intendsto assist its long-term borrowers by increasing its capacity to provide themwith short-term loans for working capital.

6.06 BSB's Strategy Paper includes its first attempt to establishpriority sectors for its own future financing activities. Its prioritiesare consistent with those of GOB. In evaluating the project applicationsin its pipeline, BSB has developed a further definition of investmentpriorities beyond that provided in GOB investment schedules. In general,BSB will give priority to export industries and industries based on domesticraw materials. Balancing, modernization, and replacement of existing plantswill be given priority over new investments. BSB will avoid financing proj-ects in sectors where there is significant under-utilization of existingcapacity, a condition caused primarily by the lack of foreign-exchange forimported inputs. BSB will be guided by the above priorities in processingprojects in its pipeline and in promoting new projects. However, beforedeciding to finance any project, BSB will continue to undertake a fullappraisal of its particular technical, financial, and economic prospects.

6.07 BSB now has a large backlog of projects in its pipeline, and itslimited staff must be assigned to processing these projects. However, whennew recruitment alleviates BSB's staff constraints, it intends to increase

- 23 -

its role in promoting new projects. Although BSIC is also responsible forpromoting new projects in the private sector, there is ample scope for BSBas well. Promotional activities by BSB could be especially useful if theyhelped interest potential project sponsors in non-traditional activities ofhigh economic priority, particularly export industries.

BSB's Forecast Operations

6.08 The recent improvements in the private sector investment climate,and the availability of foreign exchange to finance the first public sectorindustrial projects under the Five Year Plan, led to an increase in BSB'sloan approvals from Tk 17 million in FY73 to Tk 76 million in FY74, andTk 268 million in FY75. In addition, by March 1975 BSB had over 150 projectapplications pending and anticipated, requiring financing of nearly Tk 800million 1/ (Annex 16). BSB has since eliminated projects in non-prioritysectors, including many project proposals based on imported raw materialsfor which existing domestic capacity is underutilized. About Tk 530 mil-lion 1/ of prospective financing appears in its Strategy Paper. Of theremaining projects, about 49% are chemicals and 41% cotton textile projectsin the public sector, the balance being mainly private sector projects inspecialized textiles, food processing, engineering, packaging and printing,and other sectors. A substantial proportion of these projects would producefor the domestic market and would require imported raw materials. Althoughmany may be quite worthwhile, the relative dearth among them of new exportprojects and domestic raw material based import substitution projects indi-cates a need for promotional activities to concentrate in these priorityareas.

6.09 The IDA sector mission to study the cotton textile industry,undertaken in connection with Fourth Imports Program Credit during March1975 found that the economic justification for capacity expansion inthe cotton textile sector requires careful scrutiny. The argument in favorof expansion in the cotton spinning sector is based primarily on the presentlow level of per capita cloth consumption in Bangladesh and the fact thatconsiderable under-utilized handloom capacity exists due in large part tothe scarcity of yarn. However, as cotton spinning is now highly import-dependent and the foreign exchange shortage in Bangladesh is most acute,the amount of spinning capacity that can be used satisfactorily is con-strained by the limited availability of foreign exchange earnings, unlessthat capacity is used for export. Although the cotton spinning sector hashigher capacity utilization than many other industries in Bangladesh, thereis still considerable room for improvement through increasing the productivityof existing spindles and the rehabilitation of currently idle spindles.

1/ Taka value adjusted to reflect effect of May 1975 devaluation. Excludeslarge potential investments in the Karnaphuli Paper and Rayon Mills,which would exceed BSB's normal lending limits.

- 24 -

The action program recommended in the sector survey and accepted by theGovernment, includes measures to increase utilization of existing capacity.Several project proposals for local production of man-made fiber have sur-faced recently and should be pursued vigorously, since they could reduce oreliminate the foreign exchange constraint on increasing capacity fordomestic consumption of textiles. New cotton spinning plants should there-fore be constructed in a way to permit easy conversion to blends with man-made fibers. As regards the cotton weaving sector, low priority should begiven to capacity expansion in this sector until production in the handloomsector comes close to full capacity. BSB should take these factors intoconsideration as part of its economic analysis of new cotton textileprojects.

6.10 During negotiations, IDA discussed with BSB the expected compositionof projects to be financed under the IDA credit. The following understandingswere reached with BSB in this regard:

(a) BSB would attempt to limit the percentage of financingrequired out of the Credit for new cotton spinningmills producing for the domestic market to no morethan 40 percent of the Credit;

(b) to reflect a concern regarding foreign exchange constraintswhich cause underutilization of capacity in other industrialbranches, the Credit should not be used for investmentsdesigned for expansion in import-substitution sectorssubstantially dependent on imported raw materials whereutilization of existing capacity is less than 70% basedon two shift capacity at peak periods;

(c) the above limits should be applied flexibly; they arenot intended to exclude projects which are technically,financially and economically justified; and

(d) low priority should be given to capacity expansionin cotton weaving until production in the handloomsector comes close to full capacity.

6.11 BSB's projected operations and financial statements through FY79appear in Annexes 18 through 21, and their assumptions are given in Annex17. BSB is likely to approve a total (net of cancellations) of about Tk 272million in FY76, and 10% annual increases thereafter. About 75% of BSB'sapprovals are expected to be for import financing.

Financing Requirements

6.12 Foreign currency. BSB's resource statements at December 31, 1975appear as Annex 6. By March 15, 1975, BSB had fully committed its US$12.6million loan from ADB, and had approved about US$10 million equivalent in new

- 25 -

foreign exchange loans (primarily for two large cotton spinning mills).Commitment of these projects will be delayed due to lack of foreign exchange.Including the above US$10 million, BSB is likely to require a total of aboutUS$44 million to cover its foreign currency financing requirements through FY77.Against this it now has only US$3 million equivalent in tied credits fromIndia, and DM 3 million (US$1.25 million) from KFW 1/. ADB is willing toconsider another loan to BSB of perhaps US$15 million once an IDA Credit isfully committed. ADB would like to alternate with IDA in providing fundsto BSB every other year, which would mean BSB would undergo the disciplineof an appraisal every year. IDA and ADB are coordinating their approachesto BSB. Therefore, IDA funds should be provided for BSB's financing require-ments only through 1977. For this, US$25 million would appear appropriate.The above approach assumes a second IDA Credit would become effective 18months after the first. This is shorter than the normal two-year interval,but is appropriate since IDA will be better able to keep a closer check onremaining issues with a shorter interval between appraisals.

6.13 Domestic currency. BSB's domestic currency financing require-ments are subject to several uncertainties, including: (a) the volume ofdomestic currency commitments; (b) the realization of BSB's collectiontargets; (c) the recognition of past IDBP liabilities and their new repay-ment schedules; and (d) BSB's own profit forecasts. The estimate of thesecash flow items is as follows (for FY76-FY78):

Domestic Resource PositionFY76 FY77 FY78--- Tk Million-----…-

Loan collections 26 23 25Increase in fixed deposits 17 23 30Internal cash generation 39 43 53Share capital increase 50

New commitments (60) (68) (74)Loan repayments (34)Loan repayments on IDBPborrowings (29) (46) (44)

Resources available forcommitment:Opening balance 210 169 194During period (41) 25 (10)Closing balance 169 194 184

The above figures include an assumption that BSB's jute industry loans andthe past IDBP liabilities corresponding to them do not fall due during thenext three years. Other IDBP borrowings are expected to be rescheduled overten years with payments beginning at the end of 1975. If BSB is reasonablysuccessful in meeting its collection objectives, and if other assumptionsare as above, it is unlikely that BSB would require additional domesticcurrency financing.

1/ Not yet effective.

- 26 -

Objectives and Terms of a Proposed IDA Credit

6.14 It is proposed that a US$25 million IDA Credit be extended to GOBfor on-lending to BSB. The objectives of the Credit would include: (i)assisting the development of industry, with a consequent favorable impacton employment, incomes, and foreign exchange earnings and savings; (ii)helping to create a more favorable policy climate for investment in export-oriented projects; and (iii) helping to restore BSB's creditworthiness andto strengthen its soundness and effectiveness as a development finance insti-tution.

6.15 Relending rates and exchange risk. As a consequence of the July1974 increase in general interest rates of about 3%, banks now normallycharge a 12% interest rate on loans. Up through 1974, the rate of inflationwas much higher than interest rates (a 76% cost of living increase for middleincome consumers in Dacca was indicated for the year ended December 31, 1974).Future price increases are very difficult to predict, however, and in factGOB's recent anti-inflation measures appear to have resulted in pricedeclines for some basic consumer goods in recent months. The IDA fundsshould be relent by BSB at 12%, which would provide substantial positivereal rates. Subborrowers should also take the exchange risk, which wouldincrease their cost of funds in case inflation in Bangladesh exceeds world-wide inflation rates (assuming regular adjustments in the exchange rate).IDA funds should be relent by GOB to BSB at 9%, which would provide BSBwith a satisfactory spread of 3%.

6.16 Free limit. The free limit should be set at US$150,000 and theaggregate free limit at US$6 million. These limits would allow IDA toreview about one fourth by number of the sub-projects to be financed byBSB covering at least 76% by amount of the total Credit.

6.17 Disbursements. Disbursements under the Credit should be providedfor 100% of the CIF cost of direct imports, 70% of the invoice price of goodspreviously imported, and 25% of construction costs that would represent theimport financing component of such costs. A schedule of estimated disburs-ements for the Credit appears as Annex 22.

6.18 BSB's debt/equity limit in the Credit should be 5:1, and no subor-dinated debt included in equity. This is a conservative limit, which isappropriate given the condition of BSB's portfolio. Other terms and conditionswould be those generally applied to recent IDA Credits to development financecompanies. The amortization of the Credit should be the aggregate of theamortization schedules of subprojects, with a maximum maturity of 15 yearsfrom the date of subproject approval by IDA.

Projected Financial Results -/

6.19 The projections assume provisions of 50% on equity investments, 10%on total overdue interest, 100% on new penalty interest and 6% on the loan

1/ The projections have not been adjusted to reflect actual FY75 results.

- 27 -

portfolio. BSB may have to decrease salaries of some officers to bring themin line with those of other public sector agencies. Despite this, BSB'sadministrative costs are expected to increase by 20% in FY76 and 10% there-after, due to new recruitment and general salary increases. BSB's averagecost of borrowings are expected to increase from 5% in FY75 to 8% in FY78,but this should be nearly offset by an increase in average interest earningson loans from 10% to 12% over the same period. As a result, net profit asa percent of total assets should remain roughly constant at about 1.1%(Annex 13). Increasing leverage would permit a slight increase in profitsas a percent of average equity (from 6.8% in FY76 to 7.5% in FY79).

6.20 As a result of the conversation of Tk 150 million of GOB subor-dinated debt into capital reserves (para 5.18) and the proposed Tk 50 mil-lion increase in equity by GOB. BSB's debt/equity ratio would then notexceed a 5:1 limit by FY79. BSB's debt service coverage is subject toconsiderable uncertainty because the amount and revised repayment schedulesfor past IDBP borrowings has not yet been clarified. Assuming theseborrowings would be repaid over 10 years commencing at the end of 1976(excluding borrowings to finance the jute industry), then debt servicecoverage would exceed 1.2 throughout the projection period. Since maturitiesof BSB's borrowings roughly match maturities of subloans, its debt servicecoverage should remain favorable if its collection performance and profitsare reasonably satisfactory.

VII. RFCOMMENDATIONS

7.01 On the basis of agreements reached with GOB and BSB above, itis recommended that an IDA Credit of US$25 million be approved for BSB. Thefollowing are recommended as conditions of effectiveness of the proposedCredit:-

(a) that BSB has appointed a Director of Operations and a ChiefAccountant, both of suitable quality and experience(para 4.05);

(b) that BSB has appointed an exDert in economic appraisal and projectpromotion, and an expert in accounting and information systems,each with qualifications, experience and terms and conditionsof employment satisfactorv to the Association (para 4.06);

(c) that BSB has signed rescheduling agreements acceptable to theAssociation with each jute processing enterprise havingoutstanding debt ot BSB (para 5.06); and

(d) that GOB has provided Tk 50 million in additional equity to BSB(para 5.18).

BANGLADESH SHILPA 3ANK

Banglade-h: Production tnd Capacity Uttli-ica in Selected Industrie-

Production Chaan6 (i) Production 8 Capaclty Jttliation1

Industry Unit ProductionJl-e br17 Actual/Target 1969/70 1972/73 1973/74 1974/75 1974/75 1975T76

1969/70 1972/73 1973/74 1974/75 1974/75 1975/76 Over O July-De

July-De- July-Dec July-Dec July_Dec ----------- Ac- uala----------------(Actual), (Erti.tur (T-9get)

------------- Atu Ls--a-----n t (T--------------- (Estipte|Target: 1969 1973 1974

1. Jute Tectilea 560 446 500 239 483 600 -14.6 - 7.0 49 74 56 69 66 67 H3

He-aina (000 toc) 228 155 172 76 160 221 -33.3 -15.5 58 n.m. na. 72 63 67 92

Sacking (000 toe) 279 210 227 116 230 272 -12.8 - 1.7 67 na. na. 69 70 70 83

C-rpet Backiag (0oo ton) 33 54 66 29 6o 66 75.8 -11.6 73 u.s. n. 57 50 52 58

Othera (200 ton) 20 27 35 17 33 4i 70.0 - 1.7 - n.0. a.a. 100 97 94 94

2. Cotton Tetile

Cloth (Pillion Yards) 60 59 79 42 88 110 41./7 9.6 89 49 49 77 71 74 93

Yarn (Million lie) 106 81 91 48 83 110 - 3.3 4.2 93 79 6o 59 72 62 82

3. Paper end Board

Neweprint (2oO ton) 36 28 26 14 28 35 -35.4 14.7 79 69 54 53 56 56 98

Paper (0OU ton) 31 21 24 12 23 45 -29.8 - 6.9 80 102 69 49 50 48 94

4 Fe,tilize-

Urea (000 ton) 95 ?26

279 34 67 260 - 6.5 -74.0 21 91 62 62 15 15 58

TSP (000 ton) - - - 6.3 20 70 - - 19 - - - 3 13 46

Amon.iu Sulphate (goo ton) 4.7 6 10.3 1.7 3.5 10 308 0 -73.0 35 39 50 96 28 29 83

5. Cement (000 to) 53 32 58 58 160 300 188.9 188 9 45 53 23 35 30 40 57

6. Steel Iagont (cOO too) 74 68 74 37 75 150 33.7 23.1 82 22 27 29 30 30 6o

7. Petrleum Prco-cte (000 ton) 853 776 323 326 993 1200 -23.6 101.9 66 57 52 22 43 66 80

8. Matches (Milli.a geosE boee.) 12.9 5.9 5.0 2.3 4.8 2.0 -64.4 - 8.o 49 86 28 31 30 30 11

9. Tee (Million lbe) 67 53 61 49 72 72 n.e. n.e. n.e. n.a. a. n.a. na. 0.0 0.0.

10. psoisear (OOOdoz ) 655 681 44o 131-/ 263/ 300/ -56.o -31.08/ 598 n.n. na. n.a. 228/ 225/ 438/

11. Food and Allied Products

Edible Oil and Vegetable Ghie (000 ton) 11 10 19 6 13 55 - 9.1 -36.8 43 31 07 P6 i6 17 73

FiBh vescees.ig (100 lbs) 2502 1115 3100 1886 3800 5000 50.8 21.7 134 36 16 24 29 30 39

Soft Beverage (oOO Bottles) 622 3960 684o 2441 4848 n.a. 684.9 -28.6 45 22 20 79 57 56 a.a.

Cigare-teE (billion) 17.8 12.0 12.9 5.0 n.a. n.a. -43.8 -22.5 n.a. n.e. n.a. 23 18 n.a. n.a.

12. sugar (000 ton) 93 19 88 38 132 132 41.9 32.9 100 55 11 52 59 83 83

13. Engineering acd Shipping

Diesel nEgins (No.) 1284 1353 1720 4052 4200 5000 533.1 426.9 156 43 45 57 n.a. 129 83

Pamps (N..) - 900 1865 4541 6400 800U - 189.1 116 n.a. n.a. n.0. s.c n.b. n.a.

Heavy Vehicle- (N..) 455 1228 2068 635 1200 2000 128.4 -38.6 71 n.a. n.e. 69 42 42 67

(Car, bu, truck)

G.I. Sheet and Steel Pipes (Ton) 5134 2800 3661 377 800 2500 -85.5 -79.4 27 n.a. n.a. 58 12 12 25

8/ public ster only

Source: Planning Con=ision; NMtiomeli.ed IndoetrieiSi Dision and Sector Cnrpor-tione, Boreau of Statistics

Extracted fre:- "Beegladeeh: The C-rrent nemonmic Sitoatics and Short-Tera Outlook,"

Report NM. 710a-BD dated May 21, 1975

ANNEX 2

BANGLADESH SHILPA BANK

Bangladesh: Interest Rates as of March 31, 1976

PercentPer Annum

Bank Rate 8

Lending Rates by Commercial Banks

Loan and advances except for those indicated below 12-13Loans and advances against Jute goods and Tea 10.25

Lending Rates by S>ecialize Lendinq Institutions

BSB

Domestic currency loans 12-~Foreign currency loans:

For Sub-projects under IDBI and ADB credits 9For Sub-projects under Indian Textile Machinerycredit 9For Sub-projects under KfW loan 12

Penal interest on overdue amount 2

BSRS

Domestic currency loans 129/Foreign currency loans

For Sub-projects under IDBI credit 9For Sub-projects under ADB credit 12.50

Penal interest on overdue amount 2

Saving and Fixed (Term) Deposit Rates

Commercial Banks

Saving accounts - 6Accounts of 3 months and over but less than 1 year 6-6.50Accounts of 1 year and over but less than 3 years 7.25-8.25Accounts of 3 years and over 9.25

BSB and BKB

Saving accounts 4- 6Accountsof 3 months and over but less than 1 year 7-7.50Accounts of 1 year and over but less than 2 years 8.25-9.25Accounts of 3 years and over 10.25

~~j7E .above Bank Rate, subject to a minimum of 12% p.a.

April 15, 1976

BANGLADESH SHILPA BANK

Summary of Operations

(Amounts in TK million)

APPROVALS FY62-FY69 FY70 FY71 FY72 FY73 FY74 F75

Foreign currency loans 6 74a/ 88 79 10 - 57 201Local currency loans 202a/ 143 12 5 17 19 67Equity investments n.a. 3 19 6 _ _ -

Total Amount 8 76 a/ 134 110 21 17 76 268Number of loans l,OlOa/ 10 86 158 24 31 89

COMMITMENTS

Foreign currency loans n.a. 82 55 1 - 4 68Local currency loans 17 9 5 8 11 25Equity investments - 10 2 2 - -

Total 99 74 8 10 15 93

DISBURSEMENTS

Foreign currency loans n.a. 28 26 23 - 2 24Local currency loans 17 101 13 14 15 11Equity investments - 9 3 1 1 _

Total 45 136 39 15 18 35

a/ Projects of the Industrial Development Banik of Pakistan located hit Binlad.eh.

April 15, 1976

BANGLADESH SHILPA BANK

Sectoral Distribution of Loans OutstandinL as of December 31, 1975

(Aaountu in Million Taka)

Private Sector Public Sector TotalNo. of No. of No. of

Industrial Sector Projects Amount Projects Amount Projects % Amount %

Food & Allied Products 53 h2.q 16 16.3 69 9.6 c8.8 6.2Jute & Allied Fibre Products 3 1.6 39 514.3 42 5.8. 515.9 54.3

Cotton, Wollen & SyntheticTextile 7 9.2 25 187.3 32 4.4 196.5 20.7

Paper, Paper Products & Print- 23 23.7 9 17.7 32 4.4 41.4 4.4

Tannery & its products 6 5.0 - 6 0.8 5.0 0.5Non-Metallic Mineral Products 16 29.5 1 0.8 17 2.4 30.3 3.2

Forest & Wood Products 2 0.9 2 0.4 4 o.6 1.3 0.1Rubber & Rubber Products - - 2 3.1 2 0.3 3.1 0.3

Basic Metal Products 3 4.5 2 4.0 5 0.7 8.5 0.9

Metal Products 10 3.1 5 2.0 15 2.1 5.1 0.5Electrical Machinery & Goods 6 3.5 2 0.8 8 1.1 4.3 0.5

Machinery & Spare Parts 2 0.2 o.6 3 0.4 0.8 0.1

Transport Equiiments 1 0.2 - - 1 0.1 0.2 -

Chemicals 11 6.5 1 0.2 12 1.7 6.7 0.7

Petro-Chemicals - - 1 1.6 1 0.1 1.6 0.2

Service Industries 72 39.8 7 7.1 79 11.0 46.9 4.9Mining, Mineral Oil & Gas - - - - - -

Miscellaneous 1 o.6 2 0.8 3 0.4 1.4 0.1Small Industries 383 20.4 7 2.2 390 54.1 22.6 2.4

Total 599 191.2 122 759.2 721 100% 950.4 100%

i incDluding y:uiiCurrency

April 15, 1976

ANNEX5Page 1

BANGLADESH SHILPA BANK

Sector-Wise Position of EquitgCort-folio As on 31st December, 1975-(Amount in Million Taka)

Name of Project Owned shares Amount Dividendheld Invested

COTTON TEXTILE:

Raj Textile Mills Ltd. 50.00 100,000 1.000Rupali Nylon Ltd. 41.66 50,000 0.500Tamijuddin Textile Mills 44.44 80,000 0.800Goalundo Textile MillsLimited 50.00 100,000 1.000Habibur Rahnan TextileMills Limited 44.44 80,000 0.800N.H. Textile Mills Ltd. 40.00 80,000 0.800Kazi Textile Mills Ltd. 28.57 40,ooo 0.400Pioneer Rope Mfg. Ltd . 40.00 2,000 0.200Associated TextileCorporation Ltd. 42.13 1,500 0.150Yusuf Textile Mills Ltd. 47.50 47,500 0.475Terry Textile Mills Ltd. 44.89 2,150 0.215H.M. Sadique Silk MillsLimited 35.37 1,100 0.110

ENGINEERING/STEEL:

Allied Automobiles Ltd. 39.02 800 0.080Pak Arabian Engg. Co. Ltd. 35.61 1,250 0.125 0.002Sigma Engineering Works Ltd. 41.66 1,000 0.100Al-haj Ahmed Ali Steel(Re-Rolling) Mills Ltd. 28.00 70,000 0.700

ELECTRICAL:

General ElectricalIndustries Limited 42.22 760 0.076National Electric Co.Ltd. 45.00 4,500 0.450

PAPER/PRINTING:

Eastern Straw Board & PaperMills Ltd. 5.75 1,000 0.100

LEATHER & RUBBER:

Eastern Progressive ShoeIndustries Limited 30.42 4,000 0.400Dacca Trading Company 18.98 900 0.090

ANNEX 5Page 2

X No. ofName of Project Owned shares Amount

_________ _____________________ held Invested Dividend

FOOD & ALLIED:

Chandpur Tobacco Co. Ltd 38.46 6,ooo o.600Rahmania Vanaspati ProductsLimited 16.00 2,500 0.200Kushtia Ice & Cold StorageLtd. 19.61 1,000 0.100Pioneer Cold Storage andIce Plant Ltd. 45.45 2,000 0.200 0.010Megnum Enterprise Ltd. 20.60 1,500 0.150Savar Cold Storage Ltd. 44.30 1,750 0.175Eastern Cold Storage Ltd. 33.33 2,500 0.250Moderr. Industries Limited 37.50 6,ooo o.60c 0.036T.S. Enterprise Limited 33.71 3,000 0.030Kohinoor Rice Mills Limited 47.44 2,500 0.250 0.025Eggs & Hens Limited 28.30 2,250 0.225Kedarpur Tea Estate Limited 77.78 17,500 0.350Palash Ind. Enterprise, Ltd. 34.88 7,500 0.075lTIsco Limited 45.45 500 0.050Diana Oil Mills (Pvt.) Ltd. 42.85 300 0.300Azad Biscuit & Bread 48.00 600 o.o60Factory LimitedSarker Food Industries Ltd. 31.91 750 0.075N.B. Enterprise Ltd. 47.61 3,000 0.030

MINERAL OIL & GAS:

Bricklinkers (Pvt.) Ltd. 40.00 7,000 0.700

12.721

17i/:F Insvral cases, BSB holds over 49% of the shares of a company.This is due to the fact that BSB took over the shareholdings of theEquity Participation Fund.

ANNEX 6Page 1

BANGLADESH SHILPA BANK

Resource Position as on December 31, 1975(in million Taka)

A. Foreign Currency Resources a December 31, 1975

1. Untied Resouces

ADB Credits b/ 187.1

Less: Loans outstanding 175.7

Total ADB resources availablefor disbursement 11.4

Less: Committed but undisbursedresources 11.4

Total untied resources availablefor commitment Q/ Nil

2. Tied Resources

Credit from the Industrial Development Bankof India (IDBI)g/ 33.0

Indian Textile Machinery Credit e/ 8.3

Sub-total 41.3

Less: Loans outstanding 5.2

Resources available for disbursement 38.1f/

Less: Committed but undisbursed resources 9.7

Resources available for commitment Nil

a/ 1 US$ = Tk 14.85b/ ADB credits were signed in June 1973. The proceeds are to be lent

to BSB at 6 7/8% p.a. in one case with 18 years repayment (including3 years of grace) and at 6 1/2% p.a. in the second case with 15 yearsrepayment (including 3 years of grace).

c/ A loan of Tk 18.5 million equivalent was signed with KfW on December 30,1975 but is not yet effective.

d/ Extended in May 1974 at 5% p.a. and 15 years repayment (including 3 yearsof grace).

e/ Extended in May 1974 as part of a larger credit to the Government. Theproceeds are on-lent to BSB at 9% p.a. and relent at 13% p.a.

f/ Includes an amount equivalent to Taka 26.4 million under IDBI Credit ofTaka 33.0 million which is not now available for disbursement as thelast date for utilization of the Credit had expired on 7.12.1975.Request made through the Govt. of Bangladesh to the IDBI for utilizationof reritiA, sIpt,o 31.'.'1076 is still under active consideration by theGovt. of India.

April 15, 1976

ANNEX 6Page 2

BANGLADESH SHILPA BANK

Resource Position as on December 31, 1975(in million TakaF

B. Local Currency Resources December 31, 1975

Equity 73.35Government-Subordinated Loan 166.5Fixed Deposits (3 years and above) 96.87Interim Profit (unappropriated) 25.76

362.46

Borrowings

Central Bank 8.50BSIC a/ 3.94Debentures b/ 40.00Taka equivalent of IDBP contracted loans-not recognized by Government 670.62

Unrecognized local currency liabilities 95.83

Total Borrowings 818.89

Total Domestic Currency Resources 1181.37

Less: Local currency loans outstanding 696.13Taka equivalent of Pre-IndependenceBorrowings 323.25Equity investments 12.72Government bonds 63.66Net fixed assets 2.21

1097.97

Total Domestic Resources Available for Disbursement 83.40

Less: Committed but undisbursed domesticresources 25.75

Domestic Resources Available for Commitment 57.75

a/~Bangladesh Small Industry Corporation. Loans (Tk. 5.0 million)made to BSB at 4% payable over 30 years, to finance small scaleindustries by BSB. Repayment is being withheld and related torecover of sub-loans against it.

b/ BSB has not acknowledged liability for these foreign obligationswhich were assumed by IDBP prior to December 1971. As maturitiesfall due on these borrowings, BSB transfers the amount due fromone account to another, but no actual payments have been madesince December 1971.

April 15, 1976

ANNEX 7Page 1

BANGLADESH SHILPA BANK

Statement of Operating Policies

Approved by BSB Board on April 25, 1975

Objectives of BSB

1. In terms of the Bangladesh Shilpa Bank (BSB) Order, 1972(President's Order No. 129 of 1972), enforced from the 31st October, 1972,the main objective of the BSB is to provide credit facilities and equitysupport to industrial concerns in Bangladesh. In other words, the BSB will -

(i) mobilize resources within and outside the country forinvestment in industry; and

(ii) stimulate industrial development through financing andadvising industries regarding the establishment of newprojects and the balancing, modernization, replacementand expansion of the existing projects.

These objectives are carried out through the operating policies discussedhereinafter.

Long-term Loans

2. Long term loans in foreign currency and/or local currency aregiven for setting up of new industrial projects and/or for balancing,modernization, replacement and expansion of the existing industrial enter-prises in public and private sectors.

Working Capital Loans

3. The BSB also provides limited short-term borrowing facilities tomeet the working capital needs of the industries which have received long-term loans, guarantees, equity-support and/or bridge finance. It alsoextends temporary loan facilities to its clients who maintain fixed depositaccounts with the BSB. To the extent that the BSB can mobilize commodityloans, it will provide short-term loans in foreign exchange for the importof raw materials and spare parts required by its clients who have receivedlong-term financial assistance from the BSB.

Bridge-financing

4. Short-term advances against shares underwritten are made to enablea company to go into commercial production before floating the shares forpublic subscription or release of fund against ADP (Annual Development Plan)allocations by the Government in respect of public sector projects.

ANNEX 7Page 2

Guarantee for Credits/Loans

5. The BSB provides guarantee for credits/loans raised by industrialprojects from other sources.

Equity-support

6. Equity-support is extended only to limited-liability companiesfor financing the industrial projects by way of -

(i) outright purchase of shares; and

(ii) under-writing the issue of shares.

Public Fund Administration

7. Funds allocated by the Government for public sector projects canbe channelized through the BSB on payment to the BSB of commission at theagreed rate by such projects.

Private and Public Sectors

8. Both public sector and private sector projects are eligible forthe BSB's assistance. In the private sector, financial assistance will beextended only to those industries for which monetary provisions are generallyindicated in the Investment Schedules published by the Government from timeto time.

Project Appraisal

9. The BSB will finance only those projects which it has determinedthrough its own appraisals to be technically sound, financially viable andeconomically justified provided also the managerial ability and creditworthiness of the sponsors of such projects are satisfactory in the opinionof the BSB.

Terms and Conditions

10. The standard terms and conditions for extending financial assist-ance are applicable to all borrowers. But the main core of the terms andconditions of the BSB's financial assistance varies from case to casedepending upon the nature of assistance and the status of the borrower.Special conditions are stipulated as and when the circumstances so warrant.

Security for Loan

11. The BSB will obtain adequate security coverage to protect itsexposure in any loan. Loans are usually secured by mortgage/hypothecationof the existing assets of the projects and/or the assets to be created withthe BSB's financial assistance.

ANNEX 7Page 3

Repayment Schedule

12. Repayment of loans and guarantees is usually made according to anagreed repayment schedule or in accordance with the amortization scheduleof the foreign credit line under which the subloan is accommodated. It mayordinarily extend up to a maximum period of twenty years which may be furtherextended by the Board of Directors on the merits of each case.

Lending Rates

13. The lending rates of foreign currency and local currency loans aredetermined so as to allow the BSB an adequate spread to cover its operatingexpenses and creation of adequate reserves and to be in line with otherlending rates in the country.

Lending and Investment Limits

14. The BSB determines the debt-equity ratio of projects it financeshaving regard to the project's earning and cash generation power. Itundertakes additional risks in respect of projects in the under-developedareas where entrepreneurs are shy and industry investable capital is meagre.The BSB will see that the sponsors' own contribution to the project costis sufficient for their adequate stake therein and to induce their whole-hearted participation in the projects.

15. The BSB would not ordinarily take up more than twenty percent ofshares representing the paid-up capital of an industrial company except incases where it may be worthwhile to convert a part of the BSB's loan intoequity (depending on the operational results of the company) provided thatthe BSB's overall equity investment in any industrial company would notexceed fortynine percent of the company's paid-up capital. The BSB willseek to encourage widespread ownership of shares in industrial companies,and to this end, it will sell its own equity holdings whenever possible andappropriate.

16. The BSB's commitments by way of loans and/or equity-support inany industrial company should not exceed fifteen percent of the BSB's ownnet worth except in cases where attractiveness of projects and lack of othersources of funds justify the BSB's higher level of investments provided thatspecial measures are taken to protect the BSB from the magnitude of therisks involved.

17. The BSB's aggregate investments by way of equity support toindustrial companies should not exceed at any particular point of time theBSB's own net worth.

Portfolio Diversification

18. The BSB will seek to diversify its portfolio among industrialsectors and strive to have a wide spread geographical distribution of itsprojects.

ANNEX 7Page 4

Financial Policies

19. As a development financing institution, the BSB will always havein its investment portfolio projects involving risks. The BSB seeks tomaintain its capital structure on the basis of 5:1 debt-equity ratio. TheBSB will make adequate and separate provision to cover itself for likelylosses on the principal and interest amount of its loans and also forlikely losses on its equity portfolio. The BSB will refrain from takingany exchange risk on foreign currency borrowings.

Promotional Policies

20. Identification of projects and entrepreneurs, including potentialforeign investors interested in making investments in Bangladesh, is anintegral part of the BSB's activity directed towards promotion of industrialinvestment both in the public and the private sectors. The entrepreneursare given free technical advice in respect of plant and machinery, productand process, availability of inputs and other related matters to enablethem to select a project. The BSB also prepares model project reports forthe small entrepreneurs who are otherwise unable to seek professional counselfrom other sources.

Follow-up Activities

21. In order to protect its own investment and to provide assistanceto its clients, the BSB will maintain close liaison with the project-manage-ments through periodic inspection of projects under construction and inoperation. The project managements are required to keep the BSB informedof the state of affairs of the projects/companies through periodic progressreports and annual audited financial statements.

Relation with the Government

22. While the BSB is wholly owned by the Government, its charter allowsautonomy to the Board of Directors to organize, operate, manage and conductits affairs on commercial consideration within the broad policy-frameworkof the Government. The BSB's Board of Directors also has independence asper its charter to extend or withhold financial assistance to any projectwithin the meaning of the Government's industrial investment policy andFive-Year/Annual Development Plans and Investment Schedules.

Co-operation with other Institutions

23. The BSB is keen to maintain close relationship with national andinternational institutions engaged in various development activities. It iswilling to participate in joint ventures with other development institutionsprovided such projects meet its investment criteria. The BSB also wantsto collaborate with other institutions in respect of economic research,technical assistance and project appraisal.

BA.VGLADESH SEIILPA BANK

Organization Chart at April 4, 1975

Board of DirectorsChairman_andUManaging_Director

Mr. A.H.M. Kamaluddin

Director of Operations General Manager Financial_Advisor

vacant

_ Loan and Equity Board Foreign Exchange|De artms 15 b/| Department, O Departrnent, 4

[Engineering __FEstablishment Central Accounting~~t Departrrzent -7 | Department 2 Department, 21

Ec no-r ~ -o m iGc I|eneral Banking Loan Accounting8 Department, 6 | m Department. 10 Department, 18

Loan Administration Training lStatistics~partment, 36 l Department 1 1 -Department, 61

Le al iDe artment 7 FPublic Relations _uit & Method|Department. 4 Ieament,

6 Branches, 26|

a/b/ Staff numbers indicated above are as of June 30, 1974.

Includes only number of professional staff. Professionals 208Non-Professionals 392

April 15, 1976 Total Staff 600

ANNE 9

BANGLADESH SHILPA BANK

Age-wise Distribution of Arrears

at December 31,_1974 and 1975

December 31. 19714

OutstandingPrincipal Arrears

Age of Arrears Amount ,% Principal Interest Total

Up to 3 months 13.13 2.0 0.32 0.55 0.87

Between 3 and 6 months 10.99 1.7 0.67 0.43 1.10

Between 6 and 12 months 19.35 2.9 3.41 1.140 4.81

Between 12 and 24 months 21.86 3.3 2.41 2.17 4.85

0Over 24 months 600.72 90.1 254.84 165.39 420.23

Total 666.05 100.0 261.65 169.94 431.59

December 31, 1975

Up to 3 months 16.60 2.6)4 0.61 1.140 2.01

Between 3 and 6 months 52.84 8.41 o.98 0.37 1.35

Between 6 and 12 months 57.16 9.09 2.90 3.69 6.59

Between 12 and 2)4 months 14.30 2.27 2.1)4 3.98 6.12

Over 24 months 1487.80 77.59 316.03 234.73 550.76

Total 628.70 100.00 322.66 244.17 566.83

April 15, 1976

ANNEX 10BANGLADESH SHILPA BANK

Non-Jute Arrears at December 31, 1974(Tk million)

No. of Principal ArrearsPublic Sector Projects Outstanding Principal Interest Total

1. Projects under litigationpayments 1 0.12 0.12 - 0.12

2. Other projects ceasedoperation 6 4.9,3 2.28 1.94 4.22

3 Projects not making anyPayments in previous24 months 40 53.55 21.78 13.48 35.26

4. Other projects makingirregular payments 38 63.34 21.32 7.93 29.25

Sub-Total 85 123,.94 45.50 23.35 68.85

Private Sector

1. Projects under litigationSmall-scale 41 0.70 o.69 0.30 0.99Other 38 20.20 16.96 5.o4 22.00

2. Projects ceased operationSmall-scale - -

Other 16 3.69 2.93 o.94 3.87

3. Other projects not making anypayments in previous 24 monthsSmall-scale 192 7.26 3.59 2.92 6.51Other 19 17.37 7.28 3.56 10.84

4. Projects making irregularpaymentsSmall-scale 157 7.69 3.17 1.43 4.60Other 133 87.67 37.13 17.24 54.37

Sub-Total 596 144.58 71.75 31.43 103.18Small-Scale (390) (15.65) (7.45) (4.65) (12.10)Other (206) (128.93) (64.30) (26.78) (91.08)

Total Public and Private 681 266.52 177C25 54.7S 172.03

April 15, 1976

ANNEX 1 1

BANGLADESH SHILPA BANK

Audited Income Statements (FY72 through FY75)(Tk Million)

FY71W FY72 FY73 FY74 FY75

INCOMEInterest on foreign currency loans 28.9 25.5 27.8 59.5Interest on taka loans 12.5 10.7 10.1Interest and penal interest on amounts overdue 7.9 19.1 29.7 51.5Interest on term deposits and money at call 4.3 5.5 6.5 8.2Return on investments .3 .8 .7 1.0Other interests and receipts 2.4 2.1 2.1 2.7

Gross Income 36.6- 56.3 63.7 76.9 122.9

EXPENSESInterest on deposits 3.7 5.6 10.0Interest on borrowing 20.8 22.7 24.0Additional interest imputed on contracted loans 14.1 15.7 -

Total Financial Expenses 18.8 . 38.6 44.0 34.1

Compensation to employees h.2 3.8 4-4 (Bonus to staff .5 .5 .6 (14.8Gratuity Fund .2 .2 .2Employees Benevolent Fund .1 .1 .1Depreciation .1 - .1 0.2Rent, insurance and other *xpenses 2.4 2.4 3.1 3.9Other adlministrative expenses .1 .1 .2 0.9

Total Administrative Expenses 9.0 L. 76.1-/ 8.7g 2

Provisions 8.2 9.6 8.4 50.2

Total Expenses and Provisions 27.8 50.9 55.3 61 94.1

Income before taxes 8.9 5.4 8.4 15.8 28.8Less: Taxes 3.1 4.7 8.8 15.0Net Income 2.3 3.7 7-0 13.8

APPROPRIATIONSSpecial reserves .6 .9 1.6 2.8General reserves 1.7 .3 2.9 8.5Dividends - 2.5 2.5 2.5

a! IDBPts East Pakistan operations. Breakdown of income and of expenditure items not available.

b/ Net of Provisions

c/ Includes contributions to Gratuity Fund and Employees Benevolent Fund of TK 0.2 million and- TK 0.1 million respectively, that BSB's incorrectly shows in its books as appropriationg out

of net income.

April 15, 1976

ANN3X 12

BANGLADESH SHILPA BANK

Audited Balance Sheets, FY72 - FY75

ASSETS Dec. 17, 1971 FY72 FY73 FY74 FY75

Cssh in hand and with other banks 153.4 69.6 89.8 174.1 220.0Government securities 1.5 .5 13.0 13.0 62.6Short term loans 7.2 7.2 6.7 4.7Interest receivable 56.0 a/ 95.6 155J4 233.7

Total Current Assets 154-9 133.3 205.6 9 521.0

Equity portfolio 1.5 1.5 11.8 12.4 12.7

Gross Loan Portfolio 437.1 685.4 697.4 683.9 876.3

Less: Provisions -17.3 -26.9 -34.9 -70.9

Net Loan Portfolio 668.1 670.3 649.0 805.4

Fixed assets (net) 2.8 2.3 2.1 2.1 2.2Other assets 5.7 18.4 22.2 8.1 14.3

Total Assebs 602.0 823.6 912.2 1,020.8 1,355.6

LIABILITIES

Current Liabilities 96.5 108.9 144.0 203.3 244.9

Fixed deposits 11.0 b/ 33.0 b/ 30.0 b/ 37.7 57.9Debentures - - - 40.0 40.0Other liabilities 25.2 14.9 11.8 7.5 4.6

Total Domestic Currency Borrowings 36.2 47.9 41.8 85.2 102.5

IDBP borrowing not yet recognised by Goverrment 287.7 489.6 458.1 455.3 588.7Post-Independence Borrowings - - 45.3 48.5 132.3

Total Foreign Currency Borrowings 287.7 489.6 503.4 503.8 721.0

',ar adjustment account c/ 172.5 172.5 215.5 - 47.4Subordinated Government loan - - - 166.5 166.5Paid-up capital - - - 50.0 50.0Reserves -9.1 4.7 7.5 12.0 23.3

Net Worth 9.1 4.7 7.5 62.0 73.3

Total Liabilities and Net Worth 602.0 823.6 912.2 1,020.8 1,355.6

Contingent Liabilities 26.1 46.2 1.2 9.3 7.2Assets and Liabilities assigned to IDBP - Pakistan 953.2 - - - -

a/ Combined accrued interest and principal amount overdue is given at Tk 161.4 million; the breakdown into componentsis an estimate.

b/ Total deposits (including fixed deposits) on December 17, 1971 and at the end of FY72 and FY73 were Tk 21.8 million,Tk 65.7 million and Tk 59.6 million respectively, the breakdown into deposits and fixed deposits is an estimate.

c/ Represents the difference between the domestic assets and liabilities which BSB acknowledged in seperating itsaccounts from those of IDBP's.

April 15, 1976

BANGLADESH SHILPA BANK

Past and Pro,jected Finanrial RatiosYears BE3ing June 30

Actual Projected1972 1973 & UY75 2L 1Ly77 Id'd IY72

i. Income Statemat Items as % of Average Total Assets

Gross Income 7.9 7.8 8.0 10.3 9.7 10.1 10.5 10.7Firancial Expenses 4.9 4.7 4.6 2.9 5.0 5.1 5.4 6.2

Administrative Expenses and Other Expenses 1.0 0.8 0.9 0.8 o.8 0.8 0.8 0.8

Profit Before Provisions 1.4 1.5 1.6 5.4 2.5 2.4 2.6 2.4

Net Profit °.4 0.5 0.8 1.2 1.2 1.2 1.4 1.1

2. Selected Income and Cost Items

Income from Loans as % of Averge Lcan Portfolio 8.5 10.6 9.9 14.2 11.4 11.8 12.0 12.0

Cost of Term Debt as % of Average Term Debt(excluding subordiLnted loan) n.a 6.7 7.6 4.8 7.0 7.5 7.4 8.5

3. Net Profit

As % of Average kluit.y 37.7 65.6 21.0 20.4 10.0 6.9 9.0 7.5

As % of Average 2tuity + Subordirated Loan 37.7 65.6 3.0 5.9 5.2 4.5 5.9 5.1

4. Structural Ratios

(Term Debt + Subordinated Loan)/Equity 112.0 71.6 12.2 13.5 4.7 4.3 4.6 4.9

Temr Debt/Aquity + Subordinated Loan) 112.0 71.6 2.6 3.4 4.7 4.3 4.6 4.9

Provisions as % of Gross Loan and &juity Portfolio 2.5 3.9 5.1 8.0 5.3 5.5 5.6 5.8

5. Debt Service Coverage n.a 3.5 3.4 2.7 2.1 1.8 1.9 1.3

April 15, 1976

ANNEX 14

BANGIADESH

Public Sector Industrial Investments in Plan(TK million)

Under Construction Balancing,At Beginning Modernization New

Sector of Plan & Replacement Projects Total

OUTSIDE.BSBS -PIRVI,WPetrochemicals - 1,610 161Fertilizer 43 75 118Rayon - 139 139Shipbuilding 332 23 - 355BSIC and CIC 2.40 - 20 60 220

Subtotal 515 43 1,884 2,442

WITHIN BSB'S PURVIEWJute 49 150 84 283Non-jute textiles 160 99 805 1,064Engineering 2/ 571 97 252 920Iron and steel 2/ - 126 864 990Chemicals (other

than above) 47 15 247 309Paper and board 2/ 98 144 124 366Forestry 15 9 73 97Mining and *inerals j/ 8 9 601 618Sugar 2 / 51 67 18 136Food and allied _ 4 75 79Leather 10 8 68Cinema 5 _ 25 30

Subtotal 1,004 730 31,226 4,960

Total 1,51 773 5,110 7,402

/ Bangladesh Small Industries Corporation and Cottage Industry Corporation.2/ May include some projects of a larger size than BSB would normally finance.

April 15, 1976

ANNEX 15Page 1

BANGLADESH SHILPA BANK

Strategy Paper(approved by BSB's Board on January 14, 1976)

1. The Bangladesh Shilpa Bank's main objective is development finan-cing by way of providing credit facilities and equity-support to industrialconcerns for industrialization of Bangladesh. To achieve its objective, theBank has to perform a number of allied functions, such as, mobilization ofresources, assistance to its clients, investment promotion and training ofits staff internally and through outside agencies. In the context of thecurrent resources position and staff constraints, the Bank intends to beguided in its operations by the following priority principles during thecourse of the next few years.

ASSISTANCE TO THE BANK'S EXISTING CLIENTS

2. The Bank had always had contacts with its projects throughobtention of periodical financial and performance reports and throughinspection. Its current policy is to further intensify its efforts fora closer review and monitoring of the project's performance and operationalproblems and to help solve the problems internally and with the assistanceof the external institutions. Such steps may call for re-structuring capi-tal, change in organization and management, improving marketing and qualitycontrol, rendering advice and assistance to solve problems of cost control,scarcity of physical inputs, and liability increase emanating from monetary,fiscal, industrial, labor and other policies of the Government. To thisend, the Bank may stipulate suitable conditions for enforcement. The Bankmay also strengthen the present Evaluation and Inspection Section of theLoan Administration Department into a full-fledged Department to be mannedby qualified and experienced financial analysts and engineers as and whenthe staff position is eased and after arrival of the UNDP experts.

COLLECTION OF OVERDUES

3. With the currency devaluation in January 1972, the amount ofarrears had shot up and maintained upward trend with the continued non-payment by the public sector'projects. As on the 31st December 1974,the total arrears stood at Taka 431.5 million, of which the share ofthe Jute Sector alone was 60%. Further devaluation of the Taka from17th May, 1975 increased the outstanding foreign currency liabilitiesautomatically by another 58% increasing the arrears thereby to Taka487.4 million as on 30th June, 1975 of which the share of Jute Sectorwas about 66%. The other factors contributing to the growth of arrearswere the problems emanating from the shortage of imported raw materialsand spares, labor unrest, law and order situation, and the managementproblems in the public sector projects.

ANNEX 15Page 2

4. The Bank would continue to make serious efforts in the next twoto three years to realize the overdues. In the case of Jute sector whichaccounted for the overdues of Taka 319.5 million as on the 30th June, 1975,a meeting was held on 18.9.75 with the Finance Secretary in the chair andit was decided in principle to give effect to the rescheduling of paymentsof the various Jute mills financed by the Bank on the following basis:

(i) The earlier Government decision in respect of grantingof moratorium (grace period) for five years beginningfrom 1973 would be acceptable to the Bangladesh JuteIndustries Corporation (BJIC) and the financialinstitutions;.

(ii) The total period of rescheduling would be reduced fromtwenty years as was earlier envisaged to fifteen yearsinclusive of the moratorium;.

(iii) The Bangladesh Jute Industries Corporation (BJIC) wouldtry to repay as much as possible towards the reductionof interest even during the period of moratorium althoughit (BJIC) could not agree to any specific amount;

(iv) The rate of interest in respect of the foreign cutrrencyloan would remain the same as stipulated in the originalloan agreements between the BSB and the Jute Mills;

(v) No subsidy would be allowed in respect of the rate ofinterest on the local currency loan (which is usuallyhigher than the rate of interest applied to the foreigncurrency loan); and

(vi) A joint exercise would be undertaken by the BJIC and thefinancial institutions (including the BSB) to determinethe actual debt-servicing capacity of each Jute Mill andif any Jute Mill is found to be in a position to repaythe loan, the moratorium would not be applicable to it.

In accordance with the above decisions BSB is at present finalizing therevised schedule of repayment of individual mills and also conducting asurvey to ascertain the debt-servicing capacity of the BSB-financed JuteMills. In the case of other public sector projects, the Bank discussed thearrear situation with the relevant Sector Corporations for clearance of over-dues as on the 30th June, 1975. The following targets have been set up forcollection of overdues on the basis of the understanding given by the PublicSector Corporations (other than the BJIC/Jute Mills):

ANNEX 15Page 3

TARGETS FOR COLLECTION OF OVERDUES(PUBLIC SECTOR)

(Amount in million Taka)

Overdues Target 1975-76S1. as on for cash for re-No. Name of Corporations 30.6.75 recovery scheduling

1. Textile Industries 30.4 7.6 22.8Corporation

2. Steel Mills Corporation 2.9 0.7 2.2

3. Engineering & Shipbuilding 2.3 - 2.3Corporation

4 Fertilizer, Chemical & 5.o 0.5 4.5Pharmaceutical Corporation

5. Food & Allied Industries 6.6 1.7 4.9Corporation

6. Paper & Board Corporation 3.6 0.9 2.7

7. Inland Water Transport 1.3 0.3 1.0Corporation

8. Parjatan Corporation 1.9 1.9

9. Forest Industries Development 0.4 - 0.4Corporation

10. Freedom Fighter's Welfare 0.2 0.2Trust

11. Sena Kallyan Sangstha 0.1 - 0.1

12. Disinvestment Board 7.1 7.1 -

13. Under Direct Control of 6.2 - 6.2the Government

68.0 20.7 47.3

5. The Bank also initiated discussion with the private sector proj-ects for clearance of overdues as on the 30th June, 1975, and the follow-ing targets have been set up for collection of arrear dues on the basisof the understanding given by them:

ANNEX 15Page 4

TARGETS FOR COLLECTION OF OVERDUES(PRIVATE SECTOR)

(Amount in million Taka)

Overdues Target 1975-76Si. as on for cash for re-No. Name of Corporations 30.6.75 recovery scheduling

1. Jute *2.0 0.4 -2. Cotton Textile 2.4 1.2 1.23. Steel 0.4 - 0.4

4. Engineering 2.0 0.5 1.55 Electrical 0.8 0.2 0.66. Chemical 2.4 0.6 1.87. Paper & Packaging 2.1 0.2 1.98. Printing & Publishing 4.6 1.2 3.49. Leather 2.4 0.2 2.210. Rubber - - -11. Food 3.8 0.8 3.012. Ice & Cold Storage 10.0 2.5 7.513. Cigarettes 4.8 1.2 3.614. Hotels 15.5 4.0 11.515. Cinema 6.2 1.6 4.616. Water Transport 4.6 1.2 3.417. Road Transport 0.5 0.2 0.318. Non-Metalic Mineral 19.0 5.0 14.0

Products19. Miscellaneous 2.7 0.7 2.020. Small Industries **13.7 - -

(BSIC-sponsored projects)

99.9 21.7 62.9

*Provision for bad and doubtful debt of Taka 1.6 million has been made onaccount of a damaged project.

**The question of transferring the liabilities on account of the small in-dustries (BSIC-sponsored) to the BSIC is being negotiated with Ministryof Industries and the BSIC.

6. In addition to the above, the Bank will accelerate its supervi-sion efforts by increasing its project visits and insisting on receivingregular financial statements from all its clients.

PROJECT APPRAISAL

7. While entertaining applications for financial assistance andprocessing them, the following guidelines will be kept in view:

ANNEX 15Page 5

(i) The industries mainly based on local raw materials, theproducts of which are exportable or form industrial rawmaterials and consumable goods and where the existingcapabilities are inadequate will be given top priority;

(ii) Where the setting up of projects involves the import ofraw materials, priority will be given to those industrieswhich are export-oriented or import-substituting;

(iii) All other industries which are neither import-substitutingnor export-oriented but primarily based on the importedraw materials will be taken up for consideration only whenthe national interest so demands; and

(iv) In all categories of industries mentioned in (i) to (iii)above, preference will be given to BMRE cases.

In determining the above noted priorities of industries, the capacityutilization of the existing industrial units will also be taken intoconsideration.

8. In view of the recent revision of the Investment Policy of theGovernment raising the private sector investment ceiling from Taka 30 mil-lion to Taka 100 million, BSB expects to contribute effectively in theacceleration of industrial investment in the private sector. The Bankwould also endeavor to seek out entrepreneurs for industries eligiblefor setting up in collaboration with the Sector Corporation.

9. The Bank would also endeavor to avoid financing any new projectin a sector where the existing ondustrial units have significant under-utilized capacity. It is, however, felt that in certain sectors of in-dustries such as those producing essential consumer goods/import substi-tution products, for which there is substantial demand which could not bemet even if installed capacities could be utilized at an optimum level,but there is under-utilization of existing capacities due to shortage ofimported raw materials, the Bank in such cases may finance these nationallyimportant industrial sectors, if the Bank is reasonably convinced thatthere is likelihood of improvement in the supply of imported raw materialsin near future. Sectoral studies with regard to the capacity utilizationwill be taken up by the Bank to assess the position regarding utilizationof capacity and the position will be reviewed from time to time.

10. In determining the Bank's own sectoral priorities for lendingoperations, it is primarily guided by the Industrial Investment Schedulefor private sector financing and by the Government's own investment plansfor the public sector. Thus, the BSB's priorities for lending are con-sistent with those of the Government.

ANNEX 15Page 6

11. The following table indicates the volume of financial assistancethe BSB expects to provide to various priority sectors based on projectsnow in its pipeline and others expected to be received:

(Taka in '000')

Loan Applied for Public orF/C L/C Private Sector

A. DOMESTIC RAW MATERIALS BASED:

1. Ice Plant & Cold Storage 5,137 710 Private Sector2. Packaging, Printing & 6,521 950 -do-

Publishing3. Cinema Hall 2,594 2,715 -do-4. Straw Board 810 - -do-

5. Salt Crushing 795 1,157 -do-6. Tea Chest Mfg. 1,993 1,000 -do-7. Industrial Chemicals 800 - -do-8. Jute Textile 1,081 3,100 Public Sector

Total: 19,731 9,632

B. EXPORT-ORIENTED.

1. Tannery & Footwear 7,860 2,050 Private Sector2. Catching, Canning and 16,271 3,739 -do-

Processing of Fish3. Fruit & Vegetable

Processing 950 1,050 -do-4. Melamine Crockery 672 195

Total: 25,753 7,034

C. ItPORT SUBSTITUTION (DOMESTIC/INDIRECT IMPORT RAW MATERIALS BASED)

1. Cotton Textile (Towel 4,807 1,514 Private SectorLooms)

2. Synthetic Textile 27,029 5,326 -do-Weaving & Knitting)

3. Hosiery 3,012 482 -do-4. Absorbent Cotton 3,493 750 -do-5. Food Products 250 120 -do-6. Canvas Cloth, Belt, etc. 2,364 970 -do-7. Thread Spooling 3,674 381 -do-8. Mosquito Netting etc. 945 400 -do-9. Cotton Textile (Weaving) 95,370 15,160 Public Sector

Total: 140,944 25,103

ANNEX 15Page 7

Loan Applied for Public orF/C L/C Private Sector

D. IMPORT SUBSTITUTION (REQUIRINGIMPORTED RAW MATERIALS BELOW 20%)

1. Ready made Garments 395 397 Private Sector2. Waste Mobil Oil Purification 700 - -do-

Total: 1,095 397

E. IMPORT-SUBSTITUTION (REQUIRINGIMPORTED RAW MATERIALS (20% &ABOVE)

1. Pharmaceuticals 20,411 6,890 Private Sector2. Misc. Industries 2,172 1,392 -do-3. Flour Milling 24,412 6,761 -do-4. Engineering 7,613 3,267 -do-5. Domestic Hardware 400 75 -do-6. Paper Mills 36,200 31,700 Public Sector7. Chemicals 151,450 110,316 -do-8. Cotton Textile (Spinning) 76,300 28,800 -do-

Total: 318,958 189,201

GRAND TOTAL (A+B+C+D+E): 506,481 231,367

WORKING CAPITAL LOANS(INCLUDING FOREIGN EXCHANGE)

12. The BSB has come to a conclusion that under the present circum-stances, it can make a significant contribution to full-capacity utiliza-tion of its otherwise idle projects through making short-term loans fortheir working capital requirements. The BSB will seek to obtain alloca-tions of commodity credits so that it can provide foreign exhange for theimport of raw materials and spare parts required by its clients. TheGovernment of U.K. has lately agreed to give a commodity aid of 1.00million for import by the BSB-financed projects of raw materials and spareparts.

13. The Bank would continue and expand its promotional activitiesfor project identification and project development, particularly in re-spect of export-oriented and agro-based industries, such as fisheries,leather and leather goods, processing and canning of agricultural pro-ducts (pineapple, banana, papaya, guava, cashewnut, lemon, tomato paste),silk industries, cigars, and cheroots from local tobacco, starch factories,paper and paper products. It will also explore the development prospectsof forward or backward linkage industries such as spare parts, medicinaldrugs, rayon and industries using industrial wastes. Besides, the recentproject promotion activities of the Bank in the less developed regions,such as northern districts, and Chittagong Hill Tracts will be furtherintensified.

ANNEX 15Page 8

14. The Bank would continue its efforts in augmenting its Takaresources position by attracting deposits from both individual andCorporation/Companies, by issue of debentures, by enlarging the equitybase through increased contribution by the Government and by borrowingfrom the Central Bank at concessional rates.

BANGLADESH SHILPA BANK

Pipeline of Projectsa/, March 1975

(TK million)h/

Amounts in Active Pipeline Applications Total/Expected not yet Assigned Applications Private Public

Sector Priority Less Priority Rejections for Appraisal Expected Sector Sector

Textiles 81 12 3 119 194 38 368Food and allied products 5 2 8 39 169 130 85Engineering 8 - 1 6 89 81 22Paper, printing 14 4 6 9 _ 27 -Chemicals, glass 10 2 3 3 57 72 Leather 1 - - - 33. 34 d/Miscellaneous 3 2 8 4 66 96-

Total (TK million) 122 22 29 180 548 391 481

Number of projects 5° 15 29 34 47 113 33

a/ Excludes possible investments of TK353 million and TK90 million respecti,vely in the Karnaphuli Rayonand Paper Mills, which are too large for BSB to finance except under special arrangements.

b/ The Taka value of expected foreign currency lending (roughly 75% of total) has been adjusted to takeaccount of the May 1975 devaluation of the Taka.

c/ Excludes expected cancellations out of active pipeline.d/ Forest industries.

April 15, 1976

ANNEX 17Page 1

BANGLADESH SHILPA BANK

Main Assumptions of Projected Operations and Financial Statemepts, FY75-FY79

FORECAST OF OPERATIONS

Net approvals in FY76 would be Tk 272 million followed by 10%annual increases thereafter. Foreign currency loans are expected to beabout 75% of total approvals.

2. About 60% of approvals are expected to be committed in the year ofapproval, 40% in the following year. About 60% of commitments are expectedto be disbursed in the year of commitment, 35% the following year, and 5% inthe second year after commitment. This is in line with BSB's past experience,allowing for some expected improvements in commitment rates due to streamlin-ing of legal procedures.

REVENUES

3. Interest on existing foreign currency loans is 8%, and on domesticcurrency and new foreign currency loans it is 12%. Interest on overdueinterest is taken at 8%. Penalty interest on overdue interest and principalis calculated at 1.5%.

4. Other loan charges include technical examination and documentationfees (aggregating 0.5% of approvals) and letter of credit charges andcommitment fees (aggregating 1% of commitments). A TK 2 million per yearexchange risk commission on counterpart funds is collected and paid toGovernment.

5. Income from deposits and Government securities is taken at anaverage level of 6%.

EXPENSES

6. Interest on borrowing is calculated at 5.5% on unrecognized IDBPborrowings, at 7% on the existing ADB credit, and at 9% on new foreignborrowings. A TK 2 million exchange risk commission is included in interestexpense. Interest expense on deposits is computed at 9% on fixed deposits,7% on short-term deposits, and 5% on savings accounts (included in short-term deposits).

ANNEX 17Page 2

7. Administrative costs are projected to increase by 20% in FY76,15% in FY77, and 10% thereafter, reflecting salary increases and growthin numbers of staff.

8. Taxes are computed at 54% of profit before tax.

CASH FLOWS

9. Subordinated Government debt of Tk 150 million are expected to beconverted into equity in FY76. In addition, GOB will increase BSB's equity byTk 50 million in FY77.

10. The May 1975 Taka devaluation is expected to increase the Takavalue of BSB's foreign currency loans and borrowings by about Tk 280 million.

11. Collections and repayments exclude any changes on the 60% ofBSB's portfolio in the jute industry (which is expected to be rescheduled).

ANNEX 18

BANGLADESH SHILPA BANK

Forecast of Operations, FY75-FY79(TK million)

Actual Years Ending June 301/ 1974 1975 1976 1977 1978 1979

NET APPROVALS

Foreign currency loans 57 201 208 229 252 277Local currency loans 38 67 614 70 77

Total + 7 272 299 329 302

COMMITMENTS

Foreign currency loans 4 68 197 220 243 267Local currency loans 11 25 60 68 714 82

Total 93 257 288 317 349

DISBURSEMENTS

Foreign currency loans 2 24 166 207 232 255Local currency loans 15 11 50 74 73 78

Total 17 3 T216 281 305 333

1/ Net of assumed 10% cancellations. Excludes possible loans to the Karnaphuli PaperMill and the Karnaphuli Raycn & Chemicals Plant.

April 1•, 1976

ANNEX 19

BANGLADESH SHILPA BANK

Projected Income Statements, FY75-FY79(TK million)

Actual Years'Ending June 301974 1975 1976 1977 1978 1979

INCOME

Loan interest 68 88 126 152 182 215Other loan charges 2 5 6 6 7 7Income from deposits and Gov'tsecurities 7 15 8 22 25 27

Total income 77- 10=5 152 180 214

EXPENDITURES

Interest on deposits 7 9 12 15 20Interest on borrowings 0 41 70 85 96 125

Total financial expenses 44 T8 79 97 111 15FAdministrative and other expenses 9 11 13 15 16 18Provisions 8 40 21 22 2h 29

Total expenses T1 T9 113 T1' 151 192

Income before tax 16 9 39 46 63 57Taxes 9 5 21 25 34 31

Net Income 7 4 18 21 29 - 26

April 15, 1976

ANNEX 20

BANGLADESH SHILPA BANK

Pro,jected Balance Sheets, FY75-FY79(TK million)

Actual Years Ending June 301974 1975 1976 1977 1978 1979

ASSETS

Cash and deposits 174 262 283 374 426 444Government securities 13 62 62 62 62 62Short term loans 7 16 18 21 24 31

Interest receivable 153 160 172 181 191 217Less: Provisions - (24) (33) (41) (49) ( 59)

Total current assets 347 477- 502 9 7 654 745

Foreign currency loans 481 823 a/ 955 1,130 1,321 1,535Local currency loans 203 203 227 268 316 377

Equity investnents 13 13 13 13 13 13

Less: Provisions j35) j.1) (63) (77) 3 1Net portfolio 662 3W 1,132 1,334 1l,W7 1, 13Fixed and other assets 12 12 16 21 25 26

Total Assets 1,021 1,476 1,650 1,950 22^3 a

LIABILITIES and EQUITY

Short-term deposits 45 47 61 79 101 133Bangladesh bank borrowing 34 34 - - - -Interest payable 94 lia 136 159 180 200

Other current liabilities 30 33 33 44 53 61

Total current liabilities 203 225 230 282 334 394

Fixed deposits 45 59 76 99 129 167Domestic borrowings 0 40 40 40 40 40

IDBP borrowings not yet recognized 456 746 a/ 717 671 627 585Other foreign borrowings 48 173 a/ 339 5)46 768 989

Total term debt 589 L,0- 1.172 1.356 1.564 1,781

Subordinated Government loan 167 167 17 17 17 17Share capital 50 50 5o 100 100 100Reserves 12 16 31 47 71 92Capital reserves - 150 jO1 152 150

229 -3233 14 338 359

Total Liabilities and Equity 1,021 1,476 1,650 1,952 2,236 2,534

Contingent liabilities 9 52 20 1 - 7

a/ The May 1975 devaluation is expected to increase the Taka value of foreign currencyloans by about TK 280 million beginning in 1975, of unrecognized IDBP borrowuings byabout TK 250 million, and of other foreign currency borrowings by about TK 30 million.The projections include these adjustments.

April 15, 1976

ANNEX 21

BANGLADESH SHIILPA BANK

Prolected Cash Flow Statements, FY75-lVY79(TK million)

Years Ending June 30

1975 1976 1977 1978 1979

SOURCES

Net income plus non-cash charges 44 39 43 53 55

Increase in share capital - - 50 - -

Foreign currency loan collections 34 34 32- 41 41Local currency loan collections 29 26 23 25 17Increase in fixed deposits 14 17 23 30 38Foreign borrowings 97 166 207 232 255Increase in current liabilities 22 5 52 52 60

Total 240 287 380 433 466

USES

Repayments

On IDBP borrowings (39) 29 46 44 42Other foreign borrowings - - - 10 34

Disbursements

Foreign currency loans 97 166 207 232 255Local currency loans 29 50 64 73 78

Dividend - 3 5 5 5Increase in fixed and other assets - 4 5 4 1Increase in current assets 153 35 53 65 51

240 287 380 433 466

a / Before provisions.

April 15, 1976

ANNEX 22

BANGIADESH SHILPA BANK

Schedule of Estimated Disbursements for the IDA Credits-

Per Quarter Cummulative-------- US$ Million-

IDA Fiscal Year and Quarter

1976-77

2nd 2.2 2.23rd 2.2 4.44th 2.4 6.8

1977-78

1st 2.4 9.22nd 2.24 11.63rd 2.0 14.04th 2.0 16.0

1978-79

1st 2.0 18.02nd 2.0 20.03rd 2.0 22.04th 1.0 23.0

1979-80

1st 1.0 24.02nd 0.5 24.53rd 0.5 25.0

25.0

7T Assumes Credit would be effective by July 1976.

April 15, 1976