Stress Testing and SME Final

7/28/2019 Stress Testing and SME Final

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SME Portfolio Credit Stress Testing

Program Bangladesh Bank

Sukamal Sinha Choudhury

General ManagerBangladesh Bank


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SME at a glance in Bangladesh

SMEs in Bangladesh comprises of cottage, micro, small andmedium enterprises

SMEs comprise about 99% of private industrial establishments

Of the total share of manufacturing value added to GDP, SMEs

contribution is estimated at 28-30% SMEs employment are about 80% of total industrial labor force

SMEs are taking finances both formally and informally

SME is accelerating financial inclusion which in turn helping toachieve the targeted growth of the economy

Half of the population is women who are not involved ineconomic activities


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SME Priority and Strategy

Government Priority :

Formulating a separate policy for SMEPromulgation of new industrial policy in 2010.

Defining SMEs

Giving emphasis to booster sectors

Including cottage and micro enterprises to SME definition

Formulating a strategic committee to achieve objective of the SME policy

Bangladesh Banks Priority :

Bringing SME Banking under proper monitoring and supervision of theCentral Bank

Ensuring end use of SME credit through monitoring and evaluation

Financial inclusion of marginal, small and women entrepreneurs

Capacity development of the bankers


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Central Banks Policy Initiatives

Formation of a Separate Department

Objective of the Department Reduction of poverty and hunger

Women empowerment

Employment generation

Gender equality Economic development of the country

Formulating SME credit policy and programs

Bringing Discipline in SME Financing

Performing Environment Friendly SME Activities

Emphasis has been shifted from large credit to small credit

Emphasis on manufacturing and service sector.


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Central Banks Policy Initiatives

Bangladesh Bank has issued SME credit policyand programs where following a number of

new measures have been taken:

Target Based Lending (TBL) Cluster Financing (CF)

Women Entrepreneurship Development(WED)

Promotion of SME issues Training [for bankers and entrepreneurs]

Incentives for bankers


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Stakeholders in SME financing

47 Commercial Banks and 30 Non Bank Financial Institutes

Bangladesh Bank

International Donor Agencies (Refinance Programs)

ADB

WB (IDA Credit)/EGBMP

JICA

Ministries- Ministry of Finance, Ministry of Industries

Chambers/Business Organizations

The federation of Bangladesh Chambers of Commerce and Industry (FBCCI)

Dhaka Chambers of Commerce and Industry (DCCI)

Metropolitan Chambers of Commerce and Industry (MCCI)

National Association of Small and Cottage Industries in Bangladesh (NASCIB)


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Role of Bangladesh Bank

Formulation and circulation of SME related policy, rules, regulations andguidelines

Review and evaluation of SME Financing activities of Banks and NBFIs

Supervision and monitoring of SME Financing

Monitoring Cell

Mobile monitoring Onsite & Offsite supervision

Help create a SME credit market

Maintenance of Low cost refinance fund- JICA, ADB, WB & BB Own Fund

Cluster Financing

Promotion and Development

Arranging Fair, Seminar, Workshops, Exchange of Views, Awareness

building

Capacity Development of Bankers and Entrepreneurs


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Defining SME in line with Industrial Policy

The basis of Bangladeshi definition is assets [excluding land & building] and/or

number of employee employed. The latest definition was adopted in theindustrial policy 2010 and by SMESPD of BB circular No 01 of 2011.

Criteria Fixed Asset excluding land and Building (million BDT) No. of Manpower employed

Size Manufacturing Service Trade Manufacturing Service Trade

Cottage < 0.5 10 [including family members]

Micro > 0.5 - 5.0 < 0.50 < 0.50 10-24 < 10 < 10

Small > 5.0- 100.00 > 0.50 - 10.0 > 0.50 - 10.00 25- 99 10-25 10-25

Medium >100.00-300.00 >10.00- 150.00 >10.00-150.00 100-250 50-100 50-100


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SME Financing Performance & Evaluation

4.86

7.127.38

6.69 6.71

8.72

0

1

2

3

4

5

6

7

8

9

10

2010 2011 2012

Target Achievement

SME Credit has

a persistent

increase overthe last three

years. Financial

Institutes set

their targets bythemselves and

achieve targets.

(Amt in bn USD)


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Small Enterprise Financing Performance and Evaluation

Disbursement to small enterprises andshare increasing

YearCredit

to Small

Enterpri

ses

Total SME

CreditShare

Rate of

Increase

2010 2.88 6.69 43.02

2011 3.23 6. 71 48.13 +11.82%

2012 4.73 8.72 54.23 +12.67%

(Amt in bn USD)

43.02%48.13% 54.23%

56.98% 51.87%45.77%

0%

20%

40%

60%

80%

100%

2010 2011 2012

Small Medium


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SME Financing Performance and Evaluation

Disbursement to manufacturing andservice sectors has increased in the

last three years.

Disbursement to womenentrepreneurs has also increased bothin number of enterprises and inamount

Disbursement to new enterprises hasincreased considerably

SME Credit Performance Rating ofBanks/NBFIs on the basis of targetachievement, sectoral segregation,

women Entrepreneur financing,cluster financing & promotionalactivities.

28.3%

29.4%

31.4%

26.0%

27.0%

28.0%

29.0%

30.0%

31.0%

32.0%

0

0.5

1

1.5

2

2.5

3

2010 2011 2012

Disbursement Share

Disbursement to Mfg. (bn USD)

3.4%

3.8%

3.2%

3.0%

3.2%

3.4%

3.6%

3.8%

4.0%

0

0.050.1

0.15

0.2

0.25

0.3

2010 2011 2012

Disbursement share

Disbursement to Women Ent. (bn USD)


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SME Credit portfolio (As on Dec/2012)

21.5%21.2%

22.9%

20

20.5

21

21.5

22

22.5

23

23.5

2010 2011 2012

Credit Exposure to SME

Sector

SME credit has overall increase overthe last three years.

Comparative NPL

position

0

5

10

15

2010 2011 2012

7.27%6.12%

10.03%

3.49%3.36%

6.71%

NPL% SNPL%

Non performing loan in SME sector isalways much lower than NPL in overall

credit.

An increase in the NPL in the SME sector

(also in overall credit) may be explained by

introduction of newer loan classification

system under BASEL II .


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Stress Testing: A Modern Supervisory Technique

Importance

Stress testing is Central to the Basel II Supervisory Framework;

Large Banks & Supervisory or Financial stability authorities

worldwide are employing stress tests for their risk analysis.

Recent global financial markets turmoil also highlighted theimportance of stress tests.

Objective

Safeguarding and maintaining financial stability for achieving and

maintaining price stability.


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Defining stress testing

Stress testing is a risk management technique used to evaluate

the potential effects on an institution's financial condition of a

specific event and/or movement in a set of financial variables. It

is an integral part of the BIS Capital Adequacy framework.-BIS

Stress testing is a simulation technique, used to determine the

reactions of different financial institutions under a set of

exceptional, but plausible assumptions through a series of

tests.

Bangladesh Bank (the Central Bank of Bangladesh) first adopt

Stress Testing in 2010

Established a New Department in Bangladesh Bank-

Financial Stability Department


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Banking System of Bangladesh

Banks/

NBFIs

No. of

Banks/

NBFIs

No. of

Branche

s

Total Assets Total Deposit Total Loans & Advances Total SME Credit

Amount % of the

Industry

Amount % of

the

Indust

ry

Amount % of the

Industry

Amount % of the

Industry

Banks 47 8059 83679.5 95.5% 63354.4 97.5% 51878.6 92.6% 11581.5 96.9%

SCBs 4 3449 22735.1 16746.1 11157.3 3135.4

DFIs 4 1417 4733.0 3123.2 3334.2 667.8

PCBs 30 3130 50890.9 39687.7 34423.6 7496.5

FCBs 9 63 5320.5 3797.4 2963.5 281.8

NBFIs 31 164 3960.0 4.5% 1593.7 2.5% 4137.0 7.4% 371.2 3.1%

Total 78 8223 87639.5 100% 64948.1 100% 56015.6 100% 11952.7 100%

1 USD = BDT 77.93; 1 USD= AED 3.6729

As on June, 2012

USD in Million


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16

Banks & NBFIS

Guidelines on Stress TestingIssued on April 21, 2010

First time in Bangladesh

NBFIs

Revised Guidelines on Stress

Testing for NBFIs-

Issued on 12 July, 2012

Incorporating New dimensions Introducing Insolvency Ratio

(IR)

Introducing Stress Testing

Rating Scale (WAR-WIR)

Revised Guidelines on Stress Testing Issued on February 23, 2011

Incorporate some new issues

Sensitivity Analysis for InterestRate based Stress Test

International standard practice for

liquidity Stress Test

Inclusion of VaR Analysis

Changing Frequency Level-

Quarterly

Objective:

To ensure soundness and stability of

the banking system.

Banks

Bangladesh Banks Stress testing Guidelines


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At the system level-

Stress Tests are primarily designed to quantify the

impact of possible changes in economic environment

on the financial system.

At Institutional Level-

Stress Test technique provide a way to quantify the

impact of changes in a number of risk factors on theassets and liabilities portfolio of the institution.

Bangladesh Banks Stress testing Guidelines


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The objective of stress testing

It helps banks in assessing their potential vulnerability to adverse

changes in market conditions, e.g.

the extent to which their asset quality might be affected by aneconomic downturn.

how the value of their securities holdings might be affected bychanges in interest rates/credit spreads.

provide banks with more forward-looking information to managetheir risks and enable them to be better prepared for stressedsituations.

Supervisors can make use of stress tests to monitor the risk profileof individual banks and assess the strength and soundness of thebanking system.

18


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Identificationof Specific

Vulnerabilities

Constructionof a Scenario

PerformingNumericalAnalysis

Consideringthe Numerical

Analysis

Summarizingand

Interpretingresults

19

Stress Testing Process


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Scope of Stress Testing (First Guideline, 2010)

20

5 Risk

Factors

Intt.Rate

ForcedSale value

ofCollaterals

NPLsStockPrices

F.ExRate

SimpleSens

itivityAnalysis

Liquidity : Stressed Separately


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Scope of Stress Testing (Revised Guidelines)

Maturity Gap Analysis for Intt. Rate Risk

Duration Gap Analysis for Change in Market value of equity

Value at Risk (VaR) for Estimating actual amount of potential loss


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Scope of Stress Testing

Stress test is carried out assuming three different hypotheticalscenarios:

Minor Level Shocks: Small shocks to the risk factors;

The level for different risk factors can, however, vary.

Moderate Level Shocks: Medium level of shocks;

The level is defined in each risk factor separately.

Major Level Shocks: Big shocks to all the risk factors;

The Level also defined separately for each risk factor.

Assumptions behind each Scenario: single factor sensitivity analysis;

Each of the five risk factors has been given shocks of three differentlevels.

The magnitude of shock has been defined separately for each riskfactor for all the three levels of shocks.

22


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Techniques

23

Simple Sensitivity Analysis

Measures the change in the value of portfolio for shocks of various degreesto different independent risk factors .

Ex.: Adverse movement of intt. Rate by 100 basis and 200 basis.

The Impact will be measured only on dependent variable (e.g. Capital)

Scenario Analysis

Encompasses the situation where a change in one risk factor affects anumber of other risk factors or there is a simultaneous move in a group ofrisk factors.

Stress testing can be based on- The historical scenarios- a backward looking approach, or

The hypothetical scenario-a forward-looking approach.

Maximum Shock Scenariomeasures the change in the risk factor in

worst-case scenario (level that wipe out Capital)


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Stress test results: Banking System Aggregate

Source: Financial Stability Report, 2011-BB

The Banking

system in

Bangladesh is

largely risk

sensitive to the

credit risk.

Intt. Rate Risk, Ex.

Rate Risk, Equity

Price Risk do no

bring down the

CAR below therequired level.


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Negative Impact on CAR due to Stress on Different Factors

(Bank Group-Wise) (as of December 2012)

Factors SCB PCB

(Conv.)

PCB

(Is.)

FCB SDB Total

Default of sector

concentration-1

3 0 1 0 2 6

Default of top large

loan borrowers

4 18 4 2 2 30

Negative shift in

NPL categories

4 0 1 0 2 7

Decrease in FSV of

the collateral

4 1 1 0 2 8

Change in interest

rate

1 1 1 0 0 3

Change in exchange

rate

3 0 1 0 1 5

Change in equity

price

3 2 1 0 1 7

Increase in NPL 3 7 2 0 2 14

Stress test results

No possibility of

concentration in SMEs

No possibilities for

SMEs

Most SME loans are

collateral backed

(value more than doubleof loan size)

SME Loans are out

of Spread

SMEs in BD have

insignificant

international exposure


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Linkage Between Stress Testing and SME Financing

For SME provisioning is set at 0.25% against 1.0%provisioning for other credits

Credit Shock leads to Capital Adequacy Shock

Therefore, the shock is lower for SME financing

UC SMA SS DF BL

0.25%

Minor Moderate Major

Rate of

Provision


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Banks SME Exposure & CAR

Top 10 SME Exposure Banks

2011

Name of

Banks

SME

Exposure (%)

CAR (% of

RWA)

BASIC 72.5 10.13

Uttara 53.2 12.79Janata 50.4 9.19

BRAC 48.7 11.6

Exim 38.8 10.89

UCBL 35.9 10.44

AB Bank 32.3 11.37

IBBL 31.5 13.09

IFIC 26.5 10.01

DBBL 25.1% 11.23

RequiredMinimum CAR of

RWA= 10% as per Basel II

All the Top 10 SME

exposure Banks except Janata (a SCB)

Bank maintained the minimum

requirement.

It is expected that the banks (except

a few) is resilient to minor shocks due

to credit, interest rate risk could be

arisen for SME exposures.


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Limitations and Challenges

Stress testing:

SME financing has gained focus in Bangladesh only since 2010,therefore the market is still nascent.

Stress testing for sectoral lending is also newer idea in Bangladesh.Bangladesh Bank is still doing the stress testing on trial and errorbasis

State-of-the art online reporting system by Banks/NBFIs not yetestablished. SCBs with large branch network are lagging behind;and they are unable to accommodate with modern technology,approaches and initiatives.

Lack of trained officials both in Banks and NBFIs.

A new department established in Bangladesh Bank. However, thebank is working under a lot of limitations.


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Limitations and Challenges

SME Sector:

SME lending is usually highly supervised therefore interest rate ishigh.

Often the enterprises can not meet collateral requirements; evennot easily available.

As the banks are owned by industrialists who also own largecorporate, sometimes focus of the banks are concentrated on largecorporate credit.

Financial literacy is low in case of women and small, micro andcottage enterprises.

Reduce regulatory burden for small, micro and cottage enterprises.

Absence of Credit Guarantee Scheme, venture capital financing.

Lack of awareness and training towards modern technology.


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Future Planning

Start up financing

Credit Guarantee/Insurance Scheme Venture Capital Financing

Extending refinancing and prefinancing

SME deposit mobilization

Cluster mapping

SME product marketing, specially web based marketing

Non Financial Services,

Governance

Rating of Fis on the basis of SME financing

Stress testing

Other modern techniques and tools to make SME financingprofitable, secured & entrepreneur friendly.

Communication with international world to large extent to getbenefit of modern technologies.


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Q/AThank you


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Reporting


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Reporting

Stress Testing and SME Final

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