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Bank financing to business firms occupies the largest portion of total lending portfolio in Bangladesh. Non-Banking Financial Institutions (NBFIs) come next. The analysis of financing viability by financial institution at times seems to be ambiguous due to lack of industry-specific information in the market. It leads the credit composition, financing criteria, disbursement mode, repayment term inaccurately structured.
A bank is not only the financier in working or term capital of a corporate entity, but it also acts as a financial consultant of a company. Whether the future operational strategy of a business matches the existing operational set-up and is effective as per investment plan or whether there is a loophole in existing or planned operation due to improper utilisation of technology, manpower, and machineries is a matter of concern to a banker. Sometimes manufacturing firms procure or import smart machineries for increased productivity and/or minimising production cost, whereas absence of adequate technological knowledge and skilled manpower to operate the machine may cause the company to incur loss. The standard market practice, profitability range, market demand of products or services and the business process information in the market may be either obscure or totally missing. Because of these, operation of a firm may lead to losses which eventually may be the reason for non-repayment of borrowed capital. When a large portion of lending goes non-performed, the fund of banks or NBFIs gets squeezed leading to liquidity crisis. In addition to this, sometimes due to invested money getting stuck, the cash swing in bank becomes slow, which also makes the liquidity shortage.
In the USA, to exchange credit information Risk Management Associates (RMA) was founded in 1914 at Philadelphia. To help in taking financing decision by the lending institution, RMA publishes the financial data including current ratio, quick ratio, receivable turnover ratio, inventory turnover ratio, interest coverage ratio, fixed assets ratio to net worth, leverage ratio, return on assets, return on equity, fixed asset turnover and total asset turnover ratio which are grouped by industry and size. In addition to this, RMA also expresses major assets, liabilities, profits, operating expenses, sales items in percentages of corporations in an industry, industry default probabilities and cash flow measures considering 450 different industries and estimated default probabilities in time intervals. Dun & Bradstreet (D&B), a renowned international credit rating agency collects and preserves information of millions of firms all over the world and works with the data of more than 800 different lines of business and provides credit information at the request of the member institutions worldwide. These type of business decision-making data providers deliver the benchmark operating and financial ratio for different industries, by which the information regarding the industry can be easily obtained.
Besides corporate firms, the Cottage, Micro, Small and Medium Enterprises (CMSMEs) worldwide are recognised as engines of economic growth, particularly for developing countries. Although approximately 7.8 million of CMSMEs are representing 90 per cent of industries in Bangladesh and they are contributing 25 per cent to gross domestic product as well, most of them suffer from taking strategic decisions for their business. Diversification is a barrier for them due to lack of market information. We know, this sector is relatively labour-intensive, dependent on indigenous skills and technology and it also contribute to entrepreneurship development, innovativeness and growth of industrial linkages. But after all, due to smaller size and lack of related business analytics, they move their entrepreneurships towards wrong direction.
In order to make organised and sustainable business market base in Bangladesh it is crucial that the market researchers, credit rating agencies and regulatory bodies should take initiatives to formulate business data bank & analytics to ensure sustainable business decisions. It will help the entrepreneurs in their strategic business decision making and help the financier take effective and sustainable financing decisions.
Sanjoy Pal is First Assistant Vice President & Manager, SME Banking. Shimanto Bank Limited.