This document presents an analysis of entrepreneur selection by commercial banks in Bangladesh. It discusses the importance of selecting entrepreneurs, selection criteria used by banks, factors that influence entrepreneur behavior, and how banks assess the attractiveness and risk of providing credit to entrepreneurs. The presentation is divided into several sections that cover topics such as the economic theory of entrepreneur selection and performance, innovative ideas for new businesses, and case studies of banks' lending decisions.

1. “A Conceptual Framework for
Selection of Entrepreneurs
by Commercial Banks in Bangladesh”
Presentation :
Presented By:
MD. ARMAN HOSSAIN A.B. (30006)
MUHAMMAD NURUL AMIN (30078)
HAFIZUR RAHMAN (30041)
MD. ABU HANIF (30040)
ABDUR RAZZAK (26012)

2. Importance
of
Entrepreneurs
Selection
Selection
Criteria for
Financing
Entrepreneurs
Assessment
of Credit’s
Attractiveness
Economic
Theory of
Entrepreneur’s
Selection &
Performance
Factors
Influencing
the Behavior
of an
Entrepreneur
A Brief Summary of Our Topic
Assessment
of Risk of
Commercial
Bank Credit

3. Importance of Entrepreneurs Selection:
Surplus
Units
Deficit
Units
Banks
Credit
Management
Entrepreneurs
are the Real Risk
Takers of the
Economy
Selection of right
Entrepreneurs
To reduce The Default Rate of
Credit

4. Personal Guarantees and pledges made
by the owners of a business firm or by
cosigners to a credit
Personal Guarantees
Resources on the Customer’s Balance
Sheet
Balance Sheet
Customer’s Expected Profits, Income or
Cash Flows
Expected Cash flow
Safety Zones Surrounding the Funds Credited by a Bank….:

5. Balance
Sheet
More
However, The most outer or remote safety zone of a credit is the guarantee from
the borrowers or cosigners where they pledged their personal assets to back the
credit taken from the bank. On the other hand, income and cash flow from
business are to be the primary safety zones of a credit and these are actually
preferred sources of ensuring repayment of credit.
Which option among these three should be more logical?

6. Innovative
Idea
Determination
Capacity
Building
Financial
Aspects
Legal
Aspects
Environmental
Issues
Ethical
Issues
R&D
Assessment of Credit’s Attractiveness…………..:
Gathering
ideas both
internally
and
externally
Coordination
of
Knowledge
and
Experience
Extra
ordinary
quality,
confidence
and skills
Feasibility
Analysis of
Expected
Cash flows
Trade License
and Other
Documents
Waste
management,
Ecological
Balance etc
Maintaining
ethical
standards
Future
development
of business
PotentialSuccessofCredit

7. Case study: Bank lending decisions using projections

8. Loan Application….:
Suppose, PAPERBASIS’s working capital line of credit is approaching its renewal date. Mr. Tison -
the manager and business owner of the firm, wants to renew the line at a higher (by 10%)
amount and at better terms. He thinks sales will slightly increase, but in his opinion, the present
$500 working capital line should not be necessary for receivables and inventory financing.
Further, Mr. Tison indicated that he will not need to spend external funds on new equipment.
Process of Bank Assessment…:
Mr. Tison’s request is very typical. Every business owner is interested in making money. The
starting point for making money is focusing on revenue, as Tison has done. It is the starting
point for virtually every planning or budgeting process, whether highly informal and carried
around in the owner’s head or very structured and contained in countless papers and
reports. Though acknowledged, balance sheet accounts are often an afterthought. In making
his request, Mr. Tison did not necessarily comment on his precise expectations about
accounts receivable or inventory. He intuitively ignores that even if sales increase his
accounts receivables or inventories are likely to decrease and as a consequence (held other
parameters constant) borrowing needs to be lower, at least in the short term.
Bank’s Decision….:
Bank decided to reject the credit application because of the abnormality in
projections.

9. Verification of Documents
 The existence of the company/ business, its
directors/business owner’s legality of borrowing.
 The business operations risks and management depth,
experience and expertise of the owners.
 The financial strength and repayment capability (including
the cash flow) of the borrower.
 The operating risks of the business
 The strategy plans of the borrower to mitigate such risks
and maximize profitability
 The borrowing needs proposed facilities are in line with
the.
 The overall risk associated with the proposed borrowing.

10. The Determinants of Probability of
Default
 The probability of default refers to the ability or capacity of a
borrower to service/repay debt obligations. The higher this ability,
the less likely the borrower will default. For a corporate borrower, its
repayment ability is determined by various factors including
business and financial performance, industry trends, management
experience and strategies, funding lines, parental support etc.
 Academic theory/research – which highlight various indicators from
corporate financial statements that are predictive of
creditworthiness
 Past experience – although not necessarily perfect, the past is a
useful predictor of the future. Thus, a bank can use its past
experience to identify key default drivers and develop a rating
model.

11. Economic Theory of Entrepreneurship Selection and
Performance
 Education as a Determinant of Entrepreneurship Selection and Performance
 The level of education might influence the propensity to become self-
employed through several channel. Education enhances managerial ability,
which increases the probability of entrepreneur. Working in the opposite
direction, higher levels of education might generate better option and thus
decrease the likelihood of entrepreneurship.
 Education may also influence entrepreneurship performance in several
ways.
 The main factors affecting earnings are schooling and experience. This
specification and the implied positive returns to schooling have found
empirical support in the wage sector. This reasoning would seem to apply in
other occupational sectors as well, such as entrepreneurship, but little
systematic work has been done on the subject. Schooling is acknowledged
both for its productive effect on the quality or quantity of labor supplied, as
assumed by Mincer, and for its value as a signal of productive ability in labor
markets without complete information.

12. Lending Technologies and the Supply of
Entrepreneurs’ Credit
• Researchers looked more closely at each of the lending
technologies: the five transactions technologies. In addition to a
brief description of each technology, they highlighted the nature of
the information used in underwriting by each technology (e.g., soft
vs. hard), and how each technology solves the opacity problem.
They also discussed how the financial institution structure and the
lending infrastructure affect the feasibility and efficacy of each
technology.
 Financial Statement Lending
 Small Business Credit Scoring:
 Asset-Based Lending
 Factoring
 Trade Credit
 Relationship Lending

13.  Analysis of Entrepreneur’s Selection.
 Analysis of Entrepreneur’s Skills.
 Risk Factors of Commercial Bank Loan.
 Hierarchy Model of Commercial Bank Loan Risk.
Agenda…….:
13

14. Management Aspect Marketing Aspect
Technical Aspect: Financial Aspect
Analysis of Entrepreneur’s Selection
Wednesday, January 13, 2016 14

15.  Entrepreneurship Skills: Technical Skills
 Management Skills:
Analysis of Entrepreneur’s Skills
Wednesday, January 13, 2016 15

16. Object Risks Loan Terms Risks
Management Risks System Environment Risks
Assessment of Risk of Commercial Bank Credit
Wednesday, January 13, 2016 16

17. Hierarchy Model of Commercial Bank Loan Risk
Define the set of loan risks as A, loan object risks A1, loan terms risks A2, management
risks A3, system environment risks A4, define weight as W=(W1，W2，W3，W4) then
subdivide the four factors, A1=(S1、S2、S3、S4、S5)，A2=(S6、S7、S8、S9)，A3=(S10、
S11,S12、S13) A4=(S14、S15、S16).
IndexSub-Index
W
Goal

18. Case study: Sally’s loan is rejected because of the probability of
repayment uncertainty
Sally applied for a business loan at her bank. She wanted to borrow $10,000 to buy
machinery. She thought the bank would accept her loan application as her sales
projection is enough to cover her loan repayments. Sally was disappointed when the
bank rejected her application. They felt she would not be able to make the loan
repayments as she also has a $5000 debt to pay off and no savings in her bank
account. Sally decided to focus on paying off her debt and build up some savings
before she applied for another loan.

19. The Financial Sector Reform Program (FSRP) was
introduced in the early nineties in Bangladesh with a view
to bringing about financial discipline by undertaking
appropriate reform measures in the financial sector. The
program was undertaken by the Government of
Bangladesh with combined support of the World Bank and
USAID under the ‘Structural Adjustment Program’.
Observation of Previous Practices of Lending Risk Analysis

20. Observations on Recent Risk Management Practices in Banks in
Bangladesh
Bangladesh Bank issued its BRPD Circular No. 17 dated October
07, 2003 advised all the scheduled banks to put in place an
effective risk management system by December, 2003 based
on the certain guidelines furnished to them. It appears from
the circular that the banking industry is completely different
from other industries in terms of the diversity and complexities
of the risks they are exposed to.

21. Definition of Credit Risk
It is defined as the possibility that a borrower will fail to
repay his/her debt (s) to the bank/lender on the due date.
When the bank/lender is unable to collect the debt (s) from the
borrower (s), the bank/lender will be short by the amount of
cash that the borrower has failed to repay.
Another terminology that can be used to describe such a
risk factor - “Risk of Default”.
As a bank or any financial services provider’s credit risk
increases over time, this institution is compelled to make
provision to write off the debt (s) in its books of account.
Loans written-off translates into an operating expenses.

22. Specific factors for credit approval for business customers
Internal factors
 Financial risk
Assessment of the existing financial position
Assessment of the expected financial position
Accounting quality
 Business risk
Market position
Operating Efficiency
 Management risk
Management business expertise
Payment record
External factors
 Conditions in the respective economic sector of activity
 Economic trends in the industry of activity

23. A Typical Example of Credit Risk
Suppose, I took a loan of US$1,000 from Citibank at the
interest rate of 5% per annum for a period of 5 years.
I repaid for the first 6 months regularly and then stopped
repaying the loan on month 7 because I have made other
commitment elsewhere.

24. Is Credit Risk Important for a Bank?
For most banks, loans are the largest asset on the bank’s
Balance Sheet, and obviously the major source of credit risk.
Besides loans, there are other pockets of credit risk, both on and
off-balance sheet such as:
(a) Investment portfolio,
(b) Overdrafts,
(c) Letters of credits (L/Cs), and
(d) Guarantees.
If a bank or financial institution does not ensure that there
is a systematic credit appraisal system in place, then this
bank is likely to become heavily exposed to credit risk.

25. Introduction of Credit Risk Grading (CRG)
System in Credit Operations
The risks associated with the borrower or counter-party
need to be carefully and critically analyzed before
funding to the client’s business. To quantify the risk
exposure, it should be graded as per credit risk score
sheet by the individual banks in line with the guidelines
of CRG Manual.

26. A Typical Risk Grading (Credit Rating) System
under CRG Manual