SMESPD Circular Letter No. 02: Inclusion of Micro Enterprises and RMG Sector Safe Working Environment Program under Two Step Loan Fund

He ad Bangladesh Bank (Central Bank of Bangladesh) Head Office Motijheel, Dhaka-1000 Bangladesh www.bb.org.bd SME & Special Programs Deptt. FSPDSME-PIU SMESPD Circular Letter No.02/2013 Date: 22 October, 2013 anglad CEO/MD All Accredited Banks and Financial Institutions under FSPDSME Project Head Office, Dhaka Dear Sirs, Inclusion of Micro Enterprises and RMG Sector Safe Working Environment Program under Two Step Loan Fund for refinance or pre-finance of JICA assisted Financial Sector Project for the Development of Small and Medium Sized Enterprises [FSPDSME], BD-P67. Please refer to SMESPD Circular No. 01/2012 dated 12 March, 2012 and the Operating Guidelines of FSPDSME Project attached with the circular. With the aim of extending financial support to micro enterprises and ensuring safe working environment for RMG and knitwear sector workers some amendments in the Operating Guidelines have been made. Details are explained below￾01. The Two Step Loan (TSL) fund of JICA assisted FSPDSME project is providing medium and long term loans to small and medium enterprises for their productive investment. It has been observed, however, that the intended beneficiaries of the project dropped below as the Industrial Policy 2010 has raised the threshold of definition of SMEs in terms of fixed investment and number of employees. Accordingly, the Steering Committee of the project has decided to include micro enterprises as defined by the Industrial Policy 2010 and SMESPD Circular No. 01 of 2011 dated 19 June, 2011 as eligible for financing. In order to cater the need of the micro enterprises the lower limit of sub-loan is re-fixed at BDT 200,000.00. The maximum limit of sub-loan will remain unchanged. 02. In the backdrop of tragic incidence of Rana Plaza collapse and recent crisis in the RMG and Knitwear sector a special initiative has been taken to improve safe working environment for RMG workers. An initiative to finance the improvement of safe working environment of RMG and knitwear sector workers, the project authority has decided to start helping RMG and Knitwear sector of the country through the ongoing JICA assisted FSPDSME project. In this regard some exceptions to current Operating Guidelines have been approved. A Memorandum of Understanding (MOU) for “RMG Sector Safe Working Environment Program” has been signed among JICA, Bangladesh Bank, BGMEA, BKMEA and Public Works Department (PWD) of Ministry of Housing and Public Works on 3 rd October, 2013. The signed MOU and the concept note regarding this program is now an integral part of the Operating Guidelines of the FSPDSME project. RMG and Knitwear factories which are members of BGMEA and/or BKMEA with labor employment of 100-2000 provided that the factory building is owned by the applicant entrepreneur will get loan facility up to BDT 100,000,000.00 for the purpose of retrofitting, rebuilding & relocation of their factory buildings. The TSL fund of FSPDSME scheme will support 100% of the sub-loan amount as pre-finance. Disbursement to the PFIs will be made at least in 3 (three) tranches to each RMG and Knitwear Units selected for pre-finance upon receiving certificates from PWD engineers and PFI engineers at different stages of work. 03. The relevant sections of Operating Guidelines[ e.g. Section 2.1.2: Size (page-15); Section 3.1: Terms and Conditions of Sub-Loan (page-17); Annex-VI: Terms and Conditions of Sub-Loans (page-63); Annex-VII: Terms and Conditions of On-Lending Loans (page-64) have been revised to include the financing facilities to micro enterprises and to allow the exceptions for financing to RMG and Knitwear industries under the “RMG Sector Safe Working Environment Program”. 04. The relevant modified sections of the Operating Guidelines are annexed herewith as Attachment-1. Incorporating all the modifications and exceptions a revised version of the Operating Guidelines has also been prepared which is available at our website (http://www.bb.org.bd/mediaroom/circulars/circulars.php). 05. All other rules and procedures of the Operating Guidelines will remain unchanged and in force. 06. This circular letter will be treated as effective from the date of issue. Please acknowledge the receipt. Yours sincerely, Attachment: As mentioned above. (Md. Masum Patwary) GM (CC), SMESPD & PD, FSPDSME Tel: 9530186

2 Attachment-1 The relevant Modified Sections of the Operating Guideline (OG) of FSPDSME Project. Section-2.1.2: Size (Page 15 of OG) The size of eligible End-borrowers shall be based on the definition of SMEs provided in BB’s SMESPD Circular No. 01 dated 19 June 2011, which, on the basis of the new definition in the Industrial Policy 2010, defines SMEs1 as follows: Table Error! No text of specified style in document.-1: Definition of SMEs Sector Total Fixed Assets excluding land and building (Tk million) Labor Employment Medium industry/ enterprise Manufacturing 100.0 - 300.0 100 - 250 Service/ Trading 10.0 - 150.0 50 - 100 Small enterprise Manufacturing 5.0 - 100.0 25 - 99 Service/ Trading 0.5 - 10.0 10 - 25 Micro enterprise Manufacturing 0.5 - 5.0 10 - 24 Service/ Trading ≤ 0.5 ≤ 10 Exception: RMG and Knitwear sector industries which are member of BGMEA and/or BKMEA with labor employment 100-2000. Note 1: If any enterprise falls under a particular category under one criterion (total fixed assets or employment) but a larger-size category under the other, then the enterprise will be classified into the latter category. Note 2: The definition for the trading sector has been added by BB and is applicable to the various financings made by BB. Note 3: The exception will only be applicable for the RMG and Knitwear sector safe working environment program under an MOU signed among JICA, BB, PWD, BGMEA and BKMEA. The concept note and the signed MOU will be an integral part of the RMG Sector Safe Working Environment program along with this Operating Guidelines. The category for employment of 26 to 49 workers in the service sector is missing in the BB’s Circular as well as the Industrial Policy 2010. MOI has clarified that this category should fall under the category of medium enterprise, which will also be applied by BB. In the current definitions practically used by BB, those public limited companies or subsidiaries of large enterprises whose sizes belong to the above definition of SMEs are not entitled to be treated as SMEs. This practice shall be applied for this TSL Project, too.

1 Any change in the definition of SMEs used under the TSL Project shall be first approved by the Steering Committee and then concurred by JICA.

3 Section-3.1: Terms and Conditions of Sub-loan (page 17& 18 of OG) The PFI shall assume all lending risks associated with extending of Sub-loans under the TSL Project. The terms and conditions of the Sub-loan scheme under the TSL Project are outlined in Annex VI. The Sub￾loan is the term used to express the loan to be provided by the PFI to the End-borrower which includes the credit funded by the OLL from PIU and by the PFI’s own funding source. A Sub-loan also means the combined total of the credit for fixed investment and for working capital to the End-borrower. The minimum and maximum ceiling amount established for the eligibility criteria of the Project in respect of the loan amount shall be applicable to the total amount of the financing for the fixed investment and for the working capital to the End-borrower. SMEs in different sectors and of different natures (such as gender) will be equally treated with regard to the terms and conditions of loans so far as they satisfy pre-set eligibility criteria. As indicated in Section 3 of the Participation Agreement, there are specific conditions required for Sub￾projects as shown below:  Minimum of 10% of the total estimated cost of Sub-project is to be financed from Borrower’s own resources, in cash or in kind;  Minimum of 15% of the total estimated cost of Sub-project is to be financed from PFI’s own fund resources;  Maximum of 75% of the cost of the Sub-project can be financed from the OLL window of the TSL scheme; and  Sub-loan for Sub-project will not be used to finance such items as: purchase of land, land use rights, payment of tax and import duties, working capital2 and cost of such activities asresettlement and other compensation cost and refinancing for existing loans3 .  Exception is applied only for the RMG and Knitwearsector safe working environment program: o Minimum of 10% of the total cost of the sub-project is to be financed by the borrower from his own resources; and o Maximum of 90% of the cost of the sub-project can be financed from the OLL window of the TSL scheme. Note: The exception will only be applicable for the RMG Sector Safe Working Environment Program under an MOU signed among JICA, BB, PWD, BGMEA and BKMEA. The concept note and the signed MOU will be an integral part of the RMG and Knitwear sector working environment program along with this Operating Guidelines. Sub-loan shall be made on terms whereby PFI shall obtain, by written contract (a sub-loan agreement) with the End-borrower, or by other appropriate legal means, rights adequate to protect the interest of PFI, including the right to: (1)require the End-borrower to use the proceeds of Sub-loan exclusively for the purpose of Sub-project which only includes eligible items as specified above; (2)require the End-borrower to carry out and operate the Sub-project with diligence and efficiency and in accordance with sound technical, financial, resettlement, environmental4 and managerial standards, including the implementation of the action plan for displaced persons, and to maintain adequate records; (3)require the End-borrower to submit their financial statements for every accounting term, at least on an annual basis, until the full repayment of sub-loans; (4)inspect, by itself or jointly with representatives of PIU, MOF-BFID or JICA, if they shall so request, such goods, works, plants and constructions and installations, as the case may be, included in the Sub-project, the operation thereof, and any relevant records and documents; (5)obtain all such information as JICA, MOF-BFID, PIU or PFI may reasonably request relating to the foregoing and to the administration, operations and functional conditions of the End-borrower, and to the benefits to be derived from the Sub-project; (6)involve any remedies against the End-borrower, including suspension, termination or withdrawal of the Sub-loan, which will be available to PFI by law, in event of failure of the End-borrower to perform its obligation under contract with PFI; and (7)take any legal action against the End-borrower in case of default following the prevailing rules and regulations and prudential regulations/ guidelines of BB.

2 Sub-loan proceeds may be used for initial working capital, which is associated with the investment loan. 3 The refinancing can be extended only for sub-loans that have been disbursed 1 month prior to PFI’s request of the respective OLL. If a sub-loan is disbursed in more than one installment, this cut-off date should be counted from the final disbursement. 4 established by GOB

4 ANNEX-VI: Terms and Conditions of Sub-loans (page-63 of OG) Lender: The PFIs (The eligible banks and financial institutions) Borrower: Clients of PFIs (SMEs) (See “Eligibility Criteria for End-borrowers) Currency: Bangladesh Taka Amount: Tk 200,000 － Tk 50,000,000 [Exception: For the RMG and Knitwear sector safe working environment program, the maximum loan amount will be Tk.100,000,000] Terms and Conditions Term: 2 - 5 years (incl. grace up to 1 year) 5 - 8 years (incl. grace up to 2 years) (Working Capital) 1 year, annually renewable up to 5 years5 [Exception: For the RMG and Knitwear sector safe working environment program the maximum loan tenure will be 15 years including a grace period of maximum 2(two) years. ] Interest rate: To be determined by arrangement between PFI and Borrower in compliance with the rules and regulations prevailing in Bangladesh [Exception: For the RMG and Knitwear sector safe working environment program a maximum of 5% spread over Bangladesh Bank rate can be charged by the PFIs to the sub-loans including all sorts of charges, fees and commission except documentation charges] Repayment Schedule: To be determined by arrangement between PFI and Borrower in compliance with the rules and regulations prevailing in Bangladesh Interest payment: To be determined by arrangement between PFI and Borrower in compliance with the rules and regulations prevailing in Bangladesh Prepayment: To be determined by arrangement between PFI and Borrower in compliance with the rules and regulations prevailing in Bangladesh Security: To be determined by arrangement between PFI and Borrower in compliance with the rules and regulations prevailing in Bangladesh Note: The exception will only be applicable for the RMG and Knitwear sector safe working environment program under an MOU signed among JICA, BB, PWD, BGMEA and BKMEA. The concept note and the signed MOU will be an integral part of the RMG and Knitwear sector working environment program along with this Operating Guideline.

5 based on actual results of sales and production

5 ANNEX- VII: Terms and conditions of On-lending Loans (page-64 of OG) Lender BB Borrower Eligible PFIs Amount Within 75% of the cost of Sub-project i.e., about 83%6 of Sub-loan amount (Tk. 416,666 – Tk. 41,666,6667 ) Exception: For the RMG and Knitwear sector safe working environment program-within 90% of sub-project i.e. 100% of the sub-loan amount. Currency Bangladesh Taka Terms & Conditions: Term (grace): 2 - 5 years (incl. grace up to 1 year) 5 - 8 years (incl. grace up to 2 years) (Working Capital) 1 year, annually renewable up to 5 years8 [Exception: For the RMG and Knitwear sector safe working environment program the maximum loan tenure will be 15 years including a grace period of 2(two) years.] Maturity: Synchronized with that of the respective Sub-loan, i.e., Equal to the maturity of the Sub-loan Interest rates: Bangladesh Bank Rate (currently at 5% p.a.) Interest payment: Quarterly (calculated on accrual basis) Penalty: Overdue not expected, as BB will realize the installment amount plus applicable interests by debiting them against the current account of the concerned PFI maintained with BB. However, the PFI may be allowed to make delay in payment within 3 working days on valid ground with condition that request for such delay shall be made in advance and that a penalty of 3% above the Bank Rate on due amount applied for. Security: In case that a PFI fails to repay any installment of loans as per the repayment schedule, BB may realize the installment amount plus applicable interests by debiting them against the current account of the concerned PFI maintained with BB. Note: The exception will only be applicable for the RMG and Knitwear sector safe working environment program under an MOU signed among JICA, BB, PWD, BGMEA and BKMEA. The concept note and the signed MOU will be an integral part of the RMG and Knitwear sector working environment program along with this Operating Guideline.

6 maximum 75% of total cost to be financed by OLL, while Sub-loan covering maximum 90%. 7 OLL covers 75% of total cost, while sub-loan covers 90% of total cost. 8 renewable being synchronized with Sub-loan