Though belated the central bank has, for the first time, created a credit guarantee scheme (CGS) to encourage banks to expedite financial support to cottage, micro and small (CMS) enterprises in increased volume. The board of directors of the banking sector regulator approved a policy late last week that would facilitate the introduction of the CGS. The scheme is designed to help the lenders concerned retrieve a part of the loss incurred by them in the event of non-payment by the borrowers.
The debilitating impact of Covid-19 pandemic on every sphere of the economy, seemingly, has prompted the Bangladesh Bank (BB) to put in place the CGS, primarily to help the lesser industrial and commercial entities. The question onemight, however, feel tempted to ask is: Why does the central bank wantto help the CMS enterprises under a protective shield when all other sectors in the economy are also badly affected by the pandemic?
The answer to the query, possibly, lies in the most banks' diffidence to offer funds to the CMS enterprises notwithstanding the fact the latter have been making a sizeable contribution to the national economy. These enterprises have been perennially vulnerable to lack of access to formal institutional finance. Factors such as poor market linkage and lack of skilled labour are also seen as major deterrents to their smooth operation.
According to an International Finance Corporation (IFC) estimate done nearly four years back, micro and small and medium enterprises have a financing gap of Tk237 billion. By now, the gap has surely widened further. However, no estimate is available for the CMS enterprises. The financial institutions, mainly banks, do consider the SMEs or CMS enterprises 'risky' in the matters of lending because of the latter's unstructured and low-quality management and limited product mix. Moreover, these entities, usually, lack collateral that the banks consider a highly important prerequisite in the case of the lending fund to someone.
However, one can hardly blame banks if one goes through the statistics relevant to the borrowings by the SMEs. The non-performing loans in the case of SMEs had increased eightfold to Tk 220 billion between 2010 and 2016. Nearly 40 per cent of the loans given to these enterprises by the state-owned banks have become classified. The situation is also pretty bad for a few private banks that have made aggressive lending to the SMEs.
However, the default culture has been prevalent more among large borrowers. It is no secret that many high-profile delinquent borrowers enjoying influential connections have managed fresh loans time and again. A section of banks and the regulator concerned have been rather unduly tolerant towards this particular class of borrowers.
There is no denying that the cottage, micro and small enterprises have received the severest blow dealt by the pandemic. More than half of them have been forced to close down and another 25 per cent have witnessed severe cut in their daily turnover. Millions working in these enterprises are now unemployed. So, nothing can be more useful than helping these enterprises financially to make a turnaround in such a difficult time. Since the BB has created a fund of Tk20 billion, initially, under the CGS scheme, the banks should feel encouraged to offer loans to eligible CMS enterprises.