Microfinance institutions (MFIs) can now provide collateral-free loans of up to Tk 4 million for micro enterprises to help boost the country's small and medium enterprises.
According to draft guidelines, non-governmental organisations (NGOs) and MFIs have to maintain a 50/50 ratio for micro and micro enterprise loans so that the focus cannot deviate from poverty alleviation through micro credit.
Micro enterprise loan will range from Tk 100,000 to Tk 4.0 million.
Mohammad Yakub Hossain, director at Microcredit Regulatory Authority (MRA), said the country's NGOs and MFIs have been providing bigger loans than the size of micro credit.
"But the amount of loan is not more than 1.5 million. We have formulated the guidelines to formalise micro enterprise loan and set limit."
It is a demand of time, he said, adding that now small and medium enterprises (SMEs) in the country will get loans on easy-terms and conditions and also collateral-free.
MRA has formulated draft guidelines in consultation with the sector and opened for public opinion. It will be finalised by the end of March, according to MRA sources.
As per the guidelines, a 'credible' person with a net worth and income to repay the loan can be selected as a guarantor of the loan.
"Guarantor will be jointly and severally responsible for repaying the loan and interest accrued thereon. Only one person should be chosen as the guarantor of a loan."
The guidelines said applicant's spouse will also be acted as a guarantor. "In absence of spouse, father, mother, brother and sister may give loan guarantee."
In case of group-based lending, guarantee by the respective group against the loan taken out by a member should be considered as group security. "If a member of the group is a defaulter, then the whole group may be identified as defaulter."
The maximum debt-equity ratio should be 60:40. In case of first time, one MFI may restrict to 50:50 debt-equity ratio due to lack of credit record, low accuracy of information and absence of collateral.
"Gradually, this ratio can go up to 70:30, depending on satisfactory loan repayment performance and creditworthiness of the borrower," the guidelines said.
MFIs shall identify the risks and prepare a list of probable actions to mitigate risk factors. Before providing a loan, MFI requires to check the legality of enterprises and receipt of all licences and permission to undertake business.
It will also check the company's employee turnover rate, availability of required experts/skilled employees within the vicinity of the business at an affordable compensation package, profitability, ability to repay the loan instalment from incomes, leverage capacity, operating costs, available cash (and bank balance) and net cash flow to provide a loan, according to guidelines.
MFI must have its own ME lending manual to be followed for internal control.
Internal audit department should inspect branches regularly. MFIs will have to provide information regularly to Credit Information Bureau (CIB) online after their launch.
In addition, they need to submit reports monthly and annually as per the rules set by MRA. Each MFI will have to formulate separate business strategies to finance micro enterprises.
They will also have to develop and market innovative loan and deposit products, based on the needs of the customers and the nature of various economic sectors.
Each MFI will take appropriate measures to provide proper training to an adequate number of ME financing staff/officers/employees for smooth functioning of ME financing activities.
Emranul Huq Chowdhury, former chairman of Credit and Development Forum (CDF), a forum of NGOs-MFIs, said this is a good initiative for the sector as well as SMEs.
"We have long been demanding the formulation of guidelines on micro enterprise loans," he said, adding that micro credit is a success in the country.
Many micro credit members have graduated from micro borrowers. "There is a demand created for micro enterprise loans," he said.
Md. Fazlul Kader, Deputy Managing Director at PKSF, said inability to provide collateral is considered as one of major challenges for micro entrepreneurs to access the loan.
He ruled out more risks in micro enterprises than micro credit. "The ways MFIs run they will ensure return of loans."
According to draft guidelines, the interest rates on loans disbursed through MFIs will be determined based on the MFI-customer relation as per instructions issued by MRA.
MRA has recently re-fixed service charge of microcredit at 24 per cent from previous 27 per cent.
BURO Bangladesh Director Mosharraf Hossain said the banks don't have the capacity the NGOs-MFIs have to reach and monitor the loans.
"MFIs are closer to small and micro enterprises that banks," he said, adding that real interest rate of banks is much higher than what is shown after addition of a lot of charges, fines and fees to interest rate.
Currently, there are around 700 NGOs and MFIs in the country though around 10 MFIs control around 70 per cent of the market, MRA sources said.
There are around 35 million clients while loans of around Tk 1,400 billion were disbursed until 2019, according to MRA.
