As banks have appeased their appetite for risk and tightened their lending criterion , non-bank financial institutions (NBFIs) are mounting up their SMEs bucket to capture quality portfolio. NBFIs supplement banks by providing infrastructure and allocating surplus resources to individuals and companies with deficits and also mobilising savings for investment. Additionally, NBFIs also introduce competition in financial services. While banks may offer a set of financial services as a package deal, NBFIs unbundle and tailor this service to meet the needs of specific clients. Individual NBFIs may specialise in one particular sector and have advantage in respect of information. Through the process of unbundling, targeting, and specialising, NBFIs enhance competition within the financial services industry. Subsequently, in 2016, the NBFI, otherwise known as shadow banks, make an impressive loan growth of 37.94 per cent compared to banking growth of 15.32 per cent, according to Bangladesh Leasing and Finance Companies association (BLFCA).
Currently, 33 NBFIs are operating in Bangladesh under strict regulations and monitoring of the Bangladesh Bank and inclusive growth strategy framework. The system can attract clients with its innovative product along with simple paperwork, quick approval, easy credit process, speedy decision-making and no red-tapism. Approval of loan is less time consuming.
However, the NBFIs are still plagued by high cost and dearth of fund, which remains the main impediment to their credit growth. At times they borrow funds from commercial banks or call money market, which again gives competitors of NBFIs an advantage of low-cost fund. So, the credit market has become an impervious battle field and NBFIs swim against the changing ebb. NBFIs should, therefore, concentrate its investment on diversified and strategically devised areas under innovative PPG (Product Policy Guideline) and fill up the gap with brand new avenue. Considering credit demand in the country, NBFIs are trying to carve a niche market.
SME is still an untapped market in the country. Currently, GDP per capita in Bangladesh is $1602 and the global GDP rank is 150th, according to Wikipedia.
There is a notion among some people that large corporate loans are less problematic than unstructured SME loans. But, industry experts opine that the loss in corporate lending here is more than the loss in SME lending. NBFIs prefer SME financing mainly because:
- Usually, SME business is operated by its proprietor. The proprietor knows about demand and supply side, diversification of product and creates supply chain, establishes distribution network, plans for successor, customer base, geographical footprints and outreach capability, establishes relationship with key suppliers/ key customers ensuring stable supply and demand retain policy, strength of business model reflected in proven growth rate of sales/EBITDA (earning before interest, taxes, depreciation and amortisation) /net profit etc.
- Beside making profit, through SME financing, a lot of employment is generated and thus the benefit goes to a larger population. "If any finance disburse Tk100 crore to a large corporation, say to a group for constructing a five star hotel, it will generate employment for 1,000 people. But if it distributes Tk 100 crore to 1,000 small scale entrepreneurs, they will be able to create job opportunities for another 10,000 people. So the SMEs contribution to the national economy is higher." Said CEO of a leading NBFI.
- Of the portfolio mixing both corporate and SME bucket of any NBFI, SME is less risky. In case of any default of SME loan, financier suffers less due to the small amount. If the loan is large, the default rate gets much higher even from a single loan exposure.
- Because of cash flow-based investment mainly, the default rate is moderate in SME loan. High productivity, comfortable liquidity, safety cushion against liability and coverage position as well as effective inventory are convenient here on account of proper monitoring and recovery of instalment.
- The main constraints faced by SMEs include paucity of independent land, absence of owned premise, fragmented market, low entry barrier, deficient infrastructure and utility services, weak legal and regulatory framework, inadequate access to finance, lack of skilled workforce, poor business support services, risk associated with potential supply disruption due to natural calamity or political unrest, import dependence, limited internal fund generation capacity due to weaker bottom-line profitability, weaker retained earnings. Limited capacity utilisation and further capacity enhancement planning may give rise to external borrowing and hike the leverage position while lower the adequate coverage against increased financial cost etc.
However, the government constituted a national taskforce on SME development in 2003 to draw up a realistic strategy for promoting rapid growth and vigorous competitiveness among SMEs in Bangladesh. The task force identified common constraints faced by SMEs and made a number of recommendations that led to the setting up of a new institution, the SME Foundation in 2007. The idea was that this foundation would serve as the central authority to steer both policies and actions designed to support SMEs. Moreover, the BB recently redefined the limit of SME, which is expected to create an inductive climate for all banks and NBFIs.
The writer is head of CRM, FAS Finance & Investment Ltd.
imdadul7648@gmail.com