Banks need to be extra cautious

In an economy, the banking sector plays a significant role, which has become more evident at the time of coronavirus pandemic. The government has announced financial stimulus packages to help businesses recover from the loss caused by the shutdown.

More than 80 per cent of these packages are in the form of liquidity support to businesses and agriculture which have to be channeled through the banks and financial institutions. The government will provide interest subsidy for the working capital to be disbursed by commercial banks to the small, medium and large business and refinancing. But banks will have to lend money from their own source.

When the lockdown will be withdrawn, affected businesses – small or big – will approach banks to avail the loans. Banks will have to scrutinize carefully to identify who are genuinely affected and who need how much. The process may have already started. But it is expected to be enhanced with the reopening of economic activities.

Checking genuineness of the claims of losses due to Covid-19 and determining customers' requirement will be a major task of banks prior to the disbursement of loans. 

Because of the past track record of the banking sector, there are enough reasons to worry about the distribution of loan under such stimulus schemes. We already have large amount of non-performing loans (NPLs). Significant amount of these NPL is due to wilful defaulters who do not want to pay back their loans. Stimulus packages during the Covid-19 crisis may be another opportunity for the wilful defaulters. So banks need to be vigilant and strong.

It is common that whenever any support measures are announced during the times of crisis, there is a race for availing those by some sections, no matter whether they are affected or not.

The Covid-19 could be another such situation when due to oversight or weak due diligence, opportunist may take advantage. Before taking any loan, a genuine borrower thinks twice if he or she will be able to repay it. But a willful defaulter will try to get it anyhow. 

But the onus will be on banks. They have to have enough liquidity in the system, and on the other hand, they have to select clients judiciously so that they get their money back.

Small and medium enterprises (SMEs) are the worst hit by the shutdown. But many banks are reluctant about lending to SMEs as small loans increase their operational cost. Moreover, banks' requirements for collateral, mortgage, and the need to have previous track record on banking transactions make it hard for SMEs to get bank loans.

Many SMEs have not taken any bank loan in the past. Entrepreneurs invested by taking personal loans from family and friends. Their small businesses were closed, their income stopped, but they had recurring costs like house rent, utility bills, staff salary etc. Say, salons, beauty parlours, boutique shops, and the like. They are genuinely affected.

They need the support most. Banks need to support them to get back to their business. If banks ask for collateral or look for previous loan history, these small businesses will never be able to proceed with their businesses. Bangladesh Bank has guidelines for lending, but individual banks will have to apply their own judgment to support businesses, including the small ones.

Not all SMEs are Dhaka-based, they are scattered across the country. State-owned banks have country-wide branches. Many private banks have SME-dedicated desks and branches. They should come forward now to help small businesses to revert back from their losses.

SME Foundation, Palli Karma-Sahayak Foundation and non-government organisations having experiences in working with SMEs, especially in the rural places should be engaged in identifying the affected small businesses and help them in accessing loans from banks. Agent banking may also play a role here. 

Apart from being judicious and careful, banks need to go beyond traditional approach of providing services only to large businesses. They have to reach out to the small ones who have much less capacity to recover the losses from Covid-19 shock.

Dr Fahmida Khatun, is the executive director at Centre for Policy Dialogue