Identification and targeting of MSMEs for a new loan is a complex issue. A database of MSMEs could be helpful to bring them under the credit-based stimulus package
Micro, Small and medium enterprises (MSMEs) are the mainstay of our economy in creating scopes of employment and self-employment for millions. MSMEs are now quite predominant in the industrial structure of Bangladesh comprising over 97 percent of all economic units (Economic Census, 2013). More than eight million workers are now being employed in these sectors.
The contribution of the MSME sector to the GDP is estimated at about 25 percent, which makes the sector an engine of growth. However, they are often deprived of policy support as can be realised by strong trade associations of different sectors. And during this hard time of economic stalemate caused by the Covid-19 pandemic, MSMEs are among the ones worst hit.
The Covid-19 crisis affects the MSMEs on an enormous scale worldwide. They are the worst-hit by the Covid-19 crisis because of suppressed domestic and international demand due to social-distance measures and fears among the population.
The Production process has been affected to a great extent and the situation in Bangladesh is not any different. The government enforced the social-distancing measure by declaring general holidays from March 26, 2020. Most of the people stay at home and therefore production and services of MSMEs have been disrupted.
In the face of Covid-19 pandemic, the government of Bangladesh has declared a stimulus package worth Tk20,000 crore to help MSMEs to recover their loss and maintain the vibrancy of the economy. The government intends to provide loans to MSMEs under this stimulus at 4 percent interest rate instead of the normal 9 percent interest rate.
Therefore, the whole stimulus is a credit-package, where the government provides only about Tk1,000 crore as interest subsidy in a year under the declared package. Unfortunately, the need of the hour is to reach out to those who do not have access to bank finance.
Now the question is, whether and to what extent MSMEs will get benefited out of the current stimulus package. The next question is, within the current package context, what are the ways to make the stimulus more effective for this sector. I shall reflect on these issues in this article.
To implement the stimulus package successfully, the first and foremost condition is to have a comprehensive database of MSMEs. Most of the MSMEs are out of the formal registration system and therefore it is difficult to identify them.
The latest Economic Census conducted in 2013 by the BBS identified about 7.8 million economic enterprises, of which roughly 9.7 lakh are MSMEs. Among them 11 percent are micro, 88 percent are small, and 1 percent are medium enterprises. Two other organizations working on MSMEs, namely SME Foundation and BSCIC, presumably do not have any comprehensive list of MSMEs.
Now it's a high time to develop a comprehensive list of MSMEs with tripartite collaboration between BBS, BSCIC and SME Foundation, which would be helpful in providing various stimulus and policy support to this sector.
The 2013 Economic Census data is somewhat outdated and therefore it needs to be updated. Based on 2001/03 and 2013 Economic Census data, I have estimated the number of Micro, Small and Medium enterprises for the year 2019.
On average, MSMEs grew at an annual rate of 7.2 percent and workers grew at a 6 percent rate during the inter-census period, 2001/3 and 2013. In 2019, the total number of MSMEs are estimated at 1,358,603, of which 54,344 are manufacturing units and the rest 1,304,259 are trading and service units.
Trading and service units comprise about 96 percent of total MSMEs. In 2019, total employees (persons engaged) are estimated at 9,937,244 persons at the MSME sector, which was 7,306,797 in 2013. After deducting unpaid family workers, there are roughly 8,744,775 wage/salaried workers engaged in this sector. The estimated number of cottage and household economic units (employee<10 persons) is estimated at 9,587,388 units and corresponding workers are 17,324,130.
Though the updating of MSME database may not be feasible at this moment, it is better to work with the 2013 list of BBS with some addition/deletion from BSCIC, SME Foundation and other relevant organizations.
The second aspect of the stimulus is its design and modalities. It is to be noted that lack of access to bank finance is the main obstacle for the development and growth of MSMEs, this is true not only in Bangladesh but also worldwide. In one of our studies we find that less than 40 percent SMEs have access to bank finance in Bangladesh, and If micro businesses are included, the percentage of small enterprises staying out of banks' coverage will be much bigger.
While most of them even do not have access to banks, they will find it hard to comply with the complicated procedures to get the stimulus loan. Banks will ask for collateral, guarantee, papers etc. which they don't have. So, I think only the firms that have access to bank finance can avail of the benefit of the stimulus credit package. In that case more than 70 percent of MSMEs will be left out of the benefit of the government's Covid-19 stimulus for the MSME sector.
Therefore, I have a few suggestions to make the stimulus more inclusive and effective for the MSME sector as part of their recovery strategy.
First, we have to consider a reasonable timeframe for the stimulus taking into account uncertainties of the coronavirus pandemic. The uncertainties will remain at least for one year given that no vaccination and effective treatment would be available during this time. Considering the current year as distressful for the MSMEs, the recovery phase therefore should be set for a 3-year period. We should not expect anything from these firms for the first year.
Second, the firms that already have bank loans, a one-year moratorium on their interest and principal payment could be on the card to give them relief from their current distress.
Bangladesh Bank data shows that the total outstanding loan in the MSME sector stood at Tk2,19,293 crore (as of October, 2019) for which the MSME sector pays roughly an amount of Tk2,192 crore as monthly interest. The government could even consider waiver of a part of the interest payment as part of the stimulus without sanctioning them a fresh loan.
Third, identification and targeting of MSMEs for a new loan is a complex issue. If BSCIC and SME Foundation could devise a database of MSMEs that could be helpful to bring them under the credit-based stimulus package.
In BSCIC industrial estates, about 5,000 MSMEs are in operation. The SME Foundation conducted a survey of MSMEs in 177 natural clusters having more or less 50 firms in each cluster.
These cluster-based firms can also be identified for this stimulus loan. BSCIC also provides small credit to MSMEs for their capacity building, which also gives BSCIC a leverage to identify some MSMEs outside BSCIC estates. A coordination from Bangladesh Bank with SME Foundation and BSCIC is important particularly to identify smaller firms for this stimulus package.
Fourth, default rate is a big concern for banks in designing any credit-based package for MSMEs. Definitely the credit under the stimulus package should be collateral-free and guarantor-free. Complying with all the procedures of bank loan, it will be difficult for the MSMEs to get benefit out of the stimulus. In this case, banks could follow the loan procedures of the "Credit Wholesale Program (CWS)" of the SME Foundation.
Under the program, banks provide group-based lending (5 firms form a group) in MSME clusters and they do not ask for collateral or guarantee. Since CWS is a highly successful program with repayment rate over 95 percent, I think this CWS modality can be applied to the stimulus credit program too. On top of this, the loan should be given for a three-year period with a one-year grace period so the enterprises can get enough time to resume the production and businesses.
I also want to propose to attach a debt relief grant component in the loan package in order to make it really helpful for these smaller firms. For example, firms can be given a condition that once they repay the whole amount, 30 percent of the principal will be returned to them as debt-relief, which will motivate them to repay the loan amount.
As part of modalities, the loan amount can be segregated in two parts: wage payment and capital financing. Considering our estimated capital labor ratio in these firms, 60 percent of the sanctioned loan can be allocated for wage bill and the rest 40 percent for capital financing. Following the experience of RMG package, wage bills can be disbursed directly to the employees' bank/mobile account. Otherwise, there will remain possibilities of employee retrenchment and layoff situations.
Fifth, MSME selection, group-formation, monitoring of firms etc. are quite daunting that not only increase operational costs of banks, but also put banks in a difficult situation because of their inadequate capacities to handle all these issues. In making this stimulus package successful, I again argue that SME Foundation's CWS program's modality can be applied here.
For example, SME Foundation and BSCIC will borrow money from Bangladesh Bank's refinancing window and then BSCIC and SME Foundation will identify partner banks through which this loan package will be implemented. I suggest here that under this loan package, banks should only charge 2 percent service fees from the MSMEs instead of the current 4 percent interest rate, and the government should be generous to pay back the rest 7 percent interest payment as subsidies to the banks (instead of 5 percent under current policy). Even under this modality of loan disbursement, micro-credit institutions can also be brought on board to identify and disburse the loan to MSMEs.
Sixth, apart from financial packages, exemption of VAT and income tax obligations for MSMEs for the firms having yearly turnover to a certain level (for example, 20 lac Taka) could be useful for tackling this difficult situation.
The stimulus thus should consist of three components: interest waiver for the existing indebted firms; debt relief grant; and interest subsidy for the new loans, which might increase the burden of the government more than that is designed at this moment. Coming to the current package, Bangladesh Bank has created a Tk10,000 crore refinancing for banks and instructed all the commercial banks to follow usual bank procedures to disburse credit to MSMEs.
I think this 'business as usual' policy would not work and most of the MSMEs will be left out of the stimulus making the package unsuccessful. Though direct conditional transfer would be preferred to credit based package to overcome distresses of small businesses, the current package can be made a bit more pragmatic with the suggested measures given in this article. If we can not reach out to the right firms with this stimulus, most of these small firms will eat up their capital and become bankrupt by the end of this pandemic.
It is therefore an urgent call for reaching out the appropriate firms as quickly as possible with the stimulus.
Dr Monzur Hossain is the senior research fellow at Bangladesh Institute of Development Studies (BIDS)
The views expressed in this article are the author's own and do not reflect those of BIDS. The author can be reached at: [email protected]