Strict supervision and monitoring will be required to ensure quick disbursement, and maintain transparency and accountability at all levels
The government's commitment to support sustainable development of the SME sector is clear and commendable. The announcement of a comprehensive and holistic SME Policy (New SME Policy 2019) promising an extensive incentive package and outlining a time-bound implementation plan is well-intended to boost sustainable SME growth in a conducive SME development environment.
Again, a quick response to rescue and rehabilitate the employment-augmenting SMEs badly dismantled by the Covid-19 consequences is another laudable step. Declaration of a Tk20,000 crore stimulus package for the sector is a timely interventional measure.
However, a speedy and fruitful implementation of the stimulus package remains a critical challenge for the government. These notes are intended to share some of my thoughts with all the relevant stakeholders who may be involved in the distribution process.
Discussions and deliberations on the modalities of stimulus package distribution are in the offing by some think tanks (i.e. Sanem) and BIDS, the leading national research organisation. The Sanem thinkers highlight the possibilities and constraints to employment generation by the SMEs, especially in the rural areas for youths and the returned wage earners from abroad.
They seem to be apprehensive of differences between political and economic institutions on various issues, which may act as deterrents to speedy and quick decision-making and lack of smooth coordination among various stakeholders. These may lead to coordination failures and result in a delayed policy implementation. These are valid concerns, but other critical issues influencing the distribution process also need to be clearly thrashed out.
In the absence of reliable information on the extent of dislocations caused by factory closures, supply chain disruption, sales decline, loss of markets, and consequent cash crunch etc., it is difficult to identify the targeted beneficiaries and address their most urgent needs. The only source of information available so far is a preliminary survey of a sample of 215 SME units carried by Light Castle Partners and Sheba.xyz, two foreign consultancy outfits during April-May 2020. The important findings are:
a) Complete shutdown of operations by 50 percent of the sample units due to unavailability of raw materials and lack of sales outlets
b) Drastic fall (50 percent) of revenue earnings
c) Fall in cash reserves
d) Market disruptions to the extent of 20-40 percent
The fall-out effects of these consequences of Covid-19 are lay-offs of the workers and rising unemployment in the SME sector. On top of all these, the lockdown process is likely to play havoc with the SME entrepreneurs. Nearly 70 percent of them are likely to go out of business according to preliminary assessments.
Against these predicaments, the sector needs quick and adequate bailouts in the form of bank loans (and grants) and other necessary business development support services (BDS) for enabling them to restart and generate employment opportunities for millions. Besides employment generation, SMEs account for 98 percent of the private sector industrial establishments, 28-30 percent of GDP and close to 15-18 percent of value added in the GDP.
The sector, therefore, qualifies to bounce back to normal operations with favourable policy support to help maintain Bangladesh's ascendency toward achieving the SDG goals.
Stimulus package distribution mechanisms
After threadbare discussions, distribution of working capital loans among the entrepreneurs has been decided as the main palliative in the short run. The loan sanctioning process is to be handled by district level committees (healed by DCs?) and comprising representatives from the government, the Bangladesh Bank, commercial banks, BSCIC, PKSF, chambers of commerce and industries, and the president of National Association of Small Cottage Industries of Bangladesh (NASCIB). The committee will have the mandate for co-option of more members if desired.
The distribution committee is broadly reflecting an element of decentralisation of the loan sanctioning process up to the district level. However, the banks involved in the process of sanction and distribution of the loans will play a key role in making the loans available to the targeted beneficiaries, starting from processing the loan applications to final disbursement.
A big element of uncertainty underlying the entire process relates to the targeted entrepreneurs' access to the loan facilities normally restricted by high collaterals, extensive documentations and above all, high interest rates charged by the banks. Strict adherence to these conventional practices in sanctioning and disbursing loans may thwart the whole philosophy of bailing out the SMEs from Covid-19 crisis. Strict supervision and monitoring will be required to ensure quick disbursement and maintain transparency and accountability at all levels.
SMEs belong to extremely heterogeneous categories and are widely spread out in every nook and corner of the country. This requires targeting and distribution to strike regional balance. Rural-urban balance needs to be upheld through benefitting the potential beneficiaries from urban, peri-urban, and rural areas.
Similarly, striking gender balance is even more important to do justice to the women entrepreneurs who often complain against banks for being discriminatory based on sex of the client.
To enable the SME entrepreneurs to come out of the quagmire and start smooth operations, some additional facilitating steps may include (i) soft loans at concessional interests, (ii) flexible instalment packages, (iii) granting of payments for workers and (iv) VAT exemptions on revenues and current expenses for the current and next fiscal year. These supports may to some extent help the SMEs to tide over their cash crunch problems.
Finally, some of the MFIS (i.e. PKSF, Asa, Brac etc) which are successfully operating microenterprise lending may be inducted in the lending process to fill the gaps of "missing middle" in SME financing. The micro and cottage enterprises face difficulties when they outgrow the small amounts lent by the MFIs but are not yet fit to secure bigger loans from the banks.
These arrangements made after due diligence may help SMEs of all categories to have broader access to institutional credit facilities. However, a separate amount of Tk2,000 crore for distribution among the cottage enterprises in the rural areas – distributed as prioritised – may reach the targeted beneficiaries in the rural areas.
The author is an honorary professor of economics at the University of Dhaka, and an eminent SME specialist