SMEs needed financial support most yet deprived: BB

When it comes to the needs for financial support, the small and medium enterprise (SME) sector ranks at the top as stated by most banks, assuming that this segment has heavily suffered from Covid-19 shocks, according to a Bangladesh Bank survey.

But in reality, small businesses have got less than what they need under the stimulus package.

Based on the market survey, the Bangladesh Bank has recommended that the government introduce social safety bond named Covid-19 pro-poor bond to support people who have lost their jobs in the informal sector.

The government can also rationalise tax for SMEs for the time being to help them make a quick turnaround. Several countries have done so for the sector for a short tenure.

The survey conducted on 59 banks found that 54 banks perceived that the SME sector would require strong financial support to bounce back. The recovery might be slow but steady growth can be achieved in due course with the right financial support.

Respondents of the survey placed the SME as the third hardest-hit sector in the pandemic time – it experienced income shocks subsequent to losses in the informal sector, according to a central bank survey on Covid-19 impacts released on Monday.

From the market survey, the Bangladesh Bank found that labour forces in the informal sector, which mostly belong to the SME segment, largely experienced income shocks because of job losses.

Workforces engaged in the informal economy are being exposed to twin challenges – life and livelihood shocks – as compared to their counterpart fixed-income group.

In addition to job losses they have to contend with depressed wages.

Presenting the general wage rate index, the survey report revealed that the wage rate, which was in a rising trend in 2019, saw a drastic fall since the virus struck the country in March last year.

In the year before the pandemic, the wage rate had a rising trend as it started from 6.21% in January 2019 and ended with 6.54% in December 2019.

The wage rate sharply fell to 5.82% in September last year. However, it improved slowly to 6.15% in November as the economy started to rebound after public movement restrictions were eased.

The survey report also observed that wage shock differs from one sector to another.

Maximum wage rate deterioration occurred in the service sector, followed by the industrial sector, while the workforce in the agriculture sector remains relatively less vulnerable owing to a lower erosion of wage incomes.

A large number of the temporary labour force in the service sector are involved in restaurant, tourism and transport service-related jobs. The virus safety measures, like social distancing and movement restrictions, harshly and disproportionately affected this segment of the labour force.

On the other hand, industry workers also face an almost similar reality as their wage rate wanes sharply from 6.14% in January 2020 to 5.18% in July 2020.

Due to Covid-19, their work-related industries such as construction, real estate, and RMG and textile industries heavily suffered from low domestic and external demand which ultimately influenced their livelihoods, according to the report.

Despite substantial pandemic shocks, the SME sector did not get stimulus loans as per their needs, the report observed.

As of 31 December 2020, credit disbursements under the stimulus package reached about 54.1% of the target fixed for cottage, micro and small enterprises. It was 22% for low-income professionals, farmers and marginal businesses, according to the survey report.

According to SME Foundation's data, the number of SMEs in the country is about 78 lakh and their contribution to GDP now stands at 25%. The sector has a 13.53% share in the total credit of the banking sector.

On the other hand, disbursements were 66% for large industries and 97.5% for export-oriented industries under the stimulus packages during the same time.

The government has declared low-cost stimulus packages amounting to Tk1.21 lakh crore for all sectors of the economy.

When contacted, Syed Mahbubur Rahman, managing director of Mutual Trust Bank and former president of the Association of Bankers Bangladesh, told The Business Standard that the risk that banks face in disbursing loans to the SME sector is one of the major reasons for low disbursements to SMEs.

Besides, the cost of SME loans is higher than that of other loans, whereas, the interest rate spread between lending and deposit now is only 3%. Apart from this, the SME sector accounts for more than 10% of default loans. Because of all these reasons, banks are less interested in disbursing loans to small ventures.

However, there are some banks with an exception, he said adding that in this case, the boards of directors of those banks stay on the side of their management to deal with risks.

The seasoned banker called for a new mechanism to increase credit disbursements to the SME sector as it has created the most employment.

He thinks that alongside the bank boards, the government and the central bank should come forward in this regard.

Introduction of Covid-19 pro-poor bond

The report said the government can issue a special social safety bond to address short-term socio-economic setbacks due to the Covid-19 pandemic. The proceeds of this bond can be used for the people who have lost their jobs and whose livelihoods have been severely affected during the pandemic, pulling them again out of the poverty line through ensuring employment security.

Particularly, this bond can fund projects to tackle unemployment caused by the pandemic.

In particular, the government can announce some public work projects for the jobless informal sector workers for a limited time as a number of countries have already taken such initiatives.

The pro-poor bond can be tax-exempt, can contain put options and other facilities (small denominations and monthly coupons) to attract investors. Moreover, the socio-economic goals and positive social impact of this bond can be publicised widely.

The maturity of this bond can be five to 10 years. The general public, including non-resident Bangladeshis, banks, non-bank financial institutions and other financial institutions might be eligible to invest in the bond. As worldwide many social bonds are increasingly getting popular, the pro-poor bond in Bangladesh might be the promising one.