The economy is not recovering because the largest job-generating sector – CMSME – has not been able to withstand Covid-19 shocks
- Bangladesh has 1.16 crore SMEs; 1.07 crore cottage, micro entrepreneurs
- CMSMEs currently employ 3.17cr people
- Cottage, micro enterprises require Tk1.60 lakh loans on average
- Only 8 banks have joined the credit guarantee scheme thus far
Banks have not been able to disburse even half the Tk20,000-crore stimulus package announced by the government for cottage, micro, small and medium enterprises (CMSMEs) despite two time-extensions.
Moreover, the Bangladesh Bank has not been able to motivate banks to provide collateral-free loans to small entrepreneurs, even with the setup of a credit guarantee scheme.
Therefore, the finance ministry has decided to involve non-government organisations (NGOs) in the distribution of incentive loans to CMSMEs.
The decision was made last Thursday, the second day of a series of workshops organised by the finance ministry on the implementation of the stimulus package to tackle the Covid-19 crisis.
The data presented at the meeting on the package implementation was disappointing. It was revealed that the economy is not recovering because the largest job-generating sector – CMSME – is not able to withstand the Covid-19 shocks.
A Finance Division official told The Business Standard (TBS) that they are disappointed with the progress of the CMSME package implementation.
Banks are not interested in lending to micro and cottage entrepreneurs. Only eight banks have joined a credit guarantee scheme that has been set up, he also said.
He said, "Therefore, it has been decided to disburse loans amongst micro and cottage entrepreneurs in rural and remote areas through Palli Karma Sahayak Foundation (PKSF), SME Foundation, Bangladesh NGO Foundation and Micro-Credit Regulatory Authority (MRA)."
State-owned agencies have a network with NGOs that distribute microcredit. Therefore, by engaging these NGOs, it will be possible to provide working capital to cottage industries and micro entrepreneurs very quickly and easily, he observed.
In this regard, PKSF Chairman Dr Kazi Khaliquzzaman Ahmed told TBS, "I have also proposed that senior government officials use such state-owned enterprises, including PKSF, to deliver the incentive package benefits to cottage and micro entrepreneurs. It will not be possible to implement this package without the support of these organisations."
The interest rate on the package, announced in April this year to provide working capital to the CMSME sector, is 9%. The government will provide 5% in subsidy, while borrowers will pay the rest.
Cottage, micro and small industry entrepreneurs mainly depend on NGOs for loans. Even in normal times, they traditionally refrain from taking bank loans.
According to the central bank, in 2019, around more than 3 lakh cottage and micro industry entrepreneurs received loans from different banks and financial institutions.
As of January 2020, these agencies have a debt status of Tk13,118 crore to around 16 lakh cottage and micro industries, out of around 32 lakh entrepreneurs facilitated by them.
Around 80 lakh cottage and micro industry entrepreneurs have been organised by MFIs listed under MRA, including Brac, ASA, BURO Bangladesh.
Some 202 agencies affiliated to the PKSF have been distributing loans to cottage and micro industries via 10,370 branches in almost all upazilas across the country.
Given that most small and cottage entrepreneurs do not have bank accounts, nor do they have any assets for mortgage, economists have been opposing the government's decision to implement the package through banks from the very beginning.
The average loan demand of these enterprises is around Tk1.5 lakh, but banks are not interested in disbursing such small loans. Therefore, economists have been recommending involvement of NGOs in the implementation of this package.
Various government agencies, including the PKSF, the SME Foundation, and the Ministry of Industries, also submitted written proposals to the finance ministry to involve NGOs in the process.
According to the Bangladesh Bank, the government intended to provide working capital of Tk14,000 crore to cottage industries and micro-entrepreneurs. So far, only Tk8,218 crore has been disbursed from this fund, most of which has gone to medium industries.
Planning Minister MA Mannan, FBCCI President Sheikh Fazle Fahim and Distinguished Fellow of the Centre for Policy Dialogue Prof Dr Mustafizur Rahman expressed dissatisfaction about this at a workshop last Thursday.
Admitting that loan disbursement from the CMSME package has not reached optimal levels, Bangladesh Bank Governor Fazle Kabir said that the lending proportion to CMSMEs is lower than that to large organisations.
A significant share of the undisbursed fund for small and cottage entrepreneurs will be released through NGOs, finance division officials said.
In this respect, the finance division has started working on formulating terms and conditions. The finance ministry will also take steps to increase the amount of money under the existing credit guarantee scheme and include more banks.
The PKSF recommendations
The PKSF submitted a written proposal to the finance ministry last August, recommending the engagement of NGOs in disbursing loans for CMSMEs. At the time, PKSF recommended that Tk14,000 crore allocated for cottage and micro enterprises (from the Tk20,000 crore stimulus package for the entire CMSME sector) be disbursed through microfinance institutions (MFIs).
It recommended that banks receive 5% interest subsidies from the government on the loans, while banks provide funds to the MFIs at a lending rate of 6%. The MFIs would then disburse this money (borrowed from banks) to the cottage and micro enterprises at a lending rate of 9%.
The PKSF also recommended that the Bangladesh Bank issue a circular in this regard.
If the recommendations are implemented, the MFIs would incur a 4% loss as a result of the 10-13% administrative cost and 1-2% debt consolidation reserves.
To offset this loss, PKSF has recommended that banks provide funds to the MFIs for a three-year term. The MFIs would repay the money in 10 equal instalments on a quarterly basis with a six-month grace period. The MFIs would provide loans to the cottage and micro entrepreneurs on a two-year term.
Abdul Awal, executive director of the Credit and Development Forum – a platform for microfinance institutes – told TBS that it is not possible to disburse the loans amongst cottage and micro entrepreneurs in remote areas without the involvement of 759 registered NGOs.
"We want to participate in the implementation of the package without a concern for profits. The only way to recover our old loans is to help the CMSMEs restart their businesses with new loans."