Cenbank plans Tk40,000cr refinance scheme to revive closed factories

Highlights:

• Over 1,200 shuttered factories identified for possible support
• Priority for export-ready firms with confirmed orders and clear market demand
• Economists back targeted support, but warn against funding non-viable businesses.
• Strict oversight planned to prevent misuse, corruption, and fresh bad loans

Bangladesh Bank is set to roll out a Tk40,000-crore refinance scheme to help revive closed factories, aiming to boost production, protect jobs, and support exports amid ongoing economic challenges.

The central bank is preparing a policy proposal this week to be sent to the prime minister for approval. Once cleared, a circular will be issued to implement the scheme, officials familiar with the process told The Business Standard.

Under the proposed package, Tk20,000 crore will be allocated to large industries, Tk10,000 crore to cottage, micro, small and medium enterprises (CMSMEs), and Tk10,000 crore to the agriculture sector.

The funds will be disbursed as short-term working capital loans with tenures ranging from one year to 18 months, enabling factory owners to resume operations and restart idle machinery.

"This facility will be available to businesses that were operational but became distressed due to post-Covid disruptions, the Russia-Ukraine war, and volatility in the foreign exchange market," a senior Bangladesh Bank official said on condition of anonymity.

He added that priority will be given to firms with confirmed orders and market demand for their products to ensure effective utilisation of the funds.

Funding source under discussion

Officials said discussions are ongoing over whether the scheme will be financed directly by Bangladesh Bank or supported through government funds.

Given the liquidity stress in the banking sector, the refinance scheme is more likely to be funded by the central bank. However, this raises concerns about inflation, as injecting fresh liquidity could increase the money supply in the economy.

Banks are expected to access the funds from Bangladesh Bank at interest rates of around 5-6%, while lending rates for borrowers will be set slightly above the prevailing inflation rate but below the policy rate.

More than 1,200 factories identified

The initiative follows a recent announcement by Prime Minister Tarique Rahman, who said the government would strengthen the economy by ensuring workers' rights and reopening closed industrial units.

Bangladesh Bank has already collected data from trade bodies and banks on closed and partially operational factories. Officials said more than 1,200 such industrial units have been identified, including both large borrowers and smaller firms.

Separate lists have been prepared for factories with outstanding loans above Tk100 crore and those below that threshold. The central bank has also held meetings with managing directors of several banks to assess financing needs and identify viable firms.

Factories with strong market prospects will be prioritised. In cases where firms are classified as loan defaulters, they may be allowed to reschedule their loans under relaxed conditions before accessing the new facility.

Bangladesh Bank spokesperson Arief Hossain Khan said discussions with the government are ongoing. "We are collecting data from banks and evaluating what kind of support can be provided. Once finalised, the fund and its guidelines will be announced," he said.

Support measures during interim regime

The interim government took targeted steps to support distressed industrial groups. It provided more than Tk525 crore to Beximco Group to clear dues of around 27,000 workers across 14 closed units, aiming to ease labour unrest and partially resume operations.

Similarly, Nassa Group received policy support to reopen back-to-back letters of credit after banks became reluctant due to loan defaults, putting the jobs of around 25,000 to 27,000 workers at risk. 

The interim government also allowed export proceeds to be prioritised for wage payments and operational expenses before debt servicing, alongside coordinated administrative support from relevant ministries.

Economists' assessment

Economists have welcomed the initiative in principle but warned of potential macroeconomic risks.

Fahmida Khatun, executive director of the Centre for Policy Dialogue, said the plan could help revive production and create employment, but the source of funding remains a key concern.

Mustafizur Rahman, a distinguished fellow at the CPD, has emphasised the necessity of categorising closed factories based on their current state before attempting to revive them. 

He noted that while some units remain shut due to specific, rectifiable issues and could thrive under proper management, others have deteriorated beyond recovery due to prolonged mismanagement.

According to the economist, refinancing or special funds should be reserved strictly for those enterprises capable of demonstrating a sustainable business model, as the livelihoods of countless workers depend on their success. However, he warned against artificially sustaining non-viable factories that would remain perpetually dependent on state support.

Mustafizur further highlighted that successfully revitalising these industries would not only stimulate employment but also bolster government revenue through increased VAT and direct tax collections, ultimately helping to bridge the national budget deficit.

Concerns over inflation

Fahmida cautioned about inflationary risk, saying, "At present, many banks are facing liquidity shortages, and government revenue growth is also under pressure. If the central bank directly finances the scheme, it could add to inflationary pressure by increasing the money supply."

She suggested that part of the fund could be mobilised from banks with stronger liquidity positions, while a portion could be allocated through the national budget to reduce inflation risks.

A senior central bank official also cautioned that financing the entire amount through money creation could have a multiplied impact on liquidity due to the money multiplier effect.

"If the full Tk40,000 crore is injected by the central bank, the overall impact on the economy could be several times higher, putting additional pressure on prices," he said.

The banker added that such a move could complicate Bangladesh Bank's primary objective of controlling inflation, potentially creating a policy trade-off between price stability and employment generation.

Lessons from pandemic stimulus

Bangladesh Bank officials also recalled that in 2020, the Awami League government introduced 23 stimulus packages worth Tk128,303 crore to mitigate the impact of the coronavirus pandemic, much of which was financed through monetary expansion. A significant portion of those loans has since turned non-performing.

Officials stressed that strict monitoring would be required to prevent misuse of funds under the new scheme. Only firms not involved in financial irregularities or capital flight will be eligible, and safeguards will be put in place to minimise corruption and ensure proper utilisation of funds.