Big relief for small businesses as PKSF cuts rate

The Palli Karma-Sahayak Foundation (PKSF) has brought down its lending rate to 18% from the existing 24% for providing loans to micro entrepreneurs to rejuvenate their businesses hit hard by Covid-19.

The government has already released Tk250 crore from the Tk500 crore stimulus package to help the small entrepreneurs deal with the pandemic situation.

The PKSF has begun to disburse loans from the package through its associate microfinance institutions at the 18% rate, said PKSF officials.

The World Bank and the Asian Development Bank (ADB) will also provide the PKSF with $205 million and $150 million, respectively, for credit support for virus-hit small entrepreneurs. The PKSF has decided to distribute this loan at 18% too.

Industry insiders hope this initiative of lowering the interest rate on small loans will help small-sized industries bounce back from the pandemic shocks and thrive faster. Employment opportunities will also be created again.

PKSF officials said the operational cost is higher for small loans. If the size of a loan increases, its operational cost decreases.

The PKSF has taken an initiative to reduce the interest rate by adjusting the cost of funds for small and large amounts of loans. For instance, the operational cost for Tk30,000 in loan is more than that of Tk3 lakh. If the loan amounts to Tk10 lakh, the operational cost decreases further, they said.

So, the PKSF thinks that microcredit institutions will still be able to make profits on the disbursement of bigger amounts even if the interest rate is reduced for micro entrepreneurs, PKSF officials added.

At one time, the interest rate on loans for micro entrepreneurs was 30%, which was later reduced to 27% by the Microcredit Regulatory Authority (MRA). However, prior to that, the PKSF had fixed the rate at 24% for them.

Dr Salehuddin Ahmed, former governor of the Bangladesh Bank, said microfinance institutions might face a profit-related problem to some extent for lending smaller amounts at 18% rate. But they will be able to make profits on bigger-sized loans. The larger the amount is the lower the operational cost will be.

PKSF Chairman Dr Qazi Kholiquzzaman Ahmad said, "According to the MRA, microfinance institutions realise 24% interest on loans – 21% in operational cost and 3% in profit. We have decreased it to 18%. This will not affect their profit margins. If they face any problem, we will give them subsidies."

Dr Nazneen Ahmed, senior research fellow at Bangladesh Institute of Development Studies, "It is a good initiative of the PKSF. Entrepreneurs in villages who do not get loans from banks will now able to take out more loans from microfinance institutions. This will further increase employment opportunities too."

According to PKSF officials, the ADB's $150 million will come under the Micro Enterprise Development Project for providing microcredits to small entrepreneurs affected by the pandemic.

There are several clusters of small enterprises across the country, and the PKSF plans to disburse loans under the project in those areas. One such example is the shoe industry in Bhairab, which has around 5,000 entrepreneurs.

Besides, the PKSF is considering some clusters of dairy industry entrepreneurs in Sirajganj, Chattogram and Satkhira to provide them with microcredits.

Besides, the World Bank will provide $150 million to increase the employability and productivity of low-income urban young entrepreneurs affected by the Covid-19 crisis.

Under the Recovery and Advancement of Informal Sector Employment Project, the PKSF will disburse $100 million in microcredits to small entrepreneurs.

PKSF officials said a project titled Sustainable Enterprise Project is already being implemented with funding from the World Bank. Under this project, the lending agency had agreed to provide $110 million in loans for small entrepreneurs. Some 40% of the money has already been distributed in the past two years.

Considering the Covid-19 impact, the World Bank has promised to provide an additional $105 million in loans under this project.