How stimulus fails to support SMEs

Though there is a fund, policy barriers and reluctance of banks held cottage, small and medium enterprises (CSMEs) back from accessing low-cost loans to revive their pandemic-affected businesses.

Only 12% of SME borrowers received loans from the Tk20,000 crore stimulus fund till May this year, according to Bangladesh Bank data.

The number of total borrowers in the SME sector, including cottage and micro, was 7.85 lakh as of December last year. And only 95,733 beneficiaries received stimulus loans, the central bank data shows.

No fresh SME entrepreneurs get loans under the stimulus package.

In 14 months since the government announced stimulus packages soon after Covid-19 had hit the country in March 2020, banks disbursed Tk14,700 crore under the package for SMEs.

The Bangladesh Bank is facing difficulties in disbursing the rest Tk5,300 crore as banks are reluctant to take risk of recovering loans from the hard-hit small businesses.

Explaining the slow disbursement of the SME stimulus package, a senior executive of the Bangladesh Bank said borrowers will get the favour in interest rate for only one year.

If a borrower wants to pay the loan within a year, it will be very difficult because the instalment will be too big for them to pay during this crisis period.

The loan tenure can be extended till 5 years, but the interest subsidy from the government will be over after one year. As a result, small borrowers are not much interested in taking the loan.

The SME sector is ensuring more than 80% of employment in the country's industrial sector. Photo: Mumit M

On the other hand, as the monitoring cost is high and banks are also reluctant to disburse SME loans.

About not giving stimulus loans to fresh borrowers, the central bank
executive said the government mentioned that stimulus loans will be given only as working capital, meaning that only those who are already in business can access these loans.

This is why new entrants in micro and cottage businesses were left out of the SME package, explained the executive.

The Bangladesh Bank raised the issue to the government several times to change the working capital term so that new entrepreneurs can be included in the stimulus. But the issue went unheeded.

The Tk2,000 crore credit guarantee scheme was another safeguard for banks to support micro and cottage businesses, which also did not work as desired.

Bangladesh Bank data shows, only Tk29 crore guarantee coverage was given to banks.

The policy barrier is also the reason behind the failure of credit guarantee scheme, said a senior executive of the Bangladesh Bank associated with the scheme.

The official said the credit guarantee scheme was introduced only for stimulus package. The stimulus loan will be given to only existing borrowers as working capital and those clients already have collateral with banks.

The objective of the credit guarantee scheme was to support the borrowers who do not have collateral.

The Bangladesh Bank will give guarantee for 80% of customers' loans and the rest will be disbursed at banks' own risk. Moreover, banks will have to pay 1% service charge.

Since the collateral issue stands in the way of new entrepreneurs seeking stimulus loans, the credit guarantee scheme turns almost useless.

Instead, some banks are using guarantee coverage only in case of collateral deficit for raising loan limits of existing borrowers.