Startup loans should be collateral-free

Around a decade ago, Bangladesh Bank had a programme called the Entrepreneurial Equity Fund (EEF) for startups.  It was an equity participation. But this fund was closed because of some wrong selection of startups at the initial level, and consequently, the government had some bad experience. 

After shutting down the EEF, another such initiative for the startups was launched – Entrepreneurial Support Fund (ESF).  This was not equity-based; rather like a soft bank loan with 2% interest that you would have to pay in eight years. 

Suppose your project amounts to Tk 5 crore, the ESF would give you up to Tk 2.50 crore in loans at 2 % interest. 

The EEF was an equity fund initiative that would participate in company shares and appoint a representative in the board. 

But unlike EEF – the ESF asked for collateral. Here, the problem was the startups often do not have the capacity to provide collaterals. They usually do not have physical properties like land, flat, etc. Consequently, the ESF did not become popular among startups. 

The authority perhaps could defend themselves saying that the collateral was not mandatory in the ESF. But as a person who would sit on the board, I know that minus the collateral, the startups would get zero marks in the evaluation, which would eventually disqualify them. 

So, ultimately if you would like to receive loans, you needed to give collateral.

Besides, the evaluation process for getting a loan was lengthy. The process would often take six months to a year. Perhaps you applied for a loan and when a year later they confirmed you, you would not want to take the loan anymore – not an impossible outcome in the ESF mechanism. 

When I was there, I asked them to process these loans within a month. They, however, agreed to conduct them in three months, but that did not happen. 

Consequently, even years after the ESF was launched the number of loans they provided would not even exceed a dozen. So, to zoom in on the broader aspect of why the current loans are not working out, I would emphasize collaterals and time consumption. 

Now, if the new startup loan programme is to succeed, lessons should be learnt from the previous projects. If they make collaterals mandatory once again, this too will not take off. 

Bangladesh-Malaysia Chamber of Commerce and Industry (BMCCI) President Syed Almas Kabir. Sketch: TBS

I would say, for example, our efforts in terms of stimulus loans for ICT startups could be regarded as precedence. 

When the stimulus package was announced for various sectors, our ICT sector startups could not avail them for some reasons. Then we talked to some private banks from BASIS and two banks agreed to provide the BASIS affiliated startups collateral-free loans (50 lac to 1 crore) on condition that BASIS would provide a recommendation letter and we will suspend the defaulters, etc. 

When we provided the banks with such insurances, they agreed to collateral-free loans. 

This means that the banks are capable of providing collateral-free loans. 

In the last six months alone, around 65 companies have taken loans through this mechanism, whereas when it comes to the ESF loans, the number didn't even cross a dozen after years. 

When I negotiated with the banks, they said - which I agree with - that you do not have shops, or machinery or properties, based on what should we give you the loan? 

That is why we started to provide the banks with guarantees from BASIS. 

So, lessons should be learned from all these stories of success and struggles and move ahead with the new loan mechanism in a way that encourages our startups. Only then these initiatives will be successful.