Central bank wants fund from budget for low-cost tannery loans

The Bangladesh Bank has said a separate fund with budget allocation is required for the tannery sector as the government has asked the central bank to arrange low-cost loans for rawhide purchasing and tannery workers' salaries.

However, the Finance Division says that currently it does not have a plan to create a separate fund for the tanners. In the meantime, tanners said they need financial support as leather export is in a fix due to the coronavirus pandemic, while the Eid-ul-Azha is around the corner – the peak season for rawhide collection. 

On July 8, the Ministry of Commerce and Financial Institutions Division wrote to the central bank to arrange rawhide purchasing loans at 3 percent interest and salary loans for tannery workers at 2 percent interest.

The recommendation for loans was sent to the central bank based on the demand of the Bangladesh Tanners Association.

In reply to that, the central bank said a separate fund with budget allocation can ensure the facilities for the country's tannery sector.

The central bank said that commercial banks have allocated Tk644.50 crore for rawhide purchasing loans this year, which will be disbursed on bank-client relationship basis. Banks will prioritise rawhide purchasing loans on easy terms.

Last year, banks allocated Tk696.93 crore for rawhide purchasing loans, and disbursed Tk438.65 crore of it.

This year, the Bangladesh Bank recently introduced a loan rescheduling policy with easy terms for tannery owners ahead of the Eid. The arrangement enables tanners to avail loans from the fund announced to salvage the SME and industrial sector from the virus fallout.

Borrowers from the fund will pay 4-5 percent interest while the government will subsidise the rest. The defaulted loans from this package have also been allowed to qualify for rescheduling in six to eight years period.

In response to the commerce ministry and Financial Institutions Division letters, the central bank said the government created a fund of Tk5,000 crore with budget allocationto pay three-month salaries of export-oriented industry workers. But the fund ran out after clearing only the April-May salaries.

"To pay June salaries, a total of Tk2,500 crore has been shifted from the Tk30,000-crore-fund for the industry and service sector. Against such a backdrop, salary loans for tannery workers at 2 percent interest will require the creation of a new fund with budget allocation," the Bangladesh Bank replied.

The central bank letter signed by its General Manager Md Nazrul Islam also said that if the interest rate falls short of the cost of the fund, banks' income will be affected. Tanners do not qualify for loans at only 3 percent interest from the Tk50,000 crore package for SME and industrial sector.

Spices, lentil and maize cultivations have been receiving loans at 4 percent interest since 2011 under the interest compensation arrangement. The central bank thinks facilitating tanners with 3-percent-interest loan to purchase rawhide is possible if a decision is taken to subsidise interest from the budget.

In the meantime, a Finance Division official on condition of anonymity said currently they do not have any plan to form a separate fund for the tannery sector. The division believes tanners can avail loans from the government announced Tk20,000 crore package for small, medium and cottage industries at 4 percent interest.

"They will have to pay 5 percent if the loan is taken from the industrial sector fund created to cushion the virus fallout. The government has no plan to give loans to any sector at 3 percent interest now," added the official.

Bangladesh Bank Deputy Governor Ahmed Jamal told The Business Standard that around 40 percent of the tanners who took loans to purchase rawhide were already defaulters. They neither were able to apply for new loans, nor had the capacity to deposit downpayments to renew their credit.

He said, "Therefore, we gave them the loan rescheduling facility on easy terms so that they can buy rawhides during the Eid."

Bangladesh Tanners Association President Shaheen Ahmed said they have unsold leather worth Tk3,500 crore, and the volume of defaulted loans in the tannery sector is almost the same. 

Shaheen said they need a 13-year installment facility with one-year grace period and interest waiver of the previous loans.

"We do not know whether we will be able to export the piled up processed leather as the virus situation shows no sign of slowing down. Therefore, we demanded Tk500-600 crore rawhide purchasing loans at 3 percent interest," added the Tanners Association president.

He claimed that banks earlier turned them away when they applied for loans at 4 percent interest under the government announced stimulus package.

That is why we think the sector needs a separate package to salvage tanners from the virus fallout, he concluded.