‘The banks consider the SMEs as a failure with low profitability and a high risk of default’

Small and Medium Enterprises (SMEs) were hit hard by the pandemic.

According to a 2021 report of the Bangladesh Institute of Development Studies (BIDS), SMEs were estimated to have lost 66 percent of their revenue during the pandemic compared to the pre-pandemic period.

Moreover, women-led enterprises were found to be more vulnerable during the crisis, which forced them to lay off more workers. Approximately 50 percent of enterprises have resorted to laying off 76-100 percent of their workers in Bangladesh according to the Asia Foundation.

To help them recover from the hardship, the government of Bangladesh announced a Tk20,000 crore ($2.3 billion) stimulus loan package for small, medium and cottage entrepreneurs, soon after Covid-19 had hit the country in March 2020.

Illustration: TBS

However, according to a study published in September 2021 titled, 'The Future of SMEs after the Coronavirus Crisis: Challenges and Opportunities,' by the SME Foundation and Friedrich-Ebert-Stiftung, the percentage of the stimulus funds allocated to assist Dhaka's small and medium enterprises (SMEs) was less compared to that set aside for SMEs in other countries of this region.

For example, India allocated 38 percent of their stimulus funds for SMEs, Thailand 33 percent and Malaysia 24 percent while Bangladesh's allocation was around 22 percent.

And on top of that, it turns out that the allocated stimulus loans were not disbursed properly among the SMEs.

In September 2021, the SME Foundation and Friedrich-Ebert-Stiftung, Bangladesh organised a webinar where the former governor of Bangladesh Bank, Atiur Rahman, said that the revenue of the local SME sector has fallen by 66 percent due to the ongoing coronavirus crisis with 76 percent of their products remaining unsold.

Besides, 42 percent of those employed by SMEs were receiving partial payments while 4 percent have not been paid at all, he added.

But why were small and medium enterprise owners deprived of the disbursement of stimulus packages? To find out the answer, we spoke to Dr Momtaz Uddin Ahmed, professor, economist and the former chairman of the Department of Economics at the University of Dhaka.

The Business Standard: Do you think the stimulus packages are being disbursed properly among the SMEs and cottage industries in Bangladesh?

Dr Momtaz Uddin Ahmed: Although the government announced stimulus packages for SMEs, it was not disbursed or distributed properly or according to the needs of the entrepreneurs. And I am saying this according to the snapshot surveys done by the Dhaka Chamber of Commerce and other such institutions.

TBS: But what caused this to happen?

MUA: First of all, the package that was announced at Tk20,000 crore ($2.3 billion) was inadequate. The former central bank governor Atiur Rahman also suggested that at least Tk20,000 crore more should have been allocated to help SMEs recover from the Covid-19 fallout.

And the second reason includes the banks, who generally do not want to help the entrepreneurs. The banks were given the responsibility of distributing the stimulus loans. It is the government's money that they were supposed to distribute, but they behaved as if it was their money.

Turns out, it is the bigger companies that received the loan, not the small ones. If you look at a Transparency International Bangladesh (TIB) report titled 'RMG Sector in Covid-19 Crisis: Governance Challenges and Way Forward,' published in December 2020, it said, large factories got priority in receiving incentive funds. In some cases, large factory owners have been accused of using political influence and lobbying for getting the aforementioned funds.  There is a proverb - "You will find the banks on your side when the sun is shining", and that is what is happening here. The banks teamed up with some of the big companies or business owners and these owners were given the stimulus early.

The banks consider the SMEs as a failure with low profitability and a high risk of default. But if you really look into it, it is the bigger companies that are the main loan defaulters. Now if Bangladesh Bank stops the special credit programmes, the banks will never come forward to help the SMEs.

But the truth is that if we want to host world-class entrepreneurs, the banks need to change this attitude and treat the SME loan system as part of their core banking policy.

Another problem that we have here is we do not have proper data or statistics on SMEs. The number of SMEs, which enterprises need stimulus loans and which ones do not - we have no idea. And because of this, actual low-capital, small and cottage business owners, who cannot advertise, are suffering.

Again the loan application process and policy does not cover all SMEs. For example, the policy says that the 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 high for them to pay during this crisis period.

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

And then 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.

TBS: What do you think about digital loan systems?

MUA: Digital financing systems can be a game-changer in this situation that can help close the SME financing gap, enabling the smaller enterprises to tap alternative sources of funding, based on the database created by their digital footprints.

Financial technology firms (fintech), banks and financial institutions, big tech firms and large technology companies are now offering digital financial products and services via digital platforms.

For example, bKash has started this service in 2021 where one can take City Bank loans using the bKash app.  This is a great way to reach all the SMEs around the country.

Apart from this, other policies can be adapted like the implementation of SME Policy 2019 which comprises cluster-based SME development, credit disbursement process verification initiatives, the creation of digital dashboards, the development of bank-customer relations, the prioritisation of export-oriented SMEs, women-entrepreneurs and eco-friendly SME institutions, etc.