Slow loan disbursement, too many conditions frustrate SMEs

Small businesses in the informal sector -- the prime movers of the economy and worst hit by the pandemic–are skeptical of whether they will be able to avail the government assistance in time to survive the coronavirus fallout.

The sector is also worried about the borrowing formalities and has called for low-cost loans to be made easier to come by.

According to a recent study of the Bangladesh Institution of Development Studies (BIDS), 41 percent of small and medium enterprise (SMEs) shuttered businesses during the virus-induced shutdown.

The sector lost about Tk92,000 crore, an amount that could build three Padma bridges, during the March-May period. The government subsequently declared a stimulus package of Tk20,000 crore for the small production units.

Kaniz Almas Khan, managing director of Persona, who managed to avail loans from the fund said, "The loan is kind of an incentive, but the terms relating to availing it are very difficult. Most of the SMEs are going through a difficult time and they will be less likely to apply for stimulus loans if the conditions and formalities are not made easier."

Fruit vendor Aslam Akond has not been as fortunate as Kaniz Almas. Aslam used to run a shop on the Badda Link road before the virus outbreak. He had an investment of more than Tk 10 lakh in the business.

But he had to shut the business down and leave the capital after sustaining a huge business loss. He said, "As I did not have a business license, I was not eligible for the loan."

The SME sector generates 86 percent of employment in the industry sector and contributes one-fourth of the economy. The BIDS study noted that the SMEs may lose 66 percent of income this year due to the virus crisis.

However, unlike fruit seller Aslam, 48 percent of small entrepreneurs hope that they will survive the crisis. According to BIDS, 70 percent of SMEs are also positive about availing loans with 4.5 percent interest from the government-announced stimulus.

But the slow loan disbursement process frustrates many. The central bank said it has instructed other banks to prepare a time-bound action plan for the next three years, detailing loan disbursement timelines and loan amounts, to speed up SME sector recovery.

Lila Rashid, executive director of the central bank, said, "As the bank started full-fledged operations from May 31, it will take some time to analyze the loan proposal. We hope a significant number of SMEs will be able to avail loans from the stimulus within July."

Meanwhile, central bank insiders have told The Business Standard that around Tk200 crore has been disbursed to the SMEs until mid-June. The City Bank, Mercantile Bank, Bangladesh Krishi Bank and Agrani Bank disbursed the loans.

Recently, research by the Bangladesh Institute of Bank Management (BIBM) revealed that SMEs globally face considerable barriers, given that more than 40 percent of SME trade finance applications are rejected by banks. The Covid-19 pandemic will disproportionately impact the SME sector, thereby increasing their default risk in the process.

The central bank has instructed banks not to make defaulters of any borrowers until September this year for reasons of a failure on their part to clear their installments.

But this will not help the small production units much once the deadline expires, said Ahsan H Mansur, executive director of Policy Reperch Institution.