Credit risk guarantee scheme: A game of chess

Bangladesh, which is recognized as a development surprise in South-East Asia, may have a very low GDP growth of 2-3% this year according to IMF and World Bank predictions, a real and unimaginable decline from a growth rate of 8.15 percent last year.

The Government has keenly stepped forward with a stimulus package of around BDT 98 thousand 6 hundred 19 crore, which accounts for  3.5 percent of the country's GDP, so that the economy can get out of this crises and revert to its actual pace. The point to note here is that the responsibility of implementation of this stimulus would be on the banking sector. The government has given the directives in this regard and Bangladesh Bank has already issued circulars to the effect.

Bangladesh Bank took some positive policy measures to increase the money supply just to mitigate the liquidity crisis in the market, as the banks were suffering from severe liquidity crises since long. By this time, BB has cut down the Cash Reserve Ratio (CRR) from 5.5 percent to 4 percent and Repo rate from 6 percent to 5.25 percent, resulting in an increase of money supply by BDT 12-15 thousand crores (approx.). In addition to that, the Central Bank has also come forward to provide BDT 25 thousand crore, being 50% of the stimulus package.

At this stage, Bangladesh Association of Banks (BAB) and Association of Bankers, Bangladesh (ABB) requested the Governor of Bangladesh Bank, Fazle Kabir and the Finance Minister, A.H.M Mustafa Kamal to form a Credit Risk Guarantee Scheme so that the banks can get the guarantee from the government to have the money repaid if it goes unrecovered from the customers who will be availing the loans under this government stimulus package. The Finance Minister and the BB Governor are expected to come up with a pragmatic decision in this regard as they are always are very lenient to the requests of the Bank Owners and ABB.

The formation of a scheme for Credit Risk Guarantee will expedite the process and, as such, the conviction that the economy will gain a new momentum and the businesses will revert to their previous track will come true. But the question is, whether all the borrowers who will get the benefit from this stimulus package will be under this Credit Risk Guarantee Scheme as well. It demands a pragmatic discussion on some points enumerated below:  

a)    The Banks, while implementing the policy guidelines of Bangladesh Bank, will make a priority in entertaining their existing customers, who have strong relationship with them. These customers   should not be under this Guarantee Scheme to prevent bias
Some customers who are not currently classified and have not rescheduled more than 3 times, but have the possibility of being classified in future, may have the scope of incorporating under this criterion. There is a possibility that this will put undue pressure on the government, such that when they will be classified or their liability will be unpaid, the banks will, as per provision under the Guarantee Scheme, claim that fund from the Bangladesh Bank.

b)    While most customers have incurred huge losses out of this lockdown, some customers who have good current assets and retained earnings, are able to bear the shocks. They should continue availing the regular credit from the banks, prompting the banks to extend their limits. However, the customers who have incurred huge losses and don't have the capacity to run their business anymore but can get back to business again if they are given financial support, should be brought under this stimulus package. However, the bankers will have to maintain all the banking norms and due diligence.

c)    There are some customers who never availed bank loans or adjusted the bank liabilities, who should be given the scope to avail this facility from the stimulus package and be brought under the guarantee scheme. They are doing business now out of their own capacity and have first party and reliable third party collateral security. They need the cash to run the business and getting access to financial resource is their priority.

d)    There are some customers who have maintained good relationship with the bank for long and are in a really bad shape because of the COVID-19 pandemic but don't have collateral support to offer to the bank. They will be driven out of business if they are not given access to fund. They should be brought under this stimulus package but due diligence and credit rating should be done properly. They should be brought under the guarantee scheme if they, in spite of having the intention to repay the bank loans, fail and get classified.     

The government is typically very cordial towards fulfilling the demands of the bankers but now it is up to the bankers to rise to the occasion as the whole nation is at a juncture, with the government declaring stimulus package consequently, which is mainly bank driven.

The banks need to put forth calculated steps so that the classification doesn't go up further and the government should look into how cordially and skillfully the banks perform their assigned duties and responsibilities as the prudent and inclusive implementation of this initiative will help the economy to have the light and strength again.  

The author is Economics Analyst, Founder and CEO, Finpower Leadership International