We often hear it said, and it certainly is true in the case of Bangladesh, that small businesses - fashionably, but rather inelegantly categorised these days under the catch-all CMSME (cottage, micro, small and medium enterprises) - are the lifeblood of the economy. According to the SME Foundation, the sector generates 85 percent of the employment in the country, while its contribution to GDP is now about 27-28 percent.
While often the source of vibrancy and vigour in any economy, policymakers must also have an appreciation of some of the specific vulnerabilities, some of which are ever-present, and tend to be part-and-parcel of small businesses. Their vulnerability to external shocks, driven by outside factors beyond their control, is one that merits particular attention in the current economic context, following the double blow of the Covid-19 pandemic and the Russia - Ukraine war.
Which is why we welcome the announcement by Bangladesh Bank this week that for the first time, CMSMEs will be eligible to receive term loans under a $300 million, equivalent to Tk 3,210 crore, refinance scheme funded by the Asian Infrastructure Investment Bank (AIIB). The central bank had introduced the refinance scheme in June 2021 in order to help the cottage, micro, small and medium enterprises tackle the business slowdown emanating from the coronavirus pandemic. But initially it had said that borrowers would be allowed to receive the loans as working capital, with a repayment tenure of a maximum of one year. The latest move will allow CMSMEs to take term loans, which must be repaid within three years.
Additionally, of the 9 percent interest rate, just 4 percent must be borne by borrowers - the rest by the government. This means borrowers will get the loans at a cheaper rate under the refinance scheme, than they would usually get from commercial banks. Under a refinance scheme, banks first disburse loans to clients. Afterwards, the banks are reimbursed by the central bank.
Some 19 banks and seven non-bank financial institutions have already signed agreements with the central bank to operate the refinance scheme. Shapla Chattor has said that more banks will be allowed to sign up to participate. Lenders will have to meet certain conditions to qualify. For example, only lenders that were profitable at least in the last two years will be part of the scheme. Lenders whose default loans are more than 10 percent can't apply, given the current state of the banking sector.
The initiative was all the more essential, in light of the banking system's failure to burn through the incentive packages announced for the sector in two phases in light of the pandemic. During the first phase, banks disbursed Tk 15,387 crore or 77 percent of the Tk 20,000 crore incentive package announced for the CMSMEs in FY21. In the second phase, banks disbursed Tk 14,754 crore or just under 74 percent of the Tk 20,000 crore target. So, the total loan disbursement to CMSMEs actually declined by Tk 633 crore year-on-year.
A lot of the scrutiny and credit checks that our banks seem to easily overlook when it comes to disbursing funds to some of the large corporate houses, whose incentive packages were duly exhausted, suddenly become critical to the approval process for loans, when it comes to the CMSME sector - even if their record on defaults is nowhere near as poor. But let's not knock them for doing the right thing, selectively though it may be. What we would like is to see them do it more often.
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