The question hounding banks: how exactly to fix a conundrum like SME loan?
In 2001, with a vision to provide banking answers to the 'unbanked' small and medium entrepreneurs, Brac Bank started its journey.
The lending company introduced small-ticket loans to the cottage, micro, small and medium enterprises (CMSME) to especially bring the grassroots entrepreneurs beneath the umbrella of formal banking services.
Through the years, riding on the disbursement of CMSME loans, the lender also bagged a hefty profit as the tiny borrowers are seemingly more disciplined than their large and corporate counterparts in terms of repaying the fund in time.
The model has subsequently motivated others to supply loans to CMSME entrepreneurs on a greater scale, helping them register good returns from the initiative along the way.
However, lenders are actually in peril due to the economic meltdown due to the ongoing coronavirus pandemic as the central bank has imposed a pastime cap of 9 % on all loans, including those for the CMSME sector.
For example, Brac Bank's net profit crashed 40 % year-on-year to Tk 152 crore in the first half of the year.
The full total value for outstanding loans with the lender stands at about Tk 26,000 crore, of which 47 per cent was distributed to the CMSME sector.
The instance of declining profits in Brac Bank is not a solitary case as the Association of Bankers, Bangladesh (ABB), an organisation of managing directors of most banks, claimed that average earnings of the majority of the banks had already plummeted between 20 and 35 % due to the interest cap and the pandemic.
Despite having the tremendous support received from the federal government to tackle the current recession, banks are actually facing a fresh challenge in running their credit programmes for the SME and retail sectors, according to ABB.
Subsequently, on 12 July, the organisation sent a letter to the central bank governor expressing grave concern over the future of the country's CMSME sector.
"This trend in usage of finance will face a significant blow with a lending rate cap of 9 % as banks cannot afford to lend to the SME sector at that rate due to the high cost of lending and loan monitoring," ABB said.
CMSMEs are sprawled around the united states and hence, a huge distribution network with satisfactory manpower must reach, onboard, determine and monitor borrowers. This helps it be costlier to finance them weighed against corporate entities.
As per the ABB's calculations, lenders have to count at least 10.62 per cent interest rate on CMSME loans considering the weighted average cost on deposits, operating costs, minimum credit loss costs and general provisioning.
Banks must add 4 to 5 % to the calculation if they would like to enjoy profits from SME loans.
With this backdrop, the ABB urged the Bangladesh Bank to rethink the interest cap on financial products, apart from bank cards, in the interest of the SME sector.
Banks have requested BB so they can set at least a 14 % interest on SME loans.
"In that scenario, if the 9 per cent isn't lifted for SME lending, banks will be forced to cease lending to these entities, which finally will slow the growth of private sector credit, and hence, will affect the desired GDP growth," ABB said.
With minimal credit flow from banks, SMEs will eventually search for alternate financing arrangements from costly sources like microfinance institutions that charge rates up to 20 per cent or turn to loan sharks, the informal 'Mohajon' type usurers.
A lot more than 10,000 employees who are engaging with the SME programme operated by banks may face unemployment if lenders usually do not pursue these loans, ABB said.
Banks must count their losses if indeed they hand out loans to the SME sector with a 9 % interest rate, said Syed Abdul Momen, head of SMEs at Brac Bank.
"We are forced to reduce our SME credit programme in the times ahead if the prevailing interest rate cap persists," he said.
For example, banks usually appoint a couple of relationship managers (RM) to disburse a corporate loan of Tk 100 crore, however they have to deploy more than 30 RMs to distribute the same amount of loans to the CMSME sector, he said.
Therefore, it will be highly difficult to perform the SME operation following implementation of the 9 % interest cap.
The central bank in addition has introduced a Tk 20,000 crore stimulus package for the CMSME sector in order that the tiny borrowers can tackle the ongoing economic fallout.
The package has to be implemented by banks however they will get 50 % of the fund disbursed to the borrowers from BB.
As per the rules of the stimulus package, CMSMEs can take working capital at 9 per cent interest. Of the interest, 4 per cent will be borne by the borrowers and 5 % by the government.
However, banks are showing reluctance to make effective disbursements from the stimulus package as BB asked the lenders to disburse no more than 30 per cent of their existing working capital.
Besides, lenders are permitted to give out at no more than 20 % of their credit ceiling set by the central bank beneath the stimulus package to the trading sector.
Another official of an exclusive bank said that practically 65 per cent of SME loans have gone to the trading sector.
"It has created a roadblock for banks to use the stimulus package despite the central bank instruction to implement all credit packages, which were formed to mitigate the recession, by August."
The central bank should address the problems immediately as SMEs take into account 20 % of the GDP, he added.
The sector also provides 80 % of the total professional employment and 25 % of the country's labour forces.
