The central bank yesterday decided to introduce a credit guarantee scheme for the micro and small enterprises, the first of its kind in the country, giving a much-needed lifeline to the SME sector struggling to stay afloat.
The board of the Bangladesh Bank approved the scheme worth Tk 2,000 crore for the entrepreneurs in the cottage, micro and small (CMS) sector to help them tackle the ongoing crisis brought on by the coronavirus pandemic.
The scheme will initially give coverage to the fund, which is being disbursed from the stimulus package of Tk 20,000 crore for the SME sector.
"The credit guarantee will certainly give a boost to the overall SME sector," said Abu Farah Md Naser, an executive director of the central bank.
A credit guarantee scheme provides a third-party credit risk mitigation to lenders through the absorption of a portion of the lender's losses on the loans made to SMEs in case of default, typically in return for a fee.
Banks will get 80 per cent coverage of a credit given to an individual or a company. This means banks will avail the fund from the scheme if loans go sour.
The scheme will help make the stimulus package for the SME sector vibrant, said a central bank official said.
Under the package, funds will be given at 9 per cent interest rate to borrowers. Of the interest rate, 4 per cent will be borne by the borrowers and 5 per cent by the government in subsidies.
Also, the central bank will provide half of the Tk 20,000 crore stimulus package to cash-strapped banks so that they could give out the loans smoothly.
But banks are consistently showing reluctance to distribute loans from the stimulus package given the low interest rate caused by the 9 per cent lending cap the BB had imposed in April.
Bankers argue that 9 per cent interest is not sufficient as the operational cost for SME loans is high and the majority of CMS loans has to be given without collateral.
The scheme will give coverage of Tk 8,320 crore given the 10 per cent defaulted loans of the total outstanding credit in the market, Naser said.
The central bank will support the banks that apply first.
The BB has asked banks to give out 70 per cent of the stimulus package of Tk 20,000 crore to the CMS sector.
Lenders will have to bear a 1 per cent charge as registration fee to the credit guarantee scheme. The central bank has also fixed an annual charge for lenders.
Banks, whose default loans are more than 10 per cent, will not be allowed to enjoy the support from the scheme. The provision will not be applicable for the eight state-run banks.
Banks, whose default loans are below 5 per cent, will have to give 0.50 per cent commission to the central bank.
Lenders with bad loans ranging from 5 per cent to 10 per cent would have to pay 0.75 per cent.
Banks will not keep any provisioning against their loans covered by the scheme titled Credit Guarantee Scheme for CMS.
They can consider a client to be under the cottage category when they borrow less than Tk 10 lakh, as micro when they take Tk 10 lakh to less than Tk 75 lakh and as small businesses in case of borrowing of Tk 75 lakh to Tk 15 crore.
The scheme would gradually be widened and bring all types of SME loans under the scheme in phases, Naser said.
He went on to express hope that the initiative would help revive the SME sector from the ongoing pandemic.
"This is a time-befitting initiative beyond doubt," said Syed Mahbubur Rahman, managing director of Mutual Trust Bank.
"The credit guarantee scheme will give a tempo to the entire SME sector. And banks will show their interest in giving out loans," he added.
Public credit guarantee schemes are a common form of government intervention to unlock finance for SMEs, according to a World Bank report.
More than half of the countries in the world have CGS for SMEs and the number is growing, it said.
For instance, the Indian government provided a credit guarantee of Rs 3 lakh crore for the SME sector in May to fight the ongoing economic fallout. It introduced the scheme in 2000.
Small businesses have been hit particularly hard by the pandemic, which has threatened the existence of 2.5 million SMEs in Bangladesh.
The SMEs employ 40 per cent of the labour force with a GDP contribution of 25 per cent, according to the International Labour Organisation.
This prompted economists to advocate for a credit guarantee scheme for SMEs since the pandemic hit the country in March.
One of them is Atiur Rahman, a former central bank governor. Last month, he said banks are worried about risk management, so they may not like to lend to new borrowers and would rather remain focused on existing borrowers.
The central bank should implement a credit guarantee scheme to help banks lend to the vulnerable CMSME sector, he said. The MSMEs should be given support because if they remain inactive for a long time because of the lockdown, 60 per cent would be out of business.