Last week, Jerome Powell, the Federal Reserve Chairman, waved the red flag on what is increasingly looking to be a legacy of the ongoing coronavirus pandemic: a wave of small business failures.
"The pandemic is presenting acute risks to small businesses. If a small or medium-sized business becomes insolvent because the economy recovers too slowly, we lose more than just that business. These businesses are the heart of our economy and often embody the work of generations," he told the Senate Banking Committee.
This prospect is also staring at the Bangladesh economy, which would be a devastating outcome given that the small- and medium-sized enterprise (SME) sector contributes to about 25 per cent to the country's gross domestic product and accounts for 86 per cent of the industrial workforce, according to the Bangladesh Institute of Development Studies.
The sector incurred losses of about Tk 92,000 crore since the onset of the pandemic-induced economic slowdown, said the think-tank recently.
Given their importance, the Bangladesh Bank on April 13 announced a Tk 20,000 crore-stimulus package for the sector.
The package has to be implemented by banks but they will get 50 per cent of the fund disbursed to the borrowers from the BB.
And yet, funds continue to elude the cottage, micro, small and medium enterprises (CMSMEs) for banks' reluctance to disburse loans to them for fear of losses.
In short, this is a perfect catch-22 situation.
As per the guideline of the stimulus package, the CMSMEs can take working capital at 9 per cent interest. Of the interest, 4 per cent will be borne by the borrowers and 5 per cent by the government.
But only five banks have so far given out Tk 200 crore in loans under the package.
The central bank should revise some articles of the stimulus guidelines such that banks and non-bank financial institutions will disburse loans to the SMEs, said Syed Abdul Momen, head of SME at Brac Bank.
Brac Bank, one of the pioneers of SME loans, disbursed approximately half of its total loans of Tk 20,206 crore to the CMSMEs.
"We have already submitted a set of proposals to the central bank to make the stimulus package more vibrant."
Banks are allowed to disburse loans in the form of working capital, whose maximum repayment tenure is 12 months, but clients of the SME sector are used to taking out a term loan from lenders, he said.
The BB asked banks to disburse 50 per cent loans of the stimulus package in the manufacturing sector, 30 per cent in the service sector and 20 per cent in the trading sector, which is not favourable for lenders, he said.
Besides, a client of the trading sector will get a maximum loan of 25 per cent of its annual turnover from a bank.
But, the majority of banks traditionally give out loans to the trading sector as the segment is the major part of the economy, Momen said.
Besides, the ratio of 25 per cent is too much little as the SME clients usually take out small-sized loans from banks.
"So, the central bank should consider the issue positively. And it should introduce credit guarantee scheme for the SME sector in the quickest possible time," he said.
This will encourage lenders to distribute loan without any hesitation.
The government will give 5 per cent interest subsidy to a bank, but it will not enjoy the fund if the disbursed amount becomes default.
"A portion of SME loans disbursed by banks may become defaulted given the ongoing economic fallout. Against the backdrop, lenders may not show their willingness considering the situation," Momen said.
But, clients have been wrecked by banks' disinclination to lend to SME sector as many entrepreneurs are struggling to survive amidst the economic meltdown.
Farhana Nazira, an SME entrepreneur, has repeatedly requested a bank to provide loans from the stimulus package.
Nazira, who produces panjabi, sherwani and different men's outfits, was forced to close her factory and showroom located at Mirpur in the middle of April.
She, however, restarted her business on June 1, but have already faced huge amounts of losses due to the ongoing slowdown.
"I have taken a loan amounting to Tk 5 lakh from a bank. And I have never missed any loan instalment," she said.
A fresh loan worth Tk 5 lakh is required urgently to run the business, she said, adding that she has furloughed half of her 26 member-strong roster.
Full-fledged operation of the business will restart if the bank disburses the loan, she said.
"The bank has informed that it is yet to start SME loan disbursement under the stimulus package. I cannot operate my business if the ongoing situation is prolonged," Nazira said.
Along with the stimulus package, banks and NBFIs will have to give out a good amount of loans from their own sources to revive the SME sector, said Arif Khan, managing director of IDLC Finance.
For instance, lenders disbursed Tk 167,971 crore in SME loans last year, so the amount of stimulus package is not large given the volume of the annual disbursed fund.
But the lenders could show interest in investing on treasury bonds due to its higher interest rate, instead of disbursing funds to the SME sector, he said.
The interest rate on the 20-year Treasury bond stood at 8.94 per cent on June 24.
Lenders will be able to make a profit by way of giving out SME loans if they could charge 12-13 per cent interest, Khan said.
The central bank should revise some provisions of the SME notice for the stimulus package such that lenders will be encouraged to disburse loans, said a BB official requesting anonymity.