SMEs need credit the most

Bangladesh Bank has identified 13 sectors of the economy that have been severely affected by the first wave of the coronavirus pandemic, including travel and tourism, readymade garments, textile and small and medium enterprises.

They were identified in a central bank survey involving the country's 59 banks.

The survey was carried out as part of a central bank study titled "Economic and Financial Stability Implications of Covid-19: Bangladesh Bank and Government's Policy Response". The central bank made the study public on Monday.

The rest of the affected sectors are real estate and construction, education, transport and IT, trade and commerce, consumer credit, agriculture, ship-breaking and building, agro-based industries, healthcare, and power and gas.

The first five have been affected "most severely" as per the participating banks, the study said.

As much as 51 banks thought that travel and tourism were "dreadfully affected". Forty-seven banks identified the garment and textile sector, 45 banks identified SMEs, 32 banks identified real estate and construction, and 28 banks identified education as the dreadfully affected.

The survey was carried out in the second half of last year, taking into consideration sectors that needed the most credit support.

As per the responses, the SME sector has the highest credit demand in the near future, followed by the RMG and textile, trade and commerce, agro-based industries and agriculture.

Some 54 banks thought that the need for loans of the SME sector outweighed the requirement of other sectors. "The recovery in the SME sector might be slow, but steady growth may be achieved in due course if proper financial support is ensured," the study said.

The RMG and textile sector was the second highest credit-deserving sector as per 53 banks. The sector faced export orders cancellations and lower demand owing to uncertainty and continuation of the pandemic's spread in advanced economies.

Some 42 respondents perceived that the trade and commerce sector had the potential to grow fast and would require more credit to bring its growth momentum back on track.

The central bank has not considered the consequences of a second wave of the pandemic as it had just started to spread earlier this month, said a Bangladesh Bank official.

The first wave has considerably affected both the demand and supply sides of the real economy, which was partly reflected in slow growth of the GDP in the last fiscal year.

Though the agricultural sector showed some resilience despite the pandemic and other natural calamities, the real economy has experienced major slowdowns in the manufacturing and service sectors.

The manufacturing sector has been affected not only due to the demand-side shocks but also through the import channel as the pandemic has restricted the import of necessary raw materials for production from the major import partners.

The central bank has suggested that the authority concerned exercise some policy options to restore the accelerated growth trajectory of the economy from the ongoing economic slowdown.

The government may float a special bond to mark the 100th birth anniversary of Bangabandhu Sheikh Mujibur Rahman, naming it "Bangabandhu Centenary Bond (BCB)", to materialise his long-term vision.

To make Bangladesh a prosperous and developed nation, this bond's fund can be used for Bangladesh's transition towards a developed economy by 2041.

Funds from the special purpose bond may assist in financing the country's structural changes for generating mass-scale employment, socioeconomic advancement and empowerment, advancement in digitalisation, and upcoming mega projects, if required.

Besides, funds of this bond may be useful for reviving the economy from the Covid-19 shock, the study said.

The BCB can be a 30-year development bond. It might be issued both in local and foreign currency to attract local and global investors.

Tax exemption, inflation linkage, quarterly coupon, small denominations and put options can be the special features of this bond.

The government can also consider issuing a special social safety bond under the name Covid-19 Pro-Poor Bond (PPB) to address short-term socio-economic setbacks due to the pandemic.

The proceeds of the bond could be used for the people who have lost their jobs and whose livelihoods have been severely affected during the pandemic, in order to pull them out of the poverty line by ensuring job security.

This bond can particularly fund projects to tackle unemployment emanating from the pandemic, according to the study. 

In particular, the government could announce some public work projects for the jobless informal sector workers for a limited time as a number of countries have already taken such initiatives.

The PPB can be tax-exempted and can contain put options and other facilities (small denominations and monthly coupon) to attract investors. The maturity of the bond could be five to 10 years.

Commoners, including non-resident Bangladeshis, banks, NBFIs and other financial institutions, might be eligible to invest in the bond.

Worldwide, many social bonds are increasingly getting popular, and the PPB in Bangladesh might be a promising one.

In addition, banks and NBFIs should continue to pay dividends cautiously, just as they did last year as per the central bank's instruction.

"The financial sector's post-Covid-19 resilience is yet to be understood. Globally, it is assumed that the post Covid-19 period would be challenging for financial institutions due to gradual withdrawal of regulatory relaxation," the study said.

To strike a balance between a healthy capital market and a sound banking sector, the dividend pay-out policy needs to be revisited and rationalised. This initiative may enhance the banking sector's capacity to absorb any unexpected losses.

The government can also think of bringing the SMEs under a relaxed tax policy. Healthy growth of the SME sector is vital from an employment perspective, the study said.

The central bank official said a fresh study should be carried out as the second wave of coronavirus infections has already hit the country.

"This will help assess the actual loss of the financial sector. And a set of proposals will be required to fight the probable economic slowdown that would be brought on by the second wave," he said.