Time to deal with weaknesses in credit policy to support MSMEs

The Bangladesh Bank issued a circular on September 5, 2019, defining cottage, micro and small enterprises (CMSEs), CMSEs financing, women entrepreneur, and refinancing scheme and setting the credit ceiling. It proposes credit to industries, service, trading, women entrepreneurs, and new entrepreneurs. The CMSEs also include the business houses under the groups of industries, meaning conglomerates will be eligible to get the special loan offered to CMSEs.

The banks and financial institutions (FIs) are advised to develop financing strategies and give priority to innovative business. FIs are advised to give special training to their officials for CMSEs financing techniques and locate clusters and value chain to finance on a priority basis.

FIs may use agent banking if they don't have a branch in a location and distribute loans. They can use digital technology and digital financial services. FIs "may use" the service of MFIs having registration with the Microcredit Regulatory Authority (MRA), and all risks and responsibilities will be vested with FIs. Such funding will be treated as MSMEs finance. The loans are proposed to be regulated by the guideline of the MRA.

FIs were advised to introduce an application form in Bangla and different coloured papers. Officials will help entrepreneurs fill up the form. FIs will give a receipt after receiving the application and decide about credit within 10 days.

FIs "may consider" to delegate the authority of sanctioning loans to the concerned branches. The applicants shall get the opportunity to appeal to higher authorities. If the FIs refuse to lend the money, the applicant must be informed, citing the reasons for the rejection. The branches will keep the records of all applications and the details of loans for five years. FIs "may give" special facilities of repayments for about six months, considering the characteristics of a particular business on the basis of bank-customer relationship.

The circular observed that MSME financing is considered problematic, and personal, group or social guarantees may be considered to overcome the problem. The credit performance or credit history may also be considered in extending credit to the MSMEs. The individual providing the personal guarantee should be acceptable to both bankers and borrowers. The personal guarantor should be a single guarantor. The social guarantee means the guarantee extended by any establishment or organisation such as trade association, chambers, or training organisations that provide training to entrepreneurs. The group guarantee means the joint guarantee provided by some borrowers. If a member of the group becomes defaulters, the entire group will be treated as defaulters.

The FIs will set up a women entrepreneur development centre in their regional branches and a dedicated desk in each branch. Female bankers shall be posted there, and they should be given proper training for the tasks. The FIs will find some new entrepreneurs who never availed any credit facilities, and provide training to them. FIs will give loans to at least three of the trainees.

There is another existing refinancing scheme for agro-processing MSME in the location other than divisional headquarters, Dhaka, Chattogram and Narayanganj city areas. Under this scheme, FIs can provide the highest working capital and terms loans of Tk 3 crore and Tk 10 crore respectively. Under the scheme, FIs are advised to "consider" to extend loan up to Tk 25 lakh against the third-party guarantee. The policy also provides facility to MSMEs of any group of companies.

The nicely worded policy of September 5, 2019 could not serve the purposes.

The credit facilities for MSMEs are suggestive and not binding for FIs as all the policies are qualified with "may", to "consider" and subject to the bank-client relationship. Another serious loophole is that the BB considers the demand for working capital lower than a long-term loan (for fixed capital). Small and cottage industries are labour-intensive and don't require costly machinery. It is obvious that MSMEs need more working capital than long-term capital.

A daily newspaper reported that the government has prepared another policy. The owners of the cottage, micro, and small enterprises (CMSEs) will get working capital loan from MFIs if they have two guarantors and national identification cards (NIDs) or birth registration certificate. The policy also, as usual, considers the person, not the company as the borrower. Those who do not have NIDs can also get loans by submitting a certificate from the local municipal councillor or the chairman of union parishad and loan applications. The MFIs will not ask for any additional documents.

According to the proposed policy, the MRA and non-governmental organisations will manage a special refinancing fund. MSME entrepreneurs and the returnees from abroad and those trained by various agencies, including the Department of Youth Development, will be prioritised for loans.

According to the guideline, a single client shall borrow a maximum of Tk 50 lakh. At the client level, the interest rate will be a maximum of 12 per cent, of which the government will subsidise 5 per cent, and the client will repay the remaining 7 per cent.

Under the guideline, a new fund of Tk 5,000 crore for three years is being set up initially to provide loan facilities to MSMEs. The government will provide an interest subsidy to clients for a year. Whether the subsidy will continue in the subsequent years will be decided during the next budget.

The new policy has nothing new but a customised policy of microcredit organisations. The NGOs of Bangladesh developed the system from the long experiences of trial-and-error methods. 

As reported, the draft guideline will give some controls over the loan by FIs. Banks and financial institutions will send financing applications to the MRA after receiving those from MFIs. The MRA will certify the applications within three days and determine MFIs' borrowing capacity. It seems that the MRA will recover the loan and FIs will have some control over the programme. This may not work efficiently without the liberty of MFIs in extending the credit and recovering the loans in line with their procedures.

MFIs extend many other services such as insurance coverage, compulsory savings, education loan for children, adult education,  medical service training for the production of goods and service, and marketing services. The combine programmes supplement the proper use of loans and support the borrowers to repay. It is not only microcredit. Borrowers are members of MFIs, not only creditor. Unfortunately, policy-makers do not take note of the difference between bank loans and microfinance.

The author is a legal economist. He can be reached at mssiddiqui2035@gmail.com.