Since March 25, 2020, the government of Bangladesh has unveiled 19 stimulus packages to help the economy recover from the negative impacts of the coronavirus pandemic. This amounts to about Tk 103,000 crore and accounts for almost 3.7 percent of the Gross Domestic Product (GDP) of Bangladesh. For the Bangladeshi economy, this is a substantive amount, although the loss due to Covid-19 could be much more. The stimulus package includes support for export-oriented sectors, the service sector, cottage, micro, small, medium and large businesses, the agriculture sector and pre-shipment loan refinancing. This has been a timely move to help businesses revive their operations and pull through their losses. However, the stimulus package is more of a liquidity support and less of a fiscal stimulus since more than 80 percent of the support is in the form of repayable loans to be disbursed by commercial banks.
Almost four months into the announcement of the stimulus package, the disbursement of the fund is negligible. So far, only the support for the export-oriented sector (mainly the readymade garments sector) has been fully disbursed. A Tk 5,000 crore interest-free fund was allocated for the export sector with a service charge of two percent. Over 1900 export-oriented industries have borrowed from commercial banks in April and May 2020 to pay salaries of their employees. In view of demand from the export sector, allocation for them has been increased twice to pay salaries for the month of June and July 2020 as well. Total support for this sector now stands at Tk 10,500 crore.
Apart from the stronger voice of the export oriented RMG sector, their ability to move fast in terms of applying and getting the funds released has worked for them. They could receive funds under the liquidity support because they have regular transactions with banks. However, liquidity support for the other sectors remains largely unutilised so far, even though Bangladesh Bank in a recent circular advised the commercial banks to complete their corona-related loan disbursements by the end of August 2020.
Loans for the affected large industries and services amount to Tk 30,000 crore, which will be provided at nine percent interest to be split between the borrower and the government. The borrower will pay 4.5 percent interest and the government will pay 4.5 percent interest as subsidy. As of July 2020, an amount of Tk 10,000 crore was disbursed for this sector.
The progress on loan disbursement to the cottage, micro, small and medium enterprise (CMSME) sector is even slower. An amount of Tk 20,000 crore was announced as the working capital support to the pandemic-affected small businesses. This would be given at nine percent interest rate, of which the government will pay five percent interest as subsidy and the borrower will have to pay four percent interest. Till July 2020, only a little over Tk 500 crore was disbursed for the CMSMEs.
This slow pace is also observed in the case of the special refinancing scheme equal to Tk 5,000 crore for the agricultural sector at four percent interest rate. The pre-shipment credit scheme amounting to Tk 5,000 crore for export-oriented industries has also not made any progress.
In the backdrop of an already weak banking sector, the responsibility of providing liquidity support to corona-affected sectors and businesses is challenging. During the last several years, the banking sector has been suffering from poor management and lack of governance. Currently, the sector is characterised by high non-performing loans, escalation of loan write-offs, increased rescheduling of default loans, scams, low net profitability and shortage of liquidity. On the other hand, government borrowing from the sector is increasing steadily. This could limit the scope for private sector borrowing. And in view of the demand for financing the corona-affected businesses, the banking sector will face further challenges while operationalising the liquidity support packages.
Therefore, following the announcement of the stimulus package, Bangladesh Bank had undertaken a number of measures to meet the liquidity requirements of banks. These include lowering of REPO rates, reduction of Cash Reserve Ratio (CRR) and increasing advance deposit ratio (ADR).
Despite such measures, most sectors are not being able to receive funds. An important issue here is that banks will have to disburse to the affected entrepreneurs and take full responsibility of risks attached to the loans. This is the main reason for banks to be reluctant to disburse loans. Banks were advised to disregard the Guidelines on Internal Credit Risk Rating System for Banks in case of providing liquidity support. This support should be provided based on bank-client relationships. Hence, banks will be interested only towards entrepreneurs who have good relationships with banks and have regularly serviced their loans.However, the CMSME sector, which is the worst hit due to the pandemic, are facing problems in accessing loans. On the supply side, banks' costs of fund is about six percent at present. Operating and administrative costs add up another five percent. Therefore, banks feel that they will not be able to recover the cost in the case of small loans. A large part of this loan will have to be given to remote areas since the CMSMEs are spread across the country. This will increase the cost further. Also, banks do not have the capacity in terms of essential networks and trained staff to serve the micro entrepreneurs who often cannot afford any collateral. Banks cannot cover risks and associated supervision costs from the interest rate of nine percent that has been fixed by the government in the case of the stimulus package. So even though there is a huge demand for loans from this sector, financial institutions are not responding to this demand. On the demand side, micro-entrepreneurs do not feel comfortable to comply with the procedures imposed by banks to obtain loans from these institutions.
In order to help the affected businesses, the central bank has to oversee the operationalisation of the stimulus package so that the needy businesses are not deprived of liquidity support. This is important not only for the recovery of their businesses but also for creating employment.
There is a demand for credit guarantee schemes to reduce the credit risks of banks attached to the loans given to the CMSMEs. Under this credit guarantee scheme, the credit risk should be relieved by the central bank by absorbing a part of the losses of the lending financial institutions. Recently, Bangladesh Bank has announced a credit guarantee scheme equivalent to Tk 2,000 crore for the CMSMEs, which will cover a part of the risks of the lending banks. It is hoped that this will improve lending to the CMSMEs under the stimulus package.
Banks are apprehensive of disbursing loans from a commercial perspective. They are worried about whether their money will be paid back. Given the existing culture of high loan default, this is a justified concern. Loan defaulters may use this opportunity to take more loans and default once again. Indeed, several international organisations have alerted that emergency situations may be conducive for vested interests and for exploiting public funds for private benefit.
Therefore, close supervision of Bangladesh Bank at every stage of implementing the liquidity support package is critical. The objective should be to maximise loan disbursement to the needy enterprises and minimise the misuse and abuse of funds.
Dr Fahmida Khatun is the Executive Director at the Centre for Policy Dialogue.