Moment to fix the SME sector
Often touted as the backbone of an economy, Bangladesh has never wholeheartedly nurtured the cottage, micro, small and medium enterprises sector like the governments around the world, particularly those of China, India, the UK, the US.
So the economic tempest brought on by the global coronavirus pandemic, which has left the majority of the enterprises in a race for survival, has provided the government with the occasion needed to get its act together on the sector.
More so, because a cornered CMSME sector can turn out to be the weak link in Bangladesh's economic recovery and growth ambitions later on: after all, small businesses form the bedrock of everyday economic activities, making countries immeasurably stronger for their contribution.
And the starting point of that would be a credible database and realistic definition of what constitutes a cottage enterprise, a micro enterprise, a small enterprise, a medium enterprise and a large enterprise.
There is no official data on the number of CMSMEs in Bangladesh. The last time a survey was carried out was back in 2013, when the total number of SMEs -- without including the cottage and micro enterprises, of which there are hundreds and thousands -- was 79 lakh.
Without up-to-date data, forming any policy is akin to driving with one's eyes closed.
Which, perhaps, explains why there is so much debate on the utility of the Tk 20,000 crore stimulus package announced by the government for the sector that contributed at least 25 percent to Bangladesh's GDP and generated as much as 90 percent of the private sector jobs in normal times.
As of March, 72.3 percent of the stimulus fund has been disbursed to 91,427 firms, according to a finance ministry document.
But there are upwards of one crore CMSMEs in the country, according to unofficial estimates -- indicating the announced package was scanty for the sector to begin with.
Then there is the issue with classification. Is it fair to lump a company that can employ less than 15 people to one that hires 300?
Enterprises with employees between 31 and 120 are classified as small, while medium enterprises constitute employees between 121 and 300, as per the 2016 national industrial policy. Those with employees between 16 and 30 are termed as micro enterprises, and those below 16 are cottage enterprises.
But this is not consistent with the international practice, which classifies firms with employees of up to 9 as micro. Firms between 10 and 49 employees are small, while medium enterprises constitute those that employ between 50 and 249.
In other words, the cottage and micro enterprises need to be separated from the small and medium enterprises in policymaking.
Otherwise, the cottage and micro enterprises would continue to be deprived of finance or be hard done by any policy meant for the CMSME sector.
Take the case of disbursement of stimulus funds. It took months, with the deadline extended many times, for the funds to be distributed, and the full amount is yet to be given away. In contrast, the stimulus funds were disbursed at a brisk pace.
And the reason being, the process for sanctioning credit for the CMSMEs is the same as the large industries. It costs the bank the same.
Banks have a certain pot of funds to give away. Does it not make better sense for them to disburse the sum in quick time to a few medium to large companies rather than sift through the hundreds of loan applications from small and micro enterprises?
This is the reason why the stimulus funds for the CMSMEs are being given away at a lethargic pace, and is the reason why access to finance eludes most CMSMEs.
It is simply not in the lenders' interest to lend to these smaller enterprises. And this is where the government can truly make a difference for the sector.
Why not give banks disbursement targets for the cottage, micro, small and medium enterprises separately as opposed to one target under the overhead of CMSME?
Another reason for the delay in stimulus fund disbursement was that many of the enterprises could not meet the documentation requirements of the banks.
Given the rudimentary nature of many of these enterprises, it is unreasonable to expect them to have proper bookkeeping and up-to-date paperwork.
Their need for funds is not excessive, so why not give such firms direct cash transfer? Or, why not stipulate light-touch checks for such enterprises?
The cost of any grants given now will be dwarfed by the costs and repercussions of so many going bust: the loss of livelihoods, jobs, future tax revenues and economic output.
One of the common complaints from CMSMEs for being shut out of proper financial institutions is their inability to provide collateral.
Why not make lending cash flow-based instead? At present, such form of lending is extended to large industries, which can manage collateral and have a good relationship with bankers to be able to manage funds regardless.
Besides, the default rate of the cottage and micro industries is much less than the large industries. In a country where single large borrowers make way with Tk 5,000 crore, how much of a dent of a default by the CMSMEs going to create?
To facilitate access to finance for small businesses, Rizwan Rahman, president of the Dhaka Chamber of Commerce and Industry, which works extensively with the sector, called for an SME bank.
"When there are so many banks in the country, what harm would another bank do? While the government has BASIC Bank to lend to SMEs, but it is just in name. Does it actually lend to such enterprises?"
He went on to call for a different single-borrower exposure limit of Tk 2 crore for the state bank such that it is compelled to lend to SMEs and not large industries.
An SME bond would also help in channelling much-needed funding to the sector, Rahman said.
The fund raised by the bond would be invested in SMEs.
A digital marketplace for SMEs to market their products would also help the myriads of SMEs to thrive.
Rahman went on to cite the case of Alibaba in China, where the majority of the sellers in the marketplace are SMEs.
Getting SMEs into the formal banking umbrella is also important and this is where the mobile financial services providers have a spearheading role.
"But the high taxes on the MFS players is not going serve the cause. Ultimately, those will be passed on to the customers."
At present, the MFS players have to pay 15 percent value-added tax on transactions as well as 10 percent advance income tax at the agents' level and 12 percent at the distributors' level.
Rahman also called for an SME Act rather than the existing SME Policy 2019, which is not being followed faithfully.
"Without any policy overhaul, I don't see a bright future for the SMEs."