CMSMEs have a much better repayment history than heavy borrowers. So why don’t the banks lend to them?


Loan recovery from small, micro, small and medium-sized enterprises (CMSMEs) is much better than that of large enterprises. But banks generally remain reluctant to lend to SMEs

April 10, 2022, 12:45 p.m.

Last modification: April 10, 2022, 3:07 PM

Most SME entrepreneurs live in rural areas; but unfortunately the banks do not have enough branches in these regions. Photo: Mumit M


Most SME entrepreneurs live in rural areas; but unfortunately the banks do not have enough branches in these regions. Photo: Mumit M

In the recent July-September 2021 Financial Stability Assessment Report, Bangladesh Bank states that currently the biggest risk to the country’s banking sector is loan recovery from major customers.

The sector has been indebted to the best customers for several years. As a result, many senior bank managers and officials spend most of their working hours trying to prevent big customers from defaulting on their loans. And concerned parties, including the governor of Bangladesh Bank, remain busy trying to pressure big customers to repay delinquent loans.

According to the BB report, the banking sector debt has increased to Tk 11 lakh 85,000 210 crore, where the delinquent loan is Tk 1 lakh 168 crore.

There are a few heavy borrowers in the country who themselves have taken out loans from 30 to 35 different banks and financial institutions. At least two-thirds of loans granted by banks are locked up in the hands of just 100 institutions.

Conversely, loan recovery from small and medium-sized craft enterprises (MSMEs) is much better than from large enterprises. Even though the Covid-19 pandemic shut down businesses for much of the year, small businesses managed to repay 77.68% of target loans.

Yet banks are generally reluctant to lend to SMEs.

Why is this the case?

Professor Dr Momtaz Uddin Ahmed, former chair of the Department of Economics at the University of Dhaka, said: “Banks view SMEs as failures with low profitability and high risk of default. But if you really think about it , large corporations are the main defaulting debtors.”

During the Covid-19 pandemic, the government declared special credit schemes where banks were given Tk 20,000 crore to disburse among CMSMEs. Momtaz Uddin Ahmed says that “if Bangladesh Bank stops this credit scheme, banks will never come forward to help SMEs”.

Kamrun Naher. Illustration: TBS

Kamrun Naher.  Illustration: TBS

Kamrun Naher. Illustration: TBS

Ahsan H Mansur, Executive Director of the Bangladesh Policy Research Institute and Chairman of Brac Bank, said: “It is true that banks tend to lend to large corporations, even if they are the most major defaulters. But it’s also true that most banks don’t have a strong SME operating section. And that’s because they don’t have a better connection in rural areas, where most CMSMEs are.

Most CMSME entrepreneurs live in rural areas; but unfortunately our banks do not have enough branches in these regions. As a result, most entrepreneurs stay off their radar, Mansur said.

That said, Ahsan H Mansur pointed out that the government and the central bank must also understand that risk and reward are intertwined: the greater the risk, the greater the reward.

Mansur said: “What I mean is that the banks are taking high risks with the larger loans they lend to large corporations for high remuneration. But here the return is relatively erratic. On a On the other hand, loans to CMSMEs may not bring high remuneration, but they are regular.”

According to him, the SME loan works almost like the microfinance model. Banks need a separate management team that will closely monitor CMSMEs, maintain regular communication and collect loan installments at regular intervals. Otherwise, if entrepreneurs fail once, it becomes extremely difficult for them to get out of this pit.

All this requires a certain administrative expense that banks do not want to spend. On the other hand, even though running large companies has high administrative costs, banks tend to lend to them because high returns are expected. This is another reason why banks are reluctant to help CMSMEs.

On top of that, “banks lend to both SMEs and large borrowers at a maximum interest rate of 9%, which means that returns for large borrowers will be much higher. So why would banks give priority for SMEs? says Ahsan Mansur. According to him, the government is responsible for this. “This government needs to review its policies that will adjust the rewards to the risk taken.”

In addition, many private banks are owned by large corporations which are major defaulters. Mansur pointed out, “For example, company X owns several companies and also bank Y. So if you investigate, you will see that bank Y lends to X companies. This is how the whole cycle repeats itself.”

So no one pays back their loans, and in the end, all the burden falls on ordinary people.

“All it does is serve defaulters with more and more opportunities for manipulation,” Ahsan H Mansur said. And according to him, the government and the central bank should have been more vigilant before allowing the operation of such banks.

Bank Brac is doing quite well in this sector. Not just during the pandemic, this year the bank met its target, as its SME portfolio grew to 53%, while corporate and retail loans accounted for 30% and 18% respectively.

“Well, you have to understand that Brac has been working with microfinance from the very beginning, so he has a good network and also the mechanism to work with each other. Most banks don’t have such an infrastructure,” Mansur said.

How to increase CMSME loans?

As Ahsan Mansur says, not all banks will be SME focused. Some will be trade-focused, while other banks may focus on business and personal lending. He added: “If you force everyone to promote SME lending, it will not be healthy. SME policy should therefore promote SME-oriented banks.

Professor Mumtaz, on the other hand, said that there is no SME-focused bank in Bangladesh. “The government should first create a bank dedicated to SMEs. Otherwise, this sector will remain in the hands of several banks and this will deepen the field of manipulation even more.”

If it is not possible to create such banks, Ahsan Mansur offers a solution. During the pandemic, the government had a loan disbursement strategy for CMSMEs. The government should ask the banks that have been successful in providing the loans to focus on SMEs, as they have proven to be good at managing SMEs.


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