– Center for political dialogue
The Covid pandemic has had a colossal and far-reaching impact on the world. It has touched all spheres of human life – lifestyle, health, business, sports, entertainment, etc. Bangladesh is no exception and we have been hit hard by Covid-19, still fueled by low vaccination rates and lax safety protocols.
The last time the world witnessed something similar was the Spanish flu, which has not affected society on this scale, especially in today’s world ruled by trade and globalization. . A significant drop in external demand, especially in the clothing sector, a dramatic drop in tourism, growing debt and a sharp drop in foreign direct investment led to the worst recession since the Great Depression of the 1920s. So As SARS-CoV-2 is seriously damaging our lives, so too is the collapse of the economy, which has resulted in the loss of 114 million jobs worldwide. Especially in third world countries like Bangladesh, where 30% of the population lives below the poverty line, hunger could kill them before Covid-19, especially the 17 million “new poor”.
This impact is evident in the case of small and medium-sized enterprises, or SMEs, in Bangladesh, which remains a key driver of growth needed to spur technological change and innovation, essential for employment and well-being. SMEs are the backbone and lifeline of all least developed and emerging market economies and the SME landscape is immense for Bangladesh. The definition of an SME may differ from country to country, but overall the following general parameters define an SME. It would be anyone or a combination of (a) turnover, (b) number of employees, (c) equity investment and (d) size of bank facility.
There are 7.9 million SMEs employing about 25 million people and representing about 24 percent of GDP. While Bangladesh is among the few LDCs to have successfully deployed targeted investments and rapid institutional reforms and is less at risk than other countries, a significant economic recovery is still needed to return to pre-levels. the epidemic. In Bangladesh, as in many other emerging economies, SMEs have been hit hardest by the Covid epidemic. They suffered greatly from one or a combination of the following: (1) loss of income leading to business disruption and closure; (2) a substantial drop in orders; (3) lack of liquidity due to non-realization of receivables; and (4) the unavailability of funding from financial or non-financial institutions.
Serious and immediate support is therefore necessary to relaunch this engine of economic growth through three key interventions.
Regulatory / Policy Support from Government and Regulators: In the last 18 months or so, the government has already done its part by providing support in the form of: (a) a stimulus package worth around $ 12 billion dollars or 3.7% of GDP in the form of cash aid to businesses; these include all types of businesses, large and small. The government should ensure and closely monitor the disbursement of this financial assistance to targeted beneficiaries through all public and private sector banks. b) The Bangladesh Bank has already provided assistance in the form of a relaxation of its policy: moratorium on loan repayments, postponement of classifications, substantial reduction of compulsory liquidity reserves for banks from 5.5% to 4% in average every two weeks, significant interest rate subsidy, reduction in the interest rate on pensions and repurchase of government securities. In addition, the advance / deposit ratio increased from 85% to 87% for conventional financing and from 90% to 92% for Islamic financing; the maturities of the letters of credit were also extended, and (c) the central bank granted approximately $ 952 million at a subsidized interest rate for agriculture, low-income professionals, farmers and micro-entrepreneurs . These were all aimed at increasing immediate liquidity in the market and lending to businesses of all sizes in order to revitalize the economy.
New equity injection by owners, financial and non-financial institutions and NGOs: although it is extremely difficult for SME owners to inject capital / new equity at this time when the existence of their life is in question, they can nevertheless pledge other assets instead of injecting cash. It will be even more difficult for micro and small businesses. Alternatively, they have to borrow long term from informal markets, IFNBs or NGOs, to save their businesses. This will have a negative impact on their businesses by increasing the cost of running the business. Certainly, banks would like to see their participation when they approach banks for working capital financing and capital investments.
Easy access to banking facilities for SMEs: One of the most important stakeholders in the whole process of relaunching and recovering the economy, in general, and SMEs, in particular, other than owners is the Bank. Banks must devise an aggressive strategy for the livelihoods of SMEs. Banks generally don’t like the risks of SMEs but like the rewards and this approach needs to change. The “one size fits all” strategy will not work here if they want to support renewal. They will need to have separate approval criteria and strategy for micro and small enterprises and another for medium enterprises.
Basically, there can be two ways to finance SMEs through lenders / financial institutions – one for micro and small businesses and one for medium businesses.
For microenterprises, both formal and informal, and small businesses, banks should establish a parameterized lending process given the volume / number of businesses that will apply for small loan amounts and not have a proper accounting. These parameters must be simple and easily applicable. Banks can use their credit card score card, commonly known as A score, as a substitute for approving such low cost loans. These loans should be based on equal monthly installments and medium term, three to five years, as they will be used for both business restart / creation and financing of long term / essential working capital needs. End-use control can also be provided through direct payments to vendors and suppliers. The mechanism for repayment and operation of the account should be determined by borrowers and banks on mutually agreed terms.
Risk management will be done by portfolio. Banks must be technologically advanced to manage this portfolio with strong collection mechanisms. The whole process must be automated for accuracy, monitoring and speed of execution. Public and private banks have sufficient and more extensive network coverage to meet this segment. Banks will need to maintain a separate loan impairment budget for this segment which should be reviewed periodically. Preferably, this segment should sit within the retail banking department. This will diversify the risk for the banks and avoid the concentration of a significant exposure on single borrowers. Such a portfolio will avoid heavy loan write-downs as is the case for large industrial clients. The finance minister recently said that over 60% of industrial loans have gone bad.
The segment of loans / installations for medium-sized enterprises will be approved on a case-by-case basis. These must be approved on the basis of the balance sheet with a detailed cash flow analysis for repayment. These can be partially secured by company assets.
Much of it is bread and butter for banks in all emerging markets. Given the current gloomy economy, banks must review their licensing criteria and make them simpler, faster and less painful for customers.
Sadly, 8.07% is our loan depreciation in June 2021 according to the Bangladesh Bank, which is frightening and considerably high by any stretch of the imagination. Considering the effect of the Covid epidemic with the prolonged easing by the central bank, this ratio of NPL will be alarming.
It is recommended that, like the government, all other stakeholders, in particular all types of lenders such as banks, non-financial financial institutions and development partners, become aware of the reality on the ground and make concerted efforts to revive this vital sector of the economy in order to achieve / maintain the target of around 8 percent GDP growth towards the promotion of a middle income country.
SMEs would benefit from digitizing their businesses so that they can easily access financial services and also have their files easily accessible. In the long term, stakeholders must adequately invest in SMEs to drive business success through skills development programs, university scholarships and rigorous research and development to collect indicative data to make them resilient to future shocks.
Touhid Shipar Rafiquzzaman is a retired banker.