Addressing capital crunch of rural SMEs

Despite the much touted policy support for the small and medium enterprises (SMEs), it is becoming increasingly clear that this sector is far from being adequately nourished. Small and medium enterprises, defined variously in terms of both breadth and scope, have continued to remain on the margins -- both in manufacturing and trading. Although this genre of business activity, being  hugely diverse in nature, has been recognised as one requiring facilitation to be able to establish itself as a key player in the trade arena, it's yet to overcome symptoms of infancy in this country.

While the overall SME sector is facing many problems, SMEs set up in the rural areas over the past decades feel the bite harder, especially on account of financing, among others. Newspaper reports say scheduled banks and non-bank financial institutions are providing no worthwhile support by way of financing the small rural entrepreneurs. The target set by the central bank for the public sector banks for loan disbursement to these units has only partly been materialised. Reportedly, only 22.15 per cent of the total SME loans for rural entrepreneurs have been disbursed in FY17. Quoting central bank data, a local daily reports that during the year, out of the total Tk 1,419.36 billion disbursed by banks and the NBFIs under the Bangladesh Bank's SME credit programme, the share of rural SMEs was Tk 31,4.45 billion.

True, urban SMEs, mostly bigger in size and having relatively better credit worthiness are likely to get a bigger share of the loans. Nevertheless, the amount disbursed last year does reflect that these small rural units are being deliberately ignored. The five state-owned commercial banks - Sonali, Janata, Agrani, Rupali and BASIC - which should have pioneered in financing these units are, in reality, far behind the local private commercial banks. While the state-owned banks disbursed Tk 55.46 billion or 12.99 per cent of their total SME loans in 2017, private commercial banks disbursed Tk 109.33 billion or 18.30 per cent in the same period. This, no doubt, presents a totally undesirable picture.

The overall loan disbursement to the SME sector has reportedly experienced a surge, a considerable leap by more than 22 per cent. That is to say, most loans got disbursed to credit-worthy SMEs located in the urban areas. This conversely explains the utterly disproportionate manner in which SME funding is working in the country. One of the factors underlying the poor level of loan disbursement to these units is that most commercial banks and NBFIs do not consider them credit-worthy and tend to prefer traders as more reliable debtors. But the reality remains, as pointed out by noted Economists, such sense of security in dishing out excessive loans to the traders makes little or no economic sense as it does not contribute much to productivity nor does it help create job opportunities. Besides, one feels there might be chances of fund diversion to other sectors as well.

Reports quoting Bangladesh Bank officials say that a number of banks and NBFIs are in no mood at all to disburse loans to the rural SMEs. The law too does not bind them with any obligation to do so. In other words, it's just the bank-client relationship, the traditional norm in banking transactions, which determines the loan disbursement to these small entities. As a result, the cluster-oriented SME units in rural areas are not in a position to leave any noticeably positive impact on the economy.

It need not be stressed that if the government's credit facilities do not promote income generation and employment, especially in the rural areas, rise in loan disbursement makes little sense for the simple reason that traders can avail of loans from commercial banks on various counts to run their business, which is not the case with the SMEs, particularly rural SMEs.

Concerned quarters feel that the SME loan policy should be better directed in that the focus should clearly be on how best to ease out capital constraints of small and medium manufacturers in rural locations. There is thus the need for specific guidelines in respect of SME loan disbursement which, among others, should provide for strong monitoring besides setting out disbursement ratio between traders and manufacturers.

The country is experiencing a growth of small enterprises in rural Bangladesh in a variety of business segments. Both farm and non-farm based SMEs are sprouting, mostly without any well-planned supervision by any government agency. While poultry, dairy, fisheries occupy a considerable space among rural SMEs, others ranging across small-scale manufacturing to trading are also looking for the right route to grow and sustain. If these units, with many teething problems, are provided with some relief from their perennial capital constraint, it is highly likely that they can play a role of multiplier significance to the local communities. One major role in this respect could be halting urban migration, a problem that is going unabated while much of the resources in the rural areas remain largely untapped.

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