Shrinking bank finance for rural businesses

With commercial banks shying away from rural credit, economic activities in village areas relying on bank financing are facing increasing challenges. Moreover, many commercial banks are considering winding up their operations in rural areas due to factors such as high interest rates, inflation and fund shortage.

The plight of cottage, micro, small, and medium enterprises (CMSMEs) in rural areas is worsening due to the bank-financing crunch, resulting in lost markets both domestically and internationally. Although the central bank had introduced refinancing schemes to assist CMSMEs in their recovery from the shocks of the Covid-19 pandemic, no fresh schemes have been introduced after repayment, according to bankers. A significant increase in interest rates for bank loans since June last year, driven by the central bank's contractionary monetary policy to curb inflation, has further compounded the challenges facing rural enterprises with escalation of costs of funds and production.

Bankers have identified several factors like rising cost of fund and production in this higher-interest and inflation regime that made a strong bite on the demand for credits in the rural areas after the Covid-induced shocks. As a result, the flow of fresh disbursement of loans in rural communities has continued dropping in recent months. It has been reported that most banks, as part of their cost-cutting mechanism, are reducing the number of rural outlets, resorting to agent banking to serve their rural clients. According to bankers, maintaining full-scale rural branches under the current liquidity tightness has become costly and unviable for many commercial banks.

According to data from the central bank, as of June 2023, banks had invested Tk 14.46 trillion across various sectors in Bangladesh, with only 12.02 per cent (Tk 1.74 trillion) allocated to rural areas. The remaining 87.98 per cent (Tk 12.72 trillion) was invested in urban regions, reflecting a significant disparity in investment distribution. The share of bank loans in rural territories continued to decline, reaching 8.05 per cent (Tk 1.24 trillion) by the end of December 2023, while urban areas received the lion's share, totalling 91.95 per cent (Tk 14.15 trillion). This skewed distribution underscores the disproportionate allocation of SME funding, primarily favouring urban areas.

Central bankers noted a decline in rural deposits from 21.27 per cent (Tk 3.59 trillion) in June 2023 to 15.23 per cent (Tk 2.66 trillion) by the end of the previous calendar year. This drop in rural deposits further exacerbates the financing challenges faced by rural businesses.

Among the major rural sectors likely to be adversely affected are dairy, poultry, fisheries, handicrafts, and numerous other small and medium-sized enterprises. These enterprises vary in size, with annual turnovers ranging from a meagre Tk 5.0 lakh to Tk 10 million, reflecting differences in employment generation. Many of these enterprises suffered significant losses during and after the Covid-19 pandemic. Although efforts were made to assist them through low-interest financing in the post-Covid period, many small rural firms were deemed non-creditworthy by commercial banks, despite government directives to assess their viability beyond the traditional mortgage-based criteria.

In such a challenging environment, where the imperative is to support rural businesses through credit facilitation, the collective reluctance of banks to engage is deeply concerning. Given the extensive nationwide operations of these businesses, ensuring continued bank financing is crucial. Even as the number of bank outlets in rural areas decreases, alternative mechanisms must be established to support these enterprises.

Many rural enterprises now face multiple challenges, with the high cost of feed for poultry, dairy, and fisheries adding to their woes. The reduced availability of local resources coupled with difficulties in importing exacerbates these challenges. A lack of finance could potentially drive many entrepreneurs to explore other business avenues.

Efforts to address these challenges require a multifaceted approach that goes beyond traditional banking services. Collaborative initiatives involving government agencies, non-governmental organisations, and private sector stakeholders are needed to build resilient rural economies. This could involve investing in rural infrastructure, providing technical assistance and training to rural entrepreneurs, and facilitating access to markets through value chain development programmes.

Furthermore, there is a need for innovative financing mechanisms tailored to the unique needs of rural businesses. This could include targeted credit programmes, venture capital funds for rural startups, and risk-sharing arrangements between banks and rural enterprises.

Supporting rural businesses is not just a matter of economic development; it is also essential for promoting social inclusion and reducing disparities between urban and rural areas. By investing in the prosperity of rural communities, we can create opportunities for sustainable growth and ensure that no one is left behind in the journey towards progress and prosperity.

Despite the difficulties facing banks due to liquidity shortages and inflationary pressures, it is imperative to prioritise support for rural businesses. These businesses play a vital role in preventing urban migration and meeting domestic demand in their respective areas. Therefore, concerted efforts are needed to ensure that rural enterprises receive the necessary financial assistance to thrive and contribute to the overall economic growth and stability of the country.

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