Contrary to popular perception that collateral guarantees recovery of loans, the unsecured small category presents far better credit-worthiness. This was revealed at a roundtable titled "Financing Opportunities in Bangladesh: Building a More Enabling System for the Private Sector" in the city on Monday last. Organised jointly by the Metropolitan Chamber of Commerce and Industry (MCCI) and the Policy Exchange Bangladesh, the roundtable gathered seasoned experts in financing, who presented the above status of loan recovery with examples. The case of BRAC Bank was cited to illustrate the point. This bank's total assets stand at around Tk 1.0 trillion and nearly half of this amount comprises SME (small and medium enterprise) loans. Of the Tk 500 billion, Tk 400 billion is unsecured and the rest Tk100 billion is collateral-based. Surprisingly, the default rate on the unsecured Tk 400 billion loan portfolio is just 2.0 per cent while this rate is 7.0 per cent for the collateral-backed portfolio.
The message is loud and clear: the bigger the loan recipients are, the greater the risk of loan defaults no matter if there is the backing of collateral. It is against this backdrop, small entrepreneurs should have easy access to credit but contrary to this, large corporate borrowers enjoy preferential credit facilities. This makes the entire credit regime lopsided, leaving the room for manoeuvring by the large borrowers. Thus the non-performing loans (NPLs) have bloated to an outsize amount with hardly any chance of recovering most of those. The BRAC experience with the unsecured SME loans indicates that investments in such smaller enterprises benefit the target enterprising segment of society. Although the SME portfolio accounts for half of the total loan portfolio, the return on it is only 17 per cent. That may not be to the liking of any bank management but if considered against the defaulting loan culture in the country's corporate sector, even this rate of return is quite welcome.
Even more important is the fact that small loans can serve entrepreneurs at the grassroots level and help establish a regime of distribution of wealth. In an oligarchic social makeup, this kind of dispersal of economic justice can work wonder. This is important in the context of means of production or manufacturing. Small enterprises serve as the driver of economic progress at the underserved level of society. Their better credit-worthiness, therefore, deserves reward for expediting the process of economic development in the interest of the maximum number of people.
So this positive economic development should be promoted with preferential loan disbursement. In this context, private-public collaboration would be desirable. Non-government organisations like the Bangladesh Rural Advancement Committee (BRAC), the Grameen Bank and Proshika have long experiences in advancing loans to the poor. They can lead the campaign for bringing small, marginal and low-income entrepreneurs under their credit programmes. Thus the underserved businesses or manufacturing units known for their steady cash flow can be given priority. Unhindered production and income should be the principal criterion for accessing finance. In this case, maintenance of digital data by the entrepreneurs and sharing those with financing institutes can be an effective system for keeping a tab on the borrowers' financial status. Its benefits are multifarious: rural to urban migration is checked with sharing of enterprising dividends.