Rising NPL in SME sector

Almost everyone wanted the banks to make available more loans to the small and medium enterprises (SMEs) that are seen as key drivers of the country's economy. But the current state of loan situation involving banks and SMEs is quite confusing. Some banks have beefed up their SME-loan disbursement in recent years and many others are still lagging far behind. A few banks are found to be hyperactive as they have overshot their respective annual targets as far as disbursement of SME-loan is concerned. But what has alarmed many is the abnormal rise in the volume of non-performing loans (NPLs) in the SME sector in recent years.

Statistics made available in a paper presented at a seminar in Dhaka early this week showed that the volume of NPLs in the SME sector had increased more than eightfold to Tk 220 billion between 2010 and 2016. In line with the performance of their overall loan operations, the rate of NPLs in areas of SME loans in the case of state-owned banks is very high --40 per cent for commercial banks and 35 per cent for specialized ones. In case of a few private banks that have expanded their SME loan portfolio aggressively, the NPL situation is also pretty bad, if not critical like that of their public sector counterparts.

The developments surrounding SME loans have given rise to opposing views in the banking industry. Some people do strongly feel that SME financing has caused erosion in the banks' profitability. But many senior bankers, who support the emergence of a strong SME sector for greater benefit of the national economy, are not ready to accept this proposition. The latter tend to feel that wrong selection of borrowers and failure to take appropriate measures for supervision and recovery of loans by the banks concerned are responsible for the rise in default rates in SME loan operations. That some banks are more interested in meeting SME loan disbursement targets than quality lending is evident from their reported aggressive lending. A total of 13 banks overshot their annual SME loan disbursement targets in just six months, between January and June this year. A couple of banks disbursed SME loans to the tune of over 200 per cent of their respective targets. Allegations have it that a section of banks are resorting to foul play to meet their SME loan targets and diverting funds to trade financing. Such diversion of fund, as many observers are of the view, is responsible for the rise in the NPL rate in the SME loans.

It is the job of the central bank to see that banks follow a standardised model in areas of SME loan disbursement and ensure their proper use through regular and effective supervision. Many banks shy away from SME loan operations because of high cost involved in their management and supervision. But that should not be the case. The saying, ' small is beautiful' will come out to be true in the case of SMEs if the banks finance the right kind of small entrepreneurs and help them overcome initial odds and grow smoothly. Most banks do not want to take the pains involved in accomplishing the latter part of the job and turn out to be mechanical. Then again, there are also limits to banks' role in doing these, as other government agencies/authorities bear also responsibility to address both economic and non-economic factors that continue to impede sustainable growth and development of the SMEs, including other enterprises. Notwithstanding this, banks on their part should put enough emphasis on both financing and supervising SME operation in order to facilitate emergence of a strong SME sector.