BUILD hails BB step: Easing financing support for CMS enterprises

Business Initiative Leading Development (BUILD) has welcomed the Bangladesh Bank initiative for introducing a Credit Guarantee Scheme (CGS) for the first time aiming to ease financing support for cottage, micro and small (CMS) enterprises.

"BUILD hopes that the credit guarantee scheme will help expedite the implementation of the government-announced BDT 200 billion working capital loans for the cottage, micro, small and medium enterprises (CMSME). This initiative will ensure more competitiveness of the CMS enterprises in terms of access to finance and as a result, these COVID-19 affected enterprises will become more vibrant, but its full operation needs proper care so that it works for the CMS sector," according to a statement of BUILD.

"BUILD earlier raised this issue of introducing a credit guarantee scheme for the CMSMEs in several platforms and also in a recent virtual dialogue where it emphasized on formalizing the informal sector as the key to the SME sector's growth."

CGS would work as a third-party credit risk mitigation to the banks/NBFIs through the absorption of a portion of the lender's losses on the loans disbursed to the cottage, micro and small enterprises(CMS). CGS will be used in replacement of collateral issues that CMS is facing for quite long. Initially, this scheme facilities will be applicable for Stimulus Packages(SP) of BDT 200 billion as a form of collateral-free working capital loan for giving support to the CMSME sector.

Many of the commercial banks in the country so far have shown their unwillingness to distribute loans from the stimulus package because of the current 9 percent lending cap and specially in financing CMSMEs because of the high operational cost for SME loans.

Upon the introduction of the credit guarantee scheme, the bank can get upto 30% portfolio guarantee cap of their CMS working capital portfolio where an individual or a company will get 80 percent coverage of a credit given by the banks. Therefore, banks will avail the fund from the scheme if loans get unpaid by the borrower as per the agreement. As a result, banks will be interested in disbursing the working capital loans to the CMSMEs under the COVID-19 stimulus package.

Under this 30% portfolio of CMSME loan , 70% will be covered by the manufacturing and service sector (Cottage, micro and small) and rest 30% for trading sector. This bar can shrink the CGS operation as in the CMS sector there is a large number of business in the trading sector. On the other hand the sectors will be identified as per the CMSME Master circular where there are- manufacturing sector will be 7 high priority and 24 priority sector of Industrial policy and Service will be 33 sectors where the trading sector has not been defined.

However, the cost of this CGS is 1% of the loan may raise the cost of funds, a challenge for banks and also for the CMS enterprises. Banks will get this guarantee for the loan/investment amount of Tk 2 lac-50 lac ( CMS limit mentioned in Master circular will not be considered in this regard). In case of current loan/ investment, the guarantee will be given for 1 year. But if the bank renews the loan/investment , banks/FI have to increase the guarantee time limit from CGS unit of BB.

Banks/other FI have to go for a participation agreement with CGS unit initially for 5 years.

Banks and other FI have to provide the early guarantee fees . 1% of the pre-determined portfolio for the 1st year, after that, the guarantee fee will be 0.5% for those who sanctioned 5% or less loan/investment amount in the previous year and 0.75% for those who sanctioned more than 5%. As the idea of CGS is quite new for our banking system, there is a need for more outreach and training for Banks/NBFIs to utilize this scheme smoothly.

In India there is similar 1% guarantee fee but in Malaysia, there is no guarantee fee, tenure is almost same or five years in these countries, the statement added.