The Financial Express

Small businesses caught in cumulative debt trap

| Updated: September 26, 2021 20:58:33

File photo used only for representation File photo used only for representation

A large number of small business owners dependent on informal moneylenders are falling into debt trap due to higher debt-servicing liabilities amid business slump during the prolonged pandemic disruption.

On the other hand, many in such small business groups have sold out ancestral land and valuables to survive in cities and towns or gone on reverse migration (urban-to-rural migration), according to field visits by this scribe.

In the meantime, the loan-moratorium period was the shortest in the MFIs in comparison with other formal-sector leading outfits, contributing to increase in debts from other sources.

Md. Alamgir Ahmed, a grocer in Pahartali area of Chattagram city, said that he had multiple loans from the microfinance institutions. When they need urgent cash, they get it from the micro-financiers. The small enterprises depended on informal moneylenders despite the fact that they charge double-digit interest rates.

The high loan-servicing rates trap them into cycles of debt. They apply for fresh credits from another micro-lender to service the old loan.

He said: "I took loans from three separate micro-financial institutions or MFIs. I know this is a trap and it is hardly possible to come out of the cycle."

He said they readily go to informal moneylenders due to difficulty in borrowing from formal institutions and for urgent need for cash.

Md. Hamidur Rahman, the owner of Hamim Tailors & Fabrics in Dhaka's RK Mission Road, told the FE that his tailoring shop was shut for almost 19 months as the educational institutions remained closed since the outbreak of the pandemic in early March of 2020.

"I usually make dresses/uniforms for the school pupils. And closure of schools and other such institutions forced me to shut my shop," he said.

Mr Rahman says his 80-square-foot shop is rented for a monthly amount of Tk 13,000. "There was no mercy on the rent". There are many instances in the globe, including in the USA, of government ordering the concerned not to take rents during the pandemic.

To retain his shop in the city he had sold out some land of his ancestral home in Sirajganj.

The dressmaking shop, however, reopened on September 05 although schools reopened from September 12.

Mr Rahman, 37, said: "No banks or financial institutions came to me to stand during the worst days of my life."

Sohel Ahmed, a small vendor at Vogovati Saha Street in front of the Narinda Government High School in old part of Dhaka, said that he had shut his small shop as the education system was closed. "There was no customer for pen, pencil and books."

He said he had tried to switch over to another profession. "But the opportunity was limited."

Mr Sohel, however, sold 2-bhori gold at over Tk 140,000 and took a shop in Narinda road, involving computer composing along with a mobile-phone financial agency. Guardians and students come to send money to their schools and for other composing-related matters.

The education-related businesses had the worst, prolonged pain to suffer during the shutdown.

The publishing industry had an over Tk 30-billion market only for printing different types of books, notes and guides.

Panjeree Publications Ltd, one of the leading publishers, says during pre-covid days they had turnover worth Tk 4.5 billion. But during the pandemic they had no new edition for printing, making its turnover less than Tk 1.0 billion.

Bashundhara Paper Mills, a listed company, saw its earnings per share plummet to Tk 1.64 in 2020 from Tk 3.99 during pre-covid period.

MRA officials said they had a very small moratorium period offered to the clients.

"We had around one-month moratorium during the first round of covid," said one official, adding: "The moratorium was also less than one month during the disastrous second wave," said Md Yakub Hossain, a director at the MRA or Microcredit Regulatory Authority.

This is highly contrasted with the formal regulated lending regime. Banks had allowed one-year-moratorium period until December 2020.

Analysts say the main lifeline of credits to these smaller businesses is microfinance institutions and they do not want to be defaulter and that's why they borrow from other institutions.

They said during this pandemic their sales dropped significantly. Many closed their business. There is a pressure to use up their savings. They had a medical emergency and had to spend large amounts. So the debt becomes a burden for them.

"Banks are risk-averse, so they [small businesses] want to keep the channel very wet, not dry," said Dr Zahid Hussain, former lead economist at the World Bank.

He questioned how people would repay the debt in time when overall poverty alleviation is at risk. The poverty rate has increased in both urban and rural areas.

The country's poor, defined as those earning less than $2.0 a day, which had been on the decline since the 1990s, swelled to 42 per cent in 2020, before the most recent wave, against 21.6 per cent in 2018, a SANEM survey finds.

"The multiple debts have a long-term impact on their survival during this particular period of pandemic. A lot of people have slipped below the poverty line and many migrated from the urban areas abandoning their business," Dr Hussain noted.

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