Covid-19 fallout on CMSMEs -- an assessment of the policy responses

Cottage, Micro, Small and Medium Enterprises (CMSMEs) have emerged as an engine of growth in Bangladesh like other any developing countries. The sector's contribution in terms of employment generation, economic value addition and business activities is enormous.  But the Covid-19 has hit the CMSMEs hard impacting them on several dimensions, i.e., business shutdown, output and job loss, sale and income fall because of nationwide shut down of 66 days during the second quarter in 2020. In response to the fallout of the Covid-19, the government and Bangladesh Bank took several polices for the CMSMEs that included stimulus package of Tk 200 billion working capital financing at 4.0 per cent interest rate, refinance scheme of Tk 100 billion against this working capital financing, credit guarantee scheme and start-up-fund apart from existing financing facilities.

The shocks of the Covid-19 pandemic were divergent and varied across larger to smaller firms. The effects on cottage, micro, and small enterprises were more severe because of higher levels of vulnerability and lower resilience related to their size. Several studies find that most of the firms experienced output loss, revenue reduction due to shrinkage in demand, pending payments, widened income gap across gender, difficulties in accessing bank finance etc. Concentration of stimulus packages on the larger firms, and most importantly lack of a proper database of all categories of enterprises and slow recovery of the smaller firms were found to be key reasons for less than expected benefit.  Many think-tanks, policy maker and researcher argue that the current CMSMEs policies and financing need some revisions to cope with the pandemic induced losses. In this backdrop, this paper note attempts to assess the fallout of the Covid-19 on the CMSMEs, status of stimulus package, resilience of credit policies, loan disbursements and their contribution to the economy.

CONTRIBUTION OF CMSMES TO ECONOMIC GROWTH AND EMPLOYMENT GENERATION: COUNTRY'S  Real Gross Domestic Product (GDP) grew, on average, above 7.0 per cent up to FY19, since FY16. The growth slipped to 5.24 per cent in FY20 from 8.15 in FY19 owing to the fallout of Covid-19 pandemic. However, it was ranked in the top five fastest-growing emerging economies, according to the World Bank. The Major portions of the growth came from the industry sector particularly from manufacturing which comprised cottage, micro, small and medium-sized enterprises (CMSMEs). The manufacturing sector has registered a growth rate of 14.70 per cent in FY19 making it the main contributor to the growth of the industry sector. With about 7.8 million CMSME units, the sector is contributing almost 25 per cent of GDP, 11 per cent of total industrial establishment, 30 per cent of total industrial employment and 40 per cent of total manufacturing output. Basically, most of the establishments of the CMSMEs are labour intensive which create employment opportunity for available and cheap labour force. At the same time the cheap labour has made the CMSMEs the fastest growing sector. However, CMSMEs growth decelerated somewhat by the Covid-19 pandemic.

Sector wise establishment of economic units data show that most of the CMSMEs are cottage industries which constitutes almost 87 per cent to the total establishments. These cottage industries play a vital role in employment generation as more than half of the employment came from this subsector (Table-1). The growth trajectory of CMSMEs shows that small industries grew faster with 26.58 per cent growth during 2003-2013 followed by medium industries (8.08 per cent). Employment generation growth is also larger in small industries between 2003 and 2013 (Table 2 - 3).  

With the contribution of the CMSMEs to industrial growth and employment generation, a multipronged strategy has been adopted.  The National   SME Policy 2019 has been framed creating equal opportunities for all and ensuring economic empowerment through increased involvement of women in the SME sector. The cluster-based SME Development Strategy is going to be adopted by identifying 117 clusters throughout the country. The government is putting its endeavour to enhance the contribution of this sector to 32 per cent by 2024 (Budget Speech, FY22). To counter the adverse economic impact of the Covid-19 pandemic, a Tk 200 billion capital stimulus package was introduced in April 2020. A broad based strategy has been set in the 8th Five Year Plan, 2020-2024, which are : Top most attention will be given to protect the jobs and enhance new jobs in the cottage, micro and small enterprises (CMSEs) that presently employ an estimated 21 million people. This will be done immediately through the provision of low-cost loans through the banking sector. The Bangladesh Bank will work with commercial banks and the non-bank financial institutions how this can be done in a flexible and low-cost manner.

ASSESSMENT OF THE IMPACT OF COVID-19 ON CMSMES: The extent of the losses of CMSMEs vary as reflected in some studies and research report of different research organisations.

An independent researcher (M Hussain) conducted a survey on 216 firms in 16 BSCIC industrial states to assess the impact of Covid-19 on CMSMEs during the year 2020. The major findings of the survey include:

- The small firms lost their output up to 26 per cent by the end of December 2020 because of the Covid-induced 'holiday' and its subsequent consequences.

- During the period, the micro and medium firms lost 20 per cent of their output as the government had imposed restrictions on movement and shutdown for the months between March and May last year to avert the spread of the corona virus.

- However, 74 per cent firms on an average were more or less affected by the pandemic, according to latest research findings released on Sunday.

- During the three-month period from March to May last year, some 96 per cent of such types of firms (SMEs) were affected

- The micro and medium enterprises have performed better than the smaller ones at the recovery stage.

South Asian Network on Economic Modelling (SANEM) conducted a firm level survey regarding the Covid-19 and Business confidence in Bangladesh and found that on an average, the large firms performed better compared to the Micro, Small, and Medium enterprises. According to the survey large enterprises are more capable of acquiring the stimulus packages than Micro, Small, and Medium enterprises. Micro and small firms received 18.4 per cent of stimulus package provided by the government to address the adverse impact of the pandemic. With regard to medium enterprises, around 42.3 per cent firms received benefits from the package. On the other hand large firms acquired 57.3 per cent.

A study done by the Centre fro Policy Dilague (CPD) observs that it is important to ensure speedy disbursement of the subsidised credit among eligible SMEs They also think that a database of all categories of enterprises, including MSMEs needs to be prepared on an urgent basis. Though the government allocated funds for women entrepreneurs under stimulus packages meant for CMSMEs, 58 per cent of them have not heard about it and 93 per cent women enterprises have not applied for any loan under the government support scheme. A separate stimulus package should be implemented for the woman entrepreneur. Moreover, the study recommended extending the loan repayment deadline for three years for SMEs to fight the fall out of the Covid-19 fall out. 94 per cent of the beneficiaries of loans under the stimulus package provided by the government were male and 6.0 per cent were female.

Policy Research Institutive of Bangladesh (PRI) in 2019 conducted a study for understanding the access to finance for SME and its impact on job creation. The major findings of the study are: (i) 7.0 per cent employment growth in all sample enterprises from inception to 2019; (ii) female-owned sample businesses led employment growth at 146.2 per cent; and (iii) the largest employment growth was in the service sector 174.2 per cent followed by manufacturing sector --131 per cent.

The key issues of the above studies and surveys include the situation faced by the CMSMEs after the Covid-19 fallout. It is observed that the CMSMEs have been most affected during the first wave of Covid-19 and also afterwards; their challenges continued as Bangladesh suffers from the ongoing second wave of the pandemic.

POLICY MEASURES FOR CMSMES IN RESPONSE TO THE COVID-19 PANDEMIC FALLOUT: The government has responded with a hefty stimulus package of Tk 1.28 trillion (US$ 14.6 billion) to recover the economic shock from the Covid-19 pandemic fallout. Of this package Tk 200 billion working capital has been allocated to the CMSMEs sector to revitalise CMSMEs from pandemic adversity. This fund has been released through commercial bank with concessional interest rates at 9.0 per cent. Out of these rates, entrepreneur will pay only 4.0 per cent and government will give 5.0 per cent as subsidy to the commercial banks. The package has been extended till 30 June, 2021 because about 72.31 per cent of the total target has been implemented up to 31 March, 2021.

Besides the stimulus package for CMSMEs, Bangladesh Bank has undertaken various policies/ initiatives in line with its existing ones for expanding credit facilities and easy accessing to credit of CMSMEs. These policies are very pragmatic and help CMSMEs to mitigate their distress faced by the Covid-19 pandemic.

Refinance. Since Commercial banks are implementing stimulus package of CMSMEs, Bangladesh Bank formed a revolving refinance scheme of Tk 100 billion from its own source for commercial banks for providing  working capital disbursements to the entrepreneurs with effect from April 26, 2020. The validity period of this fund is three years.

Start-up Fund. Bangladesh Bank has established five-year revolving refinance Fund titled 'Start-up Fund' amounting Tk 5.0 billion for commercial banks for misabusing loan to start-up entrepreneurs/ innovative initiatives. This sector is promising for creating self employment opportunities for youth and to create new entrepreneurs'.

Credit Guarantee Scheme. BB has undertaken the Credit Guarantee Scheme (CGS) policies and already initiated a CGS of Tk 20 billion to encourage commercial banks to provide loans to micro, cottage and small enterprises.

Priority to the Women Entrepreneurs in CGS. Regarding Policy of Credit Guarantee Scheme for Cottage, Micro and Small Enterprises (CMSE), women-owned Cottage, Micro and Small Enterprises (CMSE) will get priority to obtain CGS facility. Under the said instruction to ensure collateral free loan/investment for Women-owned Cottage, Micro and Small Enterprises (CMSE), henceforth the participatory financier institutions (PFIs) have to earmark at least 5.0 per cent of their Portfolio Guarantee Limit (PGL).

Waiver of Bank Charge or Fee for Loan Processing of CMSMEs. Bangladesh Bank has recently revised scheduled bank charge where banks are instructed not to take any charge or fee for loan processing, rescheduling/ restructure for CMSMEs.

Along with the above policies during Covid-19 pandemic, Bangladesh Bank has adopted several credit policies/ schemes/ programmes to flourish and expand CMSME sector from the very beginning. Some major credit policies are highlighted below:

Increased credit disbursement target. Banks are instructed to increase yearly credit disbursement target to CMSMEs by 25 per cent of the total disbursement by 2024 with minimum 1.0 per cent increment each year.

Sector-wise credit distribution target. To ensure sector-wise distribution of overall SME credit portfolio, a target for at least 40 per cent for manufacturing, 25 per cent for Service and a maximum ceiling of 35 per cent for trading has been instructed by Bangladesh Bank to be achieved by all Banks/NBFIs within 2021.

Special Attention to Small Enterprises. Banks and NBFIs are instructed to disburse 50 per cent of the total CMSME loan to Cottage, Micro and Small sector by 2021.

Grace Period. Banks and NBFIs are instructed to provide 03 to 06 months grace period to small enterprise for short to long term loan repayment.

Cluster Development Policy. To expedite cluster-based financing to CMSME sector, banks and NBFIs are advised to formulate a cluster development policy for strengthening existing clusters and developing new clusters.

SEIP Project for CMSME Sector Employment. A project has been undertaken named 'Skill for Employment Investment Programme (SEIP)' by the Government with the assistance of Asian Development Bank. Under this programme, as of February 2020, 11, 484 trainees have been trained in different technical courses and out of 11, 246 certified trainers 7,685 have been employed in different SME sectors and 2,283 have become self-employed. Among them 32 per cent were women.

Forming Women Entrepreneur Development Unit and Dedicated Desk. Banks and financial institutions are advised to form Women Entrepreneurs Development unit and Dedicated Desk in the regional offices including the head office of banks and financial Institutions and arrange necessary training facilities for women entrepreneurs. Bangladesh Bank has allocated 15 per cent of total refinancing scheme for women entrepreneurs and necessary instructions have been given to the banks and financial institutions to provide this loan.

Group based loan disbursement. Women entrepreneurs in cottage and micro sector have been given a policy of disbursing group based loans of minimum Tk 50,000 or above.

Collateral. Lack of collateral is one of the major obstacles for CMSME sector. To address this BB has introduced collateral free credit facilities for CMSMEs up to Tk 1.0 million which can be increased up to Tk 2.5 million upon personal guarantee.

Rate of Interest on CMSME Credit. Although the operating costs of the financial institutions are high for the small entrepreneurs, BB has instructed the financial institutions to keep the interest rate for CMSMEs within a tolerable level.  For this, BB is providing refinance facility to financial institutions at bank rate (at present 4 per ent) in CMSME sector. The fund obtained at bank rate through BB refinance window should be disbursed at bank rate plus not more than 5.0 per cent interest rate to the client level.

Ongoing refinance Schemes of Bangladesh Bank for CMSMEs. To expand access to finance for CMSMEs several refinance schemes have been introduced before the on-set of Covid-19 which has facilitated CMSMEs' access to credit. A brief description is given in Table-4.

TRENDS IN CREDIT DISBARMENT IN THE CMSMES: Available data show that banks and non-bank financial institutions (NBFIs) disbursed about Tk 14.74 billion to 93919 beneficiaries of CMSMEs till May 2021 under the stimulus package which was 73.70 per cent of the package.  Out of the total loan disbursement, Tk 7.44 billion (50.47 per cent) was disbursed to 5252 women entrepreneurs (Table 5).

In line with stimulus packages, BB has strengthened its loan disbursement and refinances under CMSME credit policies. During the onset of Covid-19, loan disbursement of CMSMEs  slowed in first two quarters due to national lock down of more than two months during the second quarter of 2020. Afterwards, business activities started to opening and loan disbursement also started to increase since Q3 of 2020.  Total loan disbursement of Tk 1534.96 billion went to 785858 entrepreneurs in 2020 compared to Tk 1679.70 billion and 774122 entrepreneurs respectively in 2019. The highest share of disbursed loan went to the small enterprises which accounts for 57.66 per cent in 2020 and 60.49 per cent in the previous year. Micro and cottage enterprises received 12.40 and 0.80 per cent share of the total loan disbursement which is higher than the previous year's of 9.82 and 0.76 per cent respectively reflecting that the economy is enlivening.

Loan Disbursement to New Entrepreneurs. BB's credit policy for new entrepreneurs spurred the expansion of the CMSME credit coverage which is evident from loan disbursement to new enterprise data. During the pandemic year, 2020 more than 0.1 million new CMSME entrepreneurs were financed which is 5.78 per cent higher than the previous year's inclusion of new entrepreneurs. Of the total loan disbursed to new enterprises in 2020, the highest percentage of share (58.97 per cent) went to the small industries, followed by the medium industries (21.40 per cent), micro enterprises (17.85 per cent) and cottage enterprises (1.78 per cent). 

Refinance Scheme for New Entrepreneurs. To perk up the CMSMEs in the pandemic situation, BB has widened refinance schemes to new entrepreneurs. A total of 644 new entrepreneurs received more than BDT 404 million through BB's refinance scheme which reflects the widening of access to finance for CMSMEs. Moreover, providing 23.3 per cent working capital of total loans for small enterprises helped them run their businesses.

Loan Disbursement by SME Foundation. The SME foundation also works for the development of CMSME sector of the country. Through market expansion and capacity building on various aspects it assists the entrepreneurs to start up and grow their business. By maintaining 26 per cent of total beneficiaries for women SMEF contributes to women empowerment. Moreover, under stimulus packages SMEF has been allotted Tk 3.0 billion to disburse among entrepreneurs.

CONCLUDING REMARKS:The stimulus package, credit grantee scheme, collateral free loan, concessional interest rate (4 per cent), and start-up fund along with the existing credit policies are quite supportive of building resilience of the CMSMEs during the pandemic. Available data show that about 74 per cent of stimulus fund have been disbursed to 96 thousand entrepreneurs till May 2021. The activities of the CMSMEs have started to revive from Q3 of 2020 reflected in the loan disbursement amount. The growth of loan increased to cottage, micro and small enterprise in Q4 of 2020 over Q4 of 2019. It is likely that the access to loan by the CMSMEs will expand in the coming quarters as broad-based economic activities continue to pick up.

Nasrin Akther Lubna is Deputy Director, Md. Abir Hossain is Assistant Director, and Dr. Md. Ezazul Islam is General Manager (Chief Economist's Unit) of Bangladesh Bank respectively. [email protected]

[The authors are grateful to Dr. Md. Habibur Rahman, Executive Director, Bangladesh Bank. The views expressed in the paper are the authors' own and do not reflect those of Bangladesh Bank.

The piece is based on a Policy Note (PN 2103) of BB]