The Financial Express

Suitable loan disbursement process for small businesses

Suitable loan disbursement process for small businesses

So, finally, what had been a cause for concern has come true. The government's stimulus package has seen little success in reaching out to small businesses. The case in reference here is Tk 200 billion soft loan package for micro, small, medium enterprises (MSMEs) including cottage industries, announced by the Prime Minister.

The loan package, despite the government's share of 5.0 per cent in the 9.0 per cent interest rate, is still challenging to implement, and it was mentioned by many that unless a mechanism is in place to disburse the loan to the target groups, the outcome is not going to be at all meaningful. As per the central bank's guideline, commercial banks and financial institutions are to provide loans or investment facilities to the enterprises as working capital from their own fund on the basis of bank-client relations. The banks will have to disburse a minimum of 15 per cent of their yearly loan targets to businesses in villages and marginal areas from the stimulus package. The interest rate of this lending facility will be 9.0 per cent and the concerned industries and business organisations will pay 4.0 per cent, while the government will provide the remaining 5.0 per cent as subsidy, the guideline said.  The guideline further adds that banks will have to provide 70 per cent loans of their yearly target to the cottage, micro and small enterprises while the rest 30 per cent should be provided to the medium enterprises.

As things stand now, this has not worked to the extent it was expected. Experts and businesses at a virtual policy dialogue on post-pandemic status of cottage, micro, small and medium enterprises (CMSMEs) and effectiveness of stimulus packages, suggested that the government had better adopted an alternative stimulus package disbursement process for cottage, micro and small enterprises to speed up the disbursement of stimulus loans to make the package effective. They also said that the government and non-governmental micro-finance institutions (MFIs) should be involved with the disbursement process so that the entities could avail of the fund hassle-free. The speakers mainly focused on the modus operandi of the stimulus package and its flaws in reaching out to the target groups. They said fifty per cent of the small, cottage and small enterprises in the country has not been able to benefit from the stimulus package because of cumbersome, complex and lengthy banking procedures, that among others require mortgage and collateral.

Reaching out to these enterprises which cannot afford required collateral at this time is crucially important. It is indeed difficult to know the exact number of such micro and small enterprises. Reportedly, their total number could be well over four million including small selling outlets, grocery shops and cottage industries in different districts. Observers and economists feel that providing these units a good share of the stimulus package can only render the government decision ever more meaningful.

Now, how to allow a bulk of these units access the loan calls for pragmatic and field-level efforts? Chambers and trade associations can play an important role in this regard. The authorities will need to work out a methodology whereby many of these units can be taken on board. The FBCCI President had said weeks back that the central bank and scheduled banks should reach out to them with easy rules so that they benefit from the bailout package. On the other hand,  bankers have called for the formation of a credit guarantee scheme through which the banks can recover the loans that they may consider risk-prone. The proposed credit guarantee scheme will protect banks in loan recovery through insurance, according to bankers. The credit guarantee scheme is particularly required for the cottage and micro industries as the majority of those enterprises do not have adequate financial strength. The SME Foundation has also strongly emphasised the urgent need of cottage and micro enterprises. Of the total businesses registered with the SME Foundation, 80 per cent are cottage and micro, and 1.0 per cent small enterprises.

No wonder, the foremost concern for banks would be recoverability of loans-- however low the rate of interest. Identifying enterprises, especially the micro and small enterprises, may be rather difficult to work out. It is not known whether the central bank has categorised the sectors and sub-sectors in terms of their yearly turnover or not.

Observers feel that instead of just mentioning small and micro units for eligibility of loans, the guidelines should have spelt out the sub-sectors, prioritising them on the basis of their importance to the national economy in terms of productivity and employment generation. There is an apprehension that micro and cottage industries might be left out of the benefit unless the central bank stipulates in very clear terms the eligibility criteria based on their productivity, mode of operation, and marketing networks.

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