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Banks are reluctant to lend to small and medium industries

Banks consider SMEs to be failures with low profitability and inherently represent more risk than large corporations, making banks hesitant to lend to them. So now, SMEs are struggling in the face of tough borrowing conditions and abuses.

Photo Courtesy: Merchant Inc.

Bangladesh government has announced an incentive package of Tk 20,000 crore for the SMEs in the second phase to overcome the impact of the coronavirus pandemic. However, only TK 13 and a half thousand crores of this package has been distributed which is 67.52% of the entire package.

Moreover, micro-entrepreneurs have faced the most difficulties. TK 2000 crore of this package was allocated to Credit Guarantee Scheme (CGS) to provide credit facilities to vulnerable micro-entrepreneurs but only 6% of the allocation of TK 121 crore has been disbursed.

Bangladesh government has announced a TK 5000 crore scheme for pre-shipment credit refinancing. Seventy institutions have received loans of TK 725 crore from this package, which is only 14.51 percent of the target. According to sources, major traders have received an allocation of TK 750 crore under the Export Development Fund under back-to-back letters of credit (LC) to increase raw material imports at 2% interest.

Besides, the target was to provide loans of TK 33 thousand crores to the affected industrial services sector in the last financial year. However, 1 thousand 311 institutions have been deprived of TK 12 thousand 588 crores.

Banks reluctant
Figure: Banks have always emphasized taking special initiatives in disbursing loans to small entrepreneurs.

Mustafizur Rahman of the Center for Policy Dialogue (CPD) said, “Small entrepreneurs have to go through various formalities at banks, so they get very little credit.” Generally, microcredit disbursements are below target because banks are reluctant to lend to micro-entrepreneurs.

Banks have always emphasized taking special initiatives in disbursing loans to small entrepreneurs. Employment opportunities are high in small and medium industries with 24 million people. It is very important to the economy and accounts for 25 percent of the country’s GDP.

Some banks want to develop mobile banking and offer transaction-based loans on cash platforms. Bangladesh government has announced an incentive package of TK 25 thousand crores for the SME sector in the current financial year.

Mustafizur said, “Banks will have to meet these targets and if necessary the relevant authorities will monitor them after three months”. The government has so far announced 28 incentive packages worth TK 1 lakh 87 thousand 679 crores to deal with the impact of the coronavirus pandemic.

In Bangladesh’s garment sector, factories with an export volume of up to $5 million consider SMEs. Bangladesh’s SME sector has a large share of garment factories with 50 percent or 1,500 factories. Hence, low credit facilities for SME garment factories make them less competitive than big traders. Low competitiveness often drives small companies to deal with monopolies.

If anyone has any feedback or input regarding the published news, please contact: info@textiletoday.com.bd

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