Credit wholesaling for SME financing
Saturday, 25 August 2007
Ferdous Ara Begum
A recent seminar organised by Small and Medium Enterprise (SME) Foundation on Credit Wholesaling (CW) shed some light on the new financing scheme for SMEs to be implemented by the foundation through designated banks and financial institutions. It discussed the tentative guideline prepared by the foundation. At the moment, CW is being carried out by Palli Karma Shahayak Foundation (PKSF) and some banks like BASIC, Prime Bank etc., which is mostly meant for micro entrepreneurs.
The discussion of the seminar centred on different aspects of what would be the best model for funding through this scheme. A large number of related issues are to be resolved for floating the new system. Whether the PKSF or the Bangladesh Bank (BB) model would be suitable, whether the mode of financing will be in the form of pre-lending, or post-lending, whom to be selected for funding, what the time limit should be, how the entrepreneurs will be selected and the sectors to be identified, how the market studies will be done and how the interest rate will be determined etc. -- these are important matters for the purpose.
For micro credit the micro-finance institution (MFI) keeps 1.0 per cent as insurance. Should SMEF follow the system? What would be the right spread? Whether a quota will be fixed for women entrepreneurs? What would be the actual model to be followed for credit guarantee scheme? How can the issue of collateral and related ones be addressed? All these issues were discussed in the backdrop of entrepreneurs' demand for reducing profit share and cost of funding of the financial institutions (FIs). Justifications of banks for the existing rate of interest are different; they presented a large number of reasons why interest rates cannot be lowered presently.
In the keynote paper it was noted that non-performing loan (NPL) in China is about 25.9 per cent of its gross domestic product (GDP). In India, the same is 3.1 per cent and in Bangladesh it is 5.62 per cent. So it is clear that NPL as always referred to as one of the reasons for not lowering the rate of interest, may not be the true reasons, as indicated by the rate of interest in China which is much lower than that of Bangladesh. Bangladesh Bank realising the high interest as the cause of concerns lowered bank rate from 8.0 per cent in 1997 to 5.0 per cent in November 2003. The statutory liquidity ratio (SLR) has been lowered 20 per cent in November, 2003, to 16 per cent. Cash reserve requirement remains 4.0 per cent. BB has been trying to create an enabling environment for credit for the SMEs. It is the policy and overall assessment of the banks and FIs about their willingness to extend fund for SMEs. In this situation, it should be analysed further how cost of fund can be reduced to facilitate SMEs.
According to bankers' perspective, at least 6.0 per cent spread is a must and they may give the loan at 10 per cent if the fund availability can be made at lower rate. Profiteering cannot be the goal of the government and recommended that if the government gets fund at 1.0 per cent interest then why they should give this loan at 4.0 per cent? They also shed lights on the unused money of the government coming from abroad and liquidity available to the banks. They said it is possible to raise more funds for SMEs and this should be done at any cost. Bankers also suggested for tax incentives for the SME banking as the loss of the money to be collected against tax can be offset by earning more through establishing new industries. Banks suggested for performance benefit for the good bankers and introduction of annual award for encouraging bankers to go for funding with SMEs. Somebody mentioned about the negative mind-set about SMEs. They said there are some banks trying hard to facilitate SMEs. They should be supported and acknowledged to move forward with sincere work to upgrade their services.
International scenario has also impact on SME financing. Recent and ongoing developments in the banking sector add to the concerns of SMEs and will further endanger their access to finance. The main changes in the banking sector which influence SME finance are: globalisation and internationalisation have increased the competition and the profit orientation in the sector; worsening of the economic situations in some institutes strengthens the focus on profitability further; mergers and restructuring created larger structures and many local bank branches, which had direct and personalised contacts with small enterprises, were closed; up-coming implementation of new capital adequacy rules (Basel 11) will also change SME business of the credit sector and will increase administrative costs.
All these changes result in a higher sensitivity for risks and profits in the finance sector. Business start-ups and SMEs, which want to enter new markets, may especially suffer from shortages regarding finance. A code of conduct between banks and SMEs would have allowed at least more transparency in the relations between banks and SMEs.
Based on the national and international environment on the SME financing, a theme paper was presented by the consultant of SMESDP. The paper presented a detailed position highlighting enough justification for credit wholesaling (CW) as an accepted means for SME financing, citing examples of some countries like the Philippines, India etc. The paper tried to establish the fact that small and micro entrepreneurs are good borrowers, their defaulting rate is much less than that of the large enterprises but still they are not getting the required fund.
Presenting some statistics he proved that micro and small enterprises have been able to do higher value addition per worker than the medium and large enterprises. (Labour productivity, measured by value added per worker at Tk 375 thousand, is found to be the highest in micro and small enterprises). The comparative picture for the medium is Tk 345 and that for the large is Tk 327 thousand only.
In regard to explanation of the structure of interest rates across various size classes of enterprises, the paper said that for working capital loans from local banks, rates average 13.38 and 13.39 for the micro and small enterprises respectively, which is a very narrow band. The interest rates for micro and small is even higher than the above mentioned rates, say in case of BRAC the rate of interest (collateral free for micro) is more than 18 per cent, some banks take 15.5 per cent for small enterprises while the compound rate of interest is much higher.
............................
The writer is the
ex-Executive Director of the SCCI. This is the first instalment of her two-part article on the subject
A recent seminar organised by Small and Medium Enterprise (SME) Foundation on Credit Wholesaling (CW) shed some light on the new financing scheme for SMEs to be implemented by the foundation through designated banks and financial institutions. It discussed the tentative guideline prepared by the foundation. At the moment, CW is being carried out by Palli Karma Shahayak Foundation (PKSF) and some banks like BASIC, Prime Bank etc., which is mostly meant for micro entrepreneurs.
The discussion of the seminar centred on different aspects of what would be the best model for funding through this scheme. A large number of related issues are to be resolved for floating the new system. Whether the PKSF or the Bangladesh Bank (BB) model would be suitable, whether the mode of financing will be in the form of pre-lending, or post-lending, whom to be selected for funding, what the time limit should be, how the entrepreneurs will be selected and the sectors to be identified, how the market studies will be done and how the interest rate will be determined etc. -- these are important matters for the purpose.
For micro credit the micro-finance institution (MFI) keeps 1.0 per cent as insurance. Should SMEF follow the system? What would be the right spread? Whether a quota will be fixed for women entrepreneurs? What would be the actual model to be followed for credit guarantee scheme? How can the issue of collateral and related ones be addressed? All these issues were discussed in the backdrop of entrepreneurs' demand for reducing profit share and cost of funding of the financial institutions (FIs). Justifications of banks for the existing rate of interest are different; they presented a large number of reasons why interest rates cannot be lowered presently.
In the keynote paper it was noted that non-performing loan (NPL) in China is about 25.9 per cent of its gross domestic product (GDP). In India, the same is 3.1 per cent and in Bangladesh it is 5.62 per cent. So it is clear that NPL as always referred to as one of the reasons for not lowering the rate of interest, may not be the true reasons, as indicated by the rate of interest in China which is much lower than that of Bangladesh. Bangladesh Bank realising the high interest as the cause of concerns lowered bank rate from 8.0 per cent in 1997 to 5.0 per cent in November 2003. The statutory liquidity ratio (SLR) has been lowered 20 per cent in November, 2003, to 16 per cent. Cash reserve requirement remains 4.0 per cent. BB has been trying to create an enabling environment for credit for the SMEs. It is the policy and overall assessment of the banks and FIs about their willingness to extend fund for SMEs. In this situation, it should be analysed further how cost of fund can be reduced to facilitate SMEs.
According to bankers' perspective, at least 6.0 per cent spread is a must and they may give the loan at 10 per cent if the fund availability can be made at lower rate. Profiteering cannot be the goal of the government and recommended that if the government gets fund at 1.0 per cent interest then why they should give this loan at 4.0 per cent? They also shed lights on the unused money of the government coming from abroad and liquidity available to the banks. They said it is possible to raise more funds for SMEs and this should be done at any cost. Bankers also suggested for tax incentives for the SME banking as the loss of the money to be collected against tax can be offset by earning more through establishing new industries. Banks suggested for performance benefit for the good bankers and introduction of annual award for encouraging bankers to go for funding with SMEs. Somebody mentioned about the negative mind-set about SMEs. They said there are some banks trying hard to facilitate SMEs. They should be supported and acknowledged to move forward with sincere work to upgrade their services.
International scenario has also impact on SME financing. Recent and ongoing developments in the banking sector add to the concerns of SMEs and will further endanger their access to finance. The main changes in the banking sector which influence SME finance are: globalisation and internationalisation have increased the competition and the profit orientation in the sector; worsening of the economic situations in some institutes strengthens the focus on profitability further; mergers and restructuring created larger structures and many local bank branches, which had direct and personalised contacts with small enterprises, were closed; up-coming implementation of new capital adequacy rules (Basel 11) will also change SME business of the credit sector and will increase administrative costs.
All these changes result in a higher sensitivity for risks and profits in the finance sector. Business start-ups and SMEs, which want to enter new markets, may especially suffer from shortages regarding finance. A code of conduct between banks and SMEs would have allowed at least more transparency in the relations between banks and SMEs.
Based on the national and international environment on the SME financing, a theme paper was presented by the consultant of SMESDP. The paper presented a detailed position highlighting enough justification for credit wholesaling (CW) as an accepted means for SME financing, citing examples of some countries like the Philippines, India etc. The paper tried to establish the fact that small and micro entrepreneurs are good borrowers, their defaulting rate is much less than that of the large enterprises but still they are not getting the required fund.
Presenting some statistics he proved that micro and small enterprises have been able to do higher value addition per worker than the medium and large enterprises. (Labour productivity, measured by value added per worker at Tk 375 thousand, is found to be the highest in micro and small enterprises). The comparative picture for the medium is Tk 345 and that for the large is Tk 327 thousand only.
In regard to explanation of the structure of interest rates across various size classes of enterprises, the paper said that for working capital loans from local banks, rates average 13.38 and 13.39 for the micro and small enterprises respectively, which is a very narrow band. The interest rates for micro and small is even higher than the above mentioned rates, say in case of BRAC the rate of interest (collateral free for micro) is more than 18 per cent, some banks take 15.5 per cent for small enterprises while the compound rate of interest is much higher.
............................
The writer is the
ex-Executive Director of the SCCI. This is the first instalment of her two-part article on the subject