Risk aversion keeps banks from funding SMEs, say experts

Commercial banks in the country are still reluctant to finance small and medium enterprises (SMEs) considering the risks in respect of stringent rules for loans, experts said Saturday.
They noted there is ambiguity in the statistics and information on number of SMEs and their contribution to the national economy. The banks disburse more than 62 per cent loans to large scale industries (LSIs) while the small, medium and cottage industries (SSCIs) together get about 38 per cent.
They said although SME sector has progressed much in Bangladesh, it still lags behind other South and East Asian countries where SME industries get strong policy support and make higher contributions.  
They made the observations on the concluding day of the 19th Biennial Conference 2015 of Bangladesh Economic Association (BEA). BEA organised the three-day event at the Institution of Engineers, Bangladesh (IEB) in the city.
Chief executive officer (CEO) of Business Initiative Leading Development (BUILD) Ferdaus Ara Begum made the presentation on 'Alternative Financing for SMEs' at the 12th working session titled 'Inclusive Finance and Micro Finance' with Professor Tariq Saiful Islam in the chair.
In her presentation, she said like other Asian countries, Bangladesh government has also given priority to SME funding. But due to absence of clarity in some cases, unwillingness of banks and non-banking organisations, the financial system for SMEs are skewed and SMEs have to shuttle here and there for getting access to finance whereas their recovery rate is quite higher than the LSIs.
In FY 2011-12, recovery rate of LSIs was 82 per cent, medium scale industries (MSIs) 90 per cent and SSCIs 98 per cent. In FY 2012-13, the rate was 87 per cent for LSIs, 82 per cent for MSIs and 93 per cent for SSCIs. In January-March of 2014, the rate was 115 per cent for LSIs, 90 per cent for MSIs and 83 per cent for SSCIs. In April-June period of 2014, the rate was 92 per cent for LSIs, 83 per cent for MSIs and 83 per cent for SSCIs.  
Outstanding for LSIs is the highest, about 70 per cent while in the SSCI it is the lowest, 6.06 per cent.
Although BB has given directives to open SME branches, separate provision for loans and many other policies but in reality, financing system for SMEs have not been improved up to the required level, she added.
Ms Ferdaus said access to finance from banks by the SMEs has improved in other Asian countries with Korea having 39 per cent access, Thailand 34 per cent, Malaysia 20 per cent, Cambodia 8.0 per cent, Bangladesh 6.0 per cent and Kazakhstan 5.0 per cent.
Experts said there are confusing data of SME in Bangladesh. According to data of Asian Development Bank (ADB), the number of SME is six million while BB once said the number to be 15 million. Besides, there is no concrete information about the contribution of SME in the national export recognised by the government.
There are many SMEs listed in capital market for fund raising which can be introduced in Bangladesh too, Ms Ferdaus said. The formalities for being listed in the capital market should be easy like it is in India, the Philippines, Thailand and Vietnam, she suggested.
She also recommended to increase the compulsory limit of funding to SMEs by the banks and pressurise the banks to fund in risky ventures.
In another presentation on 'Interest Rate Sensitivity of Microcredit Demand in Bangladesh' by senior research fellow of Bangladesh Institute of International and Strategic Studies (BIISS) Mahfuz Kabir said there is huge concentration of membership and loan disbursement among the big micro finance institutions (MFIs). Top 10 MFIs have 84.2 per cent of members of the total members of top 50 MFIs and 83.7 per cent of the loan disbursement.
Interest rate charged by the big MFIs and frequency of payment that is instalment times during loan period are affecting adversely the loan demand by the borrowers which implies that lower interest rate and higher frequency of payment encourage greater amount of loan by the poor borrowers. But big MFIs are not interested to lower the interest rate or increase payment frequency which ultimately will hamper poverty alleviation through microcredit, he said.
Only Grameen Bank (GB) is still pro-poor and has the lowest amount of microcredit of Tk 14,000 while all other MFIs provides loan amounting, on an average, Tk 18,000.
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