SME credit policy
Tuesday, 30 March 2010
THE central bank late last week announced, for the first time, a credit policy for the country's small and medium enterprises (SMEs). The Governor of the Bangladesh Bank (BB) released the policy following discussions with the chief executive officers (CEOs) and the managing directors of the country's commercial banks held at the sea resort town of Cox's Bazaar. Along with the policy, the central bank also has set an ambitious target of disbursing Tk 240 billion as credit in the calendar year 2010 among SMEs that are considered important because they have the potentials to create enough employment opportunities at lower level of investments. What is more important is that SMEs usually use locally available inputs and technologies and gather small and scattered savings and encourage entrepreneurship.
However, SMEs, notwithstanding their important role in the country's economy, did not, for long, receive the patronisation that they deserved either from the state or the financial institutions. Even one and half decades back, neither the policymakers nor the banks paid much attention to the SMEs; policies used to focus primarily on macro- and micro-level enterprises. The government and the banks used to deal with matters relating to financial and policy supports for large and medium enterprises, industrial or otherwise. And financing the micro enterprises has been the job of a large fleet of non-governmental organisations (NGOs). Actually, there was none to look after the interests of small enterprises. But there was a change of heart from the middle part of the last decade when policymakers started talking about promoting SMEs. The industrial policy for 2005, came out with some specific definitions of large, medium and small enterprises both in manufacturing, non-manufacturing and services sectors on the basis of their assets and employment sizes though there were some loopholes in the same.
But banks have not shown any notable interest in lending to SMEs because of high risk and high supervision cost involved in it. Despite the fact that financing remains at the top of the list of problems faced by the SMEs, their inability to provide collateral against loans remains a disadvantage. And more importantly, the majority of them are in dire need of operating fund than investment fund. To meet both the demands, commercial banks are required to scale down their operations to reach out the smaller segments of the market with smaller loans. The central bank exactly has been trying to encourage the banks to take up that role and made available refinancing facilities to them with clear advice to extend credit to more and more SME entrepreneurs. But the fact remains that except for a couple of banks that have innovative products for SMEs, most banks have not able to meet the expectations of the central bank.
The SME loans offered by banks do still carry lending rates almost equivalent to those charged on loans to large enterprises. Moreover, not many banks are willing to provide operating funds to SMEs. Besides, overall disbursement of credit to women SME entrepreneurs has been low. Hurdles to growth of SME credit to the level desired by the central bank are many and those do not have quick-fixes since banks cannot be forced to invest in businesses that carry more than usual risks and are not rewarding, in terns of return. So, to get its ambitious SME credit programme materialised, the central bank would have to address the issues that have been discouraging the banks in making adequate funds available to the SMEs. And the banks on their part do also need to make a few sacrifices in recognition of the important role that the SMEs can play in the country's economy.
However, SMEs, notwithstanding their important role in the country's economy, did not, for long, receive the patronisation that they deserved either from the state or the financial institutions. Even one and half decades back, neither the policymakers nor the banks paid much attention to the SMEs; policies used to focus primarily on macro- and micro-level enterprises. The government and the banks used to deal with matters relating to financial and policy supports for large and medium enterprises, industrial or otherwise. And financing the micro enterprises has been the job of a large fleet of non-governmental organisations (NGOs). Actually, there was none to look after the interests of small enterprises. But there was a change of heart from the middle part of the last decade when policymakers started talking about promoting SMEs. The industrial policy for 2005, came out with some specific definitions of large, medium and small enterprises both in manufacturing, non-manufacturing and services sectors on the basis of their assets and employment sizes though there were some loopholes in the same.
But banks have not shown any notable interest in lending to SMEs because of high risk and high supervision cost involved in it. Despite the fact that financing remains at the top of the list of problems faced by the SMEs, their inability to provide collateral against loans remains a disadvantage. And more importantly, the majority of them are in dire need of operating fund than investment fund. To meet both the demands, commercial banks are required to scale down their operations to reach out the smaller segments of the market with smaller loans. The central bank exactly has been trying to encourage the banks to take up that role and made available refinancing facilities to them with clear advice to extend credit to more and more SME entrepreneurs. But the fact remains that except for a couple of banks that have innovative products for SMEs, most banks have not able to meet the expectations of the central bank.
The SME loans offered by banks do still carry lending rates almost equivalent to those charged on loans to large enterprises. Moreover, not many banks are willing to provide operating funds to SMEs. Besides, overall disbursement of credit to women SME entrepreneurs has been low. Hurdles to growth of SME credit to the level desired by the central bank are many and those do not have quick-fixes since banks cannot be forced to invest in businesses that carry more than usual risks and are not rewarding, in terns of return. So, to get its ambitious SME credit programme materialised, the central bank would have to address the issues that have been discouraging the banks in making adequate funds available to the SMEs. And the banks on their part do also need to make a few sacrifices in recognition of the important role that the SMEs can play in the country's economy.