SME credit rating to \\\'reduce risk in capital management\\\'

CHITTAGONG, Mar 19: Credit rating in the SMEs (small and medium enterprises) has been opening a window of opportunities for banks and non-banking financial institutions (NBFIs) to reduce and hedge risk in portfolio and capital adequacy management.
When the SMEs are playing a very important role in the global arena, the maximum SME financing in Bangladesh is agro-based. Financing the SMEs is always venturous and challenging but desirable from national perspective and recovery point of view.
Experts from the credit rating agencies said Bangladesh Bank (BB), the central bank of the country, has recently decided to bring the SME sector under the purview of credit rating by imposing higher weight in calculating capital adequacy of banks and financial institutions on unrated clients.
Henceforth all loan exposures above Tk 3.0 million to small enterprises and loans to medium enterprises will face 100 per cent risk weight in capital adequacy calculation if these loans remain unrated.
Again banks having good rated SME clients can avail the advantage of even 20 per cent risk weight. Since most of the banks operating in the country has been doing transactions with clients at the minimum capital adequacy the decision of the BB has opened a window of opportunities for banks, said Muzaffar Ahmed FCMA, president and CEO of Credit Rating Information and Services Ltd (CRISL).
The CRISL arranged a seminar on credit rating of SME on Tuesday night in Chittagong for senior officers and executives of different commercial banks from the public and private sectors and the non-banking financial institutions of the region.
Over 50 executives and officers from different organisations attending the seminar sought advice from the credit rating experts and BB official as to how to tackle situation in connection to loan recovery.
An unrated exposure amounting to Tk 3.0 million and above of small enterprise will attract 100 per cent risk weight and any unrated exposure of medium enterprise will also carry 100 per cent risk weight. So, the BB through the BRPD (Banking Regulatory and Policy Department) on January 1, 2014, issued SME Rating Methodology and risk weight at different rating grades, sources said.
The CRISL considers both quantitative and qualitative factors in reviewing the SME operation. The methodology is comprehensive where review area concentrates on six broad categories, such as financial risk, industry risk, business risk, management risk, banking relationship risk and security risk, Ahmed said.
The year-wise SME data shows that disbursement of money for the SMEs by the BB in Chittagong division was highly satisfactory in the last calendar year. The BB disbursed Tk 169.82 billion against its target of Tk 144.82 billion in the region, 117.26 per cent against target.
KM Mustafizul Kabir, deputy general manager, SME and Special Programme Department of BB in Chittagong emphasised on compliance of the banks loan regulations while sanctioning loans to the clients.
"If you comply with the regulations while providing loans to the borrowers you will not face that much risk," he told the bankers attending the seminar.
He said that BB has been providing proper guidelines to the banks time to time and the role of credit rating agencies are also positive.
"Bank executives should adhere to the guidelines and awareness programmes to reduce and hedge their risks in portfolio and capital adequacy management," Kabir said.
The central bank disbursed SME loan of Tk 853.23 billion against target of Tk 741.87 billion throughout the country in the year 2013 (115.01 per cent), Tk 697.534 billion against target of Tk 590.1278 in 2012 (118.20 per cent), Tk 537.194 billion against target of Tk 569.40 billion in 2011 (94.34 per cent) and Tk 535.439 against target of Tk 388.58 billion in 2010 (137.79), Kabir said adding that the SME disbursement target for the year 2014 has been set at Tk 887.53 billion.
Director of CRISL and MD of Inland Securities Mohammed Mohiuddin, FCMA emphasised on developing a system of their own by the banks concerned through which they can recover their loans provided to the SMEs.
"Don't engage the BB to settle all your risk problems. It is the behaviour of the clients concerned on how you will assess and decide on granting loan," he added.