A study on financing light engineering entities shows that most of light engineering small enterprises (LESEs) in the country do business with their own fund or non-formal credit rather than going to financial institutions.
According to the study, the financial institutions also show less interest to give credit to the LESEs citing many reasons including insufficient collateral, lack of proper documentation, lack of guarantor, absence of formal record keeping etc.
The survey, conducted on 197 LESEs covering Dhaka, Bogra and Chittagong, the three light engineering hubs, says only 23 per cent have debt from different sources and 77 per cent run their enterprises with their own equity inclining to the inherent nature of small business in the country. The study on the financing of light engineering sector was conducted by a team led by Bangladesh Institute of Bank Management (BIBM) Associate Professor Ashraf Al Mamun under the supervision of the institute.
Other members of the team were Assistant Professor of BIBM Md Masudul Haque, Assistant Professor Md Mosharref Hossain and Deputy General Manager of the Financial Inclusion Department of Bangladesh Bank Md Ashraful Alam.
The study is yet to be published. Â
Replying to the questionnaires, LESEs said they were less interested to go to financial institutions mainly due to difficulty and complexity in accessing to formal credits while they have easy access to informal credits with no formality for borrowing, no collateral, flexible instalments and availability of funds.
According to the survey, some 73 per cent banks cited the main reason behind the rejection of bank loan to be insufficient collateral, 66 per cent for lack of proper documentation, 59 per cent for lack of guarantors, 38 per cent for absence of formal records, 36 per cent for non-updated trade licence, 27 per cent for unregistered business, 22 per cent for mismatch between turnover and record, 19 per cent for insufficient business experience, 17 per cent for unreliable profit figure, 16 per cent for inadequate sales revenue, 14 per cent for lack of succession.
A total of 46 financial institutions, 29 banks and 17 non-bank financial institutions, have participated in the survey.
The study also pointed out several reasons for the unwillingness of LESEs to obtain loans from banks. Some 63 per cent respondents said high interest rate prevents them from going to banks while 51 per cent opts for easy access to informal loan, 47 per cent have own funds, 39 per cent find loan processing complicated, 68 per cent have inadequate collateral, 44 per cent do not have guarantors, 7 per cent termed borrowing is disgraceful. They have also said 'fear of inability to repay loans', 'fear that loan would not be granted', 'not knowing where to go' are the reasons for not going to banks.
According to 197 LESEs surveyed, some 113 have no access to formal credit, 84 have access, 73 have never applied and 45 applied but were refused by formal financial institutions. Â
However, 69 per cent banks said they do not have specially designed products for light engineering sector while 31 per cent replied in the negative about having special products.
In response to queries some 83 per cent banks mentioned the reason for high interest rate as credit risk, followed by 79 per cent as high monitoring and recovery cost, 68 per cent high cost of fund, 47 per cent high operational cost, 41 per cent low security coverage, 17 per cent high provisioning rate, 13 per cent vulnerability and 9 per cent probability of not utilising the loan.
The industry is manufacturing over 10,000 types of items for the local industries that include automobile spare parts, spare parts for railway engine and rail line, bicycle and cycle rickshaw parts, machine tools, machinery for jute and textiles, chemicals, sugar and food etc.
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Most light engineering entities do business with own fund
Ismail Hossain | Published: August 29, 2015 00:00:00 | Updated: November 30, 2024 06:01:00
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