An 'unfriendly' income tax law still discourages banks to focus more on SME lending, particularly ensuring their access to collateral-free loan although the small and medium enterprises (SMEs) have demonstrated their great potentials.
Former deputy governor of Bangladesh Bank Khondoker Ibrahim Khaled made the observation while talking to UNB in the city recently.
If the National Board of Revenue (NBR) rethinks about the income tax rule on collateral-free small loan provision expenses and changes its law then the banks will surely be encouraged to go for more SME lending, he expressed the hope.
According to the sources in the banking sector, the existing income tax law obliges banks to pay income tax on the 'provision expenses' created over any loan which is considered to be non-performing loan (NPL) and booked as classified one.
The 'provision expenses' mean that it would be added back to the operating profit which is also considered to be 'taxable' one under the income tax law.
As per a circular issued by Bangladesh Bank's Banking Regulations and Policy Department (BRPD) on October 23, 2012, the 'classified loans' are those which are classified as 'substandard', 'doubtful', or 'bad' ones.
The existing banking sector law makes it mandatory that any NPL will have to be mentioned and booked as classified loans while preparing banks' financial reports like the 'Annual Report'.
According to the bankers, those banks which operate a large part of their lending for the SME sector, specifically small enterprise sector with collateral-free loans, have to bear additional risks including its loan becoming NPL in the pretext of any shock in borrowers' business.
Usually, they said, the operating cost of the SME lending is higher than their large corporate lending as SME needs engagement of large manpower and logistics like separate SME branches, sales offices, collection offices for loans operation while large corporate loans does not need such large engagement.
Because, the bank officials said small collateral-free loans need intensive supervision and monitoring to ensure repayment by the borrowers.
For instance, according o them, if Tk 10 billion is disbursed as corporate loans to one or more large corporate houses, only 20-30 people is good enough for operating the whole process.
But if the same amount is disbursed among 12,500 small entrepreneurs giving each an average of Tk 0.80 million, it needs few hundred staff to operate the whole process, they added.
The small enterprises usually have a single line of cash flow and are very vulnerable to any shock in businesses that are resulted in from floods or natural calamities, which make them unable to repay the loans as per schedule thus making the loans non-performing (NPL).
"We believe, when banks provide loans to small sector, its impacts are multifarious as it creates employments and improves the quality of living of our citizens", said a senior Brac Bank official wishing anonymity.
So, SME lending banks should deserve a concession in regard to 'provision expenses' when they pay income tax, he added.
"If the NBR allows banks to keep its 'provision expenses' related to small sector lending as allowable expense, then more banks would be encouraged to focus on lending in small sector," said another bank official.
Another bank official said those banks which operate SME lending deserve a special incentive on their income tax payments. "Then the coverage of banks' SME lending get bigger," he said.
