The Japan International Cooperation Agency (Jica) will fund $82.87 million in the next fiscal year for food processing companies.
Jica has assessed that the country's capital demand for agribusiness is to the tune of $1.03 billion, and the Bangladesh Infrastructure Finance Fund Limited has taken a $113 million project to which Jica will contribute the fund.
The development partner will provide $82.87 million (Tk700 crore) in the first phase for the next fiscal year through the Food Value Chain Financing project.
It will extend its financial support gradually based on the performance of the beneficiary companies in using the fund.
Jica's new project proposal came after it surveyed the industry. It found that 60 percent of agribusiness and food processing companies have been facing difficulties in meeting their capital needs.
The survey attributed a lack of well-developed business plans, high-interest rates, and complicated loan application procedure behind less accessibility to finance for these companies.
Diversification, high value-addition and food safety management of the agricultural and processed products have not progressed in Bangladesh, the survey found.
The lack of refrigeration and storage facility and processing equipment makes the post-harvest loss rate as high as 30 to 40 percent in the country.
Both enterprises and financial institutions limit financial access in agribusiness and food processing industries, said the survey.
Borrowers will get such financing at a five percent interest rate.
Credit support will enhance the industry's capacity in business development, food processing, and food safety by providing concessional financing and technical assistance – which will in turn improve the food value chain in Bangladesh.
The survey report mentioned that agriculture in Bangladesh accounts for around 13 percent of the GDP and absorbs the work force in the rural areas. The industry has also been facing a challenge in diversifying its products.
Jica wants to provide financial support through a five-year project to promote the agriculture sector in line with the government's policy.
It recognises agribusiness and food processing industries as a high-potential sector in terms of export promotion and economic development.
The Jica survey found that the value addition rate in the medium-sized companies is lower than the rates of large and small companies due to inadequate access to finance.
In particular, the medium-sized industries do not have sufficient access to the public financing scheme for their investment.
Micro and small companies can receive financial support from the refinancing scheme by the Bangladesh Bank.
There is more space for medium-sized companies to strengthen the competitiveness of the whole industry.
The survey report said if the medium-sized companies could obtain enough financial and technical support, they would be able to produce a higher value-added product and to become the driver of the industry's growth and a major player for export promotion.
The support for the financial institutions to improve the lending in agribusiness and food processing industries is highly needed according to the report.
Some companies do not have a well-developed business plan, whereas financial institutions lack the knowledge and experience in credit protection and offer high loan interest rates and complicated loan application procedures.
As a result, diversification and higher value addition to their product as well as food safety management are inhibited by insufficient investment.
Capacity development for the potential end borrowers is also required to achieve the goal for the diversification and higher value addition to improve the food value chain in Bangladesh.
Jica offers a two-step loan to provide concessional finance through Bangladesh Infrastructure Finance Fund Limited (BIFFL). BIFFL will provide loan to the entrepreneurs.
The BIFFL is the biggest state owned non-bank financial institution in Bangladesh, having authorised capital and paid up capital of Tk10,000 crore and Tk2,010 crore respectively.
The financing agreement will be signed by this fiscal year and concessional financial support will be extended gradually in the next five to six years.
The interest rates of the loan to the government will be 0.65 percent. Subsidised loan from the government to the BIFFL will be at two percent interest.
On-lending loans from the BIFFL to the end borrowers will be of maximum five percent interest.
The government will take 30 years to repay with a grace period of 10 years. The government has to pay 0.01 percent of the total loan as a consulting service fee.
The BIFFL will have 15 years to repay the loan with a grace period of two years, said BIFFL officials.
The allocation of loan proceeds of the two-step loan to small and medium enterprises and large enterprises will be set as 40 percent and 60 percent respectively based on the financial demand estimated by the preparatory survey.
An entrepreneur will get maximum Tk50 crore as loan, however, the project working committee has the authority to approve more than the amount. The ceiling amount depends on the credit risks of the end borrowers.
Special attention will be given to industrially less developed areas in the project.
The maturity and collateral will be determined by BIFFL in compliance with the prevailing rules in Bangladesh.
The objective of the project is to improve credit for agribusiness and food processing industries.
Through credit, support will enhance their capacity in business development, food processing, and food safety by providing concessional financing and technical assistance.