Cottage and micro industry entrepreneurs are not getting loans from the government's Tk20,000 crore stimulus package for these businesses along with small and medium enterprises (SMEs) as banks are disbursing most of the loans to medium industries.
As a result, many cottage and micro industries are on the verge of permanently shutting down as they have no working capital to survive.
The Palli Karma Sahayak Foundation (PKSF) last week placed recommendations with the Bank and Financial Institutions Division of the Ministry of Finance to disburse the loans from this package declared four months ago through micro-finance institutions to resolve the crisis.
According to the PKSF recommendation, "It is assumed that the capital of these entrepreneurs has been exhausted due to their lack of capacity to survive a global calamity like Covid-19. If they are not provided with stimulus as soon as possible the earnings of around 2.06 crore families will decrease significantly or many enterprises could be shut down permanently."
The PKSF recommended a part of the Tk14,000 crore, which has been allocated for cottage and micro enterprises from the Tk20,000 crore stimulus package, be disbursed through microfinance institutions (MFIs).
It recommended that the banks get 5 percent interest subsidies from the government on these 9 percent interest loans. The banks would provide funds for the MFIs at six percent interest. The MFIs would then disburse the money borrowed from the banks to the cottage and micro enterprises at a 9 percent interest rate.
The PKSF also recommended that the Bangladesh Bank issue a circular in this regard.
If the recommendations are implemented, the MFIs would incur a 4 percent loss because their administrative cost is around 10-13 percent and debt consolidation reserves 1-2 percent.
To compensate for the loss, the PKSF recommended the banks provide funds to the MFIs for a three-year term. The MFIs would repay the money in 10 equal instalments on a quarterly basis with a six-month grace period. The MFIs would provide loans to the cottage and micro entrepreneurs on a two-year term.
Experts said it has been hard for cottage and micro industries to survive as the disbursement of loans from the stimulus package is late. A large number of cottage and micro enterprises will shut down permanently without immediate loans.
They said the banks will not be able to disburse loans to these entrepreneurs fast, so some parts of the disbursement should be implemented through MFIs and non-governmental organisations (NGOs).
Dr Monzur Hussain, a senior research fellow of Bangladesh Institute of Development Studies (BIDS) told The Business Standard, "It would be better if the disbursement was done through NGOs. It would be realistic too. Otherwise, implementation of this package will not be possible and the enterprises will be shut down."
"NGOs like Brac and ASA should be included in the disbursement process along with the MFIs under PKSF. Otherwise, the cottage and micro industry entrepreneurs will not get the benefits of this stimulus package," he added.
Sayema Haque Bidisha, assistant professor of the Department of Economics, Dhaka University, told The Business Standard, "Cottage and micro industry entrepreneurs do not have the capacity to pay the four percent interest included in the Tk20,000 crore stimulus package. It is not profitable for the banks to provide such small loans to these sorts of enterprises. So, disbursing loans through MFIs and increasing incentives for the cottage and micro enterprises could be better alternatives."
"They [lenders] need to go out of their way to provide loans for those who do not have legal documents. In that case, they can be given two to three months time to collect all the necessary documents after providing loans. Around five to seven people work in each of these enterprises. If they are not provided loans, these people will slip below the poverty line," she added.
Sirajul Islam, spokesperson and executive director of Bangladesh Bank, said, "The banks have been disbursing loans through MFIs in different sectors. There are no obstacles to using MFIs in this case. The Bangladesh Bank would consider any recommendation in this regard from the finance ministry or any other government agency."
A dependency on NGOs
Cottage, micro and small industry entrepreneurs mainly depend on NGOs for loans. Even in normal times, they do not get or take loans from banks.
According to Bangladesh Bank, in 2019, around 3.09 lakh cottage and micro industry entrepreneurs got loans from different banks and financial institutions.
PKSF found that 15 banks got Tk11,985 crore from the Bangladesh Bank as part of the stimulus package and disbursed Tk1,134.90 crore till July 23 – just 9.47 percent of the total allocation.
PKSF said most of the loans that have been disbursed have gone to medium enterprises while the cottage and micro enterprises have got only a fraction of the amount that they needed.
Businessmen alleged that the banks are reluctant to provide loans in this sector as there is a risk of loans defaulting. They said the banks also have administrative limitations including a shortage of branches in the rural areas of the country.
However, the bankers said the loan disbursement in the SME sector will increase soon under the stimulus package.
Selim RF Hossain, managing director of Brac Bank, told The Business Standard, "We have distributed a considerable amount of loans to small industry entrepreneurs. The matter of distributing more loans is being discussed. So, loan disbursement in this sector will be increased soon."
M Kamal Hossain, managing director of Southeast Bank, said, "We are getting more loan applications than before, so loan disbursement will increase."
PKSF said that 202 affiliate agencies under them have been distributing loans to cottage and micro industry entrepreneurs via their 10,370 branches in almost all the upazilas across the country.
Till January 2020, these agencies have a debt status of Tk13,118 crore – to 16 lakh cottage and micro industry entrepreneurs among 32 lakh entrepreneurs organised by them. The number of cottage and micro industry entrepreneurs organised by the MFIs listed under MRA – including Brac, ASA, BURO Bangladesh – is around 80 lakh.
MFIs want discount on interest rate
MFIs have been eager to disburse a part of the SME package as loans to the cottage and micro industry entrepreneurs; however, they want a discount on the interest rate.
They said it will be hard for them to disburse loans to the borrowers at a nine percent interest rate after taking them at a six percent interest rate from scheduled banks.
According to them, they will be able to provide loans at a nine percent interest rate if the Bangladesh Bank provides them money from the Tk10,000 crore refinancing fund created to implement the Tk20,000 crore stimulus package.
The MFIs are interested in providing the loans on one-year terms though the PKSF recommends them for two years.
The MFIs have been implementing a Tk3,000 crore package of the Bangladesh Bank for the Covid-19 economic recovery scheme. In this regard, they have been providing loans to low-income people, farmers and marginalised entrepreneurs at a nine percent interest rate.
They received the money from the central bank's refinancing fund at a 3.5 percent interest rate. They want the same interest rates in order to provide loans to cottage and micro enterprises from the SME package.
Abdul Awal, executive director of Credit and Development Forum (CDF), a platform of the MFIs, told The Business Standard, "It is not possible to disburse loans to the cottage and micro industry entrepreneurs without implementing the package through 759 MFIs certified from the MAR [Microcredit Regulatory Authority]. If MFIs disburse loans at a nine percent interest rate, it will be a loss for them considering their administrative costs."
"Still, we are interested in doing this because we need cottage and micro entrepreneurs to restart their businesses with the new loans. Otherwise, it will not be possible for us to collect our previous loans from them," he added.
Abdul Awal said, "It is not possible to say anything without reviewing the PKSF recommendation. The MFIs provide loans for one-year terms. It will be profitable if it remains the same in this case. If the MFIs have to provide the loans at a nine percent interest rate then the central bank will have to provide funds for us from the refinancing fund."
Mosharrof Hossain, finance director of BURO Bangladesh, said, "There will be no profit for the MFIs if they provide the loans at a nine percent interest rate. As we would disburse the loans with our existing workforce, it will not be a loss either. The government has announced the package to help the poor entrepreneurs. We will be there to implement the package even without there being profit."
Director of COAST Trust Tarik Sayed Harun told The Business Standard, "It will not be possible for us to provide loans at a nine percent interest rate after getting them at six percent. For this, the lending rate must be increased or some initiatives, like loans at a 3.5 percent rate that the central bank has been provided for MFIs to implement the Tk3000 crore package, should be taken."
"Poor and marginalised entrepreneurs get loans from MFIs without bribes, processing fees, or documents. This is not possible in case of banks. However, our administrative costs are higher than those of the banks as we have to go to each of the borrowers to supervise the loans and get instalments," he added.