Dhaka, Bangladesh
Lending rate cuts crucial for CMSMEs

Lending rate cuts crucial for CMSMEs

Bangladesh Bank has reduced the interest rate on loans disbursed from the refinancing fund set aside to support cottage, micro, small and medium enterprises (CMSMEs) to help them in crunch time. According to media reports, the central bank issued a circular over the issue on Monday. The circular instructed the banks to disburse the loans maximum at 6% interest rate among individuals. At present, banks and financial institutions disburse the loans at 9% interest rate. They, in turn, will now pay 2% interest to the central bank, with a 2% cut compared to the previous 4%. Moreover, the new rate will be effective from Nov 18. The government announced in April different stimulus packages for different industrial and agricultural sectors to ward off the adverse impact of Covid-19 on the country's business and economy. A sum of Tk 20,000 crore was earmarked for CMSMEs. But banks disbursed just 42 per cent of the sum among the CMSMEs as of October despite a repeated push from the central bank to complete disbursement at the earliest. One such push was the announcement in July of a credit guarantee scheme (CGS) worth Tk 2,000 crore for the micro and small enterprises for funds disbursed from the stimulus package. A CGS provides a third- party credit risk mitigation to lenders through the absorption of a portion of the lender's losses on the loans made to SMEs in case of default, typically in return for a fee. Banks get 80 percent coverage of a credit given to an individual or a company. The scheme is, however, yet to become functional as banks are continuing to go slow in channelling funds into the sector. Againt this background, experts and bankers suggested various options, including lowering the interest rates, for speedy delivery of the loans. The latest step by the central bank is apparently the result of such pushes. The step in question is crucial as the lending agencies blame a number of factors that hold them back from disbursing the loans that include the cost of disbursing such loans being high, while the returns on the funds not that satisfactory. CMSMEs generally do not have documents like credit report, audit report, VAT registration etc necessary for applying for the loans. Many of the companies lack any immovable asset to be kept as collateral with the banks. These also hold the banks back from responding to the loan appeals from CMSMEs in particular. However, one cannot deny that CMSMEs desperately need bank loans. Thousands of CMSMEs, which have been hit hard by the pandemic, are waiting for the stimulus loan to rejuvenate their businesses. The loan disbursed at low interest rates is considered by experts to render yeoman’s service to these entrepreneurs. On top of all this, the government allocated the stimulus loans for these affected enterprises as its commitment to help the latter cope with the pandemic onslaught. In other words, the lending agencies are bound to disburse the loans among CMSMEs only. It is expected that the decision in question will help accelerate the process of lending to CMSMEs without any delay. It should not be forgotten that CMSMEs are worldwide considered backbone of industrialisation as they are the key suppliers of raw materials and spare parts of the capital machinery of larger industries. They are the major players when it comes to ensuring employment for youths in all countries. The revival of the sector, which contributes about 25 per cent to Bangladesh’s gross domestic product, is imperative if the economy is to fire on all cylinders, as it was before the coronavirus arrived on these shores in March.

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