EDEN BUILDING TO STOCK EXCHANGE

Published: 05 July 2020

MSMEs need grant and collateral free loan

https://dailyasianage.com/news/234358/msmes-need-grant-and-collateral-free-loan

M S Siddiqui MSMEs are an important arm of economic growth and employment. As the coronavirus pandemic hit the economy, the Medium Small and Medium Enterprises (MSMEs) are worse suffer among the businesses. These MSMEs are now struggling to keep their businesses running as their sales are down drastically due to the countrywide lockdown. Some of those are completely at shut down during the lockdown period. Typically, SMEs run on a small amount of cash, but due to dwindling sales, their funds dry up. According to JPMorgan, the average small business has 27 days of cash in reserve, but Main Street businesses often have less than 20 days' worth. MSMEs are exporters of Non-traditional goods and reportedly, hundreds of orders from local and foreign buyers have already been cancelled. According to the Bangladesh Handicraft Manufacturers and Exporters Association (Banglacraft), the size of cancellation of purchase orders of exporters is about $40 million. Handicraft entrepreneurs have also suffered large losses at the local level, estimated at around Tk600 crore. During this lockdown, the market has lost two important festivals the Pohela Boishakh and upcoming Eid. Nearly half of their yearly sales is during Eid ul Fitre, according to MSMEs. They wait for business during Eid and Pahela Baishakh. As of normal practice, all the MSMEs invested heavily in the production of handicraft products. Now due to the disruption in transportation, many entrepreneurs are not even able to bring these products to their sales centres. The livelihoods of millions of people in rural areas are at risk. A large section of the rural population, estimated at about one crore artisans, especially women living on the margins directly depend on it for their livelihood. All the raw materials of the handicraft industry are indigenous such as jute, hogla, date leaves, palm leaves, paper, terracotta, tile, embroidery, bamboo, cane, carpets and so on. Handicraft exports earn over $150 million per year. The size of the local market of this industry is around Tk6,000 crore. Most of workers in MSMEs and handicraft sectors have no social protection and often and work on no work- no pay basis. These MSMEs need financial support to provide wages to these workers in this crisis period. Recently, Prime Minister Sheikh Hasina announced incentive package of Tk72,750 crore to offset the possible downturn due to the outbreak of the novel coronavirus. Under the packages, small and medium enterprises (SMEs) including cottage industry would get Tk20,000 crore as working capital. Bangladesh Bank also announce the policy of SME financing. The interest rate on the loans has been capped at 9 per cent, of which the government will subsidise 4.5 per cent, according to the notice.

The borrower will pay rest 4.5 per cent interest rate. The refinancing scheme has been set up to assist banks to refinance the SMEs. Banks that have the funds can disburse loans to the industry owners from it. But those who lack the funds can take low-interest loans from the central bank and disburse it at higher rates. In contrast, other countries has better packages for SMEs. Switzerland also provided by the Swiss banking system. But a total of 85 per cent of the loan will continue to be backed by the Swiss government and charged at a 0.5 per cent interest rate, while the lending bank will secure the remaining 15 per cent, charged at a more competitive rate. German government announced aid program would provide for a 100 per cent loan guarantee for companies with between 11 and 249 employees, while the first program provides for an 80 per cent to 90 per cent loan guarantee to bigger companies. The package worth €1.1 billion to provide loans and guarantees to the most endangered companies and also fund the acquisition of stakes in destressed businesses. Many countries around the world have introduced stimulus packages. Those includes deferral measures, to allow small businesses to postpone payments of VAT, utility bills, debt repayments and so on. Many countries are providing further financial support for MSMEs, from loan guarantees to direct loans and grants. The Tk20,000 crore concessional loan support announced will be hard to implement if this is not complemented by refinancing from the Bangladesh Bank (BB) and backed up by guarantee from the government. Recently, the World Bank has proposed $300 million to the Bangladesh Bank as support for forming a credit guarantee scheme to speed up lending by banks in high-risk sectors, especially to SMEs, during the pandemic. The UK government was forced to quickly revamp the new €330 billion Coronavirus Business Interruption Loan (CBIL) scheme after it emerged that a significant number of small businesses in the UK were being denied the loans and being offered different loans, some of which had interest rates of up to 30 per cent. A lender can provide up to £5 million in the form of term loans, overdrafts, invoice finance or asset finance. In UK government has also announced direct grants and also state guarantee for investment and working capital. The mode of such program is (i) State guarantees for loans taken by companies to ensure banks keep providing loans to the customers who need them. These state guarantees can cover up to 90% of risk on loans to help businesses cover immediate working capital and investment needs. (ii) Subsidised public loans to companies with favourable interest rates to companies. These loans can help businesses cover immediate working capital and investment needs. (iii) Safeguards for banks that channel State aid to the real economy that such aid is consider as direct aid to the banks' customers, not to the banks themselves, and gives guidance on how to ensure minimal distortion of competition between banks. (iv) Public short-term export credit insurance for all countries, without the need for the Member State in question to demonstrate that the respective country is temporarily “non-marketable”. CBILS includes six-month Capital Repayment holidays and by waiving overdraft fees with limits of up to £5,000. The NATWEST bank UK, a specialist financial institute working to fiance new ventures also came up for lending £5,000 without any mortgage and even any personal guarantee. The Portuguese government has also provided support for maintaining employment contracts by taking on most of the cost of a worker’s salary, even if they are not working.

The Spanish government announced that the state will guarantee around 80 per cent of unpaid loans to self-employed workers and small and medium-sized companies, which represent the bulk of Spanish businesses. These two categories will receive half of the first tranche in credit lines. This working capital loan package is on the basis of banker-client relationship and against sufficient collaterals. During normal period, Banks are hardly finance MSMEs without collaterals and the fund allocated by Bangladesh Bank remain idle. The prospect of utilization of these stimulus loan packages may not serve the purposes. According to an expert, Bangladesh's stimulus package was the highest in South Asia in terms of percentage of GDP, but only its announcement was not enough. The stimulus package in the form of soft loan on client-banker relationship basis also has another challenge. The Financial institutions never handled such a huge package. The financing, distribution and monitoring are the three main areas of concern. Administrative procedure to access new funding must be transparent and simple to enable rapid and easy access. The government has formed district-based monitoring committees across the country for smooth disbursement of loans for Small and Medium Enterprises (SME). The deputy commissioners have been given the responsibility of the convener of their respective districts while deputy general managers, managers and deputy managers in charge of the Industrial Support Center at the district level of Bangladesh Small and Cottage Industries Corporation (BSCIC) will perform as member-secretary. In addition, representatives of Bangladesh Bank and SME Foundation, presidents of District Chambers of Commerce and Industry, district presidents of the National Association of Small and Cottage Industries of Bangladesh have been included in the committees as members. The committees will ensure the transparency of the loans disbursement process and will solve any problem arises during the process locally In order to save these MSMEs, they should give financial support through interest free working capital, tax waivers, withdrawal of VAT, low cost long-term loan facilities for small and medium-sized firms to keep their production running in the COVID 19 period. Besides the financial support, the sector urged the government to defer utility payments, including gas and electricity, for at least six months. The writer is a legal economist Email: mssiddiqui2035@gmail.com.