Lenders are failing to implement the second phase of the stimulus package for the CMSME sector as clients struggle to repay the secured loans under the first round.
The majority of cottage, micro, small and medium business (CMSME) clients have recently asked lenders to renew their loans as their businesses are still struggling to recover and return to pre-pandemic levels, even if the crisis has abated, bankers and businessmen say.
In April last year, the Bangladesh Bank unveiled a stimulus package worth Tk 20,000 crore for the CMSME sector to protect it from the impacts of the coronavirus pandemic. Of the sum, 77 percent has been disbursed.
According to the rules, the funds, which are given in the form of working capital, must be repaid within one year from the date of disbursement.
The mandate for the first round of stimulus loans expired in June. The central bank has allocated another Tk 20,000 crore for the current fiscal year, as the economy has not yet returned to normal after the downturn. The stimulus program will continue for three years.
Sixty-three banks and non-bank financial institutions signed a participation agreement with the central bank to grant the loans.
They only loaned Tk 1,555 crore between July 1 and October 23 as part of the second round.
Fifty-nine lenders did not meet at least 25% of their disbursement target during the first quarter of the current fiscal year.
Twenty-five lenders disbursed less than 5% of their target, according to BB data.
The poor loan performance prompted a majority of lenders to inform the central bank at a meeting in the first week of October that it was difficult for them to disburse new loans because many clients do not repay their previous loans.
On October 20, the central bank ordered lenders to raise the disbursement rate to at least 50 percent by December.
Md Al Amin, focal person for CMSME’s stimulus plan at United Commercial Bank, said the industry had missed out on several business opportunities at cultural and religious festivals in recent months due to restrictions on movement.
“Thus, they have failed to make their businesses dynamic. Most of the customers ask banks to renew their loans to avoid falling into the default zone,” he said.
Loans are granted at an interest rate of 9%. Of the cost of the fund, 4 percent is borne by borrowers and 5 percent by the government.
Customers are not eligible for the interest subsidy facility after loan renewal.
“Given the current situation, it is difficult for lenders to disburse loans effectively because finding new, competent clients is a difficult task,” said Amin.
Emranul Huq, managing director of Dhaka Bank, said a number of clients recently informed the bank that they are now in a difficult position to ensure the desired performance of their businesses.
“Dhaka Bank is now making new loans to clients if they repay previous loans. Some clients pay off old loans to manage a new one.
Due to the increase in delinquencies, Nonperforming Loans (NPLs) in the SME sector may increase slightly in the coming months. The bad debt ratio in the CMSME sector is already higher than in other areas.
CMSMEs are the most affected sector due to the coronavirus pandemic.
The higher NPL of the stimulus loans would put lenders in a difficult position as the central bank deducts the money from the current accounts of lenders maintained with the BB if customers do not repay.
The stimulus fund works like a refinancing plan. Under this program, banks initially disburse loans to borrowers and BB repays lenders.
“Banks and businesses are afraid of the pandemic as the infection has started to increase in some countries. And the vaccination program in Bangladesh is not completed to a large extent,” said Syed Mahbubur Rahman, managing director. of Mutual Trust Bank.
“Both sides are watching the situation closely.”
Recovery of the stimulus package loans is unsatisfactory, but it makes sense given the current situation, Rahman said.
The maximum loan repayment term is one year, but the scars of the pandemic are so deep that CMSMEs are struggling to repay.
For example, Rizwan Rahman, president of the Dhaka Chamber of Commerce and Industry, believes that it is not possible for borrowers to repay loans on time.
He asked for an extension of the repayment period to two to three years and the maintenance of the interest subsidy.