Home ›› 27 Jan 2022 ›› Editorial
Financial problems for cottage and micro entrepreneurs have been widely reported in the media. The pandemic situation has hit the CMSMEs really hard. Considering the overall situation, of late, Bangladesh Bank has come forward and announced the Credit Guarantee Scheme (CGS) for collateral free loans. Collateral is one of the primary requirements for availing loans from banks and financial institutions. Through CGS, collateral support will be extended by the central bank, even in case of defaulting; a significant amount of the burden will be borne by them.
Bangladesh Bank (BB) on 3 November, 2020 published 'Manual of Credit Guarantee Scheme (CGS)' for the banks and financial institutions via SMESPD Circular 4 on 3 November, 2020 to follow in facilitating loans for cottage, micro and small enterprises (CMSMEs). Objectives of the scheme are to support small entrepreneurs who cannot provide collateral but has full potential to develop entrepreneurship and thus creating employment.
The salient features of CGS manual includes; existing cottage, micro, and small entrepreneurs in the manufacturing, service, and trading sectors. Women-owned CMSEs will get priorities to obtain CGS. The portfolio guarantee limit will be determined each year with each Participated Financial Institution’s (PFI) signed agreement with the Bangladesh Bank.
The CGS Unit will bear loss up to 30 per cent of the portfolio guarantee limit of any PFI in the event of default, which will be termed as ‘Guarantee Portfolio Cap’. In a single loan case within the Portfolio Guarantee Limit, the loan will be covered up to 80 per cent of the principal outstanding. The valuation of collateral will be determined in line with the credit policy of the concerned PFIs.
The PFIs will have to pay guarantee fees under the participation agreement with the CGS Unit on an annual basis. Initial fund is BDT 2,000 core managed by Bangladesh Bank. A separate CGS unit so far distributed BDT 39 crore among 578 entrepreneurs, and BDT 61.59 crore has been approved and waiting for disbursement. The amount will increase further soon and the central bank through PFIs are planning to expand this fund among a number of small entrepreneurs.
Presently the range of loan is BDT two lacs to fifty lacs, BB believes that in some cases cottage and micro entrepreneurs requires even less to continue their entrepreneurships. So far, thirty-one banks and financial institutions have signed agreements with Bangladesh Bank and assigned focal points and established help desks to support small entrepreneurs. BB under the scheme has identified loan/investment eligibility criterion, ineligible business activities, eligibility and ineligibility of CMSME for CGS and also eligibility criterion for PFIs.
Bangladesh recently has gone even further with an announcement for collateral free loan for those who have 10/50/100 taka account, marginal/landless farmer and low income group people. In this respect a directives has been announced recently which will be named as financial service credit guarantee scheme. In that respect PFIs those who have agreement with financial inclusion department will also be able to sign participation agreement with CGS.
CGS is not new in developing countries. Korea instituted CGS since 1976 by the Korea Credit Guarantee Act- first independent public guarantee agency. It is an independent government sponsored non-profit legal entity providing access to credit for SMEs. Sources of funding are from government (45 per cent), banks through mandatory donations (50 per cent) and others including corporations (5 per cent). Korea Credit Guarantee Fund (KODIT) issues individual loan guarantee, eligible borrowers apply directly to KODIT as per advice of PFIs screens the application on a case by case basis. KODIT also offers a number of additional services for increasing the overall bankability of SMEs. Strong institutional mechanisms in parallel to its guarantee operations, is the strength of KODIT.
Guarantee coverage in Korea varies depending on credit rating and duration of guarantee usages. For borrowers with even low credit ratings, coverage can extend to 90 per cent, while borrowers with good credit ratings get a minimum of 50 per cent.
The Indian Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) was announced in 2000 by the Ministry of Micro, Small Enterprises and the Government of India and Small Industries Development Bank of India (SIDBI) to operate large-scale public owned CGS focused on micro and small businesses. CTGMSE coverage varies from 50per cent to 85 per cent as in Korea depending on the kind of borrower and amounts requested to facilitate working capital and term loan. Eligibility criterions are broad and start-ups are included. Small and micro-business in manufacturing and services sectors including those who lack collateral or third party guarantees are included as well.
The CGTMSE does not fall under the central bank’s supervision or even insurance regulatory authority of India. The scheme does not cover credit for retail trade, educational, training and academic institutions and self-help groups under micro finance. In respect of processing the loan, the PFI starts the online registration process and generates a unique identity number for each borrower on acceptance by CGTMSE. PFI then pays the one-time guarantee fee against each borrower, which is transferred online to CGTMSE within 30 days of disbursal of loan. Funds and assistance extended up to Rs 200 lac or USD 0.26 million with security fee and third party assurance is not mandatory. Guarantee amount varies depending on the amount, for small amount highest guarantee is assured.
Malaysia set up Credit Guarantee Corporation (CGC) in 1972 as a private limited company. It is 78.65 per cent owned by Central Bank of Malaysia (Bank Nigara Malaysia) and 21.35 per cent by the commercial banks in Malaysia. CGC has availed over 470,000 guarantees and financing to MSMEs valued at RM 75 billion or about USD 18 billion since its establishment. CGC has launched 40 different loan guarantee products including the Direct Access Guarantee Scheme, a loan fund for hawkers and petty traders and numerous guarantees targeting the Islamic banking markets.
CGC focuses on start-ups, specific sectors such as green technology and intellectual property and new growth areas like youth entrepreneurship. Coverage rates vary from 30 per cent-100 per cent depending on the type of guarantee requested. CGS of Malaysia initially focused on working capital and asset investment finance to small business in agriculture, commercial and industrial sectors, but recently expanded to include medium sized companies also. Maximum length is 42 months and loan amount between RM 10,000-RM 10 million, risk adjustment pricing structure is used which is linked to risk profiles of the borrowers.
Pakistan also joined the race and established CGS for small and rural enterprises in 2010. Guarantee coverage is 40-60 per cent, while 60 per cent coverage on loans extended to start-up businesses, women, and small and rural enterprises operating in under-served areas of the country. Duration of both working capital and medium term capital needs was increased to five years on 2013. Central Bank of Pakistan supervises the CGS.
It is seen from the analysis of the example of the countries that started CGS a long time back. Payment through automated services is available in most of the countries, meaning that digital education of the CMSME is a crucial point. Guarantee amount varies depending on the amount and risk. Korea has announced a Credit Guarantee Act and has been working as an independent public guarantee agency. In case of India it does not fall under the supervision of central bank, it is managed by a board of trustees while Malaysian CGC is working as a private limited company where a certain percentage is owned by its central bank. In case of Korea we have seen a portion contributed by the corporation also.
It is seen that CGS structure is different depending on the country context, coverage’s are also different depending on the cases. Bangladesh is to some extent new but progressing well, it is hoped that this type of funding would be able to support those entrepreneurs who cannot provide collateral.
Following example of successful countries a separate entity for CGS supervision can be established. According to Para 7.6.5 (proceeds of recovery) of CGS manual, failing to take all necessary steps to recover and regular reporting of the defaulted loan in question, the PFI may be imposed with a penalty, at the very initial stage the penalty issues in a policy may not give a good signal. It is stated that in case of non-recovery unrealised overdue of the loan/investment under CGS will be settled by the competent authority. Present limit of guarantee amount is small which is ok for the cottage entrepreneurs.
To qualify for a CGS, an entrepreneur needs some experiences. All profit seeking businesses are eligible except real estate, financial services or hospitality. Those announced as defaulter through CIB report, enough collateral deposited to a number of Banks and FI as per prudential regulations of Bangladesh Bank has been disqualified, CMS that already availed the CGS benefits, loan repayment arrears and announced to be a defaulter will be disqualified. In case of Bangladesh CGS is meant for short term loans and working capital. Duration of guarantee for a continuous loan is one year which can be increased further after following the process of renewal.
No doubt it is a good start. Some policy simplification for cottage and micro could really be helpful to address their financial needs and help create new employment. Bangladesh Bank should establish strong monitoring for addressing proper administration of the system so that CGS reaches to the really disadvantaged entrepreneurs.
The writer is Chief Executive Officer Business Initiative Leading Development (BUILD). She can be contacted at ceo@buildbd.org
