The federal government stimulus packages must reach those who require it the most

Since March 25, 2020, the federal government of Bangladesh has unveiled 19 stimulus packages to help the economy get over the negative impacts of the coronavirus pandemic. This amounts to about Tk 103,000 crore and makes up about almost 3.7 percent of the Gross Domestic Product (GDP) of Bangladesh. For the Bangladeshi overall economy, that is a substantive amount, although the loss due to Covid-19 could be a lot more. The stimulus bundle contains support for export-oriented sectors, the service sector, cottage, micro, little, medium and large businesses, the agriculture sector and pre-shipment mortgage loan refinancing. It has been a timely move to help businesses revive their businesses and draw through their losses. Even so, the stimulus bundle is more of a liquidity support and significantly less of a fiscal stimulus since a lot more than 80 percent of the support is certainly in the sort of repayable loans to get disbursed by industrial banks. 

Almost four months in to the announcement of the stimulus package, the disbursement of the fund is negligible. Up to now, just the support for the export-oriented sector (generally the readymade garments sector) has been totally disbursed. A Tk 5,000 crore interest-no cost fund was allocated for the export sector with something fee of two percent. More than 1900 export-oriented sectors have borrowed from professional banks in April and could 2020 to pay salaries of their workers. Because of demand from the export sector, allocation for them has got been elevated twice to pay out salaries for the month of June and July 2020 aswell. Total support because of this sector today stands at Tk 10,500 crore.

Apart from the more robust tone of voice of the export oriented RMG sector, their capability to move fast regarding applying and getting the funds released has worked for them. They could receive cash beneath the liquidity support because they have frequent transactions with banks. Nevertheless, liquidity support for the different sectors remains mainly unutilised so far, despite the fact that Bangladesh Lender in a recently available circular advised the industrial banks to total their corona-related mortgage disbursements by the finish of August 2020.

Loans for the afflicted large industries and services total Tk 30,000 crore, which is provided at 9 percent interest to come to be split between the borrower and the government. The borrower will pay 4.5 percent interest and the government will pay 4.5 percent interest as subsidy. By July 2020, some Tk 10,000 crore was disbursed because of this sector. 

The progress on bank loan disbursement to the cottage, micro, small and medium enterprise (CMSME) sector is even slower. An amount of Tk  20,000 crore was announced as the functioning capital support to the pandemic-affected smaller businesses. This would be given at nine percent interest, of which the federal government can pay five percent interest as subsidy and the borrower must fork out four percent fascination. Till July 2020, a little over Tk 500 crore was disbursed for the CMSMEs.

This slow pace can be observed in the case of the special refinancing scheme equal to Tk 5,000 crore for the agricultural sector at four percent interest. The pre-shipment credit scheme amounting to Tk 5,000 crore for export-oriented industries has also not made any improvement.

In the setting of an already weak banking sector, the duty of featuring liquidity support to corona-affected sectors and businesses is challenging. During the last many years, the banking sector offers been experiencing poor management and lack of governance. Presently, the sector is definitely characterised by huge non-doing loans, escalation of mortgage write-offs, heightened rescheduling of default loans, scams, low net profitability and shortage of liquidity. On the other hand, federal government borrowing from the sector is normally increasing steadily. This may limit the scope for exclusive sector borrowing. And because of the demand for financing the corona-affected businesses, the banking sector will deal with further issues while operationalising the liquidity support deals.

Therefore, following announcement of the stimulus package, Bangladesh Lender had undertaken several measures to meet up the liquidity requirements of banking institutions. Included in these are lowering of REPO prices, reduction of Funds Reserve Ratio (CRR) and increasing advance deposit ratio (ADR).

Despite such steps, most sectors are not having the ability to receive funds. An important issue here is that banks will need to disburse to the afflicted entrepreneurs and take complete responsibility of risks attached to the loans. This is the main reason behind banking institutions to be reluctant to disburse loans. Banking institutions were advised to disregard the Guidelines on Internal Credit rating Risk Rating Program for Banks in the event of featuring liquidity support. This support should be provided predicated on bank-client relationships. Consequently, banks will be interested only towards entrepreneurs who've good relationships with banking institutions and also have regularly serviced their loans.On the other hand, the CMSME sector, which may be the worst hit due to the pandemic, happen to be facing problems in accessing loans. On the source side, banking institutions' costs of fund is approximately six percent at the moment. Functioning and administrative costs accumulate another five percent. Accordingly, banks feel that they will certainly not be able to recover the expense regarding small loans. A large part of the loan should be directed at remote areas because the CMSMEs are spread in the united states. This will boost the cost further. As well, banks do not have the capacity regarding vital networks and trained personnel to serve the micro business owners who often cannot afford any collateral. Banks cannot cover dangers and associated guidance costs from the interest of nine percent that is fixed by the federal government in the case of the stimulus package. Hence even though you will find a huge demand for loans from this sector, financial organizations are not giving an answer to this demand. On the demand area, micro-entrepreneurs usually do not feel relaxed to comply with the types of procedures imposed by banking institutions to acquire loans from these establishments.

So that you can help the damaged businesses, the central bank has to oversee the operationalisation of the stimulus deal so that the needy businesses are not deprived of liquidity support. That is important not only for the recovery of their businesses but also for creating employment.

You will find a demand for credit rating guarantee schemes to lessen the credit rating risks of banks attached to the loans directed at the CMSMEs. Under this credit rating guarantee scheme, the credit rating risk ought to be relieved by the central bank by absorbing part of the losses of the financing finance institutions. Recently, Bangladesh Bank has declared a credit guarantee scheme equivalent to Tk 2,000 crore for the CMSMEs, that will cover part of the risks of the lending banking institutions. It is hoped that this will improve lending to the CMSMEs beneath the stimulus package.

Banks are actually apprehensive of disbursing loans from a good commercial perspective. They come to mind about whether their funds will be repaid. Given the prevailing culture of high loan default, that is a justified concern. Mortgage loan defaulters may use this chance to take more loans and default once more. Indeed, several overseas organisations have alerted that emergency conditions could be conducive for vested passions and for exploiting open public funds for private gain.

Accordingly, close supervision of Bangladesh Lender at every stage of implementing the liquidity support package is critical. The objective ought to be to maximise mortgage loan disbursement to the needy enterprises and minimise the misuse and misuse of funds.