In the past week, the central bank has sharply eased loan classification and provisioning rules, and offered credit guarantees, to try and address an unwillingness among banks to lend to small businesses.
Bangladesh Bank relaxed loan classification and provisioning rules for banks lending to the cottage, micro, small and medium enterprise (CMSME) sector as of last Tuesday (21 July).
Cottage loans are typically worth less than BDT 1 million; micro loans between BDT 1 million and BDT 7.5 million; and SME loans between BDT 7.5 million and BDT 150 million.
Under the new rules, banks can classify CMSME loans as substandard if no installments have been paid for between six months and 18 months. Previously this was between six and nine months.
CMSME loans will only be classified as doubtful if non-payment of loan installments persists for between 18 months and 30 months. Previously this was between nine and 12 months.
Loans that remain unpaid for more than 30 months will be treated as bad or loss – up from 12 months previously.
Bangladesh Bank also lowered the provisions banks have to hold against CMSME loans to:
- 25% provision for defaulted regular loans (down from between 0.5% to 5%)
- 5% provision for substandard loans (down from 20%)
- 20% provision for doubtful loans (down from 50%)
- 100% provision for bad and loss-classified loans (no change)
“We relaxed the loan classification and provisioning policy for CMSME sector to encourage participation of the banks in disbursing more loans to entrepreneurs,” Bangladesh Bank executive director Abu Farah Md Naser said in a Dhaka Tribune report.
In April, the central bank announced a BDT 200 billion stimulus package – to be used for bank lending to SMEs by August. However, banks have so far disbursed only BDT 2.5 billion of the funds.
On Friday (24 July), Bangladesh Bank additionally approved a credit guarantee scheme of BDT 2 billion to support CMSMEs which lack adequate collateral to apply for bank loans.
Under the scheme, private banks with less than a 10 percent NPL ratio will be able to make use of guarantees on working capital loans disbursed to the CMSME sector. State-owned banks can use the guarantee facility without conditions.
Banks availing the guarantee will not have to provision any the CMSME loans, even if they are reclassified.