Economic Reporter :
Businesses have said that the Credit Guarantee Scheme (CGS) can give relief to CMS enterprises if it implemented properly.
The Bangladesh Bank introduced the CGS for the first time aiming to ease financing support for cottage, micro and small (CMS) enterprises recently.
CGS would work as third-party credit risk mitigation to the banks/NBFIs through the absorption of a portion of the lender’s losses on the loans disbursed to the cottage, micro and small enterprises (CMS).
The CGS will be used in replacement of collateral issues that CMS is facing for quite long. Initially, this scheme facilities will be applicable for Stimulus Packages (SP) of Tk 20000 crore as a form of collateral-free working capital loan for giving support to the CMSME sector.
Many of the commercial banks in the country so far have shown their unwillingness to distribute loans from the stimulus package because of the current 9 percent lending cap and specially in financing CMSMEs because of the high operational cost for SME loans.
Upon the introduction of the credit guarantee scheme, the bank can get up to 30 percent portfolio guarantee cap of their CMS working capital portfolio where an individual or a company will get 80 percent coverage of a credit given by the banks.
Therefore, banks will avail the fund from the scheme if loans get unpaid by the borrower as per the agreement. As a result, banks will be interested in disbursing the working capital loans to the CMSMEs under the COVID-19 stimulus package.
Under this 30 percent portfolio of CMSME loan, 70 percent will be covered by the manufacturing and service sector (Cottage, micro and small) and rest 30 percent for trading sector. This bar can shrink the CGS operation as in the CMS sector there is a large number of business in the trading sector, said Business Initiative Leading Development (BUILD).
On the other hand the sectors will be identified as per the CMSME Master circular where there are- manufacturing sector will be 7 high priority and 24 priority sector of Industrial policy and service will be 33 sectors where the trading sector has not been defined.
However, the cost of this CGS is 1 percent of the loan may raise the cost of funds, a challenge for banks and also for the CMS enterprises. Banks will get this guarantee for the loan/investment amount of Tk 2-50 lac.
In case of current loan/ investment, the guarantee will be given for 1 year. But if the bank renews the loan/investment, banks/FI have to increase the guarantee time limit from CGS unit of the BB. Banks/other FI have to go for a participation agreement with CGS unit initially for 5years.
Banks and other FI have to provide the early guarantee fees. 1 percent of the pre-determined portfolio for the 1st year, after that, the guarantee fee will be 0.5 percent for those who sanctioned 5 percent or less loan/investment amount in the previous year and 0.75 percent for those who sanctioned more than 5 percent.
As the idea of CGS is quite new for our banking system, there is a need for more outreach and training for Banks/NBFIs to utilize this scheme smoothly. In India there similar 1 percent Guarantee Fee but in Malaysia there is no guarantee fee, tenure is almost same or Five years in these countries.
BUILD hopes that the credit guarantee scheme will help expedite the implementation of the government-announced Tk 20000 crore working capital loans for the cottage, micro, small and medium enterprises (CMSME).
Businesses have said that the Credit Guarantee Scheme (CGS) can give relief to CMS enterprises if it implemented properly.
The Bangladesh Bank introduced the CGS for the first time aiming to ease financing support for cottage, micro and small (CMS) enterprises recently.
CGS would work as third-party credit risk mitigation to the banks/NBFIs through the absorption of a portion of the lender’s losses on the loans disbursed to the cottage, micro and small enterprises (CMS).
The CGS will be used in replacement of collateral issues that CMS is facing for quite long. Initially, this scheme facilities will be applicable for Stimulus Packages (SP) of Tk 20000 crore as a form of collateral-free working capital loan for giving support to the CMSME sector.
Many of the commercial banks in the country so far have shown their unwillingness to distribute loans from the stimulus package because of the current 9 percent lending cap and specially in financing CMSMEs because of the high operational cost for SME loans.
Upon the introduction of the credit guarantee scheme, the bank can get up to 30 percent portfolio guarantee cap of their CMS working capital portfolio where an individual or a company will get 80 percent coverage of a credit given by the banks.
Therefore, banks will avail the fund from the scheme if loans get unpaid by the borrower as per the agreement. As a result, banks will be interested in disbursing the working capital loans to the CMSMEs under the COVID-19 stimulus package.
Under this 30 percent portfolio of CMSME loan, 70 percent will be covered by the manufacturing and service sector (Cottage, micro and small) and rest 30 percent for trading sector. This bar can shrink the CGS operation as in the CMS sector there is a large number of business in the trading sector, said Business Initiative Leading Development (BUILD).
On the other hand the sectors will be identified as per the CMSME Master circular where there are- manufacturing sector will be 7 high priority and 24 priority sector of Industrial policy and service will be 33 sectors where the trading sector has not been defined.
However, the cost of this CGS is 1 percent of the loan may raise the cost of funds, a challenge for banks and also for the CMS enterprises. Banks will get this guarantee for the loan/investment amount of Tk 2-50 lac.
In case of current loan/ investment, the guarantee will be given for 1 year. But if the bank renews the loan/investment, banks/FI have to increase the guarantee time limit from CGS unit of the BB. Banks/other FI have to go for a participation agreement with CGS unit initially for 5years.
Banks and other FI have to provide the early guarantee fees. 1 percent of the pre-determined portfolio for the 1st year, after that, the guarantee fee will be 0.5 percent for those who sanctioned 5 percent or less loan/investment amount in the previous year and 0.75 percent for those who sanctioned more than 5 percent.
As the idea of CGS is quite new for our banking system, there is a need for more outreach and training for Banks/NBFIs to utilize this scheme smoothly. In India there similar 1 percent Guarantee Fee but in Malaysia there is no guarantee fee, tenure is almost same or Five years in these countries.
BUILD hopes that the credit guarantee scheme will help expedite the implementation of the government-announced Tk 20000 crore working capital loans for the cottage, micro, small and medium enterprises (CMSME).
