Can credit rating be panacea for the SME industry?
Can credit rating be panacea for theSME industry?
Ashek Ishtiak Haq
ACCESS to finance has always ranked high in any survey that tried to find out the key hindrance to thedevelopment of small and medium enterprises. ‘Inability to access finance may be one of the reasons why we do not see a robust correlation between SME prevalence and economic growth,’ says the WorldBank. A MIDAS survey in 2004 found that only 18 per cent of the total funding for the SMEs is comingfrom the banking channel. Numerous microfinance institutions have emerged to lend money to thehardcore poor (whether it has done them any good is a debate we will not get into) and, at the sametime, large corporations continue to be pampered by a crowded banking industry. Although SMEsconsist of 90 per cent of all enterprises, provide employment for 87 per cent of the total industriallabour force (40 per cent of total population), contribute 25 per cent of the total GDP (Tk 741 billion in2003), it draws only 20.17 per cent of the total loan disbursed.Bankers consider SME a profitable sector which records high in credit risk. Regulators on the otherhand think it’s a winning formula to create employment opportunity (a 2005 study by the World Bank found that almost 48 per cent of employment in low-income countries is generated by the informaleconomy and SMEs), eradicate poverty (SMEs provide three quarters or more of the household incomein both urban and rural areas in Bangladesh) and technology transfer. The regulators who generally appear reticent to most of the issues have in fact adopted a more gung-ho approach towards thedevelopment of SMEs. Efforts such as the establishment of the SME Foundation, creating a Tk 665crore SME refinancing fund in the Bangladesh Bank (Tk 1,541 crore has been refinanced up to April2010), adopting a SME Credit Policy (the central bank set a target to disburse Tk 240 billion worth of loan for the SMEs), and opening up an SME department in the central bank are definitely laudable.Banks have enough reason to enter these segments, because, through financing SMEs, they can moveinto a huge untapped market, earn higher interest spread (six per cent), diversify their portfolio, accessrefinancing facilities, realise the yield and growth potential, comply with the regulations put forward by regulators, and earn CSR brownie points. However, SME financing is not a walk in the park as somemight have imagined in the beginning. The industry has its own challenges and peculiarity. The sheer
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