Credit Guarantee SchemeWB to provide $300m for CMSMEs

The World Bank Group has finalised a process to provide $300 million to the Bangladesh Bank’s credit guarantee scheme to facilitate access to finance for the cottage, micro, small and medium enterprises.

The international financial institution has held several meetings with various stakeholders of the government including the Bangladesh Bank since September 18 in this regard.

Meanwhile, the World Bank held its final meeting on this funding process with the Finance Division, Financial Institutions Division, Economic Relations Division and the Bangladesh Bank on Tuesday.

A high official of the central bank, who attended the meeting, said that this was a final meeting where the international lender finalised the process for providing $300 million investment project financing under credit guarantee scheme.

This project, which will facilitate access to finance for the small and medium enterprises, will support the post-COVID-19 recovery and growth of the CMSMEs, he added.

Key features of the fund for credit guarantee scheme

The scheme is intended to be financially sustainable, with revenues collected from the guarantee fees and returns on capital investment into eligible risk-earning assets, plus loss recovery in case of payout of a guarantee, as per the key parameters of a CMSME partial credit guarantee scheme under the World Bank project.

The guarantee fee will be around two per cent to be collected at the first disbursement and annually thereafter based on the guaranteed balance on the anniversary date of the loans.

Payment on a guarantee can be triggered upon 90 to 180 days of past due payment and the scheme coverage up to 70 percent per loans.

The scheme is designed to facilitate lending (working capital and term loans) to eligible CMSMEs subject to World Bank environment and social safeguards requirements, according to the key parameters of the scheme.

Welcoming such a move, the bankers said that the scheme would encourage them to issue more credit to small businesses without hesitation.

Demand for Guarantee loans

In a small survey conducted by the WB, lenders identified a lack of collateral and weak financial statements as two primary reasons for the credit growth decline in Bangladesh.

In another survey on 16 banks conducted by World Bank, two-thirds staff have expressed their rigidness while considering a guarantee before approval of some of the loans that were ultimately being declined.

Comments suggested that the reason for such loan decline would have an impact on whether the guarantee would be used or not and that the decision would be made on a case-by-case basis.

Three of the primary reasons for declining loan applications were-insufficient collateral, insufficient cash flow and weak financial statements.

BB formed its own credit guarantee scheme for CMSMEs

The BB in July, 2020 launched its own partial credit guarantee scheme worth Tk2000 crore for the CMSMEs. The dismal loan disbursement to the CMSMEs prompted the central bank to form such a scheme.

The CMSEs that lack adequate collateral would now be able to get bank loans, thanks to the scheme.

As of now, 277 borrowers have received collateral free loans under the central bank’ credit guarantee scheme, according to the central bank data.