Credit guarantee scheme holds the main element to successful implementation of stimulus packages

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The federal government has allotted a lot more than Tk 1 lakh crore, which is 3.7 % of the GDP, under 19 different 'stimulus plans', to mitigate the monetary ramifications of the coronavirus pandemic and kickstart our monetary recovery.

The Bangladesh Bank (BB), in addition has taken various policy measures to improve the banking sector's liquidity and support the roll-out of the stimulus packages and several other customer-friendly initiatives.

These government stimulus packages are incredible initiatives, the effective implementation of which, we believe, will contribute strongly to the recovery of the Bangladesh economy.

The majority of the stimulus packages are made to be delivered to afflicted enterprises in sort of credit (or loans) at subsidised rates.

The BB will lend funds beneath the stimulus package to banks, who, in turn, will be in charge of the roll-out of the loans to individual customers.


Basically, the banking sector will take on board all customer credit risk.

This pandemic comes at the same time when Bangladesh's banking sector has already been reeling from the consequences of many years of high unproductive loans and tight liquidity.

On top of it all, the BB imposed a 9 % lending level cap from April 1, which led to banks losing between 20 per cent to 35 % of their customer financing interest income.

The lending rate cap provides banking sector little or no room to implement any professional risk premium in loan pricing and there is justifiable apprehension that, in this environment, few banks could have any risk appetite for the inherently riskier cottage, micro, small and medium enterprise (CMSME) business segment.

What can help this is a credit warranty scheme (CGS), which provides third-party credit risk mitigation to lenders through the absorption of a portion of the lender's losses over loans designed to different customer segments in the event of a good default, typically in return for a fee.

The CGS is specially used to inspire banks to lend to comparatively riskier segments including the CMSME.

Most countries in the world have some type of CGS for CMSMEs and these schemes have invariably been incredibly effective in exponentially growing CMSME credit on those countries.

A shop around South and South East Asia, not forgetting more developed countries, gives one a fairly clear idea concerning how the CGS is used to encourage banks to get into and grow the CMSME organization.

The banking sector possesses been requesting a CGS for quite some time now and, in the current circumstances, the need for such a scheme appears even more relevant. 

It really is reliably learnt that the Environment Bank is now offering a $300 million support to the BB to create a CGS for CSMEs.

The central bank has put together a first cut CGS and has shared the same with relevant stakeholders because of their feedback.  It is expected a CGS will end up being rolled out shortly.

An effective CGS will be crucial to the overall expansion of the CMSME segment on Bangladesh and, specifically, the good implementation of the government's CMSME stimulus package.

Of lessons, the CGS must be designed such that the entire proposition is commercially viable and easy to get at by both the person customers and the participating banks.

A good poorly designed CGS will never be accepted or perhaps executed by relevant stakeholders and will not serve any purpose.

We believe this is an extremely opportune moment to talk about Brac Bank's a long time of encounter in the Bangladesh CMSME segment and our ideas about how an effective CGS ought to be designed. The CGS should:   1. Plainly define eligibility and qualification standards for FINANCE INSTITUTIONS (lenders) & CMSMEs.  

i) Concentrate on the micro, cottage and little segment with distinctive incentives for women-owned businesses. 

ii) Cover both working capital (i.e. operational expenditure) and longer-term expense (capital expenditure). It is tough to differentiate between capital and doing work expenditure in a CMSME business owner and you need to not try to do so. Access to credit is most significant for the CMSME entrepreneur and he/she will learn how to utilise the funds. 

iii) Not end up being restricted by sector classifications, all sectors of the CMSME segment (manufacturing, provider and trading) should be equally covered   iv) Accommodate the re-structuring and re-scheduling of loans for better portfolio operations.  

2. Ensure that CGS is client- and bank-friendly and may become quickly rolled out. 

i) There are actually two main methods to a CGS: the individual strategy (guarantees provided on a 'loan by mortgage' basis) and the portfolio way (banks are allowed to report guarantees on a portfolio basis). We strongly recommend that the portfolio methodology is employed in Bangladesh since it will allow the lender to react quickly and reach a more substantial number of smaller sized ticket SME borrowers. The size and scale of the Bangladesh CMSME segment are in a way that a 'loan by mortgage loan' approach is normally impractical  ii) The loan ticket size of SME debtors in Bangladesh ranges between Tk 5 lakh and Tk 1 crore. The CGS should support this selection of SME loans. 

3. Concern partial guarantees that adhere to prudential regulation and offer capital relief to loan providers.  

my spouse and i) The CGS should mitigate banks' risk through the guarantee insurance policy coverage ratio, which is often expressed as a percentage of the underlying mortgage exposure. The guarantee insurance coverage ratio ought to be high more than enough to actively encourage banking institutions to participate. In today's economical condition, the guarantee coverage ratio shouldn't be lower than 80 per cent. 

ii) CGS also needs to set a good cap on the maximum amount claims which will be accepted by the CGS. Our knowledge, and the portfolio overall health of the banking sector's current CMSME segment, suggests a cap of 30 per cent is appropriate for normal situations. In today's pandemic circumstances, the BB might even consider extending the CGS up to 50 per cent.  iii) The CGS should provide capital alleviation to the banks for the proportion of the underlying loan exposure covered by the guarantee. 

iv) The CGS should not impose new credit assessment requirements (e.g. 2/3 years' financial, organization length, etc.); it will count on the bank's internal credit assessment system.  

v) The loans guaranteed by the CGS should adhere to the prudential restrictions for loan damage classification.  

vi) CGS should allow loan providers to exclude the portion of the bank loan guaranteed by CGS during mortgage loss provisioning. 

4. Place a transparent and regular risk-based pricing coverage to make certain that the guarantee programme can be financially sustainable and attractive for both SMEs and lenders.  

i) The pricing ought to be variable and should promote prudent credit rating culture over the financial sector by offering lower costs to banks with decrease default loans. 

ii) CGS fees ought to be commercially viable, and no more than 00.5 % for banks with low default loans. Larger guarantee fees will make the CGS unattractive to loan providers.  

iii) The CGS should allow finance institutions to reimburse the credit rating guarantee charges from the debtors (SMEs) themselves.  

5. Design an efficient, obviously documented, and transparent say management method providing incentives for mortgage loss recovery, and become aligned with the local legal and regulatory framework.  

i) The procedure of inclusion of loans found in CGS and triggering promises ought to be fast, efficient, and transparent -- the entire process should, ideally, get digitised.  

ii) The credibility of the CGS largely will depend on how claims are actually handled once they experience been submitted. The complete instances under which a case can be made should become evidently articulated in the contractual arrangement between your CGS and the lender. 

iii) The CGS must have a minimum mandatory waiting around period after mortgage loan disbursement before a promise could be entered. Our knowledge suggests this waiting around period ought to be 180 times, as the tenor of the loans made to the CMSME segment is normally short-term.  

iv) The CGS must have the capability to check and restrict multiple claims from an individual entrepreneur through different loan providers.

A well-designed CGS will be a major step of progress in the country's work to grow the entire CMSME lending, which, alone, is a key developmental agenda.

We believe that a powerful CGS will accelerate not merely the disbursement of cash from the government's brand-new CMSME stimulus package, but as well give impetus to the prevailing portfolios at different banking institutions and, simultaneously, encourage banks, who've not yet used this segment, to release their new portfolios.
Source: https://www.thedailystar.net

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