The Role of the Policy Makers and Central Banks in Promoting SMEs' Access to Finance Seminar Presentation April 8 2015

The Role of the Policy Makers and Central Banks in Promoting SMEs’ Access to Finance: The case of Bangladesh

SESSION # 1

Seminar Structure

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1. Rationale for SME in the Economy

2. Market Infrastructure Development

3. Enhancing Availability of Credit Information

4. Swift, Safe and Secure Banking

5. Funding Improvement for Borrowers

6. Recommend Changes to Current Interventions

Terms & Conditions

• Discussion not monologue

• Sharing of ideas

• Remember who benefits – SMEs

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• MISTAKES ARE ALL MINE

Rationale for SME in the Economy

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Photo credit: Various newspapers


• SMEs are labour intensive

• Create large numbers of jobs

• Engines of growth for the economy– Japan, Taiwan and Koreas’ owe their success in the

industrialisation process to SMEs

• As SMEs fail, more start-up to fill the gap

• SME survival and growth is a matter of national interest

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• All stakeholder take on well meaning programs to help SMEs

• Access to finance is often the top priority• Alone, one organization will not make much of

a difference• A coordinated effort that capitalises on each

institutions strength is needed• Duplication of work is wasteful

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Interventions when SME was not on anyone’s agenda

What need to happen: A Coordinated Effort

Interventions when importance of SME recognised

RECOMMENDATIONS

1. An overarching agency needs to coordinate the activities across all ministries and agenciesa) SME Ministry

b) SME Development Act

2. Roles of responsibilities of each organisation should be clarifieda) SME Master Plan

b) Entrepreneurship Development Plan

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Market Infrastructure Development

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Reach Enhancement• Focus on access to financial services not just

access to finance• Technology has provided the ability to reach

out to underserved markets• Development of branch networks and

alternative delivery channels• Proactive policy changes has enabled financial

institutions to enhance branch networks


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Mechanisms for Increasing Loan Supply

o Information provides the comfort needed to lend.

o Already in place with additional benefits possible

Credit Information Bureau


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Mechanisms for Increasing Loan Supply• Secured Transactions Registry

o RJSC

o BRTA

o Land Registry


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o Vehicles, industrial machinery and equipment

o Inventoryo Accounts receivableso Agricultural productso Consumer goods o Commodities

o Intellectual Property Rightso Negotiable instrumentso Letters of Credito Bank accounts and

insurance policies, etc.


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Mechanisms for Increasing Loan Supply• Specialized Finance Companieso Credit Guarantee Institution

Provide individual guarantees or portfolio guarantees

Mitigate perceived risk sustainably Efficient use of funds to encourage lending to

underserved markets


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Mechanisms for Increasing Loan Supply• Specialized Finance Companies

o Special Purpose Vehicles for Securitisation: Asset Backed Securities


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Bonds backed by loan repayment receivables Great source of liquidity for FIs FIs would continue to own part of the portfolio and be

responsible for repayment collection As part their effort to support SMEs, NBR needs to

agree to preferential income tax rate on securitized SME loans

Transferability of collateral, e.g. registered mortgages need to be made easier and less expensive


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SME Friendly Product Development• Leasing: Operating Leasing

o All size of businesses benefit

o NBR & BAS recognition


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The BAS has to recognise the difference between

capital lease and operating lease In an operating lease transaction, the lessor

continues to hold on to the asset after the lease

term The NBR has to recognise this and allow the

lessor to charge depreciation of the asset


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SME Friendly Product Development• Factoring

o With and without recourse

o CIB reporting of delinquent buyer


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SME Friendly Product Development• Warehouse Receipts Financing

o Law needed

o Registered warehouses needed


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Intermediary Organization Development• Capacity building programs for SMEs and FIs

o SMEF and BSCICo BBTA and BIBMo Private organisationso Roles need to be

agreed upon


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Intermediary Organization Development• Incubators o Provide

comfort to FIs

o Seed capital for start-ups may be tied to training and mentoring provided by incubators

RECOMMENDATIONS

• STR law already exists in Bangladesh. Just needs to be set up. It should allow for registry to be used for individuals and proprietors in addition to companies and partnerships

• Credit Guarantee Institutions should cover only those transactions that banks would not otherwise approve.

• NBR needs to allow tax break for investment in asset backed securities where the underlying assets are SME loans

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RECOMMENDATIONS

• Collateral transfer needs to be made easier– Mortgage and transfer of mortgage needs to be made easier and

cheaper

• NBR to recognise difference between capital and operating lease

• BAS to define operating lease• In a factoring transaction, if the buyer provides

assignment and does not pay or delays payment, the factor should be able to report the delinquency to the CIB

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RECOMMENDATIONS

• Warehouse receipts law should be drafted and enacted

o Receipts to be used as collateral

o Warehouse requirements and registration

o Warehouse monitoring company

• BIO: BSCIC and SMEF roles to be clarified in light of recent developments

• BIO: Incubators to be involved in the appraisal of start-up funding by BB

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Enhancing Availability of Credit Information

SME Database• BB developing a state of the art database

system• 100% of all MSMEs receiving financing• Quarterly updates• Geographic, Sectoral, Operational, Financial

and other information will be collected

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SME Database• Raw data should be shared with everyone

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Loan TypeLoan Purpose Number of Employees

Size of Business District-wise Lending Gender

Consumer Protection Law/Code of Conduct

• Correcting CIB reporting errors

• Transparent advertising of financial products

• Small debt resolution scheme to assist distressed SMEs

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Consumer Protection Law/Code of Conduct• Responsible finance

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o No over lending

o No pushing products that are against SMEs best interests

52% 35%

13%

CIB’s Role Enhancement • Very powerful CIB system• Positive information should be included• MFIs & Utility Companies to submit data

o Unique ID needed

• Credit rating information given access with customer consent

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RECOMMENDATIONS

1. BB SME Market Segmentation Database should be allowed to be accessed by stakeholders for conducting their own analysis

2. Advertising of financial product should be transparent and easy to understand

3. Responsible finance should be made part of the code of conduct on FIs

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RECOMMENDATIONS

4. CIB report error correction should be made easier so that borrowers are not adversely affected

5. CIB should collect and report both positive and negative information

6. MFIs and utilities companies should be allowed to report into the CIB

7. Credit rating companies should be allowed to access CIB information with consent from customer

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SESSION # 2

Swift, Safe and Secure Banking

Direct Support to SMEs• One stop information centre • Financial Services Cost Reduction

– Encourage financial inclusion by encouraging bank account opening

• Exclude excise duty on SME deposit accounts– Encourage best practice in lending to reduce

risks to banks and SMEs• Exclude excise duty on each loan disbursed

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Swift, Safe and Secure BankingDirect Support to SMEs• Problem Solving Centre for Distressed Loans

– All businesses have downturns– SMEs are often too weak to negotiate with Fis– SMEF and/or BSCIC can help SMEs negotiate

with FIs as a mediator to reschedule and restructure loans

– Training can be offered in financial planning and financial management to SMEs

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Swift, Safe and Secure BankingMobile Banking• Financial transaction security improved• Bank led model

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o Every bank will develop their own platform

o BB could license mobile banking service providers not tied to banks

Swift, Safe and Secure BankingAgent Banking• Physical presence and

direct interaction is still an important part of banking

• Agent functions should include financial literacy and advisory at loan origination

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Specific Bank Ltd.


Credit Guarantee Fund• BB is already collaborating on the

establishment of a CGF• It will be a portfolio guarantee scheme• Heavily MIS driven to ensure operational

efficiency• This is designed to be sustainable so that the

fund continues to offer comfort to FIs in lending to underserved segments

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Credit Guarantee Fund• Walking a fine line between encouraging

banks and disabling banks• Dependency on collateral can be reduced if

the CGF can demonstrate that guarantees don’t need to be called in most cases

• Once a specific segment of SMEs get funding, CGF needs to look at less included segments

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Swift, Safe and Secure BankingStandardized Loan Origination Procedures

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• All banks don’t want exactly the same information when making a loan

• However, 85% is identical• A capacity building program

that helps SMEs prepare this 85%, will increase and ease access to finance

• If one FI turns them down, SMEs can approach another FI very quickly

RECOMMENDATIONS

1. One Stop Service should provide to SMEs. It needs to be decided who will provide this

2. Excise duties on deposit accounts and loan disbursements for SMEs should be reduced/revisited

3. Assistance should be provided to SMEs with distressed in working with FIs. This role may be played by BB, SMEF and BSCIC

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RECOMMENDATIONS4. The CGF should have a cap on portfolio in line

with other leading guarantee schemes in order to reduce the risk to the fund

5. The fund should price the guarantees with sustainability as one of the most important mandate

6. The bank-led model may be revisited as it increases the cost of doing mobile banking for each bank. In its place may be a BB licensed independent mobile services provider

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RECOMMENDATIONS

7. Clarity on what Agents of bank can do is needed.

8. Agent compensation for services – how fees and interest can be shared – needs to be clarified

9. SMEF/BSCIC may develop a standard loan application form based on the requirements of all the bank – 85% are common

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SESSION # 3

Funding Improvement for Borrowers

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Didn’t you read the sign? We have 0% in giving you a loan.


Soft loans, refinancing, on-lending of government and/or donor funds

• Incentives are dynamic tools that are used to

encourage a certain behaviour

• Incentives need to be continuously monitored

• Business sectors may need to reassessed and

included/excluded from priority

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Funding Improvement for BorrowersCredit Ceilings• Underserved clusters need to be identified and

ceilings set on refinancing/pre-financing for each cluster:o Women Entrepreneurso Farmers/Agri-businesseso Sustainable Energy Financeo Geographic Limitation

• Urban caps and rural focus

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Vehicles of Finance• Loans

oLoan application assistanceoTraining of SMEs

• Credit GuaranteesoReduces the need for collateraloProvides comfort to the banks to lend

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• SME Equity & Venture Capital Fundso Alternative source of funds for SMEs which

are often available for deserving start-ups against preferred shares when no FI will lend

o Protection of VCs are needed especially when loans become involved as they are not involved in day to day operations

o SME stock exchange or SME class of stock within existing stock exchange

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Funding Improvement for Borrowers• Mobile and Agent Banking

o The reach that mobile and agent banking can provide will allow FIs to increase their portfolio of financial services accounts at very low costs

o Agents will be able to play an important role in financial literacy which will directly impact FIs ability to lend to remote SMEs

o Assistance provided by Agents and the ability to make and receive payments through mobile and agent premises will provide significant loyalty to the first mover in these areas.

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RECOMMENDATIONS1. All soft loan conditions should be revisited from

time to time2. Credit caps should be placed on all clusters/sector

a) Overall annual caps should be setb) Monthly caps for each would help ensure that at

least the FIs try to lend to the less popular clusters/sectors

c) Once the cap is reached, the FIs should be asked to lend to other clusters for every additional refinancing sought on the cluster/sector where cap has been reached.

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RECOMMENDATIONS3. Preference shares may be excluded from CIB reporting

for VCs so that they are not adversely impacted if one of their investments defaults

4. SME stock exchange or SME class in existing exchanges may be introduced

5. There needs to be clarification on whether Agents can conduct financial literacy trainings and sales of loan products

6. There needs to be more clarity on how the fees and interest income will be shared with agents so that they can become sustainable

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Recommend Changes to Current Interventions

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• The recommendations made throughout the presentation have been split based on three criteria in the paper:

o ‘Quick Hits’

o Medium Term

o Longer Term

Last Question

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Documents

The Role of the Policy Makers and Central Banks in Promoting SMEs' Access to Finance Seminar Presentation April 8 2015