NBFIs financing to SMEs thrives

Non-Bank Financial Institutions' (NBFI) financing to small and medium enterprises (SMEs) is thriving as the demand for loans is on the rise. 

In the past, SME entrepreneurs relied heavily on banks for obtaining loans. However, with the emergence of NBFIs, these entrepreneurs now have the advantage of accessing loans with greater ease and in a shorter period. This development has significantly contributed to the progress of small entrepreneurs within this sector.

The government's initiative to enhance the availability of finance for the SME sector, along with Bangladesh Bank's directives, has played a pivotal role in encouraging NBFIs to actively participate in financing small businesses.

However, sector officials highlight that the cost of funds for NBFIs is considerably higher compared to banks. Additionally, their sources of income are relatively limited in comparison. To address this, they express the need for increased participation in profitable sectors such as investing in SMEs. This necessitates access to low-interest funds and policy support to facilitate their involvement and growth in the SME sector.

At present, 35 NBFIs are operating in Bangladesh while the first one was established in 1981. Among them, IDLC Finance is in the leading position in financing the SME sector, which is followed by LankaBangla Finance, IPDC Finance and BD Finance. Others also have contributions but on a small scale.

According to Bangladesh Bank data, IDLC has a SME loan portfolio of Tk4,300 crore, LankaBangla around Tk2,200 crore, IPDC Tk2,000 crore, and BD Finance has Tk400 crore.

Adnan Rashid, Head of SME at IDLC Finance, told The Business Standard, "There is a huge demand for SME loans across the country. And we have relationship officers in every branch to provide easy financing and service to SME entrepreneurs. They go to entrepreneurs who are interested in taking loans and serve them. So no entrepreneurs need to come to our branch.

"We always try to disburse loans within four to five days of application. Because if you don't get the loan money on time, it is hardly useful," he said.

He added that they nurse and monitor loans all the time, which improves loan recovery.

"But we have challenges in financing this sector. One of these is that if the loan installments are not paid within six months, it becomes a default. And in case of default, 100% provision has to be kept against the loan. This increases the cost for NBFIs. Here the banks get some relaxation. We want to have equal opportunities like banks," he said.

SMEs form the backbone of Bangladesh's economy with an estimated 6 million establishments across the country according to Asian Development Bank, accounting for 25% of the country's GDP, 45% of manufacturing value addition, around 90% of industrial units, and 30% of the labour force.

According to the Bangladesh Bank data, the total financing to SMEs stands at around Tk220,500 crore in 2022, which was Tk 85,323 crore a decade ago.

The central Bank played a pivotal role in driving the NBFIs to boost their SME Portfolio. As per the instruction by Bangladesh Bank, financial institutions are bound to maintain 25% of their loan portfolio as SME lending.

Not only Bangladesh Bank, SME Foundation facilitated the SME market in numerous ways. Since 2010, SME Foundation has been implementing a special loan program called "Credit Wholesaling Power" to empower SME clusters, new entrepreneurs, rural entrepreneurs and women entrepreneurs to easily avail loans. Through various banks and financial institutions, the entrepreneurs are financed with small, collateral-free loans of 9% interest under the program.

However, the World Bank said the financing gap is severe in Asia. Bangladesh is no exception from the region having a total financing gap of $1.28 billion. The gap is higher for the women-owned enterprises in Bangladesh, according to IDLC Finance's monthly report.

Banks face significant difficulties in serving this segment. It is hard to measure risks of SMEs that often don't have hard collateral and transparent financial information, the costs to acquire and serve are high, it is challenging to grasp the firm's lifecycle and its growth factors – all this leads to the slow progress in SME finance and subsequently triggers the large finance gap, said the report.