Credit guarantee scheme and SOEs
State own enterprises (SOEs) play a major role in many developing and emerging economies, where governments use them to achieve economic, social, and political objectives, in order to deliver and extend services, fill gaps in markets, develop key sectors or regions and provide employment. These are one of the major sources of revenue of the government. The mixed objectives demanded of SOEs can include contribution to poverty alleviation, fiscal stability, spatial or sectoral development, environmental protection and sector regulation.
In many countries, SOEs have failed to perform due to inefficiency and corruption. There are some exceptions as well. In some countries, SOEs are successful in delivery of certain services such as primary education and primary medical services. One of the remarkable exceptions is the SOEs in China. Despite corruption and inefficiency, Chinese SOEs are playing an important role the economy until today.
The SOEs in Bangladesh is in a dismal condition. These are experiencing chronic loss despite preferential treatment in procurement, finance and sales. Government purchases from SOEs at a higher price while their cost of production is very high--comparing to private sector organization. These enterprises are short of fund and unable to pay back to financial institutions. These loan default case is not punishable under Artho Rin Adalat Act. Their outstanding loan amount, on June 30, 2021, reached Tk 738.36 billion or over 2.14 per cent of the gross domestic product (GDP).
The amount of outstanding loans of the SOEs is backed by the government's guarantees, surged by nearly 22 per cent last year, according to budget document of 2021-22. The government gives guarantees in favour of the Bangladesh Bank, Sonali Bank, Janata Bank, Agrani Bank and Rupali Bank at home. It also gives guarantees in favour of some overseas financial institutions such as JP Morgan, US Exim, HSBC, Exim Bank China and Exim Bank of India.
Some of the sector of enterprise has eaten up the lion part of this default loan. Such guarantees against the loans, amounting to Tk 416.9 billion or more than 56 per cent of the total outstanding loans, to the power sector. The Bangladesh Biman is the second largest recipient of such loans. It took Tk 109.09 billion to purchase aircrafts and spare engines under 15 projects. The Bangladesh Chemical Industries Corporation (BCIC) took guarantees for loans worth Tk 64.38 billion under its six projects.
The energy sector took credit worth of Tk 15.2 billion, and telecom sector took credit worth of Tk 11.08 billion for launching the Bangabandhu Satellite. However, agricultural sector credit worth Tk 49.67 billion. Other miscellaneous credit, mostly taken by the Trading Corporation of Bangladesh (TCB), Bangladesh Jute Mills Corporation (BJMC), Bangladesh Sugar and Food Industries Corporation (BSFIC) reached Tk 71.9 billion.
One the other hand, Bangladesh has much more challenges of finance and private sector investment. Private sector credit growth decreased further in April, mainly due to the second wave of the Covid-19 in the country.The growth in credit flow to the private sector came down to 8.29 per cent in April 2021 on a year-on-year basis, from 8.79 per cent a month ago, according to the Bangladesh Bank's (BB) latest statistics.In February 2021, the growth was 8.93 per cent.The growth was 6.51 percentage points lower than the central bank's target of 14.80 per cent for the second half (H2) of this fiscal year (FY), 2020-21.
SOEs can serve the nation only through efficient production of goods and services. They should face market completion to learn to be efficient and corruption free. Strengthening competition and regulation in SOE markets can help align the activities of SOEs with development and policy objectives. In order to face competition of private sector and perform in the level playing field, SOEs need five major types of reforms like corporate governance; business and operations; strengthening competition and regulation in SOE markets; privatization and other ownership reform; and macro, fiscal, and public financial management reforms.
The major policy adapted by many other countries is privatization of these enterprises. The potential for privatization varies depending on the business specifics of the SOE, and on the political culture and policy priorities of the nation in question. In some cases, mixed ownership, management between the government and private sector are successful to serve the nations. Privatization potential can also vary depending on the financial performance of the SOE.
Asian Development Bank (ADB) suggested in report of 2018 that, SMEs account for 96 per cent of all Asian businesses. Just as in other countries in Asia, the socio-economic impact of SMEs in Bangladesh is immense. SME sector is plagued with several snags that are constraining growth in the sector. Notable among these challenges is the limited access to finance for SMEs. Despite the many attempts to improve access to finance for SMEs in Bangladesh, these efforts have yielded minimal results. The best option of financing SMEs is Credit guarantee.
SMEs account for the majority of businesses worldwide and are important contributors to job creation and global economic development. They represent about 90 per cent of businesses and more than 50 per cent of employment worldwide. Formal SMEs contribute up to 40 per cent of national income (GDP) in emerging economies.
The sector is constrained by about Tk225b financing gap. The amount is half of non-performing loan blacked with SOEs. According to an English daily newspaper, about 27.5 per cent of SMEs have access to credit compared to 44 per cent of large firms. According to the World Bank, one of the key reasons behind this gap is SMEs' limited ability to provide collateral, which creates the perception of a higher default risk of SMEs compared to large firms.
According to the SME Policy 2019, from the Ministry of Industries, the SME sector in Bangladesh contributes close to 25 per cent of the country's gross domestic product (GDP). Data from the Ministry of Planning (Planning Division) reveals that between 2009 and June 2014, the SME sector contributed 15 lakh jobs in the country; accounting for 80 per cent of industrial employment and almost 25 per cent of the country's entire labour force.
The only option to increase investment in SMEs sector is through Public credit guarantee schemes (CGSs). It is a common form of government intervention to unlock finance for small and medium enterprises (SMEs). More than half of all countries in the world have a CGS for SMEs and the number is growing. SMEs in Bangladesh can easily access the required financial services at a lower cost. This will stimulate growth in the SME sector and boost economic growth, foster inclusive growth, shared prosperity, and reduce poverty.
Government should guarantee to SMEs for obtaining bank credit so the SMEs can play a due role the economy.
The writer is a legal economist