Government to relax collateral requirements

The government is set to introduce an innovative financing model as part of a new law to allow small businesses and startups to show their movable assets as collateral to feed entrepreneurs and help them get loans.

A bill on the collateral protection of movable property has already been formulated, according to an official from the Ministry of Finance. The ministry will submit it to cabinet by June 30 of next year for approval.

The law should give local tech start-ups a boost, as they still struggle to borrow from local banks and non-bank financial institutions due to lack of collateral given the nature of their business.

AKM Fahim Mashroor, Founder and CEO of and AjkerDeal, welcomed the initiative.

“Startups do not have land, fixed deposits or other assets to keep as collateral to obtain loans from banks. Thus, they are always deprived of the funding essential for growth and upscaling. . “

The entrepreneur, however, believes that banks will not grant loans despite the law unless the central bank sets a mandatory minimum disbursement target.

He called for setting a disbursement target of Tk 100 crore for local startups.

The bill is in line with conditions set by global development partners when they granted budget support to the government to help the country recover from the shocks triggered by the coronavirus pandemic.

The government is drafting the law because it wants to facilitate loans to at least 1,000 chalets, micro, small and medium enterprises (CMSME) and start-up units by 2024.

It will also establish a more conducive regulatory environment and introduce innovative financing modalities to overcome the CMSME guarantee problem and improve financial intermediation.

The government will help adopt an alternative credit scoring model using digital transaction data, integrating cluster and value chain financing, and promoting bank lending based on non-traditional collateral such as trade receivables. and warehouse receipts.

Under the proposed law, raw materials, gold and other precious metals, patents, copyrights, work orders, furniture, trees, vehicles, agriculture and processed foods and fishing will be considered as collateral.

Cluster and value chain financing policies and the adoption of alternative credit scoring models to offer digital loans will be introduced.

Among the initiatives, the digital credit system will start in December 2022, the cluster financing mechanism in September 2022 and the financing of the value chain in June 2023.

Limited access to affordable finance is one of the most critical constraints facing CMSMEs in Bangladesh: only 28 percent of CMSMEs have bank loans.

Banks are reluctant to lend to CMSMEs due to higher administrative costs and insufficient fixed assets as collateral, according to a government document.

Small and micro enterprises in rural areas do not have access to formal bank credit. As a result, they are forced to borrow at higher costs from microfinance institutions or informal non-banking channels.

At the same time, the coronavirus pandemic has pushed many CMSMEs to the brink of bankruptcy and precipitated the breakdown of upstream and downstream production networks.

Although the government announced numerous stimulus packages to boost credit flows to underserved CMSMEs affected by the pandemic, lenders were reluctant to extend credit.

CMSMEs, particularly owned by women and micro-enterprises in livestock, trade and services, are comparatively more affected due to their informal nature, poor financial literacy of owners and lack of sufficient assets to support them. cover loans.

Over 70 percent of CMSMEs are located in rural areas. They account for over 80 percent of non-farm employment and contribute to rural development and poverty reduction.

Although local startups receive next to nothing in the form of funding from banks and NBFIs in Bangladesh, global financiers are investing in it.

Bangladeshi start-ups have received $ 130 million so far this year, according to Dhaka-based consulting firm LightCastle Partners. Of the sum, $ 126 million came from international sources, as venture capitalists and angel investors view Bangladesh as an untapped market and with enormous development potential for startups.

Abul Kashem Md Shirin, Managing Director of Dutch-Bangla Bank Ltd, also welcomed the bill.

He says bankers generally don’t feel comfortable taking movable assets as collateral because it doesn’t give them control over the assets. There is no guarantee that the assets will not be withdrawn a day after acceptance of the collateral.

In such a scenario, the proposed law will bring comfort, he said.

Shirin says start-ups typically don’t have any assets, but a lot of them have business potential. “If we can have movable assets, copyrights and patents as collateral, the comfort level of banks will increase.”

“If we don’t lend them out, these startups won’t thrive in Bangladesh.

Funding for startups will come from a fund set up from the net profits of banks, Shirin said.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank Ltd, however, said startups should prefer equity, not debt.

“If they go into debt, how will they pay the interest? What will happen if they default? ”