The Role of Commercial Bank in Developing Small and Medium Scale Industries in Bangladesh

It is very important and crucial for overall development of the economy of the country. SME financing has developed a lot for last several years. Loan recovery rate is much more higher compared to the large organization loan which is also large in amount.

These issues have made the SME sector very investment friendly to many financial institutions. As a result, many financial and non financial institutions now actively contributing to this sector to develop themselves as well as to develop the financial condition of the country. So private and government commercial banks can play a vital role in financing small and medium scale industries in Bangladesh. As employment generation in this sector is much more than other sector, banks together with government should come forward with huge investment in this sector.

Almost every bank in Bangladesh has an SME cell and new products and initiatives aimed at SMEs are a common feature in the business page of the newspapers. It would seem that financing these SMES is guaranteed to pave the way for economic development in Bangladesh. Small & Medium enterprise development is a precondition for sustainable economic upliftment of a country like Bangladesh. It plays a dominant role for industrial development & provides employment facilities for work force. In light of its importance, Banks & other financial institution introduces SME finance in trading manufacturing & service industry to serve the entrepreneurs.

Small and Medium Enterprises (SME) in Bangladesh contributed 25% of gross domestic product (GDP) and 85% of the industrial jobs and 25 percent of the total labor force of Bangladesh in 2007 even though the prospective sector gets negligible facilitation from different support service providers. According to ADB, the country's estimated 6 million SMEs and micro enterprises firms of less than 100 employees have a significant role in generating growth and jobs. This is a sector that has its own distinct needs and requires specialized focus. Though the employment generation in the agricultural sector has been decreased during last decade, a huge number of unemployed people got employed in this small and medium enterprise. Some commercial banks such as Karmasangsthan Bank, Bangladesh Krishi Bank, Rajshahi Krishi Unnoyon have come up with some loans which are not sufficient to flourish this evolving sector. Some private and government commercial banks have launched their distinctive SME branch to foster this sector. To make this SME loans easy and available, Bangladesh bank formulated some new policies and guidelines. But still now, there are some problems in financing this SME sector.

The reasons that make the formal banks reluctant to lend to micro enterprises are:

a) Lending to small enterprises is perceived as very risky. The uncertainties that face a small industry, the high mortality rate, the susceptibility to market changes and to economic fluctuations, make banks reluctant to deal with these clients. Nonpayment, or even delayed payment, by a few major clients can cause the collapse of a small business. The mortality rate of small businesses is indeed high.

b) Parallel to the reluctance of banks to lend to small enterprises is the reluctance of these enterprises to borrow from banks. The administrative and costly formalities of obtaining bank finance, particularly the time and paper work involved, are a formidable deterrent to smaller businesses.

c) There is a distinct institutional bias on the part of banks towards lending to the larger corporate sector. In many cases there are links in directorships, joint ownerships and various other common financial dealings between banks and the large enterprises and automatically this induces preference for directing finance to these borrowers.

d) The administrative costs of lending to small enterprises are high, which cuts deep into the profitability of such transactions for lending institutions. This is undoubtedly the case and has been borne out in studies.

e) Small enterprises are unable, or unwilling, to present full accounting records and other documentation called for by banks. In most cases such records just do not exist, making appraisal of loan applications difficult.

f) Usually such small borrowers are unable to provide the collateral and security demanded by lending banks and other institutions before approving loans.

To attain the higher growth, there is no alternative to nurture this sector with huge investment. Loans sanctioned in this sector must be at tolerable interest rate. Single digit interest rate policy is very favorable for this sector. Only banks and other financial institutions can help evolve Small and Medium Enterprises.