The World Bank has proposed $300 million to the Bangladesh Bank as support for forming a credit guarantee scheme to speed up lending by banks in high-risk sectors, especially to SMEs, during the pandemic.

Lila Rashid, a general manager at the Bangladesh Bank, confirmed that the central bank had started working on the credit guarantee scheme.

However, she said this was still in the initial stage and it would take two or three months to complete the work.

According to the initial implementation plan, the credit guarantee will not be given on individual loans, rather it will be given on a bank's portfolio based on risk measurement.

Small, micro and cottage industries will mainly be entitled to get credit guarantee support, said a senior Bangladesh Bank executive.

Banks will have to pay a price for availing such guarantee schemes similar to insurance premiums, he said.

The central bank will seek the opinions of the banks in this regard.

Prior to the coronavirus outbreak, the Bangladesh Bank had a plan to form a credit guarantee scheme only for women entrepreneurs.

But the central bank is now planning to cover the entire small and medium enterprise (SME) sector as banks are shying away from disbursing loans under the stimulus package because they think there is little hope of recovering the amount from virus-affected small businesses.

In 1992, the government had started a credit guarantee scheme on a small scale and the Bangladesh Bank was responsible for managing the fund. But it ultimately failed mainly because of individual guarantee. Clients knew about the guarantees against their loans and thus lost the motivation to pay them off.

Based on this experience, the Bangladesh Bank has decided not to give guarantee support against individual loans this time around, said a central bank source.

The demand for a credit guarantee scheme came from bankers after the government announced two stimulus packages – one for the industrial and service sector worth Tk30,000 crore and another for SMEs worth Tk20,000 crore – to support affected businesses.

In the guideline of the stimulus packages, the banks were given full responsibility for recovering the loans. Should they fail, the Bangladesh Bank will deduct interest subsidies given by the government from their accounts.

As a result, banks are delaying the disbursal of loans under the stimulus packages despite a huge number of applicants.

The Bangladesh Garment Manufacturers and Exporters Association (BGMEA) recently found in a survey that out of 139 top exporters, only four have received loans under the stimulus package, which is only 2 percent.

This situation is reflected in the private sector credit growth, which dipped to a historic low at 8.20 percent in March, said BGMEA President Rubana Huq.

The Association of Bankers, Bangladesh (ABB) recently sought a credit guarantee scheme to protect loans under stimulus packages.

Only big groups will enjoy stimulus packages as banks are reluctant to provide loans to small businesses under the stimulus package due to high risks, said Syed Mahbubur Rahman, former chairman of ABB and managing director of Mutual Trust Bank.

He said the credit guarantee scheme will speed up loan disbursement under the stimulus packages.