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Banks directed to lower SME lending rate

Star Business Report
The central bank cautioned all commercial banks yesterday for charging high interest rates for loans by distorting the definition of small and medium enterprises (SMEs).
Bangladesh Bank (BB) also expressed displeasure over the banks' preparation to implement Basel II from next year.
BB made these observations at a meeting with the chief executives of all scheduled banks, with BB Governor Dr Atiur Rahman in the chair.
“We observed that banks define SMEs as they wish and charge up to 18 percent against loans." BB Deputy Governor Nazrul Huda told reporters after the meeting at his office.
"Banks place the SME loans under other categories where the interest rate is high," he said.
Huda said the governor directed banks not to charge a high rate for SME loans anymore.
Other topics discussed at the meeting are -- disbursement of farm credit, implementation of BASEL II, introduction of the Dhaka Inter Bank Offer Rate or DI BOR and progress in launching the Bangladesh Automated Cheque Processing System.
The BB deputy governor said the biggest impediment to SMEs is lack of capital, while banks remain reluctant to lend to small entrepreneurs despite the central bank's continuous efforts.
Currently, only 21 percent of the banks' total loan portfolio is dedicated to SMEs, which is 50 to 60 percent in other countries, Huda said.
“SME loans have increased by only 2 percent in the past two years, which is much lower than expectation," he said. "If we can raise the banks' total loan portfolio to 50 percent, the outlook of the nation's economy will change."
He asked the banks to change their mindset towards SMEs.
The deputy governor however admitted that banks are unwilling to issue small loans due to the high monitoring and supervision costs.
To achieve farm credit targets, Huda said BB has decided to monitor it strictly.
“There will be a three-tier monitoring system for farm credit- the bank itself, BB branches and the BB headquarters," he said.
BB targets disbursement of Tk 11,500 crore this fiscal year.
On the implementation of Basel 11, a core risk management guideline for the banking sector, the deputy governor said most banks are not ready to adopt it.
According to a BB decision, all banks in Bangladesh should implement Basel II from January next year.
“Nine foreign banks and only seven private banks are ready to adopt Basel II," Huda said. "The four state-owned banks are lagging behind in capital formation."
“It will be tough for the remaining banks to implement the system if they do not prepare a plan of action
immediately," he added.
Banks have to raise their paid-up capital to Tk 400 crore under the Basel II framework and be strict towards credit risk management.
"If banks fail to implement Basel II on time, they may face punitive measures, including no new licences for new branches, authorised dealerships or foreign exchange houses," he said.
BB also directed banks to introduce DIBOR to set up a stable inter bank exchange rate. “We have proposed it and banks have agreed to adopt it,” he said.
The governor asked CEOs of the banks to disburse more credit to women entrepreneurs, Huda said.