SMESPD Circular No. 03: Credit Guarantee Scheme for Cottage, Micro and Small Enterprises

1 Shrawan 12, 1427 July 27, 2020 SMESPD Unit CGS Unit Bangladesh Bank Head Office Dhaka. Ref No.: SMESPD Circular No. 03 Date: -------------------- To Chief Executive/Managing Director All Scheduled Banks and Financial Institutions operating in Bangladesh Dear Sir, Regarding the launch of the Credit Guarantee Scheme for Cottage, Micro and Small (CMS) Enterprises. In view of the potential adverse economic impact in Bangladesh due to the outbreak of Novel Coronavirus (COVID-19), it has become necessary to launch a Credit Guarantee Scheme to maintain the capacity of Cottage, Micro and Small (CMS) industrial entrepreneurs and to retain the workforce employed in industrial factories, thereby achieving the desired expansion of small industries, creation of enterprises, and economic growth through the provision of collateral-free loans from the banking system. It is extremely important to involve the private and general public in economic activities for the continuous, balanced, and sustainable development of the country. One of the means to involve the private or general public in this development activity is through the business activities of Cottage, Micro, Small and Medium Enterprises (CMSME). These activities play a role in balanced and sustainable development by creating enterprises and accelerating industrialization in the country. Therefore, in addition to providing policy support to banks and financial institutions to give priority to the CMSME sector, various refinancing facilities have been provided. Furthermore, in response to the potential adverse impact on the country's economy due to the outbreak of COVID-19, the Government of Bangladesh and Bangladesh Bank are currently implementing various stimulus packages announced. In the area of providing loans/investments to the potentially viable CMS sector, the requirement of collateral acts as a notable barrier. Although many private sector customers in this sector have the capacity to repay loans/investments, banks and financial institutions are not interested in providing loans/investments to them solely due to the lack of collateral. In order to overcome the adverse impact created in the economy of the country in the CMS sector due to the outbreak of COVID-19 and to increase the flow of loans/investments in the said sector, it has been decided to provide Credit Guarantee facilities against collateral-free loans/investments in the CMS enterprise sector. This facility will be provided through the 'Credit Guarantee Scheme Unit' under the SMESPD of Bangladesh Bank. To this end, a scheme titled 'Credit Guarantee Scheme for Cottage, Micro and Small (CMS) Enterprise Sector' has been launched. Participating banks and financial institutions in the scheme will be eligible for Credit Guarantee facilities. Under the financial assistance package of 20,000 (Twenty Thousand) Crore Taka announced for the CMSME sector through SMESPD Circular No. 01 dated April 13, 2020, this Credit Guarantee facility will be provided only against working capital (Working Capital) loans/investments currently running in the CMS sector. Interested scheduled banks and financial institutions must enter into a participation agreement with the CGS Unit in accordance with the prescribed guidelines for the said Credit Guarantee facility. Under the executed agreement, portfolio guarantee will be provided by the CGS Unit against the CMS portfolio specified therein. The guidelines of the Credit Guarantee Scheme are as follows:

1. Scope of the Scheme and Selection Process of Entrepreneurs and Banks/Financial Institutions: 1.1. Necessary funds will be arranged by the Government and Bangladesh Bank for the said Credit Guarantee Scheme. Based on fund availability, a portfolio guarantee cap of up to thirty (30) percent of the prescribed portfolio limit for working capital (Working Capital) loans/investments in the Cottage, Micro and Small (CMS) sector will be provided to each participating bank and financial institution in the scheme. Under the said portfolio guarantee cap, a guarantee coverage of up to eighty (80) percent will be provided for any single entrepreneur or loan/investment recipient. 1.2. Under the guidelines issued for the participation of banks and financial institutions in providing loans/investments in the CMSME sector through SMESPD Circular No. 01 dated April 13, 2020, the said Credit Guarantee facility will be applicable against collateral-free working capital (Working Capital) loans/investments in the Cottage, Micro and Small (CMS) sector among the prescribed CMSME sector portfolios. 1.3. The sector-wise distribution of the guarantee facility under the portfolio limit will be as follows: a) Up to 70 (seventy) percent under the Cottage, Micro and Small (CMS) enterprises in the Manufacturing and Service sectors; and b) Up to 30 (thirty) percent under the Cottage, Micro and Small (CMS) enterprises in the Business (Trading) sector. 1.4. The instructions of 'Guidelines for Provision of Collateral-Free Loans/Investments in Cottage, Micro and Small Enterprises' issued by the CGS Unit of Bangladesh Bank must be strictly followed for the said guarantee facility. In addition, under the Master Circular No. 02 dated September 05, 2019, regarding refinancing in Cottage, Micro, Small and Medium Enterprises (CMSME) of the SMESPD, the said guarantee facility will take precedence in providing collateral-free loans/investments in high priority and priority sectors. 1.5. Banks and financial institutions that have at least three years of experience in providing loans/investments in the CMSME sector and whose classified loans as of December 31 of the year immediately preceding the year in which the application for the guarantee facility under the said scheme is made are 10 (ten) percent or less will be considered eligible for the said scheme. However, this rule will not apply to State-owned commercial and specialized banks for the provision of loans/investments. 1.6. Whatever the existing limit for CMS loans/investments may be, the amount of loans/investments for guarantee under the said scheme will be a minimum of 2 (two) Lakh Taka and a maximum of 50 (fifty) Lakh Taka. 1.7. For existing loans/investments, the term of the guarantee provided under the scheme will initially be one year. If the loan/investment is fully repaid within the specified time, the guarantee term for the respective loan/investment will end. However, if any loan/investment facility is renewed/rescheduled, the duration of the renewal/rescheduling will be considered as the guarantee term. In this regard, the respective bank/financial institution must increase the guarantee term from the CGS Unit in case of extension of the loan/investment term and renewal/rescheduling.
2. Application Process for Guarantee and Method of Issuance of Guarantee Certificate: 2.1. Interested banks/financial institutions must declare their portfolio based on collateral-free CMS loans/investments as of December 31 of the immediately preceding year, in consultation with the CGS Unit, in accordance with the instructions mentioned in clauses 1.2 and 1.4 of these guidelines, and must enter into a 'Participation Agreement' with the CGS Unit for an initial period of 5 (five) years. 2.2. Subject to compliance with clause 1.5 of these guidelines, a separate portfolio limit will be determined for each year. 2.3. Customer loan/investment applications under the declared portfolio must be submitted to the CGS Unit in the prescribed format for guarantee registration after verification and screening by the respective bank/financial institution. 2.4. Along with the application for guarantee registration, the respective bank/financial institution must submit a certificate confirming that customer loan/investment applications have been properly verified and screened under their approved loan policy. 2.5. Applications for guarantee registration must be made within the first 10 working days of each month. 2.6. After receiving the application, the CGS Unit will complete the necessary verification process and provide guarantee registration promptly. The CGS Unit will ensure that the portfolio limit is not exceeded during guarantee registration. 2.7. After receiving registration from the CGS Unit, the respective bank/financial institution will complete the necessary documentation and distribute the loan/investment facility in favor of the entrepreneur.
3. Guarantee Fee: 3.1. Under the bilateral participation agreement executed between the CGS Unit and the bank/financial institution, each bank/financial institution must pay an annual guarantee fee, which can be collected from the respective entrepreneur/loan/investment recipient. Except for this guarantee fee, the instructions mentioned in clause 5(c) of SMESPD Circular No. 01 issued on April 13, 2020, regarding any other fee/charge will apply. 3.2. Participating banks and financial institutions must pay a guarantee fee for 01 (one) year at a rate of 1% on the applied loans at the time of guarantee registration under the declared portfolio limit for the remaining period of the current year and for each subsequent year. Provided that the guarantee remains active, after the expiration of 01 (one) year, the guarantee fee must be paid on a daily basis on the status of loans available under the guarantee from the next period until the immediately preceding day. In this regard, for banks whose classified loan/investment ratio as of December 31 of the immediately preceding year is 5 percent or less, the guarantee fee must be paid at a daily rate of 0.50%, and for banks whose classified loan/investment ratio is more than 5 percent, the guarantee fee must be paid at a daily rate of 0.75%. 3.3. The guarantee fee must be paid in advance within 15 (fifteen) days of guarantee registration each year and within 30 (thirty) days of the completion of the immediately preceding year for subsequent years regarding ongoing guarantees.
4. Interest/Profit Rate on Loans/Investments: 4.1. The interest/profit rate for loans/investments under guarantee will follow the 9% interest rate mentioned in clause 5(a) of SMESPD Circular No. 01 issued on April 13, 2020. However, the instructions regarding the guarantee fee mentioned in this circular will not apply. 4.2. If guarantee is provided against loans provided under the refinancing scheme of Bangladesh Bank, the interest/profit rate determined by Bangladesh Bank for the refinanced loans/investments will apply.
5. Responsibilities of Banks/Financial Institutions for Entrepreneurs Receiving Guarantee Facilities: 5.1. There will be no direct communication between the CGS Unit and the entrepreneurs receiving the guarantee facility; however, the CGS Unit may inspect the business activities of the entrepreneurs at any time to verify the authenticity of the guarantee by informing the respective bank/financial institution. 5.2. The refinancing bank/financial institution must distribute loans/investments after proper due diligence and supervise and monitor their own enterprises after distributing loans/investments. The respective bank/financial institution must provide proper services/assistance to the entrepreneurs for the proper use of loans/investments. 5.3. Upon receiving an application for the guarantee facility, the respective bank/financial institution must be obliged to provide necessary information/documents as required by the CGS Unit at any time and provide all kinds of assistance to the inspection team of Bangladesh Bank during inspection.
6. Claim and Settlement Process of Guarantee: 6.1. If any loan/investment under guarantee becomes classified as bad under existing guidelines and after rescheduling (if applicable) as per serial number 6.5 below, if the loan/investment is again classified as bad without repayment, an application for claim against the guarantee can be made. However, before applying for the guarantee claim, the respective bank/financial institution must take all efforts to recover the loan/investment, file a case under the Debt Recovery Court Act, 2003, and ensure other legal measures. That is, only if the loan/investment is classified as bad after taking all measures including legal processes, loan/investment classification, rescheduling, and other applicable measures for recovery by the bank/financial institution, can the respective bank/financial institution raise a claim against the guarantee. 6.2. If the loan/investment against which the guarantee is provided is classified as bad, in that case, the amount of the claim cannot be more than the guaranteed portion of the principal of the classified loan/investment (Guaranteed Portion of Principal) or the unclaimed portion of the portfolio guarantee (whichever is less). No guarantee claim can be made for overdue interest/profit under any circumstances. 6.3. Even after the settlement of the guarantee claim, the respective bank/financial institution must continue all processes including legal steps for the recovery of the loan/investment. If any amount is recovered from the entrepreneur against the loan/investment after the settlement of the guarantee claim, it must be returned to Bangladesh Bank in proportion to the guarantee coverage. 6.4. If any bank/financial institution intentionally conceals any information regarding risk under the guarantee or provides false information, Bangladesh Bank will take necessary measures under existing laws/rules/guidelines. 6.5. If rescheduling of the guaranteed loan/investment is required for any reason, it can be rescheduled under existing/amended guidelines, and the CGS Unit must be informed. Guaranteed loans/investments cannot be rescheduled more than three times under existing guidelines. 6.6. Although there are instructions in clause 8(d) of SMESPD Circular No. 01 issued on April 13, 2020, that proper provision must be maintained before classifying loans/investments for non-payment under existing guidelines, the obligation to maintain specific provision up to 30 (thirty) percent of the portfolio limit against loans/investments classified under the scheme will remain exempted for the guarantee term.
7. Miscellaneous: 7.1. The instructions issued from time to time by Bangladesh Bank regarding loan distribution and recovery must be strictly followed. 7.2. In any matter not mentioned in these guidelines or if clarification is needed on any matter mentioned in the guidelines, the decision of Bangladesh Bank will be final. 7.3. Bangladesh Bank reserves the right to make any type of change or amendment to these guidelines. 7.4. Bangladesh Bank reserves the right to cancel the guarantee provided against any loan/investment if proper procedures are not followed in providing loans/investments or if any condition is violated. These instructions are issued under the powers granted by Section 45 of the Bank Company Act, 1991 and Section 18 of the Financial Institutions Act, 1993. These instructions will be implemented immediately. Yours faithfully, (Md. Nurul Amin) General Manager Phone: 9530221