Impact of COVID-19 on SMEs

    LightCastle Analytics Wing
    LightCastle Analytics Wing

    The SME sector of Bangladesh contributes 25% to the GDP in addition to the 7.8 million employment and 31.2 million livelihood it provides. With the extension of the lockdown, the SMEs are being immensely impacted. In order to revive the sector, the government of Bangladesh has already introduced a Tk 20,000 crore stimulus package, however, the question still remains – Will the SMEs be able to survive the pandemic and continue to operate in the same way in the post-COVID world?

    “Close to 31.2 million people’s livelihood is dependent on SMEs and Startups. If we can not find a solution to come out of the crisis, this large population will be gravely impacted, creating a chain of reaction in the entire economy.”

    Bijon Islam, CEO of LightCastle Partners

    To understand the current impact of the crisis on SMEs in detail, LightCastle Partners & Sheba.xyz collaborated on an independent study on the COVID-19 impact on the SMEs of Bangladesh.

    The detailed findings of the study were presented at a webinar, titled “A deep-dive into the COVID-19 impact on the SME Sector of Bangladesh”, jointly organised by LightCastle and Sheba.xyz. In addition to the impact, the panelists brought forth discussions around the stimulus packages, Banks’ role in the disbursement processes, contribution of MFIs, importance of digitization and the role of SMEs during the crisis.

    The panelists for the session were

    1. Md. Ashraful Alam, Project Country Coordinator, SHIFT, UNCDF

    2. Syed Abdul Momen, Head of SME Banking, Brac Bank

    3. Dr. Akond Md. Rafiqul Islam, Sr. General Manager, PKSF

    4. Samiul Kabir, Chief Strategy Officer, Sheba.xyz

    5. Nazeem Hasan Sattar, General Manager, SME Foundation

    6. Shawkat Hossain, Managing Partner, Velocity Asia

    7. Bijon Islam, CEO, LightCastle Partners

    “We couldn’t sell flowers of worth more than 12 lacs, neither can we layoff our employees, nor can we sufficiently pay salaries”

    Shelly, Florist

    Scenario of the SMEs Sector in Bangladesh

    The study was conducted in late April with over 230 SME respondents from all over Bangladesh. The respondents mainly were from Trading & Production (48.4%) that includes Perishable & Grains, Poultry, Dairy, Fisheries, Jute Diversified Products, and Retail Store; and Service Industry (51.6%) that includes food catering, electrician services, laundry, beauty salon, MFS agent, and restaurants. Some of the key highlights of findings were:

    1. 28% SMEs have seen revenue drop by at least 50%, while 52% SMEs have locks hung over their businesses generating no revenue at all.
    2. Around 68% of the SMEs have a window of less than four months to survive in current conditions before they exhaust all their cash reserves
    3. Enterprises are cutting corners massively by optimizing costs – 46% of SMEs are projecting to layoff over 50% of their Staff within four months if the situation does not improve 
    4. 42% of enterprises have cut their marketing expense down to zero
    5. In terms of financing, 52% of the enterprises would prefer soft loans at lower interest rate to survive the crisis.

    “Disbursement of loans, cashless transactions, and digital supply chain should be implemented immediately to support the SMEs.”

    Samiul Kabir, Chief Strategy Officer of Sheba.xyz

    Role of the Financial Institutions

    Course availability of around Tk 3,000 crore has already been diminished during the lockdown period and the survival of the sector largely depends on the banks and financial institutions. Some key points discussed were:

    1. A large portion of the microenterprises and cottage industries do not take Banks’ services, the MFIs are primarily responsible for providing financial services. Therefore, MFIs need to be involved in the disbursement process.
    2. In order to enable the micro and small enterprises with some financial stability, PKSF has formulated 13 protocols to safely run operations in retail markets, wholesale markets and online stores.
    3. Policies formulated by PKSF to ease the restrictions on loan disbursement, interest payments and repayments are in the process of being approved by the government.
    4. A lot of these micro and small enterprises do not always keep track of their transactions, audit reports and financial statements thus they will not be able to take the loans from Banks. However, the MFIs can play an integral role in ensuring disbursement to these vulnerable SMEs.
    5. Considering the gravity of the situation, Brac Bank has opted to not take any EMI payments for the next three months, if the current condition prevails the timeline can be extended to six months

    “The main concern for the SMEs now is to get the funds immediately otherwise they are going to collapse.”

    Dr. Akond Md. Rafiqul Islam, Sr. General Manager, PKSF

    “We are experiencing increasing demands due to the lockdown and the government has allowed us to continue with the delivery processes. However, due to supply chain disruption, our supply has significantly decreased which isn’t allowing us to benefit from the demand surge.”

    Abu Darda, CEO, Parmida.com 

    Major Concerns and Challenges of SMEs

    With only four months of cash runway a large cluster of SMEs are on the verge of going bankrupt. If the impacted enterprises do not get support immediately, revival of the sector in the near future seems bleak. Some key concerns that were raised:

    1. Only 15% of the SMEs of the country are going to receive funds from the banks for which the loan target is Tk 1,60,000 crore. Proportionately, for the total number of SMEs the loan required is going to be around Tk 10,00,000 crore which questions how the stimulus package of Tk 20,000 crore will suffice to the demand.
    2. The policy to disburse loans based on bank-client relationship is going to confine the availability of funds for the micro and smaller enterprises. On the contrary, if the banks do not provide the funds based on relationships and verify their credit histories, the already increasing NPL rate will further propel.
    3. According to the study most of the enterprises are looking for interest payment deferrals. In addition, they are seeking immediate loans with no collateral and low interest rates along with tax and vat deferrals in order to cope up with the expenses once they start their businesses again.
    4. Interest rate fixed at 9% coupled with the increasing non-performing loans, the banking industry is going through an intensive stress-test amidst the pandemic. As a result, disbursement of the hefty stimulus package remains a challenge.
    5. The regulations and procedures of the stimulus packages are such that the most vulnerable SMEs in the current scenario wouldn’t be receiving enough funds. For instance, if the SME sector is divided trading represents 60% while 40% is manufacturing but the largest but only 20% the SME package is allocated for the trading sector.

    “The stimulus package should have been designed upon taking the feedback from all the stakeholders first, in that way disbursement could have been much more smooth.”

    Syed Abdul Momen, Head of SME Banking of BRAC Bank.

    The Way Forward

    Adapting to digital solutions is key, especially during such uncertain times. Data shows that customers are quickly embracing digital channels for their transactions. During the span of two months, bkash has experienced a 12 times increase in transactions from 5,000 to 75,000. The lockdown has propelled the much needed digital transformation and brought forth very important learnings:

    1. The transactions in MSMEs should be digitized in order to make data-driven decisions to provide support. Fintech platforms should introduce new platforms to digitize the SMEs and equip them better for such types of crisis.
    2. A large portion of the SMEs serve as value-chain partners to multinational and local FMCG companies. These organizations should come forward to leverage their tracking platforms to support their partners. 
    3. Platform economies are being introduced by UNCDF where the FMCG companies and the SMEs can onboard and track their transactions and other processes.
    4. Startups and tech companies with agile mindsets should be given the opportunity to partner up with the public sector to assist and educate the micro and small enterprises on how to open up bank accounts, and take the basic banking services.
    5. Alternative channels need to be generated by streamlining organizations like Karmo Shongsthan Bank, SME foundation and the public banks should also come forward in providing loans to the affected entrepreneurs.
    6. Introduction of credit risk guarantee schemes can significantly reduce the risk of incurring non-performing loans in Banks.
    7. In addition to the financial support, the SMEs should also be given the guidance to conduct operations properly once the lockdown lifts. Otherwise, the repayments of the stimulus package will be difficult to ensure.
    8. Creating an authentic database of SMEs will be of substantial help in PPP projects to support the affected SMEs during such a crisis.
    9. Stimulus packages should have been designed upon taking the feedback from all the stakeholders first to avoid discrepancies and smooth disbursement of funds.

    “Alternative channels need to be generated by streamlining organizations like Karmo Shongsthan Bank, SME Foundation, and the public banks should come forward in providing loans to the affected entrepreneurs”

    Nazeem Hasan Sattar, General Manager of SME Foundation.

    “Fintech platforms should come forward in digitizing these SMEs to equip them better for such types of crisis”

    Md. Ashraful Alam, Project Country Coordinator of SHIFT, UNCDF.

    In conclusion, if we genuinely want to help these affected SMEs, we have to put ourselves in their shoes and tailor the facilities for them to assist them in navigating through the crisis. Similarly, it is essential to provide in-kind support in addition to funds. 

    This article was written by Mehad ul Haque, Senior Business Consultant, and Ishtiak Mourshed, Trainee Consultant from LightCastle Partners. For any queries, you can reach out at [email protected]

    LightCastle Analytics Wing

    LightCastle Analytics Wing is the research division of LightCastle Partners. It is tasked with producing periodic reports on the different sectors of the economy, analyzing trends in markets and making methodical, thorough and intelligent analysis to improve strategy and drive business growth.