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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 DIBOR 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 II, 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.
