The SME Foundation, an organisation under the industries ministry, has sought a new allocation of Tk 500 crore from the government in order to provide loans to entrepreneurs, according to a letter.

They asked for the fund as budget support for the upcoming fiscal year 2024-25. At the same time, approval has also been sought to increase the interest rate of this loan from 4 percent to 7 percent.

In 2021, loans were disbursed in two phases to small and medium enterprises with money allotted to the SME Foundation by the government during the Covid-19 pandemic.

At present, there is heightened demand for SME loans, but the SME Foundation does not have enough funds to meet that demand, said an official of the foundation.

As such, the Ministry of Industries recently wrote to the Financial Institutions Division under the Ministry of Finance regarding the allocation of new funds and the redetermination of interest rates, the official said.

According to the letter, Tk 300 crore was allocated to SME Foundation under the special incentive package announced by the prime minister during the Covid-19 pandemic.

Later, the SME Foundation formed a revolving fund by combining the loan proceeds and its own funds. Loans of Tk 294 crore were disbursed from this fund, most of which have not yet been repaid.

As a result, the foundation does not have the money to create any new revolving fund, the letter added.

The SME Foundation has been distributing loans to entrepreneurs through 20 public and private banks and non-bank financial institutions.

The interest rate on this loan was set at 4 percent, with the bank getting all the interest.

However, in the case of the new revolving fund loans, the foundation wants to increase the interest rate to 7 percent.

Under the new arrangement, the disbursing bank or financial institution will get 5 percent of the proposed interest while the remaining 2 percent will go to the SME Foundation.

It will use the funds to enhance the skills and capabilities of entrepreneurs, the official added.

SME Foundation sources said 6,066 entrepreneurs have received loan facilities so far. Of them, 3,108 entrepreneurs have received Tk 300 crore from the government's incentive package and 2,978 people have been given Tk 294 crore from the revolving fund.

Salahuddin Mahmud, managing director of the SME Foundation, said: "Currently our funds are inadequate compared to demand. That's why we have asked for new funds."

He added that a 7 percent interest rate was still much lower than the rate at which banks currently lend to entrepreneurs, especially considering service charges.

The SME sector is considered to be the country's lifeline, accounting for about 25 percent of the nation's gross domestic product.

There were 78.8 lakh business establishments in the country, according to Economic Census 2013 of the Bangladesh Bureau of Statistics. Of them, 87.52 percent were cottage, 1.33 percent micro, 10.99 percent small, 0.09 percent medium and 0.07 percent large enterprises.