PLEDGES there, ‘HOW’ missing

Rejaul Karim, a college teacher by profession, took a personal loan of Tk 6 lakh at 9.50 percent interest from a private commercial bank in 2015 to tackle some family emergencies.

The interest rate of the five-year loan all of a sudden shot up by three percentage points in September last year, leaving him dumbfounded. The lender did not give him any prior notice before hiking the rate.

Thus, his monthly instalment went up by nearly Tk 1,000, for which the bank blamed the rising cost of funds.

The cost of funds usually means the interest rates banks and other financial institutions must pay to investors for the use of their money to make loans to borrowers.

But Rejaul's case is not an isolated one.

Like individuals, businesses are also facing 3 to 4 percent higher interest rates on their loans, which put them in a tight situation. Small and medium enterprises have become the biggest victims of the lending rate hike.

Against this backdrop, Finance Minister AHM Mustafa Kamal yesterday said he would bring the lending rate to single digit.

But he didn't mention how cost of deposits of the banks will be brought down proportionately. Banks have to collect deposits at even double-digit interest rate.

So, analysts are quite doubtful about the minister's plan. They said reducing lending rates is quite tough without adjusting the interest rate on government savings tools with the market rates.

"Lenders could not mobilise deposit at single digit because of higher return on savings tools. So, there is no scope to decrease the lending rate to single digit," said Ahsan H Mansur, executive director of the Policy Research Institute.      

According to him, the rising trend of defaulted loans stemming from a lack of corporate governance in the banking system is also responsible for the high lending rate.

The banking sector faced a wide range of financial scams in recent period, which led to rise in default loans to Tk 110,874 crore as of March, up 25.15 percent year-on-year.

In his budget speech yesterday, the minister proposed some reform measures including revising the bankruptcy act, enacting a new law for merger and acquisition for weak lenders.

Experts welcomed the proposals but said there should have been a roadmap to implement those. 

"I welcome the confession made by the finance minister as no needful measures were taken to this end in recent years," said Mansur, also a former economist of the International Monetary Fund.

In his speech, the finance minister said the Bank Companies Act 1991 will be amended so that amalgamation, merger and absorption of banks can be legally processed, if required.

He also said stern measures will be taken against the wilful defaulters of bank loans.

Necessary amendments will also be brought to the Bank Companies Act to modernise the functions of holding companies and subsidiary companies. The Bankruptcy Act will also be revised so that the loan recipients can get an exit route if they fail to repay loans, he added.

The minister said he did not find any mentionable reform initiative in some areas, especially in the banking sector from the beginning.

He also hinted at forming a bank commission to restore corporate governance.

"We have heard for long about establishing a bank commission for bringing discipline in the banking and financial sectors. We would discuss with all concerned in this matter and do what is needed."

Mansur said if a commission is truly formed, the government should allow it to work independently.

AB Mirza Azizul Islam, a former adviser to a caretaker government, also expressed doubt about the effectiveness of a banking commission.

"It is impossible to strengthen the governance in banks despite forming a commission until lending on political grounds stops."

Mirza Aziz added that the finance minister had not given any clear indication on how to tackle the directors of banks, who had given loans to each other through what can be termed "mutual understanding".

"Also, there is nothing on how to recover crores of money stuck at the money loan courts."   

In the speech, Minister Kamal said stern measures would be taken against wilful defaulters of bank loans.

But, Salehuddin Ahmed, a former governor of the central bank, said there is no definition or mechanism to identify wilful defaulters.

He said the finance minister's speech seemed superficial as there was no explanation as to who was the habitual defaulter.

The budget speech mentioned many problems of the banking sector, but it bypassed the way of solutions, he added. "Many problems will go away If there is strict enforcement of the existing laws."

The finance minister also laid emphasis on making a vibrant bond market to avoid fund mismatch of banks. 

He said lenders are now giving long-term loans by collecting short-term deposits, which has created the fund mismatch. The bond market will help banks mobilise fund by way of issuing long-term bond.

Mirza Aziz observed that the government has long been assuring the financial sector of taking measures to make the bond market vibrant but that has yet to happen.