State banks miss out on WB's low-cost funds

State banks plagued with bad loans are not eligible to disburse the World Bank's low-cost foreign currency long-term funds among manufacturers.

The loan will cost a bank 3.25-3.5 percent, which, in turn, will charge its clients a maximum of 6.5 percent interest rate. The tenure of the loans will be at least for three years and the highest 10 years.

Bangladesh Bank in collaboration with the WB took the initiative last year to channel long-term loans to the manufacturing sector.

But eight state banks are not eligible for the funds due to their high non-performing loan ratio, said Subhankar Saha, executive director of Bangladesh Bank and project director of the Financial Sector Support Project that runs the programme.

For eligibility, the bank's NPL ratio has to be within 8 percent, but as of December 31 last year, the state banks' average NPL stood at upwards of 20 percent.

Already 21 private banks have signed participatory deals with the BB to use the loans for their clients engaged in manufacturing.

The average NPL of private banks stood at below 5 percent on December 31 last year.

The supply of long-term financing is constrained by banks' limited access to long-term resources, information asymmetries, capacity constraints and their relative comfort and preference to undertake shorter-term financing, according to the WB.

All of these factors inhibit long-term investments by households and the ability of firms to invest in capital upgrade and technology, expand and grow businesses and jobs at the faster pace.

A WB estimate shows there is a significant demand for long-term financing by firms, conservatively estimated at $1.5-2 billion per year for the export market. Yet, supply by the market lags behind significantly.

To help Bangladesh address the constraints, the WB has created a $350 million fund in June last year.

The project became effective on September 20, 2015, with the BB setting up a department named Financial Sector Support Project and Strategic Planning Department to implement it.

In November last year, the BB issued a letter outlining the criteria for banks to use the loans.

Other than a low NPL ratio, the CAMELS rating, which is a supervisory rating system to measure a bank's overall condition, has to be good to get the loan.

Nine new banks that came into operation in 2013 are also missing out on the funds, as they are required to be in operation for at least three years to access the loans.

"Banks having observers won't be able to get the loans," said Joarder Israil Hossain, general manager of the BB's Financial Sector Support Project and Strategic Planning Department.

For example, Islami Bank, despite being a major private bank, is not getting the funds because the central bank has appointed an observer to it for its governance crisis.

Banks that have signed participatory deals with the BB for the loans are upbeat about the benefits.   

"The cost of loans will be low and funds will be given for a longer term," said Shafiqul Alam, managing director of Jamuna Bank.