The biggest barrier to our industrialisation

While inaugurating the first national industrial fair in the city, the prime minister, at the end of last month, said she wanted to discuss how to reduce the interest rate of bank loans which she thought had become the biggest barrier to the country's industrialisation. And she was partially correct. In February, credit growth stood at 12.54 percent, the lowest since October 2014 and much lower than the central bank's target of 16.5 percent, according to its own data.

In its Spring 2019 edition of the "Bangladesh Development Update", the World Bank agreed that success of Bangladesh's development hinges on increased private investment and innovation. However, as the report also pointed out, this problem is largely down to the abysmal condition of the banking sector now struggling increasingly with non-performing loans (NPLs).

In fact, the main reason why interest rate of bank loan is difficult to bring down is because of the ongoing liquidity crisis in banks that is making them reluctant to give loans with the scarce funds they have, analysts say. Therefore, it can be argued that what the prime minister identified was not the main problem, but a symptom of it—and the main problem, as the Asian Development Bank (ADB) also pointed out this month, is most possibly the worsening state of the country's banking sector.

At the end of last year, total amount of NPLs stood at Tk 93,911 crore, up from Tk 73,303 crore a year earlier. The immense increase in NPLs and the liquidity crunch it has brought about has resulted in banks offering higher interest rate on deposits—which has shot up to double digits—to attract more of it, but without much success. Savers are still gravitating towards savings certificates and bonds for higher returns; and because their confidence in the wellbeing of the banking sector has justifiably declined.

Because "deposit growth in banks is lower than the credit growth", banks are adopting "a cautious lending policy," says Ahsan Mansur, executive director of the Policy Research Institute. And while "banks face criticism from different corners" when setting the "lending rate in keeping with the returns on deposits", it is simply "not viable" for them "to disburse loans at single-digit interest rate," according to Syed Mahbubur Rahman, chairman of the Association of Bankers.

In January, excess liquidity in banks came down 11.45 percent from a month earlier to Tk 67,642 crore. And aside from its more direct negative impacts, it has also adversely affected the capital market according to experts. "Liquidity crisis is a big problem that breeds higher interest rate on deposits and pushes investors to the banking sector from the stock market," said Shakil Rizvi, president of the DSE Brokers' Association. And this is apparent in the fact that this year's post-election scenario in the stock market does not match with that of the last four.

Whereas the benchmark index of the Dhaka Stock Exchange shot up after the past four elections, the index shed 577.78 points or 9.71 percent of its value in the three months since the most recent one. According to AB Mirza Azizul Islam, a former chairman of the Bangladesh Securities and Exchange Commission, given the substantial market capitalisation of the banking sector, "its problems are bound to spill over into the stock market." Where its ultimate worst-case scenario may result in something similar to what happened in the west during and after the 2008 global financial crisis—which we fortunately have not yet reached.

Yet, there is every reason to be pessimistic. As in spite of growing concerns, the practice of loan rescheduling and write-offs are continually increasing—with the central bank again approving loan rescheduling of Tk 20,000 crore last year. Whereas "extensive measures should be taken" to immediately recover default loans, according to Ahsan Mansur, Finance Minister Mustafa Kamal announced an easy loan rescheduling scheme for defaulters from May 1 only a month back.

The scheme will allow defaulters to reschedule their loans for 12 years by making a 2 percent down payment of total dues—at present loans can at most be rescheduled for 3 years with a down payment of 10 to 15 percent. Such wholesale rescheduling of bad loans, according to Zahid Hussain, lead economist at the WB's Dhaka office, is "not sustainable for banks". As all it would do "is just shrink large amounts of default loans" on paper, making the situation look better on the surface compared to what it actually is underneath.

This latest move, according to Khondkar Ibrahim Khaled, a former deputy governor of the Bangladesh Bank, is a result of "wilful defaulters compelling the central bank to revise the policy", which is "an ominous sign for the banking sector". Industry insiders and experts have said that a number of banks now are not only suffering from a liquidity crisis, but that this crisis "might become worse in the months ahead if immediate measures are not taken". Amidst such dire conditions, the BB's move to relax the loan classification rules will only create a moral hazard by encouraging many borrowers to not repay their loans on time which will further exasperate the stress banks are currently under.

What all this shows is that the biggest economic problem that we are facing is a direct result of bad policymaking and a number of major failures by the regulators. As the WB report points out, regulatory uncertainty in Bangladesh has become a major bottleneck of "investment"—that requires "an enabling environment of which regulatory predictability is an important dimension".

In the absence of such predictability, where the central bank and the finance ministry have whimsically changed rules and refused to enforce them year after year—or implement them selectively based on partisanship—expecting any significant increase in investment is simply illogical and impractical. Thus, the decision by the regulators to pursue this path for this long is at best foolish. And at worst, intended to benefit only wilful defaulters at the cost of the entire economy.

Eresh Omar Jamal is a member of the editorial team at The Daily Star.His Twitter handle is: @EreshOmarJamal