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News Analysis: The problem with banking on the banking sector

  • Published at 02:03 pm April 17th, 2020
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Not only will those most in need not benefit from the stimulus package, but those far less deserving will, including some who deserve the benefit least of all  

The government must be praised for coming out with a stimulation package that is equal to around 2.5% of GDP. 

The six-part package primarily offers concessional loans to industry, service, SME and agriculture sector, where the government agrees to bear part of the cost.

The package must be praised for its design and depth.

What’s missing

But the stimulus package is more indicative of what is not there, instead of what is there.

At this moment, Bangladesh is undergoing four imminent crises that need immediate attention. The package surprisingly offers nothing to resolve these most pressing issues.

It offers nothing to address the public health crisis or food security problem of logistical breakdown and a rapid fall of demand across all sector.

Instead, the ever-expanding  package hands over the burden of boosting the economy to the fragile banking sector. This shifting of weight may create its own set of problems.

No liquidity crisis

Before the coronavirus crisis, our banking sector witnessed the slowest rate of credit growth in a decade.

However, contrary to many experts’ suggestions, the slowing down was not due to a shortage of liquidity.

According to Bangladesh Bank, as of last December, the excess liquidity in the banking sector stood at above 1 trillion takas. The figure was 40% less around a year back.

As of then, neither had treasury bills excessively crowded out the private sector.

The credit growth shortfall was due to structural problems of political economy, lack of confidence among investors, and rapidly falling savings across the population, which was increasingly dependent on their savings to fund their current expenditures.

Outcome

As such, offering a large concessional loans tries to solve a supply side problem where the real problem lies in actually on the demand side. 

As such, without addressing the structural problem which created the slowest credit growth in a decade, this particular stimulus  , is unlikely to bring any fruitful result.

Although, the government has declared a number of measures to ensure that the loan can’t be used by existing defaulters, in the prevalent political-economic environment the key stake holders of the banking system can use loopholes, to reschedule outstanding loans to enjoy the concessionary support provided by the government instead of using the support to provide wage or initiate new business initiative.

The decision that the majority of the credit can only be taken for working capital does not help either. Had the government desired to boost capital investment, there should have been no bar on capital investment through this loan.

It is understood that the stimulus is designed to provide working capital for the factories and services so that they can retain their staff. To ensure this, government should have put some condition to ensure only the industries which has paid their staff can avail the loan. 

A similar incentive has been provided in the stimulus package given in US. But Bangladesh’s stimulus package has not put any such binding clause.  

Institutionalizing 9% interest rate ceiling 

Another problem this package may create is it will institutionalize the 9% interest ceiling which many banks will find difficult to adopt.

Although the government has declared that the 9% ceiling will be effective from April 1, there were doubts about how banks would remain profitable when the official inflation rate is hovering around 6%.

As per Bangladesh Bank at the end of last November, out of 40 banks, 28 banks had a cost of funds higher than 6%. Of these banks, three banks had a cost of funds above 9%, three banks were between  8% to 9%, and 11 banks had a cost of fund within 6% to 7%.  These bunks will find it difficult  remain profitable  with 9% interest rate ceiling. 

On top of this, some sectors like SME loans have a very high operating cost. Bankers across the country have suggested that for SME sector they can no way maintain a 9% interest rate due to higher operating cost for maintaining those loans.

In that scenario, institutionalizing a flat 9% interest rate through a stimulus package is likely to impact bank profitability. This will affect shareholder earnings and likely result in cost-cutting and job losses, and in the worst-case scenario we might see some  banks going out of business.

As such, there is a consequence of putting the burden of saving the nation's economy on the banking sector, which is already bleeding.

Cui bono

During the global financial crisis of 2007-08, the stimulus was directed to save the banks and large corporations.

As such, the banks recovered, and the stimulus ended up in boosting their stocks, but the customers who faced foreclosure and other crises were not benefited.

Learning from that lesson this time, countries across the world have designed their stimulus package to provide helicopter money to businesses and people directly, along with direct ration to the most vulnerable.  

Bangladesh would have done well to follow this example.

Instead, it seems as though not only will those most in need not benefit from the stimulus package, but those far less deserving will, including some who deserve the benefit least of all.  

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