Long-term bank financing

FE Team | Published: November 09, 2017 19:09:34

The move to provide long-term financing by banks and financial institutions is apparently a positive move for industrial growth -- a facility entrepreneurs in the country has been finding difficult to come by. As a result, big borrowers have to look for prospects of long-term funding and loans from overseas sources. As for the local banks, providing long-term loans is a problem because their funds or deposits are mobilised on a short-term basis. The problem appears to have eased considerably with the World Bank offering a fund worth US$300 million to the Bangladesh Bank (BB) under a project titled 'Financial Sector Support Project (FSSP)'. This will be used for funding and promoting investments and boosting production. The BB has also injected more funds at a rate of 12 per cent, and it plans to disburse Tk 100 billion within the current fiscal year. So far, 43 projects, mostly in textile and readymade garment sectors, have got such credits amounting to over US$100 million. The loans have been given in dollar mainly for procurement of state-of-the-art machinery for plants at interest rates less than 3.0 per cent with London inter-bank offered rate (LIBOR).
From a textbook point of view, long-term finance contributes to faster growth, greater welfare, shared prosperity and stability by reducing rollover risks for borrowers. Such funding thus helps lengthening of the horizon of investments and improving performance. On the flip side, long-term financing shifts risks to the providers because they have to bear the risks of default in repayments of such loans and other changing conditions in financial markets. In simple terms, it thus involves a risk-sharing contract between providers and users of finance.
In a well-functioning financial system, this may not pose a problem where borrowers and lenders are bound by long-term contracts depending on their financing needs and agreements to share the risks involved at different maturities. The common perception is that financial markets in developing economies are imperfect, resulting in a considerable scarcity of long-term finance. This impedes investment and growth. Some may argue that attempts to promote long-term credit in developing economies without addressing the fundamental institutional and policy problems have often turned out to be costly for development.
This is the critical area that needs to be well addressed, and in this regard what is most important is a strict, inexorable guideline for banks to follow. This is not to belittle the importance of long-term financing but to keep in mind a sense of caution to make it mutually gainful to the providers and the borrowers. Given the lack of desired level of transparency in the country's financial sector -- deteriorated further by wild scams in the past -- it is the prime task of all concerned, especially the BB and the financial institutions, to work out a mechanism so that the objective of long-term financing is not misused in any way. It is expected that the central bank has done its homework properly on both the challenges and opportunities of the newly launched project. Much will depend on such homework in order to ensure its long-term sustainability and thus fulfil its goals and objectives.