Long- and medium-term financing has been a problem for businesses and households for long. Medium-term loans are available but in a limited volume. But the long-term ones are scarce. Businesses and households do remain contented with financing arrangements, having a maximum period of five to seven years for repayment. Long-gestating projects, mainly those in the large infrastructure and housing sectors, need long-term financing up to ten-year period or more. This type of financing is necessary in the context of economic feasibility of such projects. It is hard to blame the banks for not meeting the long-term financing needs since they do not have the resource base for meeting this requirement. That makes a difference between a commercial bank and a development or specialised financial institution. Meanwhile, scarcity of long-term loans often forces the cash-starved businesses and households to take medium- to short-term loans to accommodate their long-term needs. In many cases, this leads to the accumulation of classified assets, a problem that has been taking a high toll on the commercial banking industry.
Early this week, the central bank governor, while speaking at a seminar organised by the Association of Bankers, Bangladesh (ABB), highlighted the issue in particular. The problem of long-term financing, as he noted, emanates from the shortage of long-term savings. The governor of Bangladesh Bank (BB) also suggested a few policy and market reforms to help generate long-term savings and meet the demand for long-term financing needs of various sectors of the economy. The areas chosen for reforms include life insurance, pension/ provident fund schemes in both public and private sectors and cost involved in debt securitisation since those do carry long-term liabilities. The deepening of insurance penetration and expansion of the funded contributory pension/ provident funds and debt securitisation at lesser costs would obviously help generate sufficient resources for long-term financing.
The penetration of life insurance in the country is presently very thin. If the life insurers are serious enough to deepen the rate of penetration, there could be substantial mobilisation of resources in the sector. The pension and provident fund schemes remain very important vehicles for generating a considerable volume of long-term savings. Officials and employers in public sector are entitled to pension/provident fund facilities. But such facilities are mostly unfunded and run on 'pay as you go' basis, using public resources allocated every year under the national budget. Only a few organised companies in the private sector do have some kind of funded schemes in place.
But the majority of the private sector entities tend to skip any such funded scheme or avoid making payments on such counts as far as possible in the case of their employees at retirement or upon resignation or for any other reason. If the public sector entities would have ensured funding for pension/provident fund benefits for their employees and introduced such schemes on a mandatory basis within the bounds of law, there would have been a surge in the volume of long-term savings. Naturally such savings would have then flowed into the banks, thus, beefing up the availability of their funds for long-term lending. Besides, joint action on the part of the central bank and the securities regulator to make the process of loan securitization less expensive and easier would in all probability help enhance the availability of long-term funds.
Problem of long-term financing
FE Team | Published: November 07, 2014 00:00:00 | Updated: November 30, 2026 06:01:00
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