Reviewing the situation in banking sector

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Businesses showing a disinterest in taking fresh bank loans at high lending rates will hurt the future business of the banks, making it all the more difficult to expand their client base. Under the circumstances obtaining now in the country, a good number of people who would have otherwise liked to try their hands at business through bank finance, are sitting on the fence. They are unlikely to opt for investment operations until the lending rates on borrowing come down, writes Imtiyaz Ahmed The situation in most private commercial banks (PCBs) that were earning high operating profits in past several years is now under some stress. Of late, deposit rate has also increased. The banks have to pay a high rate of interest on deposits to mobilize funds for their operations. But the real effective rate of interest, from the depositors' point of view, has, however, not increased. Rather, it is now on the lower side than before, because of high rate of inflation. As such, the spread between the lending charge and the cost of funds for many banks has come down. Under such circumstances, it is not tenable that the banks are only interested in hiking their lending rate, as alleged by many, to earn substantially higher profits. Neither the banks, because of their liquidity problem under conditions of their increasing needs for funds to make payment of import letters of credit, in many cases on a deferred payment basis, very high level of government borrowings from the banking system particularly from those large banks which are primary dealers -- new provisioning requirement etc., are not also in a position to increase notably their credit disbursement or funding to new borrowers and helping them with entrepreneurship -- and that, too, when infrastructure-related problems continue to put dampers on investments in real sectors of the economy. Yet then, there is no denying that that high lending rate is also discouraging the potential borrowers - the borrowers who have the real intention of paying back loans - to take recourse to bank credits at such high rates. It is to be noted here that for making reasonable profits on a sustained basis from extending resources to entrepreneurs or enterprising. The banks do need to play a facilitating role in economic growth. That will give a good signal about their being supportive of economic growth. That will help not only to underwrite the security of the economy, but also that of the banks. From acquiring additional customers or expanding their client base, the banks only add to their resourcefulness over the long haul. The growing customer base means expansion of the banks' business well into the future. But credits by commercial banks that have, of late, been showing a slowed-down growth rate in recent days is not a positive indicator. The banks do need to make efforts at their own to maintain or increase their profits in a fair and square way, i.e. through energizing the wheels of the economy. The greater part of the increased profits of the banks coming only from their management's singular efforts about recovery of debts at the high lending rates, are not sustainable. Though banks have very little to do at the stage to help bring down their cost of funds under the present circumstances prevailing in the country, they should do everything possible to lower their operational costs so that they can bring down their lending rates. The high interest rate on borrowing may help the banks to make short-term profit under the given circumstances. But such profit will not really serve well the purpose of their longer term profitability or viability. High lending rates will not also help attract the businesses or the potential entrepreneurs to avail themselves of banks credits, with high debt servicing liabilities. Some genuine existing customers of the banks are, no doubt, servicing their debts at the high lending rates in order to avoid becoming defaulters. But many more borrowers are also avoiding making repayments of their loans, risking the operations of their businesses. But the banks in general should have every reason to be worried about it. Businesses showing a disinterest in taking bank loans at high lending rates will hurt the future business of the banks, making it all the more difficult to expand their client base. Under the circumstances obtaining now in the country, a good number of people who would have otherwise liked to try their hands at business through bank finance, are sitting on the fence. They are unlikely to opt for investment operations until the lending rates on borrowing, comes down. Thus, on the whole, additional investment operations are slowing down as a result of the high cost of bank credits - a situation that also partly reflects that of high costs of funds for the banks themselves. In the longer run, such hard realities will, however, have adverse repercussions on the economy from reduced investments. Two additional factors -- other than high deposit rate -- that are stated to contributing to the banks' unwillingness or inability to decrease their lending rate merit a dispassionate consideration. One of them is their high operating costs. The other is seen as high profiteering motive on the part of a section of their owners or management. Both these factors are capable of being cut short from the management embracing ideas that would be best for the long-term health of their institutions. Operating costs can certainly be pruned through conscious policies and their efficient implementation. As for high profit-motive, if that is at all a serious issue under the present state of the situation in both financial and real sectors of the economy, the owners as well as their management should have certainly the reasons to see the very sensible point of controlling the same from taking a hard look at how far they can go with high lending rate on borrowing without hurting their long-term interests. In this situation, the Bangladesh Bank needs to exercise its powers properly as the regulatory body. Its persuasive advice rather than arbitrary overcontrol on all related matters will particularly work better. It also needs to step harder on the pedal where mere moral suasion and persuasion fail to deliver the result. It has to issue appropriate directives in time for the banks to follow, in letter and spirit, in order to reduce the spread between the interest provided to depositors against their deposits and the interest charged to borrowers against their loans. And thus spread must be realistic one so that the lenders are not bound to bear the major burden of any such high spread. On this score, Bangladesh Bank should use its authority and ask the banks to ensure maintain a spread conforming to the international standard to be followed particularly by the private commercial banks (PCBs). This will encourage depositors to keep their monies in the banks which should be good for the banks or their liquidity positions in the long run. Presently, banking deposits are also taking flight considerably from the low interests received against deposits, particularly in the context of high rates of inflation that erode the real value of their money. This is certainly a worrying factor and both the monetary and fiscal policies must operate in tandem with the aim of bringing down the rate of inflation to a tolerable limit.