How much sustainable is foreign borrowing option?

Due to high interest rate charged by national commercial banks, the suggestion for foreign borrowing option has taken a dramatic turn. While it can be undoubtedly argued that such an option can open a door for great opportunities and promises, the concern is also there from another angle. Can such an option, if encouraged, be sustained under the current circumstances? One can say that this option appears to be a prudent one considering exorbitant interest rate. At the same time, it can also be argued that this option is not desirable and sustainable given the origin of the high interest rate.
EXPLANATION FOR HIGH INTEREST RATE: There are several factors that have caused interest rate to be so high. Some of the factors, as mentioned by Dr. Abul Basher (Foreign borrowings: Prudent approach, the Financial Express, March 11, 2014)  are: (a) failure of financial institutions to mobilise resources and to avail the surpluses, (b) higher deposit rate accruing from  competition among banks for funds, (c)  bad loans and (d) inflation.  Though the first two factors influence interest rate decisively, the third one may be considered as the principal reason for the high interest rate in our country.
Both empirical and theoretical studies confirm that the higher interest rate spread in our country is due to higher default risks and higher amount of bad loans that banks carry. The higher default risks are often created by banks themselves by following the so-called higher risk and higher premium policy. This higher risk and higher premium method may be justified from the perspective of a very short-term gain. But from a sustainability perspective, this method can't be justified in most of the cases. Lending is not like selling lemons in auction market where the sellers sell their lemons to the highest bidder. It is more a business knowing not only the returns what lenders need but also the returns of borrowers who can service their loans properly. Moreover, higher risk and higher premium method not only induce banks to take higher risk but also give an incentive to borrowers to take still higher risks. The end of this process can't be known exactly with sufficient measure, but what we should know is that a bank following this method can't sustain its lending business in a safe manner for a long time. Sooner or later it will come to realise the bad consequences of such method.
Increase of interest rate due to higher inflation shouldn't be a problem since the information on inflation is availed by everybody by proper adjustments.  
As for competition for funds among banks which is mostly fuelled by new banks, foreign borrowing option will not be able to reduce the interest rate for banks. The question arises: what will happen when banks will reduce their competition for funds due to lack of demand for funds which is taken over by foreign borrowing? Probably, banks will reduce their competition for funds since they will face lack of demand for funds at least for a short-period. This reduced demand will reduce rate of interest now offered on deposits. In turn, such a reduced rate may induce savers or depositors to divert their deposits away from banks to look for a better opportunity that can offer them a lucrative rate. As a result, amount of funds in banks will be reduced and reduced funds will lead the interest rate to go high. Nothing is changed but the interest rate will show a downward tendency for a very short-period and will hit the higher level again. This point can be reinforced by the failure of banks and financial institutions to mobilise resources or to avail the surpluses.
The failure to mobilise surpluses directly shows why foreign borrowing will not help anyway to reduce interest rate. To get surpluses banks not only need to launch or offer good financial packages but also a good rate. Such rate must compete with the rate prevailing for alternative investment opportunity as well.
The above analysis shows that foreign borrowing option will not help us any way to reduce interest rate. If this is the case, then such borrowing option can't be sustained for long. Let us discuss this sustainability from another vital point of view.
COMPETITON AND INTEREST RATE REDUCTION: The strongest argument in support of foreign borrowing option is that foreign borrowing at a lower rate will induce national commercial banks to reduce interest rate encouraging competition among them. Before we become too optimistic about the lower interest rate by competition, we should ask ourselves what competition has to do with reducing interest rate in this situation. For example, competition can reduce interest rate encouraging more efficient operation by reducing high administrative costs. Therefore, foreign borrowing will able to reduce the interest rate to the same amount as it reduces administrative costs. This means interest rate reduction will be exactly equal to the reduction in administrative costs which is caused by competition.
But what's about bad loans, higher default risk and reduced funds for banks due to lower interest? Will foreign borrowing option be able to reduce interest rate exerting influence on these factors? The answer is - not at all.
Competition fuelled by foreign borrowing option will be able to reduce interest rate if and only if the higher rate is due to some factors that market itself can cure. For example, if this is so for higher charge of interest by banks due to lack of competition and disintegrated capital markets, etc.
But the factors causing the current higher interest rate are totally non-market factors which don't have anything to do with the market. Take, for example, the case of bad loans. Such bad loans, as we know, are often a result of corruption such as lending approval under political influence. The situation is created by somebody else but the burden and blame are slapped on the face of banks.
Another issue is: what is the rationale and justification for approving the establishment of a larger number of new banks in a row? Why didn't the central bank foresee such potential hazard when the government gave approval to the establishment of a large number of new banks?  On what ground would the central bank justify the approval of a large number of new banks in a row?
When somebody blames banks for charging higher interest rate, we argue that this doesn't make sense.  Banks are doing what they are supposed to do and their normal operations have been affected by the unethical practices of outsiders such as approval of lending to a lender, who even doesn't qualify for lending, under official or political pressure. But when banks respond to such practices - and they have to - by increasing interest rate to compensate for the loss, the blame automatically falls on their shoulder.
The current interest rate, to stress the point, is an optimal response to the prevailing situation. The interest rate will automatically change with the change of the situation.  Any attempt to tame the interest rate merely by manipulating it will prove futile and such an attempt will not be able to sustain itself for long.  Therefore, any play with the interest rate without changing the conditions of the playground will simply be fruitless.
Foreign borrowing is an opportunity and we need to avail it. But certainly this is not the occasion to welcome it. Doing so would be inviting another problem while trying to solve the current one. Obviously, anything that gives rise to problems should not be treated as an answer to another problem. Rather both will create another problem - and that is still a higher interest rate. The foreign borrowing option is not sustainable.
The contributor writes from the University of Denver, USA. [email protected]