Revisiting the old issues

The central bank's newly appointed chief economist Dr. Biru Paksha Paul, while taking part in a workshop in Dhaka early this week, picked up two important issues -- bank loan default culture and high lending rate -- that have been plaguing the country's banking sector for long.
He appeared to be annoyed with the banks that have heavy burdens of non-performing loans (NPL) and also with the delinquent borrowers. Though it sounded pretty unusual on the part of the central bank's chief economist, he cautioned both banks and habitual defaulters about taking stern actions against them in the event of their failure to go by the rules and improve the NPL situation.
However, how far the note of warning signalled by Dr. Paul works remains to be seen. If seen in the context of the outcome of identical cautionary words uttered by the central bank honchos on previous occasions, one has reasons to be somewhat sceptical.
The people are otherwise accustomed to observing the opposite. The delinquent borrowers or habitual defaulters were often been found dictating terms, using their connections with politically influential people. Such defaulters have borrowed heavily from both private and public sector banks. However, the state-owned banks have always been their prime target. They turned to private banks when it was not possible to milk the public sector banks anymore.
However, there are a few delinquent borrowers who are mainly involved in trade-related activities. These borrowers have successfully trapped a number of private banks and managed a substantial volume of loans. Such banks are now finding it truly difficult to recover their money.  The ongoing political trouble has made the situation even more complicated for them.
The presence of a sizeable amount of NPL is one of the factors that have, apparently, forced the banks to maintain higher spread, a problem that Dr. Paul had mentioned in his deliberation at the workshop.
Dr. Paul has found the existing average lending rate of 12.5 per cent not consistent with the prevailing rate of inflation. Besides, he said, the higher lending rates were enough to dampen investors' interest.
There is no denying that an average 5.0 per cent spread is too high despite the fact the interest rates offered by banks to depositors at the moment is unattractive. Savers are now taking their funds out of banks to invest the same in the government's savings tools which offer higher rate of return.
Yet the banks are sticking to the high spread just to ensure higher operating profit which is necessary to provision their NPLs and pay dividend to shareholders.
The central bank economist, however, reminded the banks about the danger of pursuing the high lending rates in the context of availability of overseas channels of borrowing.  He cautioned that some banks might encounter the problem of excess liquidity if the foreign borrowing was available to all potential borrowers.
That is a simple math. If a borrowing source demands higher rates, the borrowers would naturally approach the sources that offer funds at lower rates. But it is unlikely to happen now or in the near future.
Given the size of the current reserve and the prospects of fund inflows on account of remittance and export in the next few months, the committee entrusted with the responsibility of approving foreign loans by the private sector might decide against resorting to any sort of adventurism. The situation calls for exercising caution.
So, not all the potential investors would have the chance of borrowing fund from cheap foreign sources. They would continue to remain dependent on funds lent by local banks.
The question is: Will the local banks bring down their lending rates? The lending rates, undoubtedly, are now lower than before. But compared with the interest rates offered to depositors, the lending rates are still high. The banks by managing the portfolios better and reducing their cost of operation can surely bring their lending rates further down. But they might find it too difficult a task to accomplish.
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