To borrow or not to borrow …

Planning Minister AHM Mustafa Kamal last week advised businesses to borrow from foreign sources, instead of local banks.
Mr. Kamal, himself a businessman, knows well how high interest-bearing loans hurt the operation of a commercial or an industrial establishment by raising its cost of doing business. So, his advice would surely go well with the business enterprises, particularly the large ones.  
The average lending rate of the local banks is around 15 per cent per annum. But the same is much lower in the case foreign borrowing, around 5.0 per cent that includes LIBOR rate of about 0.5 per cent.
A 10 per cent drop in rate of interest on loans means a lot for any business operation. But securing foreign loans is not that easy. Borrowers have to make deals with foreign banks and submit loan proposals to the foreign loan committee at the Board of Investment (BoI) for approval. The hassle involved in the approval process is not known. However, if the bureaucratic complexities witnessed everywhere come into play here also, the hassles should not be any less.
However, loans from local banks are also not easy to come by. Borrowers have to go through lots of hassles throughout the process in between the submission of application for loans and disbursement of the same.
But what is about banks? Will they take the minister's statement with good grace?
The likely response of the banks could be a deliberate indifference despite the fact the advice in question does expose the unattractive nature of their lending operations, in terms of interest rates.
Moreover, compared to the funds they employ for lending purposes, the volume of foreign loans secured annually until now is not that large.
Last year foreign loans worth $1.19 billion, equivalent to Tk.95 billion, were secured by the private sector operators. As of November last the local banks had idle funds worth Tk. 800 billion.
However, under the prevailing circumstances when demand for funds from the private sector has otherwise been low, the scope to make investment worth Tk. 95 billion would mean a lot to the banks.
In fact, the demand for foreign loans among the private sector is likely to be more in the coming days provided the foreign exchange reserve continues to be healthy and the local banks stick to their current interest-spread, which is one of the highest in the region.  
The foreign loan committee approved nearly $350 million for more than two dozen private sector projects, including one belonging to the Airtel, a mobile phone operator during the first two months of the current calendar year. If the current trend continues, the foreign commercial borrowing might cross $2.0 billion in 2014.
But the central bank might soon be forced to rein in such borrowing against the backdrop of a slackening trend about remittance inflow. For the past few months the inward flow of remittance recorded either negative or marginally positive growth on a month-on-month basis.
The reserve grew substantially in 2013 mainly due to better export performance and healthy remittance inflow in the first half of the year against a subdued import performance. But if the political situation continues to be normal in the coming months, the import demand would pick up leading to fall in the current reserve. Moreover, if the government decides to spend a part of the reserve for the construction of the Padma Multipurpose Bridge, the country's balance of payments (BoP) situation may again come under stress.
Unfortunately, the local banks, despite their sincere desire, can hardly do anything to bring down their lending rates and provide relief to the borrowers of all types. Apart from their own high cost of operations, the banks are required to offer higher rates to the depositors to remain competitive in the task of fund mobilisation. Banks would lose depositors to the government that offer higher yields on its savings instruments and also to non-banking financial institutions (NBFIs).
Some private banks having quality loan portfolios and better management capability are in a position to lower their lending rates. But they don't. Though there is no official cap on lending rates, all banks follow unofficially agreed lending and deposit rates. So, there is little scope to rope in foreign loan seeking clients by reducing lending rates aggressively.
But anomalies involving bank interest rates, lending or otherwise, emanate from a growing propensity among most people to make high or unreasonable profit by any means, fair and foul. Most businesses are guided by high profit-making motive and the financial institutions are no exception. Whether they are successful or not in their bid is an altogether different question. But they do try their best.
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