Compounding woes of investment

Saleh Akram | Published: February 04, 2015 00:00:00 | Updated: November 30, 2024 06:01:00

It is becoming increasingly clear that the dark clouds of uncertainty hovering over the country's investment scene have further intensified. Investment volume which had been far below expectation in recent years due to lack of infrastructural facilities like gas and electricity, is aggravating due to the ongoing political crisis. Investment scenario in banks also presents a grim picture. Situation in 17 banks has already reached a perilous state. Investment growth in 14 banks is negative, while that in the remaining three has fallen below 1.0 per cent. According to bankers, if the situation continues longer, it will have a multiplier effect on the entire banking sector. The operating costs of the banks are not coming down, while the income is falling. As a result, net income of the banks is decreasing. Â
As a matter of fact, investors are now scared. Loan recovery rate of banks is going sharply down as the businessmen are not able to repay their bank loans because of the sluggish business trend and are ultimately becoming defaulters. Since the defaulters are not allowed to take fresh loans, many businesses are on the verge of closure and consequently loan recovery process has slowed down.Â Â Â Â
Bangladesh Bank is rescheduling the outstanding loans of large industrial groups in its bid to tackle the situation. In the mean time, a committee of the central bank is working on the formulation of a set of policies in this regard.
According to the business community, the running units are already under threat due to lack of capital, and new investment in a situation like this appears to be a remote possibility. As there is no other alternative but to set up new industries to achieve industrial growth and employment generation, the infrastructural limitations of gas and electricity remain as the main deterrents. As a matter of fact, the government is not being able to ensure uninterrupted supply of gas and electricity to the existing industrial units, let alone provide new connections to upcoming ones. Â
Bangladesh Bank regularly prepares a monthly report on loan deposits. The last updated report, based on the statistics of November 24, 2014, reveals that compared to the corresponding period of the preceding year, investment growth was negative in 17 banks.
Banks have been experiencing zero investment for quite some time now. Their woes have been further compounded by the reluctance of potential investors to invest. Banks collect deposits from their clients at low interest rates, and lend the same at higher rates. Real income of banks comes from investment activities. Banks' profit is actually the differential amount between lending and borrowing rates. Banks meet their operating expenses from this money and the amount left after meeting the operating expenditure and payment of government taxes, is distributed among the shareholders. But due to the lingering stagnation in investment for last several years, entrepreneurs are not able to repay their loans and the banks are resorting to various practices to avoid losses.
Since banks are not in a position to invest, fund management cost is rising. On the other hand, business people are not able to repay bank loans due to sluggish business trend, which consequently triggers increase in the volume of non-performing loans (NPL). The banks are to preserve higher provision which is drawn from their income. As a result, real profit of the banks is sliding down.
Bankers and financial experts are of the opinion that never before banks were confronted with such a difficult time.
The banking sector which was otherwise founded on a solid base, is now gradually losing its ability to withstand these pressures. It is difficult to predict what will happen if the situation persists longer. The depositors have already started withdrawing their money since interest rate has been lowered. The government is investing more in saving certificates with the hope of higher profit. As a result, banks' income is falling and the possibility of plunging into a serious crisis may not be too distant a reality.Â Â Â
Efforts of the central bank to improve the NPL situation have resulted in very little success so far. In its latest move, the Board of Directors of Bangladesh Bank approved a restructuring policy allowing borrowers of above Tk.5.0 billions for a maximum of 12 years to repay their loans. These borrowers will not be allowed to provide any cash dividend to their shareholders in the first three years of restructuring of the loan. A borrower shall get this opportunity only once. The central bank hopes that this initiative would boost economic activities and ensure repayment of loans.
All said and done, prospects of investments will brighten only if infrastructural bottlenecks of gas and electricity are removed. Other factors to boost investments, such as, bank loans and lowering of interest rates, land prices etc., shall come much later.
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