Due to the interest rate cap, banks will shy away from lending and ultimately hurt the economy and businesses, say bankers
The banking sector will no longer be the goose that laid the golden eggs when it comes to supplying money to the economy as the lending rate cap and pandemic have put the industry in enormous challenge.
They made the remark on Saturday while speaking at an online discussion with The Business Standard over the current state of the banking sector.
Dr Zahid Hussain, former lead economist of the World Bank's Dhaka office, moderated the discussion.
"Banks are not charitable organisations. They are publicly listed companies. They have responsibilities to provide financial value to their shareholders. They cannot charge fees and prices due to lending rate cap," said Selim RF Hussain, managing director of Brac Bank.
As a result, banks will shy away from SME and retail lending, ultimately hurting the national economy and domestic businesses. Small and medium enterprises (SMEs) and retail businesses will die off in less than a year, he said.
"The banking sector is a goose that lays golden eggs. we should not harm the goose, so that bank can continue to lay golden eggs in future," he explained with the help of the famous fable from Aesop's tales.
In the upcoming monetary policy, the Bangladesh Bank should give some flexibility in the lending rate to save retail and SME businesses, Selim further said.
Back in the 2016-17 fiscal year, lending rate of private banks came down to 7-8 percent, said Rahel Ahmed, managing director of Prime Bank.
Nobody needed to "instruct" banks to bring down the lending rate at the time, he said. Before imposing the interest rate cap, banks were lending at 11 percent to 12 percent.
"So, borrowers get a two percentage point reduction in lending rate, which does not have much impact on their businesses. On the contrary, through this interest rate cap, we are sucking out money from the banking sector," he said.
Rahel added that depositors are contributing to 87 percent of the money in banks, but "we have forgotten about them."
"We are only trying to serve borrowers by reducing the interest rate."
He further said the Bangladesh Bank has been giving regulatory forbearance by suspending installments, which is ultimately helping bad borrowers. "Banks will be in serious trouble when the forbearance ends," he stated.
Since the interest rate is fixed, announcing the monetary policy is just a formality now, said Faruq Mainuddin Ahmed, managing director of Trust Bank.
It is true that if retail businesses are destroyed, large businesses will also not be viable, he said.
"But I'll not prefer to lend at a 9 percent interest rate to retail and SME segments; rather, I will prefer to invest in government treasuries," he said.
At present, consumer financing has almost stopped, he added.
"We are emphasising only the garment exports, but giving importance to the domestic market will boost our GDP," Faruq opined. He said it was the market forces that brought down lending rates to single digits in 2016 and 2017. So, this should also have been market-driven.
The economy of Bangladesh grew in the free market economy regime and private commercial banks mostly contributed to industrialisation. Most large industrial loans came from private banks, which were supposed to come from the Bangladesh Shilpa Bank.
"If free interest rate was not a problem before, why is it suddenly such a big problem now?" he questioned.
It should be found out whether the entire business community demanded a lending rate cap or only some vested groups, he suggested.
In his observations, economist Dr Zahid Hussain said, "Deeper problems like governance and high default loans have to be addressed. Otherwise life support will not work in keeping the banking sector operational."
As an immediate action, Bangladesh Bank can give some indications in the new monetary policy on how much flexibility it can bring to the interest rate cap, he said. During this pandemic, both demand and supply have been disrupted. Monetary policy can be expansionary, but how effective that can be will depend on where expansion is going.
If SMEs and cottage industries remain credit-starved due to the interest rate cap, then that expansionary monetary policy will not boost production, he said.
"The interest rate cap will give short term benefits to corporate and commercial clients during this pandemic, but in the medium term, it will certainly shrink private sector credit growth," said Selim RF Hussain.
He said private sector credit growth has already started sliding, and it will be slower in the coming months because there is no risk premium and prices are lower than the recovery costs.
The SME and retail portfolio of Brac Bank is around Tk16,000 crore – now a complete loss-maker.
It is hard to believe that the 16.7 percent private sector credit growth target set in the new budget can be achieved, Selim said.
He added that people must have money to spend in order for consumption to get a boost.
"We are focusing on garment exports, but our domestic market is quite large compared to the export market. The domestic market has to be made more vibrant. If banks cannot provide money for spending, people will not consume."
The bankers said that an interest rate cap does not exist anywhere in the world. The concept of bringing down the lending rate is good, but that should be done through free market dynamics – not through artificial pricing.
Artificial pricing did not succeed in the past 30 years.
The banking sector needs to be reformed, otherwise we are heading towards a big disaster. Default loans are the biggest challenge for the sector, which is the outcome of a lack of governance, Selim said.
It is now difficult for the bank to bring back money from defaulters due to vulnerability in the regulatory framework.
When artificial pricing is imposed on a free market economy, whether it is on the banking sector or on the stock market, there will be negative fallouts.
It has already been proven in the last 30 years that what the negative impacts can be for imposing lending rate caps.
Selim said Kenya is the latest example of this; their government had to roll back from the previous decision of lending rate cap several years ago.
"The retail and SME sector should be exempted from rate cap to increase money flow into people's hands," he said.
"Do not consider the banking sector as a charity. A bank cannot be a non-profit organisation. It has to be a commercially viable profit-making organisation. It is a publicly listed entity that must generate appropriate return on assets, return on equity.
"When you randomly throw an axe at the banking sector, banks will fall, eventually impacting every sector of the economy," said the Brac Bank managing director.