Rate cap keeps private credit growth down: Bankers

Highlights-

• Achieving credit growth ceiling will be challenging in the current fiscal year: Ali Reza Iftekhar, chairman of ABB
• Credit growth slowed down because of the same pricing for all kinds of loans: Mashrur Arefin, managing director of City Bank
• Credit guarantee scheme for SMEs is inoperative: BRAC Bank Managing Director and CEO Selim RF Hussain
• Relief from provisioning of the guaranteed part can make credit guarantee scheme operational: Standard Chartered Bangladesh's CEO Naser Ezaz Bijoy
• Action should be taken against willful defaulters:  Md Jashim Uddin, president of FBCCI

Even at a time when banks are sitting on a pile of surplus liquidity with low interest loans, private sector credit growth has remained sluggish owing to the lending rate cap, raising concern over achieving expected economic growth, said bankers at an event on Thursday.

High default loans are killing the banking industry as well as businesses, they said while exchanging views with leaders of the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI)  at a city hotel.

The apex trade body organised such a meeting with top executives of banks for the first time.

FBCCI President Md Jashim Uddin moderated the meeting  titled "Role of banking sector in economic development in prevailing situation: View-exchange with bankers over problem and prospect", while Ali Reza Iftekhar, chairman of the Association of Bankers, Bangladesh (ABB), led the delegation of 32 bankers.

Private sector credit growth remained low at 7% to 8% because of the lending rate cap, said Iftekhar.

It will be challenging for banks to achieve the monetary target of 14.8% set for the current fiscal year. The economy cannot grow much with this low level of credit growth, he added.

Private sector credit grew 8.38% in July, a slight increase from 8.35% in the previous month.

The credit growth was 8.40% in the last fiscal year against the monetary target of 14.8% when the lending rate was 6% to 7%, the lowest in recent history.

The credit growth started to dip after the lending rate had been capped at 9% from 1 April last year.

Iftekhar, also the managing director of Estern Bank, said interest rates should not be fixed in the free market economy. The market should be allowed to define the rates.

"It is very difficult for banks to lend to small and medium enterprises (SME) at 9%," he added.

Lending rate should not be the same for all types of loans, he opined.

It is true that banks are reluctant to lend to SMEs because lending to large borrowers is easier than to small ones. Providing loans to SMEs requires a lot of paperwork and monitoring costs are high as well, he said.

As a result, banks could not make 100% disbursements of stimulus loans for the SME sector, he said.

Addressing the default loan issue, Iftekhar said the current default loan rate is more than 10% and it is very high.

He sought help from the FBCCI to reduce default loans.

He emphasised developing the bond market for long-term financing in businesses.

FBCCI President Md Jashim Uddin said an analysis is needed to see why private sector credit growth is not improving.

Emphasising taking actions against wilful defaulters, he called upon bankers to support businesses that defaulted on loans for genuine reasons.

"We cannot let many businesses suffer for some wilful defaulters," the FBCCI president said.

He urged bankers to speed up loan disbursements for the SME sector as it accounts for a major share of revenue for banks.

If banks do not disburse loans to small ventures right now, they will not get borrowers to lend in the near future as small businesses will die. Then, what will banks do with their money, he questioned?

Mashrur Arefin, managing director of City Bank, said credit growth slowed down owing to the same pricing for all kinds of loans.

Banks have become risk-averse due to the fixing of lending rate at 9% for SME loans, he said.

Banks now prefer secured investment like in government securities and bonds. If banks do not get 12% to 13% in returns, they will go to corporate lending, he added.

It is claimed that banks are making good business by maintaining a high spread, but the reality is different, Mashrur said.

The spread of most banks is less than 4%. He differs with the spread calculation of the Bangladesh Bank, saying that the central bank includes only the bad loan part while measuring spread, but banks have to determine it by taking total default loans into calculation too.

For instance, the spread of his bank is 4.75% as per central bank calculation, but the real spread is 3.8%, he said.

Selim RF Hussain, managing director and chief executive officer (CEO) at Brac Bank, said the credit guarantee scheme that was introduced for SMEs is completely inoperative. Banks do not show interest in the scheme because of its complex policy.

He suggested forming a simple policy to make the scheme operational.

Standard Chartered Bangladesh's CEO Naser Ezaz Bijoy said the reason can be found easily why private sector credit growth is low despite a huge excess liquidity in the banking sector.

Excess liquidity in the banking sector hit a record Tk2.31 lakh crore in July, according to Bangladesh Bank data.

Citing an example of Kenya, he said the credit growth in the country came down to 2% from 20% within three years after the implementation of the lending rate cap.

The credit guarantee scheme will be operational if banks are given relief from provisioning of the guaranteed portion, Naser added.

Moreover, not only stimulus loans, the credit guarantee scheme should also be opened for all kinds of loans, he opined.

Low credit growth is very concerning for the economic recovery, said, Md Saiful Islam, president of  Leathergoods and Footwear Manufacturers and Exporters Association.

"We have to do something out of the box to speed up the private sector credit flow," he also said.

He emphasised reducing default loans so that businesses can get interest waivers from banks in this crisis period.

Abul Kasem Khan, director of AK Khan & Co Ltd, said the tenure of working capital is usually one year, but it should be extended to 5 years, considering the current business crisis.

M Reazul Karim, managing director of Premier Bank, said his bank disbursed stimulus loans amounting to Tk1,300 crore, but borrowers are now unable to repay the loans. If they do not repay, the Bangladesh Bank will deduct the subsidised interest part from banks' accounts.

As a result, banks will be demotivated in the coming days in disbursing stimulus loans. In this case, a huge amount of stimulus loans will become defaulted, he said.

Md Obayed Ullah Al Masud, managing director of Rupali bank, said default loans created a hole for banks, slowing down credit growth.

He requested the FBCCI to hold a dialogue with banks over recovering loans from defaulters.

After the end of the one-year moratorium facility, banks started to feel the default loan wave as toxic debts increased by around Tk5,000 crore in the second quarter of the current year, raising the alarm for the banking sector.

Default loans stood at Tk99,205 crore at the end of June this year, which was Tk94,265 crore in March, according to Bangladesh Bank data.

Despite having a relaxed loan repayment facility for borrowers, default loans increased by Tk10,471 crore in the first two quarters of the current year.

The repayment period of stimulus loans started, but many customers could not pay back, causing a rise in default loans, according to industry insiders.