Businesses face new challenge of rising interest expenses

At a time when the corporate world in Bangladesh is already struggling with various challenges such as exchange rate fluctuations, import constraints, a slowdown in consumption, and energy shortages, a new hurdle has appeared – an alarming rise in interest expenses.

The borrowing cost has surged to over 12%, up from around 9% just last June, significantly eroding operating profits. Many companies fear that the interest rates on their bank loans may soar to as high as 15% in the coming months.

Infographic: TBS

"The business environment beyond our control is becoming tougher gradually and the interest rate hike is making it unbearable," said Pradip Kar Chowdhury, finance director of ACI Ltd, a top tier conglomerate of the country generating over Tk11,500 crore revenue in a wide range of industries – from consumer products to agricultural, mechanical and retail.

A 1 percentage point hike in interest is costing the company additional Tk60 crore in interest against the loans it took to build and run the diversified businesses.

While the financial struggles of individuals or families evoke empathy as a human story, the same struggles faced by companies often lack a human appeal, Pradip said, emphasising the need for the government to consider the survival of enterprises and entrepreneurs amidst such challenges.

Making Tk162 crore profit before taxes in the last fiscal year, it paid Tk214 crore in taxes while its cost of borrowing was Tk505 crore for the year.

"Apart from a handful of cash-rich businesses, the rate hike is hurting all," said Shekhar Ranjan Kar, head of finance at BSRM Group, which leads the country's steel market.

"The business environment beyond our control is becoming tougher gradually and the interest rate hike is making it unbearable." Pradip Kar Chowdhury, Finance Director of ACI Ltd

"We are worried about the impact of the rising interest rate that might hit 15% in a few months," he said, adding that in such a case his group would have to spend gigantic sums as interest.

Chartered Financial Analyst Md Moniruzzaman, who serves as the managing director of brokerage firm Prime Bank Securities, said after two consecutive years of decreasing corporate earnings, a turnaround occurred in the previous quarter as companies experienced a significant reduction in foreign exchange losses compared to the same period in the previous year.

"However, businesses selling non-staple products might continue to suffer, due to inflation and a decline in the purchasing power of people. On top of that, rising interest is also going to affect the highly leveraged companies badly," he said.

On the flipside, very few cash-rich firms would enjoy the increased interest income, he added.

According to the listed firms' latest disclosures, Square Pharmaceuticals, Padma Oil, Titas Gas, Meghna Petroleum, and Marico Bangladesh are the top firms in terms of holding net cash.

In contrast, Power Grid Company, Beximco Ltd, BSRM Ltd, GPH Ispat and ACI Ltd are the firms that have the maximum net loans when their total cash holdings are subtracted from their total bank liabilities.

Humayun Rashid, president of the International Business Forum of Bangladesh, said manufacturers are facing challenges due to shortages in fuel and power, as well as significant price increases, leading to declines in production and sales. Moreover, the escalating cost of borrowing is intensifying concerns among entrepreneurs.

"Tax should never surpass the pre-tax profit of a business, and businesses deserve fair taxation, especially when they are under multiple stresses." Economist Ahsan H Mansur, executive director of Policy Research Institute

His conglomerate, Energypac, is burdened with approximately Tk3,000 crore in bank loans and is currently unable to find a solution to alleviate the pressure on its bottom line.

Humayun said the combination of high inflation and liquidity crises within banks stems from various factors beyond what textbooks outline and merely increasing rates would not produce the desired results. Rather, the borrowing cost, if surpasses affordability, would weaken entrepreneurs, thus impeding job creation.

Alongside taking emergency measures to prevent further weakening of businesses, the government should urgently focus on how to attract investments, both from local and global sources. Meaningful reforms, investment-friendly soft and hard infrastructure and significant improvement in governance should be at the top of the list, he added. 

BSRM's Shekhar Ranjan Kar said exchange rate issues force companies to provide more than 100% margin against letters of credit (LCs). Besides, the need for working capital surged at every single point of operations.

"With all expenses skyrocketing, businesses find themselves needing to borrow more just to sustain operations, let alone consider expansion. Moreover, the rising interest on loans only adds to their burdens. What more do businesses need to endure?" said Humayun Rashid.

ACI's Pradip Kar Chowdhury said, "We have been pricing most of our products in a regulated setting, with controlled interest rates. There was a balance until the removal of the interest rate cap in the middle of last year. Now, we find it challenging to transfer the increased costs to consumers due to government regulations or market competition leading to our interest expenses exceeding affordability.

"The biggest challenge companies are facing is unjust taxation which includes advance taxes and advance income taxes at the source, even when companies are operating at a loss. The government must promptly alleviate these unjust tax burdens on companies to ensure their survival."

Echoing the same, Humayun Rashid said fair taxation is essential for attracting investment.

How to deal with rising rates?

Ershad Hossain, the managing director of City Bank Capital Resources, told TBS that in times of rising interest rates, securing debt capital at manageable interest rates can be facilitated by fixed-rate bonds.

"For instance, if a company wants to avert the risk of paying 14-15% interest against its loans, it can issue zero coupon bonds at a fixed rate of 11-12% to attract investors. The rate of return might sound less attractive for investors right now because treasury bills and bonds have equal yields. However, the return from zero coupon bonds is tax-waived for investors other than financial companies. That might help wealthy individuals or cash-rich corporations bag an effective annual return of 15-16%, depending on the tax bracket," said the investment banker. 

"Equity raising from the stock market would help businesses reduce the pains of rising rates," said Saiful Islam, a director of Brac EPL Stock Brokerage who is leading the Dhaka bourse stockbrokers' association DBA. 

A temporary pain

Economist Ahsan H Mansur, executive director of Policy Research Institute said, it is all about repairing the macroeconomy right now and monetary tightening would help exchange rate stabilisation.

The government should maximise efforts for exchange rate stabilisation, let the inflation come down and the interest rate would follow that. Businessmen have to go through the temporary pains of interest rates, he said.

"For investment attraction, the government should work on fixing the macroeconomic issues and the long-prevailing problems with doing business," Mansur said.

Tax should never surpass the pre-tax profit of a business, and businesses deserve fair taxation, especially when they are under multiple stresses, the economist added.