The growth of private sector credit has dropped to single digit this year and it is the lowest in the last fifteen years. This is a symptom that not all is well in the financial sector and it also indicates that it is more a problem of production and supply. Additionally, the banks’ ability to provide loans is gradually diminishing
There are two major reasons behind the inability of the banks to provide loans. Firstly, the liquidity of the banking sector is declining. The reason for the drop in liquidity is that we are now getting less money from the "balance of payment". Earlier, there was a surplus in the balance of payment and it rose to the peak in 2017. But after that, the rate has slowly declined, resulting in the drop of liquidity. This is the supply side of the issue and this can only be solved through the increase of supply. Because if there is no supply of fund, the banks will not be able to lend money to people.
Secondly, banking institution is a revolving fund institution. They are the custodian of depositors' money and they use the fund in a revolving manner. It rents out the fund, collects the repayment and rents again. But if the loan loss rises, it does not matter if the loan is rescheduled or not as we are not getting the money back. This effects the loanable fund and the banks cannot issue new loans.
As there is a surge in supply, there has been a rise in the interest rest, which resulted in lower demands.
But lower demand is not an issue. Supply is the main factor here and demand is the secondary one. The government here is then asking the banks to take 2 percent and reschedule the loan to reduce loan loss.
But this is not doing any good. Because the banks are only getting 2 percent of the lending amount and the rest 98 percent is still flowing outside. Thus the liquidity crisis remains. What the government is not understanding is that, if we cannot strengthen the balance of payment, our source of foreign earning will decline and we will not get any liquidity from that source.
The government is now saying that they will issue 1 percent of liquidity for all banks. For example this might reduce the loan loss by Tk10,000 crore. But by doing so they will just weaken the banking sector.
Instead of lending to the manufacturing sector, the banks are now lending more to the non-manufacturing sector. This is just a reflection of the reality. In Bangladesh's culture, most of the default loans are the term loans and the big companies are the defaulters. Thus the banks have lost trust in them and they fear that if they provide further loans to new manufacturing sector, these loans might become defaulted as well.
However, this does not mean that the banks will not provide loans at all. They will of course provide loans to the trusted industrialists that have a record of repayment. In foreign countries, the term loans are obtained from the share market through bonds. But as we do not have a bond market we are still relying on the banks.
Foreign investors are now losing interest in investing in Bangladesh and it is mostly our fault. For example, we have discouraged them to invest in the garments sector.
Earlier, we did not let the foreign investors to set up garments outside the Export Processing Zone (EPZ) area. Even now we give them very limited space to set up businesses outside the EPZ area. It is because the BGMEA thinks that if foreign investors enter the business arena the revenue of BGMEA will fall.
This however is a misconception as there is a lot of products in the garments sector other than the five or six products manufactured by the BGMEA. On top of that, the foreign investors bring their own client base to our country. For example, a Chinese investor will ensure his clients before investing money and this will no way hamper BGMEA's business. On the contrary, the government here will earn revenue.
Because of the negative growth in the credit of private sector and positive growth of credit in the public sector, the GDP in a sense may rise but it will not be a qualitative one at all. There has been a rise in the salary of government employees. But it did not add any value to the economic growth. But our GDP has surely rose because of this expenditure.
If we want to develop anything we need to nurture it properly and the same goes for the credit growth of the private sector as well. We need to reform our current economic system and if we think that it will happen on its own that is not practical at all. We need to strengthen our financial sector and we also need to strengthen our revenue earning sources to ensure government budget management. The government needs to think like a corporate, it should take steps to cut down its cost, and manage its budget properly.
Dr Ahsan H Mansur is executive director of Policy Research Institute.