The government’s plans to meet the gaping deficit in the budget, have created further concern for the banking sector, stakeholders have said.
“Now if the government takes loans from the banks, pressure will mount. This will obstruct the 8 per cent growth we aspire. New employment will not be generated either,” chairman of the Association of Bankers Bangladesh (ABB) Syed Mahbubur Rahman told Prothom Alo.
He also said private sector loans are decreasing every month as the banks don’t have money.
Most of the banks are facing an acute liquidity crisis and at this juncture the government is planning to borrow over Tk 470 billion (Tk 47,000 crore) from the banking sector, according to the proposed budget for 2019-20 fiscal year.
Experts say that if the government takes excessive loans from the commercial banks, the private sector will be hit hard. If the government borrows all the money, there will be nothing left for the private sector.
An alternative for the government is to borrow from the central bank. That would mean the central bank would have to print currency and this would lead to inflation.
The 2019-20 budget announced by finance minister AHM Mustafa Kamal on Wednesday, offered no specific way out for the crisis in the banking sector. On the contrary, it contained plans to borrow Tk 473.64 billion (Tk 47,364 crore) from the banking system. It also proposed one-digit interest on industrial loans. Bankers feel this will just serve to exacerbate the crisis in the sector further. As it is, private sector loans have dwindled to 12.07 per cent.
In his budget speech, the finance minister also spoke of amending the laws. He spoke about taking action against deliberate loan defaulters. The question is, who are the deliberate loan defaulters and who are the unintentional ones?
Former president of Dhaka Chamber of Commerce and Industry (DCCI) Abul Kasem Khan, speaking to Prothom Alo, said the budget has determined private investment target at a 24.2 per cent ratio with the GDP. This will require an additional investment of Tk 300 billion (Tk 30,000 crore). As it is, the banks are facing a liquidity crisis and interest rates are continuously going up. Now if the government also borrows from the banking sector, the pressure will simply mount. He said, no one will dare make any new investments under the circumstances. Even those who were planning to invest, will now hesitate.
The target of loans from the banking sector in the 2018-19 budget has been Tk 420.29 billion (Tk 42,029 crore). This was decreased to Tk 308.95 billion (Tk 30,895 crore) in the revised budget. Till 29 May this year, so far Tk 186.39 billion (Tk 18,639 crore) has been borrowed from the banks.
Another source of finance to meet the budget deficit is savings certificates. With high interest rates, savings certificate sales are breaking records. The sales target for saving certificate in the current fiscal had been for Tk 261.97 billion (Tk 26,197 crore) but by March this year, already savings certificates worth Tk 397.33 billion (Tk 39,733 crore) had been sold. The target in the revised budget was Tk 450 billion (Tk 45,000 crore) and this too is likely to be exceeded.
Excessive sale of savings certificate creates two kinds of problems. As interest rates on the certificates are high, depositors prefer to invest in this tool rather than deposit their savings in banks. Thus bank deposits lessen, as at present. Most banks are now desperately seeking deposits. Interest on deposits is now exceeding 10 per cent, but the government is saying this interest has to be kept within 6 per cent and interest on loans at 9 per cent.
Another downside of high savings certificate sales in that expenditure on interest increases. As a result of such costly loans year after year, the budget allocation now for payment of interest is 18.3 per cent of expenditure.
According to the finance ministry, the government collected Tk 524.17 billion (Tk 52,417 crore) in FY2016-17 for savings certificate sales and Tk 465.300 billion (Tk 46,530 crore) in FY2017-18.
Speaking to Prothom Alo in this regard, chief economist of the World Bank Dhaka office Zahid Hossain said, when there was money in the banks three years ago, the government turned to selling savings certificates to generate funds. But now at the wrong time they are aiming to take loans from the banking sector. There is no cash in the banks and borrowing from this sector will simply deepen the liquidity crisis. And taking loans from the central bank will push up inflation. This would not have been a problem had there been discipline in the banking sector.
Zahid Hossain went on to say, the budget does not have any specific mention of the prevailing crisis in the banking sector. The loan defaulters must be nabbed in order to fix the sector, the confidence of the depositors must be restored. Instead of controlling the dollar rate, the market should be allowed to control it. This will ease the liquidity crisis to an extent. The question is, when economic growth is so good and when agricultural production is so high, why are deposits dropping?
Banks run after money
Faced with the liquidity crisis, many private banks are running on loans from Bangladesh Bank and the state-owned banks. Only a handful of banks, other than the state-owned ones, have sufficient funds for investment. Many are even offering up to 14 per cent interest on deposits in order to resolve their liquidity crisis. This is pushing up interest rates on loans steadily, going up to 16 to 17 per cent.
Executive director of Policy Research Institute, Ahsan H Mansur, told Prothom Alo, the banks have no money. If loans are taken from the banking sector, the liquidity crisis will worsen and inflation may increase. Reserve money growth will probably exceed the target this fiscal. He said, the government should place stress on revenue collection rather than loans from the domestic sector. This will require initiative and extensive reforms in the revenue board.