Political campaigns needed to reduce NPLs

The presence of a huge amount of non-performing loans (NPLs) in the banking sector raises funding costs for entrepreneurs so Bangladesh Bank's decision to cap the lending interest rate was a wrong one, says economists and entrepreneurs. 

They called for launching political campaigns to reduce the NPLs and ensure proper punishment for wilful defaulters so that none dared to embezzle banks' funds.

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Bangladesh Bank set the cap on April 1 of 2020 in a bid to reduce funding costs of entrepreneurs, saying the highest interest on deposits would be 6 per cent while for lending 9 per cent.

Default loans in Bangladesh's banking sector jumped 17 per cent year-on-year to Tk 120,656 crore last year owing to a lack of corporate governance and the ongoing business slowdown.

As a result, the ratio of bad loans rose to 8.16 per cent of the outstanding loans in December compared to 7.93 per cent in the same month in 2021, showed data from the Bangladesh Bank.

"Without political will and exemplary punishment, the NPLs can not be reduced," said Syed Mahbubur Rahman, former chairman of the Association of Bankers, Bangladesh (ABB).

"Courts also need to be more active to solve the disputes though they have manpower issues," he said.

His comments came at a seminar titled "Bi-annual Economic State & Future Outlook of Bangladesh Economy: Private Sector Perspective" organised by the Dhaka Chamber of Commerce and Industry (DCCI) on its premises yesterday.

When the NPLs increase, meaning, people are not returning the funds, it ultimately raises banking costs. Moreover, the inter-bank lending rate increased along with the deposit rate, Rahman said, adding that this leaves no way out but to increase the lending rate.

"If banks cannot run, how can the economy will run? So, NPLs must be reduced," he said.

Rahman, also managing director and CEO of Mutual Trust Bank, recommended ensuring good governance and efficient use of resources to avoid the middle income trap.

Bangladesh Bank set the interest rate caps and launched a multiple exchange rate system without any justification but those were not the right decisions, said Prof Selim Raihan, executive director of the South Asian Network on Economic Modeling (SANEM).

The higher interest rate for lending was mainly a result of the presence of the high amount of NPLs and inefficiency of the banking sector but instead of addressing these issues, the central bank set the caps, he said.

Multiple exchange rates do not help bring in more remittances. Moreover, the central bank should have worked towards curbing money laundering, he said.

Those laundering money are even prepared to pay Tk 150 for every US dollar as the money has come through illegal means. So money laundering and hundi should be curbed through effective steps, he said.

Senior Commerce Secretary Tapan Kanti Ghosh urged entrepreneurs to be competitive, saying that the government would not be able to provide large amounts of subsidies and incentives after once the country makes the United Nations status graduation from a least developed to a developing country in 2026.

"Now, the government is giving cash incentive in 43 sectors but it will not be able to continue this after the graduation due to conditions of World Trade Organization (WTO)," he said.

On the other hand, Bangladesh's products will not get trade benefits such as duty free access to countries abroad so businesses need to be competitive within the country and abroad, he said while addressing as chief guest.

Sameer Sattar, president of the DCCI, said after the LDC graduation, Bangladesh would have to comply with international standards on governance and labour, social and environmental issues for sustaining the export market.

So, businesses will face some challenging situations. In this perspective, he recommended signing free trade agreements (FTA), regional trade agreements (RTA) and comprehensive economic partnership agreements (CEPA) for new markets.

"In the post-LDC era, we need to go for product diversification and strengthen backward linkage industries, skill development and technological efficiency," he said.

He suggested holding negotiations with the WTO and countries such as South Korea and the US to continue to avail duty free and quota free facilities till 2029.

Mohamed Ali Hossain, finance director of PHP Group, said the government needs to ensure continuation of policies and the duty structure. Abrupt changes to policies negatively impact entrepreneurs, he added.