The Financial Express

A decision raising questions  

Published: March 14, 2020 22:05:03 | Updated: March 16, 2020 21:57:51

A decision raising questions   

Independent economists and financial sector experts almost a decade back had given their unanimous opinion: the number of banks and non-bank financial institutions (NBFIs) operating  at that time were enough to meet the requirement of the economy and the central bank should stop allowing any more of those. But the relevant quarters, including the country's central bank, have largely  ignored  that counsel or suggestion, whatever one may like to call it. New banks and NBFIs continued to materialise in an over-saturated market at irregular intervals. The reasons could be anybody's guess.

The board of directors of the Bangladesh Bank (BB) late last week also gave its final seal of approval to a proposal for establishing yet another NBFI. The approval  would surely raise many people's  eyebrows as some NBFIs have been struggling hard to stay afloat. Some are even failing to make payments to their depositors.

One NBFI is already in the process of liquidation and a couple more might follow suit. The central bank too is also alarmed by the latest developments involving a few NBFIs. That was why, in the first week  of this month it, reportedly, advised the association of NBFIs to come up with a restructuring plan that would help restore public confidence in the sector.  

Problems facing the NBFIs are almost identical to that of the banks. Those also have an average ratio of non-performing loans (NPLs) at around 10 per cent. The ratio in the case of some NBFIs  is as high as 20 per cent. In fact, the pervasive culture of loan default has harmed these financial institutions that otherwise have been playing an important role in the economy. Nearly half of their funds, according to the central bank, is invested in the industrial sector, 20 per cent in the real estate and 16 per cent in trade and commerce, generally in the form of lease financing. 

The performance of NBFIs is also subjected to regular evaluation by the central bank in accordance with the CAMELS (Capital adequacy, Assets, Management, Earnings, Liquidity and Sensitivity) rating. But what has largely been ailing these financial institutions is the non-availability of low-cost funds. They are not allowed to take deposits other than the high-interest bearing fixed ones. Thus the cost of fund for the NBFIs hovers around 10 per cent. Yet those are better placed, in terms of collateral-based financing, than the banks because of lease-financing.

It is often argued by the policymakers and relevant others that the country needs more banks, NBFIs and insurance companies for the sake of 'financial inclusion' of the neglected section of the population.  That sounds more like rhetoric. For situation on the ground does not support any such move. The NBFI that got approval last week is reportedly sponsored mostly by institutional investors, both local and foreign.

Involvement of institutional investors, however, does not guarantee any better prospect for the proposed NBFI. What matters most here is the overall market environment. For a number of factors, the financial market environment is not conducive to any more bank or NBFI or insurance company. Instead of allowing new market players, the central bank and other regulators involving the financial sector should concentrate more on streamlining the operations of the existing ones.

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