The Financial Express
Swasti Lankabangla Swasti Lankabangla

Banks' Covid-led lending and hurdles to overcome

| Updated: August 31, 2020 21:54:14

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The government announced big set of financial stimulus packages aimed at offsetting widespread economic impacts of COVID-19 is now more pronounced than the actual status of implementation. The onus of the bulk financing has been on the banking sector. How well is bank lending progressing? How is the response behaviour of the banks? Is there any transparent flow of information regarding banks' financing operations from the regulatory authority? Are there hurdles in smooth running of the implementation of the financial packages? An attempt would be made to seek answers to the questions raised.

A highly prioritised national programme for financing the resumption of production and operations in the economy seems not being managed in a disciplined and desired manner. We are not in a position to know the implementation progress of stimulus packages from the central bank's database or reporting. The central bank publishes abundant and systematic statistics on several aspects of money, banking, capital market and economy but nothing about how well the banks have been lending under bail-out packages. Indirectly newspaper reports give us some indicative but not systematic scenario. A synchronised framework for transparency, accountability, monitoring, reporting and controlling is essential to ensure desired flow of funds-- the right amount to the right person or firm in the right time. It is the responsibility of the central bank to develop the framework but we are yet to obtain that.

BRPD  circular letter no.35  dated 02-07-2020 reveals that the Bangladesh  Bank held  meetings (on June 17 and July 02, 2020) with the CEOs of  the lending banks  to review the  progress of implementing stimulus packages for the large entrepreneurs in the industrial and the service sector and for cottage, micro, small and medium enterprises (CMSMEs). The bank representatives informed the Bangladesh Bank that they had taken all measures to implement the  lion's share of the packages  by July 2020. Bangladesh  Bank advised the banks to complete the remaining  portion  of lending by August 2020. This instruction  was issued  when  a period of 3 months already  elapsed since first declaration of  stimulus packages.

Several newspapers' reports hint that the banks have already started financing large entrepreneurs. Sonali Bank Limited is reported to have lent Tk.10 billion to Biman Bangladesh under the stimulus package  for  large entrepreneurs in the  industry and the service sector. Some other banks also launched financing. The Bangladesh Bank signed agreements with fourteen banks to disburse Tk.150 billion as part of refinancing scheme to large industries and service sector (Financial Express 19-5-2020). Reportedly, the central bank  approved loan proposals worth TK. 50 billion submitted by more than 20 banks under stimulus package for large borrowers. Thus it is evident that large borrowers' loan requests have been considered with top priority by both the lending banks and the central bank. Do they have little shock absorption capacity?

The stimulus packages targeting CMSMEs are lagging behind. For reasons unexplained, loan processing further lengthened. The banks and non-bank financial institutions ( NBFIs)  were instructed online to complete disbursement of  loans to  CMSMEs within October 2020 . Customarily the banks and NBFIs also committed to execute the package as instructed. It is learnt that the banks so far disbursed about Tk.15.50 billion only out of declared package Tk.200 billion. In view of CMSMEs' unparalleled contribution to the economy, they are not favoured with due justice.

Discrimination and delay are now two major hurdles in proper implementation of the stimulus packages. It is observed with concern that big entrepreneurs get advantages of early processing and priority treatment compared to CMSMEs. CMSMEs' lack of knowledge on stimulus packages, poor bargaining capacity, and lack of influential behaviour might have contributed to their being victims of discrimination and delayed disbursement. Discriminatory attitude and actions impair the quality of good governance.

Unusual delay in overall disbursement of loans is diminishing the expected level of  bail-out utility. Delay may be caused  by several factors--  (a) banks' reluctance to lend more  due to  little  probability of recovery, ( b) lack of lending capacity,  ( c) burden of existing non-performing loans, (d) conservative approach to maintaining current liquidity position, (e) lack of  adequate manpower, (f) lack of employee incentive, and  (g) divergent views of owners and management. If  one or more factors  act behind delay or reluctance, why do the banks commit to complete lending under stimulus packages  by the deadline  set by the Bangladesh Bank ? Can they not explain their real problems to the central bank with adequate justification and moral courage?

How can the banks go without complying with regulatory authority's directives in time? Since introduction of stimulus packages, the central banks several times advised the banks to fast-track lending to affected businesses and took a lot of measures to strengthen liquidity of the banks. But the lending banks' response was not apparently good enough though they committed to follow the guidelines in the meetings with the central bank. It is really a problem in the extended governance system in the banking sector. The central bank as part of the government lies at the top echelon of the extended structure of banking governance. It may be presumed that the banks have many questions and problems but hesitate to present them to the regulatory authority. There should be free and frank disclosure of facts and figures for better governance.

Lending banks' problems should be taken into consideration. According to a central bank' circular, the client bank relationship would largely determine the loan. Rigid risk analysis would not be applied now as per the central bank's new policy. Undeniably, the banks would have to undertake a great deal of credit risk as the lending under the stimulus packages is triggered by a pandemic situation. The degree of risk would be higher than usual. Besides, the advance-deposit ratio (ADR) may significantly delimit lending capacity despite excess liquidity ostensibly portrayed by the central bank's

Against the backdrop of COVID-19 impacts on the economy, the massive financing programme is quite distinct from usual bank lending. Now the top priority has been given on economic recovery, not on loan recovery as is obvious in policy guidelines issued by the Bangladesh Bank (a lot of relaxations have been made including liquidity enhancing measures and simple risk analysis). Hurdles should be removed by orchestrated efforts of the banks and the  regulatory authorities. Relationship between the regulated and the regulator ought to be based on mutual understanding and free exchange of views. Survival of the COVID-hit economy and the lending institutions is equally imperative.

Haradhan Sarker, PhD, is ex-Financial Analyst, Sonali Bank & retired

Professor of Management.


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