The fallacy of falling household debt  

Anyone unaware of financial terminology may be misled by the heading, 'Family debt lowest in 14 years' of the front-page lead story of the last Sunday's issue of the Financial Express.

The heading may lead one to draw the conclusion that the Bangladesh families are now financially sound than before for they are borrowing less. But the truth is otherwise.

The report quoted a study report that reviewed the household debts to formal financial institutions, especially in matters of buying residential property and cars. The basic purpose of the study, carried out by the Washington-based Institute of International Finance (IFF), was to gauze the depth of financial industry of a total of 70 countries, including Bangladesh.

According to the IFF study, the household debt as percentage of gross domestic product (GDP) has been declining in Bangladesh over the years from its peak level of 5.1 per cent in 2005. The indebtedness fell to 4.1 per cent in 2010 and 3.5 per cent in 2015. It dipped further to 3.3 per cent, the lowest in 14 years, in 2018.

The falling trend that represents lesser involvement of the people with the formal financial sector is in contrast to the continuous expansion of the economy.

The normal trend is that household indebtedness grows in line with the expansion of an economy. Why is the trend opposite in Bangladesh?

Experts blame the lack of depth of the country's financial sector for this unusual happening.

There could be multiple reasons for lesser involvement of households with the formal financial institutions. It could be that financial institutions, including commercial banks and non-banking financial institutions, are not that interested to extend consumer and house-building loans to individual households. Then again, households could be coming to banks in lesser numbers seeking these types of loans.

None is likely to contest the fact that banks in Bangladesh are more focused on trading and large loans. This propensity is largely responsible for the ongoing crisis in the banking sector.

One needs to take note of some peculiarities in matters of household indebtedness in the country. When household indebtedness was at its peak in 2005, the rate of interest on housing and consumer loans was quite high, between 14 and 15 per cent. But in the last two to three years, the banks lowered their lending rates in both the cases to a notable degree. Housing loans were available at single-digit rate of interest. Yet, according to IFF study, the demand for these types of loans went down notably.

The size of car loans offered by banks has not been that large. But the demand for housing loans should have been very high since aspiration for owning own accommodation among families is always very strong. But squeezing of the demand even for such loans is quite surprising when banks have been offering housing loans at single-digit interest rates until recently.

One major reason for the drop in demand for housing loans could be the unusual hike in the prices of land, apartments and flats. The government too has increased different types of fees and taxes on household properties. The real estate builders are having a difficult time because of poor demand for their products.

However, lack of interest of banks in involving a greater number of households in housing and consumer financing is evident from their individual exposures. Such a propensity is rooted in their ownership pattern and the style of their operations.

Banks do generally engage in fierce competition to net 'big' clients. They even compete to buy questionable loans belonging to big clients. But they are not that generous when it comes to lending to small clients.

The banks should have no reasons to shy away from providing housing loans to individual households as the default rate in the case of this particular financing is still low. But the truth is, barring a few, most banks, both private and public, are not that interested in extending housing loans to households. Instead, they offer medium to large loans to builders. But the experience of banks in the case of this type of financing is not that palatable. They have got substantial volume of funds stuck up in the real estate sector.

There is no denying that slide in household debts is an unnatural development in an economy that has been expanding at a healthy rate. Policymakers claim that Bangladesh's economic growth is largely a consumption-led one. If that is so, there has to be a reflection of that in household indebtedness. The banks do need to be innovative to find out products for attracting the individual households. 

However, like in the case of household indebtedness, there are some other aberrations, including a moribund stock market and poor growth of employment, in an economy expanding at a healthy rate.  

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