The private sector, already under strain owing to rising costs, dollar crisis, and a demand slump amidst high inflation, is facing even greater challenges following the removal of the lending rate cap on 1 July, after more than three years.
As a result of the removal of the 9% ceiling, banks have swiftly increased their lending rates to 10.1%, compared to the previous rate of 9% or lower just a few weeks ago.
This surge in borrowing expenses has further exacerbated the situation for companies that have persistently operated during the pandemic and coped with high inflation. It poses an even tougher challenge for those who have already increased their bank liabilities to expand operations and create jobs.
One such example is ACI Ltd, a rapidly expanding conglomerate with nearly two dozen firms spanning various industries such as pharmaceuticals, automobile and engineering products, agribusiness, consumer products, and retail chains. ACI Ltd will now face an additional annual expense of Tk50 crore solely for debt servicing, which is more than enough to erode its entire annual profit.
The pressure is similar for the country's leading steel market BSRM as the capital-intensive business needed huge bank loans to expand and continue operations.
Banks are now asking for 10.1% interest against existing loans, representing a 125-150 basis points increase in just a few weeks, said Shekhar Ranjan Kar, head of finance at BSRM Group.
"The small rise in interest means a huge negative impact on our profitability due to the sheer size of operations," he added.
Two listed BSRM companies, BSRM Steels and BSRM Ltd, have bank loans totalling over Tk11,000 crore, and an increase in interest expenses might make it even more challenging for the companies to achieve a minimum profit.
"It was a fresh headache for us and an opposite scenario of what we came through during the tough days of the pandemic," ACI Executive Director and Head of Finance Pradip Kar Chowdhury told The Business Standard.
ACI had the courage to keep expanding business operations during the tough times of the pandemic and even after the Ukraine war that sparked global inflation due to the lower interest rates at that time.
The weighted average cost of borrowing bottomed out at as low as 6.5% in 2021, much lower than the allowable ceiling of 9% that came into effect at the beginning of 2020, thanks to the loose monetary policy and stimulus loans aimed at faster recovery from the pandemic shocks.
"In a year until March, our borrowing cost soared by around 100 basis points, and in less than three months, here came another round," said Pradip.
With over 5,000 products and more than 20,000 employees, ACI's annualised revenue crossed Tk11,000 crore in the last fiscal year.
It made only Tk25 crore in net profits in the nine months as Tk372 crore of its Tk502 crore operating profits was spent on interest against its over Tk5,000 crore loans.
Analysts have said the company must increase its operating profits this fiscal year to avoid a net loss due to the interest burden.
The ACI executive director said, "We have to reorganise our loans to control the weighted average cost of borrowing, minimise other costs to offset the higher finance cost, and also have to prioritise investments that should generate higher returns."
According to BSRM's Shekhar Ranjan Kar, MS rod prices have soared to over Tk1 lakh per tonne from Tk60,000 three years ago, due to the higher costs of raw material imports, energy, and transportation.
The increased finance cost must be reflected in product prices to maintain profitability, which is the biggest challenge for the industry, especially when steel production and consumption have already slowed down in the last fiscal year.
GPH Ispat, another top-tier steelmaker, built its state-of-the-art induction furnace steel plant in Chattogram before the pandemic, and foreign loans were a good source of finance for the publicly traded company.
The devaluation of the taka has already inflated its foreign currency liabilities by around 25% to the equivalent of Tk1,200 crore now, and the higher interest at home is increasing concerns as its total loans stand at over Tk4,800 crore, said HM Ashraf-Uz-Zaman, the group finance chief and company secretary at GPH.
The good faith that banks would charge good borrowers less seemed to be absent now as the banks are pushing through the limits allowed by the central bank-suggested corridor – 300 basis points above the six-month average of 182-day treasury bills, said Masud Khan, adviser to a top tier cement-maker and export leader, Crown Cement.
ACI's Pradip Kar, however, said on Saturday that a few of their loans were yet to hit a double-digit interest rate, but they were nearing the 10% mark.
Low interest rates helped the private sector stay afloat during the pandemic and let the economy outperform its peers. And, with the tougher market dynamics since the Ukraine War, the challenges further intensified, said entrepreneurs.
The US dollar kept inching up, making imports even more expensive, while added tax burden since 1 July pushed cement manufacturers into another war for increasing prices.
"The rate hike emerged as an added challenge during these tough times," said Humayun Rashid, president of the International Business Forum of Bangladesh.
Humayun, also the managing director of electro-mechanical conglomerate Energypac, said due to the global raw material hike and more than 25% devaluation of the taka, companies now have to deploy much more working capital to retain their import and production volume. Also, the higher cash margin for letters of credit made their finances more crucial.
"Job creation and the scale of operations all are under threat," he said, adding that the central bank should ensure better money market liquidity so that competition drags down the lending rate to a tolerable single-digit range.
The government must borrow and it should try to source funds from external sources and leave banks with liquid money to support the private sector that rolls the economic wheel, he added.
A 100-150-basis-point increase in interest rates was not unforeseen though, said Chartered Financial Analyst SM Galibur Rahman, head of research and investment strategy at Shanta Securities.
"We anticipate a decline in profitability of the companies that borrowed a lot. On the other hand, cash surplus companies will earn more from banks or other fixed-income securities where they park their surplus cash," he added.
Anticipating the post-cap rate hike, banks started to attract depositors at an increased rate in early June that led to a 100 basis point hike on average in deposit rates, depending on the banks' appetite.
That, on the other hand, emerged as a comfort factor for cash-rich firms as they would earn more from their idle cash parked at banks or other fixed-income securities, said Galibur Rahman.
IDLC Securities, a top-tier brokerage firm, in its June 2023 report, sorted out a number of cash-rich companies that include Square Pharmaceuticals, state-owned oil companies such as Padma, Meghna, and Jamuna, consumer product companies such as Marico Bangladesh, Olympic Industries, and also mobile financial service provider bKash as their net cash holding ranged from Tk261 crore to over TK6,400 crore.
On the other hand, among the publicly traded firms, the largest borrowers awaiting higher interest expenses also include Walton, Beximco Limited, Summit Power, Ifad Autos, Bashundhara Paper Mill, Premier Cement, Doreen Power, Aftab Auto, and Mir Akhtar.