Banks need to focus on long-term deposits for infrastructure financing

Numerous constraints deter banks from chipping in with large individual investments in the country's infrastructure sector, despite the possibility of the investments to turn out to be profitable, development experts told a discussion Thursday.

At the programme titled "Infrastructure Lending by Banks: Corporate Versus Project Financing Approach", they noted that the banks couldn't provide long-term loans by raising short-term investments.

Due to the single client exposure limit, the average credit limit of banks in a single project is only $20 million – resulting in the banking sector's contribution to infrastructural development at only 2.6%.

Against the backdrop, the experts at a discussion suggested that banks collect long-term deposits to ensure financing in mega infrastructures. They have called for the development of stock and bond markets in the private sector as an alternative to long-term deposit collection by the banks.

As the chief guest to the Bangladesh Institute of Bank Management (BIBM) hosted event, BIBM Executive Committee Chairman and Bangladesh Bank Deputy Governor SM Moniruzzaman said Bangladesh's infrastructure investment is concentrated in the power sector due to increasing electricity demand.

He said investment in this sector was guaranteed by selling electricity to the government. Individual investment in other sectors is low owing to scant revenue prospect.

He, however, said there is a vast potential for private investments in the transport sector including roads, railways, bridges and information technology.

A survey report prepared with information from public and private banks and financial institutions was presented at the event.

BIBM Prof and head of the survey Dr Prashanta Kumar Banerjee said it is difficult for banks to provide long-term loans as a large portion of the bank's deposits are the  short-term ones.

In this case, he advised that the banks, especially the public ones, issue long-term bonds with a government guarantee.

Referring to IMF data, BIBM Assistant Professor Md Ruhul Amin in the keynote paper said it is possible to attain 0.4% growth in a year and 1.5% in the following year by increasing investment by 1% of the Gross domestic product (GDP).

Citing the Global Infrastructure Hub Report, he said Bangladesh lacks $192 billion investment in water, electricity, telecom, ports, airports, roads and railways by 2040.

Though private sector investment is encouraged in these sectors, domestic and foreign funding dominate development financing in the end.  

Apart from this, banks can give these loans for a maximum of 5-6 years, whereas loans are required for project financing for 15-20 years.

Commenting that Bangladesh lags behind the neighbouring countries in terms of bank loans in the infrastructure sector, he said banks invested $17,091 million in 134 projects in the country between 1990 and 2020.

At the same time, Indian banks invested $274,959 million in 1,103 projects while Pakistani banks invested $32,935 million in 115 projects. The investment in 91 power projects in Bangladesh amounted to $8672 million.

The keynote paper says 76.27% banks of the country have investments in infrastructural developments. Of them, 67% projects managed the loans on project finance basis while 33% were approved loans on corporate finance approach. The remaining banks lend the infrastructures in a mixed system.

It further said 70% banks do not have their policy on infrastructure loans for large projects while 93% banks are seeking guidelines from the central bank in this regard.

The survey also found that 91% banks have a liquidity crisis in terms of long-term lending.

Dr Md Akhtaruzzaman, director general to BIBM, said banks have a limited capacity to finance a tiny portion against the massive demand in the infrastructure sector. He noted strong capital markets, venture capital and specialised institutions are required to finance large projects.

Expressing concern over the current stock market situation, he said there has been no improvement though the Asian Development Bank (ADB) has been working to develop the bond market and the capital market for a decade.

He also said the development of roads, bridges and railways would not be possible without bond issuance or capital market development.

On financing infrastructural development through venture capital by large corporate entities, he said there are at least 100 corporate houses with a capital of $5-6 billion, and they can jointly finance the projects.

However, there is a huge potential for banks to invest in economic zones, he said.

Abul Kalam Azad, executive director of Bangladesh Bank and IPFF-II Project director, said financing the long-term projects is risky for banks.

As an alternative to that, he called for the stock market development and improving the bond market. He advised the banks to introduce bonds with a government guarantee.

Emranul Huq, managing director and CEO of Dhaka Bank Ltd, it is risky to invest in infrastructures if there is any lacking in the entire process ranging from project formulation to post-implementation management.

Noting that infrastructure financing is not possible under the corporate financing system, he said although the formulation of project loan proposal and finalising it is a relatively lengthy process, there is no alternative to it in infrastructural development.

He said the average tenure of FDR in a bank is two years while some deposits are being collected for seven years. If the credit term is longer than that, financing becomes difficult.

Nazmul Haque, director (Investment) and head of advisory at Infrastructure Development Company Limited (IDCOL), said banks can lend to small projects through corporate financing and large projects through project financing.

AKM Abdullah, senior financial sector specialist to South Asia Finance and Private Sector, the World Bank, said the public-private partnership entrepreneurs are usually evaluated as project contractors. Valuing them as crucial partners also increases project quality.

He added that Bangladeshi bankers, entrepreneurs and even government stakeholders think of making a profit in the short term. As a result, private sector participation in long-term projects is low.

Advising to diversify the funding sources to large projects, he said long-term life insurance funds can be set up in the private sector.

He added that although there is a $3-4 billion provident fund in the private sector, the fund is being used as a short-term deposit. He thinks that the money from the provident fund should be invested in the long run.