The government should exclude weak and poorly governed banks from disbursements of stimulus loans for the benefits to reach actual recipients, the Centre for Policy Dialogue (CPD) says.
The think-tank suggests preventing defaulters from borrowing from the stimulus packages to tackle the rising trend of non-performing loans (NPLs).
Additional responsibility for disbursing stimulus may create an extra burden on banks, whose financial health is deteriorating steadily in the last decade with high non-performing loans, escalation of loan write-offs, major scams and irregularities, CPD researchers said at a press briefing on Monday, arranged to unveil the first reading of its flagship report titled "State of the Bangladesh Economy in FY2020-21".
They also expressed concerns over the rising trend of excess liquidity in the banking system and said the excess money will tempt bankers to lend funds in risky sectors, resulting in a further rise in NPLs.
Dr Fahmida Khatun, executive director at the CPD, said the stimulus funds should be disbursed taking into consideration the defaulting tendency of businesses in the country.
There are more than 3 lakh defaulters in the banking system, and it is time to analyse how much money disbursed under stimulus packages will come back again, Fahmida said.
Due to the yearlong moratorium on loan classification, it is impossible to understand the real situation of NPLs in the banking sector at present, she added.
The two largest stimulus packages are entitled to the defaulters, which may further increase the degree of NPLs in the banking system. To track down the status of the disbursements from the stimulus packages, she urged conversion of capital supports into term loans.
There is no proper information on whether weak and poorly governed banks are receiving Covid-19 liquidity support packages or not. Information is not available about how much liquidity support each bank has received, and what amount of loans they have given out, Dr Fahmida pointed out.
She raised several questions: how many defaulters have received new loans from stimulus funds? Did any borrower get a disproportionately large share? What is the volume of NPLs in each bank and the banking sector as a whole? How did banks assess which businesses were affected by Covid-19?
CPD Senior Research Fellow Towfiqul Islam Khan presented the keynote at the event and said stimulus packages announced by the government is only 19.29% of Covid-19 relief funds and only 0.83% of the GDP. The fund falls far short of the 11% of GDP that is estimated to be required to mitigate the socioeconomic impacts of Covid-19.
He said a larger portion of the funds is going to large and medium-sized industries, while small firms are being deprived owing to a lack of good relations with banks, proper documents and other issues.
Uneven distribution of stimulus funds leads to an uneven recovery of the economy, while the larger firms are in a leading position and smaller ones have been left behind, he added.
Excess liquidity a new concern
The paper presented on the event has found exponentially rising excess liquidity as a major concern for the banking system and for monetary stability, economic growth and the interest of the savers too.
Towfiqul Islam said excess liquidity in the banking sector has nearly doubled from Tk1.03 lakh crore to Tk2.05 lakh crore between January and December 2020.
Excess liquidity has more than doubled in state-owned commercial banks and more than tripled in Islamic banks, he said adding that excess liquid assets comprised 49% of the total liquid assets of the banking sector.
Huge liquid money led to a fall in the interest rates even below average point-to-point inflation, which would reduce the value of savings, said Towfiqul adding that real deposit rate, adjusted with the point-to-point inflation, was -0.88% in November 2020 compared to 0.12% in January that year.
Excess liquidity in the banking system has led to a fall in interest rates. The real deposit rate, adjusted with the point-to-point inflation, fell from 0.12 per cent in January 2020 to -0.88 per cent in November 2020.
The negative real interest rate on bank deposits means that the value of people's savings was depleting during the pandemic – a time when they needed to utilise their savings the most, he added.
Towfiqul said banks might disburse loans randomly to offset losses owing to excess liquidity. As a result, the amount of default loans is likely to increase because of risky investments.
Banks are being encouraged to lend to various government projects as demand has declined.
He also fears that the lack of interest in disbursing loans to the private sector can hamper investment.
CPD's distinguished fellow Professor Mustafizur Rahman said excess liquidity can appear as a reason for discomfort for a long time. Due to such liquidity, banks' cost of funds will increase. Savers will also shy away from parking their money in banks if they do not get more interest on deposits than inflation.