FBCCI urged to take up NBFIs issues with central bank  

Financial institutions have rushed to the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI) for taking up their issues, such as liquidity crisis, interest rate cap on deposits and tenures of directors, with the central bank.

"We will be grateful if you take up the matter with the Bangladesh Bank for the speedy resolution of the same," read a letter the Bangladesh Leasing and Finance Companies Association (BLFCA) – a platform of the non-bank financial institutions – sent to the FBCCI president on 29 September, highlighting "burning issues faced by the NBFIs".

The letter, signed by Mominul Islam, chairman of the association, emphasised lifting the cap on interest rates on deposits of financial institutions.

The letter mentioned that the central bank has capped the deposit rates for NBFIs at 7%, although due to high inflation in the country, most banks are collecting deposits at over 7%. Therefore, it is difficult for financial institutions to collect deposits at the prevailing rate.

"Additionally, banks are not giving funds or renewing funds to NBFIs at below 8%. Under this situation, financial institutions are continuously losing deposits and there is a serious risk of default unless the interest rate cap on deposits is withdrawn. As such, we earnestly request the Bangladesh Bank to withdraw the interest rate cap on deposit at the earliest," it added.

According to the August data of the central bank, out of 29 NBFIs operating in the country, only five – DBH Finance, IDLC Finance, Union Capital, National Housing Finance and Investments, Lankan Alliance Finance Limited and IPDC Finance – kept the interest rate below 7% in deposit collection following the official cap in July, while the remaining 24 crossed the cap.

Thirteen institutions paid over 8% interest on deposits. Of them, Uttara Finance and Investments offered the highest 9.60%. The data for September are yet to be released.

Under central bank rules, the interest rate of bank deposits of three months or more will be higher than the inflation rate of the previous three months. Due to the Ukraine-Russia war, interest rates on bank deposits are high as inflation is on the rise. The country's inflation was 9.1% in August and 9.5% in the previous month.

FBCCI Vice President Md Aminul Haque Shamim told The Business Standard that the federation has placed various demands before the central bank on different issues amid the crises in the country.

"BLFCA is a member of our federation. It has written about its various problems. But the matter has not been discussed by the board yet. If our authorities feel that this matter needs to be brought to the attention of the central bank, then it will be taken up," he added.

Salehuddin Ahmed, a former governor of the Bangladesh Bank, told TBS that financial institutions cannot compete with banks because banks and financial institutions are providing similar services.

"Financial institutions are unable to accept customer deposits without fixed deposit receipts (FDRs). Additional interest is to be paid as FDR from the customers and at the same time the customers are also being given loans at higher interest. Due to this, many customers could not repay loans due to high-interest rates, resulting in increasing defaults," he added.

The former governor said the central bank needs to have special supervision to restore the transparency of financial institutions.

"The weak institutions should be merged with good financial institutions and banks."

Additionally, the central bank can make separate refinancing schemes for financial institutions. The NBFIs will get the scheme facility at 5% and lend it at 9% to certain sectors. Then their defaults will come down and the companies will also make a profit.

Formation of special fund for liquidity support  

In the letter to the FBCCI, the financial institutions have placed their request for the creation of a special liquidity support fund by the central bank.

They said most of the financial institutions are struggling to manage their liquidity since 2019, when serious mismanagement in a few of NBFIS made media headlines. There has been a general perception that the government or the Bangladesh Bank will not support any failing NBFI as has been done for commercial banks in the past. This has caused a serious dent in the confidence factor of depositors and lenders of NBFIs.

In such a situation, except for a few large NBFIs, it has been difficult for most financial institutions to honour their debt obligation as there was simultaneous demand for the withdrawal of funds from depositors and lending banks and financial institutions. This has crippled the institutions' operations and depositors' money has become stuck. The NBFIs' participation in different refinancing schemes or stimulus packages is also restricted to the minimum level.

"Under such a situation, we request the Bangladesh Bank to form a special refinancing scheme of Tk10,000 crore specifically for NBFIs," read the letter.

Appointment of directors at financial institutions

In the letter, the association stated that the central bank has recently made a policy that bars directors from serving at financial institutions for more than three terms, although bank directors have the opportunity to stay for one more year.

However, no time extension has been allowed in the case of NBFIs. Bringing about such major changes at the board level of NBFIs without allowing any time for compliance will create a sudden vacuum at the governance level which may lead to unwarranted consequences.

"As such, we request three years/one term further allowance for directors who have already completed or are currently serving their third term," added the letter.

Besides, the letter has sought a moratorium extension for Covid-19 and flood-affected borrowers.

The letter, dated 28 June 2022, said a moratorium on loan instalment repayment by Covid-19 or flood-affected borrowers has been suspended. However, the moratorium facility is still continuing for such borrowers of banks which has put the borrowers of NBFIs in a challenging situation. 

Full payment on their instalments will push them to permanent failure in business and eventual default with a debt obligation.

"As such, we kindly request the Bangladesh Bank to reinstate the moratorium facility extended for Covid-19 or flood-affected borrowers," it added.

GM Abul Kalam Azad, spokesperson and executive director of the central bank, told TBS the Bangladesh Bank is the regulator of the NBFIs.

"If these institutions have various problems including liquidity crisis, then they should have come to the central bank. I think the central bank will take appropriate measures if their problem is logical," he added.

Defaulted loans at non-bank financial institutions edged up to around 12% in the April-June quarter, according to a central bank report, thanks to lending anomalies and winding down of Covid-led repayment facilities.

The NBFI defaulted loan was Tk14,232 crore in the first quarter of 2022, which spiked by Tk1,702 crore at the end of June, shown in the Quarterly Financial Stability Assessment Report of the Bangladesh Bank. ***