Banks in Bangladesh had a 9.8 percent annual growth in loans last year, while it came down to 1.4 percent for non-banking financial institutions (NBFI).
The latter group of lenders now needs access to low-cost funds so that they can keep providing a lifeline to businesses during the phase of recovery from the pandemic shocks.
In an online press meet on Tuesday, Bangladesh Leasing and Finance Companies Association (BLFCA) said the NBFI sector is suffering because of the structural issues in the financial system and some wrong perceptions that need to be addressed sooner.
The session, moderated by BLFCA Chairman and IPDC Finance Limited's Managing Director Mominul Islam, discussed the nature of an ideal financial system and the problems they are facing due to lack of it.
BLFCA leaders said commercial banks all over the world mainly finance short-term business activities, while NBFIs go for medium- and long-term financing with their specialisation.
For that, NBFIs abroad have long-term sources of low-cost funds, like bonds and deposits.
In India, the top three NBFIs get 44-69 percent of their total funds from low-interest bonds, which is 2-3 percent for Bangladeshi ones.
NBFIs in Bangladesh currently depend on commercial banks for 37 percent of their total funds on average, according to BLFCA, and banks rush to pull their money back in cases of liquidity crisis in the money market.
Currently, of the Tk87,000 crore in NBFI assets, over Tk30,000 crore is contribution of public deposits.
Now, a long-lasting uneven competition with banks – which also have a presence in each of the very limited business areas and sources of funds NBFIs look for – makes it difficult for NBFIs to collect enough deposits to flourish.
However, thanks to the specialisation and innovation for a customer-centric business model that lets a large number of customers prefer NBFIs for a little higher interest from deposits and quicker loan disbursements.
In 2019, NBFIs had suffered a perception shock after the government's decision to liquidate one NBFI and unfolding stories of extreme rise in bad loans in some two to three other firms.
Non-performing loans in the NBFI industry will come down to below 5 percent if the three to four firms are excluded, and that is a better scenario than in the banking sector so far, said Mominul Islam.
Stories of the poorly-governed firms might have let some depositors think negatively about the entire NBFI sector of 33 firms.
The association is working hard to increase peer push within the industry for a high standard of governance, modernisation, and skill development in management alongside working hand to hand with the regulator to restructure one of the ailing NBFIs for depositors' confidence revival, and promulgate a modernised act for their industry, said Golam Sarwar Bhuiyan, vice-chairman of BLFCA and managing director of Industrial and Infrastructure Development Finance Company (IIDFC) Limited.
Top NBFIs with sound management and good governance have no issue with non-performing loan or liquidity, said Arif Khan, managing director of IDLC Finance Ltd and an executive member of BLFCA.
BLFCA Vice-Chairman AZM Saleh, also managing director of Islamic Finance and Investment Limited, said it is time to initiate regulatory framework to differentiate the business areas, and control mechanism of banks and NBFIs.
He also called for a regulatory framework for inter Shariah-based bank call money market.
SM Shamsul Arefin, BLFCA executive member and managing director of Uttara Finance and Investments Ltd, said, "We do not want to compete with the banks. Rather, we want to work together with them. Our services are easier to receive than what banks provide. Hence, customers can get easy loan facility without getting upset."
Arif Khan emphasised a rapid development of the bond market that will fix a lot of serious structural problems with financing in Bangladesh.
On top of the existing systematic disadvantages, NBFIs suffered further in recent months due to the Covid-19 pandemic.
In April and May, some pre-mature encashment of deposits along with reduced loan recovery by 50-70 percent of NBFIs have led to difficulties. However, with the economy coming back to life, NBFI clients are also returning with their deposits and loan applications.
In June, over 85 percent of loan dues, including the instalments of April and May, were recovered as the selectively chosen clients are serious about repayment despite their hardship in businesses, said Mominul Islam.
"The three key sectors that borrow from NBFIs are manufacturing, trading and service. The first two are recovering in business and if supported properly, most of them will be able to pay back all their loans in the coming days," said AZM Saleh.
He added, "We, as lenders, can restructure loans to the service sector businesses if they take more time to recover."
NBFIs want to contribute to the economic recovery increasingly, and for that, they need pre- or re-financing support from the Bangladesh Bank.
The BLFCA chairman said the central bank is likely to provide them with such a fund of Tk2,000 crore, while the industry of lenders with specialisation in SME and retail loans, and working capital financing demands a liquidity scheme of Tk10,000 crore to strengthen lending.