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HURDLES to growth of the private sector in Bangladesh are many. The situation in recent years has improved a bit. But it is far from congenial for an unhindered and smooth growth of the private business and investment.
Studies carried out by various national and international agencies from time to time have identified the problems that are frequently confronted by the private sector people while doing business.
The problems, according to a number of such studies, that are generally experienced by the private sector relate to policy as well as institutional matters. There have been piecemeal efforts in the past to address some of the problems. But in the absence of required seriousness, those attempts failed to deliver the desired results.
Sometimes back, in the process of preparing the much-talked-about Poverty Reduction Strategy Paper (PRSP), the government had engaged a team of experts known as 'Thematic Group' to assess the state of affairs with the country's private sector growth and suggest measures to resolve those. The Group came up with a long list of problems experienced by the private sector entrepreneurs. The problems included the accumulated bad debts in the banking sector, poor financing system, sluggish capital market and poor infrastructure.
The Group had paid special attention to the problem of financing faced by the private sector people. While discussing the issue, it had brought to the fore the issue of the huge non-performing loan (NPL) burden of the banking institutions. The main burden of NPL is borne by the public sector banks and the first generation private banks. The problem of NPL particularly has proved to be a real obstacle to the smooth flow of funds to the private sector.
But the problem has been created through the joint efforts of sections of unscrupulous bankers and private sector people.
Every bank has bad debts. Amounts vary but no bank can claim that it does not have NPL. But what happened in the case of bank loans in the late seventies and throughout the eighties was enough to jolt the sector for the next decade. The share of the NPL was more than 40 per cent of the total outstanding loans of the country's banking system in the early nineties. At the insistence of the multilateral donor agencies, the government tried to bring the situation under control by implementing a well-designed financial sector reform programme. In spite of many lapses, the programme has helped the government to improve the situation putting restrictions on indiscriminate and insider lending by the banking institutions and through making provisions for bad debts.
The extent of the share of the NPL in the total outstanding loans of the country's banking system has come down to nearly 17 per cent due to strict monitoring by the central bank. The legal reforms carried by the incumbent government soon after its coming to power have enabled the central bank to exert more authority as a regulator.
The situation in the banking sector today is very much different from what was even three to four years back. Things are now better regulated, supervised and monitored. Even the boards of the public sector banks these days do demonstrate the courage to refuse requests from very influential quarters to grant undue loan facilities to delinquent borrowers. Such influence peddling actually had been the main reason for the accumulation of huge NPL in the past. However, such interferences from the powerful quarters are still there.
If not the public sector banks, many of the private sector banks having problems with their loan portfolios have successfully emerged out of the difficulties. Others are expected to do the same soon. When the public sector banks would be transferred to the private sector, much of the woes of the banking sector will be over.
The clients these days actually enjoy the competitive environment in the banking sector. Banks are coming out with different products to attract prospective clients. But the lending rates offered by the banks are still high compared to even our neighbouring countries. The higher lending rates have a strong relation to the size of the NPL in the banking system and the 'advice' from the central bank.
The existence of huge NPLs has constrained many banks from lowering their lending rates. But what is interesting is that the banks which can afford to lower their lending rates because of their better loan recovery performance continue stick to higher lending rates. Here, higher profit earning seems to be the main motive.
Under the situation, the entrepreneurs are left with no option other than taking loans from the banks at rates which very often are found to be economically unviable. The bankers very often blame higher cost of fund for higher lending rates. But that is not always true. It is the profit-motive that has kept the lending rates high. One cannot however overlook the role of the central bank that, at times, for the sake of reining in inflation, advices the banks to push up their lending rates.
Under the circumstances, the non-banking financial institutions (NBFIs) and the capital market remain viable alternatives for providing funds to the private sector. But in those areas too, the situation does not look that promising. The NBFIs, on the one hand, do not have refinancing facility and the capital market is constrained by a host of factors, on the other. How can be NBFIs be viable alternative when they have to borrow funds from banks at higher rate of interests? The capital market showed some promise of picking up in 2004. But much to the disappointment of the investors its performance in 2005 was rather laclustre.
The government has to ensure flow of funds to the private sector at an affordable cost if it really wants investment to pick up. But whichever institution gives such funds needs to be extremely careful in selecting its clients.
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