NBFIs-better performers in a hostile environment
Shamsul Huq Zahid
The non-banking financial institutions (NBFIs) are only second to the private commercial banks in industrial term lending with better recovery record. Yet they are looked down upon.
In the fiscal 2002-03, the NBFIs disbursed industrial loans worth Tk. 9.47 billion-more than the amount disbursed by the nationalised commercial banks (NCBs) combined or all foreign banks operating in Bangladesh.
The over-dues as percentage of the total industrial loans disbursed by the NBFIs until the end of the last fiscal was only 7.38 per cent. The same for the NCBs was a staggering 36 per cent, for private commercial banks over 16 per cent. The foreign banks as usual are better performers than any group of banks or NBFIs with only 1.30 per cent over-dues of their total outstanding loans.
The total number of NBFIs in the country is 28. Of these, 15 are under domestic private ownership, one is in the public sector and the rest are joint ventures.
A question is often asked: Does the Bangladesh economy need so many NBFIs? This question is nothing unique for the NBFIs. The same question is being raised in the case of private commercial banks and the insurance companies.
Of the three groups of institutions, the element of risk is more with private commercial banks since people do deposit their money in large amounts with those. But certain amendments made to the Bank Company Act and regulatory actions during the past couple of years have put the banking institutions, including the private ones, on a better footing.
In 2003 banks were asked to raise their individual minimum capital to meet the ratio of capital to risk weighted assets. The NBFIs were also asked to do the same.
But the real life situation with the banks and NBFIs is different. Most banks that are running short of capital as required under the amended Bank company Act, 2003 are one by one floating initial public offerings (IPOs). But most NBFIs are yet to be financially strong enough to do so.
Moreover, the NBFIs are finding it difficult to have access to cheap funds. For the relatively old NBFIs fund has not been a serious problem. But for the new ones, it is hell of a problem.
These institutions do not have access to funds offered to commercial banks at lower rate of interests. They have to borrow from other sources including the call money market. In the call money market, the NBFIs are, allegedly, subjected to discrimination. They have to pay higher rates of interest.
Moreover, call money market does not solve their problem since they do need long-term funds from institutional sources for making long term investments. But the availability of such funds is far too inadequate to meet their requirement.
The NBFIs are allowed to take term deposits but not savings or current deposits. The term-deposits are not cost-effective because of higher rate of interests and other informal expenses involved in those.
Entrepreneurs do find the NBFIs more business-friendly than the commercial banks because processing of loans is far less cumbersome and easy. These financial institutions do not ask for any collateral from the borrowers. This is a major relief for the clients seeking institutional funds.
There is no denying that the NBFIs themselves would have to make efforts for strengthening their capital base. Going to the capital market remains to be the best way to achieve that objective.
But a good number of NBFIs are still not prepared to do the same. They need some more time. Until then, these financial institutions do deserve support from the central bank. It is up to the policy makers of the central bank to devise ways to help the NBFIs.