Lending policy reform It cannot wait
The Daily Star Asia News Network Dhaka
Finance and Planning Minister M. Saifur Rahman is in a race with time to get a loan of US$1.80 billion under the poverty reduction growth facility (PRGF) of the International Monetary Fund (IMF). Pressured, he has echoed a precondition set by the IMF: the nationalized commercial banks (NCBs) ought to stop lending afresh if Bangladesh is to secure the loan facility. The ball is in the Bangladesh Bank court to frame a new lending policy in consultation with the NCBs. But, of course, implementation will be for the latter to ensure.
Pressure or no pressure, we should have a rational lending policy out of our own understanding of what is good for us, what is in the economy's best interest. The cornerstone of the desired policy seems to have been enunciated by the finance minister himself: Lending should be linked to loan recovery. This is a very important principle; one is only surprised why it has not been followed so far.
The fact that the NCBs are creaking under the deadweight of 28 percent non-performing loans is because there has not been any laid-down principle to guide the lending operations except for circulars issued on ad hoc basis.
Wrong choice of loanees has been the root cause of loans eluding recovery. Corrupt and politicized practices spawned the erratic choices. All these could be warded off if the NCBs were obliged to make fresh lending contingent upon their reaching certain recovery levels.
What is more important, the debts gave a handle to the NCBs to raise their lending rates in a bid to make up for their liquidity short-fall caused largely by the unrecovered loans. In other words, the industry and business are being forced to pay the price for the banks' failure to recover outstanding loans, their overall mismanagement in that vital area.
Cost of lending is a crucial matter. Indeed, "no business can be profitable if it has to pay 14 percent interest on bank loans", to say nothing of the demand of rent-seeking. So, the banks will have to reduce the lending rates to let business and entrepreneurship grow. They can do so by efficient loan management with debt recovery and good choice of new loanees as its core elements.
With the banks ridding themselves of bad debts in accord with the central bank guideline circulated in January, they will be largely freed up to focus on the pressing task of improving loan management. But the willful defaulters must be vigorously pursued with all the legal means at our command so as to have them pay back their dues or face punitive action. This will have a deterring effect on bad lending practices.
When all these steps are taken we will be set on course for a much improved lending direction with the priorities recast properly based on purely economic and productivity considerations.