Banks meet 99.6 percent because firms shy away from the stock market | Techy Kings

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Although Bangladesh has made excellent progress in many economic indicators in the last decade, entrepreneurs, industrialists and the entire business sector are still dependent on the banking sector for funding.

Banks also make long-term loans on short-term deposits, creating mismatches in their treasury management and sending non-performing loans higher.

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But the burden of bad assets has weakened many banks and raised the cost of funds for borrowers.

At the end of September, outstanding private sector credit stood at Tk 13.79 lakh crore compared to around Tk 12.10 lakh crore in the same month in 2021, data from Bangladesh Bank showed.

Banks and non-bank financial institutions contributed more than Tk 1.68 lakh crore to businesses to meet their financing demands during the period, which is 99.63 percent of private sector financing.

But during the same period, only six companies raised a combined Tk 626 crore from the stock market, which is considered the cheapest source of capital, according to the Dhaka Stock Exchange.

“But many entrepreneurs avoid listing on the stock market because they don’t want to share ownership and be under accountability,” said AB Mirza Azizul Islam, a former financial adviser to the interim government.

According to Islam, many influential people think that bank funds can fail easily. “This culture needs to be eradicated.”

In another unpromising move, the central bank has given many benefits to borrowers.

If such benefits continue to pour in, it will only encourage people to go to banks instead of the stock market, added Islam, also a former chairman of the Bangladesh Securities and Exchange Commission.

As Bangladesh aims to become a developed country, it needs to take on big projects, but these projects cannot be financed by the banking sector alone, said Toufic Ahmad Choudhury, director-general of the Bangladesh Academy for Securities Markets.

Between 2016 and 2040, Bangladesh will need an investment of $608 billion to realize its dream of becoming a developed country, according to a Global Infrastructure Hub report.

“Is the banking sector ready or strong enough to lend long-term funds? Not at all. So, the government should encourage corporates to raise funds from the capital market,” said Choudhury.

When a company goes public, it needs to be held accountable and under regular monitoring.

If a listed company underperforms, its shares will fall. Entrepreneurs are also aware of their performance and banks know about the health of the business.

“These natural connections in the financial system don’t exist here,” Choudhury said.

Another reason for the absence of diverse sources of financing in Bangladesh is that conglomerates can easily get bank loans. Large businesses even borrow from multiple lenders when they seek to undertake large projects. Therefore, they can avoid listing on the stock market, but this is not possible in many countries.

Banks can also come to the security market to meet their financing needs. But they didn’t do that. Instead, they mostly depend on people’s deposits.

“This puts pressure on the bank’s treasury management,” said Choudhury who is also the former director-general of the Bangladesh Institute of Bank Management.

Meeting long-term funding needs with short-term deposits has increased NPLs, he said.

Non-performing loans in the banking sector hit an all-time high of Tk 125,257 crore in June, up 26.3 percent from a year ago.

Mobilizing funds from banks and financial institutions is easy compared to the stock market, said Anis A Khan, former chairman of the Bangladesh Bankers Association.

“Although banks can provide loans in a short time, an entrepreneur sometimes has to wait more than a year to raise funds from the stock market.”

“The depth of the stock market is not up to the mark, so some entrepreneurs prefer banks.”

Listed companies are responsible for maintaining governance and compliance and making disclosures, which many business people don’t like, according to Khan.

For example, if a company fails to declare any dividend for a year, it is downgraded to “Z” category from “A” category. But entrepreneurs can stop making installments because of their relationship with the bank.

According to Khan, bonds can be a good solution for long-term financing.

Ershad Hossain, chief executive officer of City Bank Capital, one of the leading merchant banks in Bangladesh, said long-term financing demand should be met with long-term funds such as insurance funds, bonds and the stock market.

But corporate bonds in Bangladesh are less than 1 percent of the country’s gross domestic product, while they are 60 percent in China and 16 percent in India.

Life insurance funds can be another source of funding, but reforms are needed in this area, Hossain said.

“Mutual funds can be a useful tool for pooling people’s long-term savings and the stock market should be an investment place for general savers.”

In Bangladesh, banks are also major players in the secondary market of the stock exchange.

Hossain said: “But if banks are major players in the stock market, they are actually major financiers in a different way.”

He suggested that corporate companies issue asset-backed securities in the stock market. “This will allow them to bypass the banking system.”

Mirza Azizul Islam urged the government to try to bring more corporate companies to the market in an effort to increase the contribution of the capital market to the economy and reduce the dependence of the private sector on the banking sector.

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