Can banks safely deliver the BB stimulus for industries?

Bangladesh Bank's Tk60,000 crore stimulus package is a bid to revive growth, create jobs, and support struggling sectors. But its most interesting feature may be financial rather than industrial. Of the total amount, Tk41,000 crore is described as a "refinancing" facility sourced from banks with excess liquidity through longer-term deposits at 10%, while Tk19,000 crore will come from BB's own resources under government guarantee arrangements. 

That structure raises a basic question: if most of the money is expected to flow through banks rather than directly from the central bank, what exactly is being solved?

The terminology itself invites scrutiny. In conventional central banking, refinancing typically refers to liquidity provided by the central bank to financial institutions. Here, however, the presentation suggests that the larger component will be mobilised through bank resources rather than central bank funding. That does not make the approach wrong — but it does make incentives more important.

The implicit assumption is that Bangladesh's slowdown reflects insufficient credit supply — that banks have liquidity but are not lending enough, and cheaper financing can unlock investment and production.

This diagnosis deserves closer examination.

Banks stop lending for different reasons. Sometimes they lack liquidity. Sometimes they lack capital. But often they lend cautiously because they do not trust borrower quality or their ability to recover loans if projects fail.

Bangladesh's banking system is the third case. Despite repeated rescheduling exercises and regulatory support, problem loans remain elevated, and credit discipline remains weak. Private credit growth has slowed sharply. That does not necessarily mean banks are unable to lend. It means they are more selective — or reluctant — to take the risk.

That distinction matters. If banks are already unwilling to lend commercially to some borrowers, what changes when those loans become part of a stimulus programme?

Borrower quality does not automatically improve. Project viability does not change. Supply constraints do not disappear. What changes is the incentive structure.

Here, an important detail is unclear. The presentation does not specify whether participating banks will receive compensation beyond the stated 10% funding structure or who ultimately absorbs losses if loans underperform. Those are not technical details. They determine where risk ultimately sits — in bank balance sheets, government accounts, or the central bank.

If banks retain the risk without additional compensation, participation may remain limited to institutions willing to accept weaker underwriting standards. If losses are ultimately socialised through guarantees or subsidies, pressure shifts to public finances. If lending decisions become influenced by programme targets rather than credit fundamentals, financial vulnerabilities may simply migrate rather than disappear.

This concern is important because many of the sectors targeted by the package are not constrained by finance alone. Bangladesh's current slowdown does not resemble a conventional demand recession. Firms continue to report operational constraints linked to energy availability, import frictions, and uncertainty around production conditions. Reports of substantial installed investment sitting idle because of gas shortages suggest that access to finance is not the binding constraint in many cases.

If firms cannot operate reliably, additional credit may improve liquidity without generating proportional increases in output. That creates a difficult trade-off. Banks participating in the programme may support firms through a difficult period. But if production does not recover quickly enough, the result could be additional exposure without the growth needed to support repayment.

This is not an argument against stimulus.

Support for SMEs, agriculture, export diversification, and smaller enterprises could generate meaningful returns if targeted well and paired with measures that remove operational bottlenecks. But that requires distinguishing between firms that are fundamentally viable but temporarily short of liquidity and firms whose expansion remains constrained by factors that additional credit cannot resolve — such as unreliable energy supply, import frictions, or weak market conditions.

That distinction matters because it determines where risk ultimately ends up. If the programme succeeds, banks help create productive borrowers and support recovery. If it fails, the risks migrate into bank balance sheets, government guarantees, and eventually the broader economy. The real test of the Tk41,000 crore component is therefore not how much money gets disbursed. It is whether the lending remains disciplined.

Banks should not be expected to suspend credit assessment simply because loans are packaged as stimulus. Their role is to identify firms that are fundamentally viable but temporarily constrained — not to expand exposure indiscriminately. Equally important, regulators must create enough space for banks to exercise commercial judgment rather than treat disbursement targets as a substitute for risk management.

A stimulus delivered through banks succeeds not when it maximises lending, but when it preserves and enhances the quality of lending.

If viable firms receive temporary support and recover, the programme can strengthen both production and financial stability. If weak borrowers are kept alive through subsidised exposure or political pressure, the risks do not disappear — they accumulate elsewhere in the system.