Is banking sector ready to bear the burden of stimulus package?

Recently Bangladesh's Prime Minister unveiled a financial stimulus package of Tk77,750 crore for various sectors to fight the financial damage of Covid-19.

The amount is almost 3.20 percent of our last year's GDP.

The small, medium and large organisations or enterprises adversely affected by Covid-19 crisis will get the money. All the money will be given as a credit at a lower interest rate through banks.

But assessment of the repayment capacity in post pandemic time will be difficult for banks. So, it seems that the real burden in terms of cash flow, credit risks, and operational hazard will fall on the banking sector.

Bangladesh Bank has recently issued a number of circulars detailing the modus operandi of these packages. The government is trying to address all necessary issues concerning the money market to keep the money flow normal.

First I would like to focus on the net financial impact of stimulus packages on government treasury.

The first scheme is Tk30,000 crore which will be distributed from banks' own fund as working capital to the affected industries and service sector organisations with a maximum ceiling of 30 percent of existing working capital limit of each organisation at nine percent interest rate.

Borrowing organisations will give 4.5 percent interest and government will provide 4.5 percent interest as subsidy. So, the government will bear Tk3,037.50 crore.

The second scheme is Tk20,000 crore which will be distributed from banks' own fund as a working capital to small, medium and cottage industries at nine percent interest. The government will subsidise interest at 5 percent, i.e. interest will be four percent at the borrowers' end. Following the above calculation, the net burden on the government's treasury will be Tk2,250 crore.

The third scheme is Tk12,750 crore as enhancement in existing EDF loan facilities for exporter. Here the government will take additional burden of Tk700 crore.

The fourth credit scheme is Tk5,000 crore as "Pre-shipment Credit Refinance Scheme" and its interest would be six percent at the clients' end. Bangladesh Bank will charge three percent on the banks which is three percent down from the Repo rate. Thus the government's burden here is Tk337.50 crore.

The fifth scheme is Tk5,000 crore for export oriented organisations for paying three-months' worth salaries and wages to their employees at a mere cost of two percent onetime service charges. It will be recovered with loan installments within loan period of 18 months including six months grace period. This is a direct fund support from the Bangladesh Bank through scheduled banks. This seems to be the most relaxed rescue package with the net cost from the government treasury of Tk450 crore for 18 months.

The sixth and last financial package is Tk5,000 crore declared for working capital support of agriculture sectors at a cost of four percent at the borrowers' end. Here the government will take additional burden of Tk240 crore for 18 months.

The calculations reveal that the total costs/subsidy will be Tk7,012 crore from the government treasury, not total package value of Tk77,750 crore.
Some points on the modus operandi of these packages

We see that in all cases credit risk will fall on the banks' shoulder. That is the banking sector is going to take further credit exposure of Tk77,750 crore. Thus the sector runs the risk of significant amount of default loans if the organisations availing these facilities cannot stand on business and cannot repay the loans.

More importantly, Tk 50,000 crore is to be financed from deposits of the banking sector, which will squeeze liquidity of the bank amid Covid-19 economic crisis. This crisis will render many people jobless and out of business. Thus deposit flow of the banking sector is likely to be adversely affected.

However, this liquidity problem has been addressed by the Bangladesh Bank with following measures:

i.    Downward revision of mandatory cash reserve ratio (CRR) by 150 basis points from 5.5% to 4% which would lift the bank's liquidity by Tk18,000 crore.

ii.    Upward revision of Advance-Deposit Ratio (AD ratio) by 200 basis points from 85% to 87% for conventional bank and from 90% to 92% for Sharia-based banks to increase liquidity flow further.

iii.    Slashing the repo rate by 75 basis points from 6% to 5.25% to make the borrowing by commercial banks from Central bank cheaper.

Regarding the approval and disbursement of credit facilities under these packages, there are significant risk of moral hazard and adverse selection. It will be very difficult to identify the right candidate for the facilities under these schemes.

There are no objective criteria to identify organisations adversely affected due to Covid-19 pandemic. There is also a risk of inclusion of fake organisations or exclusion of really affected organisations. Further loan approval process will take a long time due to squeezed working hours by bank officials and requirement of taking consent from Bangladesh Bank prior to approval for each loan.

But there is little incentive offered for banks for operating these packages when cost of fund and administration is considered. Thus many banks might not be interested to carry out the packages in full swing due to the lack of sufficient incentives. Hence I call upon the central bank to consider this issue.

Rafiqul Islam, is a finance professional with interest in money market and capital market. Email: rafiqacma@gmail.com