RMG stimulus package implementation: Challenges for the banking sector

The Covid-19 pandemic has affected human life, economy and business in a profound way and with long term effects. Like other countries, Bangladesh has also been affected in different sectors, particularly in economic activities. Estimates from different organisations have already shown a drastic fall in GDP of Bangladesh in the upcoming years, particularly in the next fiscal, due to massive damage caused by the pandemic.

Different sectors of businesses like RMG, exports, remittance, FDI etc. faced a severe crisis during the lockdown period. Of these affected sectors, RMG has been affected badly due to cancellation of orders, placement of no new order from the buyers and disruption of trade with other countries.

Bangladesh primarily exports RMG products to the EU (62 percent) and the USA and Canada (21 percent). Over the last three decades, the cumulative average RMG exports growth climbed to 14.8 percent annually which reached $34.2 billion in FY2019 and representing 84.2 percent of the country's total exports, according to Bangladesh Export Promotion Bureau.

The contribution of the industry to the GDP of the country is 11.2 percent. (Review and Outlook, 2020, Bangladesh Garments and Textile Industry). According to Bangladesh Garment Manufacturers and Exporters Association (BGMEA), international buyers have either cancelled or suspended shipments worth $3.16 billion affecting 2.26 million workers as of 18 April 2020.

Under these circumstances, different parts of RMG sector have been affected severely- the continuation of the business, receiving new orders; ensuring health and safety of employees and workplace; salaries and wages of the workforce; the cost of operations etc. Considering such effects, the RMG sector needs proper guidance and assistance, both financial and non-financial, from the government to overcome damages and restore the business environment.

The total stimulus package announced by the government for economic recovery is equivalent to Tk1 trillion, which is 3.6 percent of the GDP. This allocation has been made in a separate estimate outside the budget. The government announced a $5 billion stimulus package for the garment industry in March 2020. Later on, the government declared another $8 billion for the garment and related industries.

The government declared stimulus packages for the recovery of RMG and to ensure financial assistance to the affected areas of business. These stimulus packages would be channelled and executed using the banking networks and implemented by both government and private banks with the collaboration of the government, as per the direction of Bangladesh Bank.

The banking system plays a vital role in the economic activities of the country and has become a driving force in the financial system of Bangladesh. The outbreak of Covid-19 has depressed the banking sector of Bangladesh like many other sectors. Due to the prolonged pandemic and a long term lockdown of the country, several risks have emerged for the financial system in particular and the economy as a whole.

Banks are already struggling with the bad debts and other irregularities, including weak governance, inefficient performance and shaky financial health, which are worsening during the pandemic. Facilities allowed in the stimulus schemes may increase the rate of loan default and augment the NPLs. Most importantly, the stimulus packages offer benefits in terms of repayment and interest charge, which will result in negative or adverse effects on the profitability of banks. Banks thus may feel discouraged to extend loans and put emphasis on the fulfilment of terms and conditions of loans.

The stimulus package of Tk5,000 crore will be given to pay wages and salaries of workers by export-oriented industries, where the borrowers can avail loans to pay wages and salaries for three consecutive months of April, May and June 2020. Borrowers will repay the loan in 18 equal monthly instalments i.e. after six months, starting from January 2021 till June 2022. The borrowers will not be charged with any interest/ profit on these loans; rather, they will be charged a one-off 2 percent service charge on the loan amount.

Besides the government has declared a budget of Tk6 trillion for the FY2020-21 with a deficit amount of Tk1.8 trillion. The government has an estimate to raise the deficit fund from banks or capital market. A total amount of Tk54,000 crore has been projected for collection from banks. If the government takes that much money from the banks, banks will not be able to enhance its credit to the private sector due to a crisis of fund. Besides, slower growth of deposits due to single-digit plan may also put banks into challenges to maintain steady growth in liquidity, profits and overall financial positions.

Although the central bank has reduced the CRR rate to ensure liquidity in the banking sector, a decrease of deposits in implementation of single-digit interest rate, increases in government borrowing from banks may result in a shortage of liquid funds, which subsequently may hinder the implementation of the stimulus plan declared by the government. Such trio i.e. the implementation of the stimulus package, government borrowing for budget financing and defensive strategy of banks in consideration of liquidity, profitability, NPLs or default and the repayment schedule may create a mess in the execution of stimulus packages.

Besides banks have experienced a substantial amount of NPLs from the RMG as most of the banks have their investment in this sector. The new loans to be provided under stimulus plans might aggravate the NPLs in the sector and put banks at default risks.

Experts expressed doubts about effective implementation of the stimulus packages to revive the economy and also recommended fiscal measures to support the businesses rather than pushing the banking sector in pressure for financing.

Khondaker Golam Moazzem, research director of Centre for Policy Dialogue, said if the defaulters take the opportunity and default again, the non-performing loans in the country's banking sector would increase further and weaken the financial health of the banks.

Ali Reza Iftekhar, managing director of EBL, said the challenge for the banking sector is how efficiently they can reduce the cost of the deposit, to maintain enough spread and attain profitability. Bangladesh Bank has issued a circular for relaxation of loan classification till June 2020. With the single-digit interest on deposits, the ongoing Covid-19 pandemic, two-month interest income suspension, and dwindling private credit growth rate, it will be a tough and challenging year for the banking industry.

It is obvious and clear that under the pandemic situation, banks will face a decline in profitability due to intentional, unintentional and regulatory terms in payment of loans from borrowers. Credit is the main source of income for banks and brings the royal portion of profits. Due to the ongoing crisis arises for Covid-19, the economy has slowed down and a recessionary effect is about to appear.

A contraction of business and economic activities will affect banks in different ways like deposit mobilisation, earning capacity, expansion of business, control of credit default, operational costs and cost of fund etc. which may result in salary cut, employee retrenchment or lay-offs, control over expenses (as already executed by some banks for a temporary period till December 2021).

Finally, it can be said that proper monitoring along with stringent measures from regulators and government in nurturing and implementing the terms and conditions of the loans will be essential for effective implementation of stimulus packages. Otherwise, the new loan to existing borrowers under stimulus packages may aggravate the NPLs in banks with a negative impact on profitability and operating costs which will subsequently affect the liquidity, profitability, resilience, strong capital base and financial health of banks in the long run.