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Budget 20-21: Will be taking toll on banking sector?

Published : Sunday, 14 June, 2020 at 12:00 AM  Count : 1236
Md Zillur Rahaman
AHM Mustafa Kamal, the Finance Minister of Bangladesh, has placed a hefty ambitious budget of tk 5.68 trillion for the upcoming financial year 2020-21. Moreover, he has set a tax revenue target of Tk 3.30 trillion. The proposed budget is 13 per cent bigger than the revised outlay of the outgoing fiscal year. The finance minister has placed the proposed budget in such an unprecedented time when the world is passing a deadly crisis. On that note, the Finance Minister also said, it is not the size of the budget that matters; rather it is how we confront the COVID-19 pandemic and salvage the wrecked economy.
 
The government has proposed Tk 955.74 billion in the social safety net programmes, which is 16.83 per cent of the entire budget and 3.01 per cent of the GDP. The allocation was tk 818.65 billion in last year's revised budget. The enhancement of social safety net programmes is a laudable initiative of the government to calm down the COVID-19 hit marginal new poor. However, the big challenge of the budget is to meet the deficit of revenue collection. The overall budget deficit will be Tk 1.90 trillion in the fiscal year 2020-21, which is 6.0 per cent of the total GDP and that deficit was at 5.0 per cent in the last fiscal year.

The banking sector is currently passing a fragile time and presently facing three major challenges--a big volume of non-performing loans, the implementation of single digit interest rate and the corona hit recession. The big budget deficit of the upcoming fiscal year will put extra pressure on the banking sector in addition to the above three big challenges.

It is to be mentioned that our Banking sector is trapped in a gridlock of NPLs so much that the total volume of classified loans is growing concern for banking experts as well as government. This problem has started to be widening with an evil trend of loan embezzlement among the industrial borrowers in our country. Frequent scam series in banking industry is surely a red light and unfortunately the commercial banks are highly surrounded by it. As a result, the high volume of NPLs reduces the profitability. On the other hand, the banks ultimately pass the cost of bad loans on to the borrowers by increasing interest rates, which eventually reduces their credit growth.

 Implementation of single digit interest rate is also turning out to be a double edged sword as it is discouraging people from saving, creating temporary deposit crisis in banks and squeezing lending concerned with the banking sector. The government has implemented the same from April 1, 2020 through Bangladesh Bank and it means the all the scheduled banks are bound to charge a maximum nine per cent interest rate for lending and six per cent for deposit. Some of the commercial banks have already started providing not more than six per cent interest rate for savings from February 1, 2020. This move by the commercial banks of the country has prompted a flurry of savers to withdraw their funds. The surprising fact is that it has declined the spreading rate which ultimately causes the operating profit of all the commercial banks has drastically down turned.

Alarmingly it has been observed that the prevailing COVID-19 hit economy has also faced a number of new challenges  hefty borrowing from the banking system by the government, fall in export receipts, slow down of the remittance inflow, lower GDP growth, declining import of raw materials and capital machinery, soaring non-performing loans in the banking sector, slow collection of revenues, low turnover in the capital market, shrinking and firing in the job market, upturn of the new poor segment and private sector poor credit growth in the current fiscal year 2019-20.

According to the budget document the government will go for hefty borrowing from the banking system to partly finance budget deficit for the fiscal year 2020-2021. This bank borrowing is set to climb 79 per cent to Tk 849.80 billion for the FY'21 from Tk 473.64 billion a year ago. Under the arrangement, the government will borrow Tk 536.54 billion by issuing long-term bonds while the remaining Tk 313.26 billion will come through treasury bills. Meanwhile, the government has increased its bank borrowing target by more than 74 per cent to Tk 824.21 billion from the original goal of Tk 473.64 billion for the FY' 20.
Macroeconomic policy says, if the government borrowing or government investment increases, then money supply of the banking sector reduce which automatically bring down the private investment scope. It is called "crowding out effect" in Economics.

Government has proposed to implement all the COVID-19 hit stimulus package through private sector investment and it is also a big challenge. Due to 'the crowding out effect',  the lower banking channel credit growth will slow down the export and import volume as working capital is required for manufacturing industry to boost up the same and timely lack of working capital hits the non-performing loans. However, slower export and import growth sluggish the government poor revenue collection as government earns a good amount of duties from these sectors.

Each of the economic indicators is interrelated and dependent on each other and the above indicators are not helpful for sound economic growth. The economists are persistently criticising in different forums that crowding out effects are prevailing in our economy during the last few years.

So, the falling trend in sales of national savings certificates and lower revenue collection has prompted the government to scale up borrowing from banks and such higher bank borrowing target might adversely impact the country's money market if the entire amount is borrowed from banks. And then definitely private sector credit growth will be hampered if the government borrowed the total amount from the banks and it will put extra pressure on the turmoil banking sector in addition to the big volume of non-performing loans, the implementation of single digit interest rate and the COVID-19 hit recession challenges.

To gain the healthy GDP growth rate, increase in broad money and other indicators are playing an important role in economic transformation of Bangladesh.So we urged the government to curtail the high borrowing policy to boom up the banking sector credit growth positively.

The writer is banker and freelance contributor





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