Banking, energy reforms vital for recovery

Former Dhaka Chamber of Commerce and Industry (DCCI) President Ashraf Ahmed said the government began its tenure at a time when critical economic indicators-including growth, investment and employment-were already trending downward due to policies adopted over the previous year.

“Welcome steps have been taken-an expansionary budget and a reduction in interest rates-which should help us recover. However, without resolving the energy and banking crises, the road to recovery will be an uphill task,” he said.

The majority of non-performing loans (NPLs) in the banking system are concentrated in a small number of banks, with the top 10 accounting for the lion’s share, he said. The actual situation in the well-run banks is nowhere near as dire as the overall picture suggests.

The capital shortfall in banks with the highest NPLs is creating a systemic drag on the entire sector. Unless the banking system’s ability to support credit growth is restored, the chances of returning to much-needed investment levels will remain low.

The good banks, which still hold the majority of the system’s deposits, need more capital to lend to the private sector. Investing in banks that are already facing capital shortfalls will not deliver growth, as they will not be in a position to support credit until they recover.

“The banking system has enough liquidity; what it is short of is capital,” he said.

While weak lending growth has emerged as a major bottleneck, the cost of capital, which is hovering in the mid-teens, is also acting as a brake on new investment.

High interest rates will continue to undermine the feasibility of new investment decisions, he said.

“Therefore, structural reforms in bank administration are essential, and opportunities for loan rescheduling need to be expanded,” Ashraf said.