The Bangladesh Bank (BB) has identified three reasons for finding alternative sources of long-term financing instead of the banking system.
"Arranging long-term fund through floating corporate bonds, instead of bank loans, will help stabilise stock markets alongside reducing the liquidity management risk of banks," the central bank said.
The central bank said that the long-term financing through short-term deposits creates mismatch in asset and liability position of the banks, raising risks to the liquidity management.
In most cases, long-term loan loses qualitative standards with economic cycle resulting in increased burden on banks for keeping provisions, the banking regulator noted.
The central bank also said due to sanction of long-term loans, the banks become sensitive to the interest rate fluctuation in money market, which is not expected for the stabilisation of money market.
In a letter to the ministry of finance last week, the BB said the last monetary policy also laid importance on finding alternative sources of long-term financing.
At a pre-budget discussion with businessmen on Monday, finance minister AMA Muhith also echoed the central bank's views on the long-term financing.
"Our investment fund largely comes from banks. Borrowing in the short-term and lending in the long-term by banks is not at all satisfactory. Capital market is the only solution to it," the minister said.
Muhith said in the next budget, some indication would be there to make the capital market vibrant, because equity coming from bank loan was not good.
Meanwhile, the International Finance Corporation (IFC), in a recent diagnostic report, said Bangladesh capital market environment was not conducive to the issuance of debt instruments or mobilisation of debt to help local businesses secure long-term financing.
It said long-term debt issuance is subject to higher issuing cost and rigorous regulatory due diligence.
"The inadequacy of the accumulated equity capital and very constrained space for long-term debts outside the banking network are huge impediments to growth in private as well as public sector investments in key sectors including infrastructure, industrial manufacturing and housing," the World Bank's private sector lending arm said.
The IFC reiterated that it will work on issuing offshore Taka bond and green bonds to help Bangladeshi businesses get long-term finance outside the banking sector.
"…the IFC will make efforts to execute demonstration transactions to lead the way for other market participants to do similar transactions in the areas including offshore taka bond issuance, investment in market infrastructure, green bonds and green finance, securitisations," it said in an aide-memoir on the capital market development in January.
The IFC came up with the proposal as Bangladeshi businesses lacked long-term debt in absence of a 'vibrant stock market' in the country.
It identified poor governance in both public and private sector commercial banks, rising non-performing loans and other structural constraints, which also limit the banking sector's capacity to remove the long-term finance bottlenecks.
The IFC said the long-term financing could have been less difficult to mobilise had there been a deep and vibrant capital markets "with lead-ins for intermediation of long-term debts".
Presently, over 80 per cent of the country's debt comes from the banking sector. "Dominance of commercial banks also indicates the prevalence of short and medium-term lending and limit on the capacity of long-term financing."
The IFC identified three reasons behind long-term lending limitations of domestic banks.
The banks have no easy access to foreign exchange resources thus cannot lend in foreign currency, they are short on long-term taka resources resulting in failing to lend in Taka beyond five to six years of maturity, which is significantly shorter than the economic life of most long-term investment projects.
Another reason, the IFC found, is that the banks rely on variable-rate resources (deposits), thus cannot provide fixed rate loans, although this could be the best practice for projects creating long-term assets.
The lender termed Bangladesh's two stock markets relatively small and heavily equity-driven.
The two stock exchanges have a market capitalisation to GDP ratio of 22 per cent while the ratio is 80 per cent in India, 96 per cent in Thailand, 55 per cent in Vietnam, and 159 per cent in EU for debt market.
In the EU, the ratio is 60 per cent for equity/stock market.
