Non-banks facing uphill battle
What started with lease financing, progressively diversified into term lending, working capital financing, corporate advisory, housing finance, merchant banking, equity financing and finally took the name of today's non-banking financial institution (NBFI).
With an effort to strengthen the economy through long term financing, in 1983 the government permitted NBFIs to offer lease financing.
Regulations such as the Financial Institutions Act of 1993 developed with time, enabling NBFIs to broaden their products and provide the greatest possible convenience to borrowers.
Today, NBFI is playing a vital role in the financial system, acting as a noteworthy bridge between households and businesses. Even though NBFI has been able to infiltrate the financial system, it faces tremendous competition from local and international banks in respect to both asset and liability.
Yet, the zeal for developing innovative long-term solutions for clients has created competitive advantage for the top performing NBFIs.
Currently, there are around 35 NBFIs in Bangladesh. Even though some are successful in sustaining good asset quality, most are struggling with a high degree of non-performing loans (NPLs).
The Covid-19 pandemic, Russia-Ukraine war and subsequent inflation have negatively impacted the economy and thus can be blamed for increasing NPLs in the overall banking sector.
However, inadequate governance and several news on loan scams and fraudulence have degenerated the condition for NBFIs.
Meanwhile, to reduce the cost of capital, the central bank and banking association have set a maximum interest rate of 9 per cent on all bank loans and 6 per cent on deposits.
Subsequently, in the wake of rising commodity prices, banks were allowed to keep deposit rates higher than the rate of inflation. On the other hand, the central bank imposed an interest rate cap of 11 per cent on loans and 7 per cent on deposits for the NBFI sector to bring a resemblance with banks from July this year.
For a long time, the banking industry has been a victim of NPLs. Furthermore, recent rumours regarding liquidity shortfall amid media reports on large scams in the banking sector have created unwanted misperception and confusion among depositors.
As both banks and NBFIs operate in the same customer segments, where the major source of funds for NBFIs is term deposits, NBFIs are dealing with additional liquidity stress.
The rationality behind the difference of 2 per cent between banks and NBFIs in case of the lending cap was justified considering the high cost of funds for NBFIs.
Previously, NBFIs would offer 1-2 per cent more than banks on deposit and maintained the spread on the lending accordingly.
However, in case of deposits, the new regulation failed to maintain the same rationality as the bank's deposit rate cap had a provision of adjustment with inflation that was absent in NBFIs'.
This has made it difficult for NBFIs to survive. As the country's inflation jumped to 9.5 per cent in July, banks accordingly adjusted their deposit rate for staying competitive. Whereas, NBFI failed to surpass the cap of 7 per cent deposit.
As a result, the NBFIs are having a difficult time maintaining their market positions.
And for this reason, depositors are more willing to transfer their money from NBFIs to banks. Evidence is there that total deposit of NBFIs has already reduced to Tk 420 billion as of June this year from Tk 426 billion as of June 2021.
If the same scenario continues, the NBFI sector would witness a severe crisis that would further deter the economy's growth. Hence, it is high time regulators looked into the issue and mitigate the price disparity between banks and NBFIs.
The author is a banker and analyst