Commercial banks inclining towards short-term loans

Rafiqul Islam Azad: Commercial banks in Bangladesh are encouraging short-term loans for different reasons, including low risk, high profit, and liquidity crunch. As part of the strategy, the banks are moving away from the culture of long-term loans, considering the interest rate intelligently, the possibility of future interest rate increases, and the political situation ahead of the upcoming general elections.

Insiders said the banks are also showing interest in short-term loans due to the recent biggest loan scam. Additionally, a review of private sector loans reveals that large sums of funds are tied up with the top few defaulters in the country, depriving ordinary investors.

The rate of recovery for long-term loans is nominal, whereas the collection rate for current, demand, and short-term loans provided to small and medium entrepreneurs and farmers is high, according to insiders.

Meanwhile, government reports also revealed the fact that long-term loans have a lower recovery rate. Finance Minister AHM Mustafa Kamal recently presented a list of the top 20 defaulters before Parliament. All of the defaulters had taken out long-term loans. Out of the total amount of Tk 19,283 crore distributed to only 20 customers, the default amount was Tk 16,587 crore. The total number of defaulters is 786,065.

The central bank is also making a similar information. According to the updated data from Bangladesh Bank, the amount of fixed-term loans distributed across the country is Tk 618,043 crore. Out of that, defaults amount to Tk 76,634 crore, which is 12.40 percent. On the other hand, the amount of short-term loans (agricultural and micro-credit) distributed across the country, isTk 52,670 crore. The default in short-term loans is Tk 2,128 crore, which is 4.04 percent, according to sources at Bangladesh Bank.

Furthermore, the disbursed demand loans (short-term) amount to Tk 298,229 crore. Among them, the default amount is Tk 17,102 crore, which is 5.73 percent. The amount of current loans (short-term) distributed is Tk 448,937 crore. Among them, the default amount is Tk 34,353 crore, which is 7.65 percent, sources added.

While speaking to the media, the spokesperson and executive director of Bangladesh Bank, MezbaulHaque, mentioned that banks provide loans considering interest rates, liquidity, and domestic and political factors. It is normal for businessmen to take loans after calculation. In this case, whether a loan is long-term or short-term depends on the demand, and short-term loans are more profitable.

However, a senior official from a public bank stated that the bank operates according to its own plan. Nevertheless, he emphasized that the development of the country and its people is the foremost priority.

Given the significant contribution of cottage, micro, small, and medium industries (CMSME) to the country’s development, there is a strong emphasis on distributing loans to entrepreneurs in this sector. The loan recovery rate in the sector is also commendable, he added.

Meanwhile, the central bank has raised the interest rate ceiling to 9 percent from July of this year and introduced intelligent interest rates. The interest rate was around 11 percent and might increase further. Additionally, there is a liquidity shortage in the banking sector. In such a scenario, the bank is focusing on distributing short-term loans, he further explained.

A senior banker observed that the interest rate has no bearing on whether a bank’s loans are long-term or short-term. “It mainly depends on the customer’s demand. Customers can take loans considering various aspects of interest rates, time, and investment. In this case, the bank has no influence. The bank follows an investment policy,” he added.

There is limited opportunity to always be on the side of profit and loss. We disburse loans by understanding the customer’s needs. However, loans to farmers and small entrepreneurs are given greater importance, said the banker.

According to Bangladesh Bank’s SME portal, the amount of short-term loans distributed among small entrepreneurs in the January to March quarter of this year stood at Tk 32,131 crore, compared to Tk 19,935 crore distributed in the October-December quarter of last year.