The private sector credit disbursement by non-bank financial institutions dropped to an all-time low in last fiscal year of 2018-2019 due to growing public distrust in the entities and falling credit demand from the sector.
Growth in the private sector credit through the NBFIs dropped to 4.1 per cent in FY19, the lowest since FY02, according to the Bangladesh Bank data.
At the end of last fiscal year, outstanding credit of the NBFIs to the private sector stood at Tk 67,000 crore against Tk 64,400 crore a year ago.
Experts and top executives of the NBFIs said that the major reason for the sharp fall in credit growth was the public distrust in the NBFIs since the sector along with the banks had witnessed a series of scams and irregularities in the past several years.
Distrust in the NBFIs intensified following their failure in repaying individual depositors as well as the institutions like banks and the subsequent BB moves to liquidate two NBFIs — Bangladesh Industrial Finance Company Limited and People’s Leasing and Financial Services Limited.
Former Bangladesh Bank governor Salehuddin Ahmed told New Age, ‘Firstly, the credit demand fall was a major reason for the decrease in private sector credit growth through the NBFIs. As the investment situation did not improve, the demand for credit fell.’
Secondly, scarcity of source of fund that resulted in high rate of interest in the NBFIs was another reason for the fall in the private sector credit growth, Salehuddin said.
Besides, scams in the banking sector as well as in the NBFIs also resulted in fund crisis for the NBFIs, he said, adding that the liquidation of People’s Leasing also created an issue of distrust.
On July 27 this year, the BB received approval from the finance ministry for the PLFS’ liquidation.
Later, the BB appointed liquidator to PLFS after securing approval from the High Court and the process of liquidation is underway.
‘Since the NBFIs are completely dependent on deposits from banks and individuals, the entities suffered liquidity crisis due to negative perception surfaced after the move to liquidate People’s Leasing,’ IPDC Finance managing director and chief executive officer Mominul Islam told New Age.
Besides, lack of confidence in the NBFI sector made the situation worse for them to collect deposits, he said.
However, several NBFIs have managed to post double-digit growth in the private sector credit disbursement and even IPDC Finance posted over 30 per cent growth in credit issuance, he mentioned.
Mominul said that NBFIs depended on short-term deposits from banks and individuals due to absence of long-term source of fund, the bond market, he said.
Stringent policy to issue bonds was the reason for the non-functioning state of the instrument, he said, adding that the central bank and the National Board of Revenue were working on the issue.
At present, the country has 34 NBFIs with the maiden one was established in 1981. As per a BB stress test report, 13 were in the red zone, 17 in the yellow zone and four in the green zone.
To rescue the NBFIs from liquidation, the BB has already issued a number of policy supports including the extension of borrowing limit for them from call money market.
Besides, the BB has already instructed banks not to withdraw their deposits from the NBFIs.