The World Bank has warned that the government's excessive borrowing from the banking sector and using banks to stabilise the stockmarket will make the country's financial sector weak and ultimately dampen growth.

The WB in its latest economic update released yesterday said, “These pressures could hurt the efficient allocation of capital and dampen economic growth.”

The WB also said the significant rise in export and import trade has increased the demand for trade financing including letter of credit facility, adding to liquidiy pressures.

Also the increase in interest rates and the problems in the textile sector arising from liberalised rules of origin could add to the non-performing loan portfolio of banks.

This will ultimately reduce loanable funds of the banks, the WB said.

It said all these factors can hinder the banking system in its role of allocating resources to private activities with the best possible returns.

“Since these pressures are not likely to ease in FY12, the concerns will continue and could even intensify over the course of the year,” the WB update said.

Explaining the macroeconomic pressures in the banking system, the WB report said the government's increasing reliance on domestic financing is raising concerns on crowding out domestic financing of the deficit, most of which came from banks.

The multi-lateral lender said, this has intensified the liquidity pressures that some of the banks are facing.

The exposure of some banks to the stockmarket, as well as the creation of a fund with support from public financial institutions to shore up the market also reduces loanable funds for the private sector.

The creation of the fund also increases contingent liabilities for the government, the report added.

The update said weak corporate governance in parts of the banking sector, especially state-owned banks, leads to sub-optimal loan decisions.

Finally, there are vulnerabilities posed by ad-hoc policy decisions such as changes in interest rate caps, contribution to a stock stabilisation fund, and financing of large loss-making state enterprises.

Mentioning various steps taken by the government and the Securities and Exchange Commission (SEC), the WB said equity markets have remained volatile.

About approval for setting up new banks, the WB update said, the central bank is planning to invite applications to establish new banks and insurance companies even though the country is facing the problem of “overbanking.”

Allowing new institutions to enter the market may not necessarily increase competition or access to finance. New banks would also imply the need for closer regulation and supervision, the lender said.

It also commented on the budget for the current fiscal year and macroeconomic situation.

The WB said the current budget had several measures aimed at protecting local industries by raising customs, supplementary and regulatory duties.

Nominal protection increased significantly from 23.7 percent in fiscal 2011 to 26.5 percent in fiscal 2012.

The WB said the overall nominal protection rate is now at its 2006 level, which is a setback to the agenda for trade diversification.

The global lender also projected that the government will have to give subsidy of Tk 30,320 crore to Bangladesh Power Development Board, Bangladesh Petroleum Corporation and Bangladesh Chemical Industries Corporation in the current fiscal year.

The actual subsidy was Tk 12,300 crore last year.

The WB report said the budget faces a major subsidy burden and has over-programmed the annual development programme.

In contrast, its revenue target is ambitious in the wake of a strong revenue growth last year.

News: The Daily Star/ Bangladesh/ 26-Oct-2011