JB's interest-free farm loans
Experts feel bank is in for a new bout of losses

A Z M Anas

Janata Bank's plan to offer interest-free farm loans threatens to push up its piled-up losses incurred through years, while weakening the state lender's profitability, according to experts who assess the banking sector.

They said the second largest state bank will have limited "window of opportunity" to recoup its potential losses as the central bank's interest rate cap would not allow it to "cross-subsidise."

In the past, commercial banks would offset lower income with interest on farm credits by charging higher rates on other types of loans such as trade financing and industrial loans.

The bank has unveiled a plan to introduce agricultural credit to landless and small farmers without interest or collateral by January next, particularly in areas hit by Monga or famine-like situation, as well as devastating cyclones like Aila and Sidr to help farmers restore their livelihoods.

"It's simple. This new mode of lending is going to snuff out Janata's future," an observer, who monitors the bank's performance regularly, said.

In addition to the risks of massive default, the greatest danger, the observer added, is that Bangladesh Bank's "mandatory" rural credit disbursement will curtail Janata Bank's scope to recoup losses by charging higher interest rate on other forms of lending.

"It's a quandary. You need to comply with the central bank regulations. Again, you can't raise interest rates," said the observer who wanted not to be named.

Janata's planned channeling of loans to priority sectors like SME and agriculture is part of the compliance with the central bank's order.

Lending for agriculture has been made compulsory for all commercial banks, with incentives in the form of refinance facilities, and ceiling on lending rates and charges for priority sectors.

"These approaches do not have a history of much success, and it remains to be seen as to how much additional credit flows to the priority sectors," the World Bank said in a recent research note.

The World Bank said price decrease in imports has already affected Janata Bank's letter of credit business, which is one of the major sources of non-funded income.

Non-interest-bearing deposit has not been met primarily due to retaining existing institutional deposits competing the private banks, and decrease in marginal deposits resulted from decrease in import price following the global financial crisis, the global lender said in a recent review.

The low interest rate on the bonds issued by the government for state-run Bangladesh Petroleum Corporation (BPC) for Tk 25.57 billion combined with low investment demand and interest rate cut as encouraged by Bangladesh Bank affected banks' interest income, it said.

The bank's seemingly "suicidal" move comes at a time when the state lender's net worth of capital has continued to improve.

Prof Abul Barakat, who chairs Janata Bank's board, said the bank will give out loans without interest to landless and marginal farmers in Monga, Aila and Sidr-affected areas for six months.

He said farmers can avail Tk 5,000 to Tk 15,000 under this new lending scheme.

Mr Barakat made it clear that the landless and marginal farmers who have already taken micro-loans or any 'dadon' would not be allowed this facility.

The JB chairman said a special team of the bank would be deployed to assess the utilisation of loans taken by farmers.

An expert opposed to the scheme warned that it would just drive up the bank's losses if the state lender, which plans to raise Tk 10 billion in an initial public offering, pursued this lending approach.