Companies scramble to repay bank loans

Some companies in Bangladesh are scrambling to repay bank loans in order to avoid higher finance costs since the interest rates in the banking sector are on the rise.

Bank interest rates currently stand at about 12-14 percent compared to below 9 percent just several months back as the Bangladesh Bank is allowing the market to determine the cost of funds as part of its efforts to tighten the money supply to tame inflationary pressure.

And since the interest rates may rise further, the companies are taking steps to quickly pay back loans using funds from alternative sources, according to business leaders.

For instance, Renata PLC, Emerald Oil, and Beximco Ltd have issued bonds and preference shares and sold existing stocks to raise funds of more than Tk 2,530 crore in total to repay loans.

Preference shares, commonly referred to as preferred stock, are company shares that pay dividends to shareholders before common stock dividends are issued.

"Corporates are searching for alternative sources of finance as the lending rate is rising and it may rise further," said Professor Mahmood Osman Imam, a financial analyst.

However, only the strong corporates will be able to raise funds from alternative sources as they have a good credit rating and reputation, he added.

Against this backdrop, Imam suggested the government incentivise the purchases of financial instruments other than zero-coupon bonds so that corporates can enjoy a wider mix of funding.

Corporates prefer issuing zero-coupon bonds for their popularity among investors, who do not have to pay any tax on the income generated.

So, providing the same facility for other financial instruments, such as corporate bonds, convertible preference shares and green bonds, would provide an alternative for financing other than bank loans.

However, the country's bond market has still not developed properly and there is a scarcity of fund providers in the alternative market, Imam said.

Renata, a drug maker, is in the process of issuing bonds and preference shares to raise funds of more than Tk 1,000 crore.

Jubayer Alam, company secretary of the company, said Renata is opting for alternative financing in order to keep its profitability stable in the coming years.

"It is difficult to maintain a consistent profit growth if bank interest rates are volatile, and the current macroeconomic scenario suggests that interest rate may rise further."

Alam also said companies can plan accordingly even if the cost of alternative financing is high as uncertainty in this regard is even more troubling.

Beximco, a local conglomerate, decided to raise Tk 1,500 crore by issuing zero-coupon bonds with one-third of the funds to be spent on repaying bank loans.

The bonds, however, have a higher yield rate of 15 percent compared to the current lending rate of between 12 and 14 percent.

"So, the yield rate will eventually look better if the bank interest rate keeps rising," said a senior official of a merchant bank.

"Since the interest rates rose, corporates are exploring other ways to repay loans as it is tough to run a business while paying a higher interest rate," said Rizwan Rahman, managing director of ETBL Holdings Limited.

The company, which is engaged in businesses such as construction, manufacturing, warehousing, cold storage, stocks, banking, insurance, infrastructure and house finance, took a loan a couple of years ago at 8.9 percent interest.

Although the rate has since risen to 13.5 percent, bankers are saying it may increase up to 14.5 percent, said Rahman.

The problem is, he argues, that the company did not plan for higher interest costs at the time of borrowing. "So, our company will face difficulties to survive without sacrificing its bottom line."

The interest rate rose as the central bank took on a contractionary monetary policy to tame inflation. On the other hand, the government is borrowing from the central bank, which will fuel the price level.

And considering how the government involves itself in fixing the exchange and interest rates, Rahman questioned why businesses should suffer from poor economic policies.

"If the interest rate and the dollar rate were market-based, it may rise initially but it will eventually stabilise," said Rahman, also a former president of the Dhaka Chamber of Commerce and Industry.

Minori Bangladesh, a subsidiary of Japanese farming company Minori Co Ltd, decided to sell 46 lakh of its 3.62 crore shares in Emerald Oil in the secondary market. The company will use the proceeds to provide Emerald Oil interest-free funds so that the latter can repay bank loans.

Professor Imam said loan-dependent companies will suffer as interest rates may rise further. "So, they should find new sources of finance and repay loans."

Rahman recommended developing alternative financing solutions to make the financial market vibrant.

Since the bond and stock markets have not developed properly, corporates can meet their demand by issuing bonds and preference shares, he said.

"The main product of the stock market is still equity issuance. Instead, it should have more diverse products."