Can banks safely deliver the BB stimulus for industries?

Bangladesh Bank's Tk60,000 crore stimulus package is a bid to
revive growth, create jobs, and support struggling sectors. But its most
interesting feature may be financial rather than industrial. Of the total
amount, Tk41,000 crore is described as a "refinancing" facility
sourced from banks with excess liquidity through longer-term deposits at 10%,
while Tk19,000 crore will come from BB's own resources under government
guarantee arrangements.
That structure raises a basic
question: if most of the money is expected to flow through banks rather than
directly from the central bank, what exactly is being solved?
The terminology itself invites
scrutiny. In conventional central banking, refinancing typically refers to
liquidity provided by the central bank to financial institutions. Here,
however, the presentation suggests that the larger component will be mobilised
through bank resources rather than central bank funding. That does not make the
approach wrong — but it does make incentives more important.
The implicit assumption is that Bangladesh's slowdown reflects insufficient
credit supply — that banks have liquidity but are not lending enough, and
cheaper financing can unlock investment and production.
This diagnosis deserves closer
examination.
Banks stop lending for different
reasons. Sometimes they lack liquidity. Sometimes they lack capital. But often
they lend cautiously because they do not trust borrower quality or their
ability to recover loans if projects fail.
Bangladesh's banking system is the
third case. Despite repeated rescheduling exercises and regulatory support,
problem loans remain elevated, and credit discipline remains weak. Private
credit growth has slowed sharply. That does not necessarily mean banks are
unable to lend. It means they are more selective — or reluctant — to take the
risk.
That distinction matters. If banks are already unwilling to lend commercially
to some borrowers, what changes when those loans become part of a stimulus
programme?
Borrower quality does not automatically improve. Project viability does not
change. Supply constraints do not disappear. What changes is the incentive
structure.
Here, an important detail is
unclear. The presentation does not specify whether participating banks will
receive compensation beyond the stated 10% funding structure or who ultimately
absorbs losses if loans underperform. Those are not technical details. They
determine where risk ultimately sits — in bank balance sheets, government
accounts, or the central bank.
If banks retain the risk without additional
compensation, participation may remain limited to institutions willing to
accept weaker underwriting standards. If losses are ultimately socialised
through guarantees or subsidies, pressure shifts to public finances. If lending
decisions become influenced by programme targets rather than credit
fundamentals, financial vulnerabilities may simply migrate rather than
disappear.
This concern is important because
many of the sectors targeted by the package are not constrained by finance
alone. Bangladesh's current slowdown does not resemble a conventional demand
recession. Firms continue to report operational constraints linked to energy
availability, import frictions, and uncertainty around production conditions.
Reports of substantial installed investment sitting idle because of gas
shortages suggest that access to finance is not the binding constraint in many
cases.
If firms cannot operate reliably,
additional credit may improve liquidity without generating proportional
increases in output. That creates a difficult trade-off. Banks participating in
the programme may support firms through a difficult period. But if production
does not recover quickly enough, the result could be additional exposure
without the growth needed to support repayment.
This is not an argument against
stimulus.
Support for SMEs, agriculture,
export diversification, and smaller enterprises could generate meaningful
returns if targeted well and paired with measures that remove operational
bottlenecks. But that requires distinguishing between firms that are
fundamentally viable but temporarily short of liquidity and firms whose
expansion remains constrained by factors that additional credit cannot resolve
— such as unreliable energy supply, import frictions, or weak market conditions.
That distinction matters because it
determines where risk ultimately ends up. If the programme succeeds, banks help
create productive borrowers and support recovery. If it fails, the risks
migrate into bank balance sheets, government guarantees, and eventually the
broader economy. The real test of the Tk41,000 crore component is therefore not
how much money gets disbursed. It is whether the lending remains disciplined.
Banks should not be expected to
suspend credit assessment simply because loans are packaged as stimulus. Their
role is to identify firms that are fundamentally viable but temporarily
constrained — not to expand exposure indiscriminately. Equally important,
regulators must create enough space for banks to exercise commercial judgment
rather than treat disbursement targets as a substitute for risk management.
A stimulus delivered through banks
succeeds not when it maximises lending, but when it preserves and enhances the
quality of lending.
If viable firms receive temporary
support and recover, the programme can strengthen both production and financial
stability. If weak borrowers are kept alive through subsidised exposure or
political pressure, the risks do not disappear — they accumulate elsewhere in
the system.
















