Rising interest rates deter new investment, expansion plans

If banks raise lending rates by one percentage point, it costs local pharmaceutical and chemical conglomerate ACI Limited Tk 70 crore in interest payments.

With the policy rate rising by four to five percentage points since fiscal year 2023-24, ACI’s financing costs have understandably risen manifold, forcing the company to focus on rising business costs and put any expansion plans on hold—at least for now.

The conglomerate began FY24 when the Bangladesh Bank’s key interest rate was merely 6.5 percent. It rose to as high as 10 percent by mid-FY25 as the central bank rapidly increased rates to curb price pressures by making bank borrowing more expensive.

Like ACI, the central bank’s battle against stubbornly high inflation is leading other large conglomerates to experience growing financing costs and declining profit margins, compelling them to shelve their expansion plans—inflicting a blow to private sector job growth.

“With such a high interest rate, no entrepreneurs will consider expanding now,” said Pradip Kar Chowdhury, chief financial officer of ACI Ltd.

With borrowings totalling Tk 6,365 crore, ACI Ltd’s interest costs in FY24 rose by 30 percent to Tk 658 crore, according to company statements.

Similar to ACI, rising rates are creating headwinds for at least 40 listed conglomerates, which have loan portfolios ranging from Tk 1,000 crore to more than Tk 5,000 crore, according to their financial reports.

“Businesses are adopting a wait-and-see approach and will take one to one and a half years to consider fresh investment with the high interest rates,” said Rupali Haque Chowdhury, president of the Bangladesh Association of Publicly Listed Companies.

“Businesses are already facing difficulties in stimulating demand, so this increase in costs will further discourage them from investing,” she said.

Many of the large local companies were already struggling with sluggish sales as inflation remained above the 9 percent mark for around two years.

Recently, the revenue administration raised value-added tax and supplementary duties on a basket of more than 100 products and services, further compounding their difficulties.

Chowdhury said that if expansion and new investment do not take place, job creation will be seriously impacted.

Echoing similar sentiments, ACI’s chief financial officer Chowdhury said that the current business climate is not conducive to expansion and that foreign investors are deferring their investment plans.

He hopes that foreign investment will return once the political situation stabilises.WHO OWES HOW MUCH

At least 40 listed conglomerates with large bank borrowings face a challenging year ahead. Of them, five companies have bank loans exceeding Tk 5,000 crore as of FY24, according to their financial reports.

Ten companies owe between Tk 2,000 crore and Tk 5,000 crore, while 19 firms have borrowed at least Tk 1,000 crore.

These companies are expected to face a significant rise in financing costs in the coming years due to increasing interest rates.

The company with the highest loan exposure is Power Grid Bangladesh, whose total loans stood at Tk 40,600 crore as of FY24. Most of its loans came from several multinational banks, including the Asian Development Bank (ADB). Due to the large loan portfolio, the company incurred a loss in the last fiscal year as the local currency devalued against the US dollar.

The second-highest loan-taking company among the listed firms is Beximco Ltd, which borrowed Tk 6,449 crore. Other companies with large loan burdens include BSRM Steel Tk 5,945 crore, GPH Ispat Tk 5,731 crore, BSRM Ltd Tk 4,525 crore, and Summit Power Tk 3,281 crore.

These companies are also at risk of skyrocketing financing costs in the current fiscal year.

Analysts said that the recent decision to impose more VAT and supplementary duties on nearly 100 goods and services will add to their financing burden. This will either force them to evade VAT or raise prices.RATE HIKES NOT A BANE FOR ALL

Interestingly, several companies have no bank loans and instead hold fixed deposits with various banks. These firms will benefit this year from higher interest income.

Companies such as LafargeHolcim, Linde BD, Reckitt Benckiser, Unilever Consumer Care, Bata Shoe, and British American Tobacco Bangladesh are among those without bank loans, according to their financial reports.

Meanwhile, banks and non-bank financial institutions are in a comparatively better position to profit under the current high-interest-rate regime.

Asif Khan, chairman of asset management company EDGE AMC Limited and also president of CFA Society Bangladesh, said that it is ideal to conduct capital structure planning with stress tests before interest rates rise. Once rates have already increased, flexibility has declined.

However, there are a few things that highly indebted companies can consider, he said.

“Firstly, companies can look for alternative funding sources such as zero-coupon bonds and convertible debt to replace existing debt. These newer options could bring borrowing costs down.”

According to Khan, a second option is to raise some equity. For private companies, he said this could mean promoters injecting capital. For listed companies, this could involve a rights issue. Both types can also bring in strategic investors for the same purpose.

“A final option available to conglomerates is to sell non-core business units to pay down debt. Idle assets such as free land that are not generating cash flow can be sold,” he added.