Banks dealt triple blow as bankers fear fall in profit

As the year is drawing to a close, the top bankers are found increasingly worried about the profitability of their banks.

Some leading bankers said Covid-19 pandemic and single-digit lending rate have caused enough damage to the banks' profitability.

The latest directive of the central bank on additional provisioning requirement against unclassified loans has come as a serious blow, they said.

The 66-day shutdown starting from March 26 last amid the pandemic had hit the overall banking businesses hard, they added.

The net interest income has dropped significantly as the banks brought down the lending rate to single digit (9.0 per cent), except credit cards, from April 01this year as part of a government move.

As a consequence, the interest rate spread - difference between the weighted average lending and deposit rates - also squeezed by more than 1.0 percentage point to 2.94 percent in October last from 4.07 percent in March last, according to latest figures of Bangladesh Bank (BB).

Besides, the bankers said, the lower private sector lending due to subdued demand amid Covid-induced supply chain disruption has pushed down the operational profits of banks.

The private sector credit growth declined to 8.61 percent (year-on-year) in October this year from 9.48 percent a month ago. This growth was 2.89 percentage points lower than the BB's target of 11.50 percent for the first half (H1) of the current fiscal year (FY 2020-21).

The banks' income from commission has also decreased mainly due to lower import businesses because of the ongoing pandemic, according to the bankers.

The import payments dropped by nearly 13 percent to $15.78 billion during the July-October period of FY'21 from $18.14 billion during the same period of last fiscal year.

"The operational profit of the banks may fall within a range between 15 percent and 25 percent by the end of this year compared to the previous year mainly due to implementation of the signal-digit interest rate," predicted M A Halim Chowdhury, managing director (MD) and chief executive officer (CEO) of Pubali Bank Limited.

The banking businesses suffered didruption during the April-May period of this year due to the pandemic, the senior banker said.

Echoing the Pubali Bank's MD, Farman R Chowdhury, MD of Al-Arafah Islami Bank Limited, said the operational profit would fall because the lending rates came down to only 9.0 percent in April from 13 percent earlier.

"The operational profit of banks will decrease this year mainly due to lower net interest incomes," Shafiul Azam, MD and CEO of Modhumoti Bank Limited (MMBL), said.

He also said that imposing 1.0 percent extra provisioning against unclassified loans is justified for strengthening the shock-absorbing capacity of the banks.

On the other hand, Syed Mahbubur Rahman, former chairman of the Association of Bankers, Bangladesh (ABB), said a number of banks will face difficulties in complying with the Special General Provision-COVID-19 rule of the central bank.

"The central bank may not consider imposing this additional provisioning for the customers, who have paid their installments regularly," Mr. Rahman, also MD and CEO of Mutual Trust Bank Limited, said while replying to a query.

All the scheduled banks will have to set aside an additional amount of around Tk 100 billion in provisioning from their operating profits to comply with the BB's latest rules.

On December 10 last, the central bank asked the banks to increase provisioning for unclassified loans and loans in special mention accounts by 1.0 percent of performing loans, and incorporate these provisions in their balance sheets of 2020.

Actually, the extra provisioning would constrain the profitability further this year as the banks' loss-absorption capacity in terms of pre-provision income weakened due to the lending rate cap.

The amount of unclassified loans in the banking sector stood at about Tk 9.7 trillion as of September 30 last which was 91.12 percent of total outstanding loans, the BB data showed.

A BB senior official said the volume of unclassified loans might increase slightly in the final quarter of this year following implementation of the government-announced stimulus packages.

"We've imposed 1.0 percent additional general provision against all types of unclassified loans considering long-term sustainability of the banking sector," the central banker explained.

The banks usually keep required provisions against both classified and unclassified loans from their operating profits in order to mitigate risks.

The amount of default loans fell by nearly 2.0 percent or Tk 16.76 billion to Tk 944.40 billion as on September 30 from Tk 961.17 billion as on June 30 this year as the central bank suspended the routine exercise of classification to help businesses overcome the adverse impact of the Covid-19 pandemic.

Under the existing regulations, the banks have to keep 0.25 percent to 2.0 percent provisions against loans under general category, 20 percent against substandard category, 50 percent against doubtful loans, and 100 percent against bad or loss category.

On the other hand, the banks are allowed to transfer interest of loans, which have not been realised due to the moratorium facility until December 31, into their income accounts after fulfilling three conditions of the central bank.

However, the senior bankers are yet to clear about the actual impact of extra provisioning against unclassified loans in the banking sector, saying that the real picture could be known after the book closing.