Bad loans taking toll on banks’ profit earning

Profitability of the country's banks has declined by around 17 per cent over the last 10 years, mainly due to growth in the volume of bad loans, according to a study report.

The bulging non-performing loans again are hampering credit expansion, the report noted.

The volume of bad loans and operating costs of banks have ballooned over the years, but the banks are not being able to address these problem by refixing their interest rates, the report mentioned.

It has happened because of the pressure on the banks to keep their lending and deposit rates within 9.0 per cent and 6.0 per cent respectively, leading to the uncomfortable situation, it added.

The Bangladesh Institute of Bank Management (BIBM) shared the findings of the study at a roundtable on 'Interest Rate and Expansion of Bank Credit', held at its auditorium in the capital on Tuesday.

Professor Dr Barkat-e-Khuda, the BIBM's Dr Muzaffer Ahmed Chair, moderated the function, where a number of officials of the country's various banks were present.

According to the report, return on equity (ROE) of the banks was estimated 21.7 per cent in 2009, when their average lending rate and size of non-performing loans (NPLs) were 11.5 per cent and 7.3 per cent (of the total loan) respectively.

The volume of bad loans increased to 10.3 per cent, while the lending rate declined to 9.5 per cent in 2018. As a result, ROE of the banks came down to only 4.0 per cent in 2018, it also said.

"Cost of bad loans and cost on operating income (now at 52 per cent) put extreme pressure on the banks, which cannot pass the mounting expenses on to their interest rates because of the 6.0 per cent and 9.0 per cent pressure. Ultimately, it is affecting profitability of the banks," said the BIBM Professor Md Nehal Ahmed.

Presenting the research paper at the roundtable, Professor Ahmed, its lead author, said the banks are facing the double whammy.

The high volume of NPLs reduces the profitability. On the other hand, the banks ultimately pass the cost of bad loans on to the borrowers by increasing interest rates, which eventually reduces their credit growth.

According to the report, private sector credit growth was 13.2 per cent against the target of 16.8 per cent, as set by the Monetary Policy Statement (MPS) in 2018.

Mr Ahmed suggested more concentration by banks on non-interest income as well as formation of asset management companies (AMCs) like many other countries to manage and solve the NPL-related problems.

Former Supernumerary Professor of the BIBM Yasin Ali said there are some factors that the banks need to consider, like - lending and deposit rates, administrative costs, risk premium, and profitability.

He also said the lending and deposit rates have already been fixed, while the rise in bad loans cannot be controlled. The areas of administrative costs need to be reduced through increasing productivity and skills.

Citing the Chinese examples of tackling NPLs, he said the wilful defaulters cannot get public services there.

"We need to do something like that," he added.

The BIBM Supernumerary Professor Helal Ahmed Chowdhury said many banks are engaged in aggressive financing without considering the risk factors, which is distorting the market.

He suggested formation of taskforce at all levels of the banks to prevent rise in NPLs.

The NRBC Bank Ltd Executive Vice President and Head of Branch A K M Rabiul Islam said there should be a marginal rate for deposits, so that the banks can invest at a fixed rate of 9.0 per cent rate.

"But the reality is we don't get the government or corporate deposits at less than 10 per cent. We say one thing, but do something else. This is a sick competition. We need to sit and fix a unified deposit rate," he opined.

Assistant General Manager (department head) of the Rajshahi Krishi Unnayan Bank (RAKUB) Sawkat Shahedul Islam said the banks often take legal actions against the loan defaulters. But the lengthy procedure in disposing of the cases puts extra burden on them.

"It takes even more than 10 years (to dispose of a case). Quick disposal of cases is very essential to this effect."

He criticised the Bangladesh Bank's recent circular, allowing defaulters to reschedule their classified loans by paying only 2.0 per cent down payment.

"Now the good borrowers seem to be following the bad ones, who are now getting 10 years to repay the loans under the latest rescheduling facility," he noted.

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