Near-negative lending gains worsen NBFIs’ woes

Near-negative gains from lending leaves non-bank financial institutions (NBFIs) nonplussed with the spread between rates on deposit and advances hitting historical lows, showing signs of slowdown in this sector.

According to latest Bangladesh Bank (BB) statistics, the difference between weighted average rates on deposit and advances, better known as spread, narrowed to 0.16 per cent in July 2023--down by eleven basis points from June figure at 0.27 per cent.

In the previous few months, the spread had stood at 0.37 per cent, 0.44 per cent, 1.11 per cent and 1.15 per cent in May, April, March and February respectively.

There are a total of 30 NBFIs in operation and the spread in 12 financial institutions is negative. Of the total NBFIs, the spread in 19 went on a slide in July from the previous month while it is improving in 10 others and remained static in the remaining one, according to the BB data.

Seeking anonymity, a BB official said the spread was 3.04 per cent even in January 2022. Since then, it has been shrinking.

"Now it is 0.16 per cent, and this is the lowest in NBFI history. It reflects how poor the health of financial institutions here," says the official of the central bank.

Spread not alone on the flipside--other key indicators like NPL and cost of fund continue rising while the volume of deposits continues declining, the central banker notes about an apparent depositor trust deficit in saving with the nonbanks.

The BB data show over threefold rise in the aggregate volume of NPLs with the nonbanks in less than seven years. As a spillover effect of the growing NPLs, two major profitability-measuring indicators --return on asset (ROA) and return on equity (ROE) - of the sector keep dipping alarmingly.

The volume of classified loans or lease was 7.3 per cent in 2016. Since then, the NPLs have built up to 8.9 per cent, 9.2 per cent, 11.9 per cent, 13.29 per cent and 15.39 per cent in 2017, 2018, 2019, 2020 and 2021 respectively.

The quantum had further leapt to 22.99 per cent until June 2022 when Tk 159.36 billion out of total loans amounting to Tk 693.32 billion of the sector got classified as bad loans.

In terms of deposits, the volume was registered at Tk 436.98 billion in January-March period of the fiscal year, slightly down from Tk 437.53 billion recorded in the previous quarter (October-December of 2022).

The cost of fund is another indicator that is also increasing. According to the Cost of Funds Index (CoFI) released by the central bank, the weighted average cost of funds in July 2022 was 6.58 per cent and it rose to 7.11 per cent in May 2023.

However, the market players are optimistic about a turnaround from the tailspin in profitability in a couple of months, riding on the latest interest regime recently introduced by the central bank based on market-driven reference rate.

Managing Director and CEO of Strategic Finance and Investments Limited (SFIL) Irteza Ahmed Khan holds the hope that things will start improving "very soon" as the BB launched interest benchmarking after lifting the crisis-time interest caps--7.0 per cent on deposits and 11 per cent on lending.

Hailing BB's latest interest-setting mechanism based on SMART or Six-Months Moving Average Rate of Treasury Bill, he says it will help resolve the problem regarding deposit-to-lending gap, as it has now increased to 5.0 per cent compared to the previous 4.0 per cent.

Moreover, 1.0-percent annual supervision charge has been introduced for the CMSMEs, consumer finance and auto-loan products, which will now increase the overall yield onwards.

"We've made revision of the rates based on the SMART this month and you will see its reflection from coming September," he says, pointing to a silver lining on the horizons.

Seeking anonymity, the managing director and chief executive officer of a problem-ridden NBFI told the FE that the NBFI remained in the red zone since 2016 because of growing volume of NPL (non-performing loan), which led to the rise in cost of fund.

"I have been trying hard to reduce the loss as quickly as possible. We have managed to bring down the loss significantly over the last few years paying more focus on recovery," he added.

However, the executive wouldn't tell the loss in detail.

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