The country's banking system, already creaking under bad debts and other irregularities, now faces unprecedented challenges as the ongoing pandemic takes its toll on the economy. Economic problems, when they fester and get compounded, affect social cohesion. This new reality is making senior bank executives anxious because the prognosis for the foreseeable future concerning a range of performance metrics, including profitability, liquidity, and capital is not good.
In order to soften the impact of simultaneous demand and supply shocks, the Bangladesh Bank (BB), in concert with commercial banks and non-bank financial institutions, has taken in hand emergency plans. To plan ahead is to be prepared for the body blow anticipated from the (as yet unknown) severity and duration of Covid-19. Fortunately, we can draw on the lessons of the global financial crisis of a decade ago.
The prime minister has quickly placed generous stimulus packages before the nation. The mere presence of fire-fighting measures, it is hoped, will signal that authorities are on the ball. The central bank sprang into action with alacrity by issuing a host of directions and guidelines. Apparently, however, a number of those instructions are not workable in their present form. Additionally, worries have been expressed to the effect that profits will be depressed as a result of the BB's instruction to suspend interest for April and May. There is more pain still.
Banks are barred from compounding interest on credit cards for the above period. Starting in April banks are having to adhere to a 9.0 per cent interest rate ceiling on loans. Margins will thus come under pressure because the cost of funds (CoF) of private banks hovers around 7.0 per cent. A silver lining is that inter-bank call money rate is less than CoF; but this source might prove erratic in the coming months.
Observers fear that several banks will record operational losses for the first half of 2020. A major contributing factor will be a significant decline in fee income from exports, imports and remittances. According to one CEO, non-funds-based income should ideally contribute about 30 per cent of total revenue stream of banks. But this percentage is already under 20 per cent. In this context, cost-cutting seems an imperative.
A combination of job cuts and/or a brake on fresh recruitment are likely. Moreover, there is scope to trim fat from occupancy costs in the form of rent, electricity and outfitting. Banks may also choose to curtail large gatherings, travel and entertainment. If banks can be cajoled to form consortia there is a good opportunity to rationalise ATM setup and running costs; there being duplication of ATMs in certain locations. Information technology is expected to play a more prominent role in many spheres of banking, especially, in terms of cost containment and innovation. Withdrawal limit from ATMs has already been increased. As one country manager pointed out, technology is scalable whereas the human factor is not.
As for liquidity one school of thought is of the view that there is slack in the system. Firstly, the deposits of government banks are much lower than their advances leading to comfortable advance to deposit ratios (ADR). Secondly, a number of banks own government securities in excess of their statutory liquidity ratios (SLR). Thirdly, a large chunk of the stimulus package consists of refinancing. Fourthly, the lowering of the cash reserve ratio (CRR) to 4.0 per cent is expected to free up approximately Tk 190 billion system-wide. If the easing of the SLR is also taken into account the freed-up funds could reach Tk 300 billion. Fifthly, the central bank has lengthened the tenor of repo operations to 360 days.
Contrary-wise loan repayments will surely slow down on the back of projected cash flow difficulties faced by borrowers. Pressure will also build up to disburse fresh loans from the fount of the stimulus packages. The above factors will put pressure on liquidity. As for deposit collection government banks have an advantage over private banks because the public views the former group as sovereign risks.
Bankers also want changes in the provisions regarding dividends and loan provisioning. They say that the imposition of extra tax in case no dividends are paid (for 2019) is harsh. They have also requested to dial back some of the provisioning requirements for 2020 so that profits do not evaporate.
The above request is not out of place. Government revenues will undoubtedly take a hit as bank profits slide. Moreover, banks need strong legs to stand on as they have a mammoth presence in our financial system. International agencies such as Moody's give a lot of weight to the stability of the banking system when calculating country ratings.
Raihan Amin is a former banker.