Pandemic-induced unusual measures like channelling of stimulus packages, loan moratorium, temporary easing of classification and provisioning requirements helped banks go for window dressing – making their books look better than really the case is.
Some banks reported profit in the pandemic year of 2020 at their highest in years, some announced lofty dividends.
But the buoyancy might prove a mirage this year when collapsed businesses would fail to repay instalments and banks would require keeping aside a bigger chunk for provisioning bad loans.
Bankers came up with such a gloomy outlook in a soul-searching dialogue on the present state of banking health and an uncertain year ahead.
Whatever profit margin appeared in the balance sheets, it came on the back of drastic reduction in cost and dramatic rise in digital banking, which raised efficiency and productivity, they pointed out.
Banks need to practise digitisation – a lesson they learnt from the pandemic – to overcome future shocks.
Besides, the government should lower corporate tax for banks from 37.5%, which is currently among the highest in developing countries, to 25% in the next budget, and withdraw 5% tax imposed on bond yields to promote a vibrant secondary bond market, they demanded at the webinar organised by The Business Standard on Tuesday.
The webinar titled "Covid-19: new challenges for our banks" was third in a series of pre-budget virtual interactive sessions initiated by the newspaper.
"Banking sector is passing through a trying time. The situation may turn even tougher when we may not find a way to control," warned Ali Reza Iftekhar, managing director of Eastern Bank Ltd.
Low-interest stimulus loans, deferral in repayment are among the much-needed interventions to help businesses survive the Covid-19 shocks.
"When time comes for repaying these loans, that will be a big challenge for us. We are worried about getting back the money at the right time," Iftekhar said.
Reminding that stimulus packages are loans, not donations, he said the real picture of the banking sector depends on the behaviour of borrowers who enjoyed a one-year moratorium.
Where did the profit then come from at a time when businesses nosedived, private sector credit demand dipped to its lowest and repayment almost stalled during the pandemic?
"Each bank revisited its cost during the coronavirus pandemic. While reducing cost in every area of operation, we in our bank have enhanced efficiency and productivity," said Iftekhar, who is also the chairman of the Association of Bankers, Bangladesh (ABB) – a forum of managing directors of banks.
Selim RF Hussain, managing director of Brac Bank, ruled out the notion that banks made good profit last year. "It is a myth. The real picture will be exposed in the next one or two years. Then it will be clear if banks really saw profit in hundreds of crores of taka."
He claimed credit for banks for successfully handling the stimulus packages but said it is now a great liability for banks to recover the money fully. "Banks performed the duty as a social responsibility to help the government in supporting the economy. They will not make a big profit. Their return on assets will not be more than 0.5-0.6%, given the subsidised rate of interest," he explained.
The Business Standard Editor Inam Ahmed asked why banks were slow in distributing loans to small and medium enterprises, which needed the support most to protect informal sector jobs.
Selim RF Hussain acknowledged that banks were comfortable with large corporate clients whom they served quickly, while small clients lagged behind because of cumbersome procedures. Following a series of parleys with the central bank, the procedures were simplified and SME loan disbursement later gathered pace, he added, and hoped things will be much easier in case of any future stimulus.
His bank, a pioneer in SME loan, completed disbursement of Tk1,500 crore allotted to it for SMEs.
What are the ways out?
Senior bankers feel that it would have been wise for banks if they had kept higher amounts of money as provision to cushion any future shock.
Some banks did and they must be well ahead of others in case default loans soar in future.
The Eastern Bank chief executive stated that his bank maintained "more than adequate" provisioning to meet any future uncertainty.
With yields from treasury bonds and bills dwindling and lending rate capped to 9%, prospects of banks' asset growth look bleak. Should the central bank use money-market instruments like reverse repo to mop up some access liquidity from banks?
"It is true that the market is highly liquid. The Bangladesh Bank may think of mopping up some liquidity from banks. But what will the central bank do with the money?" Ali Reza Iftekhar quipped, pointing to falling credit demand amid increasing liquidity.
What if government borrowing from banks drops in the next budget?
Then banks will be in a difficult situation as they mainly maintain their statutory liquidity ratio (SLR) in the form of treasury bonds, pointed out Mirza Elias Uddin Ahmed, managing director of Jamuna Bank.
Inadequacy of high yield bonds and increased participation of non-primary dealer banks in treasury bond auction together are pushing many banks to take position in low-end bonds and there emerges a risk of banks' capital erosion in case of interest rate hike later, he said.
The secondary bond market must be properly functional and adequate bonds be supplied to help banks avert the crisis. "A revolutionary step is needed to create an alternative market for trading bonds. The 5% tax stands in the way, which must go if we want a vibrant bond market," he said, suggesting ways to help banks see asset growth.
Derivative products against loans are required for clients as well, Mirza Elias felt. "Good borrowers sometimes become defaulters and in most cases they do not find a way out. There should be an exit policy for them," he said.
"Our financial market is shallow. The next budget should have measures for this," the Jamuna Bank chief executive said.
Mirza Elias emphasised that banks must continue to practise the lesson learnt from the pandemic – massive digitisation of banking services. Of around 10 crore clients, roughly 20 lakh have access to Internet banking and the number needs to be raised to 2-3 crore, he felt.
Banks need to make use of mobile financial service through agent banking and expand the scopes for ATM booths and virtual solutions, Mirza Elias added.
Ali Reza Iftekhar felt that banks should think out of the box to go for wider digitisation to enhance efficiency and cut costs. "Pandemic has compelled us to become cost conscious," he said, stating that Eastern Bank saw a whopping 238% rise in digital transactions in recent months।
How can the next budget help?
Supply is there, but there is a dearth of demand both for credit and products.
Even a festival like Eid could not generate demand in the market, said Mirza Elias.
Lockdown is taking its toll on the economy. Private sector credit has been stalled for the last two years, with all sectors seeing a slump in activities, frustrating banks' desperate efforts to create demand for credit in the private sector.
"If people do not buy, if shops cannot sell, if factories cannot produce, if transports do not move, then how will an economy move?" Selim RF Hussain summarised the state of the pandemic economy.
The budget must find out ways to revamp the real sector, the bankers said, stressing the need for more cash handouts to low income people. Rich countries are giving in thousands of dollar, it can be Tk500, Tk1000 in Bangladesh. Only loans to businesses will not help – people need cash in hand, they pointed out.
Tax administration must go through a massive overhaul, the tax net must be widened to relieve a handful of corporate sectors of heightened pressure to pay more.
"Banks are paying 37.5% tax. In which developing country are taxes so high?" asked the Brac Bank MD.
He also called for reducing taxes on technology products and services to expedite digitisation.