Bankers brood over NPL cloud in 2021
Top executives of banks pin their hopes on business recovery and a surge in consumer spending in 2021
Amid worries about default loans going up due to the repayment pause for the coronavirus pandemic, top executives of banks, while talking to Jebun Nesa Alo, pin their hopes on business recovery and a surge in consumer spending in 2021
Banks will be under serious pressure of default loan
– Brac Bank Managing Director Selim RF Hussain
The banking sector will be under serious pressure of default loans in the new year. This pressure has already been there for several years, but banks did not feel it in the just-concluded year thanks to regulatory forbearance.
The willingness and ability of big business clients to repay loans will be understood soon when the temporary forbearance is over. The default loan scenario will be clear by the second half of next year.
As a precautionary measure, Brac Bank has maintained high debt provisioning to face the default loan wave.
The Bangladesh Bank has already issued a circular, mandating an additional 1% provisioning against unclassified loans, which is a good move for banks.
This conservative approach is needed because it still cannot be predicted how severe the default loan pressure will be in the next one year or two.
All banks should get ready to face the default loan wave by keeping heavy provisioning instead of declaring high profits. Brac Bank is fully ready to fight upcoming difficulties as we have 100% corporate governance, and 44% of shares of the bank are owned by foreign shareholders.
Banking operations will entirely change next year as the net income margin has declined significantly due to low interest rate. Moreover, in the new normal situation, banks cannot work in a traditional manner. They will have to be much more effective and efficient to survive.
Banks will have to bring new products in line with customer demand. There is a huge gap between banks' products and services and customers' requirements.
Customers' demands and requirements have changed. Now, they want digital solutions. So, banks that will fail to meet the new demands will not survive in the market.
Uncertainty looming around
– Mutual Trust Bank Managing Director Syed Mahbubur Rahman
The year 2021 will be very unpredictable for bank business. The United Kingdom already went into the second lockdown because of the new virus variant hit, and vaccination is still uncertain.
Borrowers were given payment pause for a year, which may be extended. Strong lobbying is going on to extend the facility. Banks are already in trouble with higher provisioning requirements.
If the payment pause is extended, it will create additional problems for banks. How will banks do business if customers do not pay and banks do not lend? So, uncertainty is looming around.
We have some good fundamentals like strong remittance, surplus current account balance and good improvement in the balance of payment, but all those good indicators result from a decline in imports. These indicators will not always be the same because if we want economic development, imports will jump to $4-$5 billion a month.
When imports rise, remittances will fall. Because remitters are sending money via the formal channel due to no demand for foreign currency at this moment. Many workers lost their jobs, and when the 2% incentive is lifted, remittance inflow will decline.
The current account balance may become negative as a consequence of the fall in remittance inflow.
Moreover, private sector investment is now completely stagnant. Still, economic activities are led by government investments. So, there are many uncertainties that should be addressed. Otherwise, positive indicators will turn into negative.
The next year will be more challenging. Because how long can banks go without lending, returns and payments from clients?
Economic activities likely to pick up
– Bank Asia Managing Director Md Arfan Ali
There are mixed reactions over the new year. Firstly, there is some optimism that vaccination will bring enthusiasm among people. Secondly, banks will see a huge negative impact on their balance sheets when customers start paying as many customers may fail to pay their dues accrued in a year.
So, there are uncertainties over how customers will respond to regular payments.
However, there is hope that economic activities will pick up this year as stimulus disbursement will grow confidence among businesses. In line with economic recovery, Bank Asia is planning to focus on SME and retail businesses this year as this market is much bigger than the corporate sector.
The Bangladesh Bank adopted a liberal monetary policy considering this critical situation. This stance should continue in the new year as well because access to low-cost finance is very important in this situation.
The expansionary monetary policy helped banks be comfortable with their liquidity position even during the crisis. The excess liquidity also helped banks lend at a low cost.
Banks will go for fresh recruitments this year as financial inclusion activities will increase, which will require more employees.
Three challenges ahead for banks
- City Bank Managing Director & CEO Mashrur Arefin
Number one challenge for the banking sector in 2021 is the uncertainty around a prolonged Covid-19 pandemic. The whole world's economic growth now hinges on stimulus, unemployment benefit and loan repayment deferrals. As recovery and employment generation will take time, we don't know what will happen when the government's stimulus and loan deferrals are stopped.
We are heavily dependent on readymade garment (RMG) exports. Moreover, Bangladeshi taka is in strong position against dollar now. The RMG sector may lose competitiveness with this strong position of taka. Due to global economic impact, Bangladeshi factories are running at 60-70% capacity. Retailers and foreign brands placed 30% fewer work orders for December-March 2021 season.
The second most important challenge will be how to manage non-performing loans (NPL). NPLs stood at Tk944.40 billion as of September, 2020, down by 1.74 percent from June 2020, and by 18.73 per cent from last year's. This has happened as Bangladesh Bank has redefined the classified loans. We fear that after lifting the relaxed loan classification rules, banks may be overburdened with additional Tk600 billion worth of NPLs.
The third biggest challenge will be to manage the profit margin. We are now working under interest rate capped at 9%. Big corporates with their high bargaining capacity are getting rates even below 9%. To maintain the margin, we are decreasing deposit rates. In that case, deposit may fly away from the banking sector. The current excess liquidity (approx Tk1840 billion), I fear, will be shrinking fast. Overall, due to reduced margin, new NPLs and flight of deposit, banks may face risk of insignificant profit or loss of capital.
Finally, too much regulation is another challenge. We simply don't know what's coming next from the regulators. Specially in our country the whole stimulus package is dealt by banks. As a result the whole credit risk is shouldered by banks.
At City Bank, we are giving top priority for the safety and security of our human resources during the pandemic. We are also keeping a sharp eye on the stressed loan portfolio and on how to further reduce the cost of deposit and operating expenses. Going digital for every products and services is a good way to counter the rising cost of things. Digital solutions are inarguably cheaper.
