Banks appear to have attained high profits even amid the pandemic-led crisis, but negative cash flow reflects a rainy day looming on the horizon for them as their profits exist only on paper with no real income.
For instance, Eastern Bank, one of the top performing banks in the country, has experienced a 55% profit growth in the first half of the current year although it has been running with negative cash flow.
The situation is the same for many banks that have shown a high profit growth with negative cash flow in January-June this year
In the six months, 10 out of listed 30 banks suffered negative cash flow of Tk4,900 crore.
Bankers have attributed the negative cash flow mainly to payment deferral.
Nevertheless, banks are recording interest income in their accounts despite not receiving payments. This accrual accounting method is helping banks show high profits, they add.
Accrual accounting refers to the recording of revenue or expenses when they are earned, regardless of when the money is actually received or paid.
The adoption of such an approach will have some negative impacts on banks.
Firstly, banks are disbursing dividends by taking unrealised interest incomes into account, which will ultimately deteriorate their financial health in the future. Because it is uncertain whether banks will finally be able to realise those interest incomes.
Secondly, negative cash flow has kept banks away from lending activities, a core business for them, resulting in a pile of excess liquidity with low private sector credit growth.
The private sector credit growth was 8.40% in the last fiscal year, far below the monetary target of 14.8% when excess liquidity almost doubled in the last one year and stood at Tk2.39 lakh crore in June this year, according to Bangladesh Bank data.
Presuming unforeseen losses, the Bangladesh Bank issued a dividend policy last year to discourage disbursements of cash dividends.
But the policy had little effect as most private commercial banks did not compromise on cash dividend payout last year.
In fact, they disbursed higher cash dividends for 2020 than that of the previous year, keeping directors happy.
Out of 31 private banks listed on the Dhaka Stock Exchange, 22 have disbursed cash dividends for 2020.
The total cash dividend payout by these banks stands at around Tk2,300 crore for pandemic-hit 2020, of which around Tk1,000 crore will go to the directors' pockets.
The high profitability continued this year also as borrowers have been enjoying payment deferral, which gave banks relief from maintaining a provision against default loans.
Negative cash flow is not a concern at this moment, but it will put banks into trouble if negativity prolongs, said Syed Mahbubur Rahman, managing director of Mutual Trust Bank.
Payment deferral period has been in force for one and a half years, which caused negative cash flow, he also said.
M Reazul Karim, managing director of Premier Bank, told The Business Standard, "In the first six months of this year, our bank had Tk3,000 crore in excess liquidity. So we are discouraging new deposits.
"We are taking money from the call money market as its rate is lower than that of deposits. We have increased investment too," he added.
The bank is lending more to the export-oriented textile sector alongside investing in government securities, he said, adding that they are giving loans to many textile mills that are going for expansion even in this pandemic time.
"I think it is better to have a negative operating cash flow at this time of excess liquidity, meaning that bankers are increasing investments," Rezaul pointed out.
According to the first-half reports of this year of listed banks published through the stock exchanges, the net operating cash flow of Exim Bank was the worst - negative Tk1,053 crore.
The bank has invested Tk2,038 crore against its deposit collection amounting to Tk906 crore.
The managing director of Exim Bank could not be contacted for comments.
Abdullah Al Mamun, company secretary at Eastern Bank, said a bank usually raises funds in two ways – by borrowing from another institution and collecting deposits from customers. Only the deposits received in the first half of this year have been shown in the balance sheet. The collection of preceding quarters are usually not added to it. And in the first half of this year, their loan disbursements have been more than deposits.
So, the operating cash flow has been negative. The bank remedy the negative cash flow by raising funds from other sources, he added.
However, he also said this negative cash flow in the long run is not good for a bank.
Eastern Bank invested Tk1,145 crore during the period, but it did not take any deposits during that time. The bank maintained its operating cash flow by borrowing from other financial institutions.
"We are trying to increase risk-free investment in the pandemic. We are investing in government securities and bonds and are also giving loans to the housing sector," said the Eastern Bank's company secretary.
In January-June this year, the net operating cash flow was negative Tk992 crore in United Commercial Bank, Tk882 crore in Eastern Bank, Tk729 crore in AB Bank, and Tk571 crore in Premier Bank.