Most banks have reported moderate operating profits amid the pandemic in the first six months of this year – mainly on the back of a spread between lending and deposit interest rates and a lower provision against defaulted loans.
The managing director of a private bank, speaking on condition of anonymity, told The Business Standard that although interest rates on loans were reduced last year, the rates on deposits were higher.
"That is why the spread decreases and the profit of the banks is strained. But, this gap is widening this year as interest rates on deposits have fallen, resulting in rising profits," he added.
Regarding drops in interest rates on deposits, Mohammad Shams-ul Islam, managing director of Agrani Bank, said, "This year banks have far more deposits than demand. Therefore, there is no need to increase the interest rate on deposits, so the cost has come down a lot."
According to the central bank, the average interest rate on bank deposits in the first six months of last year was around 5.5-6%. But in January-April this year, the rate came down below 4.5%. If the interest rate on the loan is 9%, the spread has increased by 1.5-2%.
Bankers say most banks have invested their excess liquidity in treasury bonds due to low demand for loans. The lenders have received massive profits from there. Again, due to the closure of loan classification as a result of the coronavirus pandemic, banks have had to keep much less reserves (provision) against loans than usual.
Apart from this, many banks have reduced their unnecessary expenses and digitised various services. All in all, they think that the operating profits of banks have increased at the end of June or in the first half of this year.
Asked about this, Syed Mahbubur Rahman, former chairman of the Association of Bankers (ABB) and managing director of Mutual Trust Bank, told TBS that banks have been able to reduce their costs significantly. Besides, the provision has to be kept low as the loan classification is closed.
Mohammad Shams-ul Islam, managing director of Agrani Bank, said the state-owned banks have reduced costs much more than private banks. These banks have a more profit-oriented mentality because they have to pay dividends to their shareholders.
He said banks' non-interest income has increased this year. Outside of this, the debt classification has been suspended. It does not show the real picture of the banks' defaulted loans. In this regard, the provision has to be kept less than it should have been. That money has been added to the profit book.
In addition, import-export trade has started to increase in the first four months of this year before the second wave of coronavirus.
He believes that the income of the banks has also increased from this sector as compared to last year.
Regarding the increase in operating profit of banks, Sohail RK Hussain, managing director of Meghna Bank, told TBS that the banks have posted a good income by investing in government treasury bonds.
"In addition, many banks have been able to reduce costs by increasing the quality of service through digital applications," he added.