Life and livelihood are in deep trouble because of the COVID pandemic. All fronts of the economy, banking included, are hit hard.
The banking sector, without any iota of doubt, is the prime mover of the economy. However, the health of the sector even before the pandemic was not that sound because of a host of reasons.
The ongoing pandemic has emerged as a serious troubling factor for the country's banks. Their problems might worsen further.
Before the outbreak of the pandemic, most banks saw erosion in their profitability. The pandemic impact coupled with lending rate cap is bound to cut the profitability further. Thus, many banks that were found to be extravagant in their heydays are now shedding jobs and cutting down other expenditures.
One has to admit the fact that the stricter capital adequacy requirement the banks have been meeting under the Basel III accord, struck in response to deficiencies exposed by the 2007-08 financial crisis in the banking sector, is helping most banks, to a great extent, survive the onslaught of the pandemic.
In this difficult time, there is a notable absence of spontaneity in both deposit mobilisation and lending. It is not only because the banks are offering highly unattractive interest rates on deposits. Public saving capacity has dwindled for understandable reasons. The private sector is not interested again in borrowing from banks unless compelled by the ongoing situation. The statistics available with the central bank do amply highlight the private sector credit growth in recent months.
However, the resource-strapped government is now asking banks to lend to industries and businesses to help the latter weather one of the worst economic crises that mankind has seen so far. Bangladesh is not the lone country to involve banks in this kind of lending. Others are doing the same.
Taking deposits is not a problem for banks, but lending is. The latter lands them in trouble if necessary precautions are not taken. Most banks, particularly the state-owned ones, have faltered in this area. Thus, the volume of soured loans has soared over the years. In some cases, 40 per cent of the loans have gone classified. The presence of high level of toxic loans has made several banks extremely vulnerable to shock.
The outbreak of Covid-19 has pushed the banks into a far more challenging situation. Banks do need to proceed with caution. Naturally, because of a very difficult situation, both the government and the central bank have taken a soft approach towards businesses. The government has announced relief packages valued at over Tk 1.0 trillion for various sectors of the economy. Banks are now executing those at subsidised interest rates. The central bank has relaxed certain rules and policy rates so that banks do not face any liquidity shortage.
Since the application of loan classification rules stayed, for the time being, it is not possible to get the latest picture about the default loans of the banks.
The loans being disbursed under the relief packages have heightened the risk of making the volume of classified loans even bigger. It is, thus, important for banks to move with extreme caution.
Some leading bankers the other day at a discussion, organised by the Bangladesh Institute of Bank Management (BIBM), made some valuable observations that could help banks tide over the future crisis.
The bankers expressed their fear that the volume of non-performing loans (NPLs) after the pandemic would rise further as wilful defaulters would take advantage of the situation and withhold their repayments to banks. Some of them even feared the start of yet another 'hari loot' (plunder) taking advantage of the stimulus packages.
They felt that the banks must look at risks involved with lending under the changed circumstances and rewrite rules in this regard. But banks do not make rules, the central bank does and, at times, under the advice of the government. None of the two, it seems, is interested in reviewing rules now.
Yet banks can do their part differently; they can meticulously exhaust all the procedures involved with fresh lending. They may not be able to cover the old loans from the delinquent or wilful defaulters, but they can stop these borrowers from securing fresh ones under the relief packages.
If the banks decide to be risk-averse in this critical time, they might find it hard to cope with the challenges of, what many tend to describe as, the ' new normal'.
It is, however, important for the board of directors of banks to come out of the old ways of doing things and get actively engaged in the decision-making process without affecting usual and prescribed relations with banks' management teams.
Experts from Nepal and Bangladesh at a webinar held on last Friday felt that the board of directors of banks needed to exercise unique oversight responsibility, based on updated and regular information of the COVID pandemic. But they said, while doing so, the boards, for the time being, should shun high-profit targets. Survival needs to be the sole motto now, nothing else.