2-month interest suspension may eat up banks’ annual profits

Banks, which have seen their profits decline by around 50 percent in April due to the lending rate cap at 9 percent, got a bigger blow with the confiscation of interest on all loans for April and May.

The central bank in a circular on Sunday said that banks would not ask borrowers for interests for these two months and would have to keep the interests in a blocked account.

So, the banks that have already transferred April's profits in their books of accounts will have to reverse the amount to the blocked account.

The decision will force banks to keep aside around Tk15,000 crore in the blocked accounts, taking into consideration that Tk10 lakh crore loans remain outstanding in the system.

According to bankers and experts, many banks will end the year as loss-making concerns due to this decision.

For example: a first generation private lender will miss out over Tk300 crore from interest income in April and May, but it will have to pay around Tk200 crore to depositors at average 5 percent interest. In addition, there are salary expenses and establishment costs.

Another old bank with nearly Tk30,000 crore deposits has to pay off depositors around Tk300 crore for these two months. But the bank could not realise a single penny from Tk450 crore interests during the period.

Relatively, new banks, especially nine fourth-generation ones, will face the music the most as they have costlier deposits than the older banks do.

"It is a crazy decision. Every bank will incur loss," said a managing director of a second-generation lender.

Another top banker said how they would repay depositors when they would have no income.

Bankers said they were already in serious pressure from the capping of lending rate at 9 percent from April 1 as the move had eroded many banks' profits by 50 percent.

For example, Pubali Bank's profits came down to Tk34 crore in April, down from Tk72 crore a month ago.

Similarly, National Bank's profits nosedived to mere Tk10 crore in April from Tk56 crore in March while that of Shahjalal Bank to Tk18 crore from Tk63 crore, Prime Bank's to Tk18 crore from Tk60 crore and One Bank's to Tk15 crore from Tk50 crore.

"We had a profit of Tk38 lakh in March, but the figure went down to only Tk2.5 lakh in April," said a branch manager of a private bank at Demra in Dhaka.

More than half the bank's branches incurred losses last month due to the capping of the lending rate, he said.

The latest move to suspend interest for two months will have far reaching impacts, such as disturbance in banks' international business, a hike in cost of doing business and a squeeze in jobs. Last but not the least, the government's revenue income will decline significantly if banks' profits erode.

"Banks will squeeze its activities – from hunting deposits for lending. There may be closure of branches and job-cuts to save money," said a banker.

Brac Bank will be one of the hardest hit lenders as it depends on interest for 85 percent of its income. The bank, known as an SME lender, got affected badly for capping the lending rate at 9 percent.

Many of the bankers said the central bank could have taken the decision in consultation with the banks.

"We are ready to support our customers at this time of the pandemic. After all, we earn from them, and we have to take care of them for our own survival," said a senior banker.

"But that must be a win-win for both of us."

Ahsan H Mansur, executive director of Policy Research Institute of Bangladesh, said the government should have offered financial benefits to the affected businesses from its pocket, but it was passing the task onto the shoulders of banks.

"Banks are being abused," Mansur told The Business Standard.

"It is like a private sector, not the government, bailing out other private sectors," he remarked.

If the trend continues, he said, the banks may face challenges in paying off depositors' money on time.

Dr Fahmida Khatun, executive director of Centre for Policy Dialogue, said the government had announced a number of financial packages to the affected industries.

But lots of responsibilities have given on the banks' shoulders without sharing any risk, she said.

"If any loan of the stimulus package gets defaulted, banks will have to take the responsibility," Fahmida said.