It was feared that the banking sector would face a double-whammy, stemming from Covid-19 and lending rate cap.
But what the end of 2020 shows is an entirely different picture with two major performance indicators – profitability and loan recovery – being far better than expected.
Waiver on classifying loans relieved banks of setting aside funds from their profits for provisioning. Banks were further helped by the government's borrowing and they could safely invest in treasury bills. All these factors cushioned the pandemic impact on banks.
Total operating profits in the banking sector declined by only 7.16% last year from the previous year when industry insiders had assumed that the 9% lending rate cap will erode profits by 40%.
The lending rate cap came into effect on 1 April last year after Covid-19 had made inroads into the country in March.
Moreover, the pandemic fallout was supposed to worsen incomes further.
In 2019, the operating profit growth was 7%, according to a detailed analysis of the loan repayment situation during the pandemic, prepared by the Bangladesh Bank.
Although operating profits declined, net profits in 2020 were expected to surge significantly because of lower provision requirements, thanks to the loan classification suspension facility offered for January-December of the year considering the pandemic situation.
The calculation of year-end net profits has not been done yet, but the September-based figure shows the trend of rising real earnings of banks.
Net profit is calculated after deducting provision – funds set aside from profits by a bank to cover bad loans – and tax from a bank's operating profit.
Operating profits in the banking sector declined by 9% in September last year, but net profits increased by 73% because of relief from the provision maintenance requirement amid the suspension of loan classification.
The requirement of provision comes when loans get defaulted.
High returns from investment in government treasury bills and bonds largely contributed to earnings when the private sector credit growth was depressed throughout the year, hovering between 8% and 9%.
The high bank borrowing of the government amid revenue shortfall pushed up the yield of bills and bonds above 9% last year, helping banks to make good earnings.
In the fiscal 2019-20, the government borrowed 97.35% or Tk80,238 crore of its target.
In the first four months of the current fiscal year from July to October, the government's bank borrowing stood at only Tk1,063 crore, down from Tk36,000 crore in the same period of the last fiscal year, with no pressure of expenses owing to Covid-19.
Low private sector credit growth and high investment in government bills and bonds took excess liquidity in the banking sector to above Tk2 lakh crore in December last year, the highest in the history.
The loan recovery situation also seemed impressive as only 23% of borrowers availed the instalment deferral facility against which loan recovery rate was 14.37%.
The recovery rate shows that borrowers who did not take the payment deferral facility could continue interest payments.
When the lending rate is 9%, the recovery rate of 14.37% is considered good recovery as borrowers did not only continue interest service but also principal payments.
Although the instalment deferral facility was effective for a total loan of Tk10,95,000 crore, only Tk2,55,386 crore were given the policy relaxation facility by 49 banks.
Banks will have to spend only Tk2,500 crore in an additional provision as a cost for payment deferral of borrowers.
In December last year, the Bangladesh Bank issued a circular, instructing banks to maintain an additional 1% provision against loan accounts that availed payment deferral facility.
Explaining how net profits will rise, a senior executive of the Bangladesh Bank said regular provisioning requirements will be lower than the previous ones as there is no fresh loan classification in the last one year.
Moreover, a small amount of loan was given payment deferral facility, which will save banks' additional provisioning costs, he said.
As a result, net profits will go up more than in the previous year, he assumed.
When contacted, Mashrur Arefin, managing director and chief executive officer of the City Bank, said banks made a good profit even in the pandemic and despite the lending rate cap, thanks to reducing costs and provision deferral facility.
But, the real challenge will be this year as payment holiday has been lifted, he said.
Sharing experience of his own bank, he said they are contacting borrowers for repayments, but most of them are requesting for time.
The depressed private sector credit growth is another big challenge because banks could not lend even at 5% as businessmen have cash in hand due to one-year payment deferral, he said.
Bangladesh Bank data shows that among good profit-makers, operating profit of Brac Bank declined by 14% compared to the previous year's, while Eastern Bank saw a 6% fall in operating profit, Dutch-Bangla Bank 7%, Dhaka Bank 9% and City Bank 26%.
Analysing the whole repayment situation of the banking sector during the pandemic situation, the Bangladesh Bank did not extend the loan classification suspension period further, which expired 1 January this year.
The Bangladesh Bank observed that borrowers now have the capacity to repay as business activities resumed in a full swing. In the analysis report, the central bank commented that many borrowers availed payment deferral facility in the last one year despite having the capacity to repay.
However, the Bangladesh Bank has relaxed the repayment of term loans.
Borrowers for term loans will get 50% extra time to repay the instalments till 1 January 2021, said the central bank circular. But the extended period will not be more than two years, and the bank-client relationship will determine the extension.
However, the business community is still pressing the central bank for further payment deferral extension.
The Federation of Bangladesh Chambers of Commerce and Industries, the Bangladesh Cement Manufacturers Association, and the Chittagong Chamber of Commerce and Industry formally requested the Bangladesh Bank for extending the moratorium period till 30 June this year.
"We do know that export has gone down by 17% and along with that the western economies are on full lockdown," said Rubana Huq, president of the Bangladesh Garment Manufacturers and Exporters Association.
"With orders down by 40% and orders and payments remaining deferred, how will we pay back our dues?" she said.