Banks willing to compromise profit to counter NPL wave

The global banking sector is bracing for a wave of non-performing loans (NPLs) in the post-pandemic era and Bangladeshi banks are no different in this regard.

So far, the country's banking sector has coped well with the Covid-19 crisis by managing a comfortable liquidity position, thanks to lenient policy support from the Bangladesh Bank, but the real crisis is predicted to come in the months ahead.

Banks are now getting ready to compromise on profits as part of their precautionary measures to manage NPLs, which are likely to spiral after the expiry of the regulatory forbearance next year.

The Bangladesh Bank is also working on an action plan to deal with NPLs by extending a rescue plan in the forthcoming year to give banks breathing space with reducing provisioning requirements.

Provisioning is the requirement for banks to set aside a certain portion of their funds to allow for uncollected loans and loan payments.

Meanwhile, that banks are still painting a rosy picture of profit even amid the pandemic is attributable to the fact that they have got relief from provision maintenance amid a suspension of loan classification during the entire year of 2020.

However, the shown profits are inflated as more than 40% income of banks remained unrealised due to a suspension in installment payment, according to industry insiders.

Compromising profit is the only way to deal with increased NPLs post-pandemic, as banks will have to keep extra money as reserve for the rainy days that are coming soon after the lifting of the central bank's support, said Selim RF Hussain, managing director of Brac Bank.

He said banks have already started to increase the amount of provisioning to more than double compared to the previous years in a bid to counter a probable wave of defaulted loans in the next year.

The Brac Bank MD added that his bank has doubled its provisioning this year compared to that of the previous year as, according to him, nobody knows how much the NPL shock will be.

Brac Bank – one of the largest banks in the country – emphasises building reserves to face a NPL shock by sacrificing profit, he continued.

He also argued that banks should declare dividends in a conservative manner this year, as around 40% income showed in their balance sheet is unrealised.

The profitability trend shows that many banks saw a moderate growth in their earnings per share (EPS) year-on-year in the first nine months of current year despite conservative lending activities and the bringing down of the lending rate to 9%.

Fitch Solutions, a global financial market researcher, has warned that banks' profitability will further worsen as soon as the facility of paying loan instalments expires because banks will have to keep aside a huge amount from their earnings as provision against defaulted loans.

The observation came in a report titled "Covid-19 Woes Perpetuating Weakness of the Bangladesh Banking Sector" released by Fitch on 26 October this year.

The report says non-performing loans will increase following the deferment facilities given by the Bangladesh Bank especially when it comes amid a weak economic environment.

As part of its crisis mitigation strategy, the Bangladesh Bank has provided instalment deferment facility to all borrowers from January to December this year.

Just before the outbreak of the novel coronavirus, banks regularised around Tk50,000 crore under the relaxed policy of 2% down payment offered by the Bangladesh Bank aiming to bring down defaulted loans to a tolerable level.

Those restructured loans have clouded the picture on riskier loans amid the pandemic.

Borrowers may need another restructuring facility in the next year which will give banks respite also, said MdArfan Ali, managing director of Bank Asia.

Endorsing the argument of Brac Bank MD Selim RF Hussain, he noted that banks will have to be more conservative in dividend declaration as provisioning will be higher next year.

Expressing similar views, Faruq Mainuddin Ahmed, managing director of Trust Bank, said, "I do not see any other way but to keep extra provisioning to face the NPL challenge in the next year."

He said banks will have to make extra efforts on recovery and nursing customers.

NPLs have already started to surge slightly even amid the suspension of loan classification during the pandemic.

The gross NPL ratio of the banking sector increased from 9% at end of March this year to 9.2% at end of June, according to the Bangladesh Bank data. However, in September, the NPL ratio came down to 8.8%, taking the total volume of bad loans at Tk94,440 crore, central bank data show.

The central bank in its financial stability assessment report for the April-June period this year raised concerns about the rising NPLs saying that impaired debt servicing capacity of borrowers due to the Covid-19 pandemic may adversely impact the NPL scene once the relaxation on loan classification is over.

Other international organisations also raised alarm for banks suggesting they should prepare for higher NPLs.

S&P – a global credit rating agency – warned that the banking sector in Bangladesh is in extremely high risk because of weak governance in some banks and high bad loans.

Ballooning defaulted loans have exposed Bangladesh's financial sector to greater risks, says the International Monetary Fund (IMF) in its draft "Financial Sector Stability Review 2020".

Fahmida Khatun, executive director of the Centre for Policy Dialogue (CPD), said banks will have to take extraordinary measures in this extraordinary crisis to deal with NPLs.

She said banks need to tighten their supervision and intensify recovery efforts to fight the NPL challenge.

The global picture

Bankers worldwide are bracing for a big surge in non-performing loans after this year's deep recession.

The coronavirus induced economic shocks will more than double the company default rates across the United States and Europe over the next nine months, ratings agency S&P Global said last month.

The agency predicted the US corporate default rates at 12.5%, while that of Europe is assumed to surge to 8.5% from 3.8%.

From Italy to Greece, the frailest lenders are already under strain. Regulators eased the pressure on bad loans to deal with the pandemic but there is no sign that this will be anything other than temporary. Lenders might well have to raise more equity at the cost of diluting existing investors.

In February, China's central bank said that the country's lenders would tolerate higher levels of bad loans, part of efforts to support firms hit by the coronavirus epidemic.