Back in 2008, banks were blamed for the global financial crisis. This time around, however, banks have emerged as the rescuers and solution providers amid the novel coronavirus outbreak. But can our banks live up to this role, given the deteriorating non-performing loans (NPLs), capping of lending rate at 9 percent, dwindling private sector credit and a lack of good clients in the sector?
Ali Reza Iftekhar, managing director of Eastern Bank Limited (EBL) and chairman of the Association of Bankers, Bangladesh (ABB), recently shared his views on this burning issue with The Business Standard in an email interview.
According to him, the success of the stimulus packages aimed at helping the economy recover from the fallouts of the pandemic will depend on at least half a dozen factors – a credit guarantee scheme, extension of loan classification time, a solution to release two-month suspension of interest, a reduction in corporate tax, liquidity support, and regulatory support for more digital client solutions.
"Funds from the stimulus package will be disbursed through the banking channel, and both credit and collection risks lie with us [banks]. But the banking industry is already overburdened with NPLs," said Iftekhar.
In this situation, bankers have requested the government for a shield so that NPLs do not escalate anymore, he said.
NPLs are 11 percent at the national level and will shoot up if write-offs, loans with stay-orders on them, and rescheduled loans are taken into consideration, he added.
Iftekhar, who has been leading EBL for over a decade and has made it one of the best lenders in the country, knows there is no alternative to a strong and financially healthy banking sector for the revival of the economy, industrialisation and employment creation.
"Indeed, banking is the lifeline of the economy," he said.
"But we have to understand that banks do business with people's money, and we have to pay our depositors whether we are able to do business or not," said the ABB chairman.
He explained that although the central bank instructed setting aside two months' interest income in a blocked account, it said nothing about upcoming credit losses banks may face due to the decision.
Iftekhar said that with the reduction in cash reserve ratio requirement, repo rate and introduction of refinance schemes, there will be adequate liquidity of taka and foreign exchange in the market, but deposit management has become a big deal now.
"The challenge for the banking sector is how efficiently we can reduce the cost of deposit, so as to maintain enough spread and attain profitability. This is going to have a deep impact on profitability as banks had earlier booked some long-term deposits at a higher rate, which will continue till the maturity date," he said.
However, he said, there were some welcome moves from the government to park 50 percent of its deposits in private banks. The government also instructed that the interest rate of semi-autonomous bodies' surplus deposits to banks be at 6 percent.
The ABB chairman also spoke about the delay in disbursing loans under the government's stimulus packages when businesses are in serious need for cash to pay employees and other operating expenses.
He said banks have been signing participation agreements with the central bank for the government's financial stimulus packages and will soon start disbursing the money in phases.
"Although the salary packages of RMG/export-oriented industries have been disbursed, the need will arise concurrently when the government eases lockdown and movement of transport resumes," said Iftekhar.
He told The Business Standard that banks are closely working with the government and regulators to help reopen the economy and quickly disburse funds of government financial stimulus packages to different sectors.
Iftekhar also spoke about how Covid-19 has impacted EBL's business.
He said that like all other industry players, EBL is also confronting the challenges of single-digit interest rate regime and the Covid-19 pandemic.
Since the lockdown in Europe and America, Bangladesh's major exporters got hit by cancellations and withholding of orders, which has impacted his bank's business.
"Although the Bangladesh Bank has issued a circular for relaxation of loan classification till June 2020, with the single digit interest, the ongoing Covid-19 pandemic, two-month interest income suspension, and dwindling private credit growth rate, it will be a tough and challenging year for the banking industry – EBL is no exception," he said.
Yet, the bank is trying to serve its customers round the clock. In addition to keeping some branches open, EBL has kept all its alternative channels operational 24/7 to dispense cash.
On the outlook of the banking industry, Iftekhar said the sector is possibly going through the most critical time now. The lending rate cap from April 1 will erode banks' profits and impact private sector credit growth, which has come down to 9 percent now from 19 percent five years ago, he said.
The ABB chairman also spoke about the lessons he learned from the business disruption due to the ongoing pandemic
"It is true that this Covid-19 pandemic has brought a radical change in our lifestyles and behaviours. More and more, people are looking for convenience in digital or virtual platforms to conduct their banking," he said.
"I can share my own experience that we have witnessed a surge in our customers' request for debit cards and our number of mobile app users have gone up recently," said the EBL boss.
He concluded by saying that digital banking will drive the industry in future.