The inclusion of unrealised income in the balance sheet, as offered by the Bangladesh Bank, will allow banks to show inflated profits, which might exacerbate the ongoing cash flow crisis, say bankers.
With such a big offer in place, banks will offer dividends against the profits that will exist only on paper, they add.
"Taking unrealised incomes into profits will reduce cash flows. But it is a good decision only when it comes to providing facilities to customers and strengthening financial health of banks," Arfan Ali, managing director at Bank Asia, told The Business Standard.
However, he warned that banks should be careful about providing dividends.
The central bank, in a circular on Wednesday, said banks will be allowed to show unrealised interest incomes as profits if borrowers pay only 25% of their payable amounts for the current year.
Moreover, as banks are taking a high risk in showing unrealised interest income as profits, they will have to maintain an additional 2% provision against those moratorium loans, according to the circular.
The additional provision will have to be transferred to the central bank's newly opened "General Provision Covid-19" account.
But the central bank's circular also stated that anyone failing to pay back their full loans from the start of the coming year will be regarded as defaulters. Currently, borrowers can avoid being classified as a defaulter by paying only 25% of the total loan.
Bankers say borrowers have been enjoying many facilities for the past two years amid the Covid-19 pandemic situation. Such facilities have encouraged a lot of them not to repay their loans despite being in positions to do so.
Mohammad Shams-ul Islam, managing director of Agrani Bank believes the new central bank instructions will play a vital role in increasing loan repayment but will make the situation challenging for banks.
Following calls from businesses, faced with difficulties amid the Covid-19 pandemic, the central bank extended the loan moratorium facility till December, said Shams.
"But not all organisations suffered problems due to Covid. Despite enjoying full-fledged production activities many borrowers did not pay back the money," he said.
However, he added, "Withdrawing the facilities on loan payment will result in a surge in the numbers of defaulters. Also, we [banks] will have to show the interest [to be received] from these defaulters in our balance sheet while keeping additional provisions against the loans, which will be very difficult."
Meanwhile, expressing concern about the central bank's latest offer to banks, Ahsan H Mansur, executive director of the Policy Research Institute (PRI) said banks will not be able to recover the loans against which they will show unrealized income.
"Owners' will demand additional dividends against the interests shown in the balance sheet. In this circumstance, banks should declare dividends in coordination with the central bank considering their [actual] financial capacity," he said.
Banks appear to have attained high profits even amid the pandemic-led crisis, but negative cash flow reflects a rainy day looming on the horizon for them as their profits exist only on paper with no real income.
The situation is the same for many banks that have shown a high-profit growth with negative cash flow in January-June this year. In the six months, 10 out of 30 listed banks have suffered negative cash flows of Tk4,900 crore.
Bankers have attributed the deterioration mainly to payment deferral.
Nevertheless, banks are recording interest income in their accounts despite not receiving payments. This accrual accounting method is helping banks show high profits, say experts.
The adoption of such an approach will have some negative impacts on banks.
Firstly, banks are disbursing dividends by taking unrealised interest incomes into account, which will ultimately deteriorate their financial health in the future. Because it is uncertain whether banks will finally be able to realise those interest incomes.
Secondly, negative cash flow has kept banks away from lending activities, a core business for them, resulting in a pile of excess liquidity with low private sector credit growth.
Commenting on the new central bank offer, Association of Bankers Bangladesh (ABB) President Syed Mahbubur Rahman warned the facility to show unrealised income as profits might deteriorate the cash flow.
"[As no actual] payment will be made, it will create a cash flow crisis for the banks. Because, even though the banks will show higher profits in papers, they will not be able to make investments as no actual payment will be made by borrowers," said Sayed, who is also the managing director of Mutual Trust Bank.
He also warned the facility will also lead to a rise in loan defaulting.
The central bank, however, thinks the new instructions will help banks in recovering loans.
"Many organisations, which were in a good position during Covid due to the central bank's massive facilities, showed insincerity in loan repayment. The loan recovery would have been higher if some different facilities were provided to borrowers who paid back the loans at the time," said Sirajul Islam, executive director and spokesperson for the Bangladesh Bank.
Speaking on the issue of the additional provision for banks to show unrealised income as profits, Sirajul said the provisions] is a 'security reserve' for the facility offered.
"If the provisions are not imposed, then many banks will provide huge dividends but will face severe difficulties in recovering the interests."
The central bank's latest circular did not include any instruction for non-bank financial institutions (NBFIs) on loan moratorium facilities. At present, NBFI borrowers have been enjoying a special offer by the central bank, under which they will only need to repay 50% of the total loan to not be regarded as a defaulter.