Post-moratorium NPL real headache for banks: Fitch Solutions
The rise in default loan will hike the provisioning cost for the banks which will ultimately hit their profitability
Banks' profitability will further worsen as soon as the facility of paying loan instalments expires because the banks will have to keep aside a huge amount from their earnings as a provision against default loans.
The observation came in a report titled "Covid-19 Woes Perpetuating Weakness of the Bangladesh Banking Sector" released by Fitch Solutions on 26 October.
The report said non-performing loans will increase following the deferment facilities given by the Bangladesh Bank, especially when it comes to a weak economic environment.
As part of its crisis mitigation strategy, the Bangladesh Bank, on 19 March, primarily directed banks to provide instalment deferment facility to all borrowers for six months – from 1 January to 30 June.
Later, the facility was extended in two phases till December.
However, banks did not get a waiver from maintaining required provision against default loans.
Bankers said default loans in the banking sector will be stable this year, but it is likely to jump in the next year when banks will restart loan classification.
The rise in default loan will hike the provisioning cost for the banks which will ultimately hit their profitability.
A loan loss provision refers to funds set aside by a bank to cover bad loans – the ones that do not get fully repaid because the customers default on their payments.
Default loans in the banking sector increased by Tk3,606 crore during the April-June quarter of the current year despite a waiver of loan repayments during the pandemic.
Bankers said default loans will spike further in the third quarter when banks will accumulate the due instalments of borrowers who will not repay loans using an extension of the waiver on loan repayments.
According to the central bank's recently approved data, the total amount of default loans stood at Tk96,116 crore at the end of June, which was 9.16% of the total disbursement and outstanding loan of 59 banks operating in the country.
The total default loan was Tk92,510 crore at the end of March, which was 9% of the total outstanding loans of the period.
The pandemic already hit banks profitability as in the first half of the current year, most banks experienced a sharp decline in their net profit which is assumed to continue in the second half of the year.
Banks are now re-engineering their business strategies to cope with the "new normal" amid the pandemic and the lending rate cap regime.
The Fitch Solutions also assumed that capitalisation will weaken over the coming months following the expiry of loan loss provisioning deferment facilities.
The business intelligence platform projected that credit growth is likely to pick up slightly, with its end-2021 forecast at 14% from the revised estimate of 11.5% in 2020, up from 8.6% previously.
The provisional data of the Bangladesh Bank shows that credit flow growth in the private sector improved slightly - 9.48% in September this year vs 9.36% in the previous month - but the growth rate is far below the monetary target of 14.8% set by the central bank for this fiscal year.
The rate of private sector credit growth came down to a single digit in November last year. It plummeted further to below 9% in March this year in the wake of the outbreak of the novel coronavirus and remained under 9% for four months till June.
Fitch Solutions also expected that deposit growth will also remain elevated over the coming months supported by a short-term surge in remittances.
The foreign exchange reserve crossed the $40 billion mark even during the pandemic backed by the high inflow of remittance, according to the Bangladesh Bank data.
The high inflow of foreign currency contributed to taking excess liquidity at a historic level of Tk1.70 lakh crore in August.