The Covid-19 pandemic is the most dramatic economic crash in a long time. The 'stay at home' strategy around the globe has resulted in global supply chain disruption and curtailed economic activities.
Very few sectors of economy remained untouched from the deadly grip of Covid-19. According to International Monetary Fund (IMF), the global economy is expected to shrink by over three percent in 2020. The banking sector, by virtue of its close connection with almost all sectors of the economy, is one of the hardest hit.
The IMF believes that banks came into the Covid-19 pandemic much stronger than they went into the global financial crisis back in 2007-08 because of better capital and liquidity buffers, thanks to Basel III. Moreover, this time, banks are not the cause of this likely severe recession. Instead, banks are expected to play a prominent role in resuming the economic engine.
The role of banks in Bangladesh is very evident in the prime minister's declaration of Tk1 trillion stimulus package. Banks have been given a prominent role to save the nation from an imminent economic slowdown. Banks have been advised to finance businesses to save them from virus-triggered bankruptcy.
The question is- how are the NPL and liquidity crunch-afflicted banks with low Net Interest Margin (NIM) going to respond? What is the motivation for the people working in the banking sector?
There are loads of negative news coming out these days relating to slashing of operating expenses through salary cuts, job cuts and other. What is the state of employee morale? It seems that the saviour of the economy is itself under threat. It is true that high non-performing loans (NPL) induced high risk premium and high loan loss provisions eat away the profits of banking sector.
The NIM of banking industry has decreased from 3.48 percent in 2011 to 2.99 percent in 2019. In addition to that, the single digit lending rate applicable from April 01, 2020 has shrunk the NIM further, thereby affecting profitability of banks. If the Return on Asset (ROA) and Return on Equity (ROE) is analysed, the downward trend can obviously be seen from the table above.
ROA & ROE of private commercial banks (PCBs) has drastically decreased from 2.1 percent and 20.9 percent in 2010 to 0.65 percent and 9.54 percent in 2019. State-owned Commercial Banks (SCBs) and state-owned Development Financial Institutions (DFIs) have consistent negative ROA & ROE, which indicates their consistent loss.
This dismal picture of the ratios can be credited to rising NPLs and subsequent maintenance of provision, mainly. Industry NPL ratio was nearly 12 percent with an amount of 1,125 billion NPL at the end of June 2019. Loan loss provision maintained was 620 billion in June 2019 which was just 142 billion in 2010 (Source: BB Annual Report 2018-19).
The dismal state has been worsened with single digit interest rate application, which will desiccate profitability further. There is no doubt that a growing economy needs funding with low interest rate, but it should not be at the expense of volatility of the banking sector. If the sector had a low NPL ratio and high efficiency, single digit interest rate would have been market induced. And finally Covid-19 came as a bolt from the blue to stagger the banking sector and leave it with a new challenge.
Then what is the way out? Are there no alternatives to the most traditional way of cutting costs at the expense of salary and career of bankers? Yes, alternatives are there. In fact, 'cutting cost and making profit' strategy does not yield good results as employee morale is the key to business expansion and profit maximization in banking sector. It is observed that around 50 percent of the operating expenses of banks are non-salary expenses where banks can apply cost cutting measures.
Moreover, there should be a strategy to tackle the Covid-19 impact with patience and socially and economically responsible business targets. In addition to that, monetary and fiscal support can help banks handle the challenges. It is in the best interest of financial stability and recovery.
Moreover, the sacred responsibility of helping the economic engine run at its usual pace and to save virus-suffered businesses shall require motivated bankers.
Bangladesh Bank being the guardian of banks has taken various monetary measures to successfully maintain liquidity in the banking sector in the general holiday e.g. reducing CRR rate to 3.5 percent, increasing ADR ratio to 87 percent, reducing repo rate to 5.25 percent, restrictions on bank dividend payments. Some other measures were delaying non-performing loan classification; waive credit card fees and interests, blocking loan interest, which got mixed response.
Considering the shrinking NIM and present scenario, Bangladesh Bank can ease the single digit lending rate or set it a little higher until the economy returns to normalcy. In terms of fiscal support, the government can ease the corporate tax for banks and financial institutions.
Banks, being a business entity like other businesses, deserve strong support too. The corporate tax rate for publicly listed companies is 25 percent whereas publicly listed bank or non-bank financial institutions (NBFI) have to pay 37.5 percent corporate tax. The net profit of banking sector decreased by 57.5 percent from CY17 to CY18 (Source: Financial Stability report-2018) and it has decreased further in 2019 and onward.
If the tax rate is eased by around 7.5 percent to 10 percent, it will help banks and share market significantly.
Lastly, significant NPL recovery can increase earnings of the banking sector. Therefore, the government can accelerate institutional and legal support for banks to fight against willful defaulters. Strong action against defaulters is also essential to minimise the abuse of stimulus package.
The banking sector has showed strong resilience to different challenges in the past. The sector has successfully completed phase-in-arrangement for Basel III implementation. Capital to Risk Weighted Asset Ratio (CRAR) of Private commercial banks (PCBs) is well above the regulatory threshold of 12.50 percent which proves their shock absorption capacity.
The Covid-19 situation is a stress scenario which is a new resilience test for the sector. Therefore, monetary and fiscal support is a must for the sector to pass the test. Economists expect a U-shaped recovery from this pandemic. With strong capital base and motivated workforce, the banking sector shall be able to deal with such a shock and contribute significantly in the successful implementation of stimulus package.
Md Abu Jafor is a Certified Expert in Risk Management (CERM) & a Banker; Email: firstname.lastname@example.org