Tough times in banking sector
By Ashraful Islam
New banks are lending out heavily – 70 to 80% of their total loans – to corporate clients instead of small and medium enterprises and retail consumers, insiders and analysts said. The risk is: if a big client fails to pay back in time, the bank may suffer as it may not be able to make adequate provision from its small profit.
‘Directors want quick profits, which is very unlikely for a new bank,’ said the chief executive of a new bank, seeking anonymity. ‘It takes at least three to five years to generate sustainable profits and pay dividends.’ Nine new banks that came to the market amid political unrest in the second half of 2013 are struggling to do business at present, facing intense competition from 47 old banks in lending and attracting deposits.
Lending out is the biggest challenge for a new bank, as borrowers demand the lowest interest rate without considering the banks’ cost of funds. According to these banks, the cost of their fund is between 11% and 12%, which is well within a single digit for many old banks. In terms of lending, if a new bank offers a borrower 11%, an old bank offers 10.5%. ‘Depositors have high expectations from us, while borrowers want the lowest rate in the market. We are in a double bind,’ said Rafiqul Islam, managing director of South Bangla Agriculture and Commerce Bank (SBAC).
Moreover, businesses are passing bad times and it has become impossible to get a good client, who wants to set up new factories or expand the existing ones amid an ongoing anti-business climate, Islam added. SBAC has lent out Tk. 1,363 crore in 2014, coming in third among the new banks, after Union Bank with Tk. 2,828 crore and NRB Commercial Bank with Tk. 1,441 crore.
Capital base widens
The capital base of the banking sector widened 10.51 percent to Tk 71,754 crore in the fourth quarter last year from a quarter ago. In the third quarter of July-September, it was Tk 64,933 crore, according to data from the central bank.
Bangladesh Bank said the capital base of the banking sector has expanded vastly in the last five years. The capital rose as a big portion of the profit was transferred to capital, and provision shortfall came down, among other factors. ‘As a result, the banking system has become stronger,’ it said in a statement recently.
As per international standards, a capital adequacy ratio (CAR) of 10% is required, but the CAR of Bangladeshi banks stood at 11.35% at the end of December, which was 10.57% three months earlier.
The CAR is the ratio of a bank’s capital to its risk weighted assets. In December, banks had a surplus capital of Tk 4,069 crore, reversing from a deficit of Tk 1,096 crore in September. If the specialised banks — Bangladesh Krishi Bank and Rajshahi Krishi Unnayan Bank — are excluded, banks’ CAR would be 12.5%, the statement added. The central bank said Bangladesh has fully implemented BASEL-II in order to strengthen the capital base of local banks in line with the international standards. Starting 2015, banks are preparing to maintain the capital requirement under BASEL-III. BASEL-III is a global, voluntary regulatory standard on bank capital adequacy, stress testing and market liquidity risk.
Deposits fall as savers rush to extract
Deposits at banks dipped 1.07% in January from a month ago as savers rush to government savings schemes that offer higher interest rates compared to the banking system. Total deposit at the country’s 56 banks was Tk. 702,814 crore as of January 29 this year, down by Tk. 7,658 crore from Tk. 710,472 crore in December 31 last year.
Bankers said banks have been lowering interest rates on deposits for nearly two years due to dull investment situation. The weighted average interest rate on bank deposits was 7.32% in November last year, which was 8.45% in the same month a year ago.
Interest rates on term deposits at private banks are as high as 9.50% while it is 8.50% at state banks. On the other hand, interest incomes on savings certificates range between 11% and 13.50%. ‘So, the savers are now getting more interested in savings certificates rather than putting money in banks,’ said Anis A Khan, managing director of Mutual Trust Bank.
Khondkar Ibrahim Khaled, a former deputy governor of Bangladesh Bank, blamed the decline in banks’ deposits on the seasonal effect. He said sometimes bank branches collect ‘hot deposits’ from their existing clients in December to reach their collection target set by their head offices. ‘These hot depositors can withdraw their money after December 31,’ he said.
In the absence of social safety nets, the government offers higher yields on savings certificates in order to provide an income to limited-income people and elderly citizens, who are highly dependent on such sources of earning. A number of bankers say the ongoing political unrest, which began on January 6, also hit the deposit growth.
A section of savers are withdrawing their deposits from banks to buy things, in bulk, whose prices might go up in the coming weeks amid growing uncertainty that the present situation, which has disrupted the supply chain, might linger. There are also a section of savers who use debit cards to withdraw money from their bank accounts when needed. Savers have withdrawn large amount of money from banks, as many ATMs across the country went out of cash in January due to blockades.
The effect of such withdrawal will not be that much significant, said Khan of Mutual Trust Bank. Bank-wise, deposits at state lenders went down by 1.59% in January compared to December, according to statistics from Bangladesh Bank. The fall is 0.90% at private banks, 0.22% at foreign banks and 1.38% at state-run specialised banks. The decline in the specialised banks was caused largely by the 3.18% decrease in deposit growth at scam-hit BASIC Bank.
