Reducing default loans will be challenging for banks

When the banking sector is under pressure to reduce  default loans  to comply with IMF (International  Monetary Fund) conditions, banks have been experiencing a rise in stressed assets as exporters are facing shipment delays, order cancellations, and deferred payments by buyers amid the global economic crisis. 

Moreover, high devaluation of taka, energy price hike, low gas pressure, and import restriction slowed down industrial production and reduced debt servicing capacity of borrowers, causing a huge amount of forced loans in banks. 

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, made the observation in an interview with The Business Standard. 

He also said that the core business of banks has been reducing as Net Interest Margin (NIM), the net return on loans, continued to narrow since the lending rate cap was imposed. As a result, profits which mostly come  from non-core businesses like treasury management will not be sustainable.

How are banks suffering from the global economic crisis?

After the pandemic, exporters got huge export orders due to pent-up demand and banks also invested due to available money. But the scenario  started to change after the Russia-Ukraine war as economies slowed down causing fall in export order. At the same time, prices of raw materials went up in the global market. Energy prices went up in the domestic market, raising production costs. 

Meanwhile, banks also came under liquidity pressure due to the dollar crisis. In this situation, buying companies started delaying shipments and defer payments. As a result, banks experienced huge forced loans, which increased distressed assets as banks are converting short term loans into long term loans to keep accounts regular. 

Big companies may survive the situation by rescheduling loans, but small companies will die. The other problem is with local manufacturers as profit margins narrowed due to high devaluation of taka. Many small companies could not import raw materials amid import limitations imposed by the central bank, which hampered their production. 

In this situation, we are worried about forced loans. Take an example of an exporter who could not ship goods as buyers delayed in delivery. His finished products remained pending in port. On the other hand raw materials worth Tk35 crore remained idle in his factory as buyers cancelled orders. But he already imported raw materials against back to back LCs but could not go for production, resulting in a forced loan of nearly Tk35 crore as he could make LC payments on time. 

Later, we converted his forced loan into a term loan, which means a non-funded loan turned into a funded loan. 

[It should be noted that non-funded loans refer to any type of credit facility which involves commitment of bank on behalf of customer for payment to third party in case of need under some agreed conditions when funded facilities are the loan where the bank or other financial institution provides real cash to their client. LCs are always non-funded facilities where lenders guarantee that a buyer's payment to a seller will be received on time.]

Such conversion of non-funded facilities into funded facilities are putting pressure on banks' liquidity as they are collecting deposits at short term, but providing loans for long term, creating a mismatch in balance sheets. Banks are opening LCs for six months, but later those turn into five to six-year term loans, creating demand for liquidity. As a result, banks are hunting deposits from multiple sources at higher cost to meet their demand. 

We are going through a very difficult situation, the deposit cost already went up above 8% when the lending  rate is capped at 9%. Banks have other management costs, then how will they lend at 9%? However, some banks are taking deposits at a higher cost because they are bound to give back money to customers when their deposits mature. If they fail to pay back deposits, it will create panic in the market. In this situation, some banks are aggressively collecting deposits.

Though the central bank is providing liquidity support through repo, still banks are under liquidity stress. The central bank provided huge liquidity support during the Eid festival, but another concern is that high-powered money is rising. Money outside banks are rising as the rates banks are offering for deposits are not matching with inflation. As a result, people are looking for alternative investment sources instead of parking money in banks, forcing the central bank to create new money in circulation, which will eventually fuel inflation. Locker demand in banks is rising and property value is also increasing, which reflects that customers are not interested in investing in banks. 

The banking sector passed another crisis in 2022. But banks made good profits even in a global  crisis. Do you think this profit trend is sustainable?

In the year 2022, most of the banks' profit came from treasury business, instead of core banking business. The net profit margin, which is a core business for banks, narrowed. It was because banks' deposit costs  increased when the lending rate was capped  at 9%. As a result, banks are focusing on non-core businesses, deviating from its core business lending, and expanding the balance sheet. 

So, such profit is not sustainable because income from non-core business is unpredictable. In this situation, banks should strengthen their capital instead of providing high dividends. In Bangladesh, banking sector capital is engineered as many banks show their capital by taking deferral from the central bank. In Pakistan, for example, they have a very strong capital base in banks, and they have good disclosures. 

It should be noted  that the  capital base of the banking industry in Bangladesh is much weaker than its peer countries in South Asia, which indicates their fragile financial health and poor brand image in the outside world.Banks maintained a capital adequacy ratio (CAR) below 12% when in Pakistan the ratio is above 18 per cent in Pakistan, and 15% in India.

Tell us about innovations in the banking sector after Covid-19 and the Russia-Ukraine war.

The banking sector experienced a massive transformation in digitalisation after Covid-19. However, there is still a lack of integration. For instance, banks are still focusing on app-based banking and internet banking, but they could not introduce integrated reporting systems where banks can get all information or access from one point. 

So, banks need to go for a robust digital platform which will help them stop data manipulation. Banks could not implement the core banking system as per the central bank's guideline. To implement the core  banking system, banks need to invest nearly Tk30 crore to Tk40 crores in purchasing foreign software. Banks also need to keep investing in cybersecurity. 

What is your plan for Mutual Trust Bank? What targets does it want to achieve in the next five years?

Mutual Trust Bank wants to be the leading digital-friendly bank in the next five years. The bank will build a network with fintech companies to reach the micro borrowers. The bank also wants  to focus on innovation of the products and as part of that it will set up an innovation lab. We are also planning to expand business in remote areas through agent banking. But the model will be different. The bank will go for partnership with chain grocery shops and different outlets of companies like Walton and so on because individual agents make agent banking risky for banks as some agents embezzle customers' money. 

The bank is also focused on coming out from provision deferral practice to clean up its balance sheet. Though the bank has provision deferral up to 2024, it finalised its balance sheet for the year 2022 without maintaining full provision requirements, which strengthened the bank's capital base. The high provision maintenance resulted in a fall in earnings per share. 

[According to Dhaka Stock Exchange disclosure, the earning per share of Mutual Trust Bank declined to Tk2.65 in the last year from Tk3.33 in the previous year.]