The cost of funds in non-banking financial institutions (NBFIs) continued to grow, severely affecting their profit earnings.
According to officials and market insiders, these rising expenses have made it difficult for NBFIs to make an immediate turnaround from the distress they have been experiencing since July last year when deposit and lending ceilings were imposed.
As the cost of managing funds gradually increased, profitability or net income margin (NIM) of the financial institutions continues to shrink to level insiders deem unsustainable.
According to the Cost of Funds Index (CoFI) released by the Bangladesh Bank (BB), the weighted average cost of funds in July 2022 was 6.58%, and it continued to rise, reaching 7.10% in February 2023.
At the same time, the adjusted cost of credit also continued to grow, crossing 8.10% in February 2023 from 7.55% recorded in July last year.
Requesting anonymity, a Bangladesh Bank official said that the rate of profitability in NBFIs continued to decline due to the increasing expense in managing funds in recent months.
The official also noted that the cost of funds in NBFIs is rising mainly due to the mounting NPL (non-performing loan) buildups that have left them in their current state.
The official further said that there has been over a threefold rise in the aggregate volume of NPLs in nonbanks in less than seven years.
The volume of classified loans or leases was 7.3% in 2016, but it had edged up to 22.99% until June 2022 when Tk15,936 crore out of the total loans amounting to Tk69,332 crore of the sector was classified as bad loans.
Banks are now offering higher rates following the withdrawal of the deposit floor rate several months ago.
But for NBFIs, there is a deposit rate cap of 7% imposed by the central bank since July last year.
According to BB data, the spread was 3.04% in January 2022.
It dropped to 1.83% when the deposit and lending caps were put into place.
The spread has continued to drop and reached as low as 1.11% in March last year.
