Publish : 20 Dec 2021, 06:26 PMUpdate : 20 Dec 2021, 06:26 PM
The emergence of Covid-19 in March 2020 led to the closure of many enterprises and organizations.
The immediate impact on the economy was two-fold: production fell as factories and business enterprises closed their doors.
Demand fell as worker’s income fell due to the enterprise closures.
Government employees continued in their jobs.
In the garment sector the government provided low interest loans so factories could continue to employ their workers.
Most large organizations continued their core employees.
Work on farms continued.
The millions of small enterprises may continue to be open but their income in most instances fell.
Eventually, after June 2021 the country returned to work and production returned to more normal levels.
How did people keep going during the months of low income and closed enterprises?
Bangladesh Bank extended credit to all kinds of enterprises enabling these to continue at some level of employment.
The government’s safety net plus direct transfer to poor households maintained to some degree income levels for persons in the lower half of the income distribution, although most observers believe these efforts were way too limited.
Altogether the government handled the pandemic very well.
Factors behind success
There were three key factors in how nations managed the Pandemic:
The extent to which enterprises were locked-down; programs of government to continue employment or income support even though the worker may not be working; finally, credit programs to enterprises.
Households reacted in three ways: (1) continue to work if this was possible. Many small enterprises continued to function although they suffered from low demand. (2) reducing expenditures with wealthier households simply not consuming items that were not essential [less eating out; less purchase of special foods; reduced purchases of clothing etc but increasing their saving.] (3) Borrowing from relatives or from the informal money markets. There is little data on the extent of the informal sector’s increase in lending to households but it is certainly substantial.
Overall wealthy households with continuing income flows tightened their belts but came through the crisis in relatively good shape.
Workers in much of large and medium scale manufacturing managed losing a few months income on the average but had savings to support them through the pandemic.
Fortunately, lockdowns on manufacturing were fairly short. Farmers did reasonably well.
Owners and workers in small enterprises did badly.
They have found themselves as the economy recovered with lower net worth largely from running down saving and borrowing from the informal money markets.
In the financial sector we can separate the share markets and the banking sector.
The share market essentially stopped functioning as regulations were issued with the effect of discouraging participation.
The banks were a different matter.
Depositors seemed undisturbed and there was little effort to withdraw deposits.
Banks also participated in the market for government debt as tax revenues fell.
Real issues
The real issues revolved around enterprises that had borrowed in normal times and the businesses would now be repaying these loans from their earnings.
Of course, the decline in demand reduced earnings and the financial condition of many enterprises weakened.
Repayments certainly declined and to minimize the impact of these on businesses the banks were told not to classify these loans which would normally have been so treated as repayments fell behind schedule.
The source of their failure to pay the installments was the pandemic, so it seemed valid to defer the matter until after the Pandemic ended.
Principal payments were sometimes just added to the end of the repayment period.
For continuing credits [where the enterprise had a credit line and had to repay enough to keep the amount due below the credit limit] it was a matter for the future.
As a result the non-performing loan situation, as recorded, improved.
Unpaid interest was usually taken to the profit account so the earnings situation also looked better.
The regulatory actions necessary to protect the banks resulted in an improvement in the bank’s financial situation on the books whereas in reality the banks were in worse shape.
The pandemic reduced earnings and some costs.
But other costs may continue even if there is no production: Rental payments for rented facilities, loan repayments on loans the enterprise had taken out, salary payments for retained staff, electricity charges.
An enterprise that borrows under one of the special programs is meant to use the funds for working capital in order to produce goods, hence requiring workers to do so.
But many enterprises borrowed money under the special programs, did not go into production or did so at a low level, and used most of the loan to cover the costs of just remaining open including repayment of debt.
In this case the impact of the special funds was to reschedule old loans.
The lending to large companies was essential both to support production when the company received orders but also to keep going until the economy recovered.
Out of all of the borrowers most now face demands for the money on loans that should have been paid in the fifteen months from April 2020 until June 2021.
Most will not have been classified but over the next year they are likely to be.
There may be further deferrals of classification allowed by the central bank but sooner or later the debt accumulated during the 15 months when there were limited earnings has to be repaid.
For larger companies it should be possible to manage this with the lending bank.
But for small companies there are greater difficulties.
On June 30, 2021 we examined the advances made by private banks to private companies or individuals.
Of the portfolio 12% of advances had balance outstanding between Tk1 million and Tk10 million.
The total outstanding of these represented 17% of total advances of this type.
From discussions with private bankers I learned that this was the range of loans that were most vulnerable to having loan repayment costs accumulated during the pandemic that the borrower would have difficulty in repaying from future earnings.
A substantial share of these loans would become non-performing.
This would add 3-4% to private banks’ NPL over what would have happened without the pandemic.
Impact
Such an outcome will have a shattering impact on many private banks.
The position of the banking system and thousands of small enterprises is as follows: The enterprises had loans between Tk1 million and Tk10 million.
The economy was working well when the pandemic struck.
Suddenly the enterprise found it could not repay its loan as it had no income.
Bangladesh Bank provided some temporary protection by forbidding the lending banks from classifying the loan as installments were not paid or credit limits remained over the amount allowed for long periods.
But the debt remained and additional interest was charged.
The banks benefitted by not having to classify loans and take the required provision.
Also, they were taking the interest due into income for the bank.
The bank’s owners smiled as dividends were paid on these fake profits.
Sooner or later the hammer would fall: The banks would classify the loans cutting off credit to the borrower; the borrower would struggle to repay a loan while trying to get the company back in operation.
No one did anything wrong.
Who should pay for losses
Who should pay for the losses brought about accidentally due to nature striking through the pandemic?
At present the banks are facing a rising tide of bad loans; as estimated above this will cause heavy losses for many banks and destroy many perfectly good small businesses.
These small enterprises received very modest support from the banks during these troubled times.
The banks knew that using one of the special credit lines for these enterprises would ultimately just pile more debt on them.
Bangladesh Bank should adopt a program to lift the weight off these small enterprises by a loan forgiveness program.
A program might go as follows: if on March 1, 2020 the borrower was current with his payments then he is eligible for loan forgiveness for all installments due from March 1, 2020 to June 30, 2021.
Bangladesh Bank will pay this by adjustments to the lending bank’s account with the central bank.
Interest accumulated during the period above would be written off the loan account.
If the interest had been taken as income then nothing happens; if not then the interest would be deducted from the loan amount and the lending bank paid the interest by Bangladesh Bank.
There are many ways to design such programs, the above is just a sketch of what a loan forgiveness program might look like.
The important point is to recognize that without looking after the small enterprises [defined as having loans between Tk1 million and Tk10 million] it will cause considerable harm to the private banks causing a substantial increase in non-performing loans.
In addiction many sound enterprises will find themselves with classified loans, losing their credit and putting them on the road to closure.
Bangladesh Bank should design on an urgent basis a program to protect the smaller private banks and the small enterprises who are exposed through their debt.
Forrest Cookson is an economist who has served as the first president of AmCham and has been a consultant for the Bangladesh Bureau of Statistics
ANALYSISPowered by Froala Editor
Covid-19 and Bangladesh's financial system
The emergence of Covid-19 in March 2020 led to the closure of many enterprises and organizations.
The immediate impact on the economy was two-fold: production fell as factories and business enterprises closed their doors.
Demand fell as worker’s income fell due to the enterprise closures.
Government employees continued in their jobs.
In the garment sector the government provided low interest loans so factories could continue to employ their workers.
Most large organizations continued their core employees.
Work on farms continued.
The millions of small enterprises may continue to be open but their income in most instances fell.
Eventually, after June 2021 the country returned to work and production returned to more normal levels.
How did people keep going during the months of low income and closed enterprises?
Bangladesh Bank extended credit to all kinds of enterprises enabling these to continue at some level of employment.
The government’s safety net plus direct transfer to poor households maintained to some degree income levels for persons in the lower half of the income distribution, although most observers believe these efforts were way too limited.
Altogether the government handled the pandemic very well.
Factors behind success
There were three key factors in how nations managed the Pandemic:
The extent to which enterprises were locked-down; programs of government to continue employment or income support even though the worker may not be working; finally, credit programs to enterprises.
Households reacted in three ways: (1) continue to work if this was possible. Many small enterprises continued to function although they suffered from low demand. (2) reducing expenditures with wealthier households simply not consuming items that were not essential [less eating out; less purchase of special foods; reduced purchases of clothing etc but increasing their saving.] (3) Borrowing from relatives or from the informal money markets. There is little data on the extent of the informal sector’s increase in lending to households but it is certainly substantial.
Overall wealthy households with continuing income flows tightened their belts but came through the crisis in relatively good shape.
Workers in much of large and medium scale manufacturing managed losing a few months income on the average but had savings to support them through the pandemic.
Fortunately, lockdowns on manufacturing were fairly short. Farmers did reasonably well.
Owners and workers in small enterprises did badly.
They have found themselves as the economy recovered with lower net worth largely from running down saving and borrowing from the informal money markets.
In the financial sector we can separate the share markets and the banking sector.
The share market essentially stopped functioning as regulations were issued with the effect of discouraging participation.
The banks were a different matter.
Depositors seemed undisturbed and there was little effort to withdraw deposits.
Banks also participated in the market for government debt as tax revenues fell.
Real issues
The real issues revolved around enterprises that had borrowed in normal times and the businesses would now be repaying these loans from their earnings.
Of course, the decline in demand reduced earnings and the financial condition of many enterprises weakened.
Repayments certainly declined and to minimize the impact of these on businesses the banks were told not to classify these loans which would normally have been so treated as repayments fell behind schedule.
The source of their failure to pay the installments was the pandemic, so it seemed valid to defer the matter until after the Pandemic ended.
Principal payments were sometimes just added to the end of the repayment period.
For continuing credits [where the enterprise had a credit line and had to repay enough to keep the amount due below the credit limit] it was a matter for the future.
As a result the non-performing loan situation, as recorded, improved.
Unpaid interest was usually taken to the profit account so the earnings situation also looked better.
The regulatory actions necessary to protect the banks resulted in an improvement in the bank’s financial situation on the books whereas in reality the banks were in worse shape.
The pandemic reduced earnings and some costs.
But other costs may continue even if there is no production: Rental payments for rented facilities, loan repayments on loans the enterprise had taken out, salary payments for retained staff, electricity charges.
An enterprise that borrows under one of the special programs is meant to use the funds for working capital in order to produce goods, hence requiring workers to do so.
But many enterprises borrowed money under the special programs, did not go into production or did so at a low level, and used most of the loan to cover the costs of just remaining open including repayment of debt.
In this case the impact of the special funds was to reschedule old loans.
The lending to large companies was essential both to support production when the company received orders but also to keep going until the economy recovered.
Out of all of the borrowers most now face demands for the money on loans that should have been paid in the fifteen months from April 2020 until June 2021.
Most will not have been classified but over the next year they are likely to be.
There may be further deferrals of classification allowed by the central bank but sooner or later the debt accumulated during the 15 months when there were limited earnings has to be repaid.
For larger companies it should be possible to manage this with the lending bank.
But for small companies there are greater difficulties.
On June 30, 2021 we examined the advances made by private banks to private companies or individuals.
Of the portfolio 12% of advances had balance outstanding between Tk1 million and Tk10 million.
The total outstanding of these represented 17% of total advances of this type.
From discussions with private bankers I learned that this was the range of loans that were most vulnerable to having loan repayment costs accumulated during the pandemic that the borrower would have difficulty in repaying from future earnings.
A substantial share of these loans would become non-performing.
This would add 3-4% to private banks’ NPL over what would have happened without the pandemic.
Impact
Such an outcome will have a shattering impact on many private banks.
The position of the banking system and thousands of small enterprises is as follows: The enterprises had loans between Tk1 million and Tk10 million.
The economy was working well when the pandemic struck.
Suddenly the enterprise found it could not repay its loan as it had no income.
Bangladesh Bank provided some temporary protection by forbidding the lending banks from classifying the loan as installments were not paid or credit limits remained over the amount allowed for long periods.
But the debt remained and additional interest was charged.
The banks benefitted by not having to classify loans and take the required provision.
Also, they were taking the interest due into income for the bank.
The bank’s owners smiled as dividends were paid on these fake profits.
Sooner or later the hammer would fall: The banks would classify the loans cutting off credit to the borrower; the borrower would struggle to repay a loan while trying to get the company back in operation.
No one did anything wrong.
Who should pay for losses
Who should pay for the losses brought about accidentally due to nature striking through the pandemic?
At present the banks are facing a rising tide of bad loans; as estimated above this will cause heavy losses for many banks and destroy many perfectly good small businesses.
These small enterprises received very modest support from the banks during these troubled times.
The banks knew that using one of the special credit lines for these enterprises would ultimately just pile more debt on them.
Bangladesh Bank should adopt a program to lift the weight off these small enterprises by a loan forgiveness program.
A program might go as follows: if on March 1, 2020 the borrower was current with his payments then he is eligible for loan forgiveness for all installments due from March 1, 2020 to June 30, 2021.
Bangladesh Bank will pay this by adjustments to the lending bank’s account with the central bank.
Interest accumulated during the period above would be written off the loan account.
If the interest had been taken as income then nothing happens; if not then the interest would be deducted from the loan amount and the lending bank paid the interest by Bangladesh Bank.
There are many ways to design such programs, the above is just a sketch of what a loan forgiveness program might look like.
The important point is to recognize that without looking after the small enterprises [defined as having loans between Tk1 million and Tk10 million] it will cause considerable harm to the private banks causing a substantial increase in non-performing loans.
In addiction many sound enterprises will find themselves with classified loans, losing their credit and putting them on the road to closure.
Bangladesh Bank should design on an urgent basis a program to protect the smaller private banks and the small enterprises who are exposed through their debt.
Forrest Cookson is an economist who has served as the first president of AmCham and has been a consultant for the Bangladesh Bureau of Statistics