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Dhaka Tribune

Not a great year, but not a bad one either for banking

2021 started with good news, but then came the second wave of Covid-19; money started accumulating in the banks again, while interest rates continued to decline
Update : 02 Jan 2022, 03:05 PM

For the banking sector, 2021 has been a bumpy ride.

The year began with good news — an upward trend in expatriate income with a steady forex reserve, along with a healthy distribution of stimulus loans.

But then in March, the second wave of Covid-19 hit, quickly slowing down private sector credit, and money started accumulating in the banks.

Then deposit rates fell below the inflation rate, although Bangladesh Bank swiftly stepped in to declare that deposit rates could not go below the inflation rate.

The ghost of non-performing loans (NPL), which had been less haunting the past year, also ended up increasing at the end of 2021.

Meanwhile, the domestic money market became volatile under import pressure as dollar prices rose sharply.

To top it off, the end of the year saw a tussle emerge between Bangladesh Bank (BB) and the Bangladesh Securities and Exchange Commission (BSEC).

Here is a recap of the ups and downs the sector went through in 2021:

Forex

Rise and fall of remittance and forex

High remittance inflow, which brought relief at the beginning of the year, started to decrease by the end of June.

From July to November, remittances declined continuously.

According to a report published by the Bangladesh Bank, expatriate Bangladeshis sent $1.55 billion as remittances through banking channels in November — the lowest in the last 18 months.

From July to November, the total remittance inflow was $8.40 billion — a 20.98% year-on-year drop.

Forex reserves crossed the $48 billion milestones on August 24 based on remittances sent by expatriates, also shrunk by 9% in 15 months.

According to the central bank, the country's reserves fell to $45 billion for the first time on May 3 this year. On the same day, the reserves increased to $45.10 billion. Before that on February 24, the reserves hit $44.02 billion.

On December 30 last year, the central bank's reserves were $43 billion.

According to Bangladesh Bank, the country’s foreign exchange was $45.80 billion on December 28, 2021.

Dollar gets expensive

The dollar market became volatile in the second phase of the year.

The price of the US dollar skyrocketed due to increased demand; the Taka lost value.

From July 2020 to August 2021, the dollar was stable at Tk84.80 in the interbank currency market. But since August, it has become dearer.

According to the central bank, the exchange rate for each of the banks' transactions on December 28 stood at Tk85.80 per dollar.

However, in the open market and cash prices, it stands much higher. Those who are going abroad to travel have to buy dollars at Tk90 to Tk92.

In such a situation, from July to November of the current 2021-22 fiscal year, the central bank has sold Tk203.20 crore or $2,032 million to various banks.

Currency swap with Sri Lanka

Yet, Bangladesh is playing banker to its friends in the region.

Once upon a time, Bangladesh was desperate to get loans. But times have changed. Now loans are being given to other countries.

This year, the government of Bangladesh promised to lend $250 million to Sri Lanka, which is facing a foreign exchange crisis.

In August, the first instalment of the agreement was sanctioned - $50 million.

The money was paid from the foreign exchange reserves under the management of the Bangladesh Bank. This is the first time in the history of Bangladesh that it gave loans to another country with a loan waiver facility.

Debt

Private sector loans

Overcoming last year's blocking situation, private sector investment is recovering. Although there was some stagnation in the first half of the year, imports and exports later continued to increase.

According to the central bank, the total amount of loans disbursed by banks to the private sector at the end of October of the current fiscal year 2020-21 stood at Tk12,19,537 crore. At the same time last year, the number of loans disbursed by banks was Tk11,14,322 crore.

As a result, credit growth in the private sector increased by 9.44% in October.

Government bank loans

To meet the budget deficit, the government is now leaning towards bank loans. According to Bangladesh Bank, in the first four months of the current fiscal year, the government borrowed more than Tk19,000 crore from commercial banks.

During the same time last fiscal year, the government did not have any bank loans. At that time, the repayment amount was around Tk25,000 crore more than taking a loan.

NPLs hiding behind loan moratorium smokescreen 

The year 2021 started with total default loans worth Tk88,734.06 crore, hiding behind the smokescreen of loan moratoriums.

To cope with the economic crisis caused by Covid-19, banks could not default customers, even if they did not repay loan instalments in time. Even if defaulters could repay 25% of the loans by December 31, they would not be in default.

And yet, non-performing loans (NPLs) kept rising.

On December 28, Bangladesh Bank decided not to extend the loan moratorium facility beyond December 31, which will be announced at the beginning of 2022.

According to central bank data, in the first six months, the defaulted debt of the banking sector increased to Tk99,205 crore.

At the end of September, the total debt of the banking sector stood at over Tk1,245,391 crore, of which, Tk101,150 crore became NPLs — 8.12% of the total debt.

In the first nine months of this year, defaulted loans increased by Tk12,416 crore.

State-owned banks in crisis

The NPL crisis, naturally, spilled over to the state-owned banking sector.

According to the latest data from the central bank, six state banks disbursed loans worth Tk219,272 crore at the end of September, of which 20% or Tk44,016 crore were default loans.

Of this, the default amount of Agrani Bank is Tk7,872 crore, BDBL had Tk560 crore, Basic Bank Tk7,619 crore, Janata Bank Tk13,873 crore, Rupali Bank Tk3,834 crore, and Sonali Bank had Tk10,294 crore default loans.

Stimulus packages stimulate irregularities

As a part of its Covid-19 recovery plan, the government provided several stimulus packages; a total of Tk250,000 crore has been announced in two phases under 23 packages so far.

Of this, debt-based incentives make up around Tk150,000 crore.

But there were allegations of irregularities, debt fraud and illegal investment in the stock market through funds taken as stimulus loans.

According to a survey by the South Asian Network on Economic Modeling (Sanem), bribery of corrupt officials has hampered the implementation of the government-announced stimulus package.

Due to lack of proper management and transparency, lack of accountability and corruption, as many as 79% of the country's businesses did not get the money for the announced package.

Management

Inflation headache for shrinking deposit dividend

Public life was miserable due to rising commodity prices throughout the year. But the opposite was seen in the interest rates on bank deposits.

Because of this, low and middle-income people are in a new predicament as returns on their savings get squeezed.

 In the middle of the year, interest rates on deposits fell to 2 to 3%.

In this regard, Dhaka Tribune published an article titled “Inflation, a major headache for shrinking deposit dividends” on August 4. Bangladesh Bank took cognizance of the issue when discussions started in various media.

Later on, August 8, the central bank issued a circular where they said the interest rate of term deposits must not be less than the inflation.

In case of setting a monthly interest rate on deposits of three months or above, banks have been instructed to calculate the average inflation of the previous three months, according to the circular that will come into effect immediately.

Layoffs on various excuses

When the second lockdown of Covid-19 started across the country on March 26, the banks started laying staff off under various conditions.

According to a report published by Bangladesh Bank, 3,313 employees of six private banks have left their jobs from January 1, 2020, to August 9, 2021.

Many of them have been laid off, removed, fired or even forced to resign.

The central bank later became concerned about the matter. Warning and formal instructions were later issued in this regard.

BB and BSEC tussle over supervision

The two main regulators of the country's financial sector, Bangladesh Bank (BB) and the Bangladesh Securities and Exchange Commission (BSEC) have repeatedly clashed this year over their supervision and jurisdiction of business and financial institutions. Towards the end of the year, the tussle got worse.

Needless to say if the situation continues, it will be a cause of concern for Bangladesh's banking and business sector in 2022.

Scorecard

‘Despite the stress, customer service increased’

It was not all bad though, as bankers and economists say there were some improvements.

Managing Director and CEO of Brac Bank Selim RF Hussain puts it: “The year was quite stressful for the banking sector as a whole. Covid-19 has had a significant impact since the beginning of last year.”

However, it is the government's credit that it did not damage our banking sector in a bad way, he added.

At that time the overall economy of the country including banks was quite strong due to various stimulus packages. Yes, there were some questions about the distribution of loans in the case of some banks.

“However, Brac Bank, as always, has shown considerable success in disbursing CMSME loans. Although we had to disburse loans of Tk1,100 crore, we have disbursed loans of Tk1,400 crore finally,” he added.

Another is that although many things are closed, the bank is not closed for long. Despite the pressure, customer service has improved considerably, Hussain further said.

In addition, the use of digital banking among consumers has increased this year. Some more steps need to be taken to keep it going in the coming year.

‘The challenge of restoring comfort’

Former lead economist at World Bank's Dhaka office Dr Zahid Hussain told Dhaka Tribune: “It cannot be said that the banking sector has done very well this year. Although some banks have done well, most of them have underperformed. Despite so many benefits this year, NPL has increased in banks.”

Even though 25% benefit has been given to organizations for the last two years, the non-performing loan is not decreasing but on the contrary, it has increased at the end of the first quarter of the year. It's a reason to be worried.

“Besides, we have seen many incidents regarding the distribution of loans for stimulus packages, where influential people took advantage of the stimulus package. On the other hand, most of the banks have not been able to finish the distribution of CMSME loans yet,” he added.

Moreover, the rising value of the dollar since the middle of the year and inflation has created a big challenge.

“However, a large impact on the export sector has had a positive impact on the banking sector. All in all, the challenge of overcoming fear is still there, which will continue for some more time,” Hussain further said.

‘Care must be taken to formulate a plan’

Former Financial Adviser to the caretaker government AB Mirza Azizul Islam said: “Although there has been some relief in remittance and reserves since the beginning of the year, it has not continued till the end. Many expatriates in Covid-19 have received additional allowances. Again, many have broken their savings and sent them to the country.”

Moreover, it was not possible to send money without a banking channel at that time because airlines were closed. In other words, money was not sent in hundi in that way.

Due to this, the remittance increased a lot during the Covid-19 period, which has been recorded in the reserve. But now that the situation is somewhat normal, that extra income is not coming to the country.

However, export earnings are giving relief. Moreover, private loans in banks are increasing. The wheel of the economy is moving again, Islam added.

“Needless to say, the coming year will be even more challenging. And for this, the government and Bangladesh Bank have to be more careful in formulating their plans,” he further said.

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