Above all, it is imperative that the Bangladesh banking sector remains in good health
Making policy to guide an emerging economy taking into account myriad factors and challenges is an unenviable task even at the best of times. Not to mention the rigours associated with it when facing up to a pandemic of a lifetime.
The economic fallout from the pandemic is thought to be more widespread and devastating. The engines of the world economy have come to a standstill. Bangladesh with its poor health care system was always going to play catch up while countries with far superior infrastructure found it difficult to manage.
A disproportionately high number of our population work in the informal sector with subsistence-level daily income which has contributed to life vs livelihood balance in relaxation of shutdown rules.
Export and remittance, the twin pillars of the economy, have already started taking a massive hit. With the nosedive of oil prices in the international market and expected prolonged slowdown in oil-dependent middle-east economies, which happens to be the key market for Bangladeshi expatriates, it is expected that deportation of sizeable migrant workers and sustained downward pressure on the growth of remittance earnings will be a new reality.
Things are hardly any better on the export front. The perennial Achilles heel of unhealthily lopsided concentration on the RMG sector in our export basket is a testament to the failure of policymakers in promoting much-needed diversification.
The sector witnessed unprecedented instances of wholesale cancellation and deferral of confirmed export orders. As per the BGMEA source, total cancellation up until now is no less than $3bn. Apart from the immediate impact on timely payment of salaries and wages to 4.1 million workers, the sheer survival for many of the small and mid-sized firms became a burning issue.
While the government has stepped in with several packages including stimulus packages for salaries and wages for three months, the existential threat for the weak and financially troubled firm remains extremely real.
Most industries catering to the local market have been badly affected. In the general holiday up to April 25, most factories were shut down. Later, factories and businesses gradually started opening up.
However, the supply chain is severely disrupted and demand for goods/services other than essentials remain way below the usual level. Cash generation capacity, all of a sudden, has dried up for the overwhelming majority of businesses. As a consequence, many companies could not pay their employees in full. Some of the firms had to resort to a more drastic measure of lay off/termination.
To counter the damaging effect of Covid-19, all the government and central banks across the globe are coming up with different initiatives to prop up the economy. Our government and the central bank also followed suit.
Different stimulus packages aiming at reviving the hardest hit sectors including the export-oriented industries, large manufacturing and service-oriented industries, CMSME, agricultural sectors, NGOs, and other affected sectors were announced promptly by the government, while the central bank provided the required guidelines for the packages.
A sizeable interest subsidy has been made available to ease the debt burden in a period of great uncertainty. Another useful feature is the longer tenor of the working capital in order to match cash flow sluggishness.
In some of the packages, the central bank also offered a refinancing facility which acted to alleviate the liquidity concern of the banking sector to support the customers under the stimulus packages. On top of that, the Repo facility was also introduced for the same purpose.
One critique, probably a valid one at that, would be the excessive reliance on the banking sector to implement the stimulus package. Not only does the bank remain the medium for loan disbursement, but the entire credit risk lies with the bank. One might argue that is what happens for all loans under a normal scenario. Normal scenario: Precisely that’s the point here. This is no normal scenario.
The new normal is outright cancellation of confirmed export orders in one fine morning, 118-year-old giant retailer filing for bankruptcy, world economy falling into a prolonged recession, belligerent trade wars, oil futures turning negative, the rise of nationalist, anti-immigrant forces in politics across continents, unprecedented health hazards, and an air of uncertainty that is almost cruel.
All these and more make up for a new normal that is quite an unchartered territory not only for consumers and businesses but also for policy-makers.
Now going back to the reason why banks -- even with liquidity created by the central bank through refinancing scheme, repo and cut in reserve ratio -- might not be in an ideal position to fully absorb the credit risk is due to the fact that underlying changes in macro conditions have rendered a lot of businesses uncreditworthy with probably no direct fault of their own.
Most of the banks are sitting on a pile of toxic assets with questionable asset quality. They can ill afford further junkies of below investment grade loans. At the same time, businesses require funding more than ever to keep their business afloat.
What is probably needed is striking the right balance to help the genuinely affected businesses and saving the bank from drowning in further trouble. The introduction of some sort of credit guarantee scheme might be useful here. However, to avoid moral hazard, both banks and the entrepreneurs must have some skin in the game.
We started with the dilemma of policy-makers for an emerging economy with limited resources. One case in point is the decision to postpone the interest realization and even more importantly, interest recognition by the bank for the month of April and May.
While this comes as a welcome relief for the affected businesses, how the banking sector will cope with this colossal loss of revenue of approximately Tk14,000 crore remains unaddressed to date.
Reimbursement of this loss to the banks through a separate stimulus package or allowing interest realization over a period of longer tenor can be considered. Otherwise, the profits in the banking sector will get wiped out this year. In fact, there has been some naïve outcry from certain quarters questioning what’s wrong if banks post a loss for a year. To put it bluntly, everything is wrong with that scenario.
First of all, banks deal with people’s money and people’s trust will be impaired in keeping deposits with a losing concern which might hurt deposit growth in the long term. Rating of the banks will be downgraded in case of posting net loss, resulting in problems in dealing with foreign banks and surely the additional confirmation cost will eventually decrease the cost competitiveness of our businesses.
Most essentially, profit is the most organic and sustainable way to achieve all-important capital adequacy. At a time when a number of our banks are already suffering from provision shortfall and incremental pressure from deteriorating financial health of a large section of borrowers, banks can ill afford to see its capital adequacy fall due to such initiatives.
Not to forget, banks represent a major segment in our capital market and this will certainly drag down the market in a big way. Loss in revenue from taxes on banking profit can also hurt the NBR target in a time of projected sluggishness in revenue collection.
To support the economy at this critical hour, it is imperative that the banking sector itself remains in good health. A sector that is already under stress should not be put in additional jeopardy through any kind of policies; be it interest postponement or taking on higher than manageable credit risk in stimulus packages without any sort of credit guarantee scheme.
At the same time, the leadership of a bank cannot fully escape the responsibility of creating a robust structure that supports genuinely affected clients with a proven track record at their hour of need while also protecting the interest of depositors and shareholders through ensuring superior asset quality.
Md Sadekur Rahman is a banker with more than 10 years of banking experience.