Originally published in The Independent on 21 July 2020

The financial sector in Bangladesh suffers in managing non-performing loans and we assume that such loans may increase during and after Covid-19 outbreak

Covid-19: For a sustainable banking future

Crisis is a threat and an opportunity at the same time. The Covid-19 pandemic has brought much of the economic activity, including financial institutions around the world to a stop, making a global recession appear inevitable.

If policy makers don’t act fast enough, it could send financial markets from a drawdown to a meltdown.Governments, central banks and policymakers worldwide are engaged in damage control of the economic losses at the moment and preparing to confront the forthcoming economic crisis with a monetary and fiscal policy of expansion such as profit/interest-rate cuts, liquidity injections, tax relief, and industry bailouts, etc. This crisis is not simply about liquidity. It is primarily about solvency, at a time when large segments of the global economy have come to a complete stop.

The financial sector in Bangladesh suffers in managing non-performing loans and we assume that such loans may increase during and after Covid-19 outbreak. And it is the peak time for every bank to assess and reassess overall lending portfolios and monitor the invested portion carefully. Disorganization in NPLs management can pessimistically affect the fund flow of the bank i.e. liquidity pressures and credit crunch. Also, it eats earnings of the banks.

In addition, a 6.00% deposit rate and 9.00% lending rate mount additional pressures on financial sector in Bangladesh during Covid-19 pandemic in view of the cost of funds, classified loans, overhead cost, regulatory issue, etc. as procuring deposit at 6.00% is still challenging and subsequently banks are producing lean earnings. For example, if a bank earns lower earnings due to lower profit rate, it will declare lower dividend to investors which will impact on the stock market negatively and subsequently international rating of the bank will be lower as banks earn lower compared to previous year which will increase reimbursement charges and downsize international ratings of the banks. Also, it will also negatively impact on government revenue collection which may augment government borrowings and national debts. We have seen that the majority of the banks records negative growths in terms of profits and few banks records operational losses for the first half of 2020 in comparison with first half of 2019. The market rate of demand and supply will be determined by the market itself.

As such, few recovery actions should be taken i.e. forming contingency team with specific tasks to attain strategic goals for a sustainable future in banking sector of Bangladesh:

* Banks need to have strategies and be ready to face the upcoming banking challenges to ensure economic sustainability. Measures should be there to address contamination risk, to prepare for probable infrastructural changes through technology adaption, to assess credit portfolios and payment services, to review current and forthcoming liquidity status, to use stimulus packages, to finance liquidity injection into the economy, to take care of reputation risk and to build trust and confidence. The buying back of government securities, reduction in repo rate, reduction in cash reserve requirement and increase in investment/advance deposit ratio of banks can act as liquidity injections in the market.

* In line with, monetary, fiscal, and financial policies should aim to cushion the impact of the Covid-19 shock and to ensure a steady, sustainable recovery once the pandemic is under control. A continuous international coordination will be essential to support vulnerable countries, to restore market confidence, and to contain financial stability risks. We have no way but to consider two key issues to recover financial sectors; firstly, to help protect the world’s most vulnerable economies, and, secondly, for the long term, to strengthen the eventual recovery of the economy.

* Due preparations should be ensured to accelerate economic recovery in the post Covid-19 situation where the board and top management will have critical roles to play. Crisis preparedness would be a key to stability. A watch group should be formed to assess data and make the bank ready to work out a reliable situational analysis when needed.

* Making an allowance for growth and sustainability of a bank depends not only on the policy of the bank itself but also the overall growth of the different wings of the economy. As most income generating sectors in Bangladesh are at risk and under threat to lose of businesses, banks have the possibility to face a critical situation ever.

* The adaptation of technology would be necessary in managing Covid-19 uncertainty and in ensuring business continuity. Online-based education and training platforms to continue with the capacity development programmes can limit cost of the banks and reduce contamination risks as well. People do not need banks, they need banking. As such, it is high time to ensure that every client is under the umbrella of virtual banking i.e. innovation in technology.

* Banks need to make the full use of capital and liquidity buffers with restrictions on dividends to rebuild the process. Indeed, where the bank capital adequacy is affected, supervisors should take targeted actions such as asking banks to submit credible capital restoration plans. Authorities may even need to step in with fiscal support either direct subsidies or tax relief to help borrowers to repay their loans and finance their operations or in credit guarantees by government. Economic stimulus packages should be disbursed to affected industries, traders, enterprises, and individuals based on banker-customer relationship and there is a higher probability of non repayment of loans i.e. credit risk. The government may provide credit guarantees to make a great success of the stimulus packages.

* Covid-19 significantly worsens both profit/interest income and non-profit/non-interest income of banks and financial institutions. It may also augment NPLs to a reasonably high extent which can lead to capital adequacy and solvency challenge significantly. As such, management of the banks entails importance in capital adequacy and solvency indicators.

* Covid-19 can create an opportunity to support clients and affected communities and can improve the reputation and image of banks and vice versa i.e. increase reputational and country risk. Digital marketing and reaction in the number of banks employees in the current context are also important indicators as many are isolated by the way of social distancing.

The susceptibility of the banking industry may make the existing condition deteriorate and may prolong a financial revival. Liquidity crisis, non-performing loans, run of banks, unplanned operational expenses and non-recovery of invested portion can lead to banks in a negative deposit growth, and subsequently, prompt a drop-down. Innovation in the products and services, most importantly, innovation in technology across the enterprise should be ensured to remain sustainably better in the market.

The writer is Manager Operations, at Social Islami Bank Limited (SIBL).