The Daily Star| June 07, 2020
Businesses should use the funds from the stimulus packages properly to make a turnaround from the ongoing economic fallout, or else they will collapse into a bad state of affairs, said a top banker.
The Tk 100, 000 crore stimulus packages, unveiled by the government in response to the coronavirus pandemic, are not adequate given the gravity of the recession.
"So, businesses will have to use the money cautiously," said Ali Reza Iftekhar, managing director of Eastern Bank, one of the leading private banks in Bangladesh.
Businesses and industries can't go for expansion at the moment as the market is not ready to absorb the investment in the wake of a fall in demand for almost all types of products.
So, they should give full attention to protect the existing businesses from the probable stringent situation, he told The Daily Star in an interview recently.
"We have already suggested our corporate clients change their business model and embrace new strategies to keep up with the situation."
Lenders are in a challenging situation while giving out loans from the stimulus packages.
Banks have started distributing loans from the funds, but they don't know the actual impact of lending on the economy.
"It will take more time to comment on this as the whole situation depends on containing the pandemic," said Iftekhar, also the chairman of the Association of Bankers, Bangladesh, a forum of managing directors of banks.
He thinks the economy will blast off if the stimulus funds help create demand.
"If the spending capacity of people does not increase as expected, the economy will face more difficulties."
Banks have the required liquidity after the central bank cut the policy rate and cash reserve ratio and relaxed the loan-deposit ratio in tandem.
Lenders are also getting finances from the Export Development Fund (EDF) of the central bank, which will help export-oriented industries bounce back from the pandemic.
The Bangladesh Bank increased the volume of the EDF to $5 billion from $3.5 billion to shore up the pandemic-stricken economy.
"But banks will have to give all-out effort to recover the stimulus funds, which are being provided in the form of refinance scheme, on time from the borrowers."
The central bank will take back the funds from banks in due time as it is not a bailout one.
Iftekhar warned lenders would face a problem if the economy does not pick up soon and the whole financial system would plunge into a vulnerable situation if the health of banks deteriorates.
"So, the senior management of banks would have to focus on strengthening balance sheets and helping businesses so that they can recover quickly."
Banks need to take a lot of initiatives to maintain adequate liquidity as no one knows when the pandemic disappears, according to the experienced banker.
Besides, lenders would have to preserve adequate capital buffer so that they can absorb the shocks stemming from the economic fallout.
"The central bank will have to compel banks to take initiatives in line with its result of the stress testing."
The initiatives would help banks avert financial problems if some large borrowers default due to the ongoing crisis, Iftekhar said.
The testing module gives a score to banks about the capacity to absorb shock.
The image of the financial sector would be tarnished if the strength of banks turns fragile. Under such circumstances, foreign banks and organisations will lose confidence in the financial sector, Iftekhar said.
He thinks the stimulus packages amounting to Tk 101,117 crore are the first phase for the economy.
"We do not know whether the funds are sufficient for the economy. The government has declared the packages quickly to tackle the first blow of the fallout."
The government is now observing the situation and more funds may be required when the economy starts to run in full swing, he said.
The upcoming budget is highly important for the banking sector as well, he said.
Deficit financing will be much higher than the previous ones and this will force the government to borrow heavily from banks.
The authorities should emphasise banks' liquidity base so that they don't face any problem in the days to come.
He thinks the deafult loans may increase in the coming days as not all customers will be able to pay back the money on time. This is a normal phenomenon in any recession.
Banks also face some other challenges.
Lenders have been implementing a 9 per cent interest rate on all loan products since April 1. This will gobble up Tk 15,000 crore to Tk 16,000 crore in profits in the banking sector.
Interest incomes account for nearly 70 per cent of the banks' earnings, while the rest comes from fees and commissions. But the income in the form of fees and commissions have decreased to less than 5 per cent now.
Besides, the central bank has asked banks to avoid compound interest rate on credit cards and this has harmed the revenue.
"So, profitability of banks will face a huge challenge this year," he said.
Operational costs for banks are almost fixed.
"We have to reduce cost and use our resources efficiently to strengthen the financial health of banks."
There is no way to keep all the economic indicators in good shape and the government could defer the implementation of major infrastructural projects except the most important ones as revenue would not get a boost in the coming days as the income level of the people from all walks of life is declining.
"This will help free up a good amount of money, which can be used as stimulus funds."
The government should cut the corporate tax for banks because of their ongoing dire straits, he said. Lenders give 37.5 per cent in corporate tax from their profit.
The central bank may also consider paying interest on the banks' fund kept as cash reserve ratio.
Digital solutions of every bank have widened due to the ongoing pandemic but this is not enough. They will have to embrace branchless banking.
"We should discourage clients not to come to branches as they can do banking from homes using digital methods."
All types of products of banks should be rolled out keeping digital solutions in mind, he said.
EBL has benefited immensely from its long focus on digital solutions: its digital banking has increased by 30 per cent during the pandemic.
The balance sheet of EBL is strong and has a reputation both in local and foreign markets as a compliant lender.
The bank is maintaining adequate liquidity, which is helping it to manage the situation smoothly.
"The bank's capital buffer is very good and is probably the highest in the market. We do not have any provision shortfall. All the financial indicators are very good."
EBL's default loan percentage is very low, helping it tackle all challenges excellently.
Defaulted loans at the bank stood at 3.35 per cent of the total loans of Tk 23,205 crore, which is way lower than the industry average of 9.32 per cent.
The performances have helped EBL bag several awards from local and global entities.
The bank received the Bangladesh Best Employer Brand Award 2019 from globally renowned Employer Branding Institute and the 'Most Innovative Retail Bank – Bangladesh 2019' award from International Finance magazine.