A virus that simultaneously affects the human mind and body, sociality of the human, world economy, and even more: breaks the concept of a global village, is Coronavirus or Covid-19. All medical science achievements have failed to stop the pandemic of the virus. In just four months of its outbreak, the entire world economy has gone into depression. The giant USA, UK, and European countries are now tensed wondering how to face the multifarious effects of the virus.
Bangladesh, too, like the rest of the world, is embracing the bitter experience of the effect of the virus. Each day, the numbers of people infected and dying are rising alarmingly. Overall businesses including the capital market have remained closed for the last one month and when everything will restart is uncertain. Likewise, Bangladesh’s banking sector is seriously hit by the effects of the Coronavirus.
The banking sector greases the wheels of the economy. The health of this sector depends not only on the policy of the bank itself but also on the growth of all other sectors of the country. When the health of the banking sector deteriorates, the growth of all other sectors is also affected. Therefore banking is closely interrelated with the rest of the wings of the economy. Due to the Covid-19 pandemic and lockdown of the country, different risks of the banking sector are being surged which is very alarming for the economy.
The major risk the bank will face is Credit Risk. The Non-performing Loans (NPL) of the Bank may rise to a new level due to this pandemic. Most businesses have suspended their operations due to the lockdown. Export-oriented industries are losing their confirmed orders as the foreign counterparts business have also stopped. Thus the creditworthiness of the existing borrower will be deteriorated which may block the possibility of the loan repayment. In March, Bangladesh Bank issued a circular not to change the classification status of the borrower up to June-2020 as the country was affected by the coronavirus. This was truly a good decision indeed. But, what is the result? Most borrowers had already stopped regular repayments as they are badly affected by the pandemic.
The government declared different stimuli for the survival of different industries, SMEs of the country which totals Tk50,000 crore and the entire fund will be arranged by the banking sector. If any borrower who has already loan liability avail a further loan under this stimulus package, the borrower will have to repay both the existing loan as well as the new loan, which will be onerous for most borrowers already facing an adverse business, increasing the debt burden. Already the NPL of the banking sector is in dire straits, and if the borrower fails to repay the fresh loan, the situation will then worsen. To avoid such circumstances the bank will choose only the highly rated clients with a steady track record and financial capacity. This mentality, however, will not serve the purpose of the stimulus package as most of the affected businessmen may not get the opportunity.
Another risk that may increase is Liquidity Risk. The Banking sector of our country has been suffering from a crisis of liquidity in the last one and a half years. Advance-deposit ratio/ Investment deposit ratio (ADR/ IDR) of most banks were high over the prescribed rate of the Bangladesh Bank (BB), that gave a time frame for the banks to bring down the ADR as prescribed, but most of them failed to comply. To date, some banks have not brought down the ADR under the prescribed rate.
The effect of Covid-19 and the result of the economic downturn will see the fund flow reducing, leaving banks to face further liquidity crises. On the other hand, as the government declared stimulus must be arranged from the bank’s fund, it will need additional funds to implement this. Bangladesh Bank has already increased the cap of ADR/ IDR 2% more to increase the lendable fund. To increase the bank liquidity Bangladesh Bank has already reduced the CRR (cash reserve requirement) from 5% to 3.5% on daily basis and 5.5% to 4% in bi-weekly basis and repo rate lowered from 6% to 5.25% while declaring that it will purchase T-Bill from the banks.
However, due to the economic depression resulting from Covid-19, incomes of different organizations have already reduced, remittance flow is already a downtrend, buying power as well as income of individuals will also be reduced which will cause serious problems to the bank’s regular fund inflow. To cover up the financial crisis, depositors will withdraw deposits - much expected in such an economic stagnant situation. Increase of NPLs will also negatively affect the fund inflow of the bank.
Both the credit and liquidity risks directly affect the profitability, sustainable growth, and finally the survival of the bank. The real income of the bank may reduce due to the increase of NPLs resulting from failure to regularly recover loans. NPLs will not only reduce the income but also increase the cost of funds. The bank has to maintain additional provisions, cuts from income or reserve funds to offset NPLs. Minimum Capital Requirement (MCR) of the Bank under BASEL-III will increase due to the increase of Risk-Weighted Asset. The liquidity crisis will reduce the investment opportunity of the bank thus facing a negative income growth. Liquidity crisis also wipes out the trust of the depositors. All this will reflect in the downtrend market value of the stocks which draws another risk - Reputation Risk. CAMELS Rating and Credit Rating of the bank will deteriorate which will ultimately weaken the bank’s position.
As I said earlier growth and sustainability of a bank not only depends on the policy of the bank itself but the overall growth of the different wings of the economy. As most of our income generated sectors of Bangladesh are in a vulnerable position that threatens the loss of businesses, the bank can face a critical situation, which they are not aquatinted with. The government, bankers, policymakers, as well as businessmen, have to work hand-in-hand to overcome the possible risks.
The government has already set different fiscal and monitory policies to instantly come out of the economic depression. To cover the economic downtrend, the government is considering an increase in the supply of money in the market, if necessary. Banks must set proper portfolio management programmes consistent with the government’s line of thinking. Thrust, as well as emergency sectors, must get priority in case of investment. Banks may increase investment in SMEs, agriculture, export-oriented and local industries, and discourage or reduce investment in the import of luxury or unnecessary/less important goods for a certain time and also reduce investment in lesser priority sectors.
Bank has to boost up the recovery process; the central bank may initiate restructure policies for existing borrowers genuinely affected by the Coronavirus outbreak. Banks may extend the repayment period by resizing the instalment considering the borrower’s present repayment capacity. Different attractive deposit products may be introduced to keep the fund flow, the salary of all employees of various organisations may be disbursed through bank accounts. The government must ensure that funds of different government, semi-government and autonomous bodies are deposited in different banks at the prescribed rate of the bank, ensuring the control of the cost of funds.
A huge amount of black money is rolling in the economy. To bring this money into the mainstream of the economy through the banking channel, the government may take different initiatives and strengthen existing laws. Dr Leandro Medina and Dr Friedrich Schneider, in a working paper of the International Monetary Fund (IMF), estimated the size of the shadow economy in Bangladesh to be 27.60 per cent of the country's GDP in 2015. It is a huge amount that should be taken into account.
The borrower has also the role of boosting the economy and the banking sector. They should create a mentality to repay bank liabilities in time. This will increase their reputation and creditability to the bank and society. Timely repayment of loans is not only a commitment of the borrower to the depositors but also reduces the cost of the borrower. The government has to update the different laws and rules relating to recovery. Some policies of the bank itself must be reformed. The impact of Covid-19 can be minimized if all the stakeholders of the bank can work together with good intentions.
Zia Uddin Mahmud is a banker & freelance writer.