But the moot-point is whether the banks can go on sustaining their high profit trends in the longer run. The banks are probably inviting their longer term ill health and failing to discharge their true and worthwhile services to the economy from pursuing short term gains
Banks thriving superficially on short term profits ?
Md Nuruzzaman
According to reports, the operating profit of the countrys private commercial banks (PCBs), some 39 in number, reflects a mixed picture in the just ended fiscal year or in 2014. The operating profits of some of them specially of the Islami Bank Bangladesh rose substantially in this period. Others trailed the Islami Bank but these also experienced higher operating profits compared to the year before. The operating profits of other showed decline, though marginally in most of the cases. But even among the banks with reduced profits, there was none that failed to show any profit.
Indeed, the PCBs have been showing higher and higher operating profits for some years in succession with none showing minus profit. The only difference last year was the profits showed a downtrend in some of them for the first time probably in a decade. And that was also not unusual given the serious political turmoil that gripped the economy in the last two years and the retarding effects of the same on the economy. But the thing to note is that the PCBs have been declaring operating profits without a pause in all this time.
But the question which arises is how well earned this profit has been or whether this rate of profit is sustainable. If the banks scored this substantially higher profits from increasing notably their credit disbursement or funding a large number of new borrowers and helping them with entrepreneurship, then the same would be well earned indeed. Banks profiting from extending resources to entrepreneurs or enterprising means their playing a facilitating role in economic growth.
Economic growth occurring, thus, not only underwrites the security of the economy, it does the same for the banks. From acquiring additional customers or expanding their client base, the banks only add to their resourcefulness over the long haul. The growing customer base means expansion of the banks business well into the future. But according to statistics of the Bangladesh Bank (BB), credit growth in commercial banks has not increased significantly to support their high operating profitability. So, the banks may not have not got their markedly increased profits in the fair and square way, i.e. through energizing the wheels of the economy. The greater part of the increased profits of the banks came from their management maintaining their hard squeeze on their existing customers to repay their debts to the banks at the high lending rates fixed earlier.
The high interest rate on borrowing is helping the short term profit hunger of the banks . But this high profit trend for now will likely be at the cost of their longer term profitability or viability . This is expressly for the reasons that businesses or the potential entrepreneurs never like a high borrowing rate. Existing customers of the banks are, no doubt, servicing their old debts at the high interest rates which is helping the banks to show high operating profits. But what about the present and the future ? Businesses are presently showing a disinterest in taking bank loans at such high rates of interest. The ones who would like to try their hands at business through bank finance, are also sitting on the fence. They will not opt for investment operations till the banks push down their interest rates on borrowing. Thus, on the whole, additional investment operations are slowing down as a result of the high cost of banking funds. In the longer run, this must have adverse repercussions on the economy from reduced investments.
The banks will also stand to suffer directly as they build up excess liquidity resulting from a laggard pace of borrowing from banks due to the high interest rates. Long standing excess liquidity is something which the banks should want the least. Successful banking involves keeping invested the greater part of their funds or giving away the same as loans by the banks. The banks business is all about giving away their resources as loans from which they can expect good returns. If the banks fail to do this and their surplus funds continue to pile up in the absence of a growing number of keen borrowers which again is linked to the persisting high rate of borrowing, then the banks will have to confront at some stage a serious crisis of their viability even in the mid term not to speak of the longer term. It should be worthwhile for the banks management to explore, therefore, this possibility -- whether they are giving up their longer term health for the glow of short term profits only.
Two factors are contributing to the banks unwillingness or inability to decrease their lending rate. One of them is their unbridled operating costs. The other is seen as sheer greed on the part of their owners or management. Both are capable of being cut short from the management embracing ideas that would be best for the long term health of their institutions. Operating costs can certainly be pruned through conscious policies and their efficient implementation. As for greed, the owners-management should see the very sensible point of controlling the same from taking a hard look at how far they can go with high interest rate on borrowing without hurting their long term interests.
The Bangladesh Bank also needs to step in and vigorously. Its persuasive advices to the banks on these matters have gone largely unheeded. Therefore, it needs to step harder on the pedal. It must urge the PCBs to reduce the spread between the interest provided to depositors against their deposits and the interest charged to borrowers against their loans. Most of the PCBs maintain a difference of over 5 per cent in this spread. Some banks have spreads ranging in the double digits. The international standards for this spread is between 2 to 3 per cent only.
Bangladesh Bank should use its influence and authority to promote a spread conforming to the international standard to be followed by the PCBs. This, on the one hand, will encourage depositors to keep their monies in the banks which should be good for the banks or their liquidity positions in the long run. Presently, banking deposits are also taking flight considerably from the low interests received against deposits. While this process is not hurting the banks in their present positions of having surplus liquidity, it could be a worrying factor over the long run. But Bangladesh Banks efforts in persuading the PCBs to give their depositors reasonable yields against deposits can solve this problem. On the other hand, steps by the Bangladesh Bank leading to reducing of the spread, making it uniform or nearly so for all PCBs and significantly pushing down of the lending rate, these measures should help deposit mobilisation by the PCBs and, more importantly, help them in lightening their load of excess liquidity.
The PCBs have been also noted for drifting away from their traditional role of lending to industries and services in recent years. Banks have been experiencing excess liquidity for a long time. This is expressly because entrepreneurs have shied away from borrowing from the banks to invest particularly in industries.
To some extent, the same fears also gripped the services sector. As a result, banking funds have been lying idle without takers. In these circumstances, banks explored non conventional forms of investments such as providing car loans, housing loans, marriage loans, loans for educational purposes, etc.
The new forms of investments by the banks have proved to be popular. For example, according to a media report, the purchases of 90 per cent of privately owned cars in the roads of Dhaka city during the course of the last decade were done with bank loans. It should be noted that many of the new banking loans are largely of a highly consumptive nature and not so much productive ones. The same do not create as much jobs or expansion of the economy as previous investments of the banks in industries and trade accomplished. Besides, it is also a question mark whether these loans related to servicing living standards of people can remain well performing in the long run if the overall economic conditions or the real economy decline. For example, car loans may not be serviced smoothly by middle class such loan takers or housing loans may not be serviced likewise in case of a general downturn in the economy leading to job losses and dwindling income of those who are now taking these loans. Thus, the banks need to review whether they can progress further with such loans. Banks need to reorient their loan programmes into small and medium enterprises that would both help the economys expansion and help underwrite the security of their loans.
The writer is former deputy managing director of a private commercial bank
