Finance Minister of Bangladesh has recently stated that more than 60 per cent of industrial loan (concentration risk) has gone bad. As on June-2021 as stated by central bank a total of 8.07 per cent advances impaired which is daunting. And surely, Non Performing Assets ratio will be higher if the distress of Covid-19 outbreak is considered along with the relaxation extended by central bank. The socio-economic interruption, deformation in trade, price level volatility, exchange rate instability, a surge in financial risk, leanings of savings, increase expenditures, layoff of industries, decrease in sales growth, lower credit growth, execution of lending rate cap, significant non-performing loans, and shock in capital adequacy with a reduced asset portfolio are the key for accelerating negative growth, and, subsequently drop-down FIs.
In addition, many of our clients are frequently requesting us to extend validity of their sanctioned facility under Covid-19 stimulus packages (1st phase) at 9.00 per cent profit rate as they are still in payment pause though this facility provided for one year at 4.00 per cent profit rate or will adjust their existing stimulus facility with a condition of sanctioning new facility under 2nd phase of Covid-19 stimulus packages. As such in a situation, recovery of stimulus packages may also augment Non Performing Assets of a bank, and thus, prolong survival.
While banks go into this pandemic in a stronger position than the global financial crisis along with Covid-19 pandemic, the current environment presents particular challenges and disruption that could impact a bank’s risk profile. The way people live their lives has changed. And expectations of banks are changing too. FIs are looking for delivering not only financial performances but a positive contribution to society, benefitting customers and communities as well as stakeholders.
And FIs are start getting the signs of negative impact at the close of 2021. What points FIs are needs to highlights? What new approach FIs need to adopt for a sustainable way forward? Lending rate cap in a free market economy, increasing classification due to the Covid-19 pandemic after withdrawal of relaxation imposed by central bank, the slower credit growth in the private sector, limitations imposed on non-funded income and fees, accumulative provision requirement, and decreased NPL-adjusted return in loan portfolios will have a direct negative impact on income margins of banks. Also, it will further constrict banks' net profit margin and profitability. It is assumable that stakeholders may understand the circumstances and make an accommodative mindset.
Keeping in mind that there is no other alternative but to efficiently handle customer’s deposit, managing balance sheet, cash management and maintain a reasonably good spread with a view to posting positive growth. But thinking forward, particularly in 2022, loan recovery will be a big challenge, particularly recovery of stimulus packages as many customers are still on payment pause as I stated earlier, under central bank's directions to ease off the pandemic shock on businesses.
When the payment pause holiday will be boosted the banking industry will face its true challenges, and, it is assumed that client will postpone their repayment of loan installment as many months as they can. Keeping in mind that banks deal with depositors' money and accountable to shareholders and other stakeholders, and hence, loan recovery will remain in concern.
Central banks, regulatory agencies and financial firms all have roles to play in expanding the availability of financial products and services to “unbanked” and “underserved” populations. In general, “underserved” means low-income segments populations, and, also means, peoples who are excluded from FIs because of their disability. Banks may introduce voice banking services under virtual banking initiative for disable community as part of its financial inclusion. Biometrics voice solutions and further advancements in artificial intelligence can accelerate the visually impaired audience’s entry into mainstream banking. The banking sector needs to return its focus to people and society. By adhering new technologies, banks can do that.
Ways of recovering:
- Working capital support for the affected businesses and industries under Covid-19 stimulus packages (1st phase & 2nd phase) for validity of one year may be extended and converted to short term loans and loan repayment to banks may start in order to boost-up banking sector, otherwise, a major portion of fund disbursed under Covid-19 stimulus packages may prolong financial revival.
- As a major portion of stimulus facility disbursed or will be disbursed under Covid-19 stimulus packages (1st phase & 2nd phase) to large industries, bank officials should be more cautious since willful defaulters may take this opportunity to default once again. Bank officials are/will also be prompt to find out potential Covid-19 affected loan seekers, since no genuine objectives and quantitative criteria for defining the term affected has been declared by the regulatory bodies. Loan defaulters should not be allowed to access any of the Covid-19 related liquidity support packages.
- Legal reforms to/be enhance/enhanced and legal process to be accelerate/accelerated for improvement of speed-up loan recovery. Forming a dedicated bench at high court for disposing-off of loans related writ cases and make sure of deposit of handsome amount against outstanding debts of loan defaulters incase of stay orders. Stay orders will not be executed if any defaulted borrowers fail to deposit of required sum of money.
- For the consequences of rising NPLs and the surge of additional risk concerns in the market, banks will have to re-examine the existing loan portfolios where any growth in credit exposure might need to allocate more capital to address the higher credit exposure. The additional capital requirement will be a major difficulty for every FI, especially for the new banks and the historically problematic banks.
- Precaution for banks itself in all possible measures is badly required. Banks with bigger portfolios in risky segments might have a greater chance of suffering larger NPL blows. Ensure, no new loans get classified and to make this success, lending discipline is a must.
- Risk management will be done on a portfolio basis. FIs need to be technologically advanced to manage portfolios and entire process has to be automated for accuracy, monitoring and quick turnaround. Also, FIs have enough and more network coverage. Banks have/will have to maintain a separate loan mutilation budget and should be reviewed periodically. Focusing retail investment will lead to diversify risks for banks and avoid concentration of large exposure to single borrower. A detailed analysis of cash flow statements along with balance sheet for medium sized entities should be reviewed on case to case basis.
- Over invoicing and trade based money laundering may initiate/will be initiated as central bank has given provision to banks to provide loans for import of coronavirus related life-saving drugs, kits, equipments and other essential medical items without repayment guarantee, and in some cases close to zero tariff. A forward looking step by bankers can prevent trade based money laundering.
- A multi-stakeholder taskforce consisting of representatives from the various ministries, central bank, commercial banks, trade bodies, civil society, non-government organizations and academia may be formed for monitoring end user of the Covid-19 liquidity support packages and evaluating their effectiveness.
- Steadfastness capital structural challenges could accelerate the post-COVID-19 recovery. Restructuring priorities like diversification of exports beyond the RMG sector, deepening the financial sector, improving urbanization, and strengthening public governance. Human capital development will be on high. Minimizing climate risks vulnerability would support the elasticity of economic development or absorbing future shocks. Rotating towards green growth could support the sustainability of development outcomes for the next generation. FIs can step up its recovery from economic downturn if right policies are implemented on time.
Confidence and trust is the key of a financial institution. And Covid-19 pandemic has forced FIs to go for digital solutions under the umbrella of virtual banking for customers and find new ways to stay connected.
The writer works at Social Islami Bank Limited as Manager Operations, Certified Finance Specialist, Certified Project Management Analyst.