Banks radiate profits on paper

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Banks recorded higher operating profit in 2021, mainly due to the relaxed policy of the Bangladesh Bank which allowed them to recognize income from unpaid loan installments.

An analysis of the operating profits of 22 banks showed that all but one lender recorded higher profits in 2021 than a year ago.

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The forbearance offered by the central bank has helped lenders enjoy strong operating profit, but it would do no good for the banking sector as a whole, analysts have warned.

On the contrary, it will weaken the financial health of banks in the long run, they said.

In accordance with central bank policy, banks were not allowed to treat borrowers as defaulters if they repaid only 15 percent of their total installments payable.

In addition, banks were allowed to transfer unrealized interest on the 85 percent of loan payments to their income books even though the amounts were not paid. It helped the banks to make the big profit.

Among banks, Islami Bank Bangladesh recorded the highest profit, at Tk 2,430 crore, compared to Tk 2,350 crore the previous year.

IFIC Bank posted the strongest growth in operating profit, which rose 144 percent to Tk 775 crore.

Shah Md Moinuddin, deputy managing director of IFIC Bank, said the private lender has also made significant income on loans to individuals.

“We have achieved positive growth in terms of deposit mobilization and loan disbursement,” he said.

Salehuddin Ahmed, a former central bank governor, said the higher profits made by banks apparently gave an indication that the financial health of lenders had improved.

“But, it’s not a real profit because they showed the amount by following an arithmetic calculation,” he said.

“The method will not bring any good for the banking sector, rather it will have a negative impact on the fundamental pillars of the banks.”

According to Ahmed, companies, shareholders and directors of lenders would get higher returns. The easing will do nothing for depositors.

A chief executive of a bank, on condition of anonymity, says directors, including lender shareholders, were supposed to handle a decent amount of dividend last year, but that would end up weakening banks.

Much of the profit did not come from borrower payments. The banks calculated the amount with the expectation that the fund would be realized in 2022.

Banks pay dividends on the basis of net profit, a majority of which comes from operating profit. But since there has been no real profit this time around for many lenders, the gap will need to be filled with available cash, which largely comes from depositors.

Ahsan H Mansur, executive director of the Bangladesh Policy Research Institute, said the high operating profit recorded by banks was just an inflated number, which should be treated as “eye drops.”

This camouflaged the real state of the banking sector, as the majority of banks recorded profits using the relaxed central bank policy, he said.

The former head of the International Monetary Fund pointed out that a good number of loans, which were used to show profits, could slip into the zone of default category this year.

“So the central bank should force banks to improve their supply and their capital base. “

The central bank asked banks to keep an additional 2% allowance as well as the 1% required against loans under the relaxed policy.

The central bank is not expected to extend the forbearance as the strength of banks has already eroded due to the downturn in business resulting from the coronavirus pandemic, Mansur said.

The easing also encouraged the usual defaulters as they were able to avoid the default area by giving a small amount in installments that they otherwise would not have had to pay.

“Banks that have not set aside the required provisions but have transferred income to their benefit will only see their health deteriorate,” Mansur said.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, said banks should be careful in calculating profits because Omicron, the highly mutant variant of Covid-19, was spreading at a faster rate.

“Banks should be putting more emphasis on strengthening the allowance base rather than calculating profit because we don’t know what lies ahead.”

Emranul Huq, managing director of Dhaka Bank, credited his bank’s default loan collection program with solid earnings from last year.

The lender has also made a magnificent profit on the export and import business, he said.

Dhaka Bank’s profit was Tk 723 crore last year, up 39% year-on-year.

Kamal Hossain, managing director of Southeast Bank, said his bank was facing lower ranked loans in 2021 than the previous year due to the BB rating policy.

He also managed a good income from foreign exchange related activities. Bank of the Southeast operating profit was Tk 1,016 crore, an increase of 25% year-on-year.

The SNB’s profit, however, plunged to Tk 238 crore from Tk 920 crore, the only lender among the 22 that posted a lower profit last year than in the previous year.

MD Mehmood Husain, managing director of the National Bank, said the central bank imposed an embargo on disbursing new loans last year, resulting in lower profits.

“Plus, delinquent loans have increased. And that has forced us to hold more provisions to keep financial health stable.”

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