Testing year for banks

The year 2016 witnessed an intense competition among banks in terms of rates, but it was a boon for the clients as they got improved services and better facilities at costs lower than before.

Increasing off-shore borrowing by reputed local business houses has reduced banks' scope to lend more, while rising nonperforming loans are eating up profits in the name of provision.

Banks with surplus liquidity also offered additional benefits in the just-concluded year to retain good customers who have a record of regular loan payments.

Amid this situation, bankers predicted that their profits would erode in 2016 compared to the previous years. Accordingly, the government will also get less revenue from the banking sector.

“It was a tough year for banks and there was huge competition to hook new customers,” said Abul Kashem Mohammad Shirin, managing director of Dutch-Bangla Bank or DBBL.

If a bank offers a good client loans at 9 percent interest rate, another bank tries to bag the customer by offering an even lower rate. The rate goes down further if a third bank comes into the scene.

Commission, fees and charges for different services also went down significantly in 2016. For example, Shirin said, DBBL used to charge 0.6 percent as letter of credit (LC) commission per quarter between 2014 and early 2015, but now it has come down to only 0.1 percent.

Read more on b3The year 2016 witnessed an intense competition among banks in terms of rates, but it was a boon for the clients as they got improved services and better facilities at costs lower than before.

Increasing off-shore borrowing by reputed local business houses has reduced banks' scope to lend more, while rising nonperforming loans are eating up profits in the name of provision.

Banks with surplus liquidity also offered additional benefits in the just-concluded year to retain good customers who have a record of regular loan payments.

Amid this situation, bankers predicted that their profits would erode in 2016 compared to the previous years. Accordingly, the government will also get less revenue from the banking sector.

“It was a tough year for banks and there was huge competition to hook new customers,” said Abul Kashem Mohammad Shirin, managing director of Dutch-Bangla Bank or DBBL.

If a bank offers a good client loans at 9 percent interest rate, another bank tries to bag the customer by offering an even lower rate. The rate goes down further if a third bank comes into the scene.

Commission, fees and charges for different services also went down significantly in 2016. For example, Shirin said, DBBL used to charge 0.6 percent as letter of credit (LC) commission per quarter between 2014 and early 2015, but now it has come down to only 0.1 percent. Similarly, LC acceptance commission slid down to zero from 0.4 percent for good clients, he said. Surplus liquidity and growing competition among banks have contributed to the sharp fall of lending rates in the outgoing year, said Shafiqul Alam, managing director of Jamuna Bank.

The weighted average lending rate came down to 10.03 percent in October from 11.05 percent in January this year, according to data from the Bangladesh Bank. “Those days of high returns for banks have gone,” Alam said.

Rising NPL has further added to the banks' woes as it eats up profits in the name of provision. “If a big loan becomes default, a bank's entire profit may go towards provisioning,” said MA Halim Chowdhury, managing director of Pubali Bank. Banks are in real trouble with loans of some big business groups, he added.

As of September 2016, the cumulative NPLs of banks reached Tk 65,731 crore or 10.34 percent of the total outstanding loans. In terms of percentage, it is the highest since June 2014, according to BB. And if the written-off loans are added to the NPLs the amount will come to Tk 110,000 crore.

“Moreover, offshore borrowing by local clients has been squeezing banks' hands to lend more,” Chowdhury said, adding that borrowers adjust local loans with these low-cost offshore loans. As a result, local lenders are deprived of interest earnings against the loans, he said.

Finally, banks are in a dilemma regarding a central bank order that asked all banks to give 10 percent rebate on the interests they earned from borrowers with three years of a regular loan repayment record.

“Good borrowers are already getting the interest rate benefits. They are offered special rate, which is as low as 7.5 percent against the market rate of 10-11 percent,” said a managing director of a bank wishing not to be named.