Banks are now going through one of their worst times. Their profitability declined substantially during the last two to three years amidst a passive stance of the country's private sector on fresh investment. Banks' problems compounded further due to an upturn in the volume of non-performing loans (NPL). Despite window-dressing the size of the NPL has grown bigger.
The situation has become far more complex lately. The primary sources of earning profit by the banks, lending to the private sector being at the top of the list, has almost dried up. And the secondary avenues of investment that include listed stocks, treasury bonds and call money market, are either shut or have become unattractive, in terms of return. The banks are truly worried about their profitability during the current calendar year.
The lower demand for fund from the private sector has been hurting the business interest of the banks and other financial institutions most. A hostile political climate had discouraged the private sector from making fresh investments during the period preceding the January 05 general elections in 2014 and the first quarter of 2015.
However, such hostility is nothing new in this country and the people are very much familiar with such unsavoury developments. But never before, the private sector had responded so negatively, in terms of investment, in a restive political climate.
The lull in the private sector investment activities has been persisting for too long a period. Almost three months have gone by since the BNP-led alliance's retreat from disruptive political programmes, but the private sector investment has not picked up to the desired level.
The finance minister in his recent budget speech also had admitted that there is a sluggish trend in private sector investment. Such a trend is largely responsible for holding back the country's economic growth rate well below the desired level. The lukewarm attitude of the private sector in making fresh investment is not only affecting the interest of the economy but also that of banks and financial institutions.
But the situation should have been altogether different. The banks have lowered their lending rates to an attractive level in recent months at the cost of depositors. In fact, the depositors holding savings accounts are getting a negative return while the holders of term deposits receiving a very marginal return of one or two per cent, if the average rate of inflation is adjusted with the rates of interest offered by banks.
Yet such attractive lending rates have been failing to woo genuine borrowers. However, one issue cannot be overlooked. The banks these days exercise caution in granting term loans because of the unearthing of a number of large loan scams. The central bank is also keeping a close watch on the loan portfolios of individual banks.
Moreover, the availability of cheap foreign loans has been encouraging many medium to large parties to go for those either to make fresh investments or repay the local loans.
The lack of interest in the private sector to secure loans aside, the banks are in a soup because of the government's decision to suspend auction of treasury bonds. Usually, scheduled banks invest almost 90 per cent of their idle money in government bonds that generate returns between 8.4 per cent and 11.97 per cent.
The stock market could be yet another area for the banks to put in a part of their idle funds and get some returns. But the cap enforced by the central bank with regard to investment in equities is depriving the banks of that facility. The banks will be required to bring down their exposure to stock market to an amount equivalent to 25 per cent of their individual paid-up capital by July 2016.
A good number of banks invested a substantial amount of money in listed stocks in the years 2009 and 2010. Prior to the collapse of the market in December 2010, they had earned hefty profits. But when the market rally turned unsustainable, the banks decided to withdraw, leading to the collapse of the market.
However, many banks got their investment in stock market stuck-up because of severe erosion in prices of stocks. The worth of the stuck-up funds of many banks is far above the cap enforced by the central bank. Moreover, the current state of the country's stock market is not at all inspiring for the investors.
For instance, the value of the banks' stocks constitutes a large part of the market capitalisation of the bourses. But there has been severe erosion in prices of the stocks of listed banks. The stocks of many banks are now being quoted at prices below their face value. The recent financials published by banks also do not indicate any possible change in the current situation.
Another area from where banks, which have surplus funds, can expect some return is the call money market. The demand for funds in the call money market in recent weeks has been very low. The call money rate has come down to only 5.24 per cent.
However, there could be a temporary change in the situation on the eve of the upcoming Eid festival when consumers spend a lot of money on apparels, shoes, household goods and journeys.
With disruptions in earning from major traditional sources, the banks have reasons to worry about their profitability and also financial health. But they do not have any control over a few factors that have a direct bearing on their overall performance. The investment climate is one factor where the government could play a decisive role, in terms of removing the fear of political instability and improving infrastructure and energy supply situation.
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