About banks' interest spread and non-performing loans
Tuesday, 18 November 2008
Shamsul Huq Zahid
A recent Bangladesh bank report has revealed an unsatisfactory performance of the country's scheduled banks as far as their loans are concerned.
The banks have the second highest interest rate spread (5.75 per cent) in South Asia, Sri Lanka being at the top (8.16 per cent). The share of their idle loans or non-performing loans (NPLs) is the highest (14 per cent) in Asia.
A lot has been said and the central bank has tried in vain to bring down the interest rate spread. After a lot of persuasion by the Bangladesh Bank governor, the bankers agreed only recently to lower the margin. Some banks have brought down their spread by lowering lending rates in some areas. However, in effect, the decline has not been proved to be that much helpful for the borrowers. Actually, the banks focused their attention to how best they can satisfy the central bank, not the borrowers representing the real sectors of the economy.
However, one cannot also overlook the predicaments of the banks. In an economy having an inflation well over 10 per cent, and the government offering 12 per cent rate of return or more to the buyers of its savings instruments and a booming stock market, the banks are left with no option other than offering attractive rates of interest to the depositors. There is no denying that higher deposit rates lead to higher lending rates.
However, the large gap between deposit and lending rates in case of some banks hardly escapes notice of the most clients. Some local as well as foreign commercial banks are paying less to their depositors and taking more from their borrowers.
The interest rate spread (IPS) can be brought down in many cases by cutting down many unnecessary and hidden administrative costs. Some private banks, apparently, are in a rate race to open branches in Dhaka and other major cities and towns with all the eye-catching features and rope in well-known bankers offering exorbitant pay packages.
Before the watchful (?) eyes of the central bank, directors of some banks are still enjoying undue perks and privileges at the cost of the banks. Instances are that all the directors of a private commercial bank are using bank vehicles round the clock. These vehicles, on paper, are attached to a number of branches of that particular bank whose balance sheet does not permit it to be so much extravagant.
True, banks will not be able to offer money to borrowers at cheap rates if they do not get deposits at cheaper rates. The question is: why should one deposit his or her money with banks if he or she has alternative options in the market?
So, banks are left with no option other than offering attractive, if not similar to the ones offered in case of alternative investment options, rate of return so that people feel encouraged to deposit their funds with banks. Of course, the banks do enjoy an edge over investments in stock market because of its uncertain nature.
But while offering better yield to depositors, the banks do need to think about their prospective borrowers. An ideal banker tries his or her best to charge less on the borrowers because it helps the latter to better run their operations and return the borrowed funds plus interest in time.
In the case of Bangladesh, the situation has rather been opposite and consequences have not been palatable. Barring the willful defaulters, hundreds of borrowers have defaulted on the repayment of their loans for a variety of reasons, the higher lending rate included.
The share of the non-performing or classified loans in the total outstanding loans of the commercial banks is estimated at 14 per cent. The bulk of the NPL, however, belong to the state-owned banks.
However, the actual size of the NPL would be much bigger, if the written-off bad debts are taken into account. In that case, the total size of the NPL would be around 23 to 24 per cent. But the state-owned banks have always been carrying a heavy burden of NPL for a variety of reasons, including the governmental interference in loan and management decisions of these banks.
The extent of the problem is better represented by the NPL figures of these banks. The size of the NPL in the country's largest bank, the Sonali Bank, was Tk. 85.47 billion as of June 30 last, which was equivalent to nearly 45 per cent of the bank's total outstanding loan amount. The amount of classified loan of the bank had increased by nearly 5.0 per cent in the last quarter of the last fiscal despite recovery of Tk. 2.46 billion from its defaulting borrowers during the same period. The sizes of the NPL were nearly 20 per cent for Janata Bank and 27.50 for Agrani Bank of their respective total outstanding loans as of June 30 last.
The government with the help of the multilateral lenders has been trying to improve the situation in these banks through management reforms. All the three banks have been transformed into corporate entities and top managers have been hired from the private sector on contractual basis.
However, as far as the NPL is concerned, the situation has not improved much. The finance adviser has recently expressed his dismay at the situation and even hinted at terminating the job contracts of the CEOs of these banks. The problems of state-owned banks have not created overnight. Rather, those have been accumulated over the years because of their inefficient and corrupt management and the government's total indifference. The newly appointed CEOs do not have magic wands to bring about a radical change in a matter of days or weeks. They need more time to improve the situation.
The days of state-owned banks' dominance in the banking sector are over and the private sector banks are now calling the shot. The private banks should learn from the mistakes committed in the past by the public sector banks and try to stay competitive by becoming friendly to both depositors and borrowers and shunning irregularities and unnecessary administrative expenditures. All these might become rather compulsory soon for the banks because of the gloomier days that seem waiting in the corner.
zahidfe@yahoo.com
A recent Bangladesh bank report has revealed an unsatisfactory performance of the country's scheduled banks as far as their loans are concerned.
The banks have the second highest interest rate spread (5.75 per cent) in South Asia, Sri Lanka being at the top (8.16 per cent). The share of their idle loans or non-performing loans (NPLs) is the highest (14 per cent) in Asia.
A lot has been said and the central bank has tried in vain to bring down the interest rate spread. After a lot of persuasion by the Bangladesh Bank governor, the bankers agreed only recently to lower the margin. Some banks have brought down their spread by lowering lending rates in some areas. However, in effect, the decline has not been proved to be that much helpful for the borrowers. Actually, the banks focused their attention to how best they can satisfy the central bank, not the borrowers representing the real sectors of the economy.
However, one cannot also overlook the predicaments of the banks. In an economy having an inflation well over 10 per cent, and the government offering 12 per cent rate of return or more to the buyers of its savings instruments and a booming stock market, the banks are left with no option other than offering attractive rates of interest to the depositors. There is no denying that higher deposit rates lead to higher lending rates.
However, the large gap between deposit and lending rates in case of some banks hardly escapes notice of the most clients. Some local as well as foreign commercial banks are paying less to their depositors and taking more from their borrowers.
The interest rate spread (IPS) can be brought down in many cases by cutting down many unnecessary and hidden administrative costs. Some private banks, apparently, are in a rate race to open branches in Dhaka and other major cities and towns with all the eye-catching features and rope in well-known bankers offering exorbitant pay packages.
Before the watchful (?) eyes of the central bank, directors of some banks are still enjoying undue perks and privileges at the cost of the banks. Instances are that all the directors of a private commercial bank are using bank vehicles round the clock. These vehicles, on paper, are attached to a number of branches of that particular bank whose balance sheet does not permit it to be so much extravagant.
True, banks will not be able to offer money to borrowers at cheap rates if they do not get deposits at cheaper rates. The question is: why should one deposit his or her money with banks if he or she has alternative options in the market?
So, banks are left with no option other than offering attractive, if not similar to the ones offered in case of alternative investment options, rate of return so that people feel encouraged to deposit their funds with banks. Of course, the banks do enjoy an edge over investments in stock market because of its uncertain nature.
But while offering better yield to depositors, the banks do need to think about their prospective borrowers. An ideal banker tries his or her best to charge less on the borrowers because it helps the latter to better run their operations and return the borrowed funds plus interest in time.
In the case of Bangladesh, the situation has rather been opposite and consequences have not been palatable. Barring the willful defaulters, hundreds of borrowers have defaulted on the repayment of their loans for a variety of reasons, the higher lending rate included.
The share of the non-performing or classified loans in the total outstanding loans of the commercial banks is estimated at 14 per cent. The bulk of the NPL, however, belong to the state-owned banks.
However, the actual size of the NPL would be much bigger, if the written-off bad debts are taken into account. In that case, the total size of the NPL would be around 23 to 24 per cent. But the state-owned banks have always been carrying a heavy burden of NPL for a variety of reasons, including the governmental interference in loan and management decisions of these banks.
The extent of the problem is better represented by the NPL figures of these banks. The size of the NPL in the country's largest bank, the Sonali Bank, was Tk. 85.47 billion as of June 30 last, which was equivalent to nearly 45 per cent of the bank's total outstanding loan amount. The amount of classified loan of the bank had increased by nearly 5.0 per cent in the last quarter of the last fiscal despite recovery of Tk. 2.46 billion from its defaulting borrowers during the same period. The sizes of the NPL were nearly 20 per cent for Janata Bank and 27.50 for Agrani Bank of their respective total outstanding loans as of June 30 last.
The government with the help of the multilateral lenders has been trying to improve the situation in these banks through management reforms. All the three banks have been transformed into corporate entities and top managers have been hired from the private sector on contractual basis.
However, as far as the NPL is concerned, the situation has not improved much. The finance adviser has recently expressed his dismay at the situation and even hinted at terminating the job contracts of the CEOs of these banks. The problems of state-owned banks have not created overnight. Rather, those have been accumulated over the years because of their inefficient and corrupt management and the government's total indifference. The newly appointed CEOs do not have magic wands to bring about a radical change in a matter of days or weeks. They need more time to improve the situation.
The days of state-owned banks' dominance in the banking sector are over and the private sector banks are now calling the shot. The private banks should learn from the mistakes committed in the past by the public sector banks and try to stay competitive by becoming friendly to both depositors and borrowers and shunning irregularities and unnecessary administrative expenditures. All these might become rather compulsory soon for the banks because of the gloomier days that seem waiting in the corner.
zahidfe@yahoo.com