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NBFIs see income diminish as they offer higher rates to depositors

Interest spread falls to a historical low of 0.44 per cent in April, says BB

BABUL BARMAN | May 25, 2023 00:00:00

Non-bank financial institutions (NBFIs) had to narrow the gap between borrowing and lending rates to stay in business, which inevitably took away a major chunk of their profits in the January-March quarter, compared to the same quarter last year.

This happened against the backdrop of dwindling deposits in banks and other financial institutions amid raging inflation and economic distress.

Weaker banks offered higher deposit rates to attract depositors, said an executive of BD Finance, even after the central bank in January removed the 6 per cent cap on the minimum deposit rate, which was in effect since June last year. For NBFIs, the minimum deposit rate cap was 7 per cent, imposed around the same time.

NBFIs normally offer higher deposit rates than banks to encourage both institutional and individual depositors to choose them for investments.

When some banks offered deposit rates as high as 8 per cent in the wake of a liquidity crunch, many institutional investors moved their money from NBFIs to banks for higher returns, said the BD Finance executive who preferred not to be named.

To remain in business, some NBFIs started offering higher rates.

But the maximum lending rate was set at 11 per cent for the financial institutions in July last year, and it is still in effect. Hence, the interest spread kept shrinking, hurting the business.

Earnings of nine NBFIs that published first quarter (Q1) financial reports dropped between 16 per cent and 99 percent year-on-year.

Of the 23 NBFIs listed on the Dhaka Stock Exchange, more than five others have not released data for several quarters as their financial condition deteriorated due to widespread scams and irregularities.

The rest are yet to publish reports.

The aggregate profit of the nine NBFIs plummeted 53 per cent year-on-year to Tk 802 million in January-March this year.

"The main business of the non-bank financial institutions was hit due to the narrowing of the gap between the interest rate on deposits and the lending rate," said Mominul Islam, managing director of IPDC Finance.

IPDC Finance's profit tumbled 93 per cent year-on-year to Tk 15.14 million in January-March.

Its interest spread was 3.58 per cent in January-March last year, which dropped to 2.90 per cent in the same quarter this year.

The average interest spread of NBFIs - both listed and non-listed - was slashed to 1.14 per cent in January-March this year from 2.97 per cent a year ago.

NBFIs' interest spread fell to a historical low of 0.44 per cent in April this year, according to Bangladesh Bank data disclosed on Wednesday.

Ten NBFIs' interest rate gap turned negative that month, meaning the deposit rates offered by them were higher than the lending rate.

On top of the shrinking interest spread, NBFIs experienced a sharp fall in profit year-on-year from the stock market.

The Investment Corporation of Bangladesh (ICB), for example, saw a 99 per cent decline in profit to Tk 2.73 million in the quarter as the corporation failed to generate expected capital gains due to the floor price on securities.

It does not invest anywhere other than the capital market.

"We could not sell-buy shares due to the floor price," said Md Abul Hossain, managing director of the ICB.

The Corporation's capital gains slumped 58 per cent year-on-year to Tk 520 million in the January-March quarter. Interest and dividend income also slumped simultaneously.

Turnover, another important indicator of the market, was lower during the quarter, reducing income from commissions charged for each share transaction.

LankaBangla Finance's consolidated profit fell 66 per cent year-on-year to Tk 79 million in January-March this year as its subsidiary LankaBangla Securities endured 96 per cent profit erosion to Tk 5.38 million during the period.

Bangladesh Finance too reported a 75 per cent year-on-year decline in its consolidated profit in the same quarter to Tk 25.23 million due to lower interest income and sluggish stock market trading.

Islamic Finance and Investment logged 79 per cent lower profit to Tk 8.79 million while United Finance bagged Tk 5.10 million, a 53 per cent decline year-on-year, and IDLC Finance reported a 29 per cent plunge in profit for the three months to March.

DBH Finance, the largest and specialised housing finance institution in the private sector, saw a 16 per cent year-on-year decrease in profit to Tk 261 million in January-March.

Meanwhile, eight listed NBFIs --- Bangladesh Industrial Finance, Fareast Finance, FAS Finance, First Finance, International Leasing, Peoples Leasing, Premier Leasing, and Union Capital --- are trading below the face value of Tk 10 each share.

Scam-hit four financial institutions -- People's Leasing, International Leasing, BIFC and FAS Finance -- are struggling to repay their depositors upon maturity of the schemes.

Prashanta Kumar Halder, former managing director and CEO of NRB Global Bank, who was arrested last year in India, had been charged with embezzling a huge amount of money from those four NBFIs. He had taken control over the financial institutions by buying shares anonymously.

Due to widespread scams in some NBFIs, the overall volume of non-performing loans soared to 24.61 per cent in September last year.

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