Banks glowing with paper profit

Banks clocked higher operating profit in 2021 mainly due to the Bangladesh Bank's relaxed policy that allowed them to count income from unrealised instalments of loans.

An analysis of operating profit of 22 banks showed all of the lenders except one posted higher profit in 2021 compared to a year ago.

The forbearance offered by the central bank helped the lenders enjoy the high operating profit but this would not bring any good for the banking sector as a whole, warned analysts.

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

As per the central bank policy, banks were not allowed to treat borrowers as defaulters if they repaid only 15 per cent of their total instalments payable.

Besides, banks were permitted to transfer the unrealised interests on the 85 per cent of the loans instalments to their income book although the sums were not paid. This helped banks register the hefty profit.

Of the banks, Islami Bank Bangladesh recorded the highest profit, at Tk 2,430 crore, last year in contrast to Tk 2,350 crore the year before.

IFIC Bank posted the highest growth in operating profit, which rose 144 per cent to Tk 775 crore.

Shah Md Moinuddin, deputy managing director of IFIC Bank, said the private lender had also posted a significant income from retail loans.

"We have managed a positive growth in terms of mobilisation of deposits and disbursement of loans," he said.

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

"But, this is not an actual profit because they showed the amount by following an arithmetical calculation," he said.

"The method will not bring any good for the banking sector, rather it will put an adverse impact on the fundamental pillars of banks."

According to Ahmed, businesses, shareholders and directors of lenders would get higher returns. The relaxation will not give anything to depositors.

A managing director of a bank, on condition of anonymity, says that the directors, including the shareholders of the lenders, were supposed to manage a good amount dividend last year, but this would ultimately weaken the banks.

A major portion of the profits did not derive from the loan instalments of borrowers. Banks calculated the amount by anticipating that the fund would be realised in 2022.

Banks provide dividend based on the net profit, a majority of which come from the operating profit. But as there has not been actual profit this time for many lenders, the gap will have to be met by the cash available that largely come from depositors.

Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, said that the high operating profit logged by the banks was just an inflated figure, which should be treated as "eyewash".

This has camouflaged the actual state of the banking sector as the majority of banks have registered the profit by using the central bank's relaxed policy, he said.

The former official of the International Monetary Fund pointed out that a good number of loans, which have been used to show the profit, may slip into the default zone category this year.

"So, the central bank should compel banks to improve their provision and capital base."

The central bank has asked banks to preserve an additional 2 per cent provision along with the required 1 per cent against the loans under the relaxed policy.

The central bank should not extend the forbearance as the strength of banks has already eroded due to the business slowdown stemming from the coronavirus pandemic, Mansur said.

The relaxation has also encouraged the habitual defaulters as they have been able to avoid the default zone by giving a small amount in installments than they would have to be paid otherwise.

"The banks that have not set aside required provisions but transferred income to their profit will only see their health deteriorate," said Mansur.

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

"Banks should place more importance in strengthening the provision base rather than calculating profit as we don't know what lies ahead."

Emranul Huq, managing director of Dhaka Bank, credited the default loan recovery programme of his bank for the robust profit last year.

The lender also made a magnificent profit from the businesses of exports and imports, he said.

Profit in Dhaka Bank stood at Tk 723 crore last year, up 39 per cent year-on-year.

Kamal Hossain, managing director of Southeast Bank, said that his bank faced lower classified loans in 2021 than the previous year due to the BB classification policy.

It has also managed a good income from foreign exchange-related businesses. The operating profit of Southeast Bank was Tk 1,016 crore, an increase of 25 per cent year-on-year.

The profit at National Bank, however, nosedived to Tk 238 crore compared to Tk 920 crore, the only lender among the 22 that saw lower profit last year than the previous year.

MD Mehmood Husain, managing director of National Bank, said that the central bank imposed an embargo on the disbursement of new loans last year, leading to a decline in profit.

"In addition, default loans went up. And this has forced us to preserve more provision to keep the financial health stable."