Profits of most listed non-bank financial institutions (NBFIs) plummeted in the first nine months of 2019 as a result of panic stemming from the liquidation of the People’s Leasing and Financial Services (PLFS).
The trepidation prompted people to withdraw deposits from the NBFIs, leading to a drop in liquidity and lending in the sector.
The situation was exacerbated by the prevalence of a high amount of non-performing loans alongside high interest rates of banks.
The non-banks also suffered a blow from their capital market exposure as stocks have been on a downward curve for several months.
Dhaka Stock Exchange data shows a fall in earnings for 14 out of the 23 listed NBFIs while a rise for eight. PLFS did not publish its quarterly earnings as it is undergoing liquidation.
“PLFS liquidation made it difficult for the sector to attract depositors. Many depositors now want to withdraw their funds,” said Chowdhury Manzoor Liaquat, managing director of Union Capital.
On June 27, the finance ministry instructed the central bank to shutter the PLFS for its failure to improve its conditions, in a first for Bangladesh’s financial sector.
The government also announced that another four or five companies were being scrutinised for their lackluster performance and might face the same.
Liaquat said the recent liquidity crunch in the banking sector fuelled the rise of interest rates.
NBFIs provide long-term loans by borrowing from banks and taking deposits from people. With banks’ interest rates continuing to stay high despite the government’s endeavour to bring about a single digit, NBFIs found it tough to make profits, he said.
According to an analysis of EBL Securities, the amount of interest paid by NBFIs rose to Tk 4,671 crore in the nine months from Tk 4,152 crore in the same period a year ago.
During the period, Union Capital’s earnings per share stood at Tk 1.31 in the negative whereas it was Tk 0.10 in the positive a year ago. Midas Financing faced the same fate.
For Bangladesh Industrial Finance, Fareast Finance, First Finance and the Investment Corporation of Bangladesh, it was a piling up of previous year’s losses.
However, Bay Leasing and Investment and Prime Finance and Investment showcased a turnaround to log in profits. Iftekhar Ali Khan, the Bay’s managing director, also blamed the poor performance of the sector on panic-driven fund withdrawals.
As of September, the NBFIs’ deposits totalled Tk 50,139 crore, a reduction of 2.83 percent from a year ago.
Liquidation is not a common practice in Bangladesh and the announcement eroded people’s confidence, he said, adding that Bay made it through for its portfolio being smaller than the market average.
Khan recommends all NBFIs strengthen their portfolios by reducing dependence on the banking sector and intensifying marketing to regain people’s confidence.
A top official of an asset management company having a huge investment in the NBFIs’ stocks said the profit downturn was perpetuated by losses in their stockmarket investment as the DSE index had also fallen.
In the nine months, income from stock market investments declined to Tk 558 crore whereas it was Tk 793 crore in the past year.
The official said the NBFIs also had to keep a higher amount of provisioning due to high NPLs.
By mid-2019, defaulted loans in the NBFIs stood at Tk 8,068 crore whereas it was Tk 5,460 crore at 2018’s end.