Without BB’s urgent fine-tuning, banks would fail to deliver stimulus packages

A goal without a plan is just a wish, said the French writer and pioneering aviator Antoine de Saint-Exupéry.

And how the Bangladesh Bank is going about implementing the mammoth stimulus package announced by the government to ensure a soft landing to the stunning nosedive in economic activities brought on by the coronavirus outbreak in the country reminds one of that saying.

The best and fastest way to learn a sport is to watch and imitate a champion, said the French alpine ski racer Jean-Claude Killy, and the country's central bank has three such specimens in the form of the Bank of England (BoE), the European Central Bank (ECB) and the Reserve Bank of India (RBI), to inform its planning process.

For instance, the BoE is purchasing treasury bills and bonds worth £200 billion from banks under its quantitative easing to inject adequate cash into lenders such that they can lend to the private sector smoothly.

If required, the UK's central bank will purchase more securities to protect both banks and the private sector from the ongoing economic fallout. 

Because, a failure to lend would create a vicious circle of more bankruptcies and higher losses on loans that would come back to hit the banks themselves, said the BoE Governor Andrew Bailey last week.

"The better path for banks is to keep lending … We keep banging this message home. If the system [ensures a good supply of loans], we'll get a better outcome."

The ECB has taken on similar measures, as it set off to purchase bills and bonds worth €750 billion from the market.

On April 30, the ECB said it would now pay banks at least 0.50 per cent and up to 1 per cent if they tap its three-year loan auction under the Targeted Long-Term Refinancing Operations (TLTRO).

This will help the Eurozone banks earn as much as €3 billion by borrowing from the ECB's package of €3 trillion under the TLTRO.

The RBI, the central bank of the neighbouring country, is also providing Rs 100,000 crore to banks under the long-term repo operation (LTRO) of three-year papers at a floating rate.

This is a great measure to help recession-affected lenders as the programme will cushion them to keep lending.

The three central banks -- BoE, ECB and RBI -- have also instructed lenders not to provide last year's dividends to both sponsors of banks and investors.

The decision -- which comes after learning a lesson from the last recession of 2007-08, when many banks had collapsed -- has helped lenders prop up their capital base during the ongoing recession, touted to be the worst since the Great Depression of the 1930s.

But the Bangladesh Bank is not thinking along this line; rather, some decisions taken by the central bank have created a worrisome situation for banks.

For instance, the BB directed banks on May 2 to transfer all interest accrued or to be accrued between April 1 and May 31 this year from all of their loans to an interest-free blocked account.

Banks will be deprived of transferring nearly Tk 14,000 crore to their income book due to the decision, said managing directors of four banks requesting anonymity to speak candidly on the matter.

"No bank will enjoy profit this year if the amount is stuck in a block account," said Syed Mahbubur Rahman, managing director Mutual Trust Bank.

Last year, banks collectively logged in operating profits of Tk 25,000 crore.

Defaulted loan, which is a major problem for the country's banking sector, may fuel staggeringly in the days ahead due to the ongoing recession, Rahman said.

A record Tk 50,186 crore was rescheduled last year, often by breaching banking norms, and yet defaulted loans hit Tk 94,313 crore at the end of 2019, up 0.42 per cent year-on-year, according to data from the BB.

Banks will have to keep provisioning massively against the non-performing loans, which will have a further adverse impact on them, Rahman said.

Export and import are the other tools for banks to enjoy profit: they get a commission for enabling the financial transactions.

But the economic fallout has contracted both exports and imports to a great extent, meaning the banks' profits books have been dealt another big blow.

"If banks become loss-making concerns, this will hurt the entire financial system," said Rahman, the immediate past chairman of the Association of Bankers, Bangladesh, a forum of private banks' managing directors.

The central bank has so far taken seven stimulus packages worth nearly Tk 80,000 crore to revive the economy and banks will have to implement all of them.

Of the packages, the central bank will provide about Tk 51,000 crore to lenders under the refinance schemes, including an additional $1.5 billion of the export development fund.

But banks will not make any profit of note from the schemes as they will have to give out a good portion of the loans as well from their own sources.

For instance, the central bank formed a refinance scheme of Tk 15,000 crore for the industrial and service sectors as part of its effort to implement the Tk 30,000 crore stimulus package for the two sectors.

Under the refinance scheme, lenders will get funds in the form of working capital at 4 per cent interest from the BB, which the end-users will get at 9 per cent.

But to enjoy the refinance scheme, banks will have to provide at least 50 per cent of each loan to the borrowers from their own sources.

Banks will be allowed to get an interest subsidy of 4.50 per cent for the disbursed loans, which will be given by their own sources.

But the majority of the banks now face a cost of fund of 7.5 per cent to 8 per cent, meaning that banks will make roughly one per cent gains from the loans.

Under the refinance scheme for the small and medium enterprises, banks will have to give Tk 10,000 crore from their own sources and almost the same consequence will be applicable for this.

In addition, banks are currently implementing the government package of Tk 5,000 crore for disbursement of wages for the export-oriented industries.

Banks will be allowed nearly 2 per cent service charge for implementation of the package, which will not bring any profit for them given their supervisory cost.

Under the stimulus packages, banks have to take all responsibilities if any of the loans turn defaults.

"As a result, banks will have to keep provisioning. So, the central bank should announce credit guarantee scheme to share a partial risk of the loans," Rahman said.

The central bank, however, took some measures to improve the cash flow of banks including cutting cash reserve ratio (CRR), policy rate and relaxation of the loan-deposit ratio.

But these have not ignited the banking sector given the gravity of the economic fallout.

The regulator of the banking sector reduced banks' CRR by 150 basis points to 4 per cent in two phases, injecting about Tk 19,200 crore into the economy.

The initiative has not helped banks much as depositors are withdrawing their money rapidly to tackle the ongoing crisis.

Had people flocked to banks to park their funds, it would have brought great relief to lenders.

Alas, people are withdrawing cash, as in moments of crisis holding more physical cash tends to give some a sense of control over the situation.

The BB also slashed the policy or repurchase agreement rate, popularly known as the repo rate, by 75 basis points to 5.25 per cent to make funds cheaper for banks.

"But the banking watchdog will have to cut the policy rate further like central banks of other nations as lenders are in a liquidity crunch," said Emranul Huq, managing director of Dhaka Bank.

The rate should be lowered from 2 per cent to 3 per cent, he said.

Although the central bank issued a notice to purchase Treasury bills and bonds from banks under the quantitative easing, the measure will no longer help lenders.

All lenders collectively now hold excess liquidity worth about Tk 100,000 crore in the form of T-bills and bonds excluding the statutory liquidity ratio (SLR).

They will have to use the securities as collaterals in the days ahead to get the central bank's fund under the repo operation.

What the BB can do instead is introduce the long-term repo operation, which has already been materialised by the RBI.

The maximum tenure of the central bank's repo is now 28 days.

If banks get a long-term fund with a lower policy rate under the BB operation, banks will keep lending confidently, Huq said.

But, the central bank has yet to declare any roadmap about how much fund will be provided to the market.

The central banks of other nations have already announced different packages to this end.

People's income will shrink in the coming days as many of them will either lose their jobs or businesses, which will ultimately hit the banks' deposit base and affect their lending in tandem.        

"Besides, the central bank should bear the banks' deposit expenses for April and May and interests on lending have been transferred to the blocked account," Huq added.

And one thing the central bank must do without any further deliberation is firmly order banks to stop providing last year's dividend -- an exercise that will add on Tk 3,000 crore to banks' capital base, said the bank chiefs asking not to be named given the sensitivity of the topic.