Bad loans cause dents in banks' profits

Bad loans ate up 51 percent of the operating profits of banks in the first half of the year -- a development that will not only bring down the dividends that shareholders get but will also have an impact on the interest rate.

Between January and June this year, the banks' operating profit edged up 11 percent but net profit slumped about 33 percent, according to central bank statistics.

As per central bank rules, banks have to keep provisioning for their classified loans from their operating profits. Thus, if banks' classified loans increase, their net profits fall proportionately.

In the first half of 2017, banks logged in operating profit of Tk 10,355 crore, up from Tk 9,325 crore a year earlier.

However, their net profits altogether came to Tk 1,845 crore, down from Tk 2,741 crore in the first six months of 2016.

The banks' net profit is calculated after deducting provisioning against bad debt and tax.

In the first six months of the year, the banks had to do provisioning of Tk 5,256 crore against their bad debts, in contrast to Tk 3,408 crore a year earlier.

The banks had restructured about Tk 16,000 crore of large loans of more than Tk 500 crore. But later, the bad borrowers did not maintain their commitment, due to which the loans turned sour, said a Bangladesh Bank official.

Because of poor governance in some banks, their overall indicators are in the negative, said various bank officials.

Most of the state banks are in a bad shape, but some private banks are vulnerable too.

The sliding net profits eat into the shareholders' dividends, and it also leads to an increase in the lending rate, the BB official said.

leads to an increase in the lending rate, the BB official said.

To maintain the spread (the difference between lending and deposit rates) within 5 percent as per BB directive, banks, in most cases, lower deposit rates.

“As a result, the depositors are affected,” he added.

Though the state-owned banks' operating profit was Tk 1,178 crore, due to provisioning against bad loans, they logged in net losses of Tk 1,046 crore for the first half of the year.

Overall, the profit situation of most of the state banks improved this year except for Sonali.

Sonali's net loss was Tk 1,257 crore but the five other state banks made net profit ranging from Tk 10 crore to Tk 127 crore.

Even the much-troubled BASIC Bank made a net profit of Tk 11.40 crore during the period, in contrast to a loss of Tk 48 crore a year earlier.

The private banks logged in operating profit of Tk 8,662 crore in the first half of 2017, which is more or less the same as in a year earlier.

But their net profit was significantly down as   some of the banks' performance deteriorated. They logged in net profits of Tk 2,766 crore, down 7.62 percent year-on-year.

Of the nine new banks, all except Farmers Bank are still making good profit as their default loans are less.

Farmers Bank, which has been lending badly from the onset, registered a net loss of more than Tk 13 crore against the operating profit of Tk 24 crore.

In the same way, Bangladesh Commerce Bank and ICB Islamic Bank made net losses. Of them, the net loss of Bangladesh Commerce Bank was Tk 149 crore and ICB Islamic Bank Tk 18.25 crore.

Islami Bank typically registers profit growth every year but in the first six months this year, its operating profit was the same as last year. But its net profit fell 24.63 percent year-on-year to Tk 257 crore.

The foreign banks made operating profit of Tk 1,228 crore and net profit of Tk 625 crore.