Challenges facing banks as pandemic persists

When we started the year, we saw Covid-19 was having a downswing. It showed upswing from the first quarter and we saw the country getting into lockdown in the last week of June. However, things started improving from the third quarter.

Loan payment relaxation has already been extended a number of times.

At the beginning of the year, the Bangladesh Bank advised that extension can be given on the basis of bank-customer relationship, depending on certain criteria. Later, it got amended twice: once up to June and later up to December subject to the fulfillment of certain conditions because of the resurgence of coronavirus caseloads.

Payment pause was given primarily to ease the debt load of the distressed borrowers suffering due to the pandemic. But the reality appeared different than thought. Along with habitual borrowers, many good borrowers are not paying on time.

Missing payment is making banks' fund management difficult and skeptical in fresh investment. We have seen customers who were willing to pay but have also declined to clear because of the forbearance.

Overall trade surged following the reopening of economic activities, both domestic and global. We saw an increase in value of import in both capital machinery and working capital category, which speaks of the fact that we are getting used to living with Covid-19.

Trade deficit widened three-fold in the first quarter of 2021 for higher import payment pressure. Overall, imports are price-driven, rather than volume-driven. Positive news is that export quickly came back on track. $40 billion plus earnings are possible as the shipment is well above the strategic target in the first half of the current fiscal year. This optimism will prevail if the export destinations remain open for trade.

Strong remittance inflow was observed until the first half of 2021 stabilising the foreign exchange market and building strong reserves. It also helped increasing local currency liquidity as the BB was buying dollar from the market to keep the dollar-taka rate steady. However, the recent declining remittance trend coupled with rising import and deferred letters of credit payment made the US dollar costlier.

Accordingly the reverse is now happening – the BB is now selling dollars to banks. As a result, the taka liquidity is getting reduced. The greenback crisis stretched the rate differential in the formal and the curb market, another reason for decreasing remittance.

It looks like the informal channel such as hundi has resurfaced after a pause caused by Covid-19.

The current account deficit may widen in the aftermath of remittance inflow fall.

The market was experiencing excess liquidity till like August or September and accordingly, the rates on fixed deposit nosedived (even to a level of 2 per cent), especially at most private commercial banks.

However, we have seen the BB coming up with circulars in August to give rates not below the inflation rate on fixed deposits of individuals and retirement funds.

The central bank also revived the Bangladesh Bill to mop up excess liquidity. As remittance got slowed down, the BB also required to sell USD in the market, which has helped mopping up some liquidity from the market.

New national savings certificate regulation discouraged the fresh sale, forcing the government to go for aggressive bank borrowing as revenue collection was not getting to the targeted level. It looks like borrowing would significantly exceed the limit set for the fiscal year of 2021-22.

The revenue shortfall could also be for the fact that businesses possibly are yet to get to full momentum. The high government borrowing is poised to aggravate the already tight liquidity conditions, which will ultimately hit the private sector. It would be an impediment to maintaining the lending rate cap. We have also seen the yield on Treasury bills and bonds showing upward trend.

Customers' demands and requirements have shifted to adaptation of digital products and services. Hence, banks' survival will be at risk if they fail to cope with these quick changes. Banks should focus on making rationalised profits after keeping adequate risks buffers.

Inflationary pressure is likely to impact common people. The government's prudence in managing the macro-economy will play a critical role. Regulatory consistency is another area where the regulators should focus in future.

It seems 2022 will be even more challenging in the pandexit era. Omicron, the new Covid-19 variant, started to show a grisly face, spreading all over the world quickly. France could soon have 100,000 cases per day. The World Health Organisation flagged this situation, saying "another storm is coming". 

In such a looming situation, payment holiday may get stretched to 2022. However, the 2 per cent extra provision requirement could put pressure on the default-burden banks struggling with provision shortfall. Asset quality may deteriorate in the post-Covid situation when the policy relaxations will not be in place. 

Since the exact extent and trajectory of Covid-19 is still uncertain, banks should devise forward-looking strategies to cope with this new normal situation.

The author is managing director of Mutual Trust Bank.