Four banks operating with negative interest rate spread above minus 2%

Hasan Adnan

Interest sector is the main source of income for any bank. Banks pay interest to depositors from the income they earn from lending money. This ‘grammar’ is followed by all banks. But the average interest rate on deposits in six state-owned, privately-owned and foreign banks in the country is now higher than the average interest rate on loans. As a result, the spread i.e. the difference between the average interest rates on banks' loans and deposits has now come down to the negative range. Four of them now have a negative spread of more than 2 per cent. These four banks are Padma Bank Limited, National Bank of Pakistan, BASIC Bank Limited and ICB Islamic Bank Limited. Besides, the spreads of Bangladesh Development Bank Limited (BDBL) and Bangladesh Commerce Bank Limited are also in the negative range. BDBL's spread is still at minus 1.5 per cent and Bangladesh Commerce Bank's spread has not yet fallen to minus 1 per cent.

Due to irregularities and corruption, a large part of the loans distributed by banks are now in the default list. As a result, it is not possible to pay interest to depositors from the income from loans. Banks have to somehow survive by losing capital or earning income from other sectors. If the path to profit from distributed loans is closed, then no bank can survive in the long run, according to economists.

According to the instructions of the Bangladesh Bank, banks can distribute loans at a maximum spread of 4 per cent. The reputable banks in the country are making high profits with a spread of more than 4 per cent. According to the data of the central bank, the average spread of the country's banking sector was 2.91 per cent in May of this year. However, the spreads of the six distressed banks were in the negative range during this time. Padma Bank, which is in a negative trend, has a spread of minus 4.59 per cent. The spread of this private bank, formerly known as The Farmers Bank, is the lowest among the 61 banks operating in the country.

The second bank in terms of negative spread is National Bank of Pakistan. And 97.99 per cent of the loans distributed by the Pakistani bank in Bangladesh have become default. Other banks at the bottom of the spread include BASIC Bank with a spread of minus 2.34 per cent, ICB Islamic Bank with minus 2.30 per cent, BDBL with minus 1.03 per cent and Bangladesh Commerce Bank with minus 0.33 per cent. In other words, the six banks that have failed to follow the grammar have much higher costs than income in the interest sector. The banks have been victims of irregularities, corruption and plunder in loan distribution. Banks have been standing on the edge of the pit for a long time. The Bangladesh Bank has somehow ensured their survival with the policy support.

Faruq Mainuddin, a former Managing Director of Trust Bank, said that no bank can survive in the long run with a negative spread. Currently serving as the vice-chairman of Brac Bank, the banker told The Daily Bonik Barta, ‘A negative spread means that some sectors of the bank are incurring losses. The interest sector is the main source of income for banks. If there is no income from there, the bank's profits decrease. And if there is not enough income from other sources, the bank goes into loss. If a bank goes into loss, its capital is eroded. And in the long run, loss means going to the verge of bankruptcy. Such banks fail to return the deposits of customers.’

BASIC Bank, a state-owned bank, has lost Tk 4,234 crore in net profit in the last 10 years after being looted in the post-2009 period. During this time, the government provided Tk 3,390 crore in capital to the bank to save it. Despite receiving this huge amount of money, BASIC Bank could not turn around. Instead, at the end of 2022, the bank's capital shortfall stood at Tk 2,131 crore. And 58.37 per cent of the loans distributed by Basic Bank are still in default. At the end of March of this year, the balance of the distributed loans was Tk 12,806 crore. Of this, Tk 7,475 crore was in the default list. The bank has also written off Tk 2,800 crore of non-collectible default loans. The bank is unable to make provisions or reserves against default loans. The capital shortfall of BASIC Bank is also more than Tk 4,578 crore. However, the bank was the most successful bank in the state-owned sector until it was devastated.

According to the central bank data, at the end of May of this year, the average interest rate on deposits of BASIC Bank was 6.02 per cent. In contrast, the average interest rate on loans was 3.68 per cent. As a result, the spread of Basic Bank was negative 2.34 per cent. In 2022, the bank lost Tk 246 crore in the interest sector. In 2021, the loss was Tk 442 crore. For the past 10 years, BASIC Bank has been making losses.

BASIC Bank Managing Director Md Anisur Rahman said, ‘The bank's reputation has been damaged due to the plundering. We have to collect deposits at a higher interest rate from government institutions. But no income is coming from the default loans. As a result, the bank is losing money in the interest sector. We had requested the government for low-interest deposits. But we did not get it. So it is difficult to pull the bank up.’

After its inception in 2013, Farmers Bank immediately got entangled in irregularities and corruption. When attempts to recover the deposits of depositors failed, the Central Bank intervened in the bank. To rescue the troubled Farmers Bank, the Ministry of Finance and the Bangladesh Bank step in. The Farmers Bank was renamed Padma Bank four years ago. Along with the change of name, the government and Bangladesh Bank provided Tk 715 crore in capital assistance to the bank. Despite receiving various types of discounts and assistance, the bank has not shown any visible improvement. Instead, Padma Bank, which failed to turn around, proposed to merge with a state-owned bank. There was also talk of bringing in foreign investment, but that did not materialize. Padma Bank has also exhausted the capital provided as equity. At the end of June 2021, the bank had a capital shortfall of Tk 2,100 crore.

According to the central bank data, the average interest rate on deposits of Padma Bank at the end of May of this year was 8.01 per cent. In contrast, the average interest rate on loans was 3.42 per cent. As a result, the spread of Padma Bank was negative 4.59 per cent. The default loan ratio of Padma Bank is now more than 59 per cent.

Padma Bank's Deputy Managing Director Mohammad Imtiaz Uddin said, ‘After Padma Bank started operations, no loan has become default. The default loans that exist now are from The Farmers Bank. But we are trying to collect those loans. The recovery situation is also good in this regard. We have taken the initiative to increase remittance flow through the bank. At the same time, foreign trade activities are starting. We are discussing with the central bank to start loan distribution activities of the bank from September. I hope Padma Bank will turn around soon.’

National Bank of Pakistan has no trace of loans distributed in Bangladesh. According to the central bank data, the average interest rate on deposits of the Pakistani bank at the end of March of this year was 6.37 per cent. In contrast, the average interest rate on loans was 0.52 per cent. As a result, the spread of National Bank of Pakistan was negative 5.85 per cent. The default loan ratio of the bank is 97.99 per cent.

Due to the negative spread, ICB Islamic Bank is continuously making losses. The current spread of the bank is negative 2.30 per cent. The default loan ratio of the bank is also more than 86 per cent.

The average interest rate on deposits of BDBL at the end of May of this year was 5.34 per cent. In contrast, the average interest rate on loans was 4.31 per cent. As a result, the spread of BDBL was negative 1.03 per cent. The default loan ratio of BDBL is 49.34 per cent.

Bangladesh Commerce Bank, which is a joint venture of the government and the private sector, has an average interest rate of 5.77 per cent on deposits. In contrast, the average interest rate on loans is 5.44 per cent. As a result, the spread of Bangladesh Commerce Bank is also negative 0.33 per cent. The default loan ratio of the bank is about 43 per cent. However, Bangladesh Commerce Bank Managing Director Mohammad Tajul Islam claims that the bank is turning around. He told The Daily Bonik Barta, ‘In 2022, we recovered Tk 233 crore in default loans in cash. This is the highest in the history of Commerce Bank. Within June of the current year, the bank's deposits have increased by Tk 500 crore. We are taking initiatives to increase low-interest deposits to bring the spread to a positive level.’

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