Banks have been hit hard by the government's decision to suspend auctioning treasury bonds, especially as the sector is already bogged by a continued crunch in private sector credit demand and a declining interest rate in the call money market, bankers said.

The private sector has failed to respond despite the banks' repeated lowering of lending interest rates over the past couple of years, they said.

Scheduled banks typically invest over 90 percent of their idle funds in the government bonds that generate between 8.4 percent and 11.97 percent returns, according to Bangladesh Bank. 

Also, the private banks have been effectively blocked from utilising the capital market for short-term profits as the central bank remains insistent that they work to cut the stockmarket exposure down to 25 percent of paid-up capital by July next year.

“Banks are under pressure as the sluggish business trend is set to affect profitability,” said Anis A Khan, managing director and chief executive of Mutual Trust Bank.

The overall situation has been generating a lot of excess cash that banks cannot invest in government treasury bonds.

The return on the call money rate has come down to just 5.25 percent, making that window less attractive for the bankers as well.

Bangladesh Bank has kept the auction of treasury bonds on hold since the first week of May after it found that the government had Tk 11,000 crore in excess funds, earned mostly by selling high-cost savings certificates to the public.

“We could have made some profit by investing our surplus funds in the government bonds, but that is not an option right now. Also, there is hardly any demand for money in the call money market,” said Shafiqul Alam, managing director of Jamuna Bank. Jamuna Bank's consolidated net profit between January and March was down to Tk 3.84 crore from Tk 7.88 crore earned in the same period last year.

Net investment in savings instruments rose 184 percent to Tk 21,184 crore in the first nine months of the outgoing fiscal year compared to Tk 7,461 crore for the same period a year ago, according to the Directorate of National Savings.

People parked their money in the savings tools as the rate of return against deposits in banks had been declining for the past two years. Banks now offer a 7-9 percent interest rate on the fixed deposit schemes, while the savings tools offered between 12.59 percent and 13.45 percent returns until May. “This gap of 4-5 percentage points lured people to buy savings tools increasing the government's interest payments,” a senior BB official said.

Bankers said lending rates have been reduced by 2 to 3 percentage points in the last year, while interests on deposits went down further. Corporate and term-loans now cost 12 to 13 percent, down from 15 percent a year ago. “A good borrower can borrow at less than 12 percent,” said the Jamuna Bank CEO. Even then, the industries are reluctant to borrow from the banks.

Private sector credit growth was down to 13.26 percent in April from 13.6 percent a month ago, according to Bangladesh Bank. 

Prime Bank's consolidated net profit stood at Tk 78.21 crore for the January-March quarter, almost half of the bank's income in the same period last year.

Foreign currency loans taken by local enterprises are also squeezing the banking sector's business space, said Ahmed Kamal Khan Chowdhury, managing director and CEO of Prime Bank.

Foreign loans are typically available at 4.5-5 percent interest, data shows. Many local companies have used these low-cost loans to pay off their outstanding loans with the local banks ahead of schedule, cutting the local banks' stream of future earnings. 

News:The Daily Star/19-Jun-2015

Four major banks have reached separate agreements to settle a US civil lawsuit over alleged foreign-exchange rigging in deals totaling nearly $1 billion, sources close to the situation said Wednesday.

The agreements by Goldman Sachs, French bank BNP Paribas and British banks Barclays and HSBC are preliminary and could change, the sources said, confirming a report on the settlements in The Wall Street Journal that cited people familiar with the matter.

The four banks' pending agreements would settle the civil lawsuit filed by Scott & Scott and Hausfeld that alleges their traders manipulated the forex market to boost the banks' profits. 

Getting new business has become the biggest challenge for banks now as companies have been suffering from aftershocks of the prolonged political turmoil in 2013 and the first quarter of this year.

This challenge is intensifying in the wake of low-cost foreign currency loans taken by local entrepreneurs, a rise in the cost of doing business for the apparel makers, higher lending rates and nonperforming loans (NPL). Provisioning rules have also put further pressures on the businesses.

These are the views of Ahmed Kamal Khan Chowdhury, managing director of Prime Bank.

“Some sectors, including garment, are not performing well. The NPL for small and medium enterprises has also increased because of their inability to cope with political turmoil,” said Chowdhury.

The apparel sector that accounts for 80 percent of the country's exports is going through an upheaval -- from compliance to competition and a rise in the cost of doing business, he said.

“We have become choosy in financing the garment sector. Companies that can sustain shocks will only be financed,” the banker said.

Prime Bank is the first bank in the country that has formed a garment monitoring unit involving a team of merchandisers who regularly visit the factories to see their business and compliance issues, he said.

On low-cost foreign currency loans taken by local businesses, Chowdhury said the trend has emerged as a big threat to them as borrowers have been paying off their loans with the local banks with foreign-sourced money at an interest rate of 4.5 percent.

“We are losing business as they could be our potential clients,” he said, adding that Prime Bank could give out foreign currency loans, but the spread is so low that it would not be viable.

Prime Bank was established in 1995 with an outlook to offer superior quality services that has paid dividends and made it one of the top private commercial banks in the country.

The bank's deposit stood at nearly Tk 20,500 crore at the end of 2014, reflecting people's growing trust on the bank.

The bank's NPL was 7.61 percent in 2014, well below the industry's average of 9.69 percent; its capital adequacy ratio is well ahead of the central bank set requirement as well.

However, the bank was running smoothly until it was hit by a loan scam in 2012.

According to the Anticorruption Commission, Bismillah Group, a terry towel exporter, siphoned off around Tk 1,255 crore from five commercial banks on false documents and inadequate collateral.

The group allegedly took over Tk 300 crore from Prime Bank on false documents. The scam hurt not only the bank's image, but also its profits.

“It was a bad experience for Prime Bank, but we learnt a lot from it,” said Chowdhury.

Bismillah Group took advantage of the bank's poor credit judgment and operational lapses -- a lesson that prompted the bank to strengthen the internal system.

“We have been introducing a centralised system to avert this kind of a loan scam; 60 percent of the work is already done.”

But the bank had to write off Tk 250 crore of the Bismillah loan after keeping the same amount as provisions, which affected profitability. Prime Bank is currently fighting the case in court.

Chowdhury also discussed the bank's business model, use of technology-driven products, lending rates, and corporate taxes.

The bank now focuses on the top 20 percent of the clients who generate 80 percent of revenue for the bank. “We have opened a dedicated desk to provide these clients with extra and superior services.”

Chowdhury said customers' choices in getting bank services have been shifting with changes in technology. Many customers now prefer alternative delivery channels, such as the internet and mobile phones, in taking bank services, he added.

On the lending rates, he said banks have been reducing the rates despite facing poor demand for credit; Prime Bank has been giving out corporate loans at 11 percent, which is up to 12 percent for term loans. The lending rate was 15 percent a year ago, he said.

“This has been possible because of a reduction in the cost of funds,” he said, deposits cost them just 6.36 percent now, down from around 8 percent a year ago.

He welcomed the government's move to cut bank's corporate tax by 2.5 percentage points to make it 40 percent, which would help many banks meet their capital adequacy requirements and reduce interest rates further.

Prime Bank also sets aside 4 percent of its net profit for corporate social responsibility activities that go to the sectors of education and health.

The e-banking platforms of HSBC enable customers make seamless payments between countries and currencies, providing businesses greater control over cash and collection, the bank's chief executive said.

Francois de Maricourt spoke at a seminar on the country's present and future outlook of automated payment platform, in the port city. Maricourt believes the seminar will further enhance knowledge on automated payment platforms in Bangladesh. The programme highlighted HSBC's expertise in global payments and cash management.

Subhankar Saha, executive director of Bangladesh Bank's Dhaka head office; Mijanur Rahman Joddar, executive director of the central bank's Chittagong office; and Jishan Shamsad, country head for global payments and cash management at HSBC Bangladesh, also spoke at the event.