Analysis: Covid-19 and the Bangladesh Financial System
This is part of a special series that offers a retrospective look at Bangladesh’s financial sector
The emergence of Covid-19 in March 2020 resulted in the closure of many businesses and organizations.
The immediate impact on the economy was twofold: production plummeted as factories and business enterprises closed.
Demand fell as workers’ incomes fell due to business closures.
Government employees continued to work.
In the clothing sector, the government provided low-interest loans so that factories could continue to employ their workers.
Most large organizations have retained their core employees.
Work on the farms continued.
Millions of small businesses may continue to be open, but their revenues have declined in most cases.
Eventually, after June 2021, the country resumed work and production returned to more normal levels.
How did people continue through the months of low income and closed businesses?
The Bangladesh Bank has provided loans to all kinds of businesses, allowing them to maintain a certain level of employment.
Also Read – A Retrospective Look at Bangladesh’s Financial Sector: Part 2
Also Read – A Retrospective Look at Bangladesh’s Financial Sector: Part 3
Read also – Analysis: Interest rates and deposits
Read also – The state of lending rates – Part 1
Read also – Analysis: The state of lending rates – Part 2
Read also – Ever higher NPLs and bankers’ dilemma
Read also – The dilemma of NPL management
Also Read – A Retrospective Look at Exchange Rate Management in Bangladesh
Also Read – Summarizing Four Relevant Problems
Read also – Governance in the banking system
Read also – Analysis: The board of directors of the bank – governance of the banking sector
Read also – Analysis: Problem banks and governance in the banking system
The government’s safety net and direct transfers to poor households to some extent kept the income levels of people in the bottom half of the income distribution, although most observers believe these efforts were far too limited.
Overall, the government has handled the pandemic very well.
There were three key factors in how nations handled the pandemic:
The extent to which businesses have been locked down; government programs to maintain employment or income support even if the worker is not working; and finally, business credit programs.
Households reacted in three ways: (1) continue working if possible. Many small businesses continued to operate despite suffering from low demand. (2) cut spending with richer households simply not consuming items that were not essential [less eating out; less purchase of special foods; reduced purchases of clothing etc but increasing their saving.] (3) Loan from relatives or informal money markets. There is little data on the magnitude of the increase in loans to informal sector households, but it is certainly substantial.
Overall, wealthy households with continued income streams tightened their belts but weathered the crisis in relatively good shape.
Workers in much of large and medium-scale manufacturing managed to lose a few months of income on average, but had savings to support them during the pandemic.
Fortunately, the manufacturing lockdowns were pretty short. Farmers have done pretty well.
Small business owners and workers have fared badly.
They found themselves as the economy recovered with lower net worth in large part due to declining savings and borrowing in informal money markets.
In the financial sector, we can separate the stock markets and the banking sector.
The equity market has essentially ceased to function as regulations have been issued, which has the effect of discouraging participation.
Banks were another matter.
The depositors did not appear to be bothered and there was little effort to withdraw the deposits.
Banks have also participated in the public debt market due to declining tax revenues.
The real problems revolved around the companies that had borrowed in normal times and the companies would now repay these loans from their profits.
Of course, lower demand reduced profits and the financial position of many companies weakened.
Repayments have certainly decreased and to minimize the impact of these on businesses, banks have been asked not to classify these loans which would normally have been treated in this way because repayments have fallen behind.
The source of their non-payment of down payments was the pandemic, so it seemed valid to postpone the case until the end of the pandemic.
Principal payments were sometimes simply added at the end of the repayment period.
For continuing credits [where the enterprise had a credit line and had to repay enough to keep the amount due below the credit limit] it was a question of the future.
As a result, the NPL situation, as recorded, has improved.
The unpaid interest was usually charged to the profit account, so the profit situation also looked better.
The regulatory actions needed to protect the banks resulted in the bank’s financial position improving on the books when in reality the banks were in worse shape.
The pandemic has reduced revenues and some costs.
But other costs can continue even if there is no production: rents for leased facilities, repayments of loans taken out by the company, payments of salaries of retained staff, electricity charges.
A company that borrows under one of the special programs is supposed to use the working capital funds to produce goods, thus forcing workers to do so.
But many companies borrowed money under the special programs, did not start production or did so at a low level, and used most of the loan to cover the costs of staying open, including debt repayment.
In this case, the impact of the special funds was to reschedule old loans.
Lending to large companies was essential both to support production when the company received orders but also to continue until the economy recovered.
Of all the borrowers, most are now facing demands for money on loans that should have been paid in the fifteen months from April 2020 to June 2021.
Most won’t have been classified, but over the next year or so they probably will.
There may be other classification deferrals authorized by the central bank, but sooner or later the debt accumulated in the 15 months when income was limited must be repaid.
For larger companies, it should be possible to manage this with the lending bank.
But for small businesses, the challenges are greater.
As of June 30, 2021, we examined advances made by private banks to private companies or individuals.
On the portfolio, 12% of the advances had an outstanding balance between Tk 1 million and Tk 10 million.
The total outstanding amount of these represents 17% of the total advances of this type.
From discussions with private bankers, I learned that these were the range of loans that were most vulnerable to loan repayment costs accrued during the pandemic that the borrower would have difficulty repaying from their funds. future income.
A substantial portion of these loans would become non-performing.
This would add 3-4% to the NPL of private banks compared to what would have happened without the pandemic.
Such a result will have a shattering impact on many private banks.
The situation of the banking system and thousands of small businesses is as follows: Businesses had loans between Tk 1 and 10 million.
The economy was performing well when the pandemic hit.
Suddenly, the company realized that it could not repay its loan because it had no income.
The Bangladesh Bank provided some temporary protection by prohibiting the lending banks from classifying the loan because the installments were not paid or the credit limits remained above the authorized amount for long periods of time.
But the debt remained and additional interest was charged.
Banks took advantage of not having to file loans and take necessary provisions.
In addition, they took the interest owed in the income of the bank.
The owners of the bank smiled when dividends were paid on these bogus profits.
Sooner or later, the hammer would fall: banks would classify loans cutting off credit to the borrower; the borrower would find it difficult to repay a loan while trying to get the business back on track.
Nobody did anything wrong.
Who should pay for the losses
Who should pay for losses accidentally caused by nature going through the pandemic?
Right now, banks are facing a rising tide of bad loans; as estimated above, this will cause heavy losses for many banks and destroy many perfectly good small businesses.
These small businesses received very modest support from the banks during these troubled times.
The banks knew that using one of the special lines of credit for these companies would only increase their debt in the end.
The Bangladesh Bank should adopt a program to lighten the burden of these small businesses through a loan cancellation program.
A program could go as follows: if on March 1, 2020, the borrower was up to date with his payments, then he is eligible for loan exemption for all payments due from March 1, 2020 to June 30, 2021.
The Bangladesh Bank will pay for this through adjustments to the lending bank’s account with the central bank.
Interest accrued during the above period would be written off from the loan account.
If the interest had been considered income, nothing happens; otherwise, the interest would be deducted from the loan amount and the lending bank would pay the interest through the Bangladesh Bank.
There are many ways to design such programs, the above is just a glimpse of what a loan cancellation program might look like.
The important thing is to recognize that without dealing with small businesses [defined as having loans between Tk1 million and Tk10 million] it will cause considerable damage to private banks, causing a substantial increase in non-performing loans.
In addiction, many healthy businesses will find themselves with loans filed, losing credit and putting them on the path to closure.
The Bangladesh Bank should urgently design a program to protect small private banks and small businesses that are exposed because of their debt.
Forrest Cookson is an economist who was the first chairman of AmCham and was a consultant for the Bangladesh Bureau of Statistics