Net profit in the banking sector soared 33.60 per cent year-on-year to Tk 2,424 crore in the first half of 2020 despite a collapse in business and a feeble recovery of loans due to the onslaught of the coronavirus pandemic.
The increase in the profit came at a time when the majority of indicators in the financial sector has been on the decline because of the economic slowdown brought on by the crisis and banks face an uphill struggle to recover both defaulted and unclassified loans.
For all latest news, follow The Daily Star's Google News channel. This led experts to call the jump in the net profit a mirage as the profit has just increased on paper.
The central bank has given a loan moratorium facility to borrowers for this year to help them avoid the default zone.
The ongoing economic hardship and the moratorium facility have put an adverse impact on the loan recovery of banks.
But lenders are transferring the interest of the loans, which is yet to be realised, to their income books enlarging the profit artificially.
Such interest is treated as an accrued interest in banking norms. Banks are allowed to show the accrued interest as income, but such amounts have to be treated as an interest in suspense if loans become defaulted.
Interest in suspense is a particular kind of asset that may appear on a company's -- or even an individual's – balance sheet.
It often denotes that a company has money due as the result of a loan, but that its borrower has not paid on the loan per an agreement.
On Monday, the central bank extended the loan moratorium facility. It also indicated that it would instruct how much of the accrued interest could be shown as income for the year.
"The Bangladesh Bank is working on it. Net profit in banks will decline at the end of this year and the banking regulator will issue a clear instruction to this end," a BB official said.
"The central bank should take the issue seriously, or else directors of private banks will enjoy dividends from public deposits," said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh.
"It is reported that a good number of directors of banks are involved in financial scams. So, they will try to enjoy more dividends riding on the artificial profit. They should be strictly barred from doing so," he said.
Banks should be instructed to treat actual incomes based on the recovery of loans, Mansur said.
Between April and June, lenders recovered Tk 869.68 crore from their defaulted loans, down from 49.13 per cent three months earlier, according to data from the central bank.
Banks realised Tk 108,288 crore from the unclassified loans in the second quarter, down 31.37 per cent a quarter ago.
The central bank should unearth the actual situation of the economy to take a decision to this end, said Mansur, also a former senior official of International Monetary Fund.
Non-performing loans did not increase too much in the first half because of the loan moratorium facility, said Syed Mahbubur Rahman, managing director of Mutual Trust Bank.
"This has helped banks keep a lower amount of provisioning against their loans, pushing up net profit," he said.
As of June, defaulted loans stood at Tk 96,116 crore, down 14.50 per cent year-on-year.
Banks should transfer their accrued interest to the income segment by analysing the actual recovery trend of loans, Rahman said.
"The rising net profit will not create any major challenge for the banking sector if dividends can be checked," said Md Arfan Ali, managing director of Bank Asia.
The central bank should give a clear instruction on the distribution of dividends, he said.
Banks will be able to keep more provisioning to tackle tough times if they are allowed to give out a lower amount of dividends than the usual period, Ali said.
Net profit in private commercial banks decreased slightly to Tk 3,292 crore in the first half in contrast to Tk 3,395 crore a year ago.
Profit in foreign banks stood at Tk 1,091 crore, up 12.90 per cent year-on-year.
Between January and June, net loss in the six state-owned commercial banks stood at Tk 76.05 crore, which was Tk 1,588 crore during the same period a year ago, BB data showed.
Three state-run specialised banks – Bangladesh Krishi Bank, Probashi Kallyan Bank and Rajshahi Krishi Unnayan Bank – saw their combined net loss doubling to Tk 1,882 crore from Tk 959 crore during the same period a year ago.
