COVID 19: Impacts and Solutions for Banks in Bangladesh

Introduction

An invisible virus has changed the face of the world overnight. Corona is changing everything in
world trade, economy, politics, inter-state relations, sociology or way of life. The banking sector,
the main driving force of the economy, has suffered the most. On the one hand, there is
pressure on the banks to disburse loans but it is not being recovered. As a result, the income of
the bank has decreased. Besides, the country's banking sector is facing various crises including
defaulted loans, liquidity crisis and declining profits.

Impacts for Covid19

The government has fixed the interest rate on banks at 9 percent from April this year; As a
result, banks will lose a lot of money.

Meanwhile, banks have been asked to suspend interest income for two months to reduce the
losses of traders. ABB has calculated that if the interest rate is suspended for two months, the
banking sector will lose Tk 14,000 crore.

No action has been taken against the defaulters due to Corona. As a result, there will be no new
debt collection. This will affect the income of the bank one more step.

Bank's deposit has been declined more in this crisis, now no one is going to keep money in the
bank. Rather going to raise money. The LC were closed due to forbidden in Export & Import.
There created Cash risk for Banks.
All in all, the banking sector is likely to face a liquidity crisis in the near future. The liquidity will
crisis reduces investment opportunities for banks and banks face an increase in negative
income.

The liquidity crisis will lose the trust of depositors. All this is reflected in the downtrend market
value of banks' stocks, which will be a cause of reputation risk of banks. A bank's CAMELS
rating and credit rating will deteriorate, eventually weakening the bank's position.

In the history of Bangladesh, no private bank has ever been heard to reduce its salary
allowance. Due to intense competition among the banks, the banks have increased the salary
allowance of their employees at different times. But no one ever thought that the salary could be
reduced. In the wake of the epidemic, a number of private banks have cut their salaries as well
as reduced their salaries to cut costs.

According to Bangladesh Bank, Tk 9,69,072 crore has been disbursed in the banking sector till
last September. Of this, 1 lakh 17 thousand 26 crore taka has defaulted, which is 11.99 percent
of the total disbursed loan. Three months ago (at the end of last June) the total amount of
defaulted loans was 1 lakh 12 thousand 425 crore. As a result, defaulted loans have increased
by Tk 3,073 crore in three months.

Solution for Banks

If a country's banking sector collapses, there is no chance for the economy to stay afloat. The
need for the banking sector to restructure the fragile economic system of the country in any
major crisis is immense. Therefore, Bangladesh Bank has taken various steps as a way to
overcome the potential crisis in the banking sector.
Banks need to reduce their operating costs by at least 40 percent. In particular, they need to
reduce their advertising cost, training cost, rental cost, travelling costs, some facilities like
maintaining higher officials’ cars cost, their housed rent & furniture facilities.

Banks need to set up an appropriate portfolio manager. They will increase investment in SMEs,
agriculture, export-centric and regional industries and reduce have to reduce their investment in
importing luxury or unnecessary or less important commodities during certain periods of time.

Banks need to step up their recovery process. Central banks can initiate structural adjustment
policies for existing borrowers who are truly affected by the coronavirus. Banks can extend the
repayment period by adjusting the installment size to account for the borrower's current
repayment capacity.

Banks can offer attractive deposit products to maintain the flow of funds. They also need to
make sure that the funds of the government, quasi-government and local governments are
deposited in other banks at a fixed rate.

Coronavirus has attracted people to digital transactions. At this time, there can be launched
various online banking facilities for the convenience of various bank customers. Some banks in
the country can added some special methods including launching insured deposit products,
easy online money transfer, opening bank accounts, online shopping.

In response to this global pandemic, A bank in Bangladesh has brought innovation to its
products and services and added a touch of technology. The opportunity to get instant loan
through mobile. The bank will provide loans to customers of mobile financial service providers.
(Applied by City Bank)

Banks can also issue Letters of Credit (LC) through Contour Blockchain Network. Blockchain is
an automated method through which the transaction process can be completed in a short period
of time. (Applied by SCB)

A Bank can deliver ATM cards and check books free of cost at home so that customer may not
have to come outside in this pandemic situation. (Applied by Dhaka Bank LTD)
The government has already quickly set up other fiscal and surveillance policies to get out of the
economic downturn. Increasing the money supply in the market is also a consideration to
compensate for the economic downturn if the government needs it.

Conclusion

The liquidity crisis in the financial sector has already abated. A lot of money has come to the
market due to the discount in the monetary policy of Bangladesh Bank. Despite the increase in
liquidity, banks have not been able to process and disburse loans to traders quickly; Because in
order to disburse any loan, the bank has to go through many processes. However, according to
Bangladesh Bank, there is a surplus liquidity of Tk 1,39,559 crore in the banking sector at the
end of June. Corona's effect was at the end of March, when the surplus was 79,909 crores.
Now the surplus liquidity in the hands of the banks has increased further. Till last June, the total
amount of deposits in the banking sector stood at Tk 13 lakh 5 thousand 454 crore. And the
amount of debt was 10 lakh 64 thousand 613 crore. The average loan-to-deposit ratio (ADR) of
banks stood at 7.22 percent. This means that most banks now have a lot of creditworthy funds.

References

https://www.thedailystar.net/opinion/news/what-covid-19-has-taught-the-banking-
industry-bangladesh-1916097

https://tbsnews.net/

https://www.arx.cfa/-/media/regional/arx/post-pdf/2020/07/11/at-capital-bangladesh-banking-
sector-report.ashx?la=en&hash=1EC1487BDA3DAD98B7BB963126441A541915F388