Assignment:
The possible impact of Covid-19 on deposit and lending rates in banking sector of
Bangladesh.

FIN-523: Financial Institutions & Markets

Prepared for:

Mohammad Sohail Mustafa CFA

Associate Professor
Bangladesh Institute of Bank Management

Prepared by:
Bishwajit Chakraborty
ID: 2018-3-95-002
Department of MBA

Date of Submission: 20 July 2020

COVID-19 Scenario in Bangladesh
The COVID-19 pandemic has thus far spread to 188countriesand territories, infecting 6.7million
people, significantly affecting the global economy. Since the corona virus has been growing
exponentially, even the developed countries have been unable to contain its spread. More than
390,000 people have died from COVID-19. With high population density, we cannot even think
how deadly the highly contagious disease will turn if it spreads from a moderate to a strong
category in India or Bangladesh. As of 01 June 2020, Bangladesh 49,534 confirmed infections
with 672 deaths, from the novel corona virus outbreak. The COVID-19 testing coverage has been
gradually increasing in Bangladesh, reaching now 1880.1/MN but is still lower than Thailand
(6,026/MN), India (2,873/MN) and Nepal (6,382/MN).The institutional quarantine capacity in
the country is represented by 629centers across 64 districts, which can receive 31,991people.
Between 17 March to 01 June 2020, total 272,339 individuals were placed under home
quarantine all the over the county and to date 80%have been already released. Remaining 20 %
( 55,465 individuals) are in home quarantine now. By 01 June 2020, in total 9,259 individuals
were isolated in designated health facilitates all over the country, of them 35% have been
released, and 6,021(65%) are presently in Isolation facilities. In its effort to contain the
pandemic, Bangladesh government first imposed a nationwide lockdown on March 26 and
has extended it six times so far and finally decided to conditionally carry out the overall
activities in the country from 31 May 2020. Authorities have declared a ban on passenger
travel via water, rail and on domestic air routes from March 24 while all public transport on
roads are suspended from March 26 till 31 May 2020.Only trucks, covered vans and vehicles
carrying medicine, fuel and perishable items were remained out of the purview of the
lockdown. Hospitals, health clinics, grocery markets, pharmacies, vegetable markets and banks
(on a limited scale) remained open to offer essential services.

Economic Impact of the Pandemic

Bangladesh is not new to disasters or major humanitarian crises. Sitting astride a river delta at
the bottom of the Himalayan range, the country is fighting a longstanding battle against the
impact of climate change and currently hosts the world’s largest refugee camp along its southern
border. In its 49-year existence, Bangladesh and its people have shown tremendous resilience in
fending off not only natural disasters such as floods and cyclones but also manmade ones, like
the 1997 Asian financial crisis and 2008 global financial crisis. The COVID-19 pandemic,
however, is a crisis of a completely different magnitude and one that will require a response of
unprecedented scale. Bangladesh’s leaders in the public and private sector must come together to
respond to the immediate threats to health systems and the long-term effects to the country’s
economy. Like most of the other nations, the outbreak of the COVID-19 pandemic is an
unprecedented shock to the Bangladesh economy. The concern for Bangladesh is higher as the
economy was already in a parlous state before COVID-19 struck. With the prolonged country-
wide lockdown, global economic slump and associated disruption of demand and supply
chains, Bangladesh economy is likely to face a protracted period of slowdown in activity.
The decline in national and global demand for manufactured goods, particularly in the garments
sector will risk creating unemployment and deepen poverty. The urban poor is expected to
be hardest hit while the number of additional poor will be higher in rural areas, as the
national shutdown will impact private consumption. Export target for FY’20 (12% growth) will
not be achievable in view of the negative (-13.09%) earnings growth over the first ten months of
FY 2020 coupled with the recent disruption caused by the pandemic. The apparel export alone
saw negative growth of (-84.9%) in April, while buyers have so far either cancelled or held
up orders worth USD 3.0bn following the outbreak of the corona virus. With very little chance of
improvement in supply chain disruptions and order flow, we expect exports earnings to fall by (-
15.4%) in FY’20. This translates around USD 5.4bn loss of export proceeds. On the other hand,
the country’s imports decreased by 3.87% in the first eight months of FY’20. Total import orders
dropped by more than 12% in January alone due to supply chain disruption caused by the
COVID-19 but performed almost similar to last year in February 2020. Going forward; lower
domestic demand, lower raw materials demand from textile and construction sectors
and falling oil prices are likely to result in negative (-11.8%) growth in total import payments in
FY’20 in our estimates. We expect remittance to grow by 6.0% in FY’20. In the first ten months
of the current fiscal year, inbound remittance registered at 11.7% growth to USD 14.9bn
driven by various government benefits. However, Remittance inflow declined by 24.7%
year-on-year to USD 1.1bn in April 2020 as corona virus pandemic left thousands of
migrant Bangladeshi workers jobless across the globe. In addition, with the collapse of oil
prices, the unemployment of Bangladeshi migrants is likely to increase further in the Middle East
which may mildly hamper 2021 remittance inflow. Our current account balance has been
improving since FY’18 driven by robust remittance and normalization of imports and might end
FY’20 in a better position than FY’19. However, things are likely to get worse as we move onto
FY’21. Even though imports are likely to fall but we expect larger fall in exports to widen trade
deficit. In addition, remittance inflows remain at significant risk in post pandemic scenario.

Being in the corona war, policymakers worldwide are engaged in damage-control of the
economic losses at the moment and preparing for confronting the upcoming economic crisis. In
addition, there are evidences and indications that financial and banking industries around the
globe might have to face remarkable instability in the forthcoming months. The banking sector
was under serious stress prior to COVID-19 arising from skyrocketing Non Performing Loans,
declining margins, deteriorations in various efficiency indicators, government directed
restructuring of loans and declining demand for loanable funds etc. Due to various ad hoc
circulars for managing infected loan books, the actual scenarios are not properly reflected or
published in reports of the banks. According to the “Global Competitiveness Report 2019”,
Bangladesh scored 38.3 out of 100 and ranked 130th out 141 countries in soundness of banks.
Deposits growth in recent years declined steadily and private sector credit growth fell to 9.2% in
January 2020.Massive loan rescheduling of BDT 50,000 core under a controversial
rescheduling offer helped banks to cut default loan of BDT 22,000 core in the last three
months of 2019. Net interest margin (NIM) decreased around 40 basis points in last 3 years.
Profitability of the sector declined drastically. Our government has already announced bail-out
packages for the recovery. Like, due to cancellation of nearly $3 billion worth of work-orders,
Bangladesh RMG industry got the attention quickly. Around 2 million workers in the industries
may be affected by this and on the other hand, around 4 million people are directly engaged with
the RMG sector e.g. backward linkage industries, accessories and packaging factories and
transportation sector.

Now, if we turn around our eyes to the industrial sector-which is also suffering from the deadly
contagious disease. As we all know that, export diversification is always a key for sustainable
growth in earning foreign currency but regrettably we are heavily relying of RMG sector. This
sector asserts that, 85 percent of the country's' export earnings come through the RMG sector.
We failed to diversify our export basket, thus creating a huge risk in our export portfolios.  The
response against the outbreak and its impact on the industrial sector is so far admirable, yet this
pandemic also poses an economic and humanitarian crisis. The prime minister was right to
identify this as a challenge and announced an emergency stimulus package of $8.5 billion
(equivalent to 2.5 per cent of GDP) for bridge financing of the working capital of small and
distribute food aid through Bangladesh's existing social safety programs as only 15 per cent of
the Bangladeshi population earns over $6 a day, and over 90 per cent of the workforce belongs to
the informal sector. As Bangladesh Government does not have enough fiscal space to make large
stimulus packages due to low tax-to-GDP ratio, the only possible option is monetary expansion,
which most developed economies have already deployed. However, in this critical situation,
banks and other NBFIs must take due preparation to accelerate economic recovery in the post-
covid-19 situation where the board and top management have critical role to play. Crisis
preparedness would be a key to bring stability. A watch group should be formed for data
assessing and make ready the bank & NBFIs for preparing a reliable situational analysis when
needed. Strategies need to be proclaimed clearly so that all workforces ensure preparing
themselves as effective as well as efficient at this stage for damage-control.

Banking sector is the wheel of an economy. The health of the banking sector depends not only on
policy of the bank itself but also the growth of all other sectors of the country. Again when the
health of the banking sector deteriorates then growth of all other sector also affected. So,
Banking is closely interrelated with rest of the wings of the economy. Due to the pandemic of
Covid-19 and lockdown of the country, the different risks of the Banking sector are being surged
which very alarming for the economy This is truly a good decision indeed. But, result of it, most
of the borrower has already stopped regular repayment as they are really badly affected by
Corona. Bangladesh government has declared different stimulus for survival of different
industries, SMEs of the country which is total Tk 50,000 crore and entire fund will be arranged
from the Banking sector of the country. If any borrower who has already loan liability, avail
further loan under these stimulus package then the borrower has to repay both the existing loan
as well as new loan under stimulus which will be quite hard for most of the borrower in an
adverse business environment.
Impact of Covid-19 on deposit and lending rates in banking sector
The banking sector is the key player of the economic activities of any countries. As a developing
country-we need to be more watchful in terms of planning to get rid out of the impact of
COVID-19 outbreak.So, debt burden of the borrower will increase. As already the Non-
performing loan (NPL) of the banking sector is a concern, if the borrower further fails to repay
the fresh loan then the situation will be worse. To avoid the situation Bank will try to choose
only the good rated clients whose track record and financial capacity are already good but this
mentality will not serve the purpose of stimulus package as the entire real affected businessman
may not get the opportunity. Another risk which may increase is Liquidity Risk. The Banking
sector of our country has been suffering from crisis of liquidity in last one and half year. ADR/
IDR (Advance deposit ratio/ Investment deposit ratio) of most of the Bank were in high over the
prescribed rate of central Bank. Bangladesh Bank had given time limit for the Banks to bring
down the ADR within the prescribed limits but most of them failed to comply. Still some Banks
could not bring down the ADR under the prescribe rate. Due to the effect of COVID-19 and
result of economic downturn the fund flow will be reduced.
Bank is going to face further liquidity crisis. On the other hand, as the government declared
stimulus will be arranged from Banks' own fund so Bank need additional fund to implement this.
Bangladesh Bank has already increase the cap of ADR/ IDR 2% more to increase the lendable
fund and to increase the liquidity of the Bank, Bangladesh Bank has already reduced the CRR
(Cash reserve requirement) from 5% to 3.5% in daily basis and 5.5% to 4% in bi-weekly basis
and Repo rate lowered from 6% to 5.25% and declared that Bangladesh Bank will purchase T-
Bill from Banks. But, due to the economic depression resulting from COVID-19, the income of
the different organization has already reduced, remittance flow is already in down trend, buying
power as well as income of individual will also suppose to be reduced which ultimately hit in the
regular fund inflow of the Bank seriously. To cover up the financial crisis, depositors will
withdraw the deposits which is very expected in such economic stagnant situation. Moreover,
increase of NPL also negatively affects the fund inflow of the Bank. Both the credit risk and
liquidity risk directly affect the profitability, sustainable growth and finally the survival of the
Bank. Significant real income of the Bank may reduce due to increase of NPL resulting from
failure to regular recovery from loans. NPL not only reduce the income but also increase the cost
of fund. Bank has to maintain additional provisions cut from income or reserve fund to offset the
NPLs. Minimum Capital requirement (MCR) of the Bank under BASEL-III will increase due to
increase of Risk Weighted Asset. Liquidity crisis will reduce the investment opportunity of the
Bank and so Bank face negative income growth. Liquidity crisis also wipe out the trust of the
depositors. All this will reflect in the downtrend market value of the stock of the Bank which
welcome another risk of the Bank is reputation Risk. CAMELS Rating and Credit Rating of the
Bank will be deteriorate which ultimately weaken the position of the Bank. Banking sector is the
wheel of an economy. The health of the banking sector depends not only on policy of the bank
itself but also the growth of all other sectors of the country. Again when the health of the
banking sector deteriorates then growth of all other sector also affected. So, Banking is closely
interrelated with rest of the wings of the economy. Due to the pandemic of Covid-19 and
lockdown of the country, the different risks of the Banking sector are being surged which very
alarming for the economy This is truly a good decision indeed. But, result of it, most of the
borrower has already stopped regular repayment as they are really badly affected by Corona.
Bangladesh government has declared different stimulus for survival of different industries, SMEs
of the country which is total Tk 50,000 crore and entire fund will be arranged from the Banking
sector of the country. If any borrower who has already loan liability, avail further loan under
these stimulus package then the borrower has to repay both the existing loan as well as new loan
under stimulus which will be quite hard for most of the borrower in an adverse business
environment.
Government Initiative to take the pandamic situation:
Government has already set different fiscal and monitory policy instantly to come out from the
economic depression. Increase supply of money in the market is also in the thinking of the
government to cover the economic downtrend, if necessary. Bank has to set proper portfolio
management program in consistence with the government. Thrust sector as well as emergency
sector must get priority in case of investment. Bank may increase investment on SME,
Agriculture, Export oriented industries and local industries and discourage or may reduce
investment on import of luxury or unnecessary/ less important goods for certain time period and
also reduce investment in less priority sectors. Bank has to boost up recovery process; central
bank may initiate restructure policy for the existing borrowers who are genuinely affected by
Corona Virus. Bank may extend the repayment period by resizing the installment considering the
borrower present repayment capacity. Different attractive deposit product may introduce to keep
the fund flow, salary of all kinds of employees of different organization may give through Bank
Account, Government has to ensure that fund of different government, semi government and
autonomous bodies are deposited in different Banks at prescribed rate of the Bank. It ensures the
control of cost of fund of the Bank. A huge amount of black money is rolling in the economy. To
bring them in the mainstream of the economy through banking channel, government may take
different initiatives, strengthen the existing laws So, it's a huge amount that should count.
Borrower has also the role to boost up the economy and Banking sector. They should create
mentality to repay the Bank liabilities in time. This will increase Now, it is high time for the
government as well as business enterprises to assess the situation and chalk out a long-term plan
to control damage. It is noteworthy to say that, we should not start blame-game now and ask for
assistances from the government only due to the limitations and scarcity of resources of different
agencies of government. But the prime role of the government should be clear any unwanted
obstacles and create opportunities among the economy by the way of sound and clear directives
like monetary & fiscal policies as well as tax structure to face the catastrophic situation. But
unfortunately if the situation prolongs, at worst, the central bank might consider hefty package to
increase money supply but this may have impact on inflation of the country, and can also
announce a stimulating fiscal policy considering universal basic income (UBI) approach. But the
task of distributing UBI to a large population is dubious, even with the availability of mobile
financial services. Therefore a core operational task force may be formed under the direct
supervision of the central bank. their reputation and creditability to the Bank and to the society.
Conclusion:
It will be difficult for small banks and newer banks to raise deposits easily as the perception of
deposits being safe have taken a hit after troubles Caused by covid-19. The basics of banking are
not favorable, with banks earning less interest and fewer fees on deposits. But some of the
pressure may prove temporary. The basic business of banking in the age of Covid-19 isn’t
proving to be easy. But for some, there could be light at the end of the tunnel. Banks’ core
lending profit margin, measuring their cost to borrow versus what they earn in interest can be
enhanced between this period by focusing on liquidity and profit management. High cost to
income ratio (78%) in banking sector with a sudden pandemic shock made banking sector ripe
for cost cut. Cuts in banking sector may come up with an endeavor to increase efficacy but if
done in biased framework, it may leave banking sector demoralized. Change management
practices in Bangladesh are also very weak. In a nutshell, we see Post-covid banking sector to
take control over its swelling costs before the earnings growth resumes. As balance sheet
management remains weak in the banking sector, post-COVID episode will leave a number of
banks/FIs in very large mismatch in short buckets. We estimate collection to fall significantly in
short term; default loan spree to come up with a new pressure for bank treasuries. However,
Bangladesh Bank took various measures to ease up liquidity in the banking sector.