Single-digit will erode banks’ profit, but is their current profit logical?

Bankers argue that the implementation of single-digit lending rate will erode profit margin of the banks. But many question if the banks' current profit margin is rational.

Currently, banks' profit margin before tax is around 70 to 80 percent, which is the highest in comparison to any other sector.

The implementation of single digit will bring it down to about 20 percent when a 10 percent earning is considered good for other businesses.

If an example is taken for impact analysis, it shows that single-digit lending rate is workable.

For instance, Eastern Bank, which is considered one of the most efficient banks, has been managing funds at a cost of 4 to 5 percent. If an average administrative cost of 1.5 percent is added, its cost stands at 5.5 to 6.5 percent.

Despite that low fund cost, the bank has been charging interest rates of 12 to 15 percent on loans. As a result, the income margin of the bank is above 120 percent.

If the 9 percent lending rate is implemented from April 1, the bank's income will come down to 63 percent.

On top of that, the bank will have to pay corporate tax over the income.

EBL's net profit was Tk311 crore in 2018.

The scenario is almost the same for many private commercial banks.

Foreign banks are even better positioned in profit-making.

For example, Standard Chartered Bank is lending at a rate 11 times higher than its deposit rate, according to Bangladesh Bank website.

Despite having low fund cost, some banks are lending at high rate as the average industry rate is quite high because of inefficient asset management. This helps some banks make unusually high earning and they also spend high on operation.

The private bankers enjoy comparatively high salary which is considered one of the major reasons for high operational cost.

A management trainee officer, an entry level post of a bank, gets salary between Tk50,000 and Tk70,000. In comparison, entry level BCS cadre officers get around Tk35 thousand, much lower than the bankers.

However, the bankers' efficiency is not reflected by the rising non-performing loans and deterioration of banks' health.

The implementation of single-digit rate will rationalise banks' profit and compel them to be more efficient in fund management as well, said a senior executive of a bank.

It will also prompt banks for job cut or slash pay structure to bring balance in salary range with other sectors, he said.

However, some banks like the scam-hit BASIC Bank and the fourth-generation banks will suffer badly from implementation of the single-digit policy, said industry insiders.

Sharing his experience, a top executive of a fourth-generation bank said their internal calculation shows that implementation of the single-digit lending rate will cause a loss of Tk185 crore for the bank this year alone.

Photo: Jebun Nesa Alo/TBS

The bank has already started to get rid of high-cost institutional deposits to reduce its cost of fund. It is also planning job cut, he said.

Banks must improve their efficiency in managing cost of fund for implementing of single-digit interest rate and many banks will have to ultimately go for merger, he said.