Showing inflated earnings could worsen cash flow crisis

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Including unrealized income in the balance sheet, as proposed by the Bangladesh Bank, will allow banks to post inflated profits, which could exacerbate the current cash flow crisis, bankers say.

With such a large supply, banks will be offering dividends against profits that will only exist on paper, they add.

“Converting unrealized income into profit will reduce cash flow. But it is only a good decision when it comes to providing facilities to customers and strengthening the financial health of banks,” said Arfan Ali. , Managing Director of Bank Asia, at The Business Standard.

However, he warned that banks should be careful about providing dividends.

The central bank, in a circular on Wednesday, said banks will be allowed to display unrealized interest income as profit if borrowers pay only 25% of their outstanding amounts for the current year.

In addition, as banks take a high risk by posting unrealized interest income as profit, they will have to maintain an additional 2% provision against these default loans, according to the circular.

The additional provision will have to be transferred to the central bank’s new “Covid-19 General Provision” account.

But the central bank circular also said that anyone who does not repay their loans in full at the start of the coming year will be considered in default. Currently, borrowers can avoid being classified as defaulters by paying only 25% of the total loan amount.

Bankers say borrowers have benefited from numerous facilities over the past two years amid the Covid-19 pandemic. These facilities encouraged many of them not to repay their loans when they were in a position to do so.

Mohammad Shams-ul Islam, managing director of Agrani Bank, believes that the new instructions from the central bank will play a key role in increasing loan repayments, but will make the situation difficult for the banks.

Following calls from companies facing difficulties amid the Covid-19 pandemic, the central bank has extended the loan moratorium facility until December, Shams said.

“But not all of the organizations suffered from problems because of Covid. Although they have full-fledged production activities, many borrowers have not repaid the money,” he said.

However, he added, “The withdrawal of loan repayment facilities will lead to an increase in the number of defaults. In addition, we [banks] will have to show interest [to be received] of these defaults on our balance sheet while keeping additional provisions on loans, which will be very difficult. “

Meanwhile, expressing concern over the central bank’s latest offer to banks, Ahsan H Mansur, executive director of the Policy Research Institute (PRI), said the banks would not be able to recover the loans they were posting against. unrealized income.

“The owners will demand additional dividends against the interest shown in the balance sheet. In this case, banks should declare the dividends in coordination with the central bank given their [actual] financial capacity, ”he said.

Banks appear to have made high profits even amid the crisis brought on by the pandemic, but the negative cash flow reflects a rainy day looming on the horizon for them as their profits only exist on paper without real income.

The situation is the same for many banks which posted high profit growth with negative cash flow in January-June of this year. During the six months, 10 of the 30 listed banks experienced negative cash flow of Tk 4,900 crore.

Bankers attributed the deterioration mainly to the deferral of payments.

Nonetheless, banks record interest income in their accounts although they do not receive payments. According to experts, this method of accrual accounting helps banks show high profits.

Adopting such an approach will have negative impacts on banks.

First, banks pay dividends taking into account unrealized interest income, which will eventually deteriorate their financial health in the future. Because it is not certain that the banks are finally able to realize this interest income.

Second, negative cash flow has pushed banks away from lending, a core business for them, resulting in excess liquidity with weak growth in credit to the private sector.

Commenting on the central bank’s new offer, Bangladesh Bankers Association (ABB) chairman Syed Mahbubur Rahman warned of the ease of showing unrealized income as profits could deteriorate cash flow.

“[As no actual] the payment will be made, it will create a cash flow crisis for the banks. Because, even though the banks will show higher profits in the papers, they will not be able to make investments because no real payments will be made by the borrowers, ”said Sayed, who is also the managing director of Mutual. Trust Bank.

He also warned that the facility would also lead to an increase in defaults.

The central bank believes, however, that the new instructions will help banks collect their loans.

“Many organizations, which were in a good position during Covid due to massive central bank facilities, have shown lack of sincerity in repaying loans. Loan recovery would have been higher if different facilities had been provided to the borrowers who repaid the loans at the time, “said Sirajul Islam, executive director and spokesperson for the Bank of Bangladesh.

Speaking on the issue of the additional provision allowing banks to display unrealized income as profit, Sirajul said the provisions]constitute a “safety reserve” for the facility offered.

“If the provisions are not enforced then many banks will provide huge dividends but face serious difficulties in recovering the interest.”

The latest central bank circular did not include any instructions for non-bank financial institutions (NBFIs) on loan moratorium facilities. At present, NBFI borrowers enjoy a special offer from the central bank, under which they will only have to repay 50% of the total loan amount so as not to be considered in default.


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