Staff Reporter :
Despite economic headwinds, top non-bank financial institutions (NBFIs) in the country posted higher profits between April and June, the second quarter (Q2) this year. This growth was driven by a record high loan-deposit rate gap and strong returns from investments in government securities.
In May, the average interest spread of NBFIs stood at 2.92%, up from 0.37% a year before, according to the Bangladesh Bank. The same month, the reference rate SMART (six-month moving average rate of Treasury bills) was removed to let the market determine interest rates.
The interest rate spread refers to the difference between the interest rates charged by financial institutions on loans and the interest rates they pay against deposits. The financial sector returned to a market-driven interest rate regime after four years, following the prescription of the International Monetary Fund (IMF) to combat inflation.
The introduction of a 9% lending rate cap on April 1, 2020, led to a sharp decline in the interest rate spread at that time. However, the spread began to increase after the central bank removed the cap in July 2023. On May 8, 2023, the Bangladesh Bank allowed lending rates to be determined by market forces.
NBFIs, however, still follow SMART to decide the maximum lending rate as the central bank has yet to issue any directive on the matter for them. Their maximum interest rate for lending is SMART plus five percentage points, while the maximum deposit rate is SMART plus three percentage points.
The latest SMART rose to 11.80% in July this year, meaning the NBFIs are allowed to charge borrowers a maximum rate of 16.8%.
IPDC Finance, one of the leading NBFIs in Bangladesh, saw its earnings grow 6.25% year-on-year to Tk 85 million in April-June this year. Likewise, United Finance posted a record 455% growth in profit year-on-year to Tk 29.46 million for the April-June quarter this year. DBH Finance’s profit rose 3.4% year-on-year to Tk 236 million in the second quarter, largely driven by investment income.
On the other hand, a significant number of NBFIs have been struggling with substantial non-performing loans, liquidity crises, and shrinking interest margins. Some companies have been enduring losses for years. Due to widespread scams in some NBFIs, the overall volume of non-performing loans in the industry soared to as high as 30% as of March this year. However, leading NBFIs managed to keep their NPL ratio below 5%.
Industry insiders attributed the lower profit or loss of the poor performers to the piling up of non-performing loans, while the asset quality of scam-hit NBFIs has deteriorated drastically, leaving a huge impact on the overall sector. Scam-hit financial institutions such as People’s Leasing, International Leasing, BIFC, and FAS Finance are struggling to repay their depositors.
Another identified issue is that NBFIs in Bangladesh suffer from providing long-term loans with short-term funds. Globally, NBFIs benefit from long-term funding sources like pensions and insurance since they provide long-term loans, unlike banks.
According to the latest data from the central bank, 34 NBFIs in the country contribute around 5% to the financial assets of the country.