The banking sector was already in a vulnerable state because of mounting default loans and the government mandated implementation of single-digit lending rate just before the Covid-19 outbreak.
A collapse in business activities amid the countrywide shutdown has added to the sector's woes, making business operations tougher for bankers.
Though, the volume of non-performing loans (NPLs), which was the key area of concern for the banking sector, came down significantly in December last year thanks to a special loan rescheduling package, bankers apprehend that such loans will spike further in the post-coronavirus period, squeezing the lending capacity of banks.
The Bangladesh Bank has deferred installment payment till June this year due to the current coronavirus crisis. As a result, banks are not reporting clients as defaulters.
Pointing out that the banking sector was struggling to deal with the two-fold challenges of high default loan and cutting down the lending rate to single digit before the outbreak of the coronavirus, Faruq Mainuddin Ahmed, managing director of Trust Bank says the pandemic has worsened the situation.
In spite of making intense efforts, banks had not been able to bring down default loans because of not having policy support from the government, he notes.
Moreover, defaulters rescheduled their loans for 10 years taking advantage of the special loan rescheduling policy offered by the government before the start of the coronavirus crisis.
"If defaulters needed 10 years to repay their debts when they faced no crisis as big as the coronavirus, they now have a bigger excuse to say that 10 years are not sufficient," he says, adding, "So, the default loan crisis is not going away, instead it will deepen further."
The government's compassionate rescheduling policy has apparently paid off as default loans fell drastically by Tk22,000 crore in three months till December last year.
The default loan rate that went up to a decade high of 12 percent in September last year came down to 9.19 percent in December, which was the lowest in the last four years.
Single-digit rate hits bank earnings
Meanwhile, banks have started to experience decline in earnings from this month after the implementation of single-digit lending rate.
The nationwide shutdown has taken a huge toll on banks' business volume, intensifying pressure on their profits.
Many banks are likely to fail to make profit this year, putting them in a more vulnerable situation, said bankers.
The probable drastic fall in banks' earnings amid the overall economic crisis is also likely to impact their employees gradually, says Md Arfan Ali, managing director of Bank Asia.
Banks will find it extremely difficult to operate their business during this crisis, he argues.
"Banks will have to lend at 9 percent, but there is a chance of a rise in deposit cost. People will save less because of unemployment which will put a negative impact on banks' deposit growth," he continues, "In this situation, making profit will be unlikely for many banks this year."
Rahel Ahmed, managing director of Prime bank and general secretary of Association of Bankers Bangladesh says, "The pandemic has entirely changed the country's economic scenario and now it is time for banks to prepare themselves to support the economy by ensuring liquidity supply."
To salvage them first, banks are analysing which sectors will see quick recovery in the post-Covid-19 period, says Mehmood Husain, managing director of NRB Bank.
"For instance, the food sector will recover quickly and that's why banks will ensure cash supply to such businesses first for the sake of their own survival," he explains.