Operating cost impacts profitability of banks
A rise in operating cost, usually, leads to an increase in lending rate
The operating cost of banks has soared, affecting profitability.
For strict control of the government and the central bank, the banks have failed to raise their lending rate.
In 2018, the banks made a 4 percent profit of their total assets. It was 12 percent in 2017, 21.7 percent in 2009, says a recent study of Bangladesh Institute of Bank Management (BIBM).
The lending rate was 13.85 percent in 2012 and 9.49 percent in 2018.
A rise in operating cost, usually, leads to an increase in lending rate. But the banks failed to adjust the extra cost due to the restrictions of Bangladesh Bank (BB).
It has negatively impacted the profitability of the banks. The non-interest income also shrunk.
In the last two decades, non-interest income has become a major contributor to banks’ earning. Introduction of new products has also boosted such income.
Non-interest income cut down a bank’s risk. It is safer than interest income, shows BB data. Such income, however, is shrinking in proportion with the total assets of the banks.
Non-interest income was 3.4 percent of the banks’ total assets in 2010. The income came down to 1.9 percent in 2018, says the BIBM study.
Interest-based income, however, was 6.6 percent in 2010. In 2012, it rose to 8.1 percent and came down to 5.9 percent in 2018.
For tackling the challenge, the BIBM study suggested that the banks increase their level of automation and technology-based banking. The global experience shows banks increase automation in their activities to reduce operating cost.
For staying relevant and competitive in the market, the study suggested the banks increase technology-based banking.
The Bangladesh Association of Banks last year decided to reduce the interest rate on loans to 9 percent and deposit to 6 percent.
It was supposed to take effect from July of that year.
One year has passed but the decision has not yet been implemented. However, there is pressure from the BB and the government to implement it.