Why the good NBFIs are now in trouble

Many scam-hit non-bank financial institutions (NBFIs), including International Leasing, People's Leasing, and Bangladesh Industrial Finance Company Limited, have long been struggling with a severe fund crisis and sky-high non-performing loans. In contrast, around a dozen well-governed firms including the IDLC, LankaBangla, the IPDC, and Bangladesh Finance were posting decent profits even during the pandemic.

However, the situation has taken a turn for the worse, and even the star NBFIs are now grappling with deposit withdrawals, despite offering higher rates. They are also burdened by higher non-performing loans (NPLs) that necessitate additional provisioning, lower interest income due to the regulatory lending rate cap, and reduced income from the capital market owing to the lacklustre stock market conditions.

Industry insiders assert that deposit withdrawals from even the most trusted NBFIs are not driven by any trust issues. Rather, the ongoing liquidity crisis in the economy has compelled numerous corporate depositors to withdraw funds and allocate them as working capital.

Businesses require increased capital to sustain their operations at a similar scale due to the higher inflation experienced across the value chain, they added.

Large deposit withdrawal, mainly by the businesses suffering cost overruns, is a common problem the industry is facing now, they added.

"Multiple factors have converged to impact the NBFI industry simultaneously," noted Md Kyser Hamid, vice chairman of the Bangladesh Leasing and Finance Companies Association (BLFCA).

In the January-March period of this year, nearly all the leading NBFIs, including specialised housing finance providers Delta Brac Housing Finance and National Housing Finance, witnessed significant drops in profits and other key indicators.

For instance, the largest NBFI, IDLC Finance's earnings per share dropped by 28.45% year-on-year in the January-June quarter, which was 65% for its major competitor LankaBangla Finance, 75% for Bangladesh Finance, and 66.7% for United Finance, according to the Dhaka Stock Exchange.

IPDC Finance, the fastest growing firm securing a decade-long winning streak, reported the biggest 93.33% decline in its quarterly profits, while its deposits dropped by Tk479 crore and NPL surged to 4.7%, from 4.14% in December 2022, 3.15% in December 2021 and less than 1% before the pandemic, according to the company's financial statements.

Kyser Hamid, who is the managing director and CEO of Bangladesh Finance, said the money was cheaper in 2021 and the cost of funds was low for the NBFIs and nowadays it turned out to be the opposite.

The NBFI's weighted average cost of funds increased to 8.12% in February from 7.34% a year ago, while new deposits were often costing even higher nowadays, he said, as some banks are offering higher interest against deposits.

There had been no lending rate cap for the NBFIs until mid-2022 and the 11% cap by the central bank reduced the industry's average lending rate by 100-200 basis points, according to Hamid.

Spread, the gap between a lender's borrowing and lending rates, dropped by 150-300 basis points, depending on the NBFI's scale, and competency, according to Hamid.

IPDC Chief Financial Officer (CFO) Fahmida Khan told TBS, their spread dropped by more than 150 points as it had to pay more interest and earn less of that.

Masud K Majumder, the CFO of IDLC Finance, said their cost of deposits went up by 84 basis points in a year through March, thanks to the central bank's around Tk2,000 crore refinancing through the firm that helped contain the surge in the overall cost of fund within 70 basis points.

On the other hand, the lending rate on average came down to 9.7% from 10.5%.

Retail deposits proved their worth to NBFIs, despite the fact some families were withdrawing deposits to meet the higher cost of leaving, said Hamid.

However, the extent of deposit withdrawal was much less by retail clients, if compared to corporate clients, said Fahmida Khan.

Retail deposits now account for over 44% of the total at IPDC, which was 30% a year ago, and its CFO said the development is in line with their strategic goal to depend less on big corporate deposits, the sudden withdrawal of which often hurts NBFIs.

NPL was being covered up due to the central bank's deferral facilities that started during the pandemic that gave a hand to borrowers earlier and now there is no mercy to non-repayments.

Hamid said, almost the entire industry is provisioning more against the surged NPL as an increasing number of borrowers went irregular in repayments since the pandemic, and the even tougher macroeconomic environment added to the problem.

IDLC CFO said, except for home loans which people try to repay regularly out of their emotion for the home, repayment deteriorated and corporate loans were the hardest hit segment for the lenders as many corporate borrowers faced financial hardship.

Fahmida Khan, like many others, believes some borrowers, getting habituated with the previously existing relaxed repayment facilities during the pandemic, now still want to continue with the same partial repayments and IPDC was strict in negotiation over the first quarter this year.