The expected happened. Banks' profits were supposed to take a massive hit in the second quarter of 2020, and that took place.
Most of the listed banks' profits slumped in the April-June quarter on the back of the shrunken economic activities for the pandemic and the implementation of the single-digit interest rate for lending while still paying higher interest for some deposit schemes.
The banks' overall lending, as well as loan recovery, also plummeted to new depths during the period.
Their non-interest income suffered a major blow as export and import dropped significantly while earnings from the ailing stock market were very depressing.
Of the 30 listed banks, only eight posted higher profits in the quarter compared with a year, while 18 booked lower profits, two incurred more losses. The other two are yet to publish their earnings, according to data of the Dhaka Stock Exchange.
Bankers fear the situation would worsen in the upcoming quarters when all banks will be allowed to downgrade their loans to bad debts if borrowers fail to repay.
Bangladesh Bank issued a notice last month saying that no banks would be allowed to downgrade any loan until September, which means that failure of any borrower to repay loan instalments between January and September would not result in defaults.
"It was expected that the earnings of the banking sector are going to fall as our lending rate suddenly dropped to 9 per cent but the deposit rate could not be brought down accordingly," said Syed Mahbubur Rahman, managing director and chief executive director of Mutual Trust Bank.
The government set the ceiling on banks' lending rate at 9 per cent and the deposit rate at 6 per cent for the sake of industrialisation and the rates came into effect from 1 April.
"We offered many schemes like money doubling plans or something like that where the deposit rate was 9 per cent or even 11 per cent in some cases. These could not be brought down and so our costs were higher."
As a result, the net interest income of the banking sector plunged, Rahman added.
Md Abdul Halim Chowdhury, managing director of Pubali Bank, echoed the same, saying that the severest blow came from the interest rate ceiling.
"And the pandemic has just added to the woes."
The business of the banking sector was almost zero in April, Chowdhury said, adding that loan recovery was not satisfactory even after the lockdown was lifted, which affected banks' turnover and profits.
As the central bank eased rules to boost money supply, the ceiling on the lending rate could be implemented but banks cannot lower their deposit rates overnight, he said.
BB brought down the bank rate to 4 per cent from 5 per cent in the monetary policy for fiscal 2020-21.
It also cut the repurchase agreement rate from 5.25 per cent to 4.75 per cent to make funds stream towards banks.
About the monetary policy, Rahman said the liquidity situation would ease and the cost of borrowing would come down due to the policy shift.
So, the overall cost of funding would be lower. However, most of the funds of the banks come through customers' deposits, so the efficacy of the latest BB move in priming the pump is up in the air.
About the non-funded income of the banking sector, Rahman said trading activities were very low in the last three months. With the decline in export and import, banks' non-funded income also dropped, he added.
Bangladesh's export earnings plunged 16.93 per cent, or $6.86 billion, to $33.67 billion in the last fiscal year -- a five-year low -- as the coronavirus pandemic brought global trade to its knees.
Due to the central bank move on loan classification, banks got a breather during the quarter. Otherwise, there could have been more classified loans and more provisions and hence lower profits, Rahman said.
"The next six months would be more challenging unless credit disbursement rises."
Stock market investment yielded nothing in the last quarter due to the shutdown of trading in the bourses during March 28 to May 30, said a top official of another listed bank, asking not to be named.
Following the resumption of stock trading, the benchmark index of the DSE nosedived about 1 per cent to reach 3,989 points at the end of the quarter.
"The interest rate ceiling and the pandemic will create big challenges for the banking sector in the upcoming days and their profits will be badly impacted," the banker said.
Now small banks will bear the brunt as they will face problems in attracting new deposits.
"The next year would be the most challenging year for the banking sector as the real effects of the pandemic will come to notice then."