Banks under strain as Tk8,565cr remittance incentive stalls

Infographic: TBS

Commercial banks in Bangladesh are shouldering an overdue government remittance incentive bill exceeding Tk8,565 crore, as severe delays in state reimbursements force lenders to finance public subsidies from their own funds, tightening liquidity and eroding profitability across the banking sector.

Under government policy, banks disburse a 2.5% cash incentive to expatriate Bangladeshis on incoming remittances on behalf of the state, with the understanding that the Finance Ministry will reimburse them via Bangladesh Bank.

However, with remittance inflows reaching a record $35.59 billion in FY2025-26 and the devaluation of the taka driving subsidy costs to Tk3 per dollar, state reimbursements have fallen nearly 9.5 months behind.

According to documents obtained by The Business Standard and central bank sources, outstanding claims stood at Tk8,185 crore at the end of June. Despite a Tk500 crore clearance on 2 August, fresh July claims of Tk879 crore pushed the balance to Tk8,565 crore.

Islami Bank Bangladesh carries the largest burden with Tk1,513 crore in pending claims, followed by BRAC Bank (Tk850 crore), City Bank (Tk335 crore), Eastern Bank PLC (Tk250 crore), Pubali Bank (Tk250 crore), BKB (Tk 1180 crore) and Southeast Bank (Tk170 crore).

Bankers say they have been facing the problem for nearly two years. They are paying incentives to customers from deposit funds, which directly affects their profits, as investing those funds in Treasury bills and bonds could yield interest of at least 9%.

A senior official of a private bank said the mismatch between banks' funding costs and delayed government reimbursements is eroding profitability and could weaken banks' incentive to mobilise remittances in the coming months.

"The Finance Ministry is delaying disbursements because of a funding crisis stemming from weak revenue collection," said a senior private bank executive.

Central bank spokesperson Arief Hossain Khan confirmed that Bangladesh Bank disburses funds immediately upon receiving them from the ministry, leaving the timeline entirely in the government's hands.

Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank, said, "The delay creates a severe opportunity cost for lenders.

Banks fund these immediate cash payouts using client deposits—which carry an annual cost of 7% to 8%—while losing out on potential yields of 9% or more by not investing those funds in Treasury bills and bonds."

"The impact on banks is threefold," noted Mashrur Arefin, Managing Director and CEO of City Bank. "Liquidity available for lending declines, stuck funds yield zero return despite ongoing deposit interest obligations, and banks lose the opportunity to invest in income-generating assets."

He said, "The government is under pressure in terms of budgetary and cash management. As remittance has grown faster than expected, the amount required for incentives has also increased significantly. However, budget allocations and fund releases have not increased at the same pace."

Mashrur Arefin said the system of providing banks with three months' advance funding should be reinstated. In addition, banks' claims should be automatically settled every month, sufficient funds should be allocated in the budget based on remittance flows, and if payments are delayed beyond the stipulated period, banks should be compensated according to their cost of funds.

Mashrur Arefin said, "The governor has acknowledged the concerns of banks. He has assured us that he will communicate with the finance ministry and take initiatives to clear the outstanding payments."

Devaluation of taka has increased the cost of remittance incentives for banks

A senior official, speaking on condition of anonymity, said the government had previously provided advance remittance incentive payments to banks. However, payments have now fallen into arrears, with some outstanding amounts dating back two years.

A banker said the incentive burden has increased compared with two years ago because remittance inflows have risen.

Meanwhile, before August 2024, the remittance exchange rate was Tk117 per dollar, and banks paid an additional Tk2.95 per dollar as an incentive.

Now, with the remittance exchange rate having risen to Tk123 per dollar, banks are paying an incentive of Tk3 per dollar from their deposit funds.

Long-term arrears could create several serious risks

Bankers say prolonged delays could create several serious risks.

Banks may lose interest in making additional investments and promotional efforts to attract remittances. They may also find it increasingly difficult to bear the costs of maintaining business relationships with foreign exchange houses and money-transfer companies.

The pressure would be comparatively greater on smaller banks and those facing liquidity shortages.

A large amount of non-performing government receivables could weaken banks' asset-liability management. Delays in incentive payments could also undermine customer confidence and increase the risk of remitters turning to informal hundi channels.

This, in turn, could undermine the positive contribution that remittances are currently making to the country's foreign exchange market, current-account balance and foreign-exchange reserves.