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Provision shortfall at banks worsens
AKM Zamir Uddin
The provision base of banks in Bangladesh deteriorated further in the third quarter of 2021 because of an increase in bad loans, highlighting the worsening health of the banking industry.
The shortfall widened to Tk 6,204 crore in September, up 50 times in contrast to Tk 123 crore in December last year, data from the Bangladesh Bank showed.
The deficit was 135 per cent higher year-on-year, leading analysts to urge banks to strengthen the provision base in order to improve their financial condition.
A provision shortfall occurs when a financial obligation exceeds the amount of cash available. It can be temporary, arising out of a unique set of circumstances, or persistent, indicating poor financial management practices.
Banks have to earmark 0.50 per cent to 5 per cent of their operating profit as a provision against general category loans, 20 per cent against classified loans of substandard category, and 50 per cent against classified loans of doubtful category.
It has to set aside 100 per cent against classified loans of bad or loss category.
The provision situation may erode further as default loans are expected to jump next year once the central bank lifts the relaxed loan classification policy.
The central bank has been following the relaxed policy since March last year to help businesses tackle slowdown caused by the coronavirus pandemic.
Between July and September, the shortfall rose due to the lacklustre performance of 10 banks, which had a combined deficit of Tk 15,351 crore.
The banks are Janata, BASIC, National, Agrani, Rupali, Bangladesh Commerce, Dhaka, Mutual Trust, Standard, and Bangladesh Krishi Bank.
The overall provision shortfall in the banking sector stood at Tk 5,583 crore in June. Some banks fared well in the third quarter, preventing the shortfall from surging further.
Of the 10 banks, some have been facing a shortfall for years due to a lack of corporate governance.
The deficit at the state-run banks was Tk 10,376 crore in September, which stemmed from a wide range of financial scams.
Janata Bank alone had a shortfall of Tk 5,313 crore, central bank data showed. The state lender earlier faced a number of scams.
The provision shortfall in the banking sector had narrowed throughout 2020 after borrowers were granted a moratorium support by the central bank.
The payment holiday had barred banks from downgrading the credit status of borrowers even if they failed to pay instalments regularly. As a result, defaulted loans did not increase on paper, allowing lenders to put aside a lower amount of funds to cover bad loans.
The central bank withdrew the moratorium support partially in March this year, pushing up both non-performing loans (NPLs) and the provision shortfall.
Up until September, NPLs stood at Tk 101,150 crore, up 14 per cent from nine months earlier and 7.1 per cent year-on-year. This was the first time after 21 months the figure has crossed the Tk 1 lakh crore mark.
Salehuddin Ahmed, a former governor of the central bank, said that the widening provision shortfall indicated that the banking sector was in trouble.
“Corporate governance at many banks has weakened in recent times due to financial irregularities.”
The shortfall sends a negative signal to the global community, tarnishing the sector’s image. Global banks usually show unwillingness to open letters of credit with the lenders facing a provision shortfall.
Some banks have recently emphasised branding, ignoring the importance of building up provision. “This is illogical,” Ahmed said.
Syed Mahbubur Rahman, managing director of Mutual Trust Bank, said that his bank had taken approval from the central bank to manage the provision in phases.
The provision shortfall of the private commercial bank stood at Tk 157 crore in September. It will have to manage the required provision within the next three years.
“We will try to keep the provision before the deadline expires,” Rahman said.
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