Loan write-offs decline as banks lose strength
Loans written off by banks in Bangladesh nosedived as lenders' ability to keep 100 per cent provisioning against delinquent assets has squeezed amid business slowdown caused by the coronavirus pandemic.
Usually, loans are written off when they are entirely covered by cash and there is no realistic prospect of recovering them. These assets are shifted to off-balance sheet records.
Banks wrote off bad debts to the tune of Tk 1,945 crore between January last year and September this year, data from the Bangladesh Bank showed. This compared to Tk 2,597 crore in 2019 and Tk 3,523 crore in 2018.
It fell as a majority of banks are unable to write off bad loans since they are struggling to survive amid a lower cash flow compared to pre-pandemic levels.
Banks are allowed to show 50 per cent of the collateral as provisions against default loans. This means lenders can avoid keeping 100 per cent mandatory cash provision against their NPLs, according to Syed Mahbubur Rahman, managing director of Mutual Trust Bank.
As per Bangladesh Bank regulations, banks have to maintain a provisioning of 0.25 per cent to 5 per cent for unclassified loans. It is 20 per cent for the default loans of substandard category, 50 per cent for the doubtful category, and 100 per cent for the bad or loss category.
Banks have to preserve a full amount of cash in provision equaling to a particular NPLs that are treated as write-off loans.
Rahman says many banks are not in a good shape as a good number of borrowers are not repaying loans. "This may be one of the main reasons behind the lower amount of write-off loans during the pandemic."
In addition, the provision base in the banking sector has weakened to a large extent in recent months due to an escalation of default loans.
The provision shortfall widened to Tk 6,204 crore in September, up 50 times in contrast to Tk 123 crore in December last year and 135 per cent year-on-year.
In September, NPLs stood at Tk 101,150 crore, up 14 per cent from nine months earlier and 7.1 per cent year-on-year.
Loan write-offs are considered one of the best practices in the world to augment the image of banks as a higher default loan gives a negative signal about the lender, said Md Arfan Ali, managing director of Bank Asia.
Emranul Huq, managing director of Dhaka Bank, said that the writing off default loans helped banks brighten their image. Besides, banks' capacity to write off loans usually gives an indication about their strength.
Salehuddin Ahmed, a former central bank governor, however, said that writing off loans were not a solution to resolve the crisis in the banking sector.
"Banks have to recover the worst category of default loans by filing cases with courts."
Banks have to lodge cases before writing off a bad loan after they remain struck in the default zone for three years.
Ahmed thinks that the latest relaxed policy for the loan classification has helped banks avoid keeping a high amount of provisioning. It is difficult for lenders to keep 100 per cent cash against a bad asset at a time when the provisioning base weakens, he added.
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