11 banks cause Tk 123.49cr sectoral provision shortfall

Bangladesh's banking sector faced a provision shortfall of Tk 123.49 crore last year, primarily for a lacklustre performance of 11 banks.

Though a moratorium significantly decreased defaulted loans, the sector is still bogged down in the undesirable situation thanks to the 11, whose combined provision shortfall had amounted to Tk 7,146 crore, shows Bangladesh Bank data.

The errant are Agrani, BASIC, Rupali, Bangladesh Commerce, Dhaka, Mutual Trust, National, Social Islami, Standard Bank, Bangladesh Krishi, and Probashi Kallyan.

A provision shortfall is an amount by which a financial obligation or liability exceeds the amount of cash available.

It can be temporary, arising out of a unique set of circumstances, or persistent, which may indicate poor financial management practices.

Banks have to keep 0.50 per cent to 5 per cent in provisioning against general category loans, 20 per cent against classified loans of substandard category and 50 per cent against classified loans of doubtful category.

It is set at 100 per cent against classified loans of bad or loss category.

Some of the 11 have been repeatedly facing shortfalls over the years due to a lack of corporate governance.

The shortfall of state-run Agrani, BASIC and Rupali alone stood at Tk 5,429 crore, the result of a wide range of financial scams.

From a wider perspective, this is an exposure of the weakness of the 11 when it comes to shielding depositors' funds from financial risks, said experts.

In contrast, the sector's provision shortfall in 2019 was Tk 6,655 crore.

But this alleviation within 12 months should in no way be interpreted as the sector's financial health having been improved.

In reality, a lower amount of default loans helped banks keep lower amounts in provisioning than what was actually required.

The sector's provision shortfall would have increased to a large extent had not the central bank declared the moratorium.

The moratorium helped reduce default loans to Tk 88,734 crore as of December last year, down 5.93 per cent year-on-year.

On March 19 last year, less than two weeks after the government reported the country's maiden coronavirus case, the central bank asked lenders not to consider businesspeople to be defaulters if they fail to repay instalments until June 30.

The moratorium facility was later extended until December and has curbed the rising trend in default loans and provisioning requirements.

Banks should strengthen their provision base in the quickest possible time, given the ongoing business slowdown caused by the coronavirus pandemic, experts said.

Salehuddin Ahmed, a former governor of the central bank, said normally it was unthinkable for a bank facing provision shortfalls for years to continue running operations.

The provisioning situation gives an indication that the banks do not have the required capital to operate their business, he said.

"Some of the weak banks should be merged with the stronger ones in the interest of the banking sector," Ahmed said.

All banks should strictly follow the latest central bank instructions to increase provisions such that they can tackle the upcoming probable financial risks stemming from the ongoing business slowdown, said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh.

Banks will have to set aside an additional amount of around Tk 10,000 crore in provisioning to absorb shocks arising this year, according to a central bank notice issued on December last year.

Lenders must keep an extra 1 per cent provision than what they now maintain for their unclassified loans.

The calculation of the new provisioning rule will have to be implemented based on the outstanding loans as of December 31 last year.

Mansur, however, said banks would face more difficulties in maintaining the required provision in the days ahead as there might be an escalation of default loans once the central bank lifts the moratorium facility.