Banks have to set aside more funds to absorb shocks
Banks will have to keep aside more funds in provision than they usually maintain to make them well-equipped so that they can absorb shocks from any increase in bad debts caused by the business slowdown in the coming year.
The central bank is now working on the issue and would take a decision soon, Bangladesh Bank officials said.
A fresh instruction will be given to banks within a day or two, they said.
"The central bank is now analysing banks' net profit and provisioning closely. And it will take a decision to this end in the quickest possible time," said BB Executive Director Abu Farah Md Naser.
He said banks would be instructed to refrain from showing an excess profit this year by maintaining additional provision. "This will help minimise shocks in the coming year."
Although the central bank's circular in September extended the deadline for loan classification further to December, it gave a hint to take measures for the fortification of the provision base as well.
Banks now set aside 0.25 per cent to 2 per cent against unclassified loans. It is 20 per cent to 100 per cent against defaulted loans.
A provision is an amount earmarked for the probable, but uncertain, economic obligations of an enterprise. The purpose is to make a year's balance more accurate, as there may be costs, which could be accounted for in either the current or previous year.
In Bangladesh, the requirement of provisions has declined since the first quarter of 2020 after the central bank allowed banks to enjoy a moratorium.
On March 19, less than two weeks after the government first 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 upward trend of default loans and the provision requirement.
Non-performing loans (NPLs) stood at Tk 94,440 crore in September, down 1.74 per cent from that three months earlier and 18.73 per cent year-on-year, BB data showed.
The country's banking sector has, historically, faced provisioning shortfall due to the failure of 10 to 11 banks.
The ongoing moratorium facility has helped banks bring down the provision shortfall to Tk 2,644 crore in September in contrast to Tk 8,119 crore one year ago.
As of September, 21 banks have failed to keep additional provisioning while 12 banks faced a shortfall in meeting the regulatory requirement, according to central bank data.
Banks in other countries have set aside additional provisioning to protect their financial health from the potential risks emerging from the ongoing economic hardship.
But, the banking sector in Bangladesh is reluctant to do so. Rather, banks are trying to increase net profit to offer a good amount of dividend to their directors.
As a result, the net profit in the banking sector soared 33.60 per cent year-on-year to Tk 2,424 crore in the first half of 2020 despite a collapse in business and a feeble recovery of loans.
Lenders are transferring the interests of the loans that are yet to be realised to their income books inflating profits artificially. Such an interest is treated as an accrued interest in banking norms.
Banks are allowed to show the accrued interest as income, but such amounts have to be treated as an interest in suspense if loans become defaulted.
Banks should be asked to keep more provisions against unclassified loans as loan classification has stopped because of the moratorium, said Salehuddin Ahmed, a former governor of the central bank.
The central bank also plans to raise the provisional requirement for unclassified loans, another central banker said.
Bankers have welcomed the central bank move, saying this would help banks strengthen their financial health.
Emranul Huq, managing director of Dhaka Bank, said the actual situation in the banking sector would be apparent next year.
"So, we should take preparation right now. Keeping excess provision will mitigate risks to a great extent," he said.
MA Halim Chowdhury, managing director of Pubali Bank, echoed Huq.