Banks’ provision shortfall widens

The provision base of the banks in Bangladesh deteriorated heavily in the first quarter of 2021 because of the surging bad loans, highlighting the worsening health of the banking industry.

The shortfall ballooned more than 42 times to Tk 5,228 crore in March compared to Tk 123 crore three months ago, data from Bangladesh Bank showed.

The deficit was up 45 per cent year-on-year. Experts say banks should have strengthened their provision base last year to avoid the widening of the shortfall.

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 may escalate in the coming days because of the ongoing business slowdown.

Between January and March, the shortfall increased due to the lacklustre performance of 11 banks, which faced a combined deficit of Tk 12,650 crore.

The banks are Agrani, BASIC, Janata, Rupali, Bangladesh Commerce, Dhaka, Mutual Trust, National, Social Islami, Standard and Bangladesh Krishi.

Some banks fared well during the quarter, preventing the shortfall from soaring further.

Some of the 11 banks have been facing a shortfall for years due to a lack of corporate governance.

The shortfall of the state-run banks stood at Tk 10,727 crore, which resulted from a wide range of financial scams. Janata Bank alone had a shortfall of Tk 5,255 crore, central bank data showed.

Md Abdus Salam Azad, managing director of Janata Bank, said his bank had recently secured a regulatory forbearance from Bangladesh Bank to keep the required provision in phases.

"So, we are in a balanced position, and there is no reason to feel discomfort at this moment," he said.

The provision shortfall narrowed throughout 2020 when borrowers were granted moratorium support from the central bank due to the economic hardship brought on by the coronavirus pandemic.

The payment holiday had barred banks from downgrading the credit status of their 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 partially in March, which pushed up both the non-performing loans (NPLs) and the provision shortfall.

NPLs stood at Tk 95,085 crore in March, up 7.1 per cent from three months earlier and 2.8 per cent year-on-year.

Salehuddin Ahmed, a former governor of the central bank, said that the escalation of the provision shortfall indicated that the banking sector had been in trouble.

"Still, the government is yet to take any measure to address the issue," he said.

Corporate governance in many banks have weakened in recent times due to financial irregularities, Ahmed said.

The shortfall usually sent a negative signal to the global community, tarnishing the banking sector's image, he said.

"The weak banks should be merged with stronger ones."

Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, said the financial condition of the banking industry might worsen further in the days to come.

"Provision will become a key factor during the difficult period. Experts have been urging banks for long to strengthen the provision base to the absorb shock."

"But some banks did not take the issue seriously. They should take steps immediately."