Huge losses eclipse state banks’ progress in trimming bad loans

Six state-run banks' progress in bringing down the defaulted loans last year on the back of recovery and the payment holiday was overshadowed by a large volume of net losses.

Sonali, Janata, Agrani, Rupali, BASIC Bank and Bangladesh Development Bank Ltd (BDBL) collectively had a net loss of Tk 4,949 crore in 2020, in contrast to a net profit of Tk 89 crore a year ago, data from the Bangladesh Bank showed.

The net profit situation would have been better if Janata and BASIC Bank had not faced a large volume of net loss.

Janata Bank accumulated a net loss of Tk 5,054 crore in 2020 in contrast to a net profit of Tk 24.64 crore. The net loss at BASIC Bank widened to Tk 366 crore from Tk 326 crore in 2019.

However, the four other banks managed to make a combined profit of Tk 470 crore last year.

Janata Bank Managing Director Md Abdus Salam Azad said that the bank had recently moved out of the negative territory after the central bank granted it a regulatory forbearance.

The bank had a capital shortfall of Tk 5,475 crore in December. It has now been given four years to get rid of the capital shortfall.

"The central bank has allowed us to set aside the capital in phases within the next four years. This has helped us make a net profit of Tk 14.45 crore last year," Azad said.

The BB extended the forbearance to Janata Bank last week.

A regulatory forbearance is a policy that permits banks and financial institutions to continue operating even when their capital is fully depleted.

Central banks give banks extended periods during which they have to comply with regulatory requirements in securing new capital. This reflects the unwillingness of regulators to take disciplinary action against problem banks for a period.

The capital shortfall at the state-run lenders in Bangladesh stood at Tk 13,100 crore last year, up 29 per cent year-on-year.

Of the six banks, only BDBL had a capital surplus of Tk 605 crore last year.

Defaulted loans at the banks declined 3.91 per cent year-on-year to Tk 42,272 crore last year.

The central bank extended a loan moratorium facility to borrowers throughout last year to shield them from the pandemic-induced economic slowdown.

As a result, banks could not downgrade the credit status of borrowers where applicable. The payment holiday helped banks curb the upward trend of non-performing loans, a BB official said.

In addition, the banks took some steps to recover the defaulted loans, which had a positive impact on the volume of the bad assets.

The banks recovered a combined Tk 782 crore from defaulters last year, which improved their provisioning base as well.

Provisioning shortfall stood at Tk 4,923 crore last year, down 37 per cent year-on-year.

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

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.

They have to set aside 100 per cent against the classified loans of bad or loss category.

Sonali, Janata and BDBL did not face any provision deficit last year.

The central bank held a meeting with the government-owned banks in March as part of a memorandum of understanding between the regulator and the lenders to improve their financial health.

At the time, the BB had asked the banks to recoup the defaulted loans, which have piled up because of the siphoning of funds through financial felonies, and monitor the top defaulters to recover classified loans speedily.

The central bank holds the meeting every three months.

Salehuddin Ahmed, a former governor of the BB, said that the central bank had been giving regulatory forbearance for long to help them keep running operation.

The government injected a huge amount of capital into the banks, but this failed to improve the situation because of a lack of corporate governance, he said.

"The banks are controlled by the finance ministry. This is a major problem. The ministry should relinquish its control over them in the interest of the entire financial sector," Ahmed said.

"If the central bank does not control the banks strictly, the financial health of the lenders will not improve."

There is a lack of professionalism among bankers, and this is another major trouble facing the lenders, he said.