Banks’ provision shortfall increases Tk8,000cr in nine months

Despite several facilities and many terms relaxed to counteract the pandemic fallout, both the provisioning shortfall of banks and their default loans keep rising. In just nine months until September, the provision shortfall of ten banks more than doubled.

The provision shortfall of 12 banks was Tk7,312 crore at the end of December 2020, according to the latest report of the Bangladesh Bank. After nine months, the shortfall of ten banks increased to Tk15,350 crore – up by Tk8,039 crore.

The provisioning shortfall of the banking sector stood at Tk6,290 crore. Of this, one government bank alone has more than Tk5,000 crore shortfall.

AB Mirza Azizul Islam, former Advisor of the Caretaker Government, told The Business Standard that defaulted loans and provision shortfall complement each other. Provision shortfall has increased due to increase in defaulted loans.

He said banks should take practical steps to reduce defaulted loans. Besides, they should approve new loans only to good clients.

According to the Bangladesh Bank, banks will have to keep 0.25% to 5% provisions against the unclassified or regular loans. For low quality or substandard loans, the rate is 20%, while it is 50% against suspicious loans and 100% against bad loans.

Bank officials say if a bank has a provision shortfall, it cannot declare any dividend. Besides, banks that fail to maintain the required provisions are at risk of running out of capital.

According to the Bangladesh Bank report, banks were supposed to maintain a provision of Tk72,348 crore at the end of September against the defaulted and regular loans. But they could keep aside Tk66,144 crore resulting in a Tk6,204 crore provision shortfall. The shortfall was Tk5,583 crore even three months ago in June.

According to the report, ten banks had a Tk15,350 crore shortfall during the period. Three months ago, the provision deficit of 11 banks was Tk14,874 crore.

The report shows there are four public banks among the ten banks with the provisioning shortfall. The four banks have a shortfall of Tk12,026 crore. There are five private banks with a deficit of Tk3,303 crore. Besides, there is a specialised bank with a shortfall of Tk21 crore.

Mirza Azizul noted that borrowers get various facilities even after defaulting on loans in Bangladesh. Bad borrowers exploit the lengthy legal process at money loan courts.

"Central bank governor, finance minister and finance secretary should talk to the chief justice and make arrangements to reduce the legal process at money loan court. This will reduce the default loans and provision shortfall," Mirza Azizul added.

Although the disbursement of loans in the banking sector has increased due to an improved pandemic situation, the amount of defaulted loans has not decreased.

In three months, the defaulted loans in the banking sector have increased by about Tk2,000 crore.

At the end of June this year, the amount of defaulted loans was Tk99,205 crore while at the end of September, it jumped to Tk1,01,150 crore, which is 8.17% of the total loan disbursed.

However, the percentage of defaulted loans has decreased from last June, according to the updated report of Bangladesh Bank.

Due to the relaxation of various conditions by the Bangladesh Bank to cope with the economic impact of the pandemic, no one defaulted last year even though they did not repay the loan. But no such facility was provided this year. The central bank has instructed that no one will be in default this year, if 25% of all types of loans are paid.

In the first nine months of this year, the defaulted loans of the banking sector have increased by Tk12,416 crore. At the end of December last year, it was Tk88,734. At that time, defaulted loans were 7.66% of the total loans.

Despite the facilities, defaulted loans have increased by about Tk12,416 crore in nine months until September. In July-September, Tk1,945 crore loans joined the defaulted rally. At the end of September, the amount of non-performing loans in the banking sector stood at more than Tk1 lakh or 8.12%.