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Banks’ provisioning shortfall narrows

Shortage Tk 132.19b as of June


FE REPORT | Monday, 15 August 2022


Overall loan-provisioning shortfall in Bangladesh's banking sector narrows a bit to Tk 132.19 billion, as of last June, and experts suggest quicker improvements as inadequate security is deemed risky.

The little improvement had taken place in six months to June as the same applicable to the state-owned banks was dealt with leniently, sources say.

The volume of overall loan provisioning applied to state-owned, private and foreign commercial banks as of June had come down by nearly 6.0 per cent (to Tk 132.19 billion" from December peak.

Shah Md. Ahsan Habib, a professor and director at the Bangladesh Institute of Bank Management (BIBM), says: "The provisioning shortfall should be addressed immediately to improve risk-absorption capital of NPLs of the banks."

He adds: "Shortfall in provisioning is not good sign for the banking industry."

Loan provision is an income-statement expense set aside to allow for uncollected loans and loan payments. Banks are required to account for potential loan defaults and expenses to ensure they are presenting an accurate assessment of their overall financial health, sans window-dressing.

The provisioning shortfall of the six state-owned commercial banks now [as of June] stood at Tk 106.17 billion, down by nearly 61 per cent from December peak.

In contrast, the overall shortfall applicable to 42 private commercial banks in Bangladesh's banking system rose to Tk 31.11 billion in June.

Central bankers say there were some privileges for the state-owned banks leading to comparatively better financial health for them.

The volume of provision shortfall narrowed significantly for state-owned banks during the period under review leading to overall fall.

He said the government banks maintained a regulatory forbearance that's why their provisioning requirement has been eased.

When bad loans surge, the loan provisioning should have been hiked. But this is not working following the regulatory forbearance applied for the state-owned commercial banks.

During the period, the classified loans of the total outstanding credits stood at approximately 9.0 per cent. It was nearly 8.0 per cent in December 2021.

The overall bad loan in June also jumped to over 8.0 per cent, up by nearly 1.0 percentage point from December figure.

However, the total outstanding loan stood approximately at Tk 13.986 trillion as of June. Of the figure, Tk 12.733 trillion or over 91 per cent was unclassified.

The BB earlier had asked all the scheduled banks to keep additional 2.0-percent special general provisioning instead of earlier 1.0 per cent against loans which have enjoyed latest policy support of the central bank.

In the case of CMSE (cottage, micro and small enterprises), such provisioning was 1.50 per cent, according to the BB.

As per BB regulations, the banks have to keep 0.25-percent to 2.0-percent provisions against general category of loans, 20-percent against substandard category, 50-percent against doubtful loans, and 100-percent against bad or 'loss' category of loans.

All the scheduled banks usually keep requisite provisions against both classified and unclassified loans from their operating profits in a bid to mitigate financial risks.

The latest BB data show four of the state-owned banks had provisioning shortfall. Only two government banks had provisioning surplus.

Of the 42 private commercial banks, four had provisioning shortfall.

However, bankers and researchers are in favour of more reduction in the shortfall, arguing that this is "urgent for a vibrant banking sector".

Shah Md. Ahsan Habib, a professor and director at the Bangladesh Institute of Bank Management (BIBM), says: "The provisioning shortfall should be addressed immediately to improve risk-absorption capital of NPLs of the banks."

He adds: "Shortfall in provisioning is not good sign for the banking industry."

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