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In the fourth quarter of 2020, a number of banks were able to decrease their shortfall thanks to the central bank’s relaxed rules that allowed lenders to stagger their provisioning
Some ten scheduled banks, including four state-owned banks, suffered a Tk 7,145 crore provisioning shortfall at the end of December last year, despite the central bank’s relaxed rules.
Provisioning is an expense set aside as an allowance 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.
In the fourth quarter of 2020, a number of banks were able to decrease their shortfall thanks to the central bank’s relaxed rules that allowed lenders to stagger their provisioning, said a high official of the Bangladesh Bank.
As a result, both the number of banks suffering from provisioningshortfall and the volume of provisioning shortfall dropped in the fourth quarter last year.
At the end of September, some 12 lenders had suffered a combined provisioning shortfall of Tk 9,469 crore.
But in the subsequent quarter, Sonali Bank, AB Bank, Trust Bank and Bank Asia came out of the provisioning shortfall list but Bangladesh Krishi Bank and Standard Bank entered the shortfall list.
As per the Bangladesh Bank regulations, banks have to keep 0.25 per cent to 2.0 per cent provisioning against loans under the general category, 20 per cent against substandard category, 50 per cent against doubtful loans, and 100 per cent against bad or loss category.
The banks usually keep the required provisions against both classified and unclassified loans from their operating profit in order to mitigate risks.
In December last year, the BB imposed an additional 1.0 per cent general provisioning against all unclassified loans aiming to improve financial health amid the global pandemic.
Experts and bankers said that the high amount of default loans in the banking sector is largely responsible for the provisioningshortfall of banks.
So banks’ provisioning shortfall decreased in the December quarter due to the drop in default loans.
At the end of December last year, total defaulted loans stood at Tk88,734.1 crore, down from 6 per cent three months earlier, according to data from the BB.
Default loans accounted for about 7.7 per cent of total outstanding loans at the end of 2020, down from 9.3 per cent a year earlier.
Thanks to the relaxed rules of the central bank, bad loans have shrivelled Tk 5,597.26 crore last year.
Provisioning shortfall is a bad sign for a bank as it indicates the weak financial health of that particular bank, said former BBGovernor Salehuddin Ahmed.
The capital base of those banks would erode significantly as they must keep provisioning as per the central bank rules, he added.
(DT)
