Banks need to set aside more funds to absorb shocks

Banks will need to set aside more funds than they usually have to prepare to absorb the shocks of any increase in bad loans caused by the downturn in activity in the coming year.

The central bank is currently working on the matter and would make a decision soon, Bangladesh Bank officials said.

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A new instruction will be given to the banks within a day or two, they said.

“The central bank is now closely analyzing the net profit and the provisioning of banks. And it will take a decision to that end as soon as possible,” said BB executive director Abu Farah Md Naser.

He said banks would be instructed to refrain from showing excess profit this year by maintaining an additional allowance. “This will help minimize shocks over the coming year.”

Although the central bank circular in September extended the deadline for classifying loans to December, it also suggested taking steps to strengthen the reserve base.

Banks are now setting aside 0.25% to 2% against unclassified loans. It is 20 to 100% against overdue loans.

A provision is an amount allocated to the probable, but uncertain, economic obligations of a company. The aim is to make the balance for a year more precise, as there may be costs, which could be booked in the current year or in the previous year.

In Bangladesh, the provision requirement has declined since the first quarter of 2020 after the central bank allowed banks to benefit from a moratorium.

On March 19, less than two weeks after the government first reported the country’s first coronavirus case, the central bank asked lenders not to view businessmen as defaulters if they fail to repay no payments before June 30.

The moratorium facility was then extended until December and curbed the upward trend in defaulted loans and the provision requirement.

Non-performing loans (NPLs) stood at Tk94,440 crore in September, down 1.74% from three months earlier and 18.73% year-on-year, according to BB data.

The country’s banking sector has historically faced a provisioning deficit due to the failure of 10 to 11 banks.

The ongoing moratorium facility helped banks reduce the provision shortfall to Tk 2,644 crore in September from Tk 8,119 crore a year ago.

As of September, 21 banks had not kept additional provisioning while 12 banks had failed to meet regulatory requirements, according to central bank data.

Banks in other countries have made additional provisions to protect their financial health from potential risks arising from the current economic difficulties.

But, the banking industry in Bangladesh is reluctant to do so. On the contrary, banks are trying to increase the bottom line to offer a good amount of dividends to their directors.

As a result, the banking sector’s net profit climbed 33.60% year-on-year to Tk 2,424 crore in the first half of 2020 despite a collapse in business and a weak recovery in lending.

Lenders shift interest on loans that have not yet been made to their income books, artificially inflating profits. Such interest is treated as accrued interest in banking standards.

Banks are allowed to display accrued interest as income, but these amounts should be treated as outstanding interest if loans are in arrears.

Banks should be urged to keep more provisions against unranked loans, as classification of loans has ceased due to the moratorium, said Salehuddin Ahmed, former central bank governor.

The central bank also plans to increase the interim requirement for unclassified loans, another central banker said.

Bankers hailed the central bank’s move, saying it would help banks strengthen their financial health.

Emranul Huq, managing director of Dhaka Bank, said the real situation in the banking sector would be apparent next year.

“So we should prepare now. Maintaining an excess provision will mitigate the risks to a large extent,” he said.

MA Halim Chowdhury, Managing Director of Pubali Bank, echoed Huq.

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