Banks face Tk 5,583cr in provision shortfall

The banking sector in the country suffered a provision shortfall of Tk 5583.38 crore at the end of June this year, exposing the worsening financial health of the sector.

The shortfall rose by Tk 318.79 crore to Tk 5583.38 crore in June compared to Tk 5264.59 crore three months ago as per the latest data from the Bangladesh Bank.

Provision is a fund that is put aside by a bank or non-bank financial institutions to cover an anticipated loss in the future.

As per the central bank guidelines, banks have to keep 0.50 per cent to 5 per cent of their operating profit as a provision against the general category loans, 20 per cent against classified loans of substandard category and 50 per cent against classified loans of doubtful category.

It has to set aside 100 per cent against classified loans of bad or loss category.

The provision deficit was up 24.09 per cent year-on-year. The increasing trend of non-performing loans in the banking sector is largely responsible for the rising trend of provision shortfall, bankers said.

At the end of June, the defaulted loans stood at Tk 98,164.31 crore, 8.61 per cent of the sector’s total outstanding loans as per the BB data.

Non-performing loans (NPLs) in the banking sector rose by Tk 3,899.12 crore in April-June this year.

The provision shortfall narrowed throughout 2020 thanks to the moratorium support from the central bank due to the economic hardship brought on by the coronavirus pandemic, a BB high official said, asking not to be named.

But the provision inadequacy started to rise from the first quarter of the current year because the ongoing moratorium on loan installments depend on the bankers-customer relationship, he added.

In the April-June quarter of this year, banks had to keep a Tk 69,734.78 crore as provision but they kept Tk 64151.40 crore as provision, according to the central bank data.

Provisioning shortfall is a bad sign for a bank as it indicates the weak financial health of that particular bank, said former BB Governor Salehuddin Ahmed.

He said the capital base of those banks would erode significantly as they must keep provisioning as per the central bank rules.