Actual provision shortfall of banks over Tk50,000cr

The provision shortfall of banks surged due to the increase in default loans, with eight banks having a shortfall of Tk20,159 crore at the end of March this year, according to central bank data.

But, sources at the central bank said the actual provision shortfall in the banking sector is more than Tk50,000 crore as several public and private banks have taken deferral advantage to reduce the provision shortfall, which amounts to more than Tk30,000 crore.

The eight banks are National Bank, BASIC Bank, Agrani Bank, Rupali Bank, Bangladesh Commerce Bank, Dhaka Bank, Standard Bank, and Bangladesh Krishi Bank.Among them, there are three state-owned banks, four private banks and one specialised bank.

According to the 2022 report of RISK-BASED CAPITAL (BASEL III), the provision shortfall of five state-owned banks that has been deferred by the Bangladesh Bank is Tk28,965 crore.

Out of this provision deferred is Tk3,720 crore of state-owned Sonali Bank, Tk8,503 crore of Janata Bank, Tk5,911 crore of Agrani Bank, Tk6,046 crore of Rupali Bank and Tk4,785 crore of Basic Bank.

Central Bank Acting Spokesperson Zakir Hossain Chowdhury told The Business Standard (TBS), "Generally, banks are required to keep a provision of 0.50% to 5% against their deposits. However, there is a policy of provisioning ranging from 20% to 100% depending on the value of default loans. Due to the increase in non-performing loans in the banking sector, the amount of this provision shortfall increased."

Some banks have been given deferral facilities due to the increased provision shortfall, otherwise, the banks would have to face various problems. Pressure will be created on their other assets. That's why several banks have got this facility to mitigate such problems. However, there is a fixed time limit for the banks to reduce these shortfalls, Zakir Hossain added.

A senior official of the central bank, seeking anonymity, told TBS the amount of the actual provision shortfall is much higher but appears less due to various facilities given by the central bank. More than 10 state-owned, specialised and private banks availed of deferral facilities for provisioning shortfalls.

"If the banks do not get the provision deferral facility, their capital will decrease. If the capital declines, banks have to pay extra interest for doing international trade. Because foreign banks do business according to the bank's capital standards," he added.

Shams-Ul Islam, former managing director and CEO of state-owned Agrani Bank told TBS, "If banks keep the amount of provision that should be kept against default loans, the profit of the bank decreases, as well as capital." 

The banks are doing a lot of work for the country free of cost or at low cost. For example, in the case of government oil, gas and other imports, banks are taking a bare minimum charge. State-owned banks take very little charge for many government social safety net programmes. If the charges for these services were high, the banks would not have a provision shortfall, he said.

According to the Bangladesh Bank report, at the end of March 2023, the default loans in the banking sector stood at Tk1,31,620 crores or 8.80% of the total loans. Out of this, default loans have increased by about Tk11,000 crore from January to March of this year.

That is, the country's banking sector is at risk of high default. Because according to international standards, a maximum of 3% default loans is considered tolerable. 

Three months ago, as of December 2022, defaulted loans were Tk120,657 crore.

The Bangladesh Bank will have to adopt international best practices in loan classification by June this year, according to the IMF country report on $4.7 billion loan approval for Bangladesh.

The central bank also committed to the IMF that it will reduce average NPL ratios to below 10% for state-owned commercial banks and below 5% for private commercial banks by 2026.