Banks paid high dividends, now they are in trouble

Infographic: TBS

As foretold, a wave of defaulted loans has hit the banking sector after a two-year payment deferral facility was lifted, with most listed private banks experiencing a severe provision balance erosion as they spent more on dividends during the pandemic instead of saving for a rainy day.

The provision surplus of 41 private banks in the country stood at Tk796 crore this March, 84% down from Tk5,000 crore in the same month last year, according to the Bangladesh Bank.

Provisions are funds set aside by a bank as assets to pay for anticipated future losses.

It was predictable that the banking sector would encounter a default loan wave once the moratorium expires, so, the Bangladesh Bank in the past two years repeatedly encouraged banks to be conservative about cash dividend payouts and save for the future.

Also, global rating agencies alerted banks of a possible default loan shock.

But, banks did not pay heed to the warnings and announced higher dividends even during the pandemic to keep their directors happy. Even in 2021, they continued to give out higher cash dividends compromising future savings.

Defaulted loans in the country's banking sector have increased by Tk10,167 crore in the first three months of this year despite various concessions on loan repayment in the wake of the Covid-19 outbreak.

At the end of December last, the amount of defaulted loans was Tk1.03 lakh crore, which climbed to Tk1.13 lakh crore at the end of March this year, Bangladesh Bank's data shows.

Banks that paid higher cash dividends saw a sharp rise in default loans after the expiry of the payment deferral facility. High default loans require banks to maintain higher provisions. High provisioning requirements will erode the capital of banks, which will ultimately shrink their lending capacity. Capital erosion will reduce dividend capacity also.

For instance, Eastern Bank, one of the largest profit-making private banks, saw a sharp rise in default loans by nearly Tk500 crore in the last one year. Its default loan rate surged to 4.31% in March this year from 3.35% in the same month last year.

The bank declared a 17.5% cash dividend for its shareholders in 2020, up from 15% declared in the pre-pandemic year of 2019.

The provision surplus of the bank came down to Tk45 crore this March from Tk160 crore a year ago, according to the Bangladesh Bank.

The lender, however, reduced its cash dividend for the year 2021, declaring 12.5% for its shareholders.

Another private commercial lender, Al-Arafah Islami Bank declared a 15% cash dividend in the last two years, which was 13% in 2019.

The bank had no provision surplus or shortfall at the end of March this year. The default loan of the bank increased by Tk500 crore over the past 12 months, putting the bank at risk of a provision shortfall.

Standard Bank, which had a provision shortfall of Tk146 crore at the end of March this year, declared a 3% cash dividend for 2021, up from 2.5% a year ago.

The bank's default loans as compared to its total outstanding loans surged to 6.22% in March this year from 5.43% in the same month last year.

The Bangladesh Bank's data shows that 25 of the 41 private banks have no provision surplus, which indicates that they only maintained the regulatory requirement but did not take preparation for a likely default loan shock.

Among the private commercial banks, four remain in provision shortfall.

Only eight banks have a provision surplus of above Tk100 crore. These banks are Brac Bank, Dutch-Bangla Bank, Islami Bank, Prime Bank, Pubali Bank, Shahjalal Islami Bank, The City Bank, and Uttara Bank.

In the banking industry as a whole, provision shortfall surged three times to Tk14,700 crore year-on-year at the end of March this year, according to the Bangladesh Bank.

Some eight banks with an accumulated provision shortfall of Tk20,800 crore have contributed to the surge in the industry average provision shortfall amount.

Of the eight banks, four are state-owned and four are private commercial banks. The four government-owned banks are Agrani Bank, BASIC Bank, Janata Bank, and Rupali Bank, while the private banks are Mutual Trust Bank, Standard Bank, Bangladesh Commerce bank, and National Bank.

Ahsan H Mansur, executive director of the Policy Research Institute, told The Business Standard that it is in no way desirable that banks would declare dividends after making provisioning.

There should be regulations that will bar banks from paying dividends unless they meet their deficits, he mentioned adding that if the bank boards do not formulate a policy in this regard, the Bangladesh Bank should make one.

"Banks are having to keep additional provisions because of increasing defaulted loans. Banks should estimate their defaulted loans beforehand, and then they need to make provisioning so that they do not have to face provision deficits. At the same time, banks have to stay cautious so that they do not face capital deficits."

The noted economist also observed that banks need to be more careful in reducing defaulted loans. Good governance, good credit, and good understanding alongside the boards' strict stance will help to bring down defaulted loans to a great extent, he said, adding that if all this can be ensured, no additional provisioning will be required.