Why three banks plunge into Tk51,616cr provision shortfall in H2

Infographics: TBS

Three banks that reported no provision shortfall in the first half of 2024 during Sheikh Hasina's regime plunged into a staggering Tk51,616 crore shortfall in the second half of the year following the political changeover in August.

Central bank officials attributed this to the revelation of accurate information regarding the health of the lenders, which had been concealed by their previous boards.

According to a Bangladesh Bank report, there was no provision shortfall in Islami Bank Bangladesh, Social Islami Bank, and state-owned Janata Bank in June 2024.  

However, the banks faced a significant provision shortfall by the end of December, with Janata reporting Tk27,860 crore, Islami Bank Tk13,153 crore, and Social Islami Tk10,603 crore.  

Typically, banks are required to maintain a provision of 0.50% to 5% of their deposits. However, provisioning requirements can range from 20% to 100% depending on the classification of default loans.  

Provision shortfalls occur due to high levels of non-performing loans. An increase in the provision shortfall leads to a decrease in the bank's net profit, which in turn results in reduced dividends for shareholders.  

Bankers say the rise in defaulted loans has led to an increase in provision deficits. In June, banks with no defaulted loans or provision shortfalls saw these indicators worsen significantly by December.  

This change is partly due to hiding such information under the sole authority of their boards, with details emerging after the fall of the Awami League government in August last year, they added.  

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, told TBS that a bank facing a provision shortfall means it is suffering from capital deficiency.  

He said to address this, cash-strapped banks will need to focus on loan recovery while simultaneously increasing profitability. As a result, the provision deficit will decrease.  

"Those joining boards of the banks will need to inject fresh capital. This will reduce the provision shortfall but will not affect the capital," said the seasoned banker.

According to data from Bangladesh Bank, 12 banks had a provision shortfall of Tk1,09,348 crore by the end of December 2024, up from Tk34,874 crore six months earlier.  

The banks with provision deficits are: Agrani, BASIC, Janata, Rupali, Sonali, Bangladesh Commerce Bank, Dhaka Bank, IFIC, Islami Bank, National Bank, Social Islami, and Standard.  

A senior central bank official told The Business Standard that the provision shortfall in the banking sector could be even higher, as several state-owned and private banks were granted provision deferral facilities.  

"The official said deferral benefits were granted for periods of up to five years, making it difficult to assess the outstanding deferred provisions, though they remain substantial," he said, on condition of anonymity.  

Another senior central bank official said the rise in non-performing loans within the banking sector has primarily contributed to the increase in provision shortfalls.  

NPLs in Bangladesh soared by Tk1.34 lakh crore in the last six months of 2024, reaching a total of Tk3.45 lakh crore by December.  

The new figure of defaulted loans accounts for 20.2% of the banking sector's total loans, according to Bangladesh Bank.  

NPLs stood at Tk2.11 lakh crore at the end of June 2024, accounting for 12.56% of total loans, when the previous Awami League government was still in power.