Bangladesh’s banks’ precautionary scenario deteriorated further in the first quarter of this year on an increase in delinquent loans, suggesting that the health of the banking sector has deteriorated.
The provisioning gap widened to Tk14,746 crore in March, up 180 percent year-on-year and 5 percent more than three months ago, according to Bangladesh Bank data.
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A provision underfunding occurs when a financial obligation exceeds the cash available. It can be temporary, arising from a number of unique circumstances, or permanent and indicative of poor financial management practices.
Banks are required to allocate 0.50% to 5% of their operating profit to loans in the general category, 20% to loans classified as “below average” and 50% to loans classified as “difficult”.
It must set aside 100 percent of the loans classified as non-performing or at a loss from profits.
The precautionary situation could deteriorate further as the number of defaulted loans is expected to spike this year as the central bank lifted an easing policy on loan classifications in December last year.
The central bank maintained a borrower moratorium facility throughout 2020.
As a result, banks failed to reclassify borrowers’ credit statuses, bringing non-performing loans (NPLs) down to Tk 88,734 crore, down 6 percent from 2019.
The BB also continued the credit easing policy until last year, helping banks to significantly curb non-performing loans.
Under the policy, borrowers were allowed to avoid falling into default in exchange for depositing just 15 percent of the total installments they owed over the past year.
Default loans at banks rose by 19.3 percent year-on-year to Tk 113,441 crore in the first quarter of 2022.
Between January and March the deficit widened on the lackluster performance of eight banks, which together ran a deficit of Tk20,863 crore.
The banks are Agrani, Basic, Janata, Rupali, Bangladesh Commerce, Mutual Trust, National Bank and Standard Bank.
Some of the banks now facing shortages had previously suffered widespread credit scams.
Of the lenders, Janata Bank faced the highest provisioning gap at Tk 8,136 crore, mainly due to a major fraud that took place at the bank in recent months.
Some individuals and companies such as AnonTex and Crescent Groups have previously siphoned large amounts of funds from Janata Bank in the name of borrowing, dealing a blow to the lender’s financial health.
Contacted Md. Abdus Salam Azad, Managing Director of Janata Bank, said the lender’s provisioning gap has narrowed in recent months and stood at Tk 10,491 crore in December last year.
He continued to hope that the shortfall would narrow further in the coming days as they now prepare the process of collecting the loan.