BB asks banks to keep extra Tk 10,000cr in provisioning

Banks will have to set aside an additional amount of around Tk 10,000 crore in provisioning to absorb shocks arising from the ongoing economic hardship caused by the coronavirus pandemic.

Lenders must keep an extra 1 per cent provision than what they now maintain for their unclassified loans, according to a central bank notice.

Analysts welcome the move saying the initiative is a time-befitting one.

The calculation of the new provisioning rule will have to be implemented based on the outstanding loans as of December 31 this year.

Banks now set aside 0.25 per cent to 2 per cent against unclassified loans. It is 20 per cent to 100 per cent against defaulted loans.

A provision is an amount earmarked for the probable, but uncertain, economic obligations of an enterprise. The purpose is to make a year's balance more accurate, as there may be costs, which could be accounted for in either the current or previous year.

In Bangladesh, the requirement of provisions has declined since the first quarter of 2020 after the central bank allowed banks to enjoy a moratorium.

Before issuing the notice, the central bank has carried out a study to detect the upcoming shock in the banking sector as borrowers continue to enjoy a moratorium facility until December.

On March 19, less than two weeks after the government first reported the country's maiden coronavirus case, the central bank asked lenders not to consider businesspeople to be defaulters if they fail to repay instalments until June 30.

The moratorium facility was later extended until December and has curbed the rising trend in default loans and provisioning requirements.

As per the banking rules, lenders are usually allowed to transfer the interest of the loans, which is yet to be realised, to their income books.

Such interest is treated as an accrued interest in banking norms.

Banks are allowed to show the accrued interest as income, but such amounts have to be treated as an interest in suspense if loans become defaulted, said a central bank official.

Against this backdrop, net profit in the banking sector is expected to get heavily inflated this year.

But the latest central bank move has reined in inflated net profit in banks.

Banks would have to keep an additional Tk 9,500 crore for the 1 per cent extra provisioning based on the outstanding non-performing loans as of September this year, according to a central bank calculation.

But the figure will increase in the final quarter of this year.

As of September, unclassified loans in the banking sector stood at Tk 969,186 crore, 91.12 per cent of the total outstanding loans, data from the central bank showed.

Non-performing loans (NPLs) stood at Tk 94,440 crore in September, down 1.74 per cent from that three months earlier and 18.73 per cent year-on-year, BB data showed.

The country's banking sector has historically faced provisioning shortfall due to the failure of 10 to 11 banks.

The ongoing moratorium facility has helped banks bring down the provision shortfall to Tk 2,644 crore in September in contrast to Tk 8,119 crore one year ago.

Banks will have to keep the amount in the form of "special general provision-Covid-19".

Lenders will not be allowed to transfer the provision to income or any other segments without permission from the central bank.

"This is a wise decision taken by the central bank beyond doubt," said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh.

Classification has been stopped since the inception of this year due to the regulatory forbearance, he said.

So, the initiative will help banks to absorb the shock, said Mansur, also chairman of Brac Bank.

He, however, said some weak banks would face difficulties to keep the required provisioning set by the central bank.

Mutual Trust Bank Managing Director Syed Mahbubur Rahman echoed him. "This is a good thing but it will create pressure on some banks," he said.

The central bank has also given a set of instructions to transfer interest and profit of the loans, which have not been realised due to the moratorium facility, to their income segment.

Banks will have to take prior approval from the board of directors to transfer the accrued interest of loans, whose size is more than Tk 10 crore, to their income segment.

If the loan size ranges from Tk 5 crore to below Tk 10 crore, the branch managers will have to take no-objection clearance from the managing directors of banks.