The banking sector's provision shortfall widened over 18 per cent in the third quarter of this year compared to three months ago, due mainly to burgeoning classified loans and forex-market volatility.
The provisioning gap surged to Tk 252.71 billion in the July-September quarter compared to the April-June period, according to the latest Bangladesh Bank data.
This surge stems from banks' failure to meet the fundamental security obligations in banking operations and indicates a deteriorating financial health of the sector.
During the third quarter, the banking industry required Tk 1.06 trillion in provisioning against their loans. However, banks only set aside Tk 811.03 billion.
Six state-owned commercial banks were required to earmark funds amounting to Tk 352.7 billion for provisioning but fell short, maintaining only Tk 225.8 billion, a shortfall of nearly 36 per cent.
The provisioning requirement for 43 private commercial banks was Tk 662.25 billion. But they only managed Tk 531.7 billion during the July-September period, clocking a shortfall of nearly 20 per cent.
Nine foreign commercial banks were required to reserve Tk 24.7 billion, but they set aside Tk 28.9 billion, resulting in a provisioning surplus of 17 per cent.
Three specialised banks were required to earmark Tk 24.0 billion for provisioning. Surpassing this, they maintained Tk 24.6 billion, representing a 2.5 per cent provision surplus.
Provisioning shortfall occurs when a financial obligation surpasses the available cash. This shortfall can be temporary, arising from specific circumstances or persistent -- signalling poor financial management practices.
Banks are obligated to reserve 0.50 per cent to 5.0 per cent of their operating profits for provisioning against general-category loans, 20 per cent against classified loans in the substandard category and 50 per cent against classified loans in the doubtful category.
The severity of a classified loan determines the level of provisioning banks must set aside, with 100 per cent required against bad loans from profits.
Many banking executives told The Financial Express that the ongoing liquidity crunch in the banking industry, because of the escalating volume of classified loans and forex-market volatility, is the primary reason behind the shortfall.
A top executive at a private commercial bank said the shortfall was due to liquidity shortages in the industry.
He said that foreign exchange volatility since the war in Ukraine has affected the industry adversely, leading to a fall in the volume of provisioning.
As a remedy for the domestic issues, the executive suggests that the central bank should step up its monitoring in the banking sector to tackle the increasing trend in default loans.
Meanwhile, the buildup of non-performing loans (NPLs) in banks edged up to Tk 1.55 trillion in September compared to the end of June.
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