Banks failing in provisioning their ballooning bad loans

Banking sector's annualised provision shortfall surged around 75 per cent in the immediate-past calendar year due mainly to burgeoning classified loans and forex-market volatility, sources said.
The provisioning-fund deficit against bad assets in commercial banks increased to Tk 193 billion by end of 2023, up from Tk 110 billion recorded in 2022, according to the latest statistics of Bangladesh Bank (BB).
This upswing, especially from seven provision-shortfall-contributing commercial lenders, stems from banks' failure to meet the fundamental security obligations in banking operations and indicates a deteriorating financial health of the sector.
The country's commercial banks needed to apportion funds amounting Tk 989 billion in 2023 for provisioning against their outstanding loans of Tk 16.18 trillion but ran short maintaining only Tk 797 billion, leaving a deficit of around 75 per cent.
The state-owned commercial banks (SCBs) hold the major share of the deficit amounting to Tk 101 billion while the provisioning gap in PCBs (private commercial banks) was calculated at Tk 100 billion in 2023.
But foreign commercial banks (FCBs) boast of provisioning surplus worth Tk 5.04 billion while provisioning surplus in specialised banks worth Tk 3.49 billion is recorded in the just-past calendar year, according to the data.
Seeking anonymity, a BB official said provisioning shortfall was found in seven commercial banks in 2023 but "the most worrying part is one first-generation private commercial bank holds around 60 per cent of the entire deficit in banks in 2023".
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 from profits, with 100-percent required against bad loans having potential risk of loss.
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 says the shortfall was due to liquidity shortages in the industry.
"Foreign-exchange volatility since the war in Ukraine has affected the industry adversely, leading to a fall in the volume of provisioning," he says.
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.
Talking to the FE, managing director and chief executive officer of BRAC Bank Selim R.F Hussain said there is no other option but getting capitalised.
"The banks falling short of the loan-provisioning standards, somehow, need to meet the standards giving top priority on cash recovery of the classified loans to avert facing actions like merger," he says about bail-in option.
Meanwhile, the buildup of non-performing loans (NPLs) in banks edged up to Tk 1.46 trillion in 2023, up around 21 per cent from Tk 1.20 trillion recorded in 2022.

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