10 banks face Tk31,549cr provision shortfall as defaults mount
The provision shortfall among banks has worsened due to surging default loans with 10 banks reporting a combined deficit of Tk31,549 crore as of June this year, Bangladesh Bank data reveals.
The banks are National Bank, BASIC Bank, Agrani Bank, Rupali Bank, Bangladesh Commerce Bank, Dhaka Bank, Standard Bank, Bangladesh Development Bank, IFIC Bank, and Southeast Bank.
Among them, four are state-owned banks and six are private.
A senior central bank official told TBS that the provision shortfall in the banking sector could be higher as provision deferral facilities were granted to several state-owned and private banks.
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"Deferral facilities were granted for varying periods, including up to five years, making it hard to assess the current outstanding amount of deferred provisions, though it remains substantial," said the official.
The official added that no new provision deferral facilities were granted in 2023 or 2024.
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.
Another senior central bank official said that the rise in non-performing loans within the banking sector has primarily contributed to the increase in provision shortfalls.
Central Bank data shows that the provision shortfall in the banking sector has risen by Tk4,963 crore between April and June. As of the end of March this year, the sector's provision shortfall stood at Tk26,586 crore.
Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank Limited, told TBS that a bank facing a provision shortfall means it is suffering from capital deficiency.
To address this, the cash-strapped bank will need to focus on loan recovery and capital injection. This situation will also change if good governance returns to the banking sector, he added.
According to a Bangladesh Bank report, default loans in the banking sector reached Tk2,11,392 crore, or 12.56% of the total loans, by the end of June. This represents an increase of around Tk29,096 crore in default loans from April to June of this year.
The high level of default loans poses a significant risk to the country's banking sector, as international standards typically deem a maximum of 3% default loans as acceptable.
Three months prior, as of March 2023, the amount of defaulted loans was Tk1,82,295 crore.
The managing director of a major private bank said many banks are failing to meet the required Capital Adequacy Ratio as per regulations. According to March figures, 16 banks are struggling to maintain adequate capital reserves against risky assets.
"Over Tk1 lakh crore in loans have been borrowed from Shariah-based banks controlled by the S Alam Group. I anticipate that a significant portion of these loans will turn default in the coming months, which will further worsen the capital and provision deficits in the banking sector," said the banker.
The Bangladesh Bank will have to adopt international best practices in loan classification by June this year, according to the IMF country report on $4.7 billion loan approval for Bangladesh.
The central bank also committed to the IMF that it will reduce average non-performing loan (NPL) ratios to below 10% for state-owned commercial banks and below 5% for private commercial banks by 2026.
