Eleven banks failed to maintain provisions against loans last year although debt classification remained closed due to the coronavirus pandemic.
The central bank's latest default loan statistics show that the provision shortfall of the 11 banks exceeded Tk7,000 crore.
Three government banks – Rupali, BASIC, and Agrani – together recorded the highest provision deficit of Tk5,429 crore.
Bangladesh Krishi Bank had a provision deficit of around Tk165 crore, and Probashi Kallyan Bank Tk78 lakh.
Provision shortfall of six private banks stands at Tk1,552 crore. They are Bangladesh Commerce Bank, Dhaka Bank, Mutual Trust Bank, National Bank, Social Islami Bank, and Standard Bank.
Standard Bank started its journey as a full-fledged Islamic bank on 1 January.
According to the Bank Company Act, a bank cannot declare dividends for its shareholders if it has a provision deficit.
Also, there is a risk of capital shortfall if a bank fails to maintain provision.
Banks earn from interests they receive by lending depositors' money. Thus, they need to operate within various restrictions to protect the depositors' money.
One of such measures is keeping a provision against a loan. The provision rate is 0.25% for regular or non-classified loans. This means if a bank lends Tk100, it needs to keep a provision of Tk0.25.
The provision rate varies according to the type of classified loans. If a loan becomes substandard after it is classified, the provision rate is 20%, meaning provision will be Tk20 against a Tk100 loan.
The rate is 50% if the loan falls into the doubtful category, and 100% if it becomes a bad loan.
The provision comes from banks' earnings. So, provision deficit arises if banks' earnings do not increase with the rise in default loans.
The central bank increased the advance deposit ratio last year to increase debt flow to tackle Covid-19 impacts. The ratio was set at 87% for conventional banks and 92% for Islamic banks.
This means conventional banks can now lend Tk87 against a deposit of Tk100 while Islamic banks can loan Tk92 against a Tk100 deposit.
The central bank changes this rate from time to time.