Banks allowed to take unrealised interest into profit

The Bangladesh Bank has come up with a mega discount for banks, allowing them to show unrealised interest incomes as profits if borrowers pay only 25% of their payable amounts of the current year.

Moreover, banks can transfer additional 1% provision that was asked to keep against moratorium loans last year, subject to the full recovery of the payable amounts from borrowers.

The central bank issued a circular giving an instruction how banks will transfer incurred interest  against moratorium loans in their profits for 2021.

The loan moratorium facility that has been running for the last two years will end in December.

The new circular will help banks show a high profit by taking unrealised income in the balance sheet for 2021.

As banks are taking a high risk for showing unrealised interest income as profits, they will have to maintain additional 2% provision against those moratorium loans, according to the circular.

The risk of this process of taking unrealised income into profits is that if borrowers fail to pay the rest of the amount, that will increase default loans. A rise in default loans will increase provisioning requirements and high provisioning requirements will eat up profits.

The facility of taking unrealised interest into income will allow banks to declare a high dividend for the current year.   

The circular instructed banks that borrowers who paid 25% of their payable amount will not be marked as defaulter.

Borrowers, who will fail to pay 25% of their payable amount by December this year, will be marked as defaulters, according to the circular.

The Bangladesh Bank came up with the circular at the time when banks are already spending high for dividends, showing inflated profits and saving less for future risk, causing a provision shortfall.

Another risk is that default loans are already on the rising trend crossing Tk1 lakh crore in September this year.

The key indicators of the banking sector's health have already started to deteriorate with rising default loans, widening provision shortfall and capital erosion.

 Most banks made a healthy profit even amid the pandemic, thanks to provision forbearance amid the ongoing loan moratorium package, but many of them spent on dividends instead of saving for rainy days, leading to widening provision shortfalls coupled with rising default loans.

Only a few banks have maintained higher provisions to offset losses arising from default loans.

General provisions are balance sheet items representing funds set aside by a company as assets to pay for anticipated future losses. For banks, a general provision is considered to be supplementary capital under the first Basel Accord.

The latest default loan statement of September shows only eight private banks out of 42 kept a good amount of surplus provision above Tk100 crore.

The total surplus provision of private banks declined by Tk1,000 crore to Tk3,586 crore in September from December last year as the rise of default loans increased provision requirements for banks.

The default loan of private banks surged to 5.47% in September from 4.66% in December last year, according to Bangladesh Bank data.

The rise in default loans also eroded the capital base of private banks.

Even though the banks seemed reluctant to maintain an extra provision during this crisis period, they were rather  eager about the dividend payout.

Even amid the pandemic, banks did not compromise on cash dividend payout  – they disbursed higher cash dividends for 2020 than in the previous year, making the directors happy.

Out of 31 private banks listed on the Dhaka Stock Exchange, 22 have disbursed cash dividends for 2020. 

Dividends declared by most of these banks for last year are higher than or similar to that of the previous year.

The profit trend for the current year shows that banks made good earnings but did not maintain adequate provisioning.

The growth of earnings per share of private banks was up to 154% in the first nine months of the current year and most banks made earnings above 20%.

Despite having good earnings, some banks were in a provision shortfall.

For instance, Standard Bank saw a 154% growth in earnings in January-September this year, but the bank was in a provision shortfall amounting to Tk100 crore in September.