Banks to spend additional money for payment pause

Banks will have to count an extra cost for loan classification deferment as they have been asked to maintain an additional 1% provision against all regular loan accounts which enjoyed payment pause this year.

The Bangladesh Bank has issued a circular to this effect, giving a guideline on how banks will take unrealised interests into their income as loan payment was deferred for the entire year of 2020 amid the ongoing Covid-19 pandemic situation.

In the guideline, the central bank has asked banks to follow general provisioning rules against their loan book.

Moreover, the additional 1% provisioning will be maintained against all regular loans which will be mentioned differently in the final balance sheet of this year in the name of "Special General Provision-Covid-19," according to the circular.

The provision maintained into this special account cannot be transferred into any other account without the approval of the central bank.

Currently, banks maintain 1% provision for unclassified loans which will be now 2% following the new instructions from the regulator.

Provisioning refers to an amount kept aside from banks' profit to cover up future loan losses.

The total volume of unclassified loans in the country's banking sector stood at Tk9,24,775 crore at the end of September this year.

"It is a good measure for banks' health, but maintaining the additional provision will be difficult for many banks," said Syed Mahbubur Rahman, managing director of Mutual Trust Bank.

He said it will have a severe impact on the net profits of banks.

In March this year, the Bangladesh Bank, as part of its crisis mitigation strategy, provided instalment deferment facility to all borrowers from January to December this year.

The classification deferment helped banks show inflated profits in the first nine months of the year as the rate of default loans came down to 8.88%, which was double-digit last year.

Even though net profits of most banks in the nine months increased even amid the pandemic thanks to relief from provisioning maintenance, more than 40% of their incomes were due. This may create a big problem for banks in the next year.

From this perspective, the central bank in its new circular imposed strict conditions in taking realized interest income against loans of this year into income.

In the case of booking interest against loans of above Tk10 crore, banks will have to take approval from their boards based on a logical assessment report of management.

In the case of loans to the rune of Tk5 crore and above, interests will be taken into income following the recommendations of branch managers and approval from the managing directors of the banks.

In the case of less than Tk5 crore loans, interests will be booked following the recommendations of branch managers and their regulatory authority, according to the circular which will come into effect immediately.