The two-year payment deferral facility is nearing its end this December, but most of the banks have conserved little in their arsenals to absorb the post-moratorium shocks.
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.
They are Brac Bank, Eastern Bank, Islami Bank, NCC bank, Prime Bank, Pubali Bank, Southeast Bank and Uttara Bank.
On the other hand, five banks – Bangladesh Commercial Bank, Dhaka Bank, Mutual Trust Bank, National Bank and Standard Bank – were in a provision shortfall even amid the loan moratorium period.
Provision shortfall of National Bank increased by five times to Tk2,385 crore in nine months till September, the highest amount among private banks.
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.
Profit that banks made during the pandemic was not real because many banks did not maintain provisions properly against bad debts, said Selim RF Hussain, managing director of Brac Bank.
He said banks, which disbursed dividends showing inflated profit, will face serious difficulties in the coming years.
In international practice, good banks keep a large amount of provision to create a capital buffer for the next one or two years, he said.
In Bangladesh, only a few banks made extra provision to meet up post-moratorium shocks, he also said.
Selim said Brac Bank made an additional half yearly profit of Tk200 crore.
At the end of September, the bank's provision surplus stood at Tk343 crore, according to Bangladesh Bank data.
"We all know that challenging years are coming, so banks should have been prudent in spending profits for dividends," said Ali Reza Iftekhar, managing director of Eastern Bank.
Many banks did not save for the coming years, he said.
Ali Reza, also the chairman of the Association of Bankers, Bangladesh (ABB), said the Bangladesh Bank has given a deferral of provisioning, not a waiver.
"I am not against dividends, but banks should make their health strong first by keeping provision," he said.
Banks made good profit in the current year as well and they should make good provision, he continued, adding that the Bangladesh Bank should not give any exemption from maintaining provisions.
The provision surplus of Eastern Bank was Tk286 crore at the end of September this year, central bank data shows.
When private banks disbursed higher dividends instead of keeping extra savings to face post-pandemic consequences, the Reserve Bank of India kept dividend payout suspended for 2020, taking Covid-19-led uncertainty into account.
In a circular issued by the central bank of India on December 4 last year, it said, "In view of the ongoing stress and heightened uncertainty on account of Covid-19, it is imperative that banks continue to conserve capital to support the economy and absorb losses. In order to further strengthen the bank's balance sheets, while at the same time, supporting lending to the real economy, it has been decided that banks shall not make any dividend payment on equity shares from the profits pertaining to the financial year ended 31 March 2020".
For 2021, the Indian central bank allowed banks to disburse dividends with a set of conditions along with the highest 50% dividend ceiling.
In a similar position, the Bangladesh Bank also discouraged banks on cash dividend payout by issuing a dividend policy for the first time last year.
The central bank set a limit on dividend payout based on the bank's capital base.
However, most banks paid dividends at their highest capacity in line with the dividend policy. Even some banks tried to pay higher dividends bypassing the policy and were penalised.
There appears the same intention on dividend payout this year too as banks have continued to make good profits, thanks to provision forbearance.
Loan moratorium gave banks relief from maintaining provision, helping them to show inflated profits.
Talking to several bankers, The Business Standard came to know that they are under pressure from directors for disbursing good dividends. As a result, they cannot keep extra provision as a cautious measure to recoup upcoming losses from rising default loans after the lifting of the loan moratorium facility from January next 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.
Raising concern about the banking sector's health, Fitch, the global rating agency in its latest evaluation report published last month, said the reported default loan is likely understated because of an extensive loan moratorium during the pandemic.
The rating agency fears that default loans will increase significantly after the ongoing loan moratorium facility is lifted, putting the banking industry under stress.
The banking sector already started to feel the default loan wave as in the first nine months of this year, default loans increased by Tk12,416 crore.
The total default loan in the banking sector crossed Tk1 lakh crore in September this year.
Conflict between BB and BSEC over dividend payout
When the Bangladesh Bank is encouraging banks to be conservative in dividend payout, considering the consequence of the post-moratorium era, the Bangladesh Securities and Exchange Commission (BSEC), the capital market regulator, seems to be going in the opposite direction.
In April 2020, the central bank kept the cash dividend payout for 2019 halted till September the same year. The decision was aimed at making a strong capital base and retaining adequate liquidity in the banking system to support the virus-struck economy.
Later, it allowed banks to disburse dividends for 2019 with a maximum of 15% cash based on a strong capital base.
In February this year, the central bank, for the first time, came up with a permanent dividend policy mainly to limit cash dividend disbursements.
In the new rule, the highest cash dividend limit has been set at 15% subject to fulfilment of the capital base requirement. Later, the ceiling was revised up to 17.5% in the face of demands made by the banks.
In December last year, the central bank asked banks to keep an additional 1% provision against loan accounts, which enjoyed a payment pause this year.
All these measures indicate that the central bank wants banks to spend less for dividends and save more to gain strength.
On the other hand, the BSEC issued a circular on 2 October 2019, allowing cash dividend even having an accumulated loss.
The circular contradicts the Bank Company Act 1991 where dividend payout without provisioning against loss is prohibited. The same rule is also applicable for non-bank financial institutions.
In the case of banks, dividend payout is highly related to depositors' interest as banks, which deal with public money, have to maintain a required capital base.
However, the BSEC has been pursuing the central bank to implement their circular for banks and non-bank financial institutions instead of considering the depositors' risk.
In the recent meeting held last month with the Bangladesh Bank, the BSEC raised the issue demanding that banks and non-bank financial institutions disburse dividends even after having accumulated losses.
The central bank did not agree with it, saying that it goes against the law.
But soon after the meeting, a BSEC representative briefed journalists that the central bank agreed to allow dividend payout with an accumulated loss.
On the very next day of their briefing, the central bank issued a press release denying the BSEC's statement.
For now, the BSEC and the Bangladesh Bank are in contradictory positions over the dividend issue.