New provisioning rule creates new unease at banks
Bankers seek additional provisioning only on loans which remained regular with payment pause facility
Bank managers are back to the whiteboard, making reality checks on what the impact of the new provisioning rule would make. The results are dark.
For example, City Bank's loan portfolio now amounts to Tk28,000 crore. Of the amount, 30% or Tk8,400 crore in loans is now enjoying payment pause for the pandemic. If the bank needs to keep additional 1% provision on its portfolio as per the new provisioning mandate, the cost will be Tk280 crore.
But if it is to maintain additional provision only on the loans, of which payments have been deferred, the cost will be around Tk84 crore, according to the bank.
If the bank has to make the additional provision on its total loan book, its net profit will decline significantly, said Mashrur Arefin, managing director of the City Bank.
It is unnecessary for the bank to maintain additional provision on 70% of its loans getting regular payments, he added.
Provisioning refers to an amount kept aside from banks' profits to cover up future loan losses.
Around 30% to 40% of the borrowers of all strong banks are getting the loan deferment facility whereas, the number is 70% for the weak ones, according to industry insiders.
So, good banks will suffer because of some weak ones by maintaining the additional provision on their total loan books, which is not fair, Mashrur Arefin opined.
The extra provision will make a severe impact on the international market as foreign banks may charge higher causing substantial losses in banks' profits. As a result, LC (Letter of Credit) cost will increase for importers, he added.
On 10 December, the Bangladesh Bank issued a circular, instructing banks to maintain an additional 1% provision against all regular loan accounts aiming to strengthen banks against an anticipated wave of loan defaults.
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 in this special account cannot be transferred to any other one without approval from the central bank.
The latest directive to maintain the provision against unclassified loans has created an unease in the banking sector as bankers think there will be a drastic fall in their profitability and also increase transaction costs with foreign banks.
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.
Currently, banks maintain 1% provision for unclassified loans, which will now be 2% following the new instruction from the regulator.
Additional provision is another penalty for lenders when borrowers are enjoying payment pause, said Syed Mahbubur Rahman, managing director of Mutual Trust Bank.
His bank will have to maintain Tk120 crore to Tk150 crore for additional provision, he also said.
The additional provision has been imposed only because of payment pause, so it can be applicable for loans that availed the deferment facility, he added.
Banks are being penalised repeatedly while customers are enjoying privileges, Mahbubur said.
He suggested imposing a dividend ceiling instead of mandating additional provision maintenance.
Big banks will suffer more for additional provision with a huge size of loan book.
For instance, Islami bank, the country's largest private commercial bank, will have to keep aside around Tk1,000 crore extra for its unclassified loans amounting to around Tk90,000 crore. As a result, the bank will see its net profit plummet this year.
Stock investors will also suffer because of profit losses of banks as price indices of bank shares have already shown a negative reaction.
Most bank stocks dropped on Monday, apprehending a reduction in profits of lenders after the central bank issued a new provisioning instruction.
The global banking sector is bracing for a wave of non-performing loans in the post-pandemic era and Bangladeshi banks are no different in this regard.
Fitch Solutions, a global financial market researcher, has warned that banks' profitability will further worsen as soon as the facility of paying loan instalments expires because banks will have to keep aside a huge amount from their earnings as provision against defaulted loans.
The observation came in a report titled "Covid-19 Woes Perpetuating Weakness of the Bangladesh Banking Sector" released by Fitch on 26 October this year.
The report says non-performing loans will increase following the deferment facilities given by the Bangladesh Bank, especially when it comes amid a weak economic environment.
As part of its crisis mitigation strategy, the Bangladesh Bank has provided instalment deferment facility to all borrowers from January to December this year.
Just before the outbreak of the novel coronavirus, banks regularised around Tk50,000 crore under the relaxed policy of 2% down payment offered by the Bangladesh Bank aiming to bring down defaulted loans to a tolerable level.
Those restructured loans have clouded the picture on riskier loans amid the pandemic.