When the overall economy was reeling under pandemic shocks in 2020, bank owners seemed to have been the lone beneficiaries as the private lenders distributed higher profits instead of saving for rainy days taking advantage of provisioning forbearance.
The pandemic relief has now brought about a real crisis for the banking sector as the provision shortfall shot up three times to Tk22,573 crore throughout the last year.
The provision shortfall has increased as key indicators of the banking sector's health have already started to deteriorate with rising default loans.
Default loans in the banking sector increased by Tk14,539 crore in the past year after loan moratoriums were partially lifted.
Provision is the fund set aside by banks to pay for anticipated future losses. High default loans require banks to maintain higher provisioning which is kept from profit.
The latest default loan statement of the Bangladesh Bank shows that nine banks fell into a provision shortfall at the end of December last year. Of the eight, four are state-owned banks and five private banks.
The provision surplus of private banks declined by half to Tk2,354 crore at the end of December last year over the same period of the previous year, according to Bangladesh Bank data.
Only 10 private banks out of 42 remained in provision surplus above Tk100 crore. They are Brac Bank, Dutch-Bangla Bank, Eastern Bank, Islami Bank, Premier Bank, Prime Bank, Pubali Bank, Southeast Bank, City Bank and Uttara bank.
Of the state-owned banks, only Sonali Bank maintained a provision surplus amounting to Tk1,372 crore at the end of December last year.
Selim RF Hussain, chairman of the Association of Bankers Bangladesh and also managing director of Brac Bank, told The Business Standard that the biggest challenge in minimising the provision shortfall in the banking sector is managing default loans.
"Many banks cannot maintain provisioning because the Bangladesh Bank offered them a lot of facilities. The central bank has to tighten its grip in the coming days. The provision shortfall cannot continue for an indefinite period. We hope that the banks will make up the deficits through better control in good governance," he said.
Borrowers enjoyed a full payment deferral facility in 2020, which gave banks relief from maintaining provisions, helping them show good profits that year.
However, the Bangladesh Bank lifted the facility partially last year, asking banks not to classify borrowers if they pay at least 15% of their dues.
Moreover, banks began to pull out of moratorium package support last year amid the economic rebound by classifying loans based on bank-client relationship.
As a result, default loans started to rise from September last year crossing Tk one lakh crore, which continued till December, recording total default loans to the tune of Tk1,03,273 crore.
Even though rising default loans are eroding profitability of banks, the Bangladesh Bank in December last year came up with a mega discount for banks, allowing them to show unrealised interest incomes as profits if borrowers pay only 15% of their payable amounts of that year.
Moreover, banks can transfer an additional 1% provision that they were asked to keep against moratorium loans in the previous year, subject to the full recovery of the payable amounts from borrowers.
The inclusion of unrealised income in the balance sheet was another opportunity offered by the Bangladesh Bank for banks to show inflated profits for 2021.
With such a big offer in place, banks would offer dividends against the profits that exist only on paper, said industry insiders.
Even though the banks seemed reluctant to maintain extra provision during the pandemic year of 2020, they were rather eager for 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 were higher than or similar to that of the previous year.
The profit taken by bank owners left most banks empty in savings, making them weak in absorbing the shock of default loan wave, said bankers on condition of anonymity.
Talking to several bankers, TBS came to know that they are under pressure from directors for disbursing good dividends. As a result, they cannot keep extra provision as a prudent measure to recoup upcoming losses from rising default loans.
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 last 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 last year, but the bank was in a provision shortfall amounting to Tk100 crore in September, which widened to Tk149 crore in December.