The provision shortfall of the scam-hit National Bank doubled in just six months to stand at Tk7,115 crore this June and with this, the private commercial lender outstripped all of its private-sector peers for the first time.
The total provision shortfall of the country's private banks amounted to Tk3,111 crore at the end of June this year, down from a surplus of Tk2,354 crore in December last, according to the latest data from the Bangladesh Bank.
But, provision shortfall in the entire banking industry improved slightly to Tk13,219 crore in June from Tk14,000 crore six months ago, thanks to a slight improvement in the default loan position of the state-owned banks.
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.
Rising provision shortfall puts banks in capital erosion that shrinks the lending capacity of banks and the ultimate outcome is that public money will be at risk.
For instance, two private commercial banks, Padma Bank and National Bank, faced a lending suspension due to severe deterioration in their financial performance.
Padma Bank became unable to pay back depositors' money and National Bank seems to be following the same direction now.
The financial health of National Bank has been deteriorating for the last two years even after the Bangladesh Bank posted an observer on the board of the bank in 2014.
The bank was identified as one of the 10 weak banks by the Bangladesh Bank after new governor Abdur Rouf Talukder took charge.
The governor at a recent press conference made a disclosure about identifying the 10 weak banks and said that the central bank would sit with them one-to-one to improve their health.
The banks have been categorised based on their capital shortages, default loan rates, provisioning, and loan-deposit ratio.
The governor has already held a meeting with the owners and top management of National Bank over its financial performance.
The central bank is now planning to appoint an administrator in the bank, said a source with the Bangladesh Bank.
The default loan rate in National Bank peaked at 23.24% in June this year from 13% in December last, central bank data shows.
The Bangladesh Bank suspended loan activities of the bank in May last year against the backdrop of a liquidity crisis caused by huge loan irregularities.
Later, the suspension was withdrawn in December in the wake of an improvement in the liquidity situation.
But, even after the long suspension, loan-related irregularities continued to take place in the bank, prompting the central bank to go for further suspension in May this year. However, this time, the suspension was partial, limiting the lending sector for the bank.
Provision shortfall situation in banking industry
The private banks fell into a provision shortfall from surplus as the volume of default loans in most of them increased in June.
The average rate of default loans in private banks surged to 6% in June from 5.31% in December last year.
Even though it was obvious that default loans would rise once the loan moratorium package is lifted, most private banks disbursed their artificial profit as dividends in the last two years instead of saving them for future crises.
Now, the banks are facing a real crisis as the provision requirement increased along with rising default loans, putting them in a provision shortfall.
Among the 42 private commercial banks in the country, five including National Bank were in a shortfall in June. The other four banks are Bangladesh Commercial Bank, Mutual Trust Bank, Southeast Bank, and Standard Bank.
Moreover, 24 banks have no surplus – meaning they are at risk of suffering shortfalls if default loans increase further.
On the other hand, of the six state-owned commercial banks, four – Agrani, BASIC, Janata, and Rupali – were in a provision shortfall in June.
The total provision shortfall in the state banks stood at Tk10,600 crore in June, according to the central bank's data.