Stipulates higher provisioning for banks as a precautionary measure
Banks will have to keep higher provisioning against their unclassified loans for this year, in what can be viewed as a proactive move from the Bangladesh Bank to protect the sector’s financial health once the loan moratorium facility is lifted in the new year.
Following the outbreak of coronavirus in Bangladesh, the central bank on March 19 asked banks not to downgrade the classification of any loans for the borrowers’ failure to furnish loan instalments until June 30. That facility has been extended twice to December 31.
Economists and bankers anticipate there will be a build-up of toxic assets once the facility is lifted from 2021 thanks to the slower economic recovery from the two-and-a-half-month-long general shutdown to flatten the curve on coronavirus.
While the curve was nowhere near to being flattened, it ended up yielding a missed quarter of economic activities.
With the view to raising the banks’ shock-absorbing capacity, the central bank asked lenders to maintain an additional 1 per cent provisioning against all unclassified loans along with the loans shown in the special mention accounts.
Special Mention Accounts are the ones that show symptoms of bad asset quality in the first 90 days itself or before it is identified as classified.
Provisioning is a portion of the income set aside to cover for
The BB also tightened the rules for transferring unrealised interest income to the income account.
Non-payment of loans has been on the rise, which is creating extra risks for the overall banking sector, said a high official of the BB requesting anonymity.
“This has prompted the central bank to come up with the instruction.”
The requirement for provisioning would increase by about Tk 10,000 to Tk 12,000 crore, he added.
At the end of September, the country’s scheduled banks maintained Tk 61,000 crore in provisioning against their requirement of Tk 63,644.4 crore.
Some 12 banks including the state-run lenders Agrani, Rupali, Sonali, BASIC and Bangladesh Commerce failed to maintain the required provisioning against their default loans, although the BB allowed keeping provisioning in phases. The lenders suffered combined provisioning shortfall of Tk 9,469 crore at the end of September.
Usually, the banks are supposed to keep 0.25 per cent to 2 per cent provisioning against unclassified loans.
But now, banks will have to keep 3 per cent provisioning including the 1 per cent additional provisioning under the head of ‘Special General Provision COVID-19’ while preparing their financial statement for 2020.
It would not be right to impose average provisioning on all the unclassified loans, said Syed Mahbubur Rahman, managing director of Mutual Trust Bank.
Many of MTB’s clients have kept their repayments regular amid the loan moratorium facility, he said.
“Why should we keep provisioning against these loans too?”
Subsequently, he urged the central bank to clarify the issue.
Until further instruction of the central bank, the banks would not be allowed to transfer the special general provision COVID-19 to any other segment, the BB notice said.
As per the notice, banks will have to follow a number of instructions in booking unrealised interest or income imposed against the loans that have become irregular in 2020.
For transferring the unrealised interest generated against the loans amounting to upwards of Tk 10 crore to the income account, approval from the board based on the audit committee’s recommendation has been made mandatory.
For booking interest generated against loans ranging between Tk 5–10 crore to the income account, approval from the managing director is a must.
For booking interest generated against loans of up to Tk 5 crore to the income account, approval from the monitoring authority of a branch along with the recommendation of the branch head has been made mandatory.