The pressure of record default loans in the banking sector has taken a terrible turn.
Defaulted loans are no longer just a recovery crisis; they are simultaneously exerting negative pressure on banks' earnings, financial protection, capital, and lending capacity.
Reduced income, in particular, has left several banks unable to maintain the required safety reserves, or provision shortfall.
As a result, the financial foundation of weak banks is becoming even more precarious.
According to a report by Bangladesh Bank based on data from the June quarter of this year, the provision shortfall of 15 public and private banks in the country has reached Tk229,146 crore.
Alongside a declining ability to cover this deficit, these banks face added pressure in attracting deposits and disbursing new loans.
Consequently, the impact of default loans is extending beyond bank balance sheets into overall operational activities.
Data shows that by the end of the June quarter of this year, defaulted loans in the country rose to Tk606,555 crore, which accounts for 32.78% of total disbursed loans.
This high volume of default loans is the primary cause of immense pressure on the earnings and provision management of troubled banks.
Stakeholders say that a large portion of the loans distributed through irregularities and corruption during the past decade and a half under the former Awami League government is no longer being recovered.
This has affected default loans across almost all public and private banks.
As defaulted loans increase, so does the requirement for provisions. However, banks unable to maintain required provisions due to falling income risk facing capital shortfalls in the future.
Mustafa K. Mujeri, senior economist and former chief economist of Bangladesh Bank, said that due to loans distributed under real and fake names during the previous government's tenure, the condition of several banks has become extremely fragile. Rising default loans in these banks have driven up the provision shortfall.
“Since they have no income, they couldn't maintain provisions. Under the rules, they will not even be able to declare profits."
State banks also shaky
The condition of state-owned banks is also alarming.
Five public banks have a total provision shortfall of Tk78,330 crore.
Among them, Janata Bank has the highest shortfall at Tk50,160 crore. Agrani Bank has a deficit of Tk12,338 crore, Rupali Bank Tk10,753 crore, Basic Bank Tk5,047 crore, and Bangladesh Development Bank nearly Tk33 crore.
The provision shortfall across 10 private sector banks exceeds Tk150,000 crore.
Among these, Islami Bank Bangladesh has the highest shortfall at Tk82,334 crore.
National Bank has a deficit of Tk23,326 crore, IFIC Bank Tk21,894 crore, Bangladesh Commerce Bank Tk645 crore, Mercantile Bank Tk2,095 crore, NRB Bank Tk130 crore, NRBC Bank Tk820 crore, Premier Bank Tk11,971 crore, Union Bank Tk5,005 crore, and Standard Bank Tk2,595 crore.
According to regulations, banks must maintain provisions at specific rates based on loan classification: 0.25 to 5% against regular loans, 20% against sub-standard loans, 50% against doubtful loans, and 100% against bad/loss loans.
This protective mechanism exists so banks do not suffer massive financial losses if a loan ultimately turns bad—a standard these 15 banks have failed to meet.
According to Bangladesh Bank calculations, the total provision requirement for the banking sector was Tk483,397 crore.
Against this requirement, Tk261,039 crore was maintained.
Although the provision shortfall for the 15 troubled banks alone stands at Tk229,146 crore, some banks managed to maintain provisions above their target.
As a result, the overall provision shortfall for the banking sector dropped slightly to Tk222,357 crore.
