People in the know of things in the banking sector had predicted the problems that are now rocking a few banks. The problems include a sharp rise in the volume of classified loans and provisioning shortfall. Some banks somehow have kept their nose above water and some others, including the foreign banks, however, are in a comfort zone.
Factors such as regulatory slackness and banks' reluctance to save for rainy days have given rise to the present situation. The volume of classified loans soared by 16.38 per cent or Tk 145.40 billion to about Tk 1033 billion at the end of 2021. The increase in the size of non-performing loans led to a higher provisioning requirement.
The concessions that the central bank granted in 2020 and 2021 in loan classification to help businesses during the pandemic contributed to the NPL buildup in the banking system. Besides, BB's policy support to businesses resulted in lower recovery of loans, which again squeezed the earnings for banks. The size of the NPL was on the lower side at the end of 2020. But with an improvement in the Covid situation in 2021, the central bank partially withdrew that support in the latter part of 2021. And this caused a notable rise in NPL volume. It is feared that the volume would soar further this year with banks going back to the usual loan classification system.
The banking sector regulator, the Bangladesh Bank (BB), being aware of the possible outcome of the soft approach towards loan classification had asked the banks to keep an extra 2.0 per cent for provisioning the loans disbursed under the pandemic-time policy support. That some banks have not complied with that advice is evident from their high provisioning shortfall. The BB also allowed banks to include the unrealised interest incomes against loans in their balance sheets if the relevant borrowers paid 15 per cent of their outstanding amounts.
The inclusion of unrealised interest income helped the banks to show inflated profits for 2021. BB's generosity would have produced better results had the banks used the same for provisioning the NPLs. Banks had a difficult time throughout 2020 because of the pandemic slowdown. Yet they paid a higher cash dividend to their shareholders instead of provisioning the rising NPLs.
Nine banks had a total provisioning shortfall of Tk 225.73 billion at the end of 2021. However, 82 per cent of it belongs to the four state-owned banks. Only 10 private banks reportedly could manage provision surplus in 2021. Thus, the overall scenario remains frustrating.
The International Monetary Fund (IMF) in a recent report has mentioned that the weaknesses of Bangladesh's banking system have deepened because of the pandemic. It suggested necessary reforms. Downsizing the volume of classified loans, thus should be a priority goal of any reform. That is easier said than done. A tough stance on the part of BB and necessary support and cooperation from the government and the banks' boards could largely help achieve the objective.