Extra 1% provisioning will eat up profits, yet it is good

The Bangladesh Bank has imposed an additional 1% provisioning against unclassified loans of banks on top of previous 0.25% to 2%, amid fear of hike in bad loans after the withdrawal of loan moratorium facility for Covid-19 on December 31.

The move will seriously affect banks’ profits, yet some bankers believe this will help banks create a buffer to absorb shocks in the way of a jump in nonperforming loans next year.

“It is a good decision for the banking sector in a pandemic situation. Otherwise, there will be huge pressure on banks next year,” said Naser Ezaz Bijoy, chief executive officer of Standard Chartered Bangladesh.

If banks disburse dividends, then they will not have adequate funds to meet the additional provisioning requirement, he said.

As per the central bank rules, banks have to keep 0.25% to 2% provisioning against unclassified loans. Provisioning is lowest, at 0.25%, for SME loans.

In a circular on Thursday, the BB said banks will have to keep additional 1% provisioning under the head of “Special General Provision Covid-19” while preparing their financial statements for 2020.

Additional requirements for provisioning would be over Tk9,000 crore — more than half of the industry’s annual profits before tax.

On March 19, the central bank, amid the outbreak of the Covid-19 pandemic, asked banks not to downgrade the classification of borrowers who failed to pay loan instalments until June 30.

That facility was later extended until December 31.

“After the facility ends on December 31, there could be a hike in bad loans. So, to keep the financial stability of the banks, we took such a decision,” a senior BB official, seeking anonymity, told Business Insider.

Until further instructions 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 Tk10 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 Tk5 crore and Tk10 crore to the income account, approval from the managing director is a must.

For booking interest generated against loans of up to Tk5 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.