How prepared are Banks in Bangladesh absorbing COVID19 shock

one crore =10 million
one EUR = BDT 101.16

By mid-July three of America’s biggest banks have set aside a combined USD 28bn for current and future loan losses, pushing Wells Fargo to a quarterly loss and hitting profits at JPMorgan Chase and Citigroup as lenders count the cost of the coronavirus crisis, reports the Financial Times.

Similarly, the largest UK, Swiss and eurozone lenders are set to keep provisioning of a minimum €23bn for the second quarter of 2020.

Oliver Wyman, a New York-based financial consulting firm, has projected as much as €800bn of loan losses for European banks over the next three years in case of a second wave of coronavirus infections.

In Bangladesh, however, only a handful of the banks are thinking along this line, with the majority yet to commence any preparation to this end at all. The country’s banking sector has faced a provisioning shortfall in recent years due to a lack of corporate governance.

For instance, a total of BDT 3,619 crore was reported as provisioning shortfall against the required amount of BDT 60,493 crore in the first quarter of 2020, according to the data from the central bank.

Previously the central Bank of Bangladesh permitted banks facing provisioning shortfall to preserve funds in phases such that they could manage a profit.

A loan loss provision is an income statement expense earmarked as an allowance for uncollected loans and loan payments. This provision is used to cover loan losses such as default loans, customer bankruptcy and renegotiated loans. Banks are required to set aside the fund from operating profits.

But in Bangladesh, banks are feeling comfortable as the central bank has given a regulatory forbearance, barring them from classifying loans until September in case of a failure to pay instalments by businesses given the ongoing financial recession. The deadline is expected to be extended to December.

As per regulations of the central bank of Bangladesh, banks must keep provisioning between 0.25 per cent and 5 per cent for unclassified loans, 20 per cent for default loans of sub-standard category, 50 per cent for the doubtful category and 100 per cent for bad or loss category.

The comfort may not last very long!

The default loans may escalate alarmingly when the moratorium period expires as a large number of businesses are seeing their capacity to pay back loans is eroding gradually.

“None has any clear idea of what will happen when the moratorium period comes to an end,” said Syed Mahbubur Rahman, managing director of Mutual Trust Bank. As a matter of fact, the majority of banks do not have adequate strength to keep provisioning to tackle the rainy days. Lenders should set aside funds for provisioning from their operating profits in the next three years so that they could go from strength to strength sidestepping the recessionary hit, he said.

Default loans in the banking sector have been maintaining an upward trend for years, weakening the provisioning base of banks. In March, the total amount of default loans stood at Tk 92,510 crore, accounting for 9 per cent of the total outstanding loans in the banking sector.

Some banks have taken preparation to strengthen their provisioning base.

City Bank kept aside BDT 41 crore in provisioning in the first half of 2020 to tackle the future uncertainty, said Mashrur Arefin, its managing director. The bank will build up a satisfactory amount of provisioning in the next three years, he said.

MA Halim Chowdhury, managing director of Pubali Bank, said his bank has taken the same measure.