Most businesses have gone through a tough time since the start of the pandemic in March this year. They are, however, not out of the woods though economic activities have started picking up albeit at a slow pace.
Banks are equally hit by the pandemic. During the so-called 'holidays' declared by the government when the viral disease was at its peak, the banks had continued their operations on a limited scale. They did not have any other options also as the business activities across the country plummeted to its lowest level ever.
The banking sector was bracing for the worst time this year and its constituents feared an unprecedented spike in the volume of soured loans as many borrowers, in addition to the delinquent ones, would default on their payments because of the pandemic.
But the central bank had come to the rescue when it asked the banks on March 19 not to consider the businesspeople as defaulters if they failed to pay instalments of their loans until June 30. The directive resulted in the suspension of loan classification. The effectiveness of the central bank's directive was extended to September next and then again to December 2020. There is no certainty that it would not be extended any further.
Before the issuance of the BB order for suspension of loan classification, the banks were required to set aside 0.25 per cent to 2.0 per cent against unclassified loans and 20 per cent to 100 per cent against classified loans.
The order to put on hold the classification of loans did reduce the size of the provision amount that banks were required to keep against their classified loans. As far as the trend witnessed in the loan classification in recent years, the volume of classified or non-performing loans, unless there is any sort of regulatory intervention, is sure to go up at the end of every quarter. Often, the banks are, however, given opportunities to window dress their liabilities.
As the provisioning requirement has been less than that of the normal time, the banks are now in an easy mood even though the pandemic has created so many difficulties for them as far as their day-to-day operations are concerned.
Historically, the banking sector has been witnessing a shortfall in provisioning by banks. Some banks do fail to meet their loan-provisioning requirement. The shortfall was estimated at Tk 92.20 billion at the end of June 2019 and the amount came down to only Tk 26.44 billion at the end of September last.
The decline in provisioning requirement coupled with the volume of accrued interest (the volume of interest that is yet to be realised), thus, is offering an opportunity to banks to increase the annual profit earning. However, most of the profit is artificial and only exists on paper.
The interest earned from classified loans is supposed to be shown as interest in suspense and cannot be taken into account while estimating profit/loss.
Besides, many loans might have been marked as classified between March and December this year because of the failure to service those by the relevant borrowers on time. Because of the moratorium, the banks have not provided for the defaulted loans. Rather they have calculated interest on the 'regular' loans and showed the same in their books of account. All these might offer the banks the opportunity to give their shareholders, particularly the big ones, handsome dividends even during one of the most difficult times, in terms of the business environment.
But the situation might turn sour for the banks when the BB moratorium will be lifted. That time is not far away.
The volume of classified loans is likely to go up abnormally then as many borrowers having relatively clean record could fail to service their debts under the prevailing circumstances. In such a situation, the provision requirement of the banks might shoot up to an unmanageable extent.
So, under the circumstances, the banks might consider setting aside funds in far larger volumes than the present requirement to cushion the future provision requirements.
The problem with many banks and business entities here has been that they are very short-sighted and more concerned about the present than future. But individuals, as well as corporates as part of their preparations for the rainy days, do need to set aside funds to absorb future shocks.
This is truer for the Bangladesh banking industry that it does not have an image that could evoke high esteem. Rather, experts deplore the poor performance of a large number of banks amidst poor internal governance and regulatory indulgence. The reports of the multilateral lenders on Bangladesh situation have always unmistakably noted with concern the poor state of the banking sector of Bangladesh.
The government and relevant others, unfortunately, despite knowing the state of things in the banking sector, continue to be indifferent. The indifference, however, might take a heavy toll on the economy and that time is not far away, it seems.
