The banking sector provisioning gap is narrowing

The overall loan provisioning gap in the country’s banking sector narrowed slightly to Tk 13,219 crore in June earlier this year.

The volume of global loan provisioning applied to foreign public, private and commercial banks from June decreased by almost 6% compared to last December.

Provision for loans is an expense in the income statement set aside to account for uncollected loans and loan repayments.

Banks are required to consider potential defaults and expenses to ensure they present an accurate assessment of their overall financial health, without dressing up.

The provisioning shortfall of the six state-owned commercial banks in June stood at Tk 10,617 crore, down nearly 61% from December.

By contrast, the overall deficit applicable to 42 private commercial banks in the Bangladesh banking system rose to Tk 3,111 crore in June.

Central bankers said that certain privileges were given to public banks, which helped them improve their financial health.

The volume of the provisioning deficit narrowed considerably for public banks during the period under review, resulting in an overall decline.

When bad debts increase, loan provisioning should have been increased.

But this does not work due to the regulatory forbearance applied to public commercial banks.

During the period, classified loans of total outstanding loans amounted to around 9%. It was nearly 8% in December 2021.

The overall amount of bad debts in June also jumped to more than 8%, up almost 1 percentage point from the December figure.

However, total outstanding loans stood at around Tk 1,398,600 basis in June.

Of this, Tk 1,273,300 crore or more than 91% was unclassified.

The central bank previously asked all scheduled banks to retain an additional special general provisioning of 2% instead of 1% previously against loans that received the central bank’s latest policy support.

In the case of CMSEs (homes, micro and small enterprises), this provisioning was 1.5%, according to the central bank.

According to central bank regulations, banks must keep provisions of 0.25 to 2% against the general category of loans, 20% against the substandard category, 50% against impaired loans and 100% against the loan category. loans in default or at a loss.

All listed banks generally keep necessary provisions against classified and unclassified loans from their operating profits in an effort to mitigate financial risks.

The latest data shows that four of the public banks have experienced funding shortages.

Only two public banks had excess provisioning.

Of the 42 private commercial banks, four had provisioning shortfalls.

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