Are The Banks Prepared for the Uncertain Future ?

Provisioning-shortfall

Many businesses are facing trouble to survive during this pandemic situation. It is expected that this pandemic will leave the legacy of long-lasting bankruptcies and redundancies.  Bank banks are already facing provisioning shortfall. It is worthy to complete the groundwork for the next upcoming years now. 

This scenario is not only applicable to the local banks' many international banks are preparing themselves to face unexpected events in the coming years. In fact, three of the biggest American banks have taken preparations for this eventuality, putting aside a combined $28 billion in provisions for current and future loan losses as part of their efforts to absorb the shocks emanating from the ongoing economic meltdown. Similarly, the largest UK, Swiss, and eurozone lenders are set to keep provisioning of a minimum €23 billion for the second quarter of 2020.

But it is really shocking that only a few banks are preparing for such unwanted events, most of them are getting ready to accept fate. Our banking sector has already engulfed with so many problems, this pandemic has worsened the situation. Apart from that, many banks had provisioning shortfall due to defective or no corporate governance. For instance, a total of Tk 3,619 crore was reported as provisioning shortfall against the required amount of Tk 60,493 crore in the first quarter of 2020, data from the central bank showed.

As per central bank regulations, banks have to keep provisioning between 0.25 percent and 5 percent for unclassified loans, 20 percent for default loans of sub-standard category, 50 percent for the doubtful category, and 100 percent for bad or loss category. But does this comfort stays longer? The default loans may increase alarmingly when the grace period expires as a large number of businesses are seeing their capacity to pay back loans is eroding gradually.

The western banks have supported the businesses by increasing the moratorium period to pay back the loans, while they have also taken mega programmes to improve their financial health by increasing provisioning. So, Bangladesh bank should also study the overall financial and business sector to find out what steps the banks should take. So, they can dictate the banks to keep apart the sp[ecific provision, as most of our banks have no provision for the bad patch.

Default loans in the banking sector have been maintaining an increasing 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 percent of the total outstanding loans in the banking sector. However, everyone will agree that this situation has aggravated during this pandemic time. So, banks should keep at least two to three years in provision to survive during a bad time. 

 


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