Huge bad debts force banks to maintain higher provisions
Most of the Bangladesh-listed banks had to keep higher provisions in the first half of 2022 due to the downward trend in the equity market and the removal of the relaxed loan classification policy which drove up bad debts.
The lenders collectively made a 7% higher profit at Tk 4,899 crore between January and June, according to their financial reports. It was Tk 4,583 crore during the same six-month period a year ago. Twenty-one banks recorded higher profits, year-on-year.
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But their revenue stream has been affected by declining income from banks’ capital market investments amid continued uncertainty caused by macroeconomic instability and financial sector volatility due to the Russian-Ukrainian war and of the persistent coronavirus pandemic.
The profits from their foreign exchange trading saved them the day.
According to financial reports, 21 banks had to keep higher provisions in the January-June period compared to the same period in 2021.
Provisions are balance sheet items representing funds set aside as assets to pay for anticipated future losses.
In Bangladesh, banks must allocate 0.50% to 5% of their operating profit to provisioning general grade loans, 20% of loans classified as below standard and 50% of loans classified as impaired.
They must set aside 100 percent of loans categorized as bad debts or profit losses as provisioning.
Provisions totaled Tk 3,621 crore in the first half, up 22.50% from Tk 2,956 crore a year ago.
“As graded loans increased, the amount of the provision also increased,” said Syed Mahbubur Rahman, managing director of Mutual Trust Bank.
Loan defaults increased by 19.3% year-on-year to Tk 116,288 crore in the first quarter of 2022, the latest for which Bangladesh Bank data was available.
It was up 9.84% in March from a quarter ago. The delinquent loan ratio represented 8.53% of outstanding debt in March, down from 8.07% a year earlier.
Loans classified in the banking sector increased although there was a moratorium in 2020 and 2021.
In order to counter the impacts of the coronavirus pandemic on the economy and businesses, the central bank has maintained the payment holiday for borrowers. As a result, banks did not have to reclassify the credit status of borrowers, leading to a decline in non-performing loans.
In June this year, the BB reintroduced a flexible loan repayment facility. Borrowers in large industries could avoid falling into the loan default category by repaying half of the loans payable for the April-June period.
Borrowers must repay 60% of their outstanding loans in the July-September quarter and 80% in the fourth quarter of 2022 if they do not want to be classified as defaulters.
Mohammad Habibur Rahman Chowdhury, deputy managing director and chief financial officer of Prime Bank, says that when banks suffer an unrealized loss on their stock market investments, they must also keep provisions.
“Although Prime Bank had to maintain a lower provision this year, many banks had to set aside a significant amount due to struggling inventory and increased delinquent loans.”
Among the listed banks, 17 recorded a drop in income from their investments in equities and bonds.
It came after the DSEX, the benchmark index of Bangladesh’s top stock exchange, fell 6.96% in the first half, according to Dhaka Stock Exchange data, reversing course from a year ago. when it had increased by 9.46%.
Listed banks’ commission income and foreign exchange trading revenue rose 82 percent year-on-year to Taka 6,408 crore in the first half. It was Tk 3,512 crore in the first half of 2021.
Thirty listed banks reported higher profits from their foreign exchange business, helped by dollar scarcity amid abnormally high imports versus weaker-than-expected export earnings and lower currency flows. fund transfers.
The foreign exchange market was hit by volatility in mid-April as the severe fallout from the war in Ukraine pushed commodity prices to record highs.
The US dollar was trading at 93.45 Tk on June 28 this year on the interbank exchange platform, where banks buy and sell among themselves, as opposed to 84.82 Tk on the same day a year ago.
Currently, the platform does not account for a large share of US dollar trades as it does not reflect market fundamentals. Instead, banks buy US dollars directly from exporters and shippers and resell them to importers.
For example, importers had to buy every dollar at 100 Tk in June.
Recently, exporters, importers and business leaders have publicly accused banks of making excessive profits. And their claim was proven justified on Monday when the central bank ordered six banks to withdraw their cash chiefs for causing volatility in the foreign exchange market.