Loan write-offs touch right down to a three-year low
Loans written off by banks plummeted to a three-year low in the first quarter of 2020 as lenders' capacity to keep 100 per cent provisioning against their delinquent assets has decreased as a result of the fall in profit.
Usually, loans are written off when they are entirely provisioned and there is absolutely no realistic prospect of recovering them. These loans are shifted to off-balance sheet records.
Between January and March, loans amounting to Tk 33.5 crore were written off, down 96.5 % from 25 % earlier and 94 % from a year earlier, according to data from the central bank.
Here is the lowest write-off amount because the first quarter of 2017 when banks removed Tk 24.74 crore from their balance sheets.
The downward trend of the write-off loans isn't a good indicator for the financial sector since it gives lenders the leeway to not reserve funds against the defaulted loans.
The central bank gave a regulatory forbearance to banks on 19 March, permitting them to not consider businesspeople as defaulters if they neglect to repay instalments until 30 June.
The deadline has been extended to September to help businesses tide over the economic hardships due to the global coronavirus pandemic.
"This is accountable for the incredulous indicator for the banking sector," said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, a think-tank.
The regulatory forbearance, an insurance plan that allows banks and finance institutions to continue operating even though their capital is fully depleted, has reined in the upward trend of the defaulted loans and didn't supply the lenders the scope to completely clean up their balance sheets utilizing the write-off module.
Towards the end of March, default loans stood at Tk 92,510 crore, which was 9 % of the full total outstanding loans in the banking sector.
According to Bangladesh Bank regulations, banks need to keep provisioning of 0.25 % to 5 % for unclassified loans, 20 % for default loans of sub-standard category, 50 per cent for the doubtful category and 100 per cent for bad or loss category.
The central bank has long followed a practice that allows lenders never to preserve the required provisioning against both unclassified and default loans.
For instance, 11 banks suffered a provision shortfall of Tk 8,632 crore by March and most of them had taken permissions from the central bank to keep provisioning in phases.
But such forbearance is not applicable for the write-off loans.
So, banks should give an all-out effort to strengthen their provisioning base to tackle the ongoing financial recession, among the worst ever sold, said an analyst.
Global lenders have paid heed to the issue and put aside funds in the type of provisioning to fight any unexpected shock.
Four American lenders -- JPMorgan Chase, Wells Fargo, Bank of America and Citigroup -- together took loan loss charges of $33 billion from April to June.
But such practices in Bangladesh's banking sector are absent. Rather, most banks try to dodge the provisioning.
Profits of almost all of the banks have dropped off 30 % and 40 per cent because of the economic slowdown, said Emranul Huq, managing director of Dhaka Bank.
"So, it really is tough for lenders to keep any extra provisioning by writing off loans," he said.
Besides, the 9 per cent lending cap, introduced in April, has dealt another blow to banks since it has caused the profit to shrivel.
The central bank's move that orders banks never to classify businesspeople as defaulters until September has encouraged lenders to ignore the loan write-off.
But Mansur said that banks would need to keep carefully the provisioning aggressively to safeguard their financial health from any shock.
This past year, the central bank gave another regulatory forbearance to banks that permitted them to reschedule default loans with a 10-year repayment tenure and 2 % down payment.
Defaulted loans amounting to Tk 52,770 crore were regularised in 2019 -- the best in a single year -- riding on the relaxed loan rescheduling rules.
This also made the practice of loan write-off less attractive, a development that further weakened the financial strength of the banking sector.
Default loans amounting to Tk 2,597 crore were taken off the balance sheets last year, down 19.03 % year-on-year.
A complete of Tk 55,553 crore has been written off since the facility was introduced in January 2003.
Of the total amount, 77 % has remained outstanding to date.
