The latest default loan statement from September shows that only eight out of 42 private banks held a good amount of excess provisions above Tk100 crore.

The two-year deferral facility comes to an end in December, but most banks have kept little in their arsenals to absorb post-moratorium shocks.

The key indicators of the health of the banking sector have already started to deteriorate with the increase in defaulted loans, the worsening of the provision deficit and the erosion of capital.

Most banks have made strong profits even in the midst of the pandemic, with no allowances under the moratorium on outstanding loans, but many of them have spent in dividends instead of saving for on rainy days, which led to a widening of provision shortfalls coupled with an increase in loan defaults.

Only a few banks maintained higher allowances to offset losses from defaulted loans.

General allowances are balance sheet items representing funds set aside by a business as assets to pay for anticipated future losses. For banks, a general provision is considered as additional capital in the first Basel Accord.

The latest default loan statement from September shows that only eight out of 42 private banks held a good amount of excess provisions above Tk100 crore.

These are Brac Bank, Eastern Bank, Islami Bank, NCC Bank, Prime Bank, Pubali Bank, Southeast Bank and Uttara Bank.

On the other hand, five banks – Bangladesh Commercial Bank, Dhaka Bank, Mutual Trust Bank, National Bank and Standard Bank – were in shortfall even during the loan moratorium period.

The National Bank’s provision deficit increased fivefold to Tk 2,385 crore in nine months to September, the highest amount among private banks.

The total excess allowance of private banks fell from Tk 1,000 crore to Tk 3,586 crore in September compared to December of last year, as rising default loans increased the reserve requirements for banks.

Private bank default lending jumped to 5.47% in September from 4.66% in December last year, according to data from the Bangladesh Bank.

The increase in defaulted loans has also eroded the capital base of private banks.

Even though the banks seemed reluctant to maintain an additional allowance during this time of crisis, they were rather anxious to receive the dividend.

Even in the midst of the pandemic, banks haven’t compromised on paying cash dividends – they paid higher cash dividends for 2020 than the year before, which makes directors happy.

Out of 31 private banks listed on the Dhaka Stock Exchange, 22 paid cash dividends for 2020. The dividends declared by most of these banks for last year are higher or similar to those of the previous year.

The profits banks made during the pandemic were not real because many banks did not properly maintain their bad debt provisions, said Selim RF Hussain, managing director of Brac Bank.

He said banks, which have paid dividends showing inflated profits, will face serious difficulties in the years to come.

In international practice, good banks keep a large amount of provisions to create a capital cushion for the next one or two years, he said.

In Bangladesh, only a few banks have taken additional steps to deal with post-moratorium shocks, he also said.

Selim said that Brac Bank made an additional half-yearly profit of Tk 200 crore.

At the end of September, the bank’s excess reserve stood at Tk 343 crore, according to data from the Bangladesh Bank.

“We all know tough years are coming, so banks should have been careful in spending their profits on dividends,” said Ali Reza Iftekhar, Managing Director of Eastern Bank.

Many banks have not saved for years to come, he said.

Ali Reza, also chairman of the Bangladesh Bankers Association (ABB), said the Bangladesh Bank has granted a deferral of provisioning, not a waiver.

“I am not against dividends, but banks should first strengthen their health by maintaining provisions,” he said.

The banks have also made good profits in the current year and they are expected to build up good provisions, he continued, adding that the Bangladesh Bank should not grant any exemptions to maintaining the provisions.

Eastern Bank’s excess reserve stood at Tk 286 crore at the end of September this year, according to central bank data.

When private banks paid higher dividends instead of keeping additional savings to deal with post-pandemic consequences, the Reserve Bank of India suspended dividend payments for 2020, taking into account the uncertainty of Covid -19.

In a circular issued by the central bank of India on December 4 last year, he said: “With the continued stress and increased uncertainty due to Covid-19, it is imperative that banks continue to retain their capital to support the economy and In order to further strengthen the bank’s balance sheets, while supporting lending to the real economy, it was decided that banks would not pay any dividends on equity shares on the banks. profits relating to the fiscal year ended March 31, 2020 “.

For 2021, India’s central bank has authorized banks to pay dividends with a set of conditions as well as the highest dividend cap of 50%.

In a similar position, the Bangladesh Bank has also discouraged banks from paying cash dividends by issuing a dividend policy for the first time last year.

The central bank has set a limit on the payment of dividends based on the bank’s capital base.

However, most banks paid dividends at their highest capacity, in accordance with the dividend policy. Even some banks tried to pay higher dividends by circumventing the policy and were penalized.

It seems that the same intention regarding the payment of dividends this year is also, as the banks have continued to make good profits, thanks to the forbearance of provision.

The loan moratorium has relieved banks of maintaining the allowance, helping them to post inflated profits.

Speaking with several bankers, The Business Standard learned that they were under pressure from directors to pay good dividends. As a result, they cannot keep an additional allowance as a prudent measure to recoup future losses from the rise in defaulted loans after the loan moratorium facility is lifted from January of next year.

The evolution of profits for the current year shows that the banks have made good profits but have not maintained adequate provisioning.

Growth in earnings per share of private banks has reached 154% in the first nine months of the current year, and most banks have achieved profits above 20%.

Despite good profits, some banks were in deficit.

For example, Standard Bank recorded 154% profit growth in January-September this year, but the bank was in a provision shortfall amounting to Tk 100 crore in September.

Expressing concerns about the health of the banking sector, Fitch, the global rating agency in its latest valuation report released last month, said the reported loan default was likely underestimated due to an extended moratorium on loans during the pandemic.

The rating agency fears that loans in default could increase significantly after the lifting of the moratorium facility on outstanding loans, putting stress on the banking sector.

The banking industry has already started to feel the wave of loan defaults as in the first nine months of this year loan defaults increased by Tk 12,416 crore.

Total bank default loans exceeded Tk1 lakh crore in September of this year.

Conflict between BB and BSEC on the payment of dividends

When the Bangladesh Bank encourages banks to be cautious in paying dividends, given the consequences of the post-moratorium era, the Bangladesh Securities and Exchange Commission (BSEC), the capital market regulator, appears to be stepping in. opposite direction.

In April 2020, the central bank suspended the payment of the cash dividend for 2019 until September of the same year. The move was aimed at building a strong capital base and keeping adequate liquidity in the banking system to support the virus-stricken economy.

Later, it enabled banks to pay dividends for 2019 with up to 15% cash on the basis of a strong capital base.

In February of this year, the central bank for the first time implemented a permanent dividend policy primarily to limit cash dividend payments.

In the new rule, the highest cash dividend limit was set at 15% subject to the basic capital requirement being met. Later, the ceiling was revised to 17.5% in response to requests from banks.

In December of last year, the central bank asked banks to keep an additional 1% allowance on loan accounts, which have benefited from a payment break this year.

All of these measures indicate that the central bank wants banks to spend less on dividends and save more to get stronger.

On the other hand, the BSEC issued a circular on October 2, 2019, authorizing the cash dividend even with a cumulative loss.

The circular contradicts the Bank Company Act 1991, which prohibits the payment of dividends without provision for losses. The same rule also applies to non-bank financial institutions.

In the case of banks, the payment of dividends is strongly linked to the interests of depositors, as banks, which deal with public money, must maintain a required capital base.

However, the BSEC asked the central bank to implement its circular for banks and non-bank financial institutions instead of considering the risk of depositors.

At the recent meeting last month with the Bangladesh Bank, BSEC raised the issue by demanding that banks and non-bank financial institutions pay dividends even after accumulating losses.

The central bank disagreed with this, saying it was against the law.

But shortly after the meeting, a representative of the BSEC informed reporters that the central bank had agreed to allow the payment of dividends with a cumulative loss.

The day after their briefing, the central bank issued a press release denying the BSEC’s statement.

For now, BSEC and Bangladesh Bank are in conflicting positions on the issue of dividends.