Capability of sustaining loan risk decreasing

Effect of increase in defaulted loans to bank

In 2020, defaulted loans in the banking sector were Tk 88,730 crores. It increased to Tk 1 lakh 56 thousand crores in June. In two and a half years, defaulted loans have increased by Tk 67,270 crore or 76 pc

Zarif Mahmud : The ability of commercial banks to deal with risk is decreasing. Non-performing loans are increasing, while the ratio of provisioning is decreasing. Income from assets is decreasing. Debt collection is declining. Due to these reasons, the net income of the banks is decreasing. As a result, the reserve fund or capital supply is unable to increase. It also reduces the rate of holding capital against risky assets. Due to these reasons, the financial condition of the banks can’t be strengthened. Gradually going towards weakness. These data were obtained by analyzing the report of Bangladesh Bank.
According to the information obtained from the report, the collection of loans of the banks is decreasing in recent times. On the contrary, the amount of defaulted loans is increasing. In 2020, defaulted loans in the banking sector were Tk 88,730 crores. It increased to Tk 1 lakh 56 thousand crores in June. In two and a half years, defaulted loans have increased by Tk 67,270 crore or 76 percent. In case of increase in defaulted loans, provision has to be kept at fixed rate against it. 50 percent to a maximum of 2 percent against regular loans. In the stage before default i.e. 5 percent if transferred as special, 20 percent after default if assumed, 50 percent if doubtful and 100 percent if classified as bad. Due to this, if the defaulted loans increase, the provision has to be kept more. 88 percent of defaults are non-performing loans.
That is, as much as the provision for bad debts is to be kept. In this, the money earned from the profits of the banks is getting stuck. These cannot be transferred to reserve fund or capital. Again, it cannot be given as dividend to the shareholders. Provision cannot be made from income as defaulted loans are increasing. As a result, the provision saving rate of the banks is decreasing. Banks are becoming weak in this.
In 2020, the provision saving rate in banks is 99.80 percent. In 2021, it decreased to 82.6 percent. In 2022, it increased slightly to 86.9 percent. In June 2023, it decreased again to 78.8 percent.
In 2020, the demand for provisioning in banks was Tk 64,800 crore. In June, it increased to Tk 1 lakh 1 thousand crores. Demand increased by Tk 36,200 crore or 56 percent during the discussion period. The amount of reserves of the banks increased from Tk 64,680 crore to Tk 79,570 crore during the same period. During the discussion period, the amount of provision increased by Tk 14,890 crore or 23 percent. In 2020, the provision deficit of banks was Tk 120 crore. Last June it increased to Tk 21,460 crores. At that time, the deficit in this sector increased by Tk 21,380 crore or 179 times. All of the provision deficits are of public sector banks. These banks are able to keep 53.94 percent provision of demand in 2020. The remaining 46.2 percent was deficit. Specialized and private banks had demand provisions. However, the provision was 30 percent more than the requirement of foreign banks. However, some private banks and one foreign bank have provision shortfalls.
Last June, the reserve ratio of government banks was 67.82 percent, 100 percent in specialized banks, 82 percent in private banks and 117.54 percent in foreign banks. Despite the increase in the provision rate, the deficit in the sector has increased due to the increase in defaulted loans. As a result, the financial weakness of the banks has come to light. Because defaulted loans are risky assets. On the contrary, the more provision there is, the more the bank’s ability to deal with risk will increase.
According to the information obtained from the report, in 2020, the banks used to earn Tk 100 and spend Tk 78.20. In 2021, he earned Tk 100 and spent Tk 77. In 2022, he spent Tk 100.78. Till June 2023 he earned Tk 100 and spent Tk 81.10. That is, the income of the banks has decreased, the cost has increased. As a result, the rate of profit has decreased. Both provisions and capital are reduced due to reduced profits. Because the profit has to be transferred to those sectors. Banks could not transfer money as per demand in capital and provision sector due to low profits. As a result, the financial weakness of the banks has increased.
In 2020, banks earned 30 paise against Tk 100 of assets or loans. Income was same in 2021 as well. Last year it increased to 50 paise. By June last, it again fell to 40 paise. However, income from capital increased. The amount of income from capital of the banks is negligible and the majority of the income is from assets. As a result, even if the income from capital increases, it does not have much positive effect on the overall income.
In 2020, 7.7 percent of total loans were in default. Last June it increased to 10.11 percent. The amount of risky assets of the banks has increased due to the increase in defaulted loans. On the contrary, there is no reserve of necessary money. As a result, the level of risk has also increased.
Banks are also exposed to increased risk as defaulted loans increase. 15 banks would have been in trouble if 3 top customers defaulted in March. Last June it increased to 20.
Capital preservation rate against risky assets was 12.5 percent in 2020. Now it has reduced to 11.19 percent. Among them, the capital of specialized banks is absolutely negative.
The loan to deposit ratio of banks was 74.77 percent in June last year. Last June it increased to 78.51 percent. That is, the loans of the banks have increased, but the deposits have decreased. This is one of the other reasons for the current liquidity crisis in banks. According to the conventional rules, the deposits of the banks have to increase more than the loans. Otherwise, liquidity crisis occurs. Loans have been growing faster than bank deposits for a long time.