Bangladesh Bank adopts new provisioning system

Published at : 25 January 2025, 10:30 pm
Bangladesh Bank adopts new provisioning system
Representational image

The Central Bank of Bangladesh has introduced a new provisioning model in compliance with international financial standards to mitigate the severe liquidity crisis and prevent bankruptcies stemming from non-performing loans (NPLs).

The move aims to ensure banks are better equipped to handle loan defaults and maintain financial stability.

The initiative comes as several banks, including those associated with prominent business groups, have struggled with significant NPLs, causing acute liquidity issues.

In September last, the provisioning shortfall for 10 major banks exceeded Tk 50,000 crore, with two state-owned banks, Janata Bank and National Bank, accounting for 65% of this deficit.

To address this crisis, the Bangladesh Bank has opted to implement the International Financial Reporting Standard (IFRS-9) Expected Credit Loss (ECL) model, which will gradually replace the previous provisioning system.

This model, initially adopted in 2014, ensures that provisions are made early, based on a loan’s credit history, performance and future outlook, rather than waiting for the loan to default.

The goal is to prevent sudden liquidity shocks in the banking sector when loans become non-performing.

According to the Bangladesh Bank’s roadmap, the new system will be fully implemented by December 2027.

Within this timeline, banks are required to establish dedicated working teams, including risk officers and financial officers, to transition to the new model.

These teams will report their progress to the central bank in stages, starting with an update in April 2025. By July 2026, the full framework will be in place, with final reports submitted to the Bangladesh Bank.

The transition process will be carried out in phases, with 25% of loan portfolios automated under the ECL model starting in September 2026.

The full implementation, covering 75% of loan portfolios, is expected by June 2027, with the entire banking sector’s provisioning system fully aligned with IFRS-9 standards by December 2027.

Experts believe the new system will improve transparency in the banking sector, preventing the concealment of poor loan portfolios and ensuring that banks’ financial health is accurately reflected.

Mohammad Abdul Mannan, Chairman of First Security Islami Bank, said that a similar model was introduced in the 1990s, revealing the true financial state of many banks that had previously hidden their weak positions.

He, however, stressed that while the ECL model would improve provisioning, it would not eliminate the root cause of high NPLs, which often stem from governance issues.

A senior official at the Bangladesh Bank highlighted that the ECL model would allow for automated reporting, eliminating the possibility of data manipulation.

This shift will provide the central bank with real-time insights into the financial condition of each bank, enabling timely interventions when necessary.

The official also noted that banks would need to strengthen their IT infrastructure to meet the demands of this transition, and that the central bank would monitor the capabilities of each bank’s implementation team closely.

As Bangladesh continues to navigate the challenges posed by non-performing loans, the adoption of the IFRS-9 model marks a significant step towards restoring stability and transparency in the country’s banking sector.

Experts said that robust corporate governance and enhanced oversight will be crucial for the system to be effective in the long term.

 


MSH

Provident funds to pay 27.5% tax

Published at : 20 September 2023, 04:57 pm
Provident funds to pay 27.5% tax

Companies and organisations will be required to file tax returns on the income generated by employee welfare funds from the current fiscal year and pay a 27.5 percent tax on the earnings. 

The Income Tax Act 2023 incorporates the provision, lifting the tax exemption and amnesty on the compulsion to file returns for funds such as provident funds, gratuity funds and workers' profit participation funds maintained by the private sector.

The law, however, has exempted government-managed provident funds from taxation, raising questions.

TIM Nurul Kabir, executive director of the Foreign Investors' Chamber of Commerce & Industry, said there were many other avenues to collect tax.

"Employees benefit from provident funds after their retirement. So, the authority should not slap taxes on retirement benefit."

He said while levying the tax, the government has not treated provident funds of the private and public sectors equally.

"It is discriminatory," he said, adding that they would appeal to the tax authority for the withdrawal of the tax on income from provident funds.

Debabrata Roy Chowdhury, director for legal, regulatory and corporate affairs at Nestlé Bangladesh PLC, said the introduction of income tax on trust funds would lower the overall income from such schemes.

"This will have an adverse long-term impact on retired employees of private organisations."

Chowdhury urged the authority to address the issue in line with the spirit of the government's initiatives aimed at ensuring social security for private sector employees.

"The recent introduction of the universal pension scheme for private sector employees is a good example of that."

A senior official of the NBR, on condition of anonymity, said the income of government-managed provident funds was exempted in line with the Provident Fund Act 1925.

He said provident funds under the private sector had been historically exempted and there was no requirement to submit tax returns. As a result, it was unclear whether the funds were properly utilised.

"From now onwards, we will see proper disclosure."

The tax official said the contribution of payroll tax is about 3 percent of the total income tax although it should increase as the economy is growing.

Md Shahadat Hossain, a former president of the Institute of Chartered Accountants of Bangladesh, said income from investment in savings certificates, where people invest as a source of future earnings, is already taxed.

"From that perspective, the imposition of tax on provident and other employee welfare funds seems okay."

However, Towfiqul Islam Khan, senior research fellow at the Centre for Policy Dialogue, said social protection for private sector employees was low.

"Provident and other workers' welfare-related funds provide little social protection. The imposition of tax will increase inequality. But there can't be any discrimination in taxation between private and government provident funds."

Khan, citing the latest income tax law that replaced the Income Tax Ordinance 1984, said the NBR tried to find new avenues to increase tax collection and improve the nation's revenue-gross domestic product ratio, which is one of the lowest in the world.

"We can see the desperation of the tax authority to boost collection. This ultimately reveals the inability of the NBR to catch the tax evaders and illicit money makers."