Business Times

Banks reduce loan provisions to boost results

By Duruthu Edirimuni Chandrasekera

Most commercial banks have reduced their loan loss provisioning for last year giving rise to a boost in their net income, banking sector analysts said. They noted that when analyzing the latest financials in many commercial banks, the reductions in provisions are quite large. “HNB, Commercial Bank, Nation’s Trust and NDB have seen a sharp drop in provisioning, while Sampath Bank and DFCC have increased theirs,” an analyst noted.

Milinda Ratnayake, Analyst SMB Securities said that the reduction in provisions is largely due to the improving macroeconomic environment with low interest rates leading to a reduction in non performing loans (NPLs).

However, some analysts argued, saying that the reductions in the provisions are an attempt at ‘showing’ better results.. “By doing this they have attempted to show better profits,” the analyst said. But bankers say that the reduction in provision is not a strategic call, rather a reflection of the profile of the loan book.

“Generally when the economy is recovering from a slow-down, the net provision charge made by banks come down, which is a reflection of the recovery of loans previously classified as doubtful loans and also the improved performance of the loan book,” a banker said.

He also noted that the banks have no discretion or they cannot understate provisioning since the Central Bank (CB) clearly specifies the rules for classifying as well as reversing doubtful and NPLs. “Two years back, the banking sector had to provide exceptionally high provisions due to the economic and business difficulties faced by its customers. At present things have changed and the economy is expanding resulting in better business conditions to borrowers. As such reducing provisions for the last year was a good move by the banks,” he said.

Others however say banks writing back their general provisions is due to a decrease in the credit growth and also due to some performing loans turning into bad loans. “When the performing loans contract the general provisioning requirements come down. However this year you may see that with the credit growth there is an increase in General provisioning by banks.

The specific provisioning is done based on the duration of NPLs. However depending on bank policy, a bank can have more stringent provisioning than stipulated by the CB,” Indika Rajakaruna, Executive, Investments Ceybank Asset Management Pvt Limited said.

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