Study on the Financial Management of Prime Bank Limited: Part 03

In this part of the "Financial Management of Prime Bank Limited" blog series (Part 01, Part 02) the discussion is made over provision. A bank has to maintain provision against different types of assets according to the regulations of central bank. The percentage of provision differs based on the quality of assets. For example, bad loan has the least probability of recovery, therefore, has 100% provision requirement. Credit quality of PBL and subsequent provision are highlighted below.

Composition of Credit based on Quality

The credit portfolio of PBL can be differentiated as unclassified and classified loans where unclassified i.e. standard and special mention account are loans with reasonable potentiality of repayment and classified i.e. sub-standard, doubtful, and bad have more potentiality of being default. For PBL, from table 09, it can be observed that the amount of unclassified loan is decreasing over the years while classified are increasing. In 2010, the percentage of total unclassified loan was 98.92% but in 2014 it is 92.39% while the classified has increased from 1.18% to 7.61%.  And, this is indicating poor performance of credit department of PBL.

Table 09: Composition of Credit based on Quality (amount in million Taka)

Composition of Provision

Provisions of PBL over the years are shown in table 10. It can be observed that total provision for loans and investments are increasing over the years. From 2012, this increase is boosting by increase in specific provision which was Tk. 732 million in 2011 but reached Tk. 1,947 million in 2012  and showed the highest in 2014 Tk. 4,568. In 2012, the increase was mainly due to the changes in loan classification rules by Bangladesh Bank.

Table 10: Total Provision as stated in the Balance Sheet (in million Tk)
	2010	2011	2012	2013	2014
General Provision
Loans/investments (Including SMA)	1,485	1,715	1,981	1,687	1,739
Interest receivable on loans/investments	-	7	10	5	6
Total General Provision	1,485	1,722	1,991	1,692	1,745
Specific provision
Sub-standard	86	84	403	87	211
Doubtful	47	119	189	459	560
Bad / Loss	501	529	1,355	3,185	3,797
Total Specific Provision	634	732	1,947	3,731	4,568
Total provision for loans, advances and lease / investments	2,119	2,453	3,937	5,423	6,313

Calculation of Provision

Table 11 shows the calculation of required provision according to different provisioning criteria. The lowest provision is applied for standard loans as these have the highest probability of repayment and the highest provision is for bad loans because of the lowest probability of recovery.

 Table 11: Calculated Provision of PBL (in million Tk)

Comparison of Calculated and Stated Provision

Table 12 represents the comparison of provision between the stated one in financial statements and calculated one based on loans and advances value provided in the balance sheet. It is found that except 2010 in all years the calculated provision is higher than the stated provision. The reason can be that PBL calculates provision on a base amount for different types of loans and there are different estimations and internal management justification involved in categorizing the loans and allocating proper rate for provision. These all information is not publicly available. Therefore, it is evident that the stated and calculated amount would vary.

Table 12: Comparison of Calculated and Stated Provision (in million Tk)