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Keywords Loans, Shareholders, Taxation, Banks, Interest, Bangladesh
Abstract This study examines the impact of making too much provision to write off bad loans by analyzing the consequences on tax and owners' equity. This study also examines that making too much provision has no relation to recovery of bad loans and so questions the rationality of making provision from current profit to write off bans in future. Provision can be kept on the current asset portion, that is, on interest receivable, and bad loans can be written off instantly from equity since it is a capital loss. Since making provision has no impact on collection of bad loans so as to improve the loan loss situation, loans becoming bad should be minimized at the least possible level, which will result in lower loan loss provision, which, in turn will increase the amount of tax payable as well as increase shareholders' wealth.
Introduction
Banks and financial institutions are the most important organizations in overall financial intermediation and economic acceleration of a country. Banks play a significant role in converting deposits into productive investment. With globalization, banks are facing severe competition in faster financial intermediation in a proper and transparent manner. At present a total of 51 commercial banks are operating in Bangladesh with four nationalized (NCB), 30 local private (PCB), 12 foreign (FCB), and five specialized (Finance Division, Ministry of Finance, Government of Bangladesh, 2002-2003). Banks work with the motive of earning profit through providing a better banking service:
In a market driven system, banks are not designed to be development institutions or welfare agencies. Their primary goal remains to make the best possible profit for their bank shareholders. Thus, it is argued that if banks are to sustain themselves as profit making corporate entities they will be inclined to entrust their resources to those who can be relied upon to repay their loans with interest. Such borrowers should normally be people who use resources efficiently. However, efficiency is not always the dominant criterion for lending. Bank managers tend to be more influenced by the social structure of borrowers on the assumption that affluent citizens are likely to be more creditworthy and hence can be relied upon to repay their loans (Rehman, 2000).
How far the...