AB Bank is facing financial crunch after its provision shortfall totalled Tk 1,340 crore at the end of 2016.

The first generation private commercial bank maintained only Tk 250 crore against the required provision of Tk 1,590 crore because of bad loans, mostly in its offshore banking unit.

The bank will face capital shortfall if the deficit amount is maintained.

The required capital of the bank was over Tk 3,000 crore while its capital surplus was only Tk 135 crore as of December last year.

Amid this situation, the BB on May 3 appointed Sheikh Mozaffar Hossain, a general manager of the central bank, as an observer to AB to closely monitor the bank's financial activities.

According to a Bangladesh Bank investigation report, AB's offshore unit disbursed over $55 million in foreign currency loans to four companies breaching rules in 2015.

The companies are: Globatt ME General Trading LLC of the UAE, Semat City General Trading LLC of the UAE, ATZ Communications Pte Ltd of Singapore and Eurocars Holding Pte Ltd of Singapore.

AB was asked to recover the outstanding loans from the four companies by May 31 last year. The outstanding loans with the four companies stood at $59.47 million as of June 2016.

But the bank could recover only $19.378 million as of October 2016, according to the BB report.

AB did not classify the loans; rather it sought exemption from the central bank from maintaining the required shortfall, in an effort to show inflated profit in its balance sheet to retain investor's confidence.

Last month, the central bank gave AB a chance to get rid of the shortfall in phases in four years which started from 2016.

The bank was asked to maintain 10 percent of the shortfall in 2016 and 30 percent from 2017 to 2019.

The net profit of the bank stood at Tk 101 crore in 2016 after maintaining 10 percent provision against the total deficit, according to the BB.

Of the 10 percent retained provision, Tk 29 crore was set aside for the default loans of the offshore unit.

Bad loans are not responsible for the high provision shortfall, said Moshiur Rahman Chowdhury, managing director of the bank.

Businessmen have a tendency to file writ petition to avoid being declared as a loan defaulter, he said.

He said banks have to keep provision against the loans to restrict them from becoming bad.

“The number of writ petition filed against AB is too high,” Chowdhury said. Over 75 percent of the total provision requirement of the bank was for the loans against which writ petitions were filed, he said.

The CEO said the bank now plans to raise capital because of its deteriorating financial health.

As of December 2016, the bank's total default loan amounted to Tk 666 crore, which was 3.24 percent of its total loan outstanding, BB data shows.

The BB sent a report about the overall financial situation of the bank to the parliamentary standing committee on finance this week.