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 loans 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.
Podder, J. and Al Mamun, A. (2004), "Loan loss provisioning system in Bangladesh banking: A critical analysis", Managerial Auditing Journal, Vol. 19 No. 6, pp. 729-740. https://doi.org/10.1108/02686900410543859
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