Why Loans Go Wrong | The Daily Star


As of March 2021, the total outstanding loans in the banking sector in Bangladesh stood at Tk 111,194 crore. Of this amount, Tk 95,090 crore has been classified, which is equivalent to 8.48% of total loans. Although the amount is not too large considering our experience in the early 80s or even 90s, we have reason to be concerned, especially when the size of classified loans increases or even temporarily reduced due to certain measures. episodic or artificial.

This is all the more alarming as most banks in Bangladesh cannot claim to have a strong culture of risk management. The recent stress test, carried out by the central bank, also revealed worrying developments.

Due to the concentration of lending among a few large borrowers, many banks run the risk of “swelling” during any possible economic crisis or difficult period.

We have gone through an era of 30% to 40%. 100 classified loans. Along with the banking sector reforms carried out by development partners with the active support of the Bangladesh Bank, credit goes to the risk managers of private and foreign commercial banks, who have significantly contributed to improving their investment portfolios. ‘assets despite strong growth.

My experience as a risk manager for almost 15 years in global banks has taught me a fact: Loans usually go badly due to incorrect or poor needs assessment, poor structuring of facilities, ” a lack of security or collateral and a low generation of internal cash flow in the management of the company. recurring arrears.

Other factors include lending based on the names of borrowers without examining their business fundamentals or future potentials or even succession, ignorance of competition or emerging competition, and economic downturn or investment. in business segments other than the main future or the economy.

Added to this, of course, are poor loan valuation, an inability to understand currency risk when cross-border exposures are taken, corruption or loan officer default, and weak or lack of credit conditions. ‘approval or compliance or monitoring of commitments.

A client can always be desperate to get the loan approved or disbursed. It is the responsibility of the loan officer to ensure that he has recognized all the risks associated with that specific portfolio or activity and has taken sufficient steps to mitigate those risks.

We saw how a large textile client suffered recurring arrears due to a poor loan repayment structure. While the business cycle dictated that end-to-end transactions would take 105 days, loans disbursed for a period of 90 days created all these problems for both parties.

Likewise, we have seen how a large local bank had to provide a large sum of money following the sudden disappearance of a large tannery client, having no identified estate.

The Chattogram branch of a foreign bank suffered greatly due to the 210-day in fine repayment facility granted to a scrapping customer, whose sale proceeds started arriving after 30 days but was diverted. to other companies, not deposited in the bank account.

A large borrower from a state bank went into default right after the term loan was disbursed, as the cost of his project skyrocketed for his inability to hedge against the fluctuation in the German mark exchange rate at the time.

A large distributor of a global consumer goods company went into default because all of his borrowed money from the bank was invested in buying land, not distributing durable consumer goods.

Loan officers often become captive to large clients because of their perceived “muscle power” or “market power” or sometimes even “emotional blackmail”. In most cases, these big customers dictate the terms.

If a customer needs 100 Tk and we give them 200 Tk, they are forced to divert excess money from the business or become unruly about timely repayment. No matter who the customer is or what their business is, a loan officer should conduct a thorough needs assessment to determine how much the customer needs to run their business and in what form.

You have to look at the business model, projected revenue, and end-to-end transaction time before deducing a figure for structuring the facility.

Even if you get a figure out of it, you have to know to what extent it would be financed by the banks and how much by the owners. The warranty or guarantee provided should be appraised by an appropriate agency or branded in the market appraisal process. Likewise, the outstanding amount can also be examined in relation to the security or collateral held.

I have also seen loans deteriorate for non-compliance with regulatory requirements, such as wastewater treatment plants, pollution of rivers or even pollution of neighborhoods. Social activist groups forced agencies to shut down factories.

Defective title deeds and the grabbing of schools or places of worship also created problems in the erection of plants, forcing companies to relocate and thus increasing the costs of the project.

The business not being relevant to the main strength of key entrepreneurs also did not help many repayments. Most importantly, you have to be with the winners in each of the business segments, not with the losers.

If one wishes to penetrate further into the customer segment with some security / guarantee or even inadequate cash generation with some trade-offs, pricing must reflect the inherent risk or the government must subsidize to encourage cash flow to these priority sectors.

Many banks or financial institutions in Bangladesh do not have their own risk policy or structured approach to appraising, disbursing and repaying loans. I have seen many financial institutions have a large number of people in their loan or credit departments, but totally dependent on the board of directors for every loan approval.

A culture of appropriate title or collateral valuation is lacking in many of these organizations. Facilities are granted regardless of the economic or business cycle. The resulting effect is loan losses, forced allowance, erosion of capital, lower profitability and falling stock prices.

A strong risk management culture with a dynamic risk management policy can help financial institutions avoid such losses. At the same time, deploying the right people for risk management is more important.

If we disburse a loan of Tk 100 crore, we can hardly make Tk 3 or 4 crore in net profit. However, if we take out a distressed loan of the same amount, we lose the entire Tk 100 crore as well as loss of reputation and employee demotivation, and even heavy collateral damage.

The author is an analyst.


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