Classified loans in Bangladesh have exceeded Tk 284,000 crore. Various agencies are even talking of Tk 4 lakh to Tk 7 lakh crores of stressed assets in the banking sector, which tends to be 25-45 percent of the total loans.

Due to the concentration of loans within a few large borrowers, many banks run the risk of going "belly up" during any possible economic meltdown or challenging period. The situation is more precarious with the weak banks that enjoyed political favour during the fallen regime.

Loans usually go bad due to: 1) improper or weak need assessment, 2) wrong structuring of the facilities, 3) security or collateral shortfall, 4) weak internal cash generation in the business leading to recurring past dues, 5) lending on the basis of names of the borrowers without looking into their business fundamentals or future potentials or even succession, 6) ignorance about competition or emerging competition, 7) failure to monitor the performance of loan asset, and 8) economic downturn or investment in the business segments other than the core ones.

Added to these are, of course, weak loan appraisal, failure to understand foreign exchange risk, corruption or failure of the lending officers and weak or no approval covenant monitoring. Too much of one-off excess approvals can be attributed to most large loan failures.

Once the recovery of a large loan or portfolio becomes doubtful, we must apply extraordinary caution and whether like it or not keep the client in a good relationship till the bank can strongly secure the exposure.

Now let us look at the Hallmark episode where an apparel exporter with Tk 200 crore projected exports with a 120-day end-to-end trade cycle ended up with Tk 3,606 crore exposures from commercial banks mostly state-owned ones. Interestingly their main banker Sonali Bank considering the trade cycle and similar industry players approved a credit limit of Tk 70 crore, the rest were local bill discounting (LBD) based on fake transport or shipping documents and subsequent use of bank limits.

More interestingly, when Hallmark's fraudulent activities were put on the surface and Hallmark applied for rescheduling, a few seniors mostly with central banking backgrounds, only kept on focusing on ensuring exemplary punishment of Hallmark promoters, not on ring-fencing the large loans exposure with further security or collateral. Since the clients' plea to reschedule the loan and business continuity was not heard positively, Sonali Bank was held captive with Tk 70 crore worth of security, not the additional risk assets or even a liability acceptance for the additional or total amount.

Hallmark's legal counsel behaved very intelligently and continued pounding on Tk 70 crore loans, not the local bill discounting amount, not to mention additional hard collateral. The legal advisers attributed the entire excess amount to the reported corruption of Sonali Bank officials and a few political seniors, putting Sonali Bank only to regret. The bank didn't consider Hallmark's rescheduling plea or business continuity appeal.

Large loan exposures once become sour, banks should keep on ensuring total liability acceptance by the borrower and security/ collateral improvement, especially hard collateral.

Learning from other similar countries, recovery of large risky and stressed assets of the banks warrants special attention, trained people assigned for recovery with legally enforceable security structures or even special approval for large loan restructuring from the central bank, not only rescheduling. The good bank and bad bank practices by a few global banks also should work here.

The author is the chairman of Financial Excellence Ltd