Do we learn anything from loan failures?

Despite having spent more than three decades in the financial sector, I faced the real test as a credit officer when I was appointed head of restructuring and recovery at Standard Chartered Bank. This was particularly so during audit, portfolio review and due diligence assignments following the Asian financial meltdown in 1997, in East Africa, Greater China and Europe.

Younger bankers often ask me: do we learn enough from credit or loan failures? My background as a risk officer has taught me that loans often go bad due to several reasons, including improper assessment of need, poor facility structuring, security or collateral shortfall, and weak internal cash generation within the business, leading to recurring past-due payments.

The reasons also include lending based on the borrower's name rather than the business fundamentals, ignorance of competition and economic downturns or investing in business segments unrelated to core operations or future prospects.

I have seen many credits go bad in Indonesia because lending officers failed to understand foreign currency conversion or fluctuation risks. In Malaysia, loans often turned sour when working capital was misused to finance projects, not unlike what we see in Bangladesh. In Taiwan, many middle-market loans went bad because the tenor provided was shorter than the trade cycle. Serious competition in India sometimes led banks to overlook security or collateral shortfalls.

In East Africa, many loans failed due to poor structuring, with borrowers diverting large sums to unrelated purposes.

Even in Bangladesh, we have seen industrial credits diverted to the stock market or siphoned off altogether. In Pakistan, "name lending" or "influenced lending" caused banks to go belly-up. In Latin America, many cases stemmed from exposure to foreign currency risk, while in Europe and North America, a drastic reduction in underlying asset values made exit impossible.

A proper assessment of need is essential, a "deep dive" into how much the client truly requires to run their business, and in what form. We must examine the business model: projected turnover, the tenor of an end-to-end transaction, and derive a figure. Even after arriving at this figure, we must assess how much will be financed by the bank and how much by the owners. I have seen loans go bad because the loan term was shorter than the trade cycle.

I have also seen loans fail because of non-compliance with regulatory requirements. For example, lacking a waste treatment plant, or causing river or neighbourhood pollution in India. Social activists forced agencies to shut down plants. Faulty land titles, or land grabs involving school or prayer sites, created problems in setting up plants, forcing relocation and pushing up project costs. The death of a key person without succession planning has also jeopardised many loans.

Bangladesh's banking sector has long struggled with loan defaults. Despite many corrective measures, defaults continue to plague the financial system. As of March 2025, bad loans totalled more than Tk 4.2 lakh crore. Borrowers owed Tk 17.42 lakh crore to banks, with an NPL ratio of more than 24 percent. In Bangladesh, loans have mainly turned non-performing due to weak loan assessment or facility structuring, lending officers' failure to understand the inherent risks of specific industries or business segments, including cross-border or foreign exchange risk, working capital loans being turned into term loans, "name lending" or "push lending" caused by intense competition, dictated loans or insider loans at state-owned and some large private banks, and, most crucially, lack of timely monitoring and action.

Our central bank, with help from development partners, has made notable progress in tackling default loans. This time, they seem more determined. However, we must develop a stronger risk management culture in every financial institution to avoid future surprises.

Mamun Rashid is an economic analyst and chairman at Financial Excellence Ltd.