Loan restructuring and recovery

Classified loans in the banking sector have exceeded Tk 211,000 crore. Various agencies are talking of almost Tk 400,000 crores of stressed assets in the banking sector, almost 25 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. Besides, the situation is more precarious with the weak banks that enjoyed political favour during the fallen regime.

We went through an era of 30 to 40 percent classified loans. Along with the banking sector reforms driven by development partners with active support from the Bangladesh Bank, credit goes to the risk managers at private and foreign commercial banks, who contributed significantly towards improvement of their asset portfolio despite large growth.

I often face a question from junior bank executives: why does a loan go bad? How can we avoid loan losses? My background as a risk officer for almost 15 years with global banks taught me one fact -- 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 and 7) economic downturn or investment in the business segments other than the core ones having relevance to the future or to the economy.

Added to these are, of course, weak loan appraisal, failure to understand foreign exchange risk where cross border exposures are taken, corruption or failure of the lending officers and weak or no approval covenant monitoring.

A client may always be desperate to get the loan approved or disbursed. It is the job of the lending officer to make sure that he or she has recognised all risks associated with that portfolio or specific business and taken enough measures to mitigate those risks.

We have seen how a large textiles client went through recurring past dues due to wrong repayment structure of the loan. In the same way, we have seen how a large local bank had to provide for large sums of money due to the sudden demise of a large tannery client, having no identified succession.

A large borrower of a state-owned bank became a defaulter right after disbursement of the term loan due to his project cost going through the roof for his failure to cover himself against the exchange rate fluctuation. In most of these cases, the large clients dictated the terms.

One must look at the business model -- how much is the projected turnover, what is the tenor of an end-to-end transaction -- and then derive a figure for facility structuring.

The security or collateral provided must be valued by a proper agency or put up on a market valuation process.

Many banks or financial institutions in Bangladesh even today don't have a risk policy of their own or any structured approach to loan appraisal, disbursement and repayment. I have seen many financial institutions having a large pool of people in their loan or credit departments, yet totally dependent on the board for each loan approval.

A robust risk management culture, with a dynamic risk management policy can help the financial institutions avoid losses. Along with that, it is more important to deploy the right people for risk management.

The author is chairman of Financial Excellence Ltd