Lending depositors’ money to borrowers and recovering the lent out money with interest are the prime functions of banks. But it doesn’t mean that banks can lend to whoever comes to banks for a loan. For giving a loan and making it recoverable as well as profitable, a banker is supposed to follow some basic principles of lending. Bankers are now entrusted with the challenging task of revitalising the economy by lending to the pandemic-hit sectors of the economy. Though Bangladesh Bank will refinance major portion of the loans disbursed under the stimulus packages and about half of the interest will be subsidized, banks will have to undertake the lending hassles and also be responsible for recovering the loan from borrowers.
Bangladesh Bank has issued a number of circulars detailing the ‘do’s and don’ts’ for banks as to stimulus loans. But Bangladesh Bank has also warned the banks that as like as recovery, responsibility of any default on such loans will bestow on the concerned bank’s shoulder. So Bangladesh Bank has asked banks to sanction the stimulus loans complying their own credit norms and policies.
That’s why it is now vital for bankers to select the right borrower following Bangladesh Bank directives as well as adhering to the basic lending principles so that the loans come back with minimum hardship to bankers. A banker appraises a loan proposal focusing on a few points of view–(i) bank’s point of view (profitability, liquidity) (ii) borrower’s point of view (credit worthiness, i.e, character, capital, source of repayment, business condition, experience, succession, account conduct, borrowing history, security) (iii) loan product’s point of view (purpose, amount, pricing, tenure), and (iv) regulator’s point of view (advance-deposit ratio, sector, target).
After sanction, banker disburses the loan completing documentation formalities as per credit norms and sanction terms. Even after the disbursement is done, banker has to keep a close and constant watch on the borrower and take adequate follow-up measures to ensure timely repayment of the loan.
| ব্যাংক, ব্যাংকার, ব্যাংকিং, অর্থনীতি ও ফাইন্যান্স বিষয়ক গুরুত্বপূর্ণ খবর, প্রতিবেদন, বিশেষ কলাম, বিনিয়োগ/ লোন, ডেবিট কার্ড, ক্রেডিট কার্ড, ফিনটেক, ব্যাংকের নিয়োগ বিজ্ঞপ্তি ও বাংলাদেশ ব্যাংকের সার্কুলারগুলোর আপডেট পেতে আমাদের অফিসিয়াল ফেসবুক পেজ 'ব্যাংকিং নিউজ', ফেসবুক গ্রুপ 'ব্যাংকিং ইনফরমেশন', 'লিংকডইন', 'টেলিগ্রাম চ্যানেল', 'ইন্সটাগ্রাম', 'টুইটার', 'ইউটিউব', 'হোয়াটসঅ্যাপ চ্যানেল' এবং 'গুগল নিউজ'-এ যুক্ত হয়ে সাথে থাকুন। |
BANKERS AS ACCOMPLICES TO DEFAULTERS:
Every bank has preset rules, risk management tools and guidelines for lending. But, despite such preset rules, tools and guidelines, many bank loans or part of loans are neither coming back to the banks nor generating any revenue for the banks. In fact, after collection of deposit, lending and recovery of the lent out money come as the second most important duty of a banker. But many bankers are wilfully or unwilfully contributing to loans to be uncollectible and compelling borrowers concerned to be defaulters. And, this is mainly for deviations of bankers from lending principles. A number of causes constituted by bankers contribute to a loan to be nonrecoverable and a borrower to be defaulter. The major causes include:
1. Wrong selection of the borrower:
Banker selects wrong borrower if he doesn’t have a clear appraisal about the five “Cs” — character, capacity, conditions, capital and collateral of the borrower before granting advance to him.
2. Improper assessment (under-financing & over-financing):
Over-financing and under-financing both are dangerous. In case of over-financing the possibility of diversion and misutilisation or multiutilisation of fund increase while in case of under-financing borrower may be compelled for multiple borrowings and so have to rush to microfinance institutions (MFI) and other informal money lenders for meeting his financial requirements and pay a heavy cost.
3. Lending in unviable projects:
If the project or business which is being financed doesn’t have potentiality of generation of good revenue, it has every possibility of getting sick or going shutdown challenging the repayment of loan of its lender.
4. Family needs ignored:
Sole proprietorship businesses generally mess family expenses with business expenses and the family expenses are met up from business revenue. When the banker ignores family expenses in calculating repayment or installment size of the loan, the loan gets irregular in payment when net revenue is not sufficient enough to cover the installment.
5. No-dues certificate & clean CIB report not obtained:
Many borrowers hide their borrowing status to his lending bank. If up-to-date and clean CIB report from Bangladesh Bank and no-dues certificate from previous lenders, if any, are not obtained before financing, the borrower might be double-financed or over-financed and repayment could be obstructed. In Bangladesh there are also examples of take-over of even classified loans of other banks ignoring CIB report status. Besides, status on borrowing from personal sources also can’t be ascertained if the borrower willingly and spontaneously doesn’t report it to the lending bank.
6. Lack of credit investigation:
Loan given without proper interview and investigation about the borrower (five C’s- character, capacity, condition, capital and collateral), his business (sales, profitability, cash flow, equity, market report, financials, CRG, ICRRS), borrowing status (CIB Report) and security (title, location, value) lacks proper judgment and leads the banker to wrong decision.
8. Influenced Lending:7. Nepotism:
Nepotism tends to lending on the basis of personal relationships rather than financial fundamentals. Many managers/credit officers favor credits to their family members, friends and acquaintances without considering their credit worthiness as well as relaxing credit norms/circulars of the bank. In many cases these loan accounts exist merely in name but the actual beneficiary is the concerned manager/credit officer.
“Push Lending”, “Dictated Lending” and “Managed Lending” biased by the borrower or any third party, higher management, board of directors, political power have every possibility of non-payment since these loans are not properly justified in terms of borrower’s credit worthiness, business viability, security coverage, solvent guarantees, and documentation. Loan is managed in the name of siblings, sons-in-law, daughters-in-law, personal driver, house servant, neighbors by appointing them as managing director or directors of the nonexistent company. Sometimes borrowers also fix many major terms/conditions of the loan by emotionally blackmailing the banker. There are also instances of forced resignation of the managing director and instant withdrawal or transfer of managers for denial of recommending or approving bad loans.
9. Name lending:
Name lending is loan to a large corporate that is well known in the market. It is lending to an obligor based on essentially three criteria related to the individual not the firm — (i) perceived reputation of the owner of the firm in the market place (ii) past history of the obligor or the owner, and (iii) whether there were any known incidents of defaults with any institution. But, recent history has shown that even the biggest names have failed. A rule of thumb is that profits from 100 good loans can be wiped away from one single bad loan.
10. Corruption in loan initiation process:
Loans involving corruption are typically lower quality loans that may not have been approved otherwise and are, therefore, more likely to go bad. These loans are approved by the loan officer/manager in exchange for private benefits from the borrower. Sometimes loans declined by head office are found to be approved by the manager at a curtailed limit within the manager’s business delegation. Many neo-businessmen who have become entrepreneurs overnight without any investment in business and many conglomerates existing merely by name are also getting bank finance abundantly. Fake TIN is opened. Age of business is 5 months but forged trade licenses for three years are shown to prove experience in the business. Loan is given against forged FDR, or same FDR is shown liened against several loans. As per the statement, in a television talk show (News Hour Xtra, ATN News dated July 11, 2017), of Mr Syed Ahsanul Alam Parvez, prominent professor of Marketing of the University of Chittagong, who was also the director of two banks and an insurance company, many loans are approved to undeserving borrowers in exchange for percentage of commission. Similarly bad loans are recommended skipping or hiding the weaknesses and threats of the loan in exchange for financial benefits from the proposed borrower. In cases where a banker takes financial benefit or other favor from the borrower in exchange for loan sanction, he will face difficulty in recovering such loans since the loan is not justified and the banker loses his moral courage to demand bank dues from the borrower.
11. Insufficiency or overvaluation of collateral:
Because of unhealthy competition of grabbing business and making profit, many loans are made by overvaluation of security. When such loans become irregular, they can’t be adjusted by liquidating the security since value of security falls short of bank dues. On the other hand, if the banker gives overemphasis on collateral than borrower or his business, it has every possibility of going defaulted.
12. Excessive reliance on landed properties as collateral:
After the financial obligation (balance in deposit accounts) bankers prefer landed properties as collateral for securitizing loans since landed properties are thought to be appreciable in price over time. But, in reality, liquidation of the landed properties for adjustment of defaulted loans is like a nightmare for bankers. Real estate prices are cyclical. Three to five years back there was ‘boom in real estate prices’. That is, the real estate market has already experienced its peak or is already softening up. There is a stagnancy now prevailing in the land prices. Price is not appreciating as expected; rather it is depreciating in many cases. When auction is invited for sale of mortgaged properties under the section 12(3) of the Artha Rin Adalat Ain, 2003, no bidder is found in most of the cases. If the borrower is a political figure or influential one, no one shows interest in auction purchase. As a result, defaulted loans are mounting because of failure of the banks in liquidating the collateral.
13. Poor documentation:
Documentation is the proof of lending. It establishes and declares banker’s legal rights on the borrower. Credit which is made to a borrower with integrity and supported by perfect documentation comes back to bank with the least trouble or difficulty. Documentation lapses put bar on the recovery process by restricting or eliminating the legal rights of the bank and thus handicaps legal actions against the defaulting borrower and guarantor. Documentation lapses majorly occur due to the carelessness of the banker or wilful non-adherence to the terms & covenants of sanction and credit guidelines of CRM and Bangladesh Bank.
14. Inexperience or inadequate training of lending banker:
Sometimes it is found that a probationer has to shoulder the responsibility of the desk of loans and advances before getting experienced with the basic lending norms, procedures and documentation formalities. As a result, many advances are disbursed without proper compliance to the sanction terms and execution of adequate documentation resulting in an advance flawed with legal errors, omissions and breaches. On the other hand, many officers who were cash officers in their whole career and don’t possess any primary knowledge of credit and even don’t understand the statement of affairs (SOA) of the branch and make a mess of the constituents of balance sheet, income statement are assigned as managers of branches. Such managers don’t understand the risks associated with lending. As a result, they recommend/approve many substandard loans without proper justifications.
15. Improper analysis of financials:
Improper analysis of income, expenses, cash flow, assets, liabilities and ratios of the business of the borrower will lead the banker to wrong decision. If the income statement, balance sheet, cash flow statements are manipulated it will not help in ascertaining the actual net income and networth of the borrower. And thus a borrower might get credit more than he needs or deserves. Many customers perform fabricated transactions to show guised turnover. Sometimes bankers are also seen to facilitate such transactions, i.e., fake deposits and withdrawals are effected in the account to show healthy turnovers.
16. Distant location of borrower:
Financing borrowers located at a distance out of commanding area of the branch hampers proper monitoring of the borrower’s business, stock, collateral etc resulting in poor transaction, misuse and diversion of bank loan because of being out of surveillance of the banker.
17. Prioritizing profit than quality of loan due to ambitious profit target:
Unrealistic profit target is also another gross cause of nonperforming loans (NPL). It is observed that many branches are laden with lofty profit targets which are not only ambitious but also unrealistic and impossible to achieve. As per Bangladesh Bank Financial Stability Report 2018, banking sector’s operating profit increased to BDT 266.4 billion in CY18 from BDT 246.5 billion in CY17, recording an increase of 8.1 per cent. On the other hand, Bangladesh Bank, in its latest monetary policy statement (MPS), set private sector credit growth target at 13.20 per cent and 14.8 per cent respectively for the first and second half of the fiscal. But many banks are aggressive in fixing operating profit growth target at a rate up to 200 per cent for many branches! Such branches rarely reach that ultra-ambitious profit targets. Managers of those branches always feel themselves underperforming and suffer from mental inferiority since their branches always lag far behind the targets; and at one stage, in fear of being rebuked and punished by top management and in urge of reaching the inflicted profit targets, go reckless for financing. In this situation managers count the quantity of the loan more than quality of the loan. They think—the quicker and the more they can finance, the quicker and the more they can earn and reach the desired profit position. With such destructive axioms they over-finance the existing borrower, finance in unviable businesses, finance in sensitive and sick businesses, finance the wrong persons who have no or substandard credit worthiness, finance ignoring security and collateral coverage. In many cases, borrowers of other banks are offered double limit with the same security by over valuation of the security, which is dangerous for a bank. On the other hand, many dishonest managers with the intention of proving himself to the bank authority as a super-performer, finance undeserving borrowers. They just keep financing without considering viability of business, credit worthiness of borrower, value of collateral and even documentation necessity. They just try with dishonest intention to be applauded and promoted by showing accelerated paper based profit in a very short time. In most of the cases, such managers throw dust particles in the eye of the bank and ring its alarm of destruction by ruining the bank’s capital and uprooting the bank’s foothold. Such managers get appreciation from the bank and also manage special promotion. After securing one or two accelerated promotions in the present bank, such managers switch to another bank by securing another higher grade. Two or three years after his switching, those loans start to be nonperforming and both the succeeding manager and the bank itself start to suffer.
18. Weak guarantee:
Weak guarantee also weakens the recovery of defaulted loans. In maximum cases, bankers don’t clear or fail to make it clear to the spouse of the borrower, mortgagors and third party guarantors their responsibility as guarantors in the concerned credit. In many cases bankers prefer a so-called guarantor without a minimum networth or a guarantor who is a valued customer of the same bank. Such guarantors especially those who are also the borrowers or big depositors of the same bank branch can’t be pressurized for recovery or reported in CIB in fear of losing business with them or deterioration of relation with them. In case of such advances, the banker concentrates on making and disbursing the credit in any way, not on its recovery prospects. On the other hand, in securitizing, bankers concentrate only on the concerned mortgage properties. Other unencumbered personal properties owned by borrower, spouse, mortgagor and guarantors get less attention and importance from the bankers. No photocopy or description of unencumbered properties is obtained by the bankers. As a result, guarantors other than the mortgagor can’t be involved and associated in recovery since they feel their no properties are encumbered against the defaulted credit. At the same time, unencumbered properties of the borrower/guarantor/mortgagor can’t be traced and attached while filing suit with the Artha Rin Adalat Ain since banker has no information about these properties.
19. Improper repayment schedule and sanction condition:
If the repayment schedule is not fixed keeping in view the time periods during which cash will be available with the borrower, it will result in inconvenience to the borrower and finally he will default in repayment. Inappropriate condition of margin (50% for all businesses) and adjustment (several adjustments in a year) can also propel a loan to be poor performing.
20. Absence of strict provision for repayment:
It has been found that in case of working capital finance, the limits are renewed every year and no repayment is insisted until outstanding (utilization) goes beyond limit because of charging periodic interest. Though there are conditions in the sanction advice of satisfactory transactions and adjustments during the validity of the limit, it is overlooked or compromised by the bank in time of renewal. This results in sanction of credit limits in those cases also where the borrowers do not genuinely require funds for their business operations. The borrowers avail of the credit limits and divert the funds to other areas. This practice can be checked if the drawing power of the borrowers is reduced month after month or the borrower is asked to repay some money at regular intervals. If every withdrawal has a separate repayment/ adjustment date (which is practiced by Islami shariah based banks) it will greatly help in achieving this objective.
21. Equity or margin amount not made visible:
A borrower will take interest in and care for any business or venture where he has a certain percentage of his own money. In this backdrop, banks demand borrower’s equity or margin at a certain percentage of the investment amount in the business or venture. As a result, loans are generally financed up to a certain percentage of the investment amount in the business or venture. Say, if the cost of making a house is Tk100 lakh, bank can finance up to Tk70 lakh, i.e, the borrower himself has to possess or arrange Tk30 lakh (margin/equity amount) in the form of hard cash, bank balance or any other visible and quantifiable form. But, in practice, equity/margin is unfortunately or willingly considered by many bankers as just a term of sanction without any implication of it in reality. In figuring equity/margin amount bankers, almost in every case, depend on assumption or borrower’s verbal statement rather than becoming sure of the margin/equity amount by making it visible in borrower’s bank account or any other transparent and quantifiable forms. As a result, bank finances a business an amount more than required. Subsequently the borrower shows no or ignorable interest in the business as he has no stake in the business. The bank loan is diverted and used in elsewhere rendering the business sick or shutdown and bank’s money uncollectible.
22. Unhealthy competition:
Nowadays competition among the banks is synonymous with wrestling. A borrower of one bank is always welcome by another bank. When a banker of “XYZ” bank comes to know that Mr. “W” has a loan with “ABC” bank, the banker starts running after and enticing Mr. “W” to switch him to his bank (XYZ) offering double limit and 1.00 percent lesser interest without considering his (W’s) business condition, need of additional fund, collateral security value, repayment behavior etc. Thus the banker pays attention not on loan characteristics but squarely on the unhygienic competition and lofty profiting. If the banker fails to make the borrower switch, he then offers a second finance from his “XYZ” bank. And thus the borrower is double-financed or over-financed pushing him into a hurdle of repayment. At one stage, both the loans get stuck and bankers of both banks keep sweating in the recovery race.
23. Improper classification:
Proper monitoring and classification of loans based on their performance give Early Alert to the bankers that a loan account is going to be poor and might get stuck. But many managers don’t classify the loan accounts properly to take unrealized interest to income and thus show fabricated income and asset quality. As a result, loan accounts deteriorating in repayment behavior don’t get proper attention from the banker well in time and subsequently turn defaulted in course of time. To avoid classification many managers also adjust the classified loans by sanctioning a fresh loan to the defaulted borrower.
24. Non-adherence to terms & covenants of sanction:
There are examples of loan disbursement by the managers even before sanction, i.e., in anticipation of sanction of the proposal parking at Head Office for approval. LC or guarantee margins are not realized as stipulated in sanction letter. Though prohibited in sanction terms, withdrawals from brick field loan accounts are allowed after March. Adjustment condition of withdrawals is not complied.
25. Ignorance of regulatory requirement or financing in sensitive sectors:
Financing in sectors, e.g., tannery, dyeing, chemical, poultry etc which are sensitive to the environment and which have regulatory compliance conditions like maintaining proper effluent treatment plant (EFT) has the chance of default, because environmentalists and other social pressure groups might force the authority concerned to shutdown or put ban on such businesses which are harmful to the environment. At the same time pressure and movement might be faced if anyone attempts to build a factory by acquisition of school, place of worship etc. Owners of such factories might be compelled to shift such factories to other places which will increase project cost and result in delayed or nonpayment of bank loans.
26. Lack of supervision, monitoring and follow-up:
Lack of supervision, monitoring and follow-up is the prime reason for many loan defaults. Banker’s failure or negligence in checking the end-use of borrowed funds and also keeping an eye on the conduct of the borrower’s account will result in unauthorised use of fund. Besides, banker’s relaxation in periodically visiting borrower’s business and collateral, inspecting stock of goods, going through the books of accounts, watching on bank account transactions might give the borrower too much freedom which erodes borrower’s sense of responsibility and urges for payment of bank dues. In such cases a borrower can lay off his business, change business address, make basic changes to the collateral or even absconds easily escaping banker’s eye which will ultimately worsen the recovery of advance.
WAY-OUT FOR PREVENTION AND CURE:
The remedies are actually inherent in the causes themselves depicted above. The following few but not all-inclusive courses of action are suggested.
Bankers have to be compliant and moralistic:
To control these anomalies by bankers and to tackle huge default loans it is essential to make every loan pure by filtering it through the credit rules and principles. But who will make this happen? It is bankers, who have to shoulder the prime duty; because it is bankers who are ultimately held liable for any loan default and also kept on a restless run until recovery. So bankers have to be banking norms compliant, uphold their morality and remain above all subjection.
A system of reward and retribution:
Bangladesh Bank has recently launched Corporate Memory Management System (CMMS) where a database of corrupt bankers will be maintained. This will put a bar against bankers switching, resigning and retiring from banks leaving a scandalous past. Punishment must be awarded to dishonest and corrupt bankers. At the same time, national integrity award system has to be implemented in every bank to recognise, reward and uplift good bankers.
Segregation of lending functions:
Loan marketing, approving, documentation, disbursing and recovery function must be segregated and separated from each other. And, loan documentation and limit creation authority should be controlled by and rested on Credit Administration Division (CAD) only. Limit creation and disbursement of loans which are approved by branch or regional office delegation should also be made centralized under CAD, which will disburse the sanctioned amount only after getting and being satisfied with loan documentation.
Controlling unhealthy competition among banks:
Multiple loans (an SME borrower of one bank is sanctioned another SME loan by another bank by hypothecating goods already encumbered with the first bank) on the same business has to be prohibited; and Bangladesh Bank (BB) selecting, on sampling basis, some CIB reports with multiple loans on same business has to hand over punishment and penalty to non-compliant banks and bankers. On the other hand, there should have an option in CIB database for reporting loans taken over and switched from other banks with mention of loan limit, quantity and value of security, interest rate etc of both present and previous banks. Similarly, Bangladesh Bank should also have surveillance system for tracking such loan takeover and switch, and actions must be taken for any reckless banking comes to notice.
Justified and achievable profit targets:
Reckless profit targets must be checked and profit targets for banks should be fixed in line with banking sector’s last three years’ average operating profit or forecasted credit growth of BB’s monetary policy or national GDP growth.
See More:
◾ Fiction of successful life: Zakat Based Economics
◾ Default loans: Cancer of the banking system
◾ Loan documentation: Possible deviations and precautions for banks
Note: Views contained in this article are my own and do not necessarily reflect that of the bank I am associated with.
Writer: Banker
