Why Loans Go Wrong?
In March 2021, total outstanding loans in Bangladeshi banking sector stood at Tk 110,194 crore. The total amount of loans outstanding in Bangladesh’s banking sector was Tk 111,194 crore. This is equivalent to 8.48%. The amount is not excessive, given our experience from the 1980s and 1990s. But, there are reasons to be concerned, particularly when the number of classified loans grows or is temporarily decreased by certain measures. It could be temporary or permanent.
This is alarming, as many banks in Bangladesh can’t claim to have a strong culture for risk management. Worrying developments were also discovered by the central banking’s stress test.
Many banks face the risk of “swelling,” due to their concentration of lending among large borrowers. Payday Champion says if you want to get a payday loan you should visit their website at paydaychampion.com.
100 Classified Loans
We are now in an era where 30% to 40% is the norm. In addition to reforms to the banking sector carried out by development partners, the Bangladesh Bank actively supported, credit is given to risk managers of foreign and private commercial bank, who have greatly contributed to their investment portfolios. Strong growth has not affected ‘assets.
Over 15 years of experience as a global bank risk manager has taught me one thing: Loans often go bad due to poor or inexact needs assessment, poor structuring, inadequate collateral, ” lack of security, or a low generation internal cash flow in management. recurring arrears.
Other factors include loans based on the names or future potentials of borrowers without having examined their business fundamentals and succession plans, ignorance or emerging competition, economic downturn or investment. In business segments other that the main future or economy.
Poor loan valuation
Other factors include poor loan valuations, inability understand currency risk when cross-border exposures occur, corruption or default by loan officers, as well as weak or inadequate credit conditions. ‘approval, compliance, or monitoring commitments.
The client may be desperate to obtain the loan approval or disbursed. It is the duty of the loan officer that he has identified all risks associated with the specific portfolio or activity and taken adequate steps to mitigate them.
We were able to see how a large client of textiles was unable to repay their loans on time due to poor repayment arrangements. Although the business cycle required that transactions take 105 days to complete, loan repayments for 90 days were a problem for both parties.
Similar to this, we’ve seen how a large bank in the local area had to offer a large amount of money to cover the sudden disappearance a large client at tannery, who was not identified as an estate.
Chattogram branch of an international bank was greatly affected by the 210-day in penalty repayment facility granted to scrapping customer. The sale proceeds began arriving after 30 day but were diverted. to other companies, which were not deposited into the bank account.
Find the right borrower
A large borrower from a bank went into default shortly after the term loan was disbursed. The reason for the high cost of his project was his inability to hedge against the fluctuations in the German Mark exchange rate.
A large distributor of a global company of consumer goods went into default due to the fact that all of his bank loans were used for land purchases and not distribution of durable consumer goods.
Because of their perceived “muscle or market power” or sometimes even emotional blackmail, loan officers are often taken captive by large clients. These big customers will dictate the terms in most cases.
If we loan 200 Tk to a customer for 100 Tk, they may be forced to borrow more money or delay paying their bills. No matter what the customer is or their business, a loan officer must perform a thorough needs assessment in order to determine how much money the customer requires to run their business.
Before you decide on a structure for the facility, you need to examine the business model and projected revenue.
How will you choose security or collateral?
Even if the figure is accurate, it’s important to determine how much the bank would finance the purchase and how much the owners would pay. A market appraisal should include an evaluation of the warranty or guarantee. You can also examine the outstanding amount in relation to any security or collateral.
I’ve also witnessed loans go bad due to non-compliances with regulatory requirements. Social activist groups forced agencies into closing down factories.
Incorrect title deeds or the grabbing schools or places for worship can also cause problems when erecting plants. Companies are forced to relocate and this increases the project’s cost.
It was also not a good idea to repay loans if the business wasn’t relevant to the main strength for key entrepreneurs. Importantly, you must support the winners of each business segment, and not the losers.
To penetrate further into customer segments with some guarantee or inadequate cash generation, pricing must reflect the inherent risks. The government must also subsidize these priority sectors to encourage cash flow.
What is the best loan policy for you?
Many Bangladesh banks and financial institutions don’t have their own risk policies or structured approaches to repaying, disbursing, or appraising loans. I’ve seen financial institutions that have large credit and loan departments, but are totally dependent on their board of directors for approval of loans.
These organizations do not have a culture that values collateral valuation or appropriate title. No matter the economic and business cycle, these facilities can be granted. This results in loan losses, forced allocation, erosion of capital and lower profitability as well as falling stock prices.
Financial institutions can avoid these losses by having a strong culture of risk management and a flexible risk management policy. However, it is important to have the right people in place for risk management.
We can barely make Tk 3-4 million in net profit if we take out a loan of Tk100 crore. But if we take out the same amount of distressed loans, we can lose the whole Tk 100 cr and suffer reputational and employee demotivational damage, along with heavy collateral loss.
An analyst is the author.