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Loan defaults and classification: A dimension in complex environment— Part-2

By M Khairul Alam
The inevitable result of the credit expansion also led to a fall of the country's foreign currency reserves for meeting voluminous and continuous import commitments, and the experience of cash crunch. Some of the commercial banks were rather forced to lend heavily in the form of term loan against industrial projects for which neither their deposit base had enough cushion nor sufficient expertise developed to appraise and monitor such project loan professionally. These loans in view of its maturity pattern are yet to show its real status for which we are to wait sometime more. Many of these industrial term loans may turn into delinquent nature in the long run and the net result will be havoc provisioning requirement. The crisis, thereby, may aggravate further. Tougher classification standard and provisioning requirement due to be phased Quarterly by 1998 but until that happens, some of the banks may be in worse shape than their financial reports suggest, unless prudent steps are undertaken right now.
Despite privatisation move, banking Industry until 1990 was used to operate effectively under a unified regulated system — the ministry asked banks what they should and should not do. Till early 90’s banks prospered by providing credit to trade-related business mainly. The government for obvious reasons required the banks to lend money in the priority sector of the country. The regulated financial market almost assured that there would be no threat to bank's profitability even though it was far from International standard. Before .introduction of revised loan
classification methodology in 1989, which appeared as toughsounding regulation to cover the losses, the profits were largely considered artificial. BCD Circular No 34 of 1989. however, put the banking industry into an acceptable disclosure system. Thereby the banks' balance sheet chock-a-block with huge bad loans has appeared more or less transparent.
Despite the awful record of the banking industry, salary and emolument of the employees have been Increased to attain efficiency in banking delivery system. But excepting a very few. quality of banking services leaves much to be desired. The amount of bad loans has kept on increasing at an unexpected pace. Therefore, the banking Industry is not just like a bad headache which may be cured with some minor treatment. It may take years to-S:ther to overcome the banking
is.
Banks refinancing the troubled clients under a nursing programme landed them ultimately with further stuck-up situation. Too much credit expansion in the past years also contributed to increased labour costs, and cut the borrowers in serious problem. As a result, along with other factors, many businesses effectively went bankrupt without formal declaration and dragged the banks to share their losses.
In a developed economy, a bank at times of crisis, usually tries to stay afloat by calling back their outstanding Ioans and refuses to accommodate new ones. But the situation in Bangladesh is reverse.
Faced with growing problems. Bangladesh Bank is pos-
sibly reluctant to come d'own hard on problem banks to set aside their accumulated losses. If the problem banks are forced to set-asidq money to cover those losses or inject fresh capital as per provisioning requirement. many of them would be in serious straits. And the result will be economic and political backlash which the country cannot sustain at this stage. Fixing the banks' problems will require huge money. The government is possibly trying to nurse the banks into shape through restructuring and privatisation hoping that investors would inject capital as well as develop better management.
Therefore, for an effective classification and provisioning standard, realistic policies and strategies need to be devised matching with the socio-economic-political environment of the country. These should focus on developing short, medium and long term agenda and gutting the right professionals who could implement the agenda. And the banking industry should remain and act as a commercial organisation free from bureaucratic tangle in absolute term.
Present classification approaches have been apparently successful in developed countries, but so far it has become effectively harder to reach its objective as the banking sector is not in a good position to fight back.
To keep pace with the market-oriented economy the banks, therefore, are yet to come up with realistic and corrective measures towards healthy growth following tra-
ditional bureaucratic management psyche, outdated rules and regulations causing very lengthy and poor delivery system. and cumbersome legal procedure in recovery of hank's money. Dictated loans, Influence of non-professionals in decision-making process, political and economic instability in the country, lack of pragmatic policies, absence of continuous vigilance and improvement of the quality and security of risk assets, lack of sense of belongingness and sense of participation of bank officials are also ailing the sector today. Demonstration of banking diligence and sincerity Is seriously needed now to overcome these age old problems.
The commercial banks have been lending to the industrial projects while the country Is yet to develop adequate entrepreneurship quality to run and manage such projects professionally compatible with international standard. Couple of years back the countiy had little experience of industry management technique. Educated people in particular with little background have just stepped into industrial ventures. Bankers still do not have much choice in selecting a good entrepreneur for financing. Bangladesh is still in the transition period of trading environment which may continue sometime more to switch over.
These limitations contributed much to the absence of corporate culture and professional management. The banks. In the name of rapid industrialisation and boosting the economy, had to lend inexperienced entrepreneurs. In
many cases, heavily. Diversion of fund for over trading or other visible and invisible purposes has been a common phenomenon in our country. The outcome of which is classified loans. Group of companies, in the absence of holding company. Is also widely used in this part of the globe where share-nolders/directors more or less are the same persons. Bank's finance to any unit of the group of companies (misnomer) easily gets switched over to other unit(s) in the absence of strict and sound accounting practice by the directors malting the borrowing company sick. All these factors contribute to classification of loan and force the bank to make loss provision from earnings or raise capital afresh for the shortfall amount. Although no bank has been compelled to comply with the provisioning requirement as yet. Very few banks have acceptable capital cushions now as per new capital adequacy requirement of Bangladesh Bank to cope with any unexpected shocks.
The objectives of BCD Circular No 34 of 1989 could not be attained till date in view of the limitations. Before introduction and implementation of the most modern and tough loan classification and provisioning requirement which remained unmatched with our local environment. the behavioural pattern of the society particularly the traditional laws, rules, regulations and disposal system need to be overhauled and modernised. Merely by engaging reputed and senior lawyers, banks classified loans cannot be realised through court cases which take years together involving valuable energy, time
and money.
It is not denying the fact that balance sheet growth has been regarded as the key measure of a bank's success, which yielded to increased emphasis on matters of profitability and capital adequacy. As Mr M G Wilcox comments ... "all banks need capital to cover and extend fixed assets and business investments, to enable trading to continue and increase, maintain the confidence of the depositors and ensure viability in the face of loss arising from inevitable business and political fluctuations and uncertainty ... Some of the factors touching the question of capital lie within the direct control of the bank concerned — most significantly the quality of management, with its influence on the structure of the balance sheet, the maturity pattern of assets and liabilities and quality of the assets portfolio", capital strength, along with risk assets quality and earning prospect, is the major factor in determining the bank's standing in the market and consequently its ability to raise required funds. It also allows the bank to offer competitive pricing and maturity structure. Growing concern about the observed deterioration in risk assets quality in the recent years which is likely to deteriorate further as per loan classification standard, has caused an emphasis on the strengthening of own funds by improving profit capability.
(To be continued)
(The article has been prepared on professional and academic interest and not to undermine any individual or institution. The views are absolutely personal.)