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Personal guarantee against corporate lending: how effective is it?
AF NESARUDDIN
Providing securities and guarantees is very common in corporate lending. Securities are immovable and moveable tangible assets and might be in the forms of pledge, hypothecation or in any other form.
These securities are mortgaged in some cases as well. All these securities are elaborately defined, quantified and well identified.
In addition to these, there are corporate guarantees for comfort of the lenders. In order to bind the borrowers in a stronger manner, personal guarantees are also obtained.
Incidentally, these personal guarantees are vague and not clearly defined. They include all present and future assets and, to some extent, business, social, and personal reputations as well.
It may be summarised that the major securities include immovable assets, debtors, and inventories. Usually, in the case of long-term loans, immovable assets are secured, while for short-term loans and overdrafts, current assets—mainly inventories and book debts—are taken as prime securities.
Even though collaterals and registered mortgages are taken, the process to encash them is lengthy.
However, the provisions of Aurtho Rin Adalat have made these recovery processes easier and simplifier.
In such an environment, what is the fate of personal guarantee (present & future assets) and how effective and forceful is this when it is not defined, quantified and clearly identified and lenders have no control over it.
It can be said without any hesitation that in many cases, the outcome of securing personal guarantee is not helpful.
After the August 5 episodes, it has been observed that many borrowers have huge personal assets in the forms of cash, foreign currencies, investments in shares, land and buildings and so on.
Many of them got the opportunity to transfer it discreetly. Even the governor of central bank has advised against purchasing properties of a defaulted borrower group.
What about others when we look at the broad spectrum. This gives us a clue to review the matter with further insights.
Now the question is what is the way out?
At the time of sanctioning loans, a complete list of the personal assets of the borrower directors, including their family members, as declared, must be recorded with values at market price or notional value where the market price is difficult to determine.
Thereafter, these should be periodically and regularly reported to the lending agencies.
Any disposal therefrom shall be subject to clearance from lending agencies. Similarly, any acquisition has to be recorded as well.
It may be contemplated that like CIB, a database of every borrower individual can be maintained centrally with periodic updates so that all the lending agencies specially banks and NBFIs can have access to it and can easily access the quantum of personal assets of the borrowers.
It is also recommended that any addition to personal assets be reported to help realistically assess the creditworthiness of the borrower, apart from the assets of the borrowing enterprises or industries themselves.
These measures will definitely help in the enforcement of recovery.
Bangladesh is a unique country with lots of special social, political, economic and cultural characteristics.
Business ethics, transparency, and accountability are, in many cases, far from expectations. The level of non-performing loans is significantly higher compared to many neighbouring economies.
Accordingly, we have no option but to address this matter as circumstances demand.
The writer is the senior partner of Hoda Vasi Chowdhury & Co.