Commercial banks play a vital role in our national as well as global economy. Besides providing customer related routine services like taking deposit, giving loan for various purposes to clients, transmitting money from one customer to others in the form of TT, MT, pay order etc., they play an important role in driving the economy in several ways.
What are the tasks to be done by these financial institutions while making their policies for their own assignments in this perspective? The task is not easy and requires prudence and experience. Otherwise, the purpose for which a finance is made may run the risk of becoming countret-productive. For example, when a bank provides finance to an enterprise, even though the purpose of the finance is clearly spelt out in the sanction letter, the concerned enterprise may stray away from using the fund for which it has been sought and may even run the risk of becoming bankrupt.
So emphasis should be made on the reality of using the fund by the concerned enterprises. Many the business enterprises get sanction for one purpose but use the same for other purposes. As such actual loan disbursement purposes are not in keeping with the stated policies causing risks for bank fund collected from a large number of depositors. In many cases funds sanctioned for working capital finance are being used to buy inoperative assets having no productive use. Now a days, fund diverting is a regular practice by many entrepreneurs in our country; be it small or big, it ultimately affects the liquidity of the enterprises. It goes without saying that when a bank is financing an entity without considering the productive use, it actually plants the seed of bad loan that comes into reality when that entity becomes insolvent.
LACK OF FAR-SIGHTEDNESS OF BANKERS IN FUNDING WORKING CAPITAL: Apart from fierce competition among so many commercial banks in financing renowned business conglomerate, setting unattainable target by bank management in disbursing their investable fund ignoring many important issues result in huge amount of bad loan. When a bank is giving working capital loan to a business enterprise, it resorts to a process of working capital assessment considering some prescribed facts of the enterprise set; say, for a medium size industry running at 80 per cent capacity, Tk 5.0 billion are taken for procuring raw material for fifteen days, Tk 3.0 billion for holding two months finished goods, Tk 1.0 billion for 15 days' work in progress and Tk 2.0 billion for two months account receivable-- in total Tk 11.0 billion for the organisation considering its size, production capacity etc. The fund is provided in the form of TR, LTR and overdraft to import raw materials and procure local items, and also to defray the operating costs. The entrepreneur while getting the fund leaves no stone unturned for using part of it to meet his personal needs apart from using the same for business purposes.
Here is not end of the story, the same enterprise being thus financed by one bank approaches another bank for loan. Such practice paves the way for classification of the total loan portfolios as bad loan.
It may be noted that eleven banks had a capital shortfall of Tk 192.96 billion at the end of September, 2020 even though they got a handsome amount of fund from the government exchequer.
UNHEALTHY PRACTICE OF BOTH BANKERS AND CUSTOMERS: Bankers procure clean credit information bureau Report (CIBR) from Bangladesh Bank with a view to either enhancing their funding facilities or keeping it as it is, to avoid classification, thus the customers approach the concerned bank to create new loan to pay the old ones which are going to be overdue. Sometimes many bankers enhance the limit of the credit facilities in the face of customers' inability to repay such old loan to keep their loans away from being classified. Loan rescheduling is also partly responsible for turning a loan into a bad loan-- because of the practices of flexibility in case of tied loan repayment schedule of the customers.
SUGGESTIONS TO AVOID BAD LOAN AND LOAN CLASSIFICATION: To avoid the above-mentioned problems, the following recommendations may be suggested:
Before providing finance to a particular customer, the concerned bank, apart from considering client's healthy financial structure, should consider whether the same customer has taken loan from other banks. In assessing working capital requirement in the aforesaid way, the bank must deduct the funding made by other bank/s. If the funding by other bank/s is inadequate, only the deficit amount should be financed.
It should be examined whether the cash flow surplus generated from the operating activities are adequate to meet the cash requirement in case of financing and investing activities.
Qualification in the Client's audit report should be considered carefully in case of new funding.
Apart from fulfilling periodical rigid loan disbursement target by the bankers, political pressure must be avoided in all types of funding by bank.
Competence and quality of credit rating agency, asset valuer should be taken into account while taking any asset as collateral. clients' reputation, status of client organisation and compliance of ethical issues by the client's Board should be considered.
Above all, bankers' prudence, experience and other related matters such as positive interest coverage ratio, both operating and financial leverage etc must get priority in new funding and to avoid classification of loan/bad loan.
Kazi Atik ACA,MBA is Head of Accounts, Television Division, Walton Hi-tech Industries Ltd. [email protected]
