Loans and advances constitute the largest segment of bank's assets. Maintaining quality portfolio of bank's loans and advances not only maximises profit but also ensures steady growth of the bank. So, utmost care and extensive measures must be taken to maintain quality portfolio of bank's loans and advances. This, of course, is the most complicated task in Bangladesh, especially when the whole industry finds itself in an adverse situation with rising NPL (non-performing loan).
However, quality loan portfolio can be maintained if proper measures are put in place. In order to do so, the bank is required to establish specific objectives and strategy-oriented loan portfolio management system. Objectives/goals of loan portfolio, among others, must include (I) maintaining high quality loan portfolio all the time, (II) no new loan to a borrower of weak standing, (III) creation of no new NPL (non-performing loan) and (IV) recovering existing NPL. At the same time, the bank must follow its loan portfolio management strategy comprising (I) procuring new assets i.e. loans and advance, (II) no more NPL, (III) treatment of quasi-NPL, (IV) introducing EWS (Early Warning System), (V) recovery of NPL, and VI) finally, reporting.
PROCURING NEW ASSETS (LOANS): Procuring new assets (new loans) are part of bank's regular business; so efforts will always be there to woo new borrowers. However, extra careful measures should be taken while procuring new assets. The following steps, among others, must be taken:
- In depth analysis in term of both financial and non-financial factors
- Assessment of all risk associated with this new loan
- Proper mitigation all risks identified
- Historical scanning of the borrower and his/her business.
- In order to do so, the following action programme can be designed while procuring new loan:
- Prepare a list of all best borrowers/business enterprises of the whole industry
- Conduct in-depth analysis and grade all those borrowers/customers listed above
- Based on the analysis and grading result, categorise the potential best borrower list as A, B & C categories.
- From the list, identify some target customers who may be pursued and marketed by the bank. However, a kind of pre-approval may be obtained either from the bank's Board of Directors or Senior Credit Committee for approaching them.
- NO MORE NPL: The task of keeping the health of bank's loan portfolio is the most complicated and challenging job, but not an impossible one. There is no hard and fast rule of doing this kind of job successfully, rather it completely depends on efficient bankers' personal skill and acumen. Nevertheless, the following tips can give some idea to work on this issue:
- Constantly monitor each and every loan account
- Credit officer must keep close touch with the borrower
- Periodically evaluate borrowers standing in the business; any adverse deviation must be brought to the notice of the senior management
- Closely monitor fund utilisation, timely repayment, debt servicing etc
- Periodically analyse to ascertain any over-funding or under-funding. If so, appropriate measures must be taken
- Keep close eye on any probable fund diversion
- Ensure all documentation process has been completed
- Periodically review the loan account in order to foresee in which direction the loan is heading.
- Measures must be underway to ensure that there will not be any more new NPL unless arising out of exceptional circumstances
- Any new NPL, irrespective of the amount, must be thoroughly investigated, actual reason must be ascertained and probable recovery action programme undertaken.
TREATMENT OF QUASI-NPL & INTRODUCING EWS: Quasi-NPL is the amount of loans and advances the state of which remains in between regular loans and NPL. In fact, this is the part of regular loans which may turn into NPL any time. This is typically the earlier state of NPL. This kind of loan portfolio is very sensitive requiring extreme care because appropriate measures, if taken, may keep the loan in good state and thus can prevent new NPL. The following tips may help develop action programme in managing quasi-NP:
- Thoroughly examine loan documentation and ensure that all procedures are complete and up-to-date
- Investigate the loan portfolio and identify the true reason of business downsize
- Evaluate the borrower's present standing
- Find out the present status of business condition
- Find correlation between the present status of the borrower and industry situation
- Identify any weaknesses from both bank's side and borrower's side and probable solution thereof, if any
- Determine whether there is over-financing or under-financing
- Identify whether borrower has undertaken any new business project
- Ascertain whether borrower's cash-flow generation is inadequate to repay the loan / service the debt
- Estimate distressed value of collateral security and outstanding loans
- Ascertain whether there has been any fund diversion
In order to properly and timely identify this type of loan, bank's loan administration team must maintain EWS (Early Warning System) in their loan monitoring system. Under this control mechanism, any loan with weak performance will come to the close attention of the credit officer who will then report the issue to the loan administration team and risk management team as well. So introducing EWS is a very crucial part of loan portfolio management.
ONE HYPOTHETICAL EXAMPLE: Say ABC & Co was initially approved BDT 5.0 million overdraft facility which has now reached BDT 10 million and debt servicing has now become very week and transaction in the account is declining. Even cash-flow generation from the borrower's regular business is not good enough to pay off this outstanding loan. This is a clear example of quasi-NPL and requires immediate attention from the banker to keep this loan in good shape. Without complete reviewing the loan file and previous history, appropriate solution cannot be designed. However, one probable solution could be to split the entire BDT 10 million into two types of loans -- BDT 2.0 million as regular overdraft limit for supporting the borrower's business, while the BDT 8.0 million converted into term loan with longer tenure so that monthly installment size falls within borrower's repayment capability.
RECOVERING EXISTING NPL: Regular measures to recover existing NPL are also an important part of bank's loan portfolio management strategy. This is a very complicated and challenging job, especially in an environment where NPL has become a national problem. Nevertheless, bank must maintain extensive measures to recover NPL, which, among others, must include the following:
- Conduct scrutiny of each NPL account
- Determine the true reason of the loan turning NPL
- Identify the present status of the borrower and his/her business
- Whether the borrower is still in business
- Whether borrower's business for which loan was approved is still running
- Whether borrower's other business is running
- Condition of the industry in which the borrower is running
- Whether money has been doled out
- Whether fund-diversion has taken place
- Whether borrower has disappeared
- Ratio between distressed value of collateral security and outstanding loans
- Status of documentation procedures
- Borrower's plan and bank's action programme for paying off the loan
- In some situation, borrower may be encouraged to take the liability to other banks
REPORTING: In spite of taking all the measures, bank may not avoid NPL because this is sometimes the result of usual course of business operation. However, there must be proper reporting system under which any NPL must be reported to the competent authority including the Board of Directors. Any new NPL, irrespective of the amount, must be reported to the competent authority including the Board of Directors. This reporting system is required to help the authority particularly the Board of Directors take immediate measure including creation of necessary provisioning that will eventually minimise the losses likely to be incurred by the bank.
Loan operation is both a science and an art. In addition to applying all kinds of tools and techniques, credit officers' personal skill, farsightedness, experience and personal skill are equally important and bankers have to prove that acumen to keep bank's loan portfolio in a good state and thus avoid NPL. In order to achieve this objective, bank may have to apply appropriate technology and deploy adequate experienced as well as competent bankers.
Nironjan Roy is a banker, based in Toronto. Canada.