The Bangladesh Bank (BB) has issued 'Large Loan Restructuring Policy' (BRPD Circular No. 04 on January 29, 2015) allowing all scheduled banks to restructure large loans sanctioned in favour of their borrowers. This is a very timely initiative for which we must appreciate the country's central bank. This kind of measures should have been taken much earlier, because during the last few years, non-performing loans have risen.
The condition of loan portfolio in Chittagong region in particular is not good at all and has deteriorated alarmingly causing a great concern of bankers and business community. Chittagong is the country's commercial capital and once upon a time this area was considered as an investment hub of the country. The Chittagong region has a history of timely repayment of loan and very good debt-servicing track record. When it was very difficult for banks to approve loan without any collateral security, many came forward sanctioning loans among members of the business community of the Chittagong region without any collateral security and solely based on personal guarantee as well as corporate guarantee. These loans have, however, been paid off on time.
When any particular region with good reputation of loan repayment is affected, it is easily understandable that there may have some other issues which need to be identified and addressed properly for the greater interest of the country's trade and commerce. Although accurate statistics are not available, yet discussing with some bankers it is learned that most of the banks' large borrowers are concentrated in Chittagong. So deterioration of loan portfolio in this area implies that large loan borrowers are mostly affected. Therefore, measures are inevitably required for preventing deterioration of large loan portfolio and issuance of this circular is, of course, one of those measures.
Default culture in our banking industry is not new and moreover, this tendency is rising day by day. The existence of bad loans is found everywhere in the world including the developed countries. If loan is disbursed, some portion may turn into bad ones and considering this unavoidable situation, special steps for recording bad loans are permitted in accounting standard. However, the way bad loan is created in our banking industry is hardly found anywhere in the world.
Further, treatment of non-performing loan and recovery measures are not found to be appropriate in managing bad loans. Rescheduling of non-performing loans is commonly used as a measure of recovering past due loans, but historically the rescheduling of loan has proved failure. Most of the loans after being rescheduled cannot continue for long and again turn into non-performing state within a few months of rescheduling.
Huge amount of large loans sanctioned during the early '80s in favour of one of the conglomerates of the country had to be rescheduled several times in various forms including ballooning-type rescheduling. Yet we have not heard that those loans have been fully paid off. So rescheduling as well as restructuring of loans is not a new concept at all. Rather this has become a regular practice in our country's banking industry.
However, in the present situation, importance has been given to the large loan borrowers. It is to be mentioned that special policy or guideline from the central bank should not be necessary for restructuring any loans. We should keep in mind that rescheduling of loans and restructuring are two different approaches as the former one is applied after the loan turns into non-performing one while the latter one is applied before the loan turns bad. Since rescheduling of loan is carried out after the loan has already been classified, there is a possibility of violating the central bank policy. But there is no such possibility for restructuring of loans as this approach is exercised when the loans remain in good shape.
In fact, loan restructuring is a part of regular activities of loan administration. In every bank, there is an effective Loan Administration Department where a group of competent credit officers are assigned with the responsibility of periodically evaluating and monitoring loan portfolio. Credit officers carry out various forms of review and analysis based on which they are capable of foreseeing how the loan is performing and in what direction the loan is heading. Accordingly, they recommend measures which among others include reviewing and revising of interest rate, upsizing or downsizing of the repayment schedule and extending or shortening of loan maturity. All of these actions carried out under regular loan portfolio monitoring measures are collectively known as loan restructuring. Therefore, restructuring of loans being the part of regular loan administration activity should not violate any circular of the Bangladesh Bank.
REASONS BEHIND NON-PERFORMING LOANS: First of all, the reasons for loans not performing well must be ascertained before allowing restructuring facility. Although the policy stipulates the necessity of stating explanation for loan restructuring, however, ascertaining the reason of non-performing loan is quite different from mere explanation. In fact, an anatomy of the loan has to be conducted on entire process from marketing initiative to the present state of loan. In our country, there is no such practice of identifying actual reasons of the loans being classified. Without ascertaining actual reasons, any measure including the restructuring facility will not bear any fruitful result to keep the loan well performing.
There may have many reasons for the borrowers falling into default. However, four different situations have so far been identified as main causes of non-performing loans, which require four separate course of action: a) wilful default and fund diversion; b) borrower extinct from business; c) business is closed but not the borrower.
WILFUL DEFAULT AND FUND DIVERSION: Wilful default is a very bad culture in the history of bank loans in our country. There are some unscrupulous people in our society who are very influential and have easy access to the loan-approving authority of a bank. By means of their connection, they exercise high influence in getting loans approved in favour of their business entity established as per the country's law. This loan is disbursed apparently in compliance with the banking norms and practice. So it cannot be said that this loan has been fraudulently sanctioned.
However, there is dishonest motive behind obtaining such loans from banks and the ill-motive can hardly be proved in the eyes of law. The main purpose of such loans is not investment; rather siphoning off the fund is the ultimate objective of the borrower. From the very beginning, this loan is considered bad and therefore no measure including restructuring facility can keep this loan in performing condition. Although the loan approved in a fraudulent means has been kept out of restructuring policy, yet there is no clear-cut instruction about applying this policy in handling wilful defaulters. Soon after the wilful defaulter is identified, the provisioning has to be made for the entire amount of outstanding loan and there will not have any other alternative but to initiate legal action for recovery of loans. We hope, the Bangladesh Bank will reconsider this matter and siphoning off fund by the wilful defaulter will be conspicuously kept out of the large loan restructuring policy.
BORROWER EXTINCT FROM BUSINESS: Sometimes adversity becomes so harsh that a businessman cannot survive and has to go extinct from operation. Even the situation is so bad that the affected businessman does not have any other alternative opportunity to invest. The closure of business is not unlikely; rather it often happens as a normal course of business. This is really a very complicated situation because the borrower himself is not responsible, but has been the victim of the situation. This is, of course, a very delicate situation which the concerned bankers have to carefully manoeuvre while undertaking any measure to recover the loan. This type of loan will have to be properly evaluated and demarcated as recoverable amount and unrecoverable amount. The recoverable amount may be considered as a good loan till the money is realised to pay off while the non-recoverable portion should be written off. However, if the amount of this loan is found to be very enormous, a government initiative is likely to be required. This kind of practice is found to be followed in the developed countries especially when the businesses are wiped out during economic recession. So allowing restructuring facility for this type of loan may not fetch any benefit and therefore should be specifically kept out of the purview of this policy what the Bangladesh Bank may consider while amending the policy.
BUSINESS IS CLOSED BUT NOT BORROWER: There is a very common situation where the concerned business unit against which a loan was disbursed is not performing well but the borrower's other business entities are running well and in addition, there may have some business opportunities opened. The cash flow generated from the borrowing entity is not good enough for debt servicing and therefore posing a threat of non-performing loans if appropriate measures are not taken. In fact, this is the ideal circumstance where loan restructuring policy is supposed to work effectively. If this loan is not restructured, mis-matching of fund is likely to arise because the borrower will try to channel fund from his running business unit to non-running business unit in order to service his debt, which will eventually result in the diversion of fund from the running business unit. Consequently the entire fund management may be adversely affected threatening the businessman to turn into a defaulter which is not desired at all.
The loan restructuring policy may well equip the bankers with providing the borrower with affordable debt-servicing opportunity. Under this policy, the entire outstanding loan of the non-operating or under-operating business unit will have to be set aside and converted into term loan with long expiry so that monthly instalment size becomes consistent with the cash-flow being generated from the borrower's existing business operation. The borrower's other business units need to be kept running with full support and cooperation from the bank so that cash-flow generation remains intact and if needed, increased cash-flow can be generated to pay the installment of restructured loan. The approach may ostensibly seem to be impractical but this is the only realistic measure.
Needless to speak that in order to recover the bank dues, the efforts should always be under way to help the borrower sustain his business operation and thereby continue to generate cash-flow adequately. This practice is commonly used all over the world and even in the developed world's banking industry.
The mere alternative to this approach is provisioning of entire loans identified as not performing well and we believe most of our banks do not have the ability to afford this widely accepted standard practice. So this large loan restructuring policy can be applied appropriately for maintaining bank's standard loan portfolio.
