High rate of non-performing loan is an acute problem

Banking sector in Bangladesh has rapidly developed during the last four decades. In fact, a revolutionary change has taken place in the country's banking arena. Product diversification, automation, online banking, mobile banking, reaching banking services to the doorstep of the common people including the poor farmers are milestones in the country's financial industry. 
This development in the financial industry is not y commensurate with the socio-economic development of the country. Our country has also maintained sustainable economic development during the last ten years defying all the odds. Even prolonged economic recession sweeping over the developed world could not affect the economic growth of our country as gross domestic product (GDP) growth has been maintained over 6.0 per cent all the time. In addition, the country has registered a sharp rise in all the parameters of socio-economic conditions. The trade, import and export volume has increased manifold. Foreign exchange reserve has reached US$ 30 benchmark. Many goods and commodities are now manufactured at international standards and some of them are being exported in limited scale in addition to our readymade garments export. Above all, Bangladesh is now a big market of 100 million consumers who can afford durable consumer goods. All these potentialities as well as development of socio-economic indices have created immense interest among the international community. 
In this situation the financial sector needs to be well-prepared to support this growth potential and thereby capitalise the opportunity being created. In order to do so, the financial institutions, including banks, will have to be upgraded and integrated with the international financial market. In recent times the uses of traditional financial services and products are rapidly declining with the emergence of many modern and sophisticated financial products which are not only conducive to use but also cost-effective for the customers and more revenue generating for the banks or financial institutions. If the banking sector intends to introduce the new products and services in our market, they will have to maintain minimum international standard in order to integrate with world financial market. Banking sector in many Asian countries have successfully done this although many segments of their banking structure are not stronger than those of ours but firm commitment and strict compliance of the rules and regulations have made it possible.    
 The main problem of our country's banking industry is high presence of non-performing loans (NPL). In fact, non-performing loan is the greatest obstacle in projecting our banks' image to the international banking community. In our country, the percentage of non-performing loan is historically high and to speak the truth, the high rate of non-performing loan is an acute problem. No bank will show any interest of doing good business with a bank with huge amount of non-performing loans. So time has come to take drastic decision in streamlining the non-performing loans. This is a long-standing problem being accumulated over the second half of the last century and as such it is really difficult to clean up. However, nothing is impossible if there is a firm commitment from all stakeholders. So with the support and cooperation from the central bank and government, if a comprehensive plan is undertaken, the country's banking industry would be able to clean up this mess of non-performing loans from the banks' books of accounts.    
Presumptions: Every programme or concept is based on some predetermined criteria, the stringent compliance of which determines the success of the programme. Likewise, the measures undertaken to streamline or clean up non-performing loans need be based on some presumptions which, among others, include at least the following: 
1. Firm determination and supporting role from the government. 
2. Firm commitment and coordinating and supporting role from the Bangladesh Bank. 
3. Firm commitment, sincerity and support of Bangladesh Association of Banks (Owners' Association).
4. Firm commitment and responsibility of Association of Bankers, Bangladesh (CEOs'/MDs' Association).  
5. Firm commitment and cooperation from the business community.  
No new approach but consolidation and streamlining of existing systems: The measures and systems required for not only streamlining country's loan operation but also cleaning up NPL are nothing new. Most of the measures and systems are already in operation in our banking industry but in an unorganised manner and many of them are found only in theory, not in practice. Therefore, all the existing measures and policies will have to be consolidated and streamlined in a very systematic manner and strict compliance thereof will have to be ensured by close monitoring. However, some new measures will have to be taken to get rid of the long outstanding NPLs. 
No concern for the business community: Previously many good initiatives were foiled by creating false alarm among the businessmen that the new measure will squeeze the opportunity of availing loan from banks which unnecessarily frightened them and they refrained from seeking bank's cooperation for implementing a new programme. Therefore, the business community, which is the main driving force behind economic and financial growth, will have to be assured first that there will not be any concern for the business community as a result of NPL cleaning-up programme, because the opportunity of receiving loans from bank shall not be affected. On the contrary, a systematic way of sanctioning loans at lower rate of interest will be in place for the business community and fraudulent way of sanctioning loans will be gradually eliminated.   
Two-way measures: Prior to undertaking NPL streamlining programme, appropriate measures will be required to prevent any recurrence of NPL. It will not be worthwhile to clean up long-standing NPLs keeping the avenues of creating new NPLs open. Two-way traffic in this case will not bring any result, instead it will create further complications that cannot be cleaned at all in future. Therefore, the scope to create further NPLs has to be sealed first and then the initiative of cleaning NPL may be undertaken. To be honest, the streamlining process of long outstanding NPLs is going to be a costly affair from every stockholder's point of view and so there is no use experimenting with this measure. Other loopholes in the system leading to creating NPLs lie in the process of loan approval and loan administration which are to be streamlined first. So the following two measures are simultaneously required: 
A. Streamlining the loan operation and thereby preventing further creation of NPL. 
B. Cleaning up of long outstanding NPL which is beyond recoverable state. 
If these two interrelated measures are taken together, the desired result may be achieved. 
Streamlining loan approval & loan monitoring system: In our country the Credit Committee based loan approval system has not been introduced yet. Usually business loans are approved either by MD (Managing Director) or Board of Directors depending upon the amount of loans and approving delegation. In some banks, there are credit committee on paper only, but the committee is dependent on MD as all the members sign the approval sheet sensing MD's motive. For personal loan and SME (Small & Medium Enterprises), either Head of the Division or a Committee approves loan with supplementary approval from MD. Besides, there is no centralized documentation and disbursement system. Even loan monitoring system is not effective at all. An obsolete loan approval and monitoring system provides wide scope of creating NPL. Therefore, the system must be standardised in order to keep the health of loan in good state which will eventually prevent further NPL.
Entire loan portfolio should be categorised in three groups, especially for approving and monitoring purposes: Personal/consumer loans; SMEs; and  Business/corporate Loans.
Introduction of committee-based loan approval: Instead of individual delegation, committee-based loan approval system needs to be introduced. A clear-cut guideline containing specific parameters and approving amount will have to be provided to the committee who will approve the loan based on the set criteria. The committee will sit together every morning and will finalise the approval/rejection decision on the loan applications received till the previous day. The committee will approve only those loan applications which are in conformity with the approved parameters and will reject those which are found otherwise. However, the committee may refer exceptional loan proposals to the Board of Directors, particularly those which are found viable but do not meet the approved criteria. These can be referred to the Board of Directors for policy decision. 
The committee members will be collectively and individually responsible for approving the loan and accordingly will be accountable to the competent authorities. However, each member will have the right to put note of dissent if he or she has any different opinion or concern. It is evident from experience that involving a group of people in unlawful activity is more difficult than convincing a single person and thus the committee-based lending will be more transparent than individual decisions. 
In order to introduce committee-based loan approving system, Board of Directors will have to be very proactive. The Board will have to agree in principle to put more control in approval system and make the approving person more accountable for due diligence. Board of Directors will develop set criteria and parameters which along with the detailed guidelines will be provided to each committee for compliance. In every meeting, the committee will be obliged to submit the list of the loans approved and rejected with reasons to the Board of Directors. BOD will review and refer those reports to the Audit Committee of the Board for verification. Audit Committee will verify and ascertain if violation of policy and approved parameter has been done. Alternatively, any violation, if detected, will be brought to the notice of BOD who will charge the MD and the committee as well for violation. In this way the control is ensured. Even the audit committee will also ensure that the approving committee did not reject any genuine loan application whimsically and thereby the access of all honest business people to the bank loan can also be ensured.   
Nironjan Roy, CPA, CMA is a Toronto-based banker. 
[email protected]