Given the track record, syndicated loans should be a priority choice of banks and non-banking financial institutions (NBFIs).
As against a default rate of over 10 per cent in the case of all loans disbursed by the country's commercial banks, the same is only 0.64 per cent for syndicated loans, according to a survey report unveiled at a recent workshop held at the Bangladesh Institute of Bank Management (BIBM) in Dhaka.
However, despite such a laudable recovery performance, the share of syndicated loans in the total lending by banks and NBFIs during the period between 1995 and 2015 was only 10 per cent or Tk.765 billion. Loans were extended to 398 projects in major sectors of the economy. Local and foreign banks provided these loans with the latter having the largest share as lead arrangers.
The major positive side of syndicated loans is that the relevant projects are closely scrutinised by the lead arrangers first and then by other participating financiers. Similarly, the providers of syndicated loans do usually keep a close watch on the projects' performance and repayments. Thus, these loans are relatively better coordinated and supervised ones, leading to satisfactory recovery of the amounts invested by banks.
Yet there are quite a number of problems that the providers of syndicated loans face very often. The problems include banks' failure in proper identification of risks and diversification, weakness in equity management, lack of human resources on the part of both lenders and borrowers. Besides, the lenders do often demonstrate their weaknesses in selection of equipment suppliers, preparation of feasibility studies of complex projects, inadequate monitoring of project implementation and failure to gather sufficient information about the sectors in which their would-be borrowers are operating.
However, disbursement of only 10 per cent of all loans through syndicated arrangements appears to be too small if seen in the context of the country's need for resources to implement large projects both in the private and public sectors.
The reason for such poor participation could be due to the lack of sufficient interest among the private sector entrepreneurs to take up large projects befitting the needs of the economy or banks are not adequately enthusiastic to take part in such lending with long repayment periods.
Entrepreneurs of large projects want the scope and opportunity to repay the loan money over a long period, 10 to 15 years. But the banks, in most cases, are willing to keep the repayment period between 4 and 5 years. The disagreement over repayment period remains a major hurdle to popularise syndicated lending among the private sector entrepreneurs in Bangladesh.
Yet loan syndication is likely to play a very important role in the coming days. This is because a sizeable amount of money, lent by the banks using the traditional banking routes, has become classified. The central bank statistics shows the average non-performing loan (NPL) size at over 10 per cent. But in reality the size is bigger than that since many banks resort to window-dressing to hide the actual size of their respective NPLs.
However, there should be efforts on the part of lead arrangers of syndicated loans for both public and private sector projects to involve development financing institutions (DFIs), multilateral agencies and other foreign lenders. It is also necessary to ensure coordination among the lenders about the safety and security of funds employed in projects. But that would largely depend on the efficiency level of the lenders. Foreign agencies, multilateral or otherwise, would be interested in taking part in syndicated loan operations only when they would find the local banks are duly efficient in handling this particular kind of financing. International practices in syndicated lending might help such lending operations by Bangladeshi banks to be more efficient and effective.
The government and the local institutional lenders do need to examine the prospect of financing some of the private-public partnership (PPP) projects through syndicated lending. The current lending rate might emerge as a problem. Yet a solution to that problem could be devised through discussions between all the parties involved.
Though syndicated lending in Bangladesh is now at a low level, it has great potential to become bigger and this is an area of lending that carries fewer risks. But lending institutions do often complain about problems that they face while executing syndication deals, ensuring coordination and engaging manpower experienced in dealing with such lending issues and repayment details.
Thus, time is ripe for the Bangladesh Bank (BB) to craft a guideline, keeping in view the relevant international practices and the local-level ground realities, for syndicated lending by banks and non-banking financial institutions. Prior to drafting such a policy, it would be important for the BB to discuss in details with banks the experience they have gained from syndicated lending operations. It could be very helpful to eliminate the problems that the banks have encountered until now and make the process smooth.