Who do we lend to?

As a Relationship Manager — or a banker in the making — one inevitably delves into credit risk, its identifiers, and ways to mitigate it early in their career. With rising non-performing loans creating a significant stress on financial capital and the broader economy, assessing credit risk has become imperative for every new credit relationship.

We analyse financials, evaluate industry risk factors, prepare models, and conduct due diligence on clients before lending — but do these measures truly identify all major risks? Quantitative analysis only reveals a fragment of the full picture. When it comes to qualitative factors, knowing what to assess and how to interpret them becomes far more challenging.

Imagine Two Scenarios:

Company A has a debt-heavy balance sheet exceeding Taka 5,000 crore. Its products sell globally, margins are decent, and repayment history is strong. The sponsors are fully engaged in operations, and the business is in a growth phase. There are no records of labour unrest, but white-collar employee turnover is high. Financial and major business decisions are made solely by the owner; his children are not yet involved in the business.

Company B, on the other hand, is managed by professionals. It maintains a fair balance between debt and equity. Its business segment is saturated and runs on thin margins, the company is at a mature stage. Whilst there have been occasional payment delays to stakeholders, its bank payment status remains “unclassified.” The next generation of owners is not directly involved, yet employee retention is higher than that of peers.

With limited funds available, which company would you lend to? At a first glance, A appears the stronger candidate. A is growing business with a solid repayment record and international presence seems ideal for a long-term relationship. Compared to that, B looks less promising. Naturally, most would prioritise A. A couple of years ago, when I was just working as arranger of funds for corporates without any credit risk on the company I was employed in, I would have picked A.

A few years later, as a relationship manager responsible not only for business development but also for NPLs, my decision would favour B. Why? Because Company A carries a major succession risk. If the sponsor were to face a health crisis, what would happen to the company? The owners built an excellent business but failed to groom successors or empower employees to make critical decisions in their absence. Company B, conversely, has skilled and empowered professionals capable of handling strategic, financial, and operational challenges. In essence, B is structured for continuity, whilst A operates like a one-man show.

This example illustrates how qualitative insights can heavily influence credit decisions — and how complex these assessments can be. With the constant evolution of financial instruments, transaction modes, and security considerations, the range of factors to evaluate before lending keeps expanding.

That said, some simple, common indicators can serve as early signals of a good borrower:

• How compliant is the company with tax and VAT regulations? Are professionals handling these functions?

• Are wages and salaries paid on time? What’s the employee retention rate?

• What does the client’s CIB record show? Do they frequently have overdue payments?

• Is the business growing — and if so, is growth financed through internal cash flow or bank borrowing?

• Are accounting policies consistent year after year, or do they frequently change?

• How involved are owners in day-to-day management? What are the qualifications and experience levels of top management? Is there a clear succession plan?

• What is the company’s environmental commitment level? Is it just on paper, or are they actually implementing some (if not all) of their commitments?

• Does the company invest in employee development? Do they just comply with labour laws or go beyond?

• How does it treat suppliers and distributors in terms of payment behaviour?

• How developed are its IT, MIS, and research functions? Are insights from these areas used in strategic decisions?

A socially responsible company that values its stakeholders is generally a safer borrower than one that grows recklessly without regard for its ecosystem. Whilst existing credit guidelines and assessment tools help evaluate a borrower’s capacity, they often fail to capture character. The factors above don’t cover the entire spectrum but provide a meaningful glimpse into a borrower’s integrity and long-term sustainability. The clearer we are about these qualitative aspects, the better informed our credit decisions will be.

Identifying the right customer is just the first step. The best credit decision also involves designing the right product for the right client. A borrower who is low risk at Taka 10 crore may become highly risky at Taka 15 crore. Past credit terms, financial ratios, fund utilisation plans, and independent cost assessments can all help fine-tune this judgement. Institutional policies regarding exposure limits and risk tolerance also play a vital role at this stage.

Timing is another critical factor. Are we funding at the right moment? So is monitoring. Once disbursed, how closely are funds monitored? Are there deviations between stated intentions and actual implementation—-and if so, do they fall within acceptable tolerance levels?

As the credit relationship progresses, the questions evolve. Identifying the right borrower and the right product is only the beginning. Like any relationship, this one requires close attention, nurturing, and periodic course correction to stay healthy. Taking the first step in the right direction, however, sets the tone for a stronger, more sustainable partnership for everyone involved.

Ayesha Sabrina is a corporate banker by profession. ayesha.sabrina91@gmail.com