Fifty-six scheduled banks are now operating in Bangladesh with 9,197 branches out of which state-owned commercial banks have 3,673 branches and share of rural branches was 56.80 per cent having 5,224 branches.
In these days of open market economy and financial independence, banks and non-bank financial institutions are doing business in a highly competitive arena. Banks are offering different products and services to their customers. Usually depositors choose a bank considering the following:
a) Rate of return against deposit,
b) Security, safety aspects and stability of the bank where deposit will be kept,
c) Distance between the location of depositors and the bank branches, and
d) Service quality of the bank
While availing credit facilities, borrowers avail credit facilities from a bank considering the following:
a) Pro-business facilities by the lender,
b) Interest rates on lending,
c) Timely and sufficient credit approval in case of requirement,
d) Service quality of the branches,
e) Relationship with some key personnel of the bank,
f) Collateral restriction against the facilities and
g) Brand image of the financier, etc.
It is a common phenomenon that small and medium-scale borrowers do their banking with a single bank and large-scale borrowers are multi-banked. Large borrowers enjoy credit lines more than that of their actual requirement. Some of these borrowers do not utilise the total approved limit because actual requirement is lower. On the other hand, some of the borrowers use this excess limit for diversion to other projects beyond the approved purposes. Certainly, this is not a healthy practice at all. Now the question is why banks allow excess limit than a borrower's actual requirement after working capital assessment? It is worth mentioning that banks have to keep capital cushion against unutilised portion of the approved limit of all the borrowers to maintain Capital Adequacy Ratio (CAR). Basically, large conglomerate customers are limited in numbers and usually loan defaulting culture is not preferred by them. As such, due to brand image, corporate/ personal guarantee with strong net worth, annual sales turnover, market share, collateral coverage, most banks pursue borrowers for maintaining business relationship with them and allow credit lines with a view to letting them provide some business transactions and ensuring earnings as well. Apart from these, in case of project financing, borrowers usually avail credit line from syndicated/ club finance.
REASONS FOR MULTI BANKING RELATIONSHIP: A question arises why a customer is multi-banked. For large customers, reasons for multi banking relationship are the following:
(1) Banks are pursuing large-scale customers to provide some credit facilities to them. In such cases, assessment of working capital is not emphasised fully. Each bank provides credit lines more than the requirement of large customers with an expectation that these customers will utilise their credit lines. This somewhat turns into name lending practice.
(2) Banks can take exposure on a single borrower/ group based on their capital. Presently, with some exceptions, banks can take exposure on any single customer/ group both in the funded and non-funded forms not exceeding 35 per cent of their capital for general customers and up to 50 per cent for export financing where aggregate outstanding principal amount of funded exposure shall not exceed 15 per cent at any point of time in both cases. Therefore, a low capital-base bank can not allow large customers credit demand at a time alone.
(3) Large loan is defined as equal or greater than 10 per cent of the capital and banks can maintain large loan portfolio maximum @56 per cent of their total Loans and Advances portfolio subject to maintenance of their net classified loan up to 5 per cent. As such, a bank may not be able to entertain a bulk number of large customer's proposals.
Therefore, it is apprehended that conglomerates shall be doing banking with more than one bank but why not SME borrowers? This has multiple reasons.
Now-a-days, due to availability of numerous financial players in the market, it is observed that one customer is availing credit facilities from multi banks/NBFIs or different banks are offering credit facilities to the same borrowers irrespective of their credibility initially with an expectation that the borrowers will utilise their bank's limit only and adjust other banks' liability. In reality, it is observed in most of the cases, these customers utilise the excess fund for other purposes instead of using it for the approved purpose only. In case of some ambitious SME segment borrowers, it is observed that if their existing banks do not intend to enhance the existing credit limit, then they approach other banks for taking over the liability by enhancing limit. This is also acting as an avenue of over-financing and encouraging customers for going beyond approved purposes. Some banks show the attitude: "Alright, bank 'A' has given you limit of Tk.10 million. We are taking over by enhancing your limit by 02/03 fold."
Emergence of new entrepreneur financing is becoming a trend to take over existing clients of other banks without assessing actual requirement. Aggressive marketing strategy encourages some customers to switch from one bank to another. Even some customers do not think twice to bear the expenses of redemption of collateral security from existing banks and cost of fresh mortgage with another bank. For SME customers, this cost is really accountable and this type of switching increases effective rate of interest which is not considered in most of the cases.
On the other hand, now-a-days for large customers, maximum banks have introduced different products which are short-term in nature to meet urgent financial requirements and also to adjust other banks' liabilities by offering lower competitive interest rate. These products are also creating avenues for multi-purpose uses of fund other than approved purposes only.
SUGGESTIONS: To bring dynamism in competitive banking environment with some sort of discipline as well, the following observations may be highlighted by regulatory authorities:
a) For working capital facilities, one borrower should have only one bank.
b) If working capital loan size exceeds Tk. 100 million, then that borrower should be financed under syndicated arrangement instead of scattered banking.
c) In case of multi banked borrowers for security arrangement only pari-passu security sharing agreement should be entertained.
d) Each customer enjoying credit facility over Tk. 10 million excluding cash or cash equivalent coverage should have credit rating mandatorily by any of the enlisted external credit rating agencies of the Bangladesh Bank to bring uniformity in practice in line with BASEL-III accord. At present, some banks are trying to obtain credit rating for medium customers too to reap the capital cushion benefit but some other banks are yet to exercise this for which customers are not willing to have credit rating as they have alternative financers where it is not imposed so far.
e) While allowing credit facilities to any limited company, usually charge creation is done on the fixed/ and or floating assets of that company. In such cases, for any changes in ownership structure 'No Objection Certificate (NOC)' is required from the financing bank. In reality, it is found that though the charge has been created on fixed and floating assets by one bank yet without NOC of the said bank RJSC &F is allowing changes in ownership structure of the limited company which should not be. Regulatory bodies should take some punitive steps for such companies as well as for RJSC&F too.
f) If loan size exceeds Tk. 2,500 million for any individual company, then that company mandatorily should raise capital by issuance of ordinary shares through Initial Public Offerings (IPO). If it is done, then our capital market will also be enriched and investors will be benefited too.
The writer works in credit risk management area in a leading private commercial bank.