Choosing the right kind of borrowers

The size of non-performing loans (NPLs) in the country's banking sector as of September 30 last stood at Tk. 567 billion, which is equivalent to nearly 13 per cent of the total outstanding loans.
The size itself made news headline because the NPL recorded nearly 1.0 per cent rise in the last quarter over that of the preceding quarter of the current calendar year. And the rise has been attributed to political troubles that have eroded banks' profitability and led to the increase in loan default rates.
But compared to the situation that had prevailed throughout the 1990s, the banking sector now has reasons to feel comfortable as far as NPL is concerned. In 1990 the ratio of NPL to total outstanding loans was more than 26 per cent and it soared to a record level of over 41 per cent in 1999, after maintaining a steady decline in the first half of the 1990s. However, the ratio fell again to 13.55 per cent in 2005.
Though the declining trend continued in the recent years, the NPL ratio could never touch 5.0 per cent, which is considered the threshold level.
A good number of factors are blamed for a loan turning substandard or doubtful or bad. On the top of these factors, possibly, remains the one that relates to the failure of banks to choose the right kind of borrowers.
The issue came up for discussion at a workshop organised by the Bangladesh Institute of Bank Management (BIBM) early this week. A survey research paper on the issue was also presented at the workshop.
The survey that covered 27 banks has found that most banks do not validate financial information through proper on-the-spot investigation. It has also noted that most banks also do not conduct formal interview of the people seeking loans while screening the loan applications. Even if such interviews were held, those are not documented.
Instances are galore where banks, while making desperate bid to recover overdue loans, found the addresses given by the defaulting borrowers as fake. Banks also fail to locate the property mortgaged against the loans. Some banks have filed cases with money loan courts to recover its funds but, in most cases, they have achieved nothing despite spending money on the process of litigation.
There is no denying that bankers are on occasions forced to lend money to borrowers with poor track record because of undue internal and external influence. The number of such clients is not that big. But the amount they borrow usually is found to be large.
But there is a lack of initiatives on the part of the bankers to address the need for gathering genuine information about the new loan seekers. While seeking to know the antecedents of a would-be-borrower, the lending bank should know whether the cash flow of the business of the borrower is enough to repay the loan. It should also assess the integrity level of the borrower.
The BIBM survey has also found fault with the lending targets imposed on the bankers and the process of review of the lending guidelines of banks as required under the credit-risk management (CRM).
None is unaware of the basic fact: where there is bank there will be classified loans. But what matters most is the total size of such loans in the case of an individual bank.
The rise in default loans is dependent on a host of factors, including the ones that are beyond the control of the bankers.
For instance, the ongoing political troubles have been taking a heavy toll on the country's economy and the banks are not immune to this development. They are already hit by it and would continue to suffer if the problems persist.
But choosing the right kind of borrowers appears to be within the reach of the bankers. What should the banks do to choose such borrowers?  They should try to gather the relevant information about the would-be clients with due seriousness.  
However, the officers, who are in-charge of the bank branches and credit divisions in the head offices of their respective banks, need to take special care in the matters relating to the selection of borrowers.
Had the banks been duly careful in the selection of borrowers, there would have been no scams like that of Hall-Mark and Bismillah Group.  Though the major loan scams have jolted the state-owned banks, there is no reason to think the private banks are insulated against this kind of problem. The latter, too, have default loan problems of serious nature. But they, possibly, know the art of window-dressing the same.  
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