Making loan restructuring policy universal

The reason for high rate of non-performing loan lies in the approach followed by the banks to sanction loans. Appropriate amount and type of loans required for running business is seldom determined before sanctioning loan. The traditional way of approving loan is still being followed in our banking industry. Scope and periphery of the business has now widened much and keeping pace with business growth, the amount of bank loan has also increased manifold but the nature of loans remains confined within Term Loan and Overdraft (OD) or CC Limit.
Loan disbursement procedure has not been updated having consistency with the purpose and scope of business. Raw material and inventory are two major components of working capital but this requirement is commonly financed with OD or CC limit. Sanctioning clean OD or CC limit provides the scope of mismatching of fund which eventually results in non-performing loan.
Standard practice of financing working capital is Revolving Term Facility which allows approving certain amount of loan based on requirement for a certain period of time, preferably three to five years. Under this revolving facility, Term Loan - 1, Term Loan - 2 and so on are disbursed in order to meet specific requirement. Sale proceeds or revenue generated from raw material or inventory procured by using specific Term Loan is utilised to pay off the corresponding Term Loan and thereby the end-use of loan and repayment thereof is ensured.
Therefore, without introducing need-based loan disbursement approach, indiscriminate sanctioning of OD or CC limit will, of course, result in non-performing loans, because free money moves in different directions. And for this obvious reason, the developed countries have introduced many sophisticated means of loan disbursement which our
country's banking industry could not adopt yet.  
Similarly, a certain amount of money is required to uninterruptedly run the business and major portion of this requirement is met by borrowing money from bank. Prior to approving any loans, specific requirement is assessed, based on which loan amount is determined. Any deviation thereof will not bring good result, because either excess or inadequate fund may result in bad loan. Excess loan allows overtrading, resulting in mismatching of fund and eventually diversion of fund.
Similarly inadequate fund cannot be utilised properly and therefore business objective is not achieved. So cash-flow generation is affected and as such, debt-servicing is badly impacted. The practice of determining actual requirement of loan for business and sanctioning thereof is hardly followed by the banks in our country.
Approving lump-sum amount as loan is the most common practice and it is very common scenario that borrower demands a certain amount of loan which is trimmed off and approved by the bank regardless whether the purpose of the loan is served.
Finding no other alternative, the borrower accepts this inadequate facility fully knowing that this will not serve his purpose. This loan approval practice results in the creation of non-performing loan and as such is mostly blamed for high rate of classified loan in banking industry. Therefore, restructuring policy is particularly required for keeping this type of loan in well performing condition.
Under restructuring policy, the entire outstanding loan has to be consolidated and converted into term loan with long maturity and monthly instalment will have to be determined matching with the borrower's ongoing cash flow so that debt-servicing along with periodic principal payment can be maintained. The recent policy related to large loan restructuring will effectively work for maintaining healthy loan portfolio of bank.  
BUSINESSMEN RISK-TAKERS AND INVESTORS: From the economic point of view, businessmen are both risk takers as well as investors. They constantly explore business opportunities for which a large amount of investment is required. A lion's share of this investment comes from borrowing fund, because businessmen usually do not hold idle cash.
Similarly, deferring further investment means detering growth which may cause a decline in business performance. Therefore, business communities all over the world never stop investment; rather keep investing unabated and as a result, they always look for sources of fund. Our business community is no exception to this international practice.
In addition, they have to confront many more adversities including political and financial uncertainty. In spite of making billion-dollar profit, companies in the developed world frequently lay off workers on the plea of mere deviation from profit target, whereas our country's businessmen hardly think of retrenching employees even after exhausting their fund. Nevertheless, they have to endure many adverse remarks including bank defaulter.
In the developed world, businessmen have many alternative sources of fund viz. bond market, private hedge fund and derivative products. If interest rate rises in the bond market, the business entity borrows from bank. Even after borrowing from bank, if interest rate falls in the bond market, they draw money from bond market and pay off bank loan. This facility has not been introduced in our country and there is no hope of introducing it in near future. So our business community has to exclusively rely on bank loan for mobilising their investible fund. Whatever the amount is approved by the bank, they willy-nilly accept it. So this type of practice will have to be completely avoided while applying large loan restructuring policy. Based on in-depth analysis, evaluation of the loan portfolio and taking borrower's business impetus and cash-flow into consideration, the outstanding loans should be restructured in such a way that the borrower can comfortably ensure repayment without any failure. Otherwise, the noble objective of this policy will not be achieved and the policy itself will prove a failure.  
MINIMUM AMOUNT & MAXIMUM TERM: This policy has specifically mentioned Tk 5.0 billion (500 crore) as minimum amount for qualifying under large loan restructuring facility. Now the question arises why the borrower having loan less than Tk 5.0 billion will be deprived of this opportunity. Challenge and uncertainty being faced by the business community is more or less the same irrespective of the amount of loan. So the policy discriminating any particular segment solely based on loan amount may create disparity and thus cause frustration among members of the business community.
Besides, large borrowers are the influential quarters of the society. So they have very good relationship with the owners and executives of the bank. Therefore, using their influence, they can easily restructure their debt without referring to any restructuring policy. But small borrowers usually do not have connection with the owners or executives of the banks. Thus loan restructuring policy is virtually required for this segment of business community. Therefore, loan restructuring policy should be made universal allowing all borrowers regardless of the loan amount. Personal or consumer loan and SME borrowings may, however, be excluded from this policy.
The policy has restricted tenure for restructuring large loan up to 12 years, although maximum term should not be determined without considering the size of the outstanding loans, borrower's repayment capability, business impetus and cash-flow. Needless to say that under restructuring policy, most of the loans may have to be consolidated and converted into Term Loan with monthly instalment consistent with the cash-flow generated from the regular business operation. Any restructuring with monthly instalment less than cash flow and revenue earnings will make this policy a failed attempt.
So monthly instalment size is the most crucial factor in restructuring loan, because, if instalment size recalculated following the restructuring of loan within a fixed 12-year term widely exceeds regular cash flow, the borrower will be compelled to default and restructuring measure will fail. Now a question may arise whether the term should be extended for an indefinite period. Of course, not. But since the loan has already been disbursed, efforts should be made to keep it in well-performing condition and for doing so, the borrower should be given the breathing time so that he can pay off the loan from his regular business operation, although not for indefinite period. Twenty to 25 years may be required depending on the complexity of the loan.
Irrespective of maximum tenure of the restructuring loan, the review term should be fixed for two/three years when restructuring terms and conditions including interest rate cannot be changed. After every two/three years, the loan file, particularly relating to borrower's repayment performance, cash-flow, revenue, profitability and business activity will have to be thoroughly evaluated and based on the findings, some terms and conditions if warranted, may be revised with setting next review date after two three years. Therefore, the maximum term for restructuring loan should be reconsidered.
NEW LOANS UNDER RESTRUCTURING FACILITY:  This policy has provided the scope of sanctioning new loan as a part of restructuring facility. However, the decision of sanctioning new loan should be substantiated with detailed analysis of the borrower's loan portfolio. As a part of the analysis, the restructuring requirement may come up with the recommendation of new loan if needed at all. The prime objective of this restructuring policy is to recover bank dues allowing the borrower to run his regular business for which the flow of working should be kept uninterrupted. Therefore, the policy should specifically mention that new financing can be provided only for meeting the requirement of working capital and this decision must be the part of restructuring facility.
Sanctioning of new loan must also be monitored and evaluated at every review date and even considering the utilisation as well as debt-servicing performance, the new loan may call for further revision. We have to keep in mind that sanctioning loan intermittently as and when demanded will not serve any purpose, rather impede the repayment schedule and eventually the loan will turn into non-performing condition.
So it has to be conspicuously spelt out in the policy that decision on any refinance can be taken at the time of restructuring and reviewing time only and the matter has to agreed upon through mutual discussion between the banker and borrower.      
At the present situation, loan restructuring is a very effective measure which is required to be applied with banker's prudence and right judgment. The main problem of our banking industry is enormously high non-performing loans and the situation is aggravating day by day. So time has come to make concerted efforts for not only preventing further deterioration of non-performing loans but also considerably improving the loan portfolio. This large loan restructuring policy, if applied properly, may play a significant role in improving bank's non-performing loans. Once the policy starts benefiting the country's business community and the bankers as well, all borrowers, irrespective of their nature, volume and turnover, should be brought under the purview of loan restructuring measures in order to bring about qualitative changes to the country's overall loan portfolio.  
The writer is a Toronto-based banker.
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