NPLs overshadow achievements of banking sector

Loan syndication is quite popular in our country but this has to be done in a standard form that requires a separate web-based market where all lenders, i.e., banks or financial institutions will be registered on lenders' side and the borrowers on the owners' side. There will be clear restriction on any loan exceeding the benchmark amount and it has to be borrowed through loan syndication. In order to borrow a syndicated loan, the borrower will have to be registered with the secured web-based loan market which will be exclusively restricted for use by the registered members only. To manage a syndication loan, four different roles are to be played by the banks that include lead bank, administrative agent, agency services and custodian. Lead bank plays the role of organising loans and their activity is restricted to the approval of the loan. Agency services provide continuous services of loan operation which include disbursement, repayment/recovery, realizing fees and interest and transaction with the participating lenders. Administrative agent is responsible for completing all the documentation formalities. Custodian bank will retain all the collateral securities in their custody.
A business entity interested to borrow fund exceeding the benchmark limit will log on to website and submit open invitation to the banks for acting as lead bank, administrative agent, agency services and custodian banks. This invitation will automatically come to all the banks registered with the website and banks will be selected for each role through open competition. At this point, lead bank will proceed with necessary analysis, rating, visiting and appraisal of the proposal based on which this bank will invite all banks through this website to participate in the proposed deal. On being invited, all interested banks will review the analysis and recommendation and if found viable, they will express their interest to participate with intended commitment. In the event of oversubscription, all participating banks will be prorated. Syndicated loan managed in this way will not only diversify the risk but also drastically reduce the potential threat of siphoning of fund as it is very unlikely to engage different banks into fraudulent activity.  
CENTRALISED DOCUMENTATION AND LOAN DISBURSEMENT SYSTEM:  In our banking system, the concerned branch of a bank is the sole authority to disburse loan to client's account. Each branch initiates loan proposal, obtains approval from Head Office, completes the documentation process and finally disburses the loan where there remains a possibility of fraudulence, because under this system there is no demarcation line drawn in the functionality of three different responsibilities.
Basically the disbursing branch will act as business unit or service providing centre. It initiates the marketing drive but should not have disbursement authority. However, a branch can act as marketing unit, so will initiate the marketing drive, meet the borrowers, do the initial analysis and will forward its recommendation to the Head Office for credit decision. At this point branch's responsibility ends and it will only maintain relationship with the borrower.
Bank will maintain separate centralised departments for documentation and disbursement to be headed by two independent executives accountable to the Policy Committee. These departments will perform the jobs of all branches who initiate loan proposal. Centralised Documentation department will perform in coordination with the respective legal department, designated lawyers and concerned regulatory bodies. Centralised disbursement department will perform in coordination with the treasury department and concerned relationship/accounts managers. Once loan proposals are approved, the files will be forwarded to the Centralised Documentation Department which will then complete the documentation formalities with intimation to respective branches. When documentation procedure is completed, the file will be forwarded to the Centralised Disbursement unit which will get ready for disbursement of loan upon receipt of drawdown notice from the branch.
This appears to be a complicated, time-consuming and bureaucratic approach, but in reality it is not at all like that. We are now in an age of electronic communication when a single email with copies to all parties concerned can perform the job quickly. Moreover many web-based programmes have been developed with minimum maintenance cost and limit allocation so the banks can consider developing this system on their own.
LOAN MONITORING DEPTARTMENT:  Continuous monitoring and evaluation of loan is the most important requirement for keeping the health of the credit in good condition. Every bank must have effective Loan Administration department where a group of competent credit officers will be assigned with the responsibility of periodically evaluating and monitoring the loan portfolios. Based on their analysis this department will prepare a report and will submit to the Credit Committee for necessary action.  
PROFESSIONAL CERTIFICATION FOR CREDIT OFFICERS: In modern banking, operation of credit has become a complicated and sophisticated technique for which special skill and commitment of the Credit Officers are required. Mere analysis and theoretical knowledge are not good enough to manoeuvre the operation of credit. Therefore specialised training and professional knowledge as well as commitment are prerequisites for an officer who will be working in the Credit Division. A certification programme maintaining high standard may be introduced. IBA of Dhaka University or BIBM (Bangladesh Institute of Bank Management) can be given that responsibility to provide this certification on Credit Operation. There must be some continuous education and professional up-gradation under this certification programme.  
TREATMENT OF NEW NPL: In spite of having all measures, policies and control in place, the eventuality of bad loan cannot be completely avoided because bad loan is a part of regular loan operation. Bad loan is found everywhere in the world including the developed countries. If a loan is disbursed, some portion may turn into bad and considering this unavoidable situation, special practices for recording bad loans are permitted in Accounting Standard. However, with appropriate measures, the percentage of bad loan can be kept to a minimum in addition to avoiding wilful default as well as fraudulent disbursement. As soon as the loan turns non-performing, immediate measures should be taken with focus on the following:
n The entire loan amount will be removed from the books of account and kept in the memo account. Provisioning will be done or loan will be written off immediately in order to keep the book clean.
n In-depth analysis will be carried out for ascertaining the reason behind the loan turning bad.
n If there was any violation/deviation from Loan Approval Guidelines/ Parameters while approving the loan, responsibility/accountability/negligence of the concerned officer/executive/committee members while approving loan will be fixed.  
n A report stating the reasons, fixing the failure/responsibility of the officer/executive/committee members will be submitted to the competent authorities including the Board of Director and Audit Department.  
n Strong recovery drive will be initiated and continued until the loan is recovered.
CLEANING UP OF LONG-STANDING UNRECOVERABLE NPL: NPLs have overshadowed the achievements of the banking sector as a result of which both banking sector and the business community are being deprived of many sophisticated financial services from the international financial market. Many praiseworthy achievements of the government and the Bangladesh Bank are being questioned because of the burden of NPL. The problem has not been created overnight; rather the present unrecoverable NPL is the accumulated NPL of last fifty years. The cleaning this Augean stable is a massive task.
Nironjan Roy, CPA, CMA is a Toronto-based banker.
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