Unsecured loan: A threat to banks

Commercial banks play the important role of mobilising financial resources from surplus units to deficit units which is crucial for the economic development of a country. Interest on disbursed credit is the main profit driver of commercial banks. Maximisation of profit, formally called wealth maximisation, is the ultimate goal of commercial banks.
They always try to disburse large credit and generate higher interest income. Large credit disbursement is not bad unless it goes to bad borrowers and without adequate collaterals. Sometimes it is seen that credit disbursements are made by keeping the so-called personal guarantee and corporate guarantee. In case the borrower defaults it is hardly possible to recover the money from the personal guarantor.
Corporate guarantee, though sounds good, is mere formality. In most cases, it is seen that the borrowing corporation itself is the corporate guarantor. As a result, if the borrowing corporation defaults and goes bankrupt, a little or nothing is recovered. In order to ensure credit repayment by the borrower, banks should ensure that adequate collaterals are kept and the market value or claimable value should be monitored regularly. Bangladesh Bank issues guidelines and regulations on credit disbursement policies. Apart from following these guidelines, each bank should formulate and follow effective collateral policy in order to keep the depositors money safe.
Md Mosarraf Hossain
West Sewrapara, Dhaka.