When credit goes wrong

My first real exposure to credit came when I joined ANZ Grindlays corporate banking in the early nineties. Later, as head of restructuring and recovery at Standard Chartered during the Asian financial crisis, I faced the reality of what happens when loans turn sour. At Citibank, where I became a senior credit officer, I learned that no amount of training replaces the discipline of sound assessment, monitoring and timely action.

Those years across Asia and Africa taught me one enduring truth: credit fails for the same reasons, time and again. Now, with the large loan restructuring committee formed by the central bank, I am seeing newer issues such as repression of businessmen during the previous regime, high interest rates, exchange rate volatility and the energy crisis. I was surprised to see how many large businessmen were tied to politics.

One of the most damaging patterns has been the restructuring of letters of credit into forced loans. In Bangladesh and elsewhere, this has often become a tool for embezzling money abroad rather than supporting trade. Once misused, these facilities are rarely recovered, leaving banks weakened. Political influence compounds the problem. I have seen loans in Pakistan collapse under the weight of name lending, and Bangladesh has suffered the same fate as politically connected borrowers take funds without accountability. When connections replace fundamentals, defaults are inevitable.

Foreign exchange risk is another recurring culprit. In Indonesia, I saw loans in dollars encashed quickly, only for the rupiah collapse to make repayment impossible. In Bangladesh, the taka devaluation has created the same distress, with obligations multiplying while repayment capacity shrinks. Add to this the absence of succession planning in many businesses. Too often, enterprises built entirely around one individual collapse after the owner dies or steps aside.

But the most basic failure remains poor need assessment. If a project needs Tk 30 and a bank provides Tk 3,000, the excess will be wasted or diverted. I often compare it to toothpaste: once squeezed out, you cannot push it back in. Lending should align precisely with the borrower's trade cycle and genuine requirements, not with misplaced optimism or pressure to disburse.

Other failures, though less visible, are just as destructive. In East Africa, I saw borrowers exploit poorly structured facilities to funnel funds into unrelated ventures. In Bangladesh, industrial loans were diverted to the stock market with disastrous consequences. Across India and Taiwan, tenor mismatches and fierce competition led banks to ignore collateral gaps and cashflow weaknesses. In every case, weak internal cash generation, officer corruption or a failure to enforce collateral turned risks into losses.

Compliance oversights also ruin businesses. In India, projects were shut down because of environmental violations or faulty land titles, making plants unviable and loans unrecoverable. These lessons are just as relevant in Bangladesh.

Not all is bleak. Regulators and reform projects, especially those supported by the World Bank, have improved monitoring, differentiated risk-based pricing and strengthened risk management guidelines. Yet much more is needed. If banks insist on lending to weaker segments, pricing must reflect inherent risk, or governments must step in with subsidies to keep credit flowing responsibly.

I have seen enough crises to know that learning from mistakes is the only way forward. Bangladesh must commit to rigorous need assessments, freedom from political interference, and stricter monitoring of foreign exchange exposure, collateral and compliance. Credit must serve real businesses, not inflated egos or political favours.

As for whether to reconstruct weaker credit to keep firms afloat, even if this frustrates sound borrowers, my view is that it depends. It depends on how distressed businesses plan to recover, their projected cash generation, ability to provide additional security, willingness to shed loss-making units and, above all, their capacity to manage the company professionally.

And we must also ask openly: why do so many businessmen want to enter politics?

The writer is a former banker.