A diagnostic review of large loan restructuring

Thanks to Bangladesh Bank, especially Governor Mansur, I was invited to join the large loan restructuring scrutiny committee set up by the central bank in collaboration with the finance ministry and the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI). Several departments of the central bank also took part regularly.

As a banker with global risk management and portfolio review experience, and the first local senior credit officer (SCO) at Citibank N.A., I found the exercise insightful despite the long hours spent on background checks, revalidating financing structures, reviewing security and collateral, ensuring the cases in review were not under the Anti-Corruption Commission (ACC) or the Bangladesh Financial Intelligence Unit (BFIU) scrutiny, and above all, assessing the repayment capacity of borrowers whose obligations were extended with even partial write-offs.

Out of more than 1,200 applications, we reviewed about 300 over almost four months. Many applicants complained that their credit lines had been discontinued at critical times. Some received project loans, but no working capital. Others suffered from very high interest rates, significant exchange rate fluctuations, energy price hikes or shortages, and even disruptions caused by post-August industrial unrest.

According to many, they were targeted because of their political affiliations. Some were jailed, a few were even sent to "Aynaghar", some were frequently picked up by law enforcement agencies, and in certain cases, businesses were seized by political cronies of the previous government under allegations of belonging to BNP or, in a few cases, Jamaat. Attempts were made by the government, the Bangladesh Securities and Exchange Commission (BSEC) and senior bankers to grab listed companies. I was surprised to see such a large number of businessmen linked to opposition parties or their support groups, possibly unmatched anywhere else. Some were granted large loans, but the money never reached their coffers, instead taken away by the bank owning company or their chosen groups. For many, it was a clear sign of governance failure, lack of accountability and poor financial transparency. Most were family businesses or "pocket companies" of the owners. Many had no CFO or finance professional, even though they had borrowed more than a hundred crore. Some cases showed clear proof of money being siphoned off.

In many cases, banks were at fault. They failed to assess client needs, accepted weak or insufficient security or collateral, lacked specific industry knowledge, did not examine internal cash generation of the businesses and neglected proper monitoring of production, sales, succession planning and financial performance. Through this process, I also came across a few capable central bankers as well as some weak commercial bankers who were found to be highly susceptible to pressure.

Most loans under our review that turned sour were approved and disbursed between 2016 and 2020, concentrated in one state-owned bank, one state agency-owned bank, one shariah-based bank and one third-generation private bank. Their present credit and recovery heads regularly attended our meetings and impressed us with their knowledge. The blemishes, however, lay with the CEOs who led these banks during that period. Their risk management capacity and their susceptibility to board pressure were questionable.

Wrong structuring, weak or inappropriate collateral, and repeated granting of excess over limits often forced us to salvage the banks themselves, not just the distressed clients. It was not always about supporting borrowers; sometimes the priority was saving the banks from acute repayment risk. There was, of course, some pressure. But mostly we saw good intentions to help distressed businesses recover, generate employment and revive exports.

Will those whose loans were restructured be able to stand on their own in five to ten years? Much will depend on whether they focus on fundamentals, optimise resources, strengthen governance, avoid political cronyism and build competitiveness in an increasingly globalised economy. Did we encourage wilful defaulters or money launderers? Thankfully, no. Now that the master circular has been issued in line with other similar countries, outlining future pathways, if banks apply the necessary diligence, we should see fewer distressed assets in future. However, like some peer countries, Bangladesh urgently needs a proper insolvency and bankruptcy law in action.

The writer is a banker and economic analyst