Syed Mahbubur Rahman is the chairman of the Association of Bankers, Bangladesh (ABB) and CEO & Managing Director of Dhaka Bank Limited. Prior this, he held the position of CEO and Managing Director of BRAC Bank Limited. With a banking experience more than 30 years, he is deemed as one of the most esteemed banking professionals of Bangladesh. Of late, MBR had an opportunity to have a one-to-one conversation on ins and out of current NPL management in Bangladesh and discussed the wayouts.
Syed Mahbubur Rahman: In a small economy size of Bangladesh, it has 59 banks for 160 million people. In a giant economy like India, there are only 30 private sector banks, South Africa has 5 private banks. The reason behind the approval of so many banks was, the different mandates the banks came up with. Some of the banks were supposed to introduce new financial products and cater to the unserved segments. Government approved these banks with a view to working on those unserved sectors and improving the overall economic wellbeing of Bangladesh. However, after the banks got approval, they are catering similar services derailing from their core value.
The bankers also did not ensure the limit of lending. All of us are running after same customers and want to make quick profit, as there is pressure of targets. In many cases name lending is happening without considering the real need. Consequently, it has created distressed assets in the economy. The intention of Government was noble but because of the unhealthy competition, the result curved to the opposite direction.
Syed Mahbubur Rahman: The banks considered the short term gain rather than thinking about the long term effect of immediate business. They could not manage to evaluate borrower’s eligibility, sensitivity of their business and capacity of repayment. Also Lack of due diligence on bank management’s part severely contributed to the increasing NPL. Unhealthy competition among banks is adding cherry on the top. To survive in the competitive market, banks are also doing equity financing. In case of equity financing, the borrowers do not feel the pressure for repayment, when a business is financed with equity, own investment is not required. Therefore, borrowers are less bothered than what they should have been in case of availing a term loan facility. Banks are financing risky clients in the name of increasing their portfolio size.
Syed Mahbubur Rahman: Banks need strong judicial support. Like China and Malaysia, judiciary division needs to set exemplary penalty to control the situation and the impact needs to be visible. For example, a loan defaulter should not get any social benefit and should not be able to travel outside the country, which is a common practice in China. There are borrowers who reside in abroad and their venture is in Bangladesh. If they default on loans, it becomes hard to bring them under jurisdiction. While we understand that there are capacity issues but the existing process needs to be addressed. The execution of the law needs to be ensured. In Bangladesh, this is just not the problem of not having proper law for this matter.
Law enforcement authority is yet to be strong enough to carry on the process smoothly. Many cases are pending since they are processed under regular judiciary support. In the rural localities, these cases are treated under regular courts, where these system for banks, it is hard to curb the default rate. Also, the lengthy process of judiciary system encouraging the customer to default on loans. The banks need to be cautious about the disbursement of loans and proper implementation of laws. They need to aggressively follow up for quicker disposal of the cases. There could be some industry specific risks; however, the increasing trend of NPL is detrimental to the overall economy of the country.
Syed Mahbubur Rahman: Although SME is booming in the country, NPL in SME sector is mostly double digit. The main reason behind it is lack of post- disbursement monitoring, which is extremely crucial in case of SME financing. Banks need to verify the authenticity of the documents provided by the borrowers, their transaction pattern, account turnover, swing in the account, payment behavior and so on. SME clients are much different from the corporate clients. Financial literacy is crucial here as most of the SME borrowers prefer single entry system to double entry system. Single bank dependent borrowers pose more risk than multiple banks. Also, banks should ensure third party guarantor for every borrower as extra cushion for risk. Bank needs to identify their roots so that it can incorporate the guarantors’ information and track them in case of default as many of the SME clients do not belong to the locality they operate business in. SME financing needs to have a holistic approach towards understanding the customer business, financials, payment behavior/ relationship with suppliers/ vendors, their family status, so that the debt does not go bad and structuring can be done properly. SMEs, in general, has single revenue stream as against large businesses which have multiple revenue streams; so if something happens they fail to pay the debts. So close supervision is much required from the bank’s side.
Syed Mahbubur Rahman: The first step to adapt with technology would be massive digitization. Globally, the banking industry is technology and big data driven. The data is not captured properly in Bangladesh and most of the data available is estimated. Globally, retail loans are disbursed based on algorithm or scorecards, whereas in our country, it still needs human intervention. However, changes are bound to happen in Bangladesh as well because system based decision making is bias- free than human decision- making. The more the millennials are coming to banking radar, the more the banks need to change the traditional way of serving its customers. We should start doing individual credit rating which is the practice of developed countries. If the banks can introduce credit score, borrowers would be more cautious about their payments. Any deferred payment would pull their rating down which would ultimately affect their future borrowing. Banks can come up with cutting-edge technology to make the lending process more specific. For instance, a borrower who does not qualify to borrow BDT 20 lacs from bank may be eligible to get BDT 10 lacs through credit scoring, because it happens through algorithm and no biased result is generated. It would ultimately help in reducing the default rate. At the end of the day, the man behind the machine plays the key role. The banking sector needs adequate equipped people as it is dealing with people’s money. Unfortunately, our banking sector does not have ample qualified people in mid and top level management. As an organization, banks do not spend enough money to train its employees. This is another sector banks should give fair importance in order to make the total system efficient and ensure due diligence.
“The asset quality is deteriorating in the highly fragment banking system.”- the remark came on the recently published Moody’s outlook for Bangladesh banking system. Despite being a robust economy, Bangladesh is witnessing ever-growing trend in bad loans. The chronic deterioration in asset quality is ultimately hitting the banks’ profitability due to covering up for high credit cost.
For the nature of banking sector whose core job is to dealing with mass people’s money, bad loans are nothing new or unique. However, the pace it is growing is alarming. Aggressive endeavors by banks for portfolio target in this populated banking sector played substantial role for rise in NPL. Some other factors like lengthy judiciary process, uncertain business environment and no evidence of exemplary measures against habitual defaulters fuel the growth of piling bad loans. Countries like China, who drastically curbed their bad loan rate over the years, used social shaming as a technique to combat their bad rates. Then again, Malaysian government introduced separate Asset-Management companies to recover the non-cash collaterals by converting them to cash. In Bangladesh, in order to curb the bad rate, whereas due diligence on bank managements’ part is required, the judiciary process needs to be streamlined as well. Also, it is high time the banking sector altogether should take strict social measures against the habitual defaulters in order to combat their default culture.Download View