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RESEARCH MONOGRAPH 14

Large Loan Financing by Banks in Bangladesh: Implications and Challenges

S. A. Chowdhury A. K. Gangopadhaya Chair Professor, BIBM

Md. Zakir Hossain Lecturer, BIBM

Muhammad Anwarul Karim First Assistant Vice President

EXIM Bank Limited

June, 2015

BANGLADESH INSTITUTE OF BANK MANAGEMENT Mirpur, Dhaka

Large Loan Financing by Banks in Bangladesh: Implications and Challenges S. A. Chowdhury, A. K. Gangopadhaya Chair Professor, BIBM Md. Zakir Hossain, Lecturer, BIBM Muhammad Anwarul Karim, First Assistant Vice President, EXIM Bank Limited Editorial Team Dr. Toufic Ahmad Choudhury, Director General, BIBM

Dr. Prashanta Kumar Banerjee, Professor & Director (RD&C), BIBM

Support Team Md. Golam Kabir, Officer In-charge, Publications-cum-Public Relations Papon Tabassum, Research Officer Md. Morshedur Rahman, Proof Reader

Graphics & Design Md. Awalad Hossain

Md. Nasir Uddin

Published in June, 2015 Published by Bangladesh Institute of Bank Management (BIBM) Plot No. 4, Main Road No. 1 (South), Section No. 2 Mirpur, Dhaka-1216, Bangladesh PABX : 9003031-5, 9003051-2 Fax : 88-02-9006756 E-mail : [email protected] Skype : bibm.bd Web : www.bibm.org.bd

Printed by Nahida Art Press, 64/F, R.K. Mission Road, Dhaka, Bangladesh.

Copyright © BIBM 2015, All Rights Reserved No part of this report may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying, recording or by any information storage and retrieval system, without the permission of the publisher

ii Research Monograph 14

Foreword

s part of the ongoing dissemination of BIBM research outputs, the present research monograph contains the findings of the research project titled “Large Loan Financing by Banks in Bangladesh: Implications and Challenges”.

This publication investigates the overall status and funding practice of large loan, concentration & implication of large loan, the regulatory framework, and puts forward some recommendations for policy makers and practitioners.

It gives me immense pleasure to publish and distribute this research output to the practitioners of the banks, as well as to the academics and common readers. I hope this monograph will be a useful guide especially for the bank employees working in the credit department.

Dr. Toufic Ahmad Choudhury Director General

It gives me great pleasure, on behalf of BIBM, to offer this important resource to

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Research Monograph 14 iii

Acknowledgement have completed the research project with support from many persons, especially from officers and executives of different banks.

We would like to extend our gratitude to Dr. Toufic Ahmad Choudhury, honorable Director General, BIBM; Dr. Prashanta Kumar Banerjee, Professor & Director (Research, Development & Consultancy), BIBM; Mr. Abed Ali, Consulting Editor, BIBM; and Mr. Md. Nehal Ahmed, Associate Professor, BIBM for their support and valuable comments. We are very obliged to the field level bankers, members of Chittagong Chamber of Commerce & Industry, corporate customers and others who have extended their helping hands during the study. S. A. Chowdhury Md. Zakir Hossain Muhammad Anwarul Karim

Director (Research, Development & Consultancy), BIBM, we really want to give cordial thanks to him. We really want to thank Mr. Abed Ali, faculty member, BIBM, for his cordial support in every step. We are also very grateful to all of our faculty colleagues for their valuable observations and constructive suggestions which helped us in completing the

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RESEARCH MONOGRAPH 14

ARGE LOAN FINANCING BY BANKS IN BANGLADESH: IMPLICATIONS AND CHALLENGES

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Contents

Abbreviations Executive Summary

ix x

1. Introduction 1 2. Review of Literature 2 3. Review of Regulatory Framework 4 4. Methodology 7 5. Current Status and Analysis 9 6. Issues and Challenges of Large Loan 24 7. Recommendations 27 8. Conclusion 30

References 31 Appendices 34

Tables

Table-1 Allowable Highest Limit of Large Loan to Total Loans Table-2 Comparative Position of Regional Countries Table-3 Status of Total Loan and Large Loan of Banks Table-4 Status of Large Loan (10 percent of the equity) of Banks Table-5 Position of Funded Large Loan of Banks Table-6 Status of Non-Funded Large Credit of Banks Table-7 Growth of Funded and Non-Funded Large Credit of Banks Table-8 Classification Status of Total Funded Loan of the Banking Sector Table-9 Classification Status of Funded Large Loan of Banks Table-10 Ranking of Banks’ Preference in Corporate Lending Table-11 Status of Sectoral Large Loan Concentration (Percentage of Banks) Table-12 Status of Regional Large Loan Concentration (Percentage of Banks) Table-13 Comparison of Concentration between Total Loans and Large

Loans of Banks

Table-14 Status of Export by Large Borrowers of Selected Banks Table-15 Panel Regression Results (Dependent Variable: Total Export

Handled by Banks) Method: Panel GMM

Table-16 Hausman Test for Correlated Random Effects

Research Monograph 14 vii

Figures

Figure-1 Comparison of Funded & Non-Funded Large Credit with Total Funded & Non-Funded Credit of Banks

Figure-2 Summary of Banks’ Response on Large Loan Financing Figure-3 Loan Pricing Methodology (% of Banks) Figure-4 Comparison of Sectoral Large Loan Concentration (All Banks) Figure-5 Impact of Large Credit in the Economy

(Opinion of Banks & Corporate Customers)

Boxes

Box-1 Collateral Securities Obtained by Banks from Borrowers of Large Loan

Box-2 Reasons of Loan Default Box-3 Issues Related to Large Loans Financing Raised by Focused Groups Box-4 Bank Financing Scenario of Chittagong

Annexures

Annexure-1 List of Bangladesh Bank Circulars of Last Ten Years related to Large Loan of Banks:

Annexure-2 Risk Management Norms of Large Loan Outlined in the Recent Circular of Bangladesh Bank

Annexure-3A Results of Unit Root Test Annexure-3B Formula Used for Calculation of Compound Annual Growth

Rate (CAGR):

Annexure-4 Indicators Used for Calculation of Credit Concentration

viii Research Monograph 14

Abbreviations ADF Augmented Dickey Fuller BB Bangladesh Bank BBS Bangladesh Bureau of Statistics BIS Bank for International Settlements BRPD Banking Regulation and Policy Department CAGR Compound Annual Growth Rate CAR Capital Adequacy Ratio CDST Customs Duties and Sales Tax CIB Credit Information Bureau CRG Credit Risk Grading D.F Degrees of Freedom DOS Department of Off-site Supervision DW Durbin–Watson ECAI External Credit Assessment Institutions EVA Economic Value Added FCBU Foreign Currency Banking Units FDR Fixed Deposit Receipt FGD Focused Group Discussion FSV Forced Sale Value FY Fiscal Year GDP Gross Domestic Product GINI Gini Coefficient GMM Generalized Method of Moments HHI Herfindahl Hirschman Index IMF International Monetary Fund LC Letter of Credit LCBs Licensed Commercial Banks LSBs Licensed Specialised Banks LSDV Least Square Dummy Variable LTR Loan against Trust Receipt NBFI Non-Bank Financial Institution NPL Non Performing Loan PAD Payment against Document RMG Ready Made Garments ROA Return on Asset

Research Monograph 14 ix

SCB State-owned Commercial Bank SEI Simpson Equitability Index SI Shannon’s Index SREP Supervisory Review and Evaluation Process SRP Supervisory Review Process VAT Value Added Tax

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Executive Summary The share of large loan or large exposure has become larger in the credit portfolio of commercial banks of Bangladesh during the last decade. It has also become a major default concern and the credit concentration risk has widened. Using both primary & secondary data and conducting Focused Group Discussion (FGD), the study investigates the implications of large loan financing by banks in Bangladesh. The study also employs panel regression model to estimate the impact of large loan on the total exports handled by banks. It is revealed that out of total loans, only 0.24 percent large borrowers (1768) availed of 54.78 percent loan facilities in 2012 and the compound annual growth rate of large loan is higher (19.17) than the growth of total loan (14.80). One of the important findings of the study is that the maximum portion of large loans is concentrated to a few borrowers and the growth of non-funded credit is very high. The regression result suggests that large credit has a direct bearing on the growth of export. It is also indicated in the study that large loan helps to create employment, develops infrastructure, promotes industrialization and contributes to the growth of GDP. It is recommended, among others, to formulate a separate set of policy norms for trade financing along with multiple large lending (both funded and non-funded) to make the lending process more pragmatic. Moreover, it is urgently needed to form debt syndication or recovery syndication to combat the inconsistency of large loan financing. However, large investments are needed in the country to ensure sustainable inclusive finance and acceleration of economic growth under the revised policy structure of Bangladesh Bank.

Research Monograph 14 xi

Large Loan Financing by Banks in Bangladesh: Implications and Challenges

1. Introduction

Banks are highly leveraged financial institutions that depend heavily on depositors’ fund in order to extend credit. In lending activities, banks consider smooth return of money by giving preference to productive sectors which contribute most to the economic development. It is observed that the share of industrial sector in GDP of Bangladesh has risen to 28 percent in FY20131. The percentage of bank finance to GDP in 2012 is around 69 percent (World Bank). In spite of government borrowings, the private sector credit expanded. As a result, in consonance with the government's development goals and in particular with the monetary policy of the central bank, banks have to play a vital role through extending different types of credit to manufacturing, infrastructure, service oriented and other productive sectors.

Lending to textile industries in creation of forward and backward linkages, extension of funding facilities to infrastructure development and export oriented sectors including RMG are some of the major initiatives taken by the banking sector over the years. In some cases, funding to import substitute industries with bulk import of indusrial raw materials, consumer essentials, and other inputs attracted the preference of bankers. Hence, banks have had to augment large loans2 and other funding facilities under the regulatory guidance of Bangladesh Bank.

It is found that large loans have been extended in the form of both funded and non-funded facilities. The funding facilities such as, syndication, club arrangement as well as lending to corporate customers within the limit of single borrower exposure became the main thrust of the banking industry in the last decade. Thus, the share of large loan has become larger in the lending portfolio of commercial banks. Moreover, large exposures, whether to a single borrower or group of borrowers, are now becoming a default concern. Credit concentration risk could also arise from large exposures if banks give loan to individual counterparties or groups of connected counterparties, put more importance to a particular industry, economic sector or a geographical region. Therefore, such exposures become risky and need constant

1 Bangladesh Bureau of Statistics (BBS) 2 Large loan, large exposure and large credit are used synonymously.

Research Monograph 14 1

monitoring of the regulatory authority in order to maintain financial stability and to avoid unwanted major shocks in the economy3.

In this backdrop, the objectives of this study are (i) to investigate the overall status and funding practice of large loan, (ii) to find out concentration & implication of large loan (iii) to review of the regulatory framework, and (iv) to put forward some recommendations for policy makers and practitioners.

1.1 Organization of the Study

Section-1 gives the background of the study followed by a brief review of relevant literature in Section-2. Section-3 presents the regional experience and the Bangladesh Bank’s4 regulatory framework. Section-4 illustrates the methodology employed while Section-5 contains the current status and analysis of data . Section-6 depicts the issues and challenges related to large loan. Section-7 presents recommendations of the study and the concluding remarks are placed in Section-8.

1.2 Limitation of the Study

The study uses all types of available data from both primary and secondary sources. Due to paucity of secondary data, some of the time-series analysis could not be undertaken. So far our knowledge goes, there is no such study made in the past on the impact of large loan in Bangladesh. Credit impact has different connotations and covers a wider range of indicators. We have restricted our study to some of the selected parameters. There is a scope of further research by including macroeconomic variables in order to assess the impact of large loan on GDP.

2. Review of Literature

During the study, extensive survey, review of available literature and research studies have been made to find out the relevant issues, reforms and challenges handled by different countries in recent times. Moreover, issues, concerns and opinions expressed in different national forums, media and other literature have also been consulted.

Large loan whether syndication, club or consortium is a long term financing arrangement extended to corporate or single borrowers. Demetriades and Hussein (1996) find the evidence that finance is a leading factor in the process of economic growth. In particular, long-term finance tends to be associated with higher productivity and growth (Caprio and Demirguc-Kunt 1998). On a priori basis, the theories of link between finance and economic growth can

3 European Banking Authority 4 Central Bank of Bangladesh

2 Research Monograph 14

be traced back to the work of Schumpeter (1912) and more recently to Goldsmith (1969); Shaw (1973) and McKinnon (1973); King and Levine (1993). These studies show a positive relationship between finance and economic growth.

There is a growing literature that studies empirically the link between finance and trade (see, for example, Beck 2002; Beck 2003; Amiti and Weinstein 2011; Paravisini et al. 2011; and Schmidt-Eisenlohr 2013). Large loan, bank's financing in general, has a huge impact on export growth while they provide pre-export and pre-import loans to firms by issuing letter of credit and similar guarantees (Schmidt-Eisenlohr 2013; Glady and Potin 2011; Ahn 2011; Olsen 2013; Antràs and Foley 2011; Eck et al. 2012; and Hoefele et al. 2012).

Infrasturucture development like energy, power, transport, telecommunication are extremely important to boost the faster economic growth of a country. However, it requires a long term finance as the gestation period is much longer. The rapid growth of private investment in India's infrastructure over the past few years has been possible largely due to commercial banks funding in the form of large exposures (IDFC 2009). Such bank finance is vital for a country where the debt market is not fully developed.

Multiple lending has become a cause of concern among the bankers and policy makers. Early literature on financial intermediation suggests that borrowing from a single bank is optimal as it reduces banks' monitoring costs (Diamond 1984) and the requirement of collateral (Boot and Thackor 1994). Multiple bank lending relationships have been extensively documented in credit markets, among firms of all sizes and ages. In the US, for instance, 50 percent of firms borrow from more than one bank (Petersen and Rajan 1994; Guiso and Minetti 2010), while this share reaches 80 percent for Italian firms (Detragiache et al. 2000). It has also been shown that multiple bank lending relationships represent a means to restore competition among lenders (Von 1995), to mitigate ex-post moral hazard behaviors (Bolton and Scharfstein 1996) and to reduce the probability of an early liquidation of the projects (Diamond 1991; Detragiache et al. 2000).

On empirical grounds, several works have tried to explain the variety observed in the number of bank relationships, both across the countries and within a country. Cross country studies have shown that a higher frequency of multiple bank lending relationship is associated to countries with inefficient judicial systems and poor enforcement of creditor rights (Ongena and Smith 2000). Moreover, in their study on a sample of Portuguese firms, Farinha and Santos (2002) have revealed that firms with a poor credit or performance record have a higher probability to switch from single to multiple lending relationships. Guiso and Minetti (2010) further added that in USA multiple lending is more frequent amongst financially opaque companies.


Large loan allows banks to be cost efficient because a large amount of loans (assets) can be monitored and supervised with lower amount of resources. This allows banks to achieve satisfactory return, which is reflected in ROA and EVA (Jahur and Riyadh 2002). A bank’s management thus creates value when it takes large investment decisions that provide benefits in excess of costs. These benefits may come to banks in the near or distant future depending on the strategies involved in decision making process (Verma 2000). Conversely, if banks' assessment of borrowers are wrong in extending large loan facilities, it will seriously affect the overall performance of banks.

3. Review of Regulatory Framework 3.1 Regional Regulatory Framework

The global financial crisis witnessed that banks could not consistently measure, aggregate and control exposures to single counterparties across their books and operations. The Basel Committee on Banking Supervision (BCBS)5 has advised that supervisors set prudential limits to restrict bank exposures to single counterparties or groups of connected counterparties. The first Basel Committee guidance on this topic, Measuring and Controlling Large Credit Exposures, was published in January 1991 in an attempt to increase convergence in the supervision of large exposures while recognising the scope for variation according to local conditions. The revised guideline of Bank for International Settlements (BIS) on ‘Supervisory framework for measuring and controlling large exposures’ has been released in April, 2014. Besides, the Core Principles for Effective Banking Supervision (Core Principle 19), revised in the year 2012, require that local laws and bank regulations set prudent limits on large exposures to a single borrower or closely related group of borrowers6.

Additional criteria of Core Principle 19, in respect of credit exposure to single counterparties or groups of connected counterparties, banks are required to adhere to the following:

(a) ten percent or more of a bank’s capital is defined as a large exposure; and

(b) twenty-five per cent of a bank’s capital is the limit for an individual large exposure to a private sector non-bank counterparty or a group of connected counterparties. Minor deviations from these limits may be acceptable, especially if explicitly temporary or related to very small or specialised banks.

5 The Basel Committee on Banking Supervision consists of senior representatives of bank supervisory authorities and central banks from Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. It usually meets at the Bank for International Settlements in Basel, Switzerland, where its permanent Secretariat is located.

6 Principle 19 states “The supervisor determines that banks have adequate policies and processes to identify, measure, evaluate, monitor, report and control or mitigate concentrations of risk on a timely basis. Supervisors set prudential limits to restrict bank exposures to single counterparties or groups of connected counterparties.” (Core Principles for Effective Banking Supervision, standards published by the Committee in September 2012, is accessible at www.bis.org/publ/bcbs230.pdf).


Currently in India, a bank's large loan exposure to a single borrower is capped at 15 percent of capital while for a group it is 40 percent. Credit exposure to a single borrower may exceed the exposure norm of 15 percent of the bank's capital funds by an additional 5 percent (i.e. up to 20 percent) provided the additional credit exposure is on account of extension of credit to infrastructure projects.

Credit exposure to borrowers belonging to a group may exceed the exposure norm of 40 percent of the bank's capital funds by an additional 10 percent (i.e., up to 50 percent), provided the additional credit exposure is on account of extension of credit to infrastructure projects. In addition to the exposure permitted as above, banks may, in exceptional circumstances, with the approval of their Boards, consider enhancement of the exposure to a borrower (single as well as group) up to a further 5 percent of capital funds subject to the borrower consenting to the banks making appropriate disclosures in their Annual Reports. The capital funds for the purpose will comprise of Tier-I and Tier-II capital as defined under capital adequacy standards. The Reserve Bank of India also created a ‘Central Repository’ of large credits to track large common exposures across banks and operationalized it on September 11, 2013. This would enable banks to be aware of leverage and common exposures.

In Sri Lanka, The single borrower limit for domestic Licensed Commercial Banks (LCBs) and Licensed Specialised Banks (LSBs) is 30 percent of the banks’ unimpaired capital (defined as Tier-1 capital and 50 percent of revaluation reserves). In order to further limit large exposures (and hence concentration risk), the aggregate of all loans/advances exceeding 15 percent of capital funds should not exceed 50 percent of the total advances of the bank. But if it is a group of companies, the single borrower limit goes up to 33 percent. If a group wants to borrow above 33 percent limit, there is a cap of 40 percent, provided that the bank and the customer have a high credit rating along with high CAR of the bank. The maximum ceiling shall, however, be determined on the basis of score calculated as follows:

Rating of the Bank Rating of the Customer*

Total Capital Ratio of the Bank Score

AAA to A- AAA to AA- >12% 1

BBB+ to BBB- A+ to A- 11%-12% 2

BB+ and below BBB+ and below <11% 3 *Rating of the holding company in the group. If there is no holding company, the rating of the lowest rated entity will be used.

If the average score is 1.0 to 1.50, 1.60 to 2.50, and 2.60 to 3.0, the single borrower limit will be 40 percent, 36 percent, and 33 percent, respectively.


Similarly, in Pakistan, the total outstanding exposure (fund based and non-fund based) by a bank to any single person or group shall not at any point in time exceed 25 percent of the bank’s equity as disclosed in the latest audited financial statements, subject to the condition that the maximum outstanding against fund based exposure does not exceed 25 percent of the bank’s equity7.

In Maldives, the total exposures, including both funded and non-funded, to a single person, or to a group of closely-related persons treated as a single person, shall not at any time exceed 15 percent of the bank’s capital base. However, the total outstanding exposures, funded and non-funded, at any time to a corporate group shall not exceed 40 percent of the bank's capital base provided that no one member of the group shall exceed 15 percent of the bank’s capital base. If loans to one member of the group are combined with loans to one or more other members and are treated as a single borrower as mentioned above, then the 15percent single borrower limit shall be treated as combined exposures (Maldives Central Bank).

3.2 Bangladesh Bank Regulations and Guidelines

The central bank of Bangladesh, like the other regulators of the region has been trying to control large loan exposures. As per central bank’s regulation, loan sanctioned to a single person8/counterparty or group amounting to 10 percent or more of a bank's total capital shall be considered as large loan. The directives from the regulator states that the total outstanding facilities by a bank to any single person/counterparty or group shall not at any point of time exceed 35 percent of the bank's total capital subject to the condition that the maximum outstanding against funded facilities do not exceed 15 percent of the total capital. However, in case of export sector the single borrower exposure limit shall be 50 percent of the bank's total capital. But funded facilities in case of export credit shall also not exceed 15 percent of the total capital. As per section 26(kha) of Bank Company Act, 1991 (amended up to 2013), the maximum ceiling of loan will be determined by Bangladesh Bank from time to time but the loan to a single borrower must not exceed 25 percent of capital at any time ( see, the list of circulars related to large loan in Appendix-1).

Bangladesh Bank, however, has allowed banks to sanction large loan as per the following limit considering the respective classified loan status:

7 Prudential Regulations for Corporate/Commercial Banking, 2011, State Bank of Pakistan Website.

8 Person means a natural person or a legal person i.e., company, corporation, associate, trust, joint venture, partnership or other business enterprise etc.


Table 1: Allowable Highest Limit of Large Loan to Total Loans

Percentage of Net Classified Loan The Highest Ceiling Fixed for Large Loan against Bank's Total Loans & Advances

Up to 5% 56% More than 5% but up to 10% 52% More than 10% but up to 15% 48% More than 15% but up to 20% 44% More than 20% 40%

In order to determine the above ‘Large Loan Portfolio Ceiling’ of any bank, 50 percent credit equivalent of all non-funded credit facilities shall be included in the total loans and advances (i.e., 100 percent funded exposures plus 50 percent non-funded exposures). However, the entire amount of non-funded credit facilities shall be included in the ‘Large Loan Portfolio’. The risk management norms of large loan as outlined in the recent circular of Bangladesh Bank are shown in Appendix-2.

3.3 Comparative Large Exposure Norms

From the comparison shown in Table-2, it is observed that large exposure limit for single party is the highest (35 percent) in Bangladesh compared to other regional countries followed by Sri Lanka. On the other hand, exposure to a group is higher in India and Maldives, which is 40 percent. However, the maximum overall exposure under certain conditions is 55 percent in India, which is the highest in the region, whereas the exposure limit is the lowest (25 percent) in Pakistan.

Table 2: Comparative Position of Regional Countries

Name of Country

Single Borrower Exposure Group Exposure Maximum Exposure

under Certain Conditions9 Funded Total Funded Total Total

Bangladesh 15% 35% 15% 35% 50% India 15% 15% 40% 40% 55% Pakistan 25% 25% 25% 25% 25% Sri Lanka 30% 30% 33% 33% 40% Maldives 15% 15% 40% 40% 40%

Source: Compilation from the data of central banks of different countries

4. Methodology

This study is based on both primary and secondary data. Besides, two detailed questionnaire have been designed to collect the primary information from different banks and from

9 Based on different conditions like infrastructure and export financing, rating of borrowers and banks, CAR of banks, etc.,

the maximum exposures are determined.


corporate borrowers. Two Focused Group Discussions (FGD10 - one with bankers of Chittagong, the other one with the Chittagong Chamber of Commerce & Industry and large corporate borrowers) have been conducted to collect field level information, views and observations. Purposive sampling has been used in order to ensure the availability of data and quality of the response. A total of 24 banks (3 state owned commercial banks, 2 specialised banks, 18 private commercial banks, and 1 foreign commercial bank) have been selected. 50 corporate borrowers mainly from Dhaka and Chittagong have been interviewed. The response from the sample banks and corporate borrowers are compiled and analysed to identify the status of credit concentration and impact of large loan. Reports of the central bank, annual reports of the Commercial Banks, World Bank/IMF reports, BIS reports, newspaper articles and other publications have also been consulted.

In order to estimate panel regression and to analyse the trends & statistical properties of large loans, secondary data have been used from 2008 to 2012. This constitutes a balanced panel study of the data set that combines time series (T) and cross section (N) analysis and has a total number of bank-year observations of 145. Other statistical techniques have also been used to analyse and interpret the collected data.

Besides, equity varies depending on the size of a bank. Therefore, threshold of large loan also varies from bank to bank. Hence, the study considers the size of large loan amounting to Tk.50 (fifty) core and above to bring analytical consistency of large loan.

4.1 Model Specification

In order to estimate the impact of large loan on the total exports handled by banks, the following model has been used:

푌 = 푓(휔 ,휋 , 휀 )

Where,

Yit = Total export funded by banks

it = Large loan

Πit = Lag (previous year's) large loan

εit = Error term

The relationship between total exports handled by banks and large loan has been analyzed by using multivariate panel regression model. The variables have been tested for stationarity with Augmented Dickey-Fuller (ADF) unit root test and found I(0). The test results are 10 30 field lever senior executives and managers of 8 selected banks (4 state owned banks and 4 private commercial banks)

including Islami Bank Bangladesh Ltd. participated in one of the FGD, while members of Chittagong Chamber of Commerce and Industry along with some corporate borrowers attended in a separate FGD.


shown in Appendix-3A. In order to understand the growth pattern of large loan, the Compound Annual Growth Rate (CAGR) has been calculated and the formula is shown in Appendix-3B.

Besides, the degree of concentration of large loan has been ascertained using the methodology provided by Bangladesh Bank in SRP-SREP guideline. Details of different indices used in this context are presented in Appendix-4.

5. Current Status and Analysis 5.1 Current Status of Large Loan

Large loans are granted to various types of customers by the banks in the form of term loan, project loan, syndication/club loan/consortium loan, working capital, trade loans, and so on. The latest position of large loan extended by the banks from 2008 to 2012 is shown in Table-3.

Table 3: Status of Total Loan and Large Loan of Banks

Year Total Loans Large Loan of Tk. 50.00

crore & above % of Large Loan to Total

Loans

% of Large Borrowers to

Total Borrowers

Amount (Cr.)

No. of Borrowers

Amount (Cr.)

No. of Borrowers

2008 251770.77 481668 114388.66 817 45.43 0.17 2009 283720.61 561608 127501.80 929 44.94 0.17 2010 365347.75 647056 178991.29 1317 48.99 0.20 2011 420042.63 686765 217304.52 1424 51.73 0.21 2012 501984.19 729730 274972.30 1768 54.78 0.24

CAGR 14.80% 8.66% 19.17% 16.69% - - Source: CIB, Bangladesh Bank

The compound annual growth of large loan is higher (19.17 percent) than the growth of total loan (14.80 percent) of banks as shown in Table-3. Moreover, large loan borrowers grew at a rate of 16.69 percent per year whereas the annual growth of borrowers of total loans was 8.66 percent. In 2008, the total loan outstanding was Tk.2, 51,770.77 crore with a borrower of 4, 81,668. The number of borrowers and the total outstanding loan increased gradually over the years and reached to 7, 29,730 borrowers and Tk.5, 01,984.19 crore in 2012. The share of large loan was 45.43 percent, 44.94 percent, 48.99 percent, 51.73 percent, and 54.78 percent of the total loan in the year 2008, 2009, 2010, 2011 and 2012, respectively. The share of large loan increased with the increase in capital of the commercial banks during the period. Most importantly, compared to total loans, only 0.24 percent borrowers (1768) availed of 54.78 percent loan facilities in 2012, while only 0.17 percent borrowers (817) got 45.43 percent financing facilities in 2008.


Table 4: Status of Large Loan (10 percent of the Equity) of Banks

Peri

od

Tot

al L

oan

in

Ban

king

Sec

tor

Tot

al L

arge

Loa

n in

B

anki

ng S

ecto

r

Fund

ed L

arge

Loa

n

Non

-Fun

ded

Larg

e L

oan

Cla

ssifi

ed L

arge

L

oan

% o

f Cla

ssifi

ed

Lar

ge L

oan

to T

otal

L

arge

Loa

n

% o

f Lar

ge L

oan

to

Tot

al L

oan

% o

f Fun

ded

Lar

ge

Loa

n to

Tot

al L

arge

L

oan

% N

on-f

unde

d L

arge

Loa

n to

Tot

al

Lar

ge L

oan

June-2013 439212.37 171241.82 103559.06 67682.76 8699.08 5.08 38.99 60.48 39.52

Source: Dept. of Off Site Supervision, Bangladesh Bank

The position of large loan based on 10 percent of equity of banks has been presented in Table-4. In June 2013, the banking sector disbursed about 39.0 percent large loan to their customers of which funded loan was about 60 percent. However, the share of large loan amounting Tk.50 crore and above was around 55 percent in 2012, as illustrated earlier in Table-3.

Table 5: Position of Funded Large Loan of Banks

Year Total Funded Loans Funded Large Loan of

Tk. 50.00 crore & above % of Large Loan to

Total Loans


Total Borrowers

Amount (Cr.)

No. of Borrowers

Amount (Cr.)

No. of Borrowers

2008 197274.64 476929 76998.65 566 39.03 0.12 2009 224696.84 556607 87987.62 668 39.16 0.12 2010 279381.83 641718 114490.01 911 40.98 0.14 2011 321018.68 681016 140208.41 1035 43.68 0.15 2012 382902.22 723372 179642.68 1302 46.92 0.18


The total funded loans and large funded loans increased during the period under review. In 2012, only 0.18 percent, that means 1302 borrowers availed of 46.92 percent large funded loan facilities out of total funded loans extended by banks, whereas in 2008, only 0.12 percent numbering 566 borrowers availed of 39.03 percent of large funded loan facilities. The compound annual growth (18.31 percent) is again higher of large funded loan than the total funded loan (14.18 percent). It is evident from the above analysis that maximum portion of the large loan is concentrated to a few borrowers.


Table 6: Status of Non-Funded Large Credit of Banks

Year Total Non-Funded Credit Non-Funded Large Credit

of Tk. 50.00 crore & above % of Large Loan to Total

Loans


Total Borrowers

Amount (Cr.)

No. of Borrowers

Amount (Cr.)

No. of Borrowers

2008 54495.43 12609 21820.68 166 40.04 1.32 2009 59023.74 13451 23248.13 190 39.39 1.41 2010 85965.74 14403 42157.07 347 49.04 2.41 2011 99015.14 14472 55930.13 355 56.49 2.45 2012 119081.95 15765 72659.14 465 61.02 2.95


Table-6 and Figure-1 represent the status of non-funded large credit facilities extended by the banks of Bangladesh. The number of total non-funded borrowers and the large borrowers increased slowly over the years from 2008 to 2012, whereas, the total non-funded facilities as well as the large non-funded facilities noticeably increased from 2009 and reached its peak in 2012. The position of large loan in Figure-1 indicates a sharp increase of non-funded facilities extended by banks. It is also evident from the CAGR that the growth of non-funded large loan is significantly higher total non-funded credit during the period.

Figure 1: Comparison of Funded & Non-Funded Large Credit with Total Funded & Non-Funded Credit of Banks

Source: CIB, Bangladesh Bank

Therefore, it can be concluded that from 2009 onwards, banks started to extend more and more non-funded facilities to their customers. This could be a major concern for the banks as well as to the regulators because ultimately most of these loans become funded liabilities of banks with a push in NPL.

0

50000

100000

150000

200000

250000

300000

350000

400000

Funded Loan

Total FundedLoan

Funded LargeLoan (Tk.50Crore & above)

0

20000

40000

60000

80000

100000

120000

140000

Non-Funded Credit

Total Non-Funded Loan

Non- FundedLarge Loan(Tk.50 Crore &above)


Table 7: Growth of Funded and Non-Funded Large Credit of Banks

Year Funded (Growth in %) Non-Funded (Growth in %) Total Loan Large Loan Total Credit Large Credit

2009 13.90 14.27 8.31 6.54 2010 24.34 30.12 45.65 81.34 2011 14.90 22.46 15.18 32.67 2012 19.28 28.13 20.27 29.91

Average (G. Mean) 18.03 23.59 21.58 35.08

Source: Authors’ Calculation

The comparative position of funded and non-funded large credit in Table-7 shows that the growth of large loan is higher than total credit growth during the period. Conversely, the growth of non-funded large credit is higher than that of funded large loan growth. This also indicates that loans are being increasingly concentrated to large borrowers.

Table 8: Classification Status of Total Funded Loan of the Banking Sector

Year Total Funded

Loan (Tk. in crore)

No. of Borrowers

Classified Loan

(Tk. in crore)

No. of Classified Borrowers

% of Default Loans

% of Defaulters

2008 197274.64 476929 30955.28 99092 15.69 20.78 2009 224696.84 556607 30937.89 116297 13.77 20.89 2010 279381.83 641718 32047.16 130430 11.47 20.33 2011 321018.68 681016 31923.62 142659 9.94 20.95 2012 382902.22 723372 49087.60 179660 12.82 24.84


The status of classified funded loans has been presented in Table-8. The classified amount of funded loan fluctuated between the year 2008 and 2012 while the default borrowers increased gradually in the same period. The highest amount of classified loan was Tk.49087.60 crore in the year 2012, whereas the lowest classified amount was Tk.30955.28 crore in 2008. The percentage of default borrowers was almost the same from the year 2008 to 2011 but all on a sudden in 2012 it increased by about 4 percent, which was the highest. Further, the percentage of default loan was the highest (15.69 percent) in 2008; on the other hand, it was the lowest (9.94 percent) in 2011. Interestingly, the percent of default loan started to drop from 2008 and reached about 9.94 percent in 2011 and again it increased to 12.82 percent in 2012.


Table 9: Classification Status of Funded Large Loan of Banks

Year

Large Funded Loan of Tk.50 crore &

above (Tk. in Cr.)

No. of Borrowers

Classified Large Loan

(Tk. in crore)

No. of Classified Borrowers

% of Default Loans

% of Defaulters

2008 76998.65 566 6100.45 59 7.92 10.42 2009 87987.62 668 5058.76 55 5.75 8.23 2010 114490.01 911 6185.22 60 5.40 6.59 2011 140208.41 1035 5140.78 59 3.67 5.70 2012 179642.68 1302 13928.44 122 7.75 9.37


Unlike the total classified borrowers of funded loan (Table-8), the classified borrowers (122) of large funded loan doubled in 2012 than that of 2011, as shown in Table-9. The classified loan fluctuated between 2008 and 2011 and it reached to Tk.13928.44 crore in 2012, which was more than two times higher compared to 2011. The reason of such increase in default loan was attributed by banks and borrowers mainly to the implementation of stricter classification policy by the central bank. However, the compound annual growth of classified funded loan was 9.66 percent, whereas the growth of classified large loans became doubled (17.95 percent), which is a matter of concern.

5.2 Large Loan Funding Practice

Large loan facilities are extended by banks to various customers by observing usual credit norms and practices. The views of participating banks (24) on different aspect of large loan has been summarised in Figure-2. It is observed that 14 percent banks set large loan target in their annual credit plan in order to minimize credit concentration. All banks mentioned that they consider the track records in terms of three years business volume/performance, CIB, peer group information, pattern of adjustment/repayment habit, etc. of borrowers for sanctioning large exposures.

All respondent banks consider experience, risk taking ability and asset base in order to assess the entrepreneurial ability of a customer. 55 percent bank opines that it is mandatory to get rated by ECAIs while 45 percent indicates that entrepreneurs are unwilling to be rated by ECAIs. However, banks prefer rated customers. 91 percent bank replies that they do not have own grading system other than CRG but a few banks use customised CRG for evaluating large exposures. 50 percent bank thinks that there are credit worthy borrowers/entrepreneurs available in Bangladesh while the remaining 50 percent does not agree with these views because they think that growth of large corporate business houses having tested management capacity are not sufficient to extend large bank finance.


Figure 2: Summary of Banks’ Response on Large Loan Financing

Source : Survey Result

14%

86%

0%

50%

100%

Yes No

Do banks set any target for sanctioning large loan in the annual credit plan/ budget?

100%

0% 0%

50%

100%

Yes No

When banks sanction large loan, whether the capital structure of customers is considered or not?

100%

0% 0%

50%

100%

Yes No

Do banks consider track record (e.g. business performance/volume,

repayment capacity/ habit, etc.) of the borrower for taking a decision?

100%

0% 0%

50%100%

Yes No

Do banks assess the entrepreneurship ability

(background, experience, risk taking ability, management skill, asset base, leadership traits, etc.)

separately?

55% 45%

0%

50%

100%

Yes No

Is it mandatory to get the large borrowers rated by credit rating agency before sanctioning a large

loan?

9%

91%

0%

50%

100%

Yes No

Do banks have their own gradingsystem (other than CRG) for

large loan borrowers/corporate customers?

100%

0% 0%

50%

100%

Yes No

Do banks assess the capacity of borrowers, including the

financial strength to overcome the hard time of the business?

50% 50%

0%

20%

40%

60%

Yes No

In your opinion whether sufficient number of good large borrowers

are available in Bangladesh?

36%

64%

0%

25%

50%

75%

Yes No

Do banks have any prescribed format for large loan sanction/

approval?

100%

0% 0%

50%

100%

Yes No

Does project visit/ road show/visual presentation matter

for taking a lending decision?

91%

9% 0%

50%

100%

Yes No

Do banks have any mandatory time limit for taking a loan

decision after receiving borrower’s complete application? 100%

0% 0%

50%

100%

Yes No

Is it obligatory to visit project/business site of the borrower

before loan sanctioning?

86%

14% 0%

30%60%90%

Yes No

Is it required to visit project/business site of the borrower after loan sanctioning?

100%

0% 0%

100%

Yes No

While sanctioning multiple large loans to a borrower/ group, do banks consider loan

liability in other banks?


Banks, where possible, obtain collateral security to secure a loan. The securities that are generally obtained by banks while giving large loans, as replied by the respondent banks are summarized in Box-1.

Box 1: Collateral Securities Obtained by Banks from Borrowers of Large Loan

Hypothecation on Inventory, Receivable, etc. Hypothecation on Plant & Machinery Personal Guarantee Corporate Guarantee Counter Guarantee Cash, FDR & other Financial Instruments Mortgage of Land & Building Pari-passu sharing agreement Trust Receipt Guarantee given by Government/Bangladesh Bank in case of loans to state owned entities. Post dated cheques covering the credit facility favouring the bank

Source: Survey Result

Figure-3 shows the loan pricing methodology followed by banks while sanctioning large loan. It is observed that about 32 percent of banks follow flat rate of interest, whereas 14 percent banks prefer risk based pricing method. About 27 percent banks fix-up the interest rate based on bargain and risks associated with the finance. Besides, another 14 percent banks determine their interest rate on the basis of bank customer relationship using bargaining method. It is observed that none of the banks offer bundle price/package price to the customers.

Figure 3: Loan Pricing Methodology (% of Banks)


Flat Rate 32%

Risk-based Pricing

14% Depends on Bargaining

14%

Special Rate 4%

Bargaining & Special Rate

4%

Risk-based &

Bargaining 27%

Risk -based, Bargaining & Special Rate

5%


However, the participating corporate customers opined that in large lending, banks put emphasis on a number of factors like collateral, asset base, reputation, etc. The ranking of such preference is summarized in Table-10. Large borrowers think that collateral security/asset base ranks the top place while repayment track record ranks second to banks' preference in making lending decisions. Though cash flow is important to understand the repayment capacity, it is placed in the third position by the corporate borrowers.

Table 10: Ranking of Banks’ Preference in Corporate Lending

Items Rank11 Collateral/Asset Base 1 Repayment Track Record 2 Cash Flow 3 Financial Strength 4 Credit Worthiness 5 Equity Base 6 Reputation 7 Risk Exposure 8 Market Condition 9 Customer Profile (CIB Report, Management Skill, etc.) 10

Source: Views of Corporate Customers, Survey Result.

Banks are always concerned about timely repayment of a loan. Therefore, they keep vigilant eyes on the customers' business performance and try to ensure timely repayment. However, in some cases loans become delinquent/default and banks resort to a number of measures to recover the loan. Views expressed by the bankers and corporate customers regarding causes of loan default have been summarised in Box-2.

Box 2: Reasons of Loan Default

Opinion of Bankers

Inappropriate selection of borrowers due to imposition of ambitious profit target. Supply driven financing & unhealthy competition among banks. Multiple lending to a single customer or a group of customers without control on fund

utilization. Fund diversion & misuse of loan. Conversion of contingent liabilities into funded liabilities. Large trade financing and LTR12s usually are not backed by any tangible collateral.

11 Rank 1 refers the highest preferences, while Rank 10 denotes the lowest. 12 LTR is a post import financing arrangement against trust receipts usually for a period of two to six months mostly having

any tangible collateral coverage.


Insufficient cash flow for debt servicing. Lack of enabling business environment. Feeble supervision & weak monitoring. Conversion of short term/trade loan to long term credit. Improper assessment of repayment capacity. Wilful default and indifferent attitude regarding timely payment of loan liability.

Opinion of Corporate Customers

Wrong selection of projects and poor feasibility study of a project/proposal. Slow implementation & non availability of essential utilities (e.g., gas, electricity, etc.) Political unrest and change in Govt. policies. Management crisis. Fund diversion/misuse of loan. Weak supervision & discrete monitoring of banks. Improper cash flow forecasting & unplanned repayment. Market volatility/price fluctuation. Overexpansion of business by some borrowers. Failure of debt servicing due to multiple borrowings. Unhealthy competition & lack of entrepreneurial ability.

Source: Views of Corporate Customers & Bankers, Survey Result.

5.3 Analysis of Credit Concentration

In line with Bangladesh Bank’s SRP-SREP process guideline,13 the study used all the indices mentioned there in order to ascertain the degree of concentration of large loan. In addition, the comparative sectoral concentration of large loan in the year 2008 and 2012 has been depicted in Figure-4 below.

13Bangladesh Bank’s SRP-SREP Process Document for ICAAP, May, 2014.


Figure 4: Comparison of Sectoral Large Loan Concentration (All Banks)

Source: Department of Off Site Supervision, Bangladesh Bank

In 2008, large credit was mostly concentrated in large & medium industries (42 percent) and in import financing (23 percent). On the other hand, large loan financing was slightly diversified in the year 2012 than that of 2008. The share of large & medium industries came down to 30 percent, whereas financing in construction, service and trade sectors increased by 8 percent, 4 percent and 8 percent respectively. Still, the sectoral share of large loan financing shows a huge disparity. However, it is important to look at each respondent bank’s large loan concentration in order to understand the necessity of credit portfolio risks management. The credit concentrations of selected banks using various indices are shown in Table-14 and Table-15.

1%

30%

1% 5%

11%

3%

12% 3%

21%

13%

Sectoral Large Loan Concentration- 2012

Agriculture (includingfishing- 1%)

Large & MediumIndustries (30%)

Small Industries (1%)

Service Industries (5%)

Construction includingReal Estate (11%)

Air & Water Transport(3%)

Trade & Warehousing(12%)

Export Financing (3%)

Import Financing (21%)

Miscellaneous (13%)

1%

42%

1% 1%

3% 5% 4% 1%

23%

19%

Sectoral Large Loan Concentration- 2008

Agriculture (1%)

Large & Medium Industries(42%)

Small Industries (1%)

Service Industries (1%)

Construction (3%)

Air Transport & Utilities(5%)

Trade & Warehousing (4%)

Export Financing (1%)

Import Financing (23%)

Miscellaneous (shipbreaking, provertyreduction,etc.- 19%)


Table 11: Status of Sectoral14 Large Loan Concentration (Percentage of Banks)

Con

cent

ratio

n M

easu

rem

ent

Inde

x

2010 2011 2012

Hig

h

Mod

erat

e

Satis

fact

ory

Equ

itabl

e

Hig

h

Mod

erat

e

Satis

fact

ory

Equ

itabl

e

Hig

h

Mod

erat

e

Satis

fact

ory

Equ

itabl

e

HHI 88% 12% - - 67% 33% - - 78% 22% - - SEI 94% 6% - - 83% 17% - - 83% 17% - - SI - 80% 20% - 6% 63% 31% - 6% 75% 19% -

GINI 71% 29% - - 56% 44% - - 56% 44% - - Note: If HHI > 0.18, it indicates high concentration and HHI > 0.1 to ≤ 0.18 indicates moderate concentration. SEI > 0 to < 0.30 indicates high concentration and SEI > 0.30 to < 0.70 indicates moderate concentration. SI > 0 to < 0.20 indicates high concentration and SI > 0.20 to < 0.60 indicates moderate concentration. Similarly, GINI > 0.80 to ≤ 1 indicates high concentration and GINI> 0.40 to < 0.80 indicates moderate concentration. Source: Authors' Calculation from the Data Supplied by the Responded Banks

Table-11 depicts the degree of concentration of banks measured by Herfindahl Hirschman Index (HHI), Simpson’s Equitability Index (SEI), Shannon's Index (SI), and Gini Coefficient. In 2010, there is a high sectoral large credit concentration as indicated by HHI, SEI and GINI. The values show that 88 percent, 94 percent, and 71 percent banks have high sectoral large loan concentration, respectively, whereas SI indicates that large loans of 80 percent banks are moderately concentrated. Although the trend slightly improved in 2011, it showed high concentration again in 2012. The values of the year 2012 indicate that large loan of 78 percent, 83 percent, and 56 percent banks are highly concentrated in some sectors of the economy as measured by HHI, SEI, and GINI coefficients, respectively.

Table 12: Status of Regional Large Loan Concentration (Percentage of Banks)

Con

cent

ratio

n M

easu

rem

ent

Inde

x

2010 2011 2012

Hig

h

Mod

erat

e

Satis

fact

ory

Equ

itabl

e

Hig

h

Mod

erat

e

Satis

fact

ory

Equ

itabl

e

Hig

h

Mod

erat

e

Satis

fact

ory

Equ

itabl

e

HHI 100% - - - 100% - - - 100% - - - SEI 94% 6% - - 94% 6% - - 88% 12% - - SI 6% 93% - - 19% 81% - - 13% 87% - -

GINI 94% 6% - - 70% 30% - - 59% 41% - -

Source: Authors' Calculation

14 The sectoral large loan concentration has been calculated based on sector classification mentioned in Bangladesh Bank’s SRP-SREP Process Document for ICAAP, May, 2013.


It can be seen from Table-12 that large loans are also regionally concentrated. During the period 2010 to 2012, the scenario of regional large loan concentration has not changed. In the year 2012, large loans of 100 percent, 88 percent, and 59 percent banks were highly concentrated in some regions (e.g., Dhaka and Chittagong) as measured by HHI, SEI, and GINI, respectively.

Table 13: Comparison of Concentration between Total Loans and Large Loans of Banks

Para

met

er

Total Loans & Advances (by Economic Purposes15)

Large Loan (Tk. 50 crore & above) by Economic Purposes

2010 2011 2012 2010 2011 2012

Inde

x V

alue

Con

cent

ratio

n

Inde

x V

alue

Con

cent

ratio

n

Inde

x V

alue

Con

cent

ratio

n

Inde

x V

alue

Con

cent

ratio

n

Inde

x V

alue

Con

cent

ratio

n

Inde

x V

alue

Con

cent

ratio

n

HHI 0.17 M* 0.17 M 0.16 M 0.25 H 0.21 H 0.18 H SEI 0.21 H 0.22 H 0.23 H 0.15 H 0.18 H 0.21 H SI 0.65 S 0.66 S 0.67 S 0.55 M 0.59 M 0.63 S GINI 0.76 M 0.75 M 0.74 M 0.83 H 0.80 H 0.80 H Average Ranking** 3.00 3.00 3.00 3.75 3.75 3.50

*M = Moderate Concentration, H = High Concentration, S = Satisfactory and E= Equitable **Ranking point has been assigned as H=4, M=3, S=2 and E=1. Source: Authors' Calculation

From the above Table, it is found that total loans of the banking sector are moderately concentrated by economic purposes as measured by two indices namely HHI and GINI in the year 2010, 2011 and 2012. But SEI and SI show high and satisfactory concentration respectively in the same period. On the other hand, all the indices, except SI have shown high concentration of large loans by economic purposes during the period.

It can be concluded that large loans are highly concentrated in some sectors of the economy as well as in some regions of the country. Hence, there is a huge scope of diversification of large loan financing by banks.

5.4 Implication of Large Loan

Large loan has wide impacts as opined by the bankers and corporate customers. They think that the country is hugely benefited through large loan financing because it helps to develop infrastructure, create employment, promote export and so on. The major implications of large credit as revealed in the survey are illustrated in Figure-5. 31percent bankers and customers 15 The total loan and the large loan concentration of the banking sector have been calculated based on ‘Economic Purposes’ mentioned in the Scheduled Bank Statistics of Bangladesh Bank.


pointed out that enormous amount of employment are created in the economy; whereas 24 percent believe that large credit significantly contributes to GDP. 12 percent respondents think that large loan helps to develop infrastructure while 6 percent perceive that large loan is useful for import substitution. The equal proportion of respondents (9 percent each) believes that large credit contributes toward generation of government revenue, promotes export, and helps industrialization.

Figure 5: Impact of Large Credit in the Economy (Opinion of Banks & Corporate Customers)


Table-14 shows the share of export by large borrowers (large export) to total export handled by banks. Banks in Bangladesh are making huge contributions toward promotion and growth of exports by providing large credit though in the opinion survey both bankers and corporate customers put 9 percent weight in the overall impact of large loan. It can be seen that the share of large export of each of the selected banks are significantly higher. The average share of export by large customers of banks in the year 2010, 2011, and 2012 are 35 percent, 31.6 percent, and 31.5 percent, respectively.

Infrastructure Development

12% Industrializatio

n (Large & Medium Scale)

9%

Export Promotion & Growth

9%

Employment Generation

31%

Import Substitution

6%

Contribution to

Government Revenue

(Tax, VAT, CDST, etc.)

9%

Contribution to GDP

24%


Table 14: Status of Export by Large Borrowers of Selected Banks

Name of Bank Year Total Export by All

Customers (Tk. in crore)

Export by Large Customers

(Tk. in crore) Share (%)

Sonali Bank Ltd.

2010 7414.00 1357.00 18.30 2011 8088.00 1810.00 22.38 2012 8741.00 1425.00 16.30

Pubali Bank Ltd.

2010 3328.36 1199.70 36.04 2011 4560.30 1468.04 32.19 2012 5747.77 1590.65 27.67

National Bank Ltd.

2010 4781.20 1298.66 27.16 2011 6089.40 1546.20 25.39 2012 6906.30 1819.68 26.35

Islami Bank (Bd.) Ltd.

2010 14842.00 3215.00 21.67 2011 17824.00 1617.00 9.01 2012 19709.00 2507.00 12.72

Dutch Bangla Bank Ltd.

2010 7349.95 4042.47 55.00 2011 9241.24 4713.03 51.00 2012 10887.86 5008.42 46.00

Eastern Bank Ltd.

2010 3963.30 2893.21 73.00 2011 5858.90 4101.23 70.00 2012 6751.80 4928.81 73.00

Mutual Trust Bank Ltd.

2010 1684.30 231.66 13.75 2011 2659.60 296.76 11.16 2012 2545.50 471.11 18.51

Average Share of Large Exports 2010 = 35.0% 2011= 31.6% 2012= 31.5%

Source: Data Supplied by Banks

The above findings are also illustrated using panel regression models in Table-15 below. Model-I and Model-II correspond to cross-section fixed effects, that is, least-square-dummy-variables (LSDV) or fixed effects and cross-section random effect models, respectively. Since the errors are expected to be correlated, the study used panel estimates generalized least squares to get efficient estimates. Then, the regression results are extended in order to select which model is better; fixed effects or random effects model. For this purpose, the result of Hausman test is reported in Table-16. The results show that the corresponding effects are statistically significant, hence the null hypothesis is rejected by the data and fixed effects model (Model-I) is preferred.


Table 15: Panel Regression Results (Dependent Variable: Total Export Handled by Banks) Method: Panel GMM

Explanatory Variable Model I Cross Section (Fixed Effects)

Model II Cross Section (Random Effects)

C 3.57E+10* (0.0000) 4.06E+10* (0.0000) Large Loan (i,t) 0.265629*** (0.0756) 0.339872** (0.0203)

Lag Large Loan (Πi,t) 0.599830* (0.0107) 0.346336*** (0.0721) N X T = 29 X 5 145 (Balanced) 145 (Balanced) Adj. R2 0.92 0.26 F -Stat 22.59 28.90 DW 2.16 1.33 J-Statistics 56.0 84.0

Note: *, ** and *** denotes significant at 1%, 5%, and 10%, respectively. Source: Authors' Calculation

In both models, the results for large loan reveal a consistent positive signs and significant relationship with total export handled by banks. Table-15 shows that the value of adjusted R-Square is 0.92. Therefore, it indicates that Model-I serves its purpose in determining the effect of bank specific variables on total export. In other words, 92 percent variability of the total export can be explained by the contemporary variable (large loan) and by the lag large loan. That means, large credit facilities are significantly supporting the growth of export in the country.

The coefficient of total export in Table-15 shows that a one taka increase in large loan increases the total export by 0.2656 taka and a one taka increase in the previous year's large exposure also increases the total export by 0.5998 taka. Thus, it reveals that large credit has a direct bearing on the growth of export.

Table 16: Hausman Test for Correlated Random Effects

Test Cross Section Random Effect Chi Sq. Statistic Chi Sq. d. f. Probability

Cross-section random

9.966217

2

0.0069

Source: Authors' Calculation

The DW statistic of the output of this study is 2.16 and this result confirms that there is no serial correlation. With computed F-value of 22.59 for the panel regression, the study rejects the null hypothesis that all coefficients are simultaneously zero and accept that the regression is significant in overall judgment.


6. Issues and Challenges of Large Loan

The crumbling position of large loan financing has exposed banks to a number of challenges. The stuck up amount of loan has gone up due to aggressive lending and mishandling of loans by banks & borrowers. The situation is aggravated further mainly because of misuse/fund diversion, multiple borrowings and non-repayment of loans by customers. Some of the important issues and the challenges related to large loan financing raised by the Focused Groups have been presented in Box-3 and in Section-6.1.

Box 3: Issues Related to Large Loans Financing Raised by Focused Groups

The interest rate of banks is high. It creates extra burden and hinders timely repayment of loan. Banks' loans are supply driven and there is no indicative forecast of import of essential

commodities. While sanctioning multiple loans to a large borrower/corporate group, repayment capacity is

not assessed correctly. In the loan sanctioning process, banks usually do not undertake any market study. The valuation

of collateral securities (primary and additional collaterals) is found defective.

Both funded and non-funded large credit facilities are allowed based on the same policy guideline and criteria. As a result, trade loans are easily available to individual borrowers and corporate groups including the new entrants.

Hardly any tangible collateral securities are obtained for extending import and export credit facilities (e.g., LTR, PAD, etc.) which ultimately turn into funded liabilities of banks.

Large loan facilities are not treated as supervised credit operation. There is a lack of effective & continuous monitoring system in banks.

Most of the large borrowers enjoy credit facilities from a number of banks and very often divert funds to other activities.

Easy access to non-funded credit and multiple rescheduling discourages borrowers to make timely repayment of loans.

Unrealistic profit target of banks and stiff market competition in the banking sector encourages branch managers and top management to embark on aggressive banking practices.

Dishonesty, corruption and other unethical practices are sometimes associated with loan sanctioning, documentation, valuation of collaterals, loan utilization, rescheduling, etc.

Banks usually sanction similar (multiple) credit facilities to a single large borrower/group without considering sufficient cash flow, asset base and repayment ability.

Borrowers are indifferent in raising equity as per terms & conditions of loans and are deficient in corporate ownership structure.

Tax regime is not conducive for doing business.

Source: Focused Group Discussions


The corporate sector of Chittagong enjoys bulk of the bank financing. During the field survey and discussions with the local bankers, business community and members of CCCI, it is felt that Chittagong scenario needs special attention because of emerging challenges of large loan funding. Therefore, the bank financing situation of Chittagong is depicted in Box-4.

Box 4: Bank Financing Scenario of Chittagong

Chittagong is regarded as the commercial capital of Bangladesh. The Port of Chittagong handles 80% of Bangladesh's foreign trade. Chittagong is the centre of industries in the areas of steel, petroleum, chemicals, shipbuilding, ship-repair and breaking, glass manufacturing, cement, ceramics, fertilizer, automotive components and motor vehicle assembly.

The port city accounts for 12% of the national economy, generating 40% of heavy industrial output, 85% of foreign trade and 60% of revenue earnings. The textile industry in Chittagong exported $4.5 billion worth of garments in the fiscal year 2011-12. Chittagong is the centre of commodity trade in Bangladesh.

All commercial banks, both local and foreign, are present in Chittagong; most of them being located in and around Agrabad, the main commercial area of the city. Banks in Chittagong have financed a large number of corporate groups with funded and non-funded credit facilities including bulk import of essential commodities against LTR. LTRs are issued continuously without any collateral security and even if some securities are taken, the valuation of those securities is faulty and highly exorbitant. A report of ‘Prothom Alo’ claims that 12-15 groups got Tk.40, 000 – 50,000 crore for import of commodities (March 15, 2014). But most of the clients have failed to repay the loan in due time. As a result, those loans have been rescheduled and become term loan for a period of three to five years.

The main reasons of this situation are price fluctuation in international and local markets, over import of some commodities, fund diversion, syndicated business, high interest rate and weak repayment capacity. It is also found that the same group of companies with different names opened local L/Cs and got LTR facilities. Therefore, without supply and delivery of goods, only based on fabricated papers borrowers availed of credit facilities from different banks.

Apart from commodity imports, banks have extended huge amount of credit facilities in ship breaking and ship making industry. In this sector, 20 banks have given around Tk.12000 to Tk.14000 crore credit facilities (Prothom Alo, March 14, 2014). In this case, banks have failed to properly assess the capacity of borrowers, business background in the ship breaking industry, prospect of repayment and volatility of international market. Moreover, banks did not check the clients experience and overlooked the linkage facilities (e.g., non availability of yard, re-rolling mill, etc.) in many cases. It is also found that the cost price of ships is higher than the selling price of scraps. Therefore, they have sustained loss and failed to repay bank loans in time.

(Continued)


Box 4: (Continued)

Chittagong Chamber of Commerce & Industry claims that the situation has been aggravated due to the aggressive funding of commercial banks, ambitious profit motive of banks, extension of multiple credit facilities and rampant disbursement of credit without ascertaining actual demand and repayment capacity of borrowers. It is further alleged that some of the bankers are also involved in unethical practices on the plea of unhealthy market competition.

Bank financing scenario of Chittagong has been reflected in the performance of banks in 2013. The NPL of almost all banks has gone up in spite of Bangladesh Bank’s extension of special rescheduling facility. If the stuck-up/rescheduled loans are not repaid, capital erosion of banks will happen in the long run, which will adversely affect the CAR of banks. If these scenarios persist, the business growth of Chittagong would be adversely affected having a negative impact in the growth prospect of the country.

Source: Compiled from the views of Focused Group Discussion, corporate customers, field level bankers and News paper reports

6.1 Challenges of Large Loan Financing

Rationalization of loan pricing to make it more customer-friendly is a major challenge for banks. On the one hand, the borrowers feel that the prevailing interest rates are very high and be reduced; banks are also reluctant to reduce interest rate due to increase in cost of fund.

For bulk and other commodity import, specific criteria (e.g. warehouse facility, financial track record, experience in the related field, repayment history, etc.) are essential in order to bring credit discipline.

Branch-wise profit target has become the main cause of aggressive corporate banking & multiple lending (funded and non-funded). So, banks need to come out from this sort of pressure banking as profit is the ultimate result of a bank’s total operational performance.

Both bankers and corporate borrowers opined that new criteria of entitlement based on debt-equity ratio, net worth, asset base, cash flow, identification of real ownership, etc. is a prime need for extension of multiple loans by different banks to a borrower/group.

Delay in project implementation due to non-availability of utility services such as gas & electricity connection during the gestation period induces the non-performing loan. As a result cost and time over run take place very often. This challenge needs quick attention of concerned authorities.

Stiff market competition in banking business, particularly at the branch level, hinders proper selection of customer as well as assessment of credit worthiness. Blending of prudential banking practice with market competition is an emerging challenge.


Indifferent attitude of banks regarding over-invoicing, fund diversion, overvaluation of collateral securities reduce the investment stake of the borrowers, which significantly inhibits timely repayment of large credit.

Most of the large borrowers lack managerial capacity, reliable database, entrepreneurial ability and corporate culture to efficiently handle multi-dimensional business activities at a desired level. As such, the capacity building process of corporate borrowers has become a vital issue at this stage of economic development.

Extension of non-funded facilities to price sensitive items, such as food grain, ship making/breaking, industrial raw materials, etc., has become a challenge due to price escalation in the international market.

Bankers viewed that acceptance against Back to Back L/Cs, bills, local L/Cs as accommodation facility and cross financing of exports are some of the burning issues that need urgent attention of the banking system.

Survey results indicate that reinforcement of the risk management process, compliance culture, monitoring system, and the capacity building process of banks are considered very vital in order to sustain the positive impact and growth of credit. Banks will have to overcome these short comings with planned approaches.

7. Recommendations

From the analysis and findings of the study, opinions and suggestions expressed in Focussed Group Discussions, views expressed by corporate borrowers, different field level bankers, Chamber of Commerce and Industry of Chittagong and seminar participants, the following recommendations have been deduced.

7.1 Policy Recommendations

One, a separate set of criteria for multiple lending should be introduced. The criteria may be fixed on the basis of sectoral preference (export, infrastructure, strategic priority, etc.), equity base/net worth of the borrower/group, independent rating (minimum ‘A rated entity), risk exposure of the borrower, liabilities with other banks and track record of debt repayment. Besides, industry specific CRG score sheet should be devised and introduced. Only one set of CRG score sheet is not at all effective for all type of loans, particularly for large exposures.

Two, large loans should not only be defined from lenders point of view, borrowers asset backings should also be considered simultaneously. Large volume of loans should be provided by banks forming syndication/clubs, not by the individual banks.

Three, a set of new policy for sanctioning large trade loans should be introduced. For sanctioning of bulk trade loans, an indicative annual forecast and ceiling of major imports


(e.g., oil, lentil, wheat, rice, fertilizer, spices, sugar, etc.,) should be communicated to the banks at the beginning of a financial year. Multiple lending for trading to a single borrower or a group should be discouraged or restricted to a maximum composite limit. Besides, obtaining of NOC from other banks should be made mandatory before sanctioning of such multiple loans.

Four, banks are often violating the single borrower exposure limits. This allows the borrowers to easily divert funds to other activities. It has also become a chronic problem in case of composite limits with LTR facilities, which also contributes to the growth of non-performing loan. Therefore, a separate set of norms and reporting standards need to be introduced to control this unauthorised practice. Besides, overdue LTRs and other short term default loans should be classified instantly.

Five, huge large loans in the form of non- funded facilities are extended without coverage of any tangible assets and are not usually backed by collateral security. Therefore, collateral security should be obtained for bulk imports having LTR facility and other non-funded credit facilities which eventually turn into funded loans.

Six, sanctioning of large trade loans to new entrants having insufficient business background and financial strength or to an established manufacturing group having no previous trading exposure, warehousing facility, etc. should be restricted or discouraged.

Seven, large loan whether funded or non-funded should only be extended to Joint stock companies (i.e., public limited or private limited companies) having acceptable rating of the borrower and CAR of the bank.

Eight, of late, Bangladesh Bank has advised all banks to form a Risk Management Committee of the Board of Directors. Among other responsibilities, the Committee may constantly review and monitor the large loan performance and associated risks involved on a regular basis. A copy of the periodic ‘Review Report’ may be sent to Bangladesh Bank.

Nine, opening of local L/Cs should be restricted as these are used by the borrowers/traders as financial accommodation facilities. Acceptance against Back to Back L/Cs, bills, and cross financing of exports need to be streamlined urgently so that these cannot be used as the source of fraudulent and unethical practice. Like Sri Lanka, international factoring could be a way forward to overcome these problems.

Ten, now-a-days, environmental and green banking issues are considered vital in financing large projects or in sanctioning large exposures. In this context, the environmental guidelines should be updated and banks be advised to ensure full compliance of environmental norms in order to mitigate risks while handling large exposures.


Eleven, like the Reserve Bank of India, Bangladesh Bank may initiate establishment of a central ‘Repository of Large Credits’ to track large common exposures among the banks. The database will be shared with the banks and NBFIs to enable them to be aware of leverage and common exposures.

7.2 Recommendations for Banks

One, there is a tendency of banks to lend to corporate borrowers of other banks. Accordingly, bankers do pursue corporate customers having loan liabilities with other banks to take fresh loan with enhanced amount. As a result, starting from the selection process, sanctioning, pricing, obtaining of collaterals, documentation, disbursement, and other due diligence are not always carried out properly. Therefore, banks should come out from such practices in order to ensure asset quality and timely recycling of loans.

Two, it has been found that borrowers’ equity are not properly invested and capitalized. Due to this, it has become a serious concern for banks as large credits are not creating the desired equity base. Banks need to ensure investment of equity during the process of implementation and would ensure conversion of borrower’s investment into paid-up capital at least before the commercial operation of a project/business. Besides, audited financial statements should be periodically evaluated to ascertain the capital base and financial health of large borrowers.

Three, the loan pricing structure needs to be reviewed in order to make it more market friendly and attractive to good borrowers. Bundle/ package pricing or risk based pricing system may be considered. A separate rebate structure should be introduced by all banks to give incentive to good borrowers having good repayment track records.

Four, assessment and valuation of collateral securities (e.g., land, building, etc.) are not done properly. Calculation of market price is based on presumptions, which often lead to overvaluation. Thus, calculation of ‘Forced Sales Value (FSV)’ becomes unrealistic. Banks should streamline this process in order to ensure proper valuation of security so that they can recover sizeable amount of loan in case of default. Besides, obtaining of plant and machineries as additional collaterals should be avoided.

Five, large loans and advances need to be treated as a supervised credit operation. It is found that intensive monitoring and supervision are not properly done. Dedicated bank officials with specific responsibility should be deployed to monitor each and every large borrower account. Appropriate monitoring instruments/tools along with compliance norms should be evolved and used continuously to ascertain the status of loans and risks involved.

Six, comprehensive criteria for selection of large borrowers/groups (funded & non-funded) along with proper risk assessment check lists should be introduced and practised throughout


the bank. Sectoral priorities along with appraisal models/norms should be formulated, circulated and used by banks to justify sanctioning of multiple loans or to sanction additional loan to an existing borrower.

Seven, it is observed that term lending through ‘Syndication’ method is a better alternative to manage risks and to avoid defaults in large loan. This method may equally be used for ‘Trade Syndication. Recovery/debt syndication of banks should be formed for addressing the Chittagong syndrome.

Eight, in Bangladesh, banks are the main source of long term financing. Entrepreneurs are not usually interested to mobilize funds from the capital market. Debt market is also in a nascent stage. Dependence on the banking system to finance large projects should be reduced and simultaneously funding from the securities market need to be integrated in the financing structure of long term investment by banks.

After compiling the recommendations of the research and participants’ discussion, BIBM may arrange a much focused round table discussion inviting 20 – 25 experts (regulators, bankers, academicians, corporate customers, etc.) in the field of large loan.

8. Conclusion

Large credit is very important in order to stimulate the economic development of a country. It has been found that large loan is playing a significant role in terms of export promotion, employment generation, import substitution, value addition and so on. Through large loans, radical changes can take place in the country if invested in the real sectors, infrastructure development, generation of power, etc. These investments are urgently needed for sustainable inclusive finance and acceleration of growth.

However, if the credit is not extended properly, in the right project or to the right entrepreneurs, the benefit of such credit facility may become futile. It is observed that cash flow assessment and repayment capacity are not done properly by banks while sanctioning multiple loans. Banks are not always careful in the creation of tangible assets and equity base through large investments. Therefore, banks need to be very pragmatic in lending to large projects/businesses because failure of repayment causes huge amount of losses to the banks, which erodes banks’ capital and deprives other customers.

Moreover, credit concentration risk is an important aspect that banks should consider. In the year 2012, around 63 percent large loans were concentrated in large & medium scale enterprises and in trade financing. Besides, all the indices like HHI, GINI, SEI, and SI suggest that large loans are mostly concentrated in some geographical regions and in some sectors. So, it is the right time to think about credit portfolio diversification. Delinquency


management is another area where banks should give special attention to recover their non-performing large assets.

Bangladesh Bank, as the regulatory authority, issues guidelines and gives directives to the commercial banks in order to bring discipline in the large credit segment of the market. However, the central bank should be more proactive and may revise its policy regime of such lending so that it can augment investment in priority sectors of Bangladesh in order to ensure economic dispersal.

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Appendices

Appendix 1: List of Bangladesh Bank Circulars of Last Ten Years Related to Large Loan of Banks:

01. BRPD Circular No. 02, dated January 16, 2014; Regarding Single Borrower Exposure Limit of Large Credit.

02. DOS Circular No. 1, dated March 12, 2013; Regarding Submission of Large Loan Statement (Form-L).

03. BRPD Circular No. 10, dated November 1, 2010; Regarding Master Circular-Single Borrower Exposure Limit of Large Loan.

04. BRPD Circular No. 22, dated June 14, 2010; Regarding

Master Circular-Single Borrower Exposure Limit.

05. BRPD Circular No. 03, dated March 13, 2007; Regarding Risk Management of Large Loan.

06. BRPD Circular No. 02, dated February 19, 2007; Regarding


07. BRPD Circular No. 06, dated April 26, 2005; Regarding


08. BRPD Circular No. 16, dated November 16, 2005; Regarding


09. BRPD Circular No. 05, dated April 09, 2005; Regarding


Appendix 2: Risk Management Norms of Large Loan Outlined in the Recent Circular of Bangladesh Bank

The existing guideline outlines the following risk management norms:

a) Banks should collect the large loan information of their borrowers from Credit Information Bureau (CIB) of Bangladesh Bank before sanctioning, renewing or rescheduling large loans in order to ensure that credit facilities are not being provided to defaulters.

b) Banks must assess credit risk by adopting Credit Risk Grading (CRG) guideline before sanctioning or renewing large loans. If the rating of a CRG turns out to be "Marginal", banks shall not sanction the large loan, but it can consider renewal of an existing large loan taking into account other favourable conditions and factors. However, if the result of CRG is a “Special Mention Account (SMA)”, neither sanction nor renewal of large loans can be considered.


c) While sanctioning or renewing of large loan, a bank should judge its borrower's overall debt repayment capacity taking into consideration the borrower's liabilities with other banks and financial institutions.

d) Banks shall examine its borrower's cash flow statement, capital size, business volume, financing requirements, ownership structure stake/control in number of companies, state of professional management, accounting system, and audited financial statements to make sure that its borrower has the ability to repay the loan.

e) In case of extending credit to large borrower/ group from more than one bank without the arrangement of consortium, inter-bank discussion and understanding, audited financial statements, rating of the borrower from credit rating agency, capital size, business volume, ownership structure etc. are be taken into consideration.

Source: BRPD Circular No. 02, dated January 16, 2014

Appendix 3A: Results of Unit Root Test

Variable Level

ADF Test Stat1 (With Intercept)

ADF Test Stat2 (With Trend & Intercept)

Total Export Funded by Banks (Yit)

- 5.5678* - 5.6397*

Large Loan (it) - 5.3886* - 5.3719* Note: 1Critical value for 1% significance level is - 3.6394.

2 Critical Value for 1% significance level is - 4.0230.

* Denotes significant at 1%. Source: Authors’ Calculation

Appendix 3B: Formula Used for Calculation of Compound Annual Growth Rate (CAGR):

퐶퐴퐺푅 = ∗ 100

Where,

Tn = Current Period

T0 = Beginning Period

n = Number of Periods

Note: CAGR is a useful measure of the growth of investment over multiple time periods.


Appendix 4: Indicators Used for Calculation of Credit Concentration

1. Herfindahl Hirschman Index (HHI):

퐻퐻퐼 = 푆

Given that,

Si = Share (%) of each element across the total cluster

Measurement:

HHI ≤ 0.01 indicates homogeneous concentration, HHI > 0.01 to ≤ 0.1 indicates satisfactory concentration, HHI > 0.1 to ≤ 0.18 indicates moderate concentration and HHI > 0.18 indicates high concentration.

2. Simpson’s Equitability Index (SEI):

푆퐸퐼 = Where, 퐷 = ∑

Given that,

D = Diversity of elements across the cluster, p = Proportion of the elements across the cluster, S = Number of elements within the cluster

Measurement:

SEI = 1 indicates equitable concentration, SEI > 0.70 to < 1 indicates satisfactory concentration, SEI > 0.30 to < 0.70 indicates moderate concentration and SEI > 0 to < 0.30 indicates high concentration.

3. Shannon's Index (SI):

푆퐼 = Where, 퐻 = −∑ 푝 퐿표푔푃

Given that,

H = Diversity of elements across the cluster, p = Proportion of the elements across the cluster,

S = Number of elements within the cluster.

Measurement:

SI = 1 indicates equitable concentration, SI > 0.60 to < 1 indicates satisfactory concentration, SI > 0.20 to < 0.60 indicates moderate concentration and SI > 0 to < 0.20 indicates high concentration.


4. Gini Coefficient (GINI):

퐺퐼푁퐼 =2∑ 푖푦푛 ∑ 푦 −

푛 + 1푛

Given that,

GINI = Gini Coefficient, i = Element serial, y = Value of element, n = Total number of elements

Measurement:

GINI = 0 indicates equitable concentration, GINI > 0 to < 0 .40 indicates satisfactory concentration, GINI> 0.40 to < 0.80 indicates moderate concentration and GINI> 0.80 to ≤ 1indicates high concentration.

Summary of Discussions in the National Seminar on Large Loan Financing by Banks: Implications and Challenges

The Seminar was chaired by the Director General Dr. Toufic Ahmad Choudhury and inaugurated by the Chairman of the Executive Committee of BIBM & Deputy Governor of Bangladesh Bank, Mr. Md. AbulKasem. Dr. P.K. Banerjee, Director (RD&C) of BIBM offered the welcome address. The seminar was largely attended by executives of different banks, researchers, faculty members of BIBM, corporate customers and media representatives. M/s K. I. Khaled, Dr. Muzaffer Ahmad Chair Professor of BIBM, Abdul Mannan, Managing Director, Islami Bank Bangladesh Ltd., Golam Hafiz Ahmed, Managing Director, National Credit and Commerce Bank Ltd. and Kaiser A. Chowdhry, former Managing Director, AB Bank Ltd. spoke as the main discussants. Besides, a large number of participants expressed their valuable comments and views in the open discussion. A summary of the discussion is depicted hereunder.

Mr. M.A. Kasem, Chief Guest and Deputy Governor, Bangladesh Bank:

Concentration of large loans in few hands, regions and sectors is a concern for Bangladesh Bank, which prefers dispersal of large loans. Banks should be very cautious while extending large loans in ship building industry. Banks should also extend large loans for infrastructural development and other growth oriented areas including green projects to protect environmental degradation and ensure sustainable development. Large loans in the form of LTR should be classified instantly, if it is not paid on due date. Problems related to defaults of large loans will be handled providing due importance to it. Large loansshould be raised by the large borrowers involving both security market and banking markets. As a follow-up of the seminar, BIBM should arrange an exclusive discussion of 20-25 experts focusing on the recommendations of the researchers and participants which would go a long way in order to formulate action oriented policy framework to handle the large loan problems and challenges.


Mr. Abdul Mannan, MD, IBBL:

The capacity of the commercial banks to extend large loans to the corporate sector has increased due to substantial growth of their capital base. Simultaneously, number of large borrowers has also increased and many corporate groups of entrepreneurs have emerged. As a result, the size and amount of large loan have grown many folds. As reflected in the research paper, the country has been hugely benefitted from large loan financing by banks through development of infrastructure, promotion of industries and generation of employment. The problems and challenges, as identified in the paper, of large loans like fund diversion, multiple lending, overvaluation of collaterals, concentration of credit etc. can be mitigated through various preventive and curative means to be adopted by the banks. In order to maximize benefits of large loans, we need to address the capacity building process of banks and corporate customers, strengthen the legal measures and create a mechanism to bring a balance amongst large loans, micro and SME loans.

Mr. Golam Hafiz Ahmed, MD, NCCBL:

Bangladesh economy as a whole has been growing amazingly over the last two decades and in the process banks have also contributed a lot. Role of entrepreneurs, especially big entrepreneurs in the process of development is also very significant. The research paper has identified the problems associated with financing large loans by the banks. About Tk. 50,000 crore has already been classified in the banking sector, largely contributed by large loans. Banks will have to address these issues for which a shared and proactive approach by the banks is needed. Slow moving accounts will have to be nursed properly and if required, may also be given incentives like interest rebate. Though fund diversion is not ethical, but in many occasions, fund diverters have been able to create value addition to economy. Banks, in a group, should negotiate with those borrowers in a convincing manner in order to get back the funds. In future, in case of multiple lending, banks should get NOC from other lending banks/peers. The second generation of large borrowers is found committed in business development and repayment of bank fund.

Mr. Kaiser A. Chowdhury, former MD, AB Bank Ltd.

Because of large loan concentration, obviously the small borrowers are not being allowed to expand its share in bank’s loan portfolio nor are they given the opportunity to gradually step into large loan borrower category. Not only the risk of concentration, large loans of banks are also associated with unholy competition and huge loan default. Bangladesh Bank has set parameters of large loan exposure from lenders’ point of view. But under a multiple bank relationship situation, a large loan should also be defined from borrowers’ perspective, lack of which may lead to over financing and fund diversion. Whatever is the form of large loan,


be it on syndication or club deal or stand-alone basis, banks must act as friends, not competitors, exchanging information among financing banks, in order to reduce credit risk. It is disappointing that 86% banks do not have targets for large loans indicating banks are directionless in this regard. However, it is good that 91% banks have a time limit for making a loan decision. Prior to disbursement, banks have the obligation to prepare feasibility report examining the important assumptions (say, sales projection) and it requires conducting sensitivity test. The true reasons of large loan default or non-realization of default loans are not really collateral and high interest rates. The default loans are basically due to loan decisions imposed by the top management. Imposed lending decisions leave no room for proper due diligence.

Mr. K. I. Khaled, Dr. Muzaffer Ahmad Chair Professor, BIBM:

The structure of this socio financial research study may be improved by incorporating some case studies linking the analysis to recommendations of the study.

Loan default, in case of large loan is not a new phenomenon. It also existed in the past. What is new here a number of banks overfinanced some borrowers, which led to fund diversion and non-payment. This problem is to be addressed by forming “recovery syndication” of banks. If it is necessary, Bangladesh Bank can give circular by directing banks to form recovery syndication for those loans which have been stuck up for long and where 10 -35 banks are involved in a single group. Banks together can voluntarily form such groups. However, if Bangladesh Bank does not impose it, banks may not initiate it. So, initially this technique may be applied by force. Then every bank will do it automatically.

This club/syndication will also help banks in limiting the overvaluation problems of collateral/ assets. Most of the defaulted large loans were related to import financing. It is argued that because of fall in price in international markets, these financing were stuck-up. This may be partly true; dishonesty and carelessness of bankers’ are also responsible.However, on case to case basis, Bangladesh Bank can take initiatives to help those clients who actually suffered but in that case, studies are needed. This large loan study may be treated as a pioneer study and a follow up study can be undertaken on the basis of case studies.

When non-funded loans are turned to funded loans, banks must treat them as classified loans. LTR are to be given only very trusted parties. For preventing loan-default, loan sanctioning process should be separated from Managing Director’s daily functions. The person who sanctions loan will not work under the Managing Director. He will not report to Managing Director. Foreign banks do the same but local banks do not do it. They can report to Risk Management Committee. Operational officers who will do marketing, they will try hard to


increase loan whereas officer who sanction loan will evaluate the proposal form the risk assessment point of view.

Views of Participants

Environmental risk is associated with large loan. Economy is expanding due to large loan but environment is also polluted by the large projects. Rivers, canals are being wasted by large funded projects. Banks extended large loans but they did not provide fund for setting up ETP. Banks did not consider the issue of waste management. So, it is necessary to finance for waste management or ETP along with large loan funding.

The issue of profit earning is a major concern of owners. Profit driven attitude of banks is rampant in Bangladesh. The neighboring countries have resolved this issue in a sophisticated manner. We can do it as well. Profit target and loan growth can be tagged to some indices like GDP growth. If the profit target, risk appetite, asset target etc. of banks are fixed by the bank boards based on a clear cut guideline of Bangladesh Bank, the tendency of push lending will be minimized. Banks will be able to give quality credit.

Concentration of borrowers must be arrested but geographical concentration is unavoidable. Banks extend finance to some geographical regions like Dhaka and Chittagong because most of the business opportunities are located in those areas. In order to arrest the over financing of borrowers, there may be a ceiling for each large borrower, based on his asset or other relevant criteria. All banks will have to follow the ceiling and cannot exceed that ceiling (either individual or collective basis), whether it is a funded or a non-funded facility.

CRG, Financial Spread Sheet as prescribed by Bangladesh Bank have become obsolete, because funded and non-funded risks are different. Large loans by way of loan takeover, toxic asset purchase did not go through rigorous loan screening process.

In large loan financing, syndicated/club arrangement is better because in syndication many banks need to be satisfied. It is tough for a client to get fund beyond their needs. So, if fresh initiatives can be taken for expansion of syndicated lending, the bad effects of large loan can be minimized. This should be done in term lending as well as in trade financing. Corporate guarantees of proprietorship and partnership entities cannot be accepted.

Bank financing particularly large loan financing is not a problem but management is. In order to address “Chittagong Crisis” bank management should be very serious. They should employ right person in the right place. Corporate governance needs strengthening in order to combat the bad practices of large loan sanctioning. Recovery syndication should be tried.


Large loan has positive as well as negative implications. For inclusive growth and for reducing disparity, SME is important.Likewise large loan is also important for an economy. But, it is a matter of concern that large loans are hugely classified. Proper assessment of borrowers is necessary for giving a quality loan. But in large loan financing, this was not properly done. Absence of monitoring is another area where we need special attention. For proper valuation of collateral securities, such as land and building, a uniform guideline is needed from the central bank.

Dr. Toufic Ahmad Choudhury, Director General, BIBM

Bangladesh Bank would be hugely benefited from today's Seminar as it has generated a number of recommendations in regard to how large loan will be redefined; how the problems that have already happened will be addressed. What will be the future policy thrust and monitoring of these issues? Large loan itself is not really a problem. It is necessary for the economy. In fact, the objective of today's Seminar is to address the problems in financing large loans. Through providing large loans, banks have over financed many customers. The person who needed Tk.100, banks gave him Tk.500. So, he has purchased land, flat, etc.; it is natural. As a result, the price of land increased.

Due to aggressive large lending, fund has been diverted and a number of problems have been created in the economy, like asset bubble. Multiple lending is really a problem; banks extended finance to clients beyond their actual needs. So, banks should address this problem. In case of multiple lending, globally, borrowers’ current ratio is restricted/ limited to 1:1. It would not be more than one whether it is single bank or multiple bank funding arrangement. We can customize our own policy by discussing with the stakeholders. Bangladesh Bank will intervene when market will fail. This is a market economy; why Bangladesh Bank will give banks each and every direction. Banks should develop their own operational norms.

Recommendations:

Recommendations which may be derived from the discussion of designated discussants (including Chief Guest and Chairman) and participants but not incorporated in the study are noted below:

1) Large volume of loans should be raised by the borrowers involving security and banking markets.

2) Large loans should be provided by the banks forming syndication/ clubs, not by individual bank.

3) Large loans should not only be defined from lenders point of view, borrower’s asset backing should also be considered simultaneously.


4) Profit and asset growth of a bank should be linked to macroeconomic growth rate. 5) Like loan syndication, recovery syndications of banks should be created for addressing

the Chittagong crises 6) Based on the current study, a number of case studies should be undertaken in order to get

in-depth knowledge about problems of large loans. 7) After compiling the recommendations of the research and participants’ discussion,

BIBM should arrange one very focused round table discussion inviting 20-25 experts in the field of large loans.


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