• Wednesday, July 30, 2014

Tougher rules for big borrowers

Sajjadur Rahman

Many borrowers will no longer qualify for big loans as the central bank has tightened rules for large-scale lending.
If the big borrowers fail to provide sufficient collateral against the loans, they will fall into the 'marginal' group on a scale of eight categories in credit risk assessment.
Previously, the borrowers with insufficient collateral had qualified for such loans.
“A large borrower can be a 'marginal' client for many reasons, including insufficient collateral. It is becoming a difficult issue for the bankers,” said Nurul Amin, managing director of NCC Bank.
Amin said there are some power plants, big spinning mills and shipbuilders that need huge capital but it becomes impossible for some of the borrowers to give 100 percent collateral against such big loans.
Worse still, many 'marginal' borrowers may fall into the category of 'special mention accounts' due to the new rules, bankers said.
But some other bankers said the new rules rolled out on Thursday would help reduce risks in the banking industry.


Generally, banks assess credit risk by doing credit risk grading (CRG), which is an evaluation of credit worthiness of a borrower, before sanctioning or renewing large loans.  
The CRG scale for the banks consists of eight categories—superior, good, acceptable, marginal, special mention, substandard, doubtful and bad—based on the points the clients get from the assessment.
The new rules say if the rating of a CRG turns out to be “marginal”, banks must not sanction the large loans, but it can consider renewal of an existing large loan taking into account other favourable conditions and factors.
It said a client of “special mention account” in the CRG will neither be able to get new loans nor qualify for renewal of existing large loans.
“Some of the big companies, mostly Chittagong-based, might turn into special mention accounts from marginal and they would not get fresh loans,” a senior banker said, wishing not to be named.
“The best side of the notice is that it gives a guideline on risk grading of large-loan customers and on calculating group exposure,” said Touhidul Alam Khan, senior executive vice president and head of corporate banking at Bank Asia.
Khan said the new circular has synchronised all previous notices regarding the single borrower exposure, large loans, credit facilities in the energy and power sector, and the definition of a business group, which is very positive for the banking sector.
Two or more persons shall be deemed to be a group if one person has the ability to control the other person(s) or to exercise significant influence over the financial and operating decisions of the other person(s) or if both persons are subject to common control or common significant influence.
The circular said economic dependence of one party on another or more other parties results in all of them being considered connected.
“The definition of group is a new one. It is a welcome move, but it can be elaborated further,” said Monirul Islam, head of risk management at Eastern Bank.
Some bankers said the definition will prevent borrowers from taking loans from different banks.
xThe bankers had expected cuts in the single borrower exposure limit, but the new notice left it unchanged. They said they expected the central bank to set the single borrower exposure limit at 25 percent of a bank's capital fund in line with the Banking Companies Act. But the BB kept the limit unchanged at 35 percent, meaning if a bank's capital is Tk 1,000 crore, a single borrower can get Tk 350 crore in loans, which is quite big, the bankers said.
However, not incorporating the environmental issues in the large loan is a weak point in the new notice.
“I think it would be more meaningful if environmental issues were linked with the large loans,” said Khan of Bank Asia.

Published: 12:00 am Monday, January 20, 2014

Last modified: 9:42 pm Monday, January 20, 2014

TAGS: borrowers large-scale lending insufficient collateral marginal NCC Bank credit risk grading (CRG)

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