It was 1992. I was then the public sector affairs head at the ANZ Grindlays Bank. At that time there was growing fear that there would be short supply of cement in the country. Subsequent to a heated debate in the parliament and newspaper editorials, the Trading Corporation of Bangladesh (TCB), the public sector trading entity, decided to import 100 thousand tonnes of cement from an East European country through open tender. We from the corporate bank seriously tried for the letter of credit (L/C) for that import and ultimately the L/C worth USD 22 million was opened through us. I being the Relationship Manager (RM) concerned was very happy about this and wanted to share the good news with my mentor Mr. Suronjon Chokroborty, the country credit manager. Mr. Chokroborty, asked me three questions- 1) Have you opened the L/C? 2) Have you realized the L/C commission and required margin? And 3) what are the shipment terms? My replies were- 1) It was obvious that we have taken the required L/C margin from TCB and realized the commission, i.e. our earnings, 2) shipment terms said, there will be three shipments through chartered vessels, first two carrying 30 thousand tones each and the last one 40 thousand metric tonnes 3) we have successfully routed the L/C to the foreign trade bank of the country through our Singapore branch. The `credit guru' Mr. Chokroborty smiled. While I pushed him hard to know the reason, he replied- there won't be any shipment unless the goods are being loaded into the mother vessel in the outer anchorage through `lighterage', since the said East European port does not have enough depth in the harbor for a 30 thousand tonne-ship. If lighterage cost is added to the export price, the contracted exporter would no longer be the lowest, he added. Believe you me, there was no shipment. The TCB had to trigger the performance bond issued and take the exporter to the court. I still wonder how Mr. Chokroborty could understand this. One answer could be, he really had all the qualities of a 'risk manager'.

Upon taking over as the public sector affairs head in 1992, I became a credit initial holder at ANZ. I was accredited as a certified credit professional at Standard Chartered Bank in 1996, after passing all the 14 module exams organized by the OMEGA, London. During my professional banking career, I did attend many basic, intermediate and advanced credit as well as risk management courses. However, I faced the real test of a credit officer, while I was made the Group Special Asset Management(GSAM) head at Standard Chartered Bank as well as while undergoing some audit assignments, following the Asian meltdown in 1997 and afterwards. I became a senior credit officer (SCO) at Citibank in 2005. My tremendous interest in macroeconomics, country risk and market risk along with complex audit assignments at Citi brought me this most coveted designation for a corporate banker. I was a business SCO till my last days at Citi and always tried my best to judiciously apply my credit discretion.

Young bank executives do often ask me, how a credit can go bad? My background as a Risk Officer for almost 15 years, taught me, credit usually go bad due to: 1) wrong borrower selection or inappropriate client need assessment, 2) wrong structuring of the facilities, 3) security or collateral shortfall, 4) weak internal cash generation in the business leading to recurring past dues, 5) lending on the basis of reputation of the borrowers without looking into their business fundamentals, 6) ignorance or under estimating the competition, 7) economic downturn or investment in the business segments other than the core ones . Added to these are, of course, weak credit assessments, failure to understand foreign exchange risk where cross border exposures are taken and corruption of the lending officers.

I have seen many credits going bad in Indonesia due to the failure of the lending officers to understand the foreign exchange fluctuation risks. Many loans in Malaysia went bad due to working capital being used to finance projects, almost similar to that of Bangladesh. In Taiwan many middle market loans went bad, because tenor provided was less than the trade cycle. Fierce competition in India forced banks to keep their eyes shut with regard to security or collateral shortfall or even weak financials. Most East African credits went bad due to failure in facility structuring and thereby borrowers were taking away huge sum of money for unrelated purposes. In Latin America cases were more related to taking large exposure in foreign currency, while in Europe and even North America, it was drastic reduction in underlying asset value or security provided, thereby making the `exit' impossible or extremely tough without huge `hair cut'.

One needs to do a `in depth' need assessment, that is how much the client needs to run his/her business and in what form. There is a saying- if you push out too much paste from a toothpaste tube; you won't be able to take this back. One has to look at the business model- how much is the projected turnover, what is the tenor of an end to end transaction and then derive at a figure. Even if one derives a figure, one has to know, how much of that would be bank financed and how much by the owners. I have also seen credit going bad, because the borrower needed the facility for 150 days, whereas the facility the bank offered was only for 120 days which the borrower had to accept under duress.

We have often seen, relationship managers marketing a credit under some agreed security and collateral parameters and disbursing the facility by keeping some documentation pending. If there is no `approval covenant' monitoring system, security perfection may remain pending for years and ultimately going bad. One should always try to take best of the securities or `nearest to clients' heart' properties mortgaged. Regular benchmarking of the security value vis-a-vis outstanding should be part of the credit culture.

I have also seen loans going bad due to non compliance with regulatory imperatives like waste treatment plant, river pollution or even neighborhood pollution in India. The social activist groups forced the agencies to close down the plants. Faulty title of land, grabbing of school or prayer places also created problems in erection of plants, thereby forced the companies to relocate and thereby increasing the project costs. Death of the key person without any proper succession also puts many loans into jeopardy. Business being not relevant to the core strength of the key entrepreneurs also didn't help many repayments. Most importantly one has to be with the winners in each of the business segment, not with the losers. If one would want to penetrate further into the client segment with some security/collateral or even inadequate cash generation or some other compromises, in that case pricing must be reflective of the inherent risk or government must subsidize to encourage money flowing to those hungry segments.

All along as a risk manager, I remembered what our credit teacher at Grindlays International Training (GRIT) in India Mr. Kartikeyan taught me- ` before approving and especially disbursing money against an approved credit, consider as if it was your own money'. He added-' taking risk is a banker's job, but it should always be a calculated risk with enough mitigants identified'. Kartikeyan further added- ` you only earn 4/5 percent net profit from a credit or loan but you lose the entire amount plus the reputation, if your credit discretion is not applied judiciously'.

(Mamun Rashid is a banker and economic analyst. E-Mail: mrashid1961@gmail.com)

News: The Daily Financial Express/Bangladesh/13-Nov-12