1.

Origination:
This is the root stage of lending. Concerned relationship manager is responsible for executing
this prime step where a borrower’s financial need is communicated to the bank formally.
There are some basic steps in the origination process & we will discuss the limitations of
those steps.

i. Borrower Selection:
Selecting the right borrower is one of the prime challenges for a lender. This crucial
assessment is sometimes compromised due to business target, market competition & lack of
experience. Except the CIB (Credit Investigation Bureau) report from Bangladesh Bank, there
is no formal database or report to assess a borrower objectively. In this era of modern
technology, it is obviously a great limitation that we are with the lack of modern & diversified
database to primarily select or identify good potential borrowers with actual financial need for
their businesses.

ii. Offering Product:

Banks are always developing different products with unique features that suits the business
dynamics of the customers. However, in most of the cases the customers are not well
informed of such customized loan products due to the absence of effective marketing &
communication. Thus, they get rigid to obtain traditional loan products (Term Loan /
Overdraft) to meet their financial need. It is also sometimes observed that the concerned
relationship managers are also reluctant to educate the borrowers with the new products. In
appropriate product offering is not only bad for the customer but for the banks as well.
Because, the while offering term loan (which is basically designed for fixed asset financing)
for the working capital purpose, the cost of capital of the customer becomes higher than it
would be for overdraft facility. On the other hand, as bank’s maximum deposits are short
term, financing unnecessarily in long term investment is a bug for maximum utilization of the
loanable fund.

iii. Bankable borrower:

Unlike the customers of different consumer products or services, the bank has to analyze it’s
customers for the products it offers. Customers who make regular banking transactions, keeps
deposits in the bank, has well literacy about the bank’s products & services; are considered
good customer of the banks and they ought to be considered as the bankable borrower. Now-
a-days, we see that loan applicants are approaching to the banks for financial leverage but has
no relationship with the banks as a depositor. It is also a limitation that we are offering loan to
the borrowers who have no banking habit or practical knowledge.
iv. Identifying the fund requirement purpose & cashflows:
In the origination process of a loan proposal, identifying the purpose of fund & analyzing the
expected cashflow is an important task. In most of the cases, the purpose of fund is yet defied
more specifically for better assessment of the borrower’s need.
2. Proposal analyzing & approval:
This second but one of the most crucial part to assess a borrower with available information.
In this step a proposal might be accepted or rejected for various financial or non-financial
reasons.
i. Risk Identification & mitigation:
Objectively identifying the financial & non-financial business risks & also finding out the
mitigation of those risks is one of the significant subjective analyses in the pre-approval stage.
Though we are identifying & pointing out the mitigation, in most of the cases those are
generic statements and has no supporting data. Such limitation significantly compromises the
quality of assessment of the loan proposals.

ii. Availability & Validity of the financial data:

For analyzing the financial health & performance of a business, there is no alternative of the
financial data those are provided by the prospective borrowers. Here the major limitation is
that the validity of those financial data can hardly be verified as most of the traditional
business concerns make cash transaction, do not follow the modern accounting methods or
tools to record their transactions & often fears to disclose actual financial position to avoid the
hassle from NBR, customs or other government authorities. Moreover, for historical analysis
of a business is required to observes it’s performance in last 3 or 5 years aligning with the
country’s economy. But due to the absence of proper accounting record process of the
proprietors, such data remains unavailable.

iii. Financial Analysis:

Financial ratio analysis is one of the key parts to know the financial health of a business. It is
good that we are using this tool as long as it is an integral part of CRG score sheet. But there
are many more financial tools such as sensitivity analysis, break-even calculation, etc. for
analyzing the business strength and make financial projection. But due to unavailability of
required data, we have a limitation to use those tools effectively.

iv. CRG calculation:

One of the instructions of Credit Risk Management (CRM) guideline Bangladesh Bank is to
develop a Credit Risk Grading (CRG) tool to describe a business’s position in numeric figure.
With this objective, BB has asked the banks to develop own customized CRG tool to asses the
borrower. However, most of the banks are following the CRG tool that BB provided as an
illustration. It is one our limitations in the pre-approval stage that many of us not yet
developed more comprehensive CRG tool to describe a business position in numeric figures
for quick understanding & presentation.
v. Lack of valid sources:
For analyzing a borrower’s current exposure with BFIs/NBFIs, CIB report is the only valid
source to get information. The borrower’s classification based on repayment history. can also
be seen there. This is good that the CIB report can be fetched via online now. But the major
limitation here is that sometimes loans might not be reported accordingly and those loans
might not come in the CIB report.

vi. Combatting against forged documents:

With the technological advancement, the frequency of forgery in documents is also rising.
Major forgery is done with the bank statements, sanction letters & other legal contracts which
have vital decision factor. Sometimes the fake documents are so pretending with the originals
that it becomes hardly possible to filter them instantly. Moreover, there is no formal scope to
verify those documents instantly through formal channel.

vii. Collateral / Security assessment:

Ensuring the quality of the collateral is one of the vital steps in the pre-approval stage. Banks
have developed their own criterion aligning with Credit Risk Management Guideline for
accepting the collateral as a security. In determining the value of the collateral, banks are
depended on 3rd party surveyors. Here the limitation is that different surveyors declares
different values for the same land. Moreover, there is a chance of biased valuation of the
collateral and monitoring the valuation process is hardly possible. Thus the lending decision
is often affected with such anomalies.
3. Documentation & Disbursement:

i. Charge documentation:
Proper charge creation & preservation of the charge documents is necessary for creating
proper hypothecation.
ii. Following up CRM condition:
To mitigate the risks to some extent, the CRM might have several special conditions in
addition to the general condition. Objectively executing those pre or post disbursement
conditions were sometimes found expired or ineffective. Lack of versatile MIS reporting is
one of the major limitations in this stage.

4. Monitoring & recovery:

i. Early Alert System:

Some banks have Early Alert System (EAS) where borrowers with the irregular payments are
reported to credit committee for analyzing the pros & cons for which such irregular
repayment is responsible. Then based on the proper analysis, the credit committee
recommends to retain or exist the customer. Many banks yet to follow this technique perhaps
due to the fear of losing customer.

ii. Cash flow monitoring:

Cash flow from the business is the primary source of repayment of the loan. For this reason, it
is always recommended to monitor from the very beginning of the borrower selection whether
the customer makes the bank transaction regularly or not. It is one of our limitations that we
are yet to follow any strict guideline to ensure that the borrowers are bankable i.e. they make
regular bank transaction & have depository relationship with the banks.

iii. Recovery of classified loans:

For the recovery of the loaned fund, the NI Act - 1881 and Money Loan Court Act – 2003 are
the shield for the banks. Failure in creating proper charge documentation aligning with those
laws may result in compromising the bank’s interest in recovering the loan. The limitations of
these laws are basically the limitations of loan recovery process. So, having lack of
knowledge regarding those limitations or strengths & scope of these laws creates the
limitation in credit recovery process.