Do banks take any lessons from bad loans?

Despite my more than three and a half decades in the financial sector, I faced my real tests as a credit officer when I was appointed as Head of Restructuring and Recovery at Standard Chartered Bank, as well as while undertaking audit, portfolio review and due diligence assignments for Citibank, N.A. across Asia, East Africa and Europe following the Asian financial meltdown in 1997 and the subsequent years.

Young bankers often ask me: Do we learn enough from credit or loan failures?

My background as a Risk Officer taught me, loan usually go bad due to: improper need assessment; wrong structuring of the facilities; security or collateral shortfall; weak internal cash generation in the business leading to recurring past dues; lending on the basis of names of the borrowers without looking into their business fundamentals; ignorance about competition; economic downturn or investment in the business segments other than the core ones having relevance to the future.

I have seen many credits turn bad in Indonesia due to the failure of lending officers to understand foreign currency conversion and fluctuation risks. Many loans in Malaysia deteriorated because working capital was used to finance projects, similar to what has occurred in Bangladesh. 

In Taiwan, many middle-market loans went sour because the tenor provided was shorter than the trade cycle. Intense competition in India forced banks to overlook security or collateral shortfalls and other compromises.

Most loans in East Africa went bad due to poor facility structuring, allowing borrowers to divert large sums for unrelated purposes.

Even in Bangladesh, we have recently seen how industrial credits were diverted to the stock market or siphoned off. In Pakistan, "name lending" or "influenced lending" pushed banks towards collapse. In Latin America, cases were more related to excessive exposure in foreign currency, while in North America and Europe, drastic erosion in underlying asset values made exits nearly impossible.

One needs to conduct a deep-dive needs assessment—that is, determine how much the client requires to run the business and in what form. The business model must be analysed: projected turnover, the tenor of an end-to-end transaction, and the resulting financing requirement. 

Even after deriving a figure, one must determine how much should be bank-financed and how much should come from the owners. I have seen credits go bad simply because the loan tenor was shorter than the trade cycle.

I have also seen loans deteriorate due to non-compliance with regulatory requirements, such as waste treatment obligations, river pollution controls, or neighbourhood environmental standards in India. Social activist groups forced authorities to shut down several plants. 

Faulty land titles, or the grabbing of school or prayer sites, also created obstacles in project implementation, forcing relocation and increasing project costs. The death of a key person without proper succession planning has likewise placed many loans in jeopardy.

The banking sector in Bangladesh has long been affected by persistent loan defaults. Despite many corrective measures, loan defaults continue to trouble the financial system. As of September 2025, such bad loans stood at more than Tk6,44,000 crore. Borrowers owed Tk17,42,000 crore to banks, with a non-performing loan (NPL) ratio of almost 35%.

Loans in Bangladesh also turned non-performing mainly due to: weak assessment of the loan or weak facility structuring; failure of the lending officers to understand the inherent risks of the specific industry or business segment including cross-border or foreign exchange risk; turning working capital loans to term loans; 'name lending' or 'push lending' due to severe competition; dictated loans or insider loans in the state owned or even some large private banks, and most importantly; lack of timely monitoring and thereby failure in taking timely action. 

My recent experience with the large loan restructuring scrutiny committee at Bangladesh Bank showed that many large borrowers do not maintain proper books of accounts or even have structured finance or accounts departments staffed with reasonably qualified professionals.

Bangladesh Bank, with the support of development partners, has come a long way in addressing defaulted loans in the financial sector. However, we still need to develop a stronger risk management culture, supported by far-sighted risk managers in every financial institution, to avoid future surprises.

Mamun Rashid is an economic analyst and Chairman at Financial Excellence Ltd

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard