Loan syndication may help minimise banks` risks

Syndication mode may help minimise risks along with reduction of non-performing loans (NPLs) in the country`s banking sector, senior bankers and experts have said.

They have also urged the Bangladesh Bank (BB) to introduce a comprehensive guideline on loan syndication for facilitating investment in different projects including infrastructure ones that will also help achieve maximum economic growth in the near future.

The observations came during discussion at a research workshop on `Loan Syndication in Bangladesh: Status and Challenges` held at the Bangladesh Institute of Bank Management (BIBM) in Dhaka Thursday with Dr. Toufic Ahmed Chowdhury, Director General of the BIBM, in the chair.

A total of Tk 765.29 billion was invested by 47 commercial banks and non-banking financial instructions through loan syndication against 398 projects during the period starting from 1995 to June 2016, according to a research paper, which was presented by Helal Ahmed Chowdhury, Supernumerary Professor of the BIBM, at the workshop.

"In future, syndication deals are expected to be more complicated, competition will be fierce, new sectors of investment will emerge and new funds will be required," the study said.  

It is expected that syndication deal will expand across the domestic boundary and international deals will be required to be undertaken by local banks and non-banking financial institutions (NBFIs), it added.

The first study on loan syndication in Bangladesh also found that in some cases while syndicated loan defaulted, the lead arranger/agent did not play the due role of legal recourse and recovery as specified in the facility agreement. This deters the whole recovery process.

In Bangladesh, most of the syndication deals have been undertaken for raising term loans for project finance.

A few of the syndication deals have also been undertaken to raise fund as preference shares/quasi-equity.

"But no deal has been administered for raising fund as equity.  Banks are reluctant to raise fund as equity through syndication," the study explained.

In this perspective, senior bankers and experts called upon the authorities concerned to explore equity and bond markets as long-term alternative sources of finance for large projects that will also help achieving maximum economic growth in the near future.

The research team also identified a number of challenges including cumbersome and time- consuming process, lack of skilled human resources and key person dependency and lack of corporate governance that the banks and NBFIs are facing in loan syndication.  

The survey data, as reported by the sample banks, shows that only 0.64 per cent of the total syndicated loan disbursed is classified compared 10.06 per cent of all loans of scheduled banks.

"The benefit of syndication process is that it splits and spreads the credit risk to sizes manageable by individual syndication partner institutions. But in itself has no mechanism to minimise liquidity and interest rate risks from term mismatches,"  SK Sur Chowdhury, Deputy Governor of the Bangladesh Bank (BB), said while addressing as chief guest at the workshop.

While bankers are striving hard to reduce their NPL, the syndication mode can be a way out of this situation, according to the deputy governor.

He also said syndication partner banks also need to bear in mind the risks in excessive leveraging that can bring even a major corporate down during a financial crisis.

"Syndication arrangers and partners thus need to limit their lending to cautiously conservative levels of debt equity ratios; with careful eye on any overvaluation of owners` equity," Mr. Sur Chowdhury noted.

"It is the responsibility of the lead arranger and syndicate participants to alertly preserve a high quality for these syndicated loans throughout its tenure to permit such securitisation possible without a hindrance," the deputy governor observed.

Helal Ahmed Chowdhury, also head of the research team, said syndication minimises risk due to the involvement of different banks and NBFIs for proper analysis by different participant banks, better monitoring of loans, reducing chances of diversion of funds, vigilance by lenders and good prospect for recovery of loans and thus paving the way for reduction of NPLs.     

Golam Hafiz Ahmed, Managing Director and Chief Executive Officer (CEO) of the NCC Bank Limited, said banks and NBFIs should maintain cautious policy to select borrowers for loan syndications.  

After borrowing bilaterally, most of the clients show interest to go for loan syndication, he added.

Mohammad Shams-Ul Islam, MD and CEO of Agrani Bank Limited, said his bank has already provided a large number of syndication loans for power, infrastructure and industrial projects.

He, however, stressed a specific regulatory guideline for syndication loan like prudential guidelines.

Welcoming the syndication loans, Arif Khan, MD and CEO of IDLC Finance Limited, said equity, bond and capital markets need to be developed for long-term financing to cater to the growing demand of the economy.

Mr. Khan also said, for creation of pension fund long-term syndication loans need to be facilitated.

Among others, Muhammad Yasin Ali, Supernumerary Professor of the BIBM, also spoke on the occasion.