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Friday, April 27, 2018

Whether all the secured loans are really secured?

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One of the fundamental tasks of bank is to lending the depositors' money in an efficient way to meet the depositors' obligation and to earn profit accordingly. Banks in Bangladesh are running after facilitating loans to clients taking collateral security in way of property mortgage. No bank generally deals with selling of property for the recovery of loan, while as a precautionary measurement they are eager to take more collateral to defend the loan as secured.

In many cases of rural SME financing, it seems, sometimes the fund for working capital financing goes to construct or renovate house or sometimes fund given for house construction goes to business investment. The availability of fund diversion is possible at the time when more funds are facilitated to customers than their actual requirement and where market level banking supervision is poor.

The unethical competition amongst bankers to hunting other banks' customers along with the bad intension of clients is driving to finance more by manipulating documents and showing excessive value of collateral. Normally at the time of credit proposal preparation by bank official, there is a general requirement of making valuation of the proposed collateral. Minimum two valuation reports (i.e. one report from the respective branch and another from third-party surveyor) are arranged.

It's true that bank needs business, but the wish of an official to be high performer of a bank makes him/her trying to satisfy the customer with either higher financing or service excellence. But a myth is heard that money is the second god. Many of the customers, either large or small, generally prone to getting more money quickly, so they choose the first one accordingly.

The areas of the land, location, ownership, human access to the land, boundaries, category of land, structure on that land should be analyzed for property valuation. CRM/Credit Division of a bank considers both valuation reports to find out the actual value of property for cross matching. But, sometimes the third-party surveyor either in line with clients' intensionand/or sometimes with relationship officer's curiosity shows the high value of property.

It's true that bank needs business, but the wish of an official to be high performer of a bank makes him/her trying to satisfy the customer with either higher financing or service excellence. But a myth is heard that money is the second god. Many of the customers either large or small generally prone to get more money quickly, so they choose the first one accordingly.

The tendency makes them to misuse their funded credit lines and divert a portion of that for another purpose, because they are getting the higher financing which is merely their wants not demands. The more credit limit in spite of their inadequacy to handle it creates funded pressure for them dramatically. That propels the credit sector unhealthy as the quality of loans is being deteriorated. 

There is another loophole of security deterioration, which is misinterpretation of legal opinion. Many bankers think about the vetting binds the lawyers totally. But it is to be in mind that the no observation comments is only the opinion of legal vetting. The authentication of ownership title analyzing the chain of ownerships of the scheduled property is legally confirmed by the panel lawyer with a title search reportas perbankers' demand.

Here, the legal search report ensures the title of ownership only, not ensures the identification and physical possession of the security. So, the bankersshould investigate to find out the physical possession of the security. Getting confirmedof physical possession, the encumbrance of that property is to be confirmed further through Non-Encumbrance Certificate (NEC) or Encumbrance Certificate (EC) that can be obtained from Sub-Registry Office under which the property belongs to. But, NEC or EC can be easily arrangedby the vendor.

If one gives some speed money, they will provide NEC or EC to everyone instead of searching about any mis case, file suit, mortgage position. Money can change a lot of things but not everything. Here, bankers should go to client's nearest business competitors to find out if he or any of his family person is availing any loan against same property from bank or any other financial institution. Because CIB report from Bangladesh Bank shows the loans' present and a few past performance, not the details of the security against the loan.

Now the security, which is generally of 4 types, in book 6 types are recorded, where mortgage is the only means of security for immovable asset. Bankers think that at the time of customers' non-repayment of loan instalments and/or excess over limit against his/her borrowing from the bank, officials can warn of selling property as part of non-legal measures of recovery.

But the reminder will be appropriate when the security is actually secured. If the client provides fake security or the overvalued security, the banks initiatives to recover loan will be nominal. A research on the Credit Operations of Banks done by BIBM shows 59.27% of total loans in Bangladesh are backed by collateral property in 2016.

Alarming is that, in many cases ofregulatory reporting banks disclose inflated value of collateral, the justification behind which is (inflated) valuation report and undoubtedly it shows that the bank is more secured in their funded investments.

But, the credit risk arises when the loan amount is not repaid back properly. In line with that, when the loan goes to be unrecoverable and bad-debt in its classification, the selling amount of property is found nuance comparatively mentioned in the valuation report at the time of loan approval. So, where the security of secured loan itself is in question, the quality of collateral cannot be ensured. Finally, it can be concluded thatin real sense all the secured loans are not secured at all. The future of this type of secured financing can never express the good outlook of banking sector.


The writer is a credit analyst of a commercial bank

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