The issue of problem loans is an albatross that keeps rearing its head in the affairs of financial institutions in both and advanced and less advanced economies. Granting loans is one of the core functions of banks.
What are the effects of bad loans?
A bank with high percentage of bad loans has cause to worry. While liquidity and profitability faces decline, there is an erosion assets and capital causing insolvency, and an eventually run on the bank and collapse.
The Banker’s Duty of Care
Many loan defaulters have an easy playing field when they are left to themselves after the funds have been disbursed. When this happens, loan officers are unable to detect early signs of default. Whether as an investor or a borrower, regular customer contact is key in a banking relationship. Investment/Sales Executives sometimes desert their customers after the deal is closed.
We don’t know that subsequent visits or calls can make the customer feel a greater sense of belonging and can even bring more funds from offshore to be added to the existing funds. Some Loan Officers also neglect their customers when the loan is approved and disbursed. In both circumstances, we should know that customer visits or calls as well as face to face meetings go a long way to impact the bank’s profitability. How do we minimize the risk of default of bank loans and customer attrition?
Supervision and Follow-up of Loans
The basic objective of supervision and a follow-up system is to ensure that the advances granted by the bank are safe. The funds lent by banks belong to the depositors and the bank staff have responsibility in safeguarding the interests of millions of depositors. Supervision of loans starts right from the stage of selection of a borrower whereas follow-up of loans starts immediately after disbursement of the loan.
The branch is the unit from which the proposal is made for any advance and disbursement channeled through. The borrowers’ maintain accounts are with the branch, operations are conducted through the account, reports, and returns are submitted, by the borrower to the branch and loans officers. Success therefore depends on how effectively the branch and loans departments ensure supervision and follow-up of the credit.
Visits by Loan Officers
Let me share some real-life cases:
Case One: A key distributor for Unilever products who benefitted from a guarantee to his supplier (Unilever) diverted the sales proceeds into building a warehouse. The bank which had guaranteed payment of cheques had to continue the misfortune of honouring the cheques until the amounts were crystalized into an actual loan, running into several hundreds of thousands of cedis.
Didn’t the Loan Officer make regular visits to the shop(s)? What about the account operation? Were there no evidence of reduceds turnovers, diversion of payments to builders or suppliers of building raw materials? Dear Loans Officers, please do not leave the monitoring of account operations to the branch operations staff alone. In banks where the loan processing rests only at the Business or Retail departments, they sometimes may not have the full details of the loan agreement and will only honour cheques that are funded!
Case Two: A customer who has been financed to sell alcoholic beverages suddenly displays a variety of other items such as rice, sugar, oil etc. A loan officer may admire customer’s ingenuity and business acumen but for all you know, he/she has defaulted in paying the supplier of the beverages and has therefore diverted to try other items whom he or she has no experience to deal in! Mr. Loan Officer, please visit your customer, check their books, as well. It falls within your right. Perhaps the loan repayment proceeds is being diverted to build up a good track record at another bank for bigger loans!
Case Three: A customer who was financed to complete a government building contract suddenly moved house into a posh residential area, “acquired a new wife” as well as a brand new luxury car! The building site was deserted. He put 90% of the blame on non-payment by the government because he is not a “card bearing” member of a ruling government’s party! This one too, they bring politics inside! Haba!
Case Four: How do you check your borrowing customers’ standing in the community? One does not need to work in the Bureau of National Investigations to find this out. There is a tendency for some customers to offer ten percent of bank loans disbursed, as tithes!! Can you imagine? Yes, the tithe-giving message has been taken to the extreme levels. I have seen contractors take their cheques to their pastors to be prayed over, with some of the funds being siphoned away by the charlatan pastors!
Funds meant for business should be used for business to enable them make profit and repay the loans and pay genuine tithes! Please make it a point to monitor the account operations, call your customers and visit them. If you are good at a little psychology, you can read in between the lines when customers are edgy and not able to explain certain expenditure patterns. Don’t behave as if you are a know it all, but do it in a very discrete way and make your suspicions known to your supervisor.
Sometimes face to face meetings within the bank premises make them see the seriousness of the situation. I remember decades ago when I used to monitor customers who had been assisted with the purchase of huge consignments of imported frozen fish at the Tema fishing harbour. I had to go to there every other day to monitor their transactions. At a point in time, the bank vehicle meandering its way between the small lanes in the harbour as well as the cold stores became notoriously known as Madam Fish.
There were times I found it difficult but eventually it became mutually satisfying for both the bank and the customers. Even with my eagle eyes, a few of them managed to divert some sale proceeds into buying other types of fish for sale, before eventually repaying the loan. Entering various cold stores in the harbour, without a jacket, to check customers’ stock balances, were some of the unforgettable experiences.
Case Five: Sometimes a call or visit can even help identify sick or even deceased customers! Relatives of borrowing customers are usually the last to inform the bank about his or her death. You may not know but a family member may be operating a deceased account’s sole proprietor’s account without the knowledge of the bankers. The KYC on customers should be continued until the account is terminated.
Dear bankers, despite this era of digital banking, artificial intelligence and Big Data Analytics, the human touch can never be replaced. Make banking great again in this new decade.
I will pause here. Next week, we shall examine the early warning signals that loan monitoring officers should identify easily and take action to avoid the deterioration of their loan portfolio.
(TO BE CONTINUED)
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TO BE CONTINUED
ABOUT THE AUTHOR
Alberta Quarcoopome is a Fellow of the Institute of Bankers, and CEO of ALKAN Business Consult Ltd. She is the Author of Three books: “The 21st Century Bank Teller: A Strategic Partner” and “My Front Desk Experience: A Young Banker’s Story” and “The Modern Branch Manager’s Companion”. She uses her experience and practical case studies, training young bankers in operational risk management, sales, customer service, banking operations and fraud.