Loan classification and profitability of RAKUB

--Mozammel Hoque

Md. Mozammel Haque Principal RAKUB Training Institute

Loan classification is a bank’s asset management process which has a vital impact on liquidity and profitability of a bank. It is an important indicator of assessing the asset quality of a bank that shows the actual picture of a bank’s health in respect of its asset quality. Under the financial reforms program of banks and financial institutions it was initiated under the proper supervision and guidance of Bangladesh Bank in the year of 1989. Before the introduction of this process, management and maintenance system of bank’s asset was not up to the standard of the international level. The system of classification of loan has geared up the bank’s asset management process which is internationally accepted.

Under this system, bank’s loans are mainly classified into two main groups e.g. unclassified/standard and classified loans. Standard or unclassified loans generate income while the classified loans don’t do so. If the customers fail to repay their dues within the stipulated time it becomes irregular and classified which loses its productivity. Classified loans are also treated as non-performing assets due to the reasons mentioned earlier. It becomes undesirable burden to the institutions. Operating loss and provision loss are the resultant action of this situation. In the socio-economic and political atmosphere of our country default culture dominates over everything and banks generally face odd situation in its business position. Sometimes it becomes threat to the existence of the banks and financial institutions.

Most of the banks of our country are running with their business amidst hazardous environment of loan default culture which is frightfully detrimental to smooth banking operations. Especially banks under government sector face this adverse situation in a great deal. Industrialists and business magnets are too much reckless to maintain their banks’ loan regular due to some lame excuses. Their irregularity in maintaining their loans lead to the total banking sector merely to be collapsed. Following this bad culture farmers, small growers, small and medium entrepreneurs are also affected with the same culture that creates negative impact on the business of the specialized banks and financial institutions. These cause a great hazard to maintain asset quality and also to ensure required liquidity and profitability.

Rajshahi Krishi Unnayan Bank (RAKUB) has also been suffering from loan classification issues from its very beginning. Its customers are not so serious about the regular transactions of their loans. A great number of clients generally default their loans. Albeit, sometimes, it is for the insolvency of the farmers due to their crop failure for repeated natural calamities, it is mostly because of the wilful default culture of the customers. As the consequence of this, institution suffers a lot due to unusual load of non-performing loan. Considering the impact of enormous figure of classified loan, RAKUB is launching special initiatives and drives for realization of irregular and classified loans to gear up the position of performing asset by motivating its clients. Inspite of the utmost effort of employees concerned, expected level of asset quality is yet to be ensured. A large portion of the total loan outstanding fails to generate income like interest. It creates threat to profitability and causes operational as well as provision loses. The bank is being overloaded with the huge amount of accumulated loss which makes the cause of capital shortfall.  It’s, indeed, matter of great concern that the total lending system can be collapsed if it goes on and immediate remedy or government support can’t be initiated.

Foundation Training TI

Though the picture of classified loan in RAKUB is not satisfactory still then there is a good symptom in the overall position of bank in the recent years. The position shows in the table given bellow will clear it.

However, as this bank is playing a vital role in the field of agricultural production which is considered as the life blood of the economy of this agro based country special support and initiatives must be ensured from the part of the government. Not only that employees shall have to be encouraged and their moral strength and energy level must be kept high anyhow by facilitating some special financial benefits like bonus or any other incentives. Strong monitoring should be ensured to protect loan from being classified. Bangladesh is now self-sufficient in food production. It has been possible due to bank’s financial support to the farmers. So, suitable loan management should be ensured at any cost by the bank authority. All these measures must be essentially confirmed for the existence of this organization for the greater interest of the country as it bears a great importance in the context of our agro based economy.