The art of sustainable lending

With world markets facing one of the worst recessions since the great depression and banks struggling to survive, it is very important to ensure that bankers have the foresight to predict a good loan from a bad one, and this could be an extremely crucial decision to make. It needs to be understood that lending provides a catalyst to the society. It provides families, businesses, entrepreneurs that much needed encouragement and boost to improve their lives and living standards. But banking practices today need to ensure that they cut down on their risks when giving out loans.
Loans are a tool of connectivity, and the lending process is an ongoing dialogue. It leads to greater communication, it leads to greater networking and more importantly it builds inter-connectedness in society, where the sum is greater than its parts. A loan cannot only provide an individual with opportunities to lead a better lifestyle, but also ensure that his children are not deprived of the basic amenities of life. Therefore, while understanding that societies at the brink of collapse require stimulus and support in the form of a helping hand; a loan, an institution that promises inflow of capital into human lives to enable them to sustain themselves in the long run. Banks need to ensure that their risks in volatile markets today are also minimised.
The first and foremost requirement for ensuring successful fruition of transaction, ie from lending to its repayment, is the collateral. However, while collateral is one of the fundamental requirements for ensuring recovery of the loan, other aspects need to be taken into account as well. Aspects like whether the business would be sustainable in the long run for the client as well. While it may be true that banks are merely responsible for giving out loans where they deem fit, another moral obligation for bankers lies in giving sincere advice to its customers on the viability of their business projects. Sometimes, market forces dictate that a certain business venture will not be feasible for a plethora of reasons.
Imagine a client seeking a loan for his business of manufacturing lanterns. While we all acknowledge that Pakistan is currently facing a severe power crisis, the business of manufacturing lanterns will not be viable given the fact that people would choose to invest in generators or UPS devices. Therefore manufacturing lanterns is neither pragmatic nor feasible in such a scenario.
The expertise of the individual seeking a loan, in his/her own respective field is also of prime importance. This can be ascertained by looking into clients’ history of operating his business. The banker needs to carefully scrutinise the business turnover cycle, cash flows of the business, working capital along with other such details. It also needs to be ascertained if a business would be viable in the short term. It is ironic how recessions persuade us to evaluate risk in our lives, after every two three decades. Some of these recessions are less prolonged however the fact that we go on to evaluate risks every now and then goes to show that our industry and those in it and risk management have been losing their bearings. Even those institutions that have been considered for long as masters in their trade, companies such as JP Morgan and Goldman Sachs would have a hard time giving themselves anything better than a C grade for their risk management prior to the recession. The problem was mainly that we depended too much on, models, liquidity and processes when all we needed was a little common sense and risk management of portfolios.

The writer is Chief Manager SME bank and has been a leading banker in the industry for
more than 30 years.