Price fluctuation of commodities in local and global markets was the reason why loan against trust receipt (LTR) was turning defaulted in Chittagong, according to 48 percent respondents of a Bangladesh Bank study.
The findings came when BB interviewed LTR clients and officials of different bank branches in May-June 2012 and April this year.
The loan against a trust receipt is provided to a client when the documents covering an import shipment are given without payment. Under this system, the client will hold their sales proceeds in trust for the bank, until the loan allowed against the trust receipt is fully paid.
According to the study report, the total LTR was Tk 48,312 crore until September 2013, which was 32.82 percent of the total outstanding trade financing. Of the amount, Tk 9,352 crore turned into term loans or default loans as those were not paid timely.
Bank officials said a major portion of the LTR was from Chittagong where commodity traders took the loans from different banks for a short period. But later they failed to pay the loans in time.
In the study, 8.7 percent respondents blamed exchange rate fluctuation for the LTR turning into default loans, while 4.8 percent mentioned transfer of fund, and 16.3 percent stocking commodities for a long period as a reason. Besides, 22.1 percent cited various other reasons.
The study said the possibility of recovering these term loans is apparently very low due to a lack of adequate mortgage, absence of goods in the banks' warehouses and fluctuation of prices of unsold goods.
In many cases, importers/clients divert the fund to purchase lands, invest in the stockmarket and set up new business, it said.
The study said interest rate for LTR loans and commissions for letters of credit (L/C) are much higher -- interest rate 13 percent to 22 percent per annum and commission 0.25 percent to 0.50 percent per quarter.
"One kind of evil competition has been observed among different bank branches in case of LC opening and providing LTR facilities against large groups in order to meet their profit target at the branch level," the report said.
The study also found that bank branches often open LCs and provide LTR facility as instructed by banks' head offices which creates a problem for branch managers to assess their clients. As a result, the LTR is not adjusted and turns defaulted at one stage.
It was also observed that the same borrower or group is taking the LTR facility from different banks due to the lenders' 'single borrower exposure limit'. As the banks have no information on the clients' loan amounts from other banks, borrowers or importers are repaying loans to one bank by taking loans from another.
The BB conducted the survey to gauge the extent of LTR given by the banks against LCs and identify malpractices.
An official of a private bank said most of their LTR were generated in Chittagong region and several banks have been facing serious problems due to such loans.
The managing director of a private bank said the LTR has been a recognised practice for long in case of commodity loans.
However, the banks have taken a lesson from the recent default loan crisis in Chittagong involving the LTR.
BB Deputy Governor SK Sur Chowdhury said the central bank has investigated the irregularities regarding the LTR in Chittagong. On the basis of the probe, the loans remaining unpaid for long have been classified and provision has been kept against the loans, he said at a recent press conference.
Punitive measures were taken against those who were involved in such malpractices, Chowdhury said, adding that the banks have been asked to form a taskforce to realise the loans.