Case study of the course Commercial Bank Management (Based on Bangladesh)

3. Case Study: Default Corporate Borrower

Bank D sanctioned a working capital in the form of a Composite Credit Limit of Tk. 2500.00 Lac in 2010 in favor of a large proprietorship firm named M/S. XYZ Electronics World. The firm, initially, was engaged in trading of electrical and electronic items i.e. Refrigerator, Air Conditioner, Color Television, Fan, Microwave Oven etc. through local procurement. Later, the firm started importing the items from China, Korea, Taiwan, and Malaysia. It runs 07 showrooms in Dhaka and Chittagong. Later, the limit was renewed and enhanced for a couple of times and eventually it reached Tk. 3000.00 Lac against the collateral security of a 05 storied building and 65.00 decimal land valuing Tk. 1200.00 Lac in total.

As the business had been growing rapidly, the entrepreneur planned for establishing a refrigerator assembling plant. He imported the capital machinery for the plant by opening Letter of Credit in cash. But the cash came from the working capital funds. However, due to various reasons, he couldnt start commercial operation of the plant till now. On the other hand, due to lack of working capital his sales plunged, whereas, his competitors grabbed the market through expanding their sales & distribution channel.

Eventually, the account turned SS by the September 2014 quarter end and became B/L by the end of March 2015 quarter. The Bank has been following up the account since its turning classified through reminder letters, personal visits and regular phone calls. Lastly, the Bank has initiated legal action through filing a suit under Artha Rin Adalat for recovery of nearly Tk. 2000.00 Lac. It may be mentioned that the rest of the composite credit limit of Tk. 3000.00 crore was non-funded in nature. Present claim to the client is about Tk. 2200.00 Lac.

A thorough study of the account reveals the following reasons for the account being non-performing:

• The entrepreneur was very ambitious and secretive to the Bank in pursuing his ambition.
• It is very challenging for a trader to succeed in manufacturing as the nature of these two businesses is different
• Relationship with the client was poor or not commanding enough to deter him from diverting the working capital fund to the long term project.
• Bank has been misled by the client by retiring the Letter of Credit for importing machinery in cash, whereas, had he approached the Bank for a separate financing for the project, the Bank would have given it a second thought. This is a common mistake by Banks when clients opt for opening LC for importing project machinery without any assessment for the feasibility of the project. Banks think that it is a mere LC and would be retired anyway either by cash or by short term credit like LTR, Time Loan, etc. But, in effect they are financing a project without knowing much of it.
• This type of clients may also benefit from having direct relationship with Banks high-ups.

1.a) Write a short summary of the case study given above.

b) Mention all the problems that are seen/found in the above case study.

c) Provide and explain recommendations/solutions for the problems found in the case study.