Corporate Guarantee (CG), one of many other forms of securities safeguarding bank's lending to firms, appears to be futile in many cases in recovering loans from guarantors when principal borrowers fail to repay.
The observation came at a roundtable titled ‘Corporate Guarantee: Does It Work in Recovery of Loan?’ held at Bangladesh Institute of Bank Management (BIBM) in the capital on Wednesday.
Discussants at the event, therefore, recommended that the regulator should rethink about CG for its better enforcement by putting in place all the due diligence by lenders, borrowers and guarantors, according to a BIBM press statement.
Assistant Professor of BIBM Md Mosharref Hossain led a team to prepare the key-note paper, which he read out at the program, on the basis of a recent study.
Other members of the research team were Md Mahabbat Hossain, assistant professor of BIBM, Maksuda Khatun and Reefat Zaman Shourov, both lecturers of BIBM, and Mohammad Shahidul Islam, senior assistant vice president of Dhaka Bank Limited.
Md Nazimuddin, director general of BIBM and executive director of Bangladesh Bank, chaired the roundtable. SM Moniruzzaman, chairman of BIBM Executive Committee and deputy governor of Bangladesh Bank, was present as chief guest.
The BIBM director general said the study would help explore the enforceability and effectiveness of corporate guarantee in recovery of loan in Bangladesh. It would also help the regulators as it delineated the regulatory aspects of corporate guarantee in detail, he added.
With many other securities, giving a corporate guarantee to banks/lenders by a company, other than the borrower, is a usual practice in the normal course of financing trade and commerce.
As part of the credit risk management practices, banks usually accept securities in different forms including CG to mitigate the potential credit risk. Obtaining security for loans is one of the safeguards that banks exercise to secure their interests.
The keynote presenter said that the broad objective of the study was to identify whether CG worked in recovering loan in the country.
The study recommends that proper assessment by the bank before accepting the guarantee is crucial. Banks should accept the guarantee provided by a credible and solvent entity only.
In absence of these, the guarantee will not be an effective security in recovery of loan in case of non-repayment by the principal borrower.
The discussants and participants were senior bank executives, academicians and BIBM faculty members.
Among others, Professor Barkat-e-Khuda of BIBM, chair professor of BIBM and former professor of Dhaka University Muzaffer Ahmed, Supernumerary Professor of BIBM and former Managing Director of Pubali Bank Limited Helal Ahmed Chowdhury, former supernumerary professor of BIBM Yasin Ali, spoke at the roundtable.