The failure of an enterprise plunges the lending banks also into a problem
Mashiur Rahman
The news report that Mr Sinha’s textile-clothing enterprise is closing down would upset anyone having an interest in our industrialization and economic growth. It was one of the largest in Asia. The failure of an enterprise plunges the lending banks also into a problem. I had little personal knowledge of Mr Sinah’s business. I hope Business Administration/ Studies Faculty of a university would conduct a study which can indicate the weaknesses and alert us to avoid the pitfalls and grapple with the issue whether to allow the productive assets to go waste or salvage with necessary restructuring.
The Bangladesh Bank may commission such a study by its Bank Management Institute or a university. The following seem reasonable hypotheses to explain the failure. First, there is a relentless drive to expand (common to entrepreneurs).
Second, initial success gives entrepreneurs privileged access to loan from banks; lending institutions compete to get the few good entrepreneurs in their client list.
Third, there is a tendency to integrate – mostly vertically – to overcome uncertain growth of linkage productions or unreliability of contract performance.
Fourth, there is limit to family owned or controlled business, including more pertinently the entities in group of companies.
Fifth and related is the shortage of professional managenent – and also workers with skill.
Sixth, as an enterprise expands, management is stretched – and more so as it integrates and diversifies. But entrepreneurship cannot grow without expanding production (i.e. advantage of scale ) and diversification (i.e. advantage of scope).
Formal assessment of investment or loan proposals unlikely can adequately capture the risks in the expanding future. Weak credit discipline encourages loan financed expansion.
The weaknesses also suggest the way ahead: enhancing professional management as well as supply of workers with skill; discouraging family owned/ managed enterprise including overlapping ownership; assessing limit of management capability; access to market and competitive strength; stronger credit discipline on borrowers as well as lenders; central bank to disclose at intervals rescheduling and stretching repayment which alerts the lender and investors (with full protection of confidentiality of beneficiaries ); finally, exercise of regulatory authority to ensure discipline and social benefit that would protect the authorities from capture.
In late 20th century, US automobile manufacture Krysler was saved from sinking by State support. Iacoca, who managed the company back to viable production, emerged as a hero. He took one dollar as his remuneration during the period the company remained on state support. Were any effort to salvage the enterprise back to production considered, deep restructuring of ownership and management would be necessary.
Two complex issues are how the banks will restructure loan while keeping flow of funds and how to cushion management from influence of third party which does not have a stake or the professional competence.
Writer : A Bangladesh Awami League politician and the Economic Affairs Adviser to the Prime Minister of Bangladesh Sheikh Hasina.
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