ACC recipe for ailing banking sector

It is no secret that the country's banking sector faces a disconcerting situation. Much of the blame for this untidy state of affairs, now prevailing in the sector, goes to the state-owned banks.
The sector regulator, the Bangladesh Bank (BB) in this case, the government, the sponsor-directors of a good number of private banks and the top management of both private and public sector banks, all have their contributions to the mess in the sector.
The Anti-corruption Commission (ACC), which has lately been filing cases against many former and serving bankers and rounding up a number of them, has tried to provide a few solutions to the banking sector problems in its Annual Report for 2015. The Commission handed over the report the other day to the President of the Republic.
The ACC has put forward three major recommendations that, it felt, might help improve the situation in the banking sector. The recommendations are: (a) formation of the boards of directors of banks with a greater number of professionals; (b) introduction of right kind of oversight mechanism and (c) materialisation of structural reforms, if necessary.
The third recommendation would come first for implementation if anyone is really interested in putting into effect the remaining two.
Undeniably, the composition of the boards of directors, in a number of cases, does affect smooth and efficient functioning of banks. In most private banks, usually, the most influential and assertive and also most competent (in some cases) sponsor-directors occupy the post of chairman of the boards of directors and in knotty cases, it is he or she who calls the shot. There are some exceptions, too. And those exceptions, as the proverbial saying goes, only prove the rule (practice).
There are also questions about the quality of many people who sit on the boards. The decision to include the professionals -- of course, qualified and competent ones having a relevant background -- as independent directors on the banks' boards is reportedly paying some dividends. While such professionals do reportedly try to put their valuable inputs as and where required, they, too, face at times a hard situation, under the prevailing circumstances.
These days, questions are being raised about the effectiveness of the bank boards in the matters of sanctioning loans. The reason for asking such questions obviously is the unabated increase in the volume of classified loans. But most people are not fully aware of the helplessness of the boards of the banks in many cases, particularly in matters of decisions about loans.
It is not too infrequently that the boards are left with no option other than approving the decisions of their respective management, for the files of a good number of loan cases, including those that at times involve a large amount of credits, are placed before them, post-facto. This implies that the management has already sanctioned the loan cases, pending approval by the boards.  
But it would not be fair to hold the bankers solely responsible for sanctioning of such loans without prior approval of the boards that are now allowed to hold not more than two meetings per month for dealing with quite a large number of "memos" or "proposals" in one-sitting. Application of proper judgement becomes, under such circumstances, a daunting challenge then, in order to conform to rules or guidelines of the central bank.
With a view to meeting the need of the clients, the bankers are, of course, required to sanction loans, pending approval of the boards. The practice is in place for the sake of banks' business. However, the central bank remains in the dark about all these developments, for, the proceedings of the meetings of the boards that are sent to it, do not refer to post-facto loan sanctioning by the boards.
Most banks have developed the habit, either by default or by design, to report the same as the approvals of 'proposals' by the board, irrespective of their nature -- post facto or not -- for reasons of not being 'chastised' by the regulator, rightly or wrongly.
However, the possibility of the involvement of an unscrupulous section of directors of banks in sanctioning and disbursement of loans of questionable quality can not be ruled out outright.
Meanwhile, it might prove quite difficult to have only the professionals on the boards of private banks since the sponsors would have reasons to resist the move tooth and nail. They would be demanding their induction into the boards for having put in their 'money' for setting up of a bank with the permission of the central bank.
However, the situation with the government-owned banks is different. The government is free to recast the boards the way it wants. Instead of pushing the political elements, it should appoint the maximum number of relevant professionals having good track records, in terms of honesty, integrity and probity, to the boards of public sector banks. Enough damage has already been done to a number of such banks through wrong selection of people for their boards. The burden of such wrong decisions has been passed on to the taxpayers; the state-owned banks are now seeking capital replenishment from the public exchequer.
In fact, the situation in the banking sector is such that neither the boards nor the bankers are doing, or, are in a proper position to do, what is right for their institutions. Bankers are supposed to take or recommend their decisions about 'loans' by exercising their due diligence and the boards are to give their seal of approvals only after being adequately satisfied with the management's decision. In fact, it is not the banks' boards but the management, dominated by bankers, that is in-charge.
The ACC in its latest annual report has suggested employment of the right kind of oversight mechanism. The commission, possibly, has found the present system deficient or weak in many ways. The central bank is in-charge of oversight of banking institutions. Following the ACC's observation, it is expected that it would look into the mechanism that is in place now, and, if needed, make improvements and adjustments to make it more effective.
There is no denying that the banking sector is in dire need of a shake-up. The ACC has reminded all concerned of their duties and responsibilities to this effect. There will be, of course, an anxious wait for early actions. Any unnecessary delay or foot-dragging might prove fatal for the banking sector.
But here again, any move, taken in haste and without taking full facts into an objective and dispassionate consideration, may create a scary situation. In that case, the normal functioning of banks will be adversely affected, much to the detriment of the interests of the overall economy.
    [email protected]