Correspondent banking and BB governor\\\'s concerns

Dr Atiur Rahman, Governor of Bangladesh Bank (BB), expressed his concern over some developed countries' withdrawing of Correspondent Banking (CB) relationship. Taking part in the discussion on "Current Regulatory Issues" at the AGM of the BIS (Bank for International Settlements) held in Basel, Switzerland in June, the governor expressed his concern over the recent decision of terminating correspondent banking relationship by some banks in the developed countries. He urged the governors of the central banks of the developed world, the World Bank and the IMF to extend their help and cooperation in reversing the decision of those banks that were terminating correspondent relations with many banks of developing countries, including Bangladesh. The governor also shared his concern with Noyer, Chairman of BIS, in his exclusive meeting at the reception arranged for the governors who attended the AGM held in Basel, Switzerland.  
This is a very timely concern expressed by the BB governor, because if correspondent relationship is cancelled, our banking sector will be badly affected and even the country's international trade and finance will greatly suffer. Because of the recent development as well as growth in our country's banking sector, it was feared that correspondent relationship was going to be a big problem. In some of previous articles this scribe clearly mentioned that many banks were facing difficulty not only in maintaining counterparty limit but also in continuing correspondent relationship.
CORRESPONDENT RELATIONSHIP AND COUNTERPARTY BANK LIMIT: In the present globalised world it is almost absurd for any bank to remain in international trade without direct help and cooperation from the banks of developed countries and it is ensured through correspondent relationship. Because of technological involvement, trade diversification and complexity of trade service products, maintaining relationship with the banks worldwide has been indispensible, otherwise international trade services cannot be provided to the customers. Usually two types of relationship are maintained among the banks. One is the counterparty bank limit while the other is correspondent relationship. Through the correspondent relationship, the corresponding bank extends allowable services as per request of the respondent bank, but the under counterparty bank limit, trade finance products are provided. LC (letter of credit) advice, remittance services and collection services fall under the purview of correspondent relationship. LC negotiation, confirmation of LC/SBLC, discounting deferred LC etc. are done under the counterparty bank limit. These two types of interbank services are, however, complementary and there is a very subtle difference between these two concepts. In fact, these two facilities are simultaneously required for a bank to provide the best international trade services to its customers.
However, these services are not automatically or randomly provided to the banks; rather detailed analysis and evaluation of a bank's performance are carried out for ascertaining suitability of any bank to establish relationship. The banks of the developed world allow correspondent relationship to the banks of developing countries considering some business and non-business performance. Of course, sovereign risk is the topmost priority while considering correspondent relationship. In fact, the sovereign risk along with the business and non-business performance of each bank is collectively evaluated to determine the eligibility of any bank for establishing correspondent relationship. Among others, the corresponding banks stringently review and evaluate four important factors of each bank-corporate governance, loan-deposit ratio, percentage of NPL (non-performing loans) and compliance including ALM (anti-money laundering).
CORPORATE GOVERNANCE: Our banking industry has made tremendous progress over the last twenty-five years, but is still far away from practising minimum corporate governance. There is no inclusion of professional members/directors in any bank's board of directors (BOD). The BOD's involvement in day-to-day operation is contrary to corporate governance. At the executive level a bank is entirely depended on a managing director (MD). As per the standard practice, the BOD must ensure the control-providing policy and guideline to the bank management while the MD will play a bridging role between the management team and the BOD. Committee-based lending has not been introduced yet. As a result, if anything goes wrong, responsibility and accountability cannot be fixed properly, instead, the blame game between the management and the board of directors arises and thereby real wrongdoers escape. Because of this practice, the standard of corporate governance cannot be ensured at the minimum level internationally, which is viewed from a negative perspective by the correspondent bank.
LOAN-DEPOSIT RATIO AND NON-PERFORMING LOANS (NPL): The loan-deposit ratio is, however, found favourable for many banks, probably due to strict regulation by the Bangladesh Bank. At the same time the volume of non-performing loans (NPLs) is in a very alarming situation for our banks. In fact, NPLs are the main impediment to projecting our banks' performance to the international banking community. In our country, the percentage of non-performing loans is historically high and the high rate is a great challenge. Ironically, the loans that turned non-performing in the 80th and 90th decades have been being carried over in the banks' books. The longstanding non-performing loans seem to be beyond the recoverable state, so there is no justification of carrying over bad loans decade after decade, which eventually jeopardises a bank's overall performance. It is more detrimental when bad loans carried over year after year in the bank's book, because this malpractice gives an impression that regular provisioning or writing off is not being done. No internationally-reputed bank will show interest to keep business relationship with the banks having an enormous amount of NPL and therefore this is considered a very negative factor for our banks to maintain correspondent relationship.
COMPLIANCE ISSUES: In the present world compliance has become a very crucial issue, which all the banks in the developed world are giving utmost importance to. In recent years many large internationally-reputed banks paid billions of dollars in financial penalty because of noncompliance with the Anti-Money Laundering and Sanction terms and conditions. Although these banks have strengthened their compliance departments, yet this remains a great concern. The nature and structure of transaction have become so complicated and deep-rooted that in most cases correspondent banks cannot ensure foolproof control on every channel of international transaction, until it reaches the ultimate beneficiary. In spite of making all-out efforts, including the use of very sophisticated technology, this problem has not been resolved. Instead, it is aggravating day by day. Soon after the new rules and regulations are put in place, the new methods of money-laundering and terror-financing are invented. Besides, sanctions are getting so complex that it has been very difficult to comply with. Introduction of KYC (Know Your Customer) and DD (Due Diligence) are not now good enough to prevent the use of the banking channel for money-laundering and terror-financing. Therefore, the KYCC (Know Your Customer's Customer) and EDD (Enhanced Due Diligence) are going to be introduced and this has caused another severe concern to the banks of developed world for maintaining correspondent relationship with the banks of developing world. How will the banks of developed countries ensure the identity and legal business of the customers of any developing country's banks, when there is a considerable difference in the standard of compliance between the developed and developing countries. As consequences of this recent development, many banks of developed world are actively considering curtailing correspondent relationship with the banks in the developing countries. And our banks may not be exempted from this impact, if some appropriate measures are not taken immediately.
MEASURES TO BE TAKEN: BB governor's concern and raising the issue with the international forum are one aspect while cleaning our own house is the other. It may, however, be mentioned here that correspondent baking is one of the most revenue-generating sources of business for the banks in the developed countries, so we will have to keep in mind that when the banks decide to close its revenue-generating avenue of business, then there are some causes of concern. If these issues can be indentified and addressed properly, there should not be any problem with maintaining correspondent relationship. In addition to improving banks' corporate governance and clearing NPL, compliance issues will have to be drastically improved to maintain the minimum international standard.
To the best of our knowledge, the owners or directors of our banks are not involved with any international crimes. They have clean reports, particularly with respect to money laundering and terror financing. In order to maintain the correspondent relationship, compliance papers of all the directors must be submitted to the correspondent banks and every year updates will also be provided on time. This is merely paper work but needs to be done professionally. The way our banks' compliance is ensured is not acceptable at all. On one occasion this scribe was meeting with the MD of one bank, where the issue of establishing correspondent relationship came up. He then called one executive from the International Division, who was responsible for correspondent relationship with foreign banks, and asked about the present status. In response, the executive said that banks did not show interest to establish relationship with them. The chapter is closed there. Had the MD reviewed the file and all previous correspondence so far made, the result could have been quite different, because in our country the responsibility of failure is easily shifted to others, as the matter is hardly verified. In this way correspondent relationship cannot be continued and the responsible officers will have to be more professional in communicating with foreign banks and providing information and documents as per their demand. Although we have strong ALM act and Bangladesh Bank's detailed guidelines on preventing money laundering and terror financing, yet compliance thereof has to be put in effective practice. Each bank must establish a very strong compliance department with highly qualified Compliance Heads. Some potential officers may be encouraged to obtain CAMS (Certified Anti Money Laundering Specialist) designation.
It is learnt that Bangladesh has come out of the grey list of FATF (Financial Action Task Force) but this is not good enough and efforts must be made to become a full member of the FATF. However, if this process is delayed, Bangladesh should obtain the membership of APG (Asia Pacific Group on Money Laundering), which is recognised as a regional-type FATF.
Now time has come to seriously consider these important factors, including compliance issue, not only to avoid termination of correspondent banking but also to integrate the country's banking with international financial market, otherwise a worse situation is not unlikely to come as a blow to our banks, if the developed country's banks move ahead with terminating correspondent relationship.
Nironjan Roy, CPA, CMA, is a banker based in Toronto, Canada.
 nironjankumar_roy@yahoo.com