Establishing discipline in financial sector sustainably

Bangladesh Bank (BB), the regulatory body of the country's banking sector, has recently taken drastic actions against two banks over allegations of serious violation of banking norms in running their businesses. It has removed the Managing Director and CEO (Chief Executive Officer) of NRBC Bank and barred him from holding any position in any other bank or financial institution for the next two years.
Similarly, the central bank has removed the Chairman of the Board of directors of Farmers Bank over allegation of some gross violations.
These punitive actions against the banks' management are apparently a warning to the whole industry. After a long silence, BB has thus played an effective regulatory role. This deserves appreciation. Only when the regulators conduct strong monitoring and take stern action against violation of rules and regulations, the financial industry remains under control and any financial debacle can be averted.
Absence of such vigilance from regulators resulted in many financial scandals and fraudulent activities in the country's banking sector. Whenever the central bank failed to take stern action against banks involved in financial scandals like the Hall Mark, Bismillah, and Basic Bank scams, a section of people attributed the failure to so-called political influence and intervention. This in many cases was intended to cover up the failure of the central bank.
True, political influence is a common phenomenon in the developing world and it is not unusual even in the developed world where such malpractice takes place in a sophisticated way through lobbyists. However, such political influence should not be considered as a big impediment to performing regulator's role. Rather, the regulators should learn the acumen of performing their due role by way of tactfully counter-manoeuvring the challenges of political influence and other unnecessary obstacles.
Political influence is rampant in our country but at the same time, bank management's incompetence or inability also sometimes gets immunity in the name of political influence and intervention.
Now that Bangladesh Bank has acted as an effective regulator, one hopes that the central bank will continue to keep it up and will even toughen its stance while performing its regulatory role. The BB should exercise its prudence while taking any punitive measure against any bank or financial institution. This is required because if any legal flaw is found, action taken by the BB may be overruled by the court. In that situation, the central bank's role will be questioned and its regulatory role will also be undermined.
Nevertheless, ambiguity may arise over the interpretation of some sections of the Bank Company Act and various circulars issued by the BB from time to time. The roles of the Managing Director (MD), and board of directors of the bank in its day-to-day affairs, particularly in sanctioning loan, have also not been unambiguously spelt out, which may create confusion or ambiguity.
The banking industry of the country is highly developed with the presence of more than 50 banks and hundreds of non-banking financial institutions. However, roles and responsibility of the management team, MD and CEO and the board of directors in running banks' day-to-day affairs, particularly in sanctioning loan, have not been defined properly. Loan proposal is originated by the branch, evaluated by the CRM (Credit Risk Management) Team, and then submitted to the MD and CEO or Board of Directors for approval depending upon their respective delegation.
So the existing practice reveals that persons at different levels of the bank, from top to bottom, are involved in sanctioning loan. In that situation, question may arise why only MD and Chairman will be punished and others will be spared. In response, some may argue that the officers or CRM have followed whatever MD or Chairman of the Board had instructed, but this should not be an acceptable explanation. Irrespective of the position, no one should carry out an order of the superior if it is not found compliant with the rules and regulations. Unfortunately, the financial industry in our country lacks this standard practice.
In his banking career, this writer has experienced many instances where MD has just asked CRM Head to look into a credit proposal to find its viability and in response, CRM Head submitted the proposal with recommendation for approval without studying its viability. This is a very difficult situation because it creates a dilemma in holding the concerned officer accountable as the Chairman may say the bank board has approved loan proposal based on the MD's recommendation.
Similarly, the MD can say he approved the loan proposal in line with CRM recommendation. If CRM or the MD is asked why they have recommended such loan proposal, they will come up with counter-argument saying that they have done so because they have been asked by the Chairman to do so.
Due to lack of proper guidelines in approving loans and due to the absence of specific rules determining the role and responsibility of executives at different levels of a bank, including the MD and the board, such blame game arises which provides a safe passage to the main culprits.
MODERN BANKING: In the face of such ambiguous situation prevailing in the country's banking industry, Bangladesh Bank should first emphasise on streamlining the entire loan operation system in the banks. In modern banking, board of directors does not directly approve any loan proposal. However, they continuously assess risks associated with sanctioning loan. And for proper assessment, they develop specific guidelines incorporating risk parameters.
The MD will be solely responsible for implementing policy and guidelines developed by the board of directors. He will exercise adequate control at every level of loan management - from loan originating office to the approving level - to meticulously comply with guidelines and parameters approved by the board. Loan proposal will be evaluated, assessed and approved within the given guidelines and parameters by the management team at different levels of the bank including credit committee, senior credit committee, risk committee and so on. If any deviation or violation of the board-approved guidelines and parameters is detected, the concerned department or person will be held accountable and responsible. At the same time, the MD will be held responsible for his failure to exercise control over a department involved in the loan approval process and accordingly punitive measure will be taken.
The board will closely monitor whether their guidelines and parameters are being meticulously complied with while approving loans. If the board fails to provide appropriate guidelines and parameters or fails to ensure compliance, its members will be held responsible and accordingly, punitive action will be taken against the defaulters.
The entire process of loan sanctioning should be brought under computer technology so that the system does not allow deviation from given parameters. If such deviation or violation occurs, an exception report will be automatically generated and distributed to the concerned authorities including the board of directors.
The roles and responsibility of board of directors, MD and CEO and management team and demarcation of each stake holder's duty should be made in black and white. Probable consequence or punishment for each violation should also be clearly specified in the written procedure. The concerned body should be made aware of this procedure and will provide written acknowledgement so that no scope of any denial or ignorance remains. These changes are required not only in the credit and loan operations but also in other areas including international trade (foreign exchange), operation department, FCD (Financial Control Department) and IT (Information Technology). Banker's accountability and responsibility can then be properly defined and the bank itself, and Bangladesh Bank as regulatory body will be able to enforce their actions against the violators what will thus restore and establish sustainable discipline in the country's financial sector.
Bangladesh Bank should consider establishing effective presence in the country's financial industry so that any market player thinks twice before violating any rules.

The writer is a banker based in Toronto, Canada.
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