Risk factors and high salary in banking sector
Tuesday, 9 February 2010
Md. Main Uddin
In Bangladesh, an employee of the financial institutions in general and banks in particular is paid many times more than the average salary of a Bangladeshi worker in other areas. Some top executives are paid abnormally high. The pay gap is increasing day by day and now many question the logic behind this.
Let us look at the success of the banking sector. According to a recent report, Bangladeshi banks are making a huge operating profit over the period although this profit is not enough to justify the true financial health of a bank. But it must be agreed that if the operating profit is high the net profit after tax and provisions will also be higher. The success of a bank primarily depends on the profit it makes, sustainability of this profit, and such sustainability, in turns, depends on the diversification of assets i.e. how many sectors a bank has extended loans. In addition, capital can play an important role in absorbing the loss of a bank. In terms of profit and its sustainability, our banks on an average are successful as most banks have been making a considerable profit for many years.
How this profit is generated deserves explanation. A big portion of the profit of many banks comes out of their remittance service and letter of credit (LC) business. As far as the remittance service is concerned, a bank plays role just as an intermediary. If it can quickly send money to the receivers, remitters will prefer that particular bank in this regard. Providing remittance service and doing LC business are routine-work of a bank and it does not need enough talent of a banker. Giving loan is the most important area of banking business where bankers must possess enough knowledge, analytical ability and finally, the prudence. A banker must know how to analyse a loan proposal to determine the creditworthiness of a borrower. This analysis must include measuring the feasibility of a project, identifying the sources of both systematic and unsystematic risks, finding out the demand for and supply of goods and services, availability of raw materials supply in future etc. All effort made here is to ensure the performance- regular repayment of principal and interest- of a loan. If a bank fails to select the right borrowers and sectors of investment, it may come up with huge defaulted loans at the end of the day, which may, in dire consequence, push that bank to a situation of bankruptcy. In this case, frankly speaking, no regulatory authority will allow that bank to go out of the market considering its serious negative effect on its clients. Such failure of a bank will also have a negative external effect on the whole banking sector and clients of other banks irrespective of their performance may start thinking that their banks may also fail. If a state-owned bank faces such a problem, there will surely be the injection of government funds to rescue it. It will surely deprive people of wellbeing as the government funds come from their income.
During the recent economic downturn, our economy did not face serious challenges for many reasons. First, our remittance flow increased even in the face of world economic crisis. Second, export income was not seriously affected. Thus, our banking sector remained on the safe side as their income from these two sectors did not hamper. In true sense, bankers did not save the banking sector.
Our banking sector has improved a lot and in some cases it entered into the domain of international regulations. Still I believe some profitable banks that will not sustain if some big and risky borrowers cannot or do not repay their loans in future. Do these banks have enough safeguards against those risky loans? Or if those borrowers do not make repayment in future who will be held liable? If, by this time, the high officials who sanctioned those loans retire how will banks catch them? Or if they sanctioned those loans under the pressure of directors or politicians how will this situation be tackled? How our banks are prepared for external shocks is another important concern. If, for external shocks, our banks are found to be vulnerable, what is the rationale behind the existing pay?
Paying huge salaries to the staff of banks must be justified by their ability to absorb risks of various sources. If our banks cannot stand strong during a financial crisis, high pay of the bankers may be seriously challenged.
(The writer, a Dhaka University Assistant Professor, is currently doing PhD in micro finance at Tohoku University, Japan)
In Bangladesh, an employee of the financial institutions in general and banks in particular is paid many times more than the average salary of a Bangladeshi worker in other areas. Some top executives are paid abnormally high. The pay gap is increasing day by day and now many question the logic behind this.
Let us look at the success of the banking sector. According to a recent report, Bangladeshi banks are making a huge operating profit over the period although this profit is not enough to justify the true financial health of a bank. But it must be agreed that if the operating profit is high the net profit after tax and provisions will also be higher. The success of a bank primarily depends on the profit it makes, sustainability of this profit, and such sustainability, in turns, depends on the diversification of assets i.e. how many sectors a bank has extended loans. In addition, capital can play an important role in absorbing the loss of a bank. In terms of profit and its sustainability, our banks on an average are successful as most banks have been making a considerable profit for many years.
How this profit is generated deserves explanation. A big portion of the profit of many banks comes out of their remittance service and letter of credit (LC) business. As far as the remittance service is concerned, a bank plays role just as an intermediary. If it can quickly send money to the receivers, remitters will prefer that particular bank in this regard. Providing remittance service and doing LC business are routine-work of a bank and it does not need enough talent of a banker. Giving loan is the most important area of banking business where bankers must possess enough knowledge, analytical ability and finally, the prudence. A banker must know how to analyse a loan proposal to determine the creditworthiness of a borrower. This analysis must include measuring the feasibility of a project, identifying the sources of both systematic and unsystematic risks, finding out the demand for and supply of goods and services, availability of raw materials supply in future etc. All effort made here is to ensure the performance- regular repayment of principal and interest- of a loan. If a bank fails to select the right borrowers and sectors of investment, it may come up with huge defaulted loans at the end of the day, which may, in dire consequence, push that bank to a situation of bankruptcy. In this case, frankly speaking, no regulatory authority will allow that bank to go out of the market considering its serious negative effect on its clients. Such failure of a bank will also have a negative external effect on the whole banking sector and clients of other banks irrespective of their performance may start thinking that their banks may also fail. If a state-owned bank faces such a problem, there will surely be the injection of government funds to rescue it. It will surely deprive people of wellbeing as the government funds come from their income.
During the recent economic downturn, our economy did not face serious challenges for many reasons. First, our remittance flow increased even in the face of world economic crisis. Second, export income was not seriously affected. Thus, our banking sector remained on the safe side as their income from these two sectors did not hamper. In true sense, bankers did not save the banking sector.
Our banking sector has improved a lot and in some cases it entered into the domain of international regulations. Still I believe some profitable banks that will not sustain if some big and risky borrowers cannot or do not repay their loans in future. Do these banks have enough safeguards against those risky loans? Or if those borrowers do not make repayment in future who will be held liable? If, by this time, the high officials who sanctioned those loans retire how will banks catch them? Or if they sanctioned those loans under the pressure of directors or politicians how will this situation be tackled? How our banks are prepared for external shocks is another important concern. If, for external shocks, our banks are found to be vulnerable, what is the rationale behind the existing pay?
Paying huge salaries to the staff of banks must be justified by their ability to absorb risks of various sources. If our banks cannot stand strong during a financial crisis, high pay of the bankers may be seriously challenged.
(The writer, a Dhaka University Assistant Professor, is currently doing PhD in micro finance at Tohoku University, Japan)