Quicksand in Banking: Possible solutions
In last few years, banking sector of Bangladesh has been passing with different tensions. Problems like loan default, financial corruption, fraud, money laundering etc are surging up day by day which have deepen the tension. Different stakeholders of the bank are worrying about the future of this sector as the existing policies and practices are failing to squeeze the problems. Despite these problems, our banking industry is growing up by adding new banks in last few years.
Operating profit of the banks is also surprisingly showing good. Even recently, though pandemic situation hit negatively in most of the sectors of the country vis-a-vis worldwide but profit of banking sector tells that the effects are likely very minimum in this sector. If so, then it is really a blessing for our economy but if not, then it is nothing but quicksand in banking which will dive our economy into the hole.
To make a strong and stable banking sector there is no alternative to minimize and control the different risks associated with Banks. Operational risk, credit risk and market risk-are considered the main risks that play great role in banking which need to control for smooth running of banks. Out of these three, in Bangladesh, banks are suffering from credit risk which makes the sector vulnerable. Some banks and financial institutions have become so sick that in spite of injecting further capital they are failing to be vibrant.
So, the policy makers and the controlling authority should concentrate on this matter to find out the causes of increasing credit risk, reviewing the existing policy and practice to find out the loopholes, formulate new policies and laws to overcome the situations. News related to loan default, loan scam, fraudulent activities of loan documentation, money laundering related to loan etc. are now become so acquaintance that readers are tired also. Depositors, ultimately whose moneys are embezzled, become worry to deposit money in banks or FIs.
Very recently, the High court has gave its full verdict on the writ petition filed last year by a rights organization that had sought its directives for the formation of a commission to look into the irregularities and corruption in the banking sector over the last two decades. In the verdict, the HC gave directives for analyzing the recent banking scams to prevent such irregularities in the future. In a balance sheet of a bank around 65%-70% of total assets are comprised of loans and advance, so, as a banker the matter also makes me think. I have outlined here some major loophole in banking policy and practice that are stimulating the credit risks; simultaneously I have given some recommendation to overcome from these deadlocks.
Restricting continuous loan and encouraging fixed term loan: At present, bank allows continuous loan (e.g.-Cash credit-Hypo, Overdraft etc.) to different business clients who can able to give collateral security irrespective of trading, manufacturing, small, medium or corporate borrowers. On the other hand, term loan is encouraging mostly in personal loans as well as SME sector those are unable to give collateral security. From the bankers view point, assessment, monitoring and recovery of term loan are easy in compare to continuous loan. From the borrower's view point, leverage (combination of equity and loan) of a customer getting stronger gradually as he started repayment of loan instalments.
When a continuous loan becomes bad, in most of the cases, entire loan with interest become default. But in the case of a term loan, a certain percentage of loan can be recovered for its nature before it become bad debts. So, to minimize the credit risk, uses of continuous loan should be restricted to the manufacturing borrower and large scale trading borrowers only and in other cases term loans should introduce. This will also help the bank to increase cash basis income rather than accrual basis income.
Affixing responsibility in loan approval and recovery: Considering the ceiling of loan, there are different approval authorities in Bank from Branch credit committee to Head Office credit committee, Executive Committee and Board of Directors. But, in practical, responsibilities mostly relays to the Branch level only where the loans is initiated first. Having no clear responsibility and tendency of bypassing the responsibilities to the branch level, some times higher authority may approve unwanted/ ineligible loan with less assessment, either intentionally or unintentionally, which tempt credit risk. So, there should have equal responsibility and accountability in each level from initiator to approval authority to bring discipline.
Cooperation between banker and Anti Corruption Commission: Usually, ACC works after happening a scam in bank and most of the time, banker faces ACC as an accused. But, if a system can be developed where bankers will spontaneously seek assistance from the ACC when a borrower wilfully denying to repay the money or when a borrower divert money elsewhere, then it can be possible to recover the money at an early stage before it become stuck-up. Bankers may work as whistle blower, if anybody of the bank involves in financial embezzlement which help to reduce corruption and possible financial loss. To implement this, employee protection should be ensured by the controlling authority.
Mortgaged Property information must be appeared: In sub-registry office, it is mandatory to show mutation and latest rent receipt in case of executing any transfer of property to ensure resemblance in property documents. But, when a property is mortgaged with any bank, this information is not found in the mutation as well as rent receipt. Besides, due to various limitations of sub-registry office, ready information of recently mortgaged properties can make available. As a result, there is scope to sell/ transfer of the property fraudulently after mortgaged with any bank. To control the situation, if information regarding mortgage of property is appear in the mutation as well as rent receipt after a property is mortgaged in any bank, then such kind of fraud can be minimized.
Updating Artho Rin Ain: Banks money is ultimately public money. Existing Artho Rin Ain should be updated and modernized focusing on accelerating judgment and recovery of the classified loans within shortest possible time. Delay in judgment may weaken the ability of the borrower to repay the money. However, some restrictions on borrower should be imposed automatically when a suit filed in Artho Rin Adalat.
If a banker follows the banking rules and regulations with professionalism, different risks including credit risk can be kept in minimum level. However, every bank has their own tools for minimizing risks. But still some policy and practice must be reviewed and updated with time. Considering the different banking loopholes and possible solutions, the reformation of banking sector should be designed without delay so that we can establish a healthy and stable banking industry that can contribute to the economic development.
The writer is a banker and