Fahmida Khatun concluding her three-part write-up on the 'State of governance in the banking sector: Dealing with the recent shocks’

The recent financial scam is an eye-opening incidence for all associated with the banking sector as well as the policymakers exposing the inherent weaknesses of the banking sector of the country. In view of the recent irregularities, appropriate measures ought to be undertaken in the short to the medium term towards improved performance of the sector. This should range from proper investigation and punishment of involved persons to improvement of the monitoring and governance of the SCBs.

Specific recommendations are the followings:

Absence of risk management policy: The absence of a comprehensive risk management policy in many banks makes it difficult to handle fraud and other extra-ordinary cases. The Bangladesh Bank (BB) has identified six core risks and asked banks to formulate and implement appropriate guidelines on those. These core risks include the following: (i) Credit Risk Management; (ii) Foreign Exchange Risk Management; (iii) Asset-Liability Risk Management; (iv) Internal Control and Compliance Risk Management; (v) Money Laundering Prevention Risk Management; and (vi) Guidelines on Information and Communication Technology.

Such guidelines, however, are hardly followed by most of the banks, specially the SCBs. The manual for loans and advances containing policies, procedures, processing and reporting of transactions, review of security and collateral and responsibilities at different levels is not followed by many banks due to which it becomes difficult for them to handle and manage clients with various levels of exposures.

Lack of internal control: The Internal Control department which ought to be the most critically important department of any bank is weak in the state-owned commercial banks (SCBs). This is mainly due to incentive failure which prevents hiring of qualified persons for this department. As the nature of the job involves patient scrutiny of compliance, people are reluctant to work here, and those who do, are often in a way dumped in this department. Absence

Lakes of information technology (IT) makes their work even more boring. Bangladesh Bank guidelines on internal control require that if there is any incidence of a loss equivalent to Tk. 10 million (1.0 crore) the Board of Directors of Banks should be informed immediately. Besides, any major irregularities, fraud and embezzlement have to be presented through a report during the monthly assessment of banks. In the case of Hall Mark scam, it seems that the bank management was hiding the illegal activities in the said branch for a prolonged period.

Political baggage of the Board of Directors: The tradition and practice of appointing Directors of the Board of the SCBs based on the political loyalty and affiliation have to be changed. The members of the Board of the SCBs should be independent, qualified, efficient and socially acceptable persons with unquestionable integrity. Bangladesh Bank Guidelines 2010 for the Directors of banks spelt out the 'Fit and Proper Test Criteria' for the nomination of Directors along with their responsibilities and power. These criteria are yet to be implemented fully.

Due to political baggage, the Directors of SCBs cannot perform their duties independently and remain morally obliged to listen to political instructions of the government. This results in weak corporate governance. As the Broad members are also the members of various committees of a bank constituted to closely guide various operations of the bank, the independence of the audit committee, the most important board committee which has to ensure compliance of business strategy and policy of the Board, cannot be maintained as well. Given the emerging challenges and dynamism of modern banking business, it is thus important that Directors of the Board have the pertinent knowledge and skill of running bank with efficiency and sincerity.

The accountability of the Directors should also be determined clearly. In case of the Hall Mark scam, it has been reported that the Board was not informed of the unscrupulous inland bill trading. However, the fact that the responsible branch was not audited and the accused branch manager was not transferred even after completion of his three years tenure are some of the issues which the Board cannot shrug off its oversight responsibility.

Inappropriate appointment of CEOs and senior officials: The scam has also exposed total failure of the Chief Executive Officer (CEO) and responsible senior managers of the bank in discharging their duties. In the SCBs, the pre-occupation of most CEOs is to keep the Board in good humour and sing the songs the way the Board likes to hear so that their position is well secured under any circumstances. It is difficult to find any instance where the CEO has been asked to leave the job because of bad performance. One may argue that in a setting where the Board is constituted of political candidates, the CEO is handicapped in taking any decision guided purely by banking ethics, norms and perceived risks. This, however, is not a saleable point.

Good business plan, effective people management programme, regulatory compliance practice, effort towards clients' satisfaction and high work ethics of any CEO of a bank are bound to be endorsed by a Board, no matter how political it may be. The performance of CEOs should be evaluated from time to time by the Board based on Key Performance Indicators (KPI). The Board can only guide and support the CEO to achieve the targets that are of benefit to the bank.

In appointing GMs, suggestions have been made to have a common and single selection and promotion committee under the BB and the Ministry of Finance for selecting GMs or promoting DGMs to GMs and for posting them in different banks following their selection. GMs should also be transferred from one SCB to another in order to not only help transfer of good practices, but also to reduce the possibility of fraudulent and unethical practices.

Shortcomings of human resource policy: Human resource (HR) development has been a neglected issue in the SCBs. As mentioned earlier, the World Bank supported reform of 2007 recommended a number of measures for the improvement of skills and performance of the officials in the SCBs. However, the HR department of the SCBs remains weak and powerless to take decisions on recruitment and promotion, partly due to lack of capacity and partly due to external influence.

In the modern day business, banks have to provide value added products and services to customers in addition to traditional banking functions. However, the SCBs suffer from lack of skilled and qualified human resources for undertaking such operations. The HR policy of banks should not only arrange for appropriate training, but should also include the reward and punishment practices of the bank.

Inertia for automation and management information system: An issue related to the HR development is the automation and management information system (MIS) in banks. It is apprehended by experts with fair amount of certainty that there may be many more Hall Mark cases that wait to be uncovered in other banks. Unless these are dug out through transparent and automated banking practices with the help of IT, the mess may be piled up and reach an unmanageable stage. Even after several reform initiatives, the inertia of the SCBs in adopting IT-based banking services and the MIS is not only disappointing but also quite surprising. Due to lack of MIS, the Hall Mark case was not detected in time even though clearing was going against SBL continuously for many months due to loan increase in a branch of the bank.

There have been comprehensive programmes for the last several years to establish automated clearing house and credit information bureau (CIB), computerisation of the head offices and branches of all banks, electronic banking services, online corporate banking service, electronic fund transfer, automated teller machine (ATM) and internet banking. While all the foreign banks (FCBs) and most private commercial banks (PCBs) have implemented these automated and electronic banking services, the SCBs are way behind in meeting these requirements. This is not only affecting their efficiency and profitability, but also giving rise to opportunities for committing scams such as the Hall Mark.

The archaic manual system of transaction records has indeed facilitated the Hall Mark forgery. It is mentionable here that as part of the reform programme, the World Bank had supported a consultant in the rank of the General Manager (GM) for IT in the SCBs for two years with a higher compensation package. GMs for IT were supposed to work on procuring computers, developing and buying software, and training officials of the SCBs. These initiatives are yet to see any meaningful result as the automation process is almost non-existent in the SCBs.

Dualism in the regulatory mechanism and regulator's oversight: It is no secret that there exists a strained relationship between the BB and the Ministry of Finance (MoF) over the supervisory and regulatory role on the SCBs. Though the BB can exercise its full authority in supervising the private commercial banks (PCBs) and foreign banks (FCBs), the MoF oversees the SCBs to some extent. The MoF appoints the Directors of the Board, CEOs, DMDs and GMs of the SCBs. However, due to less articulated mandate, the BB faces problems in implementing recommendations of audits and ensuring overall governance of the SCBs.

Full autonomy of the central bank has been suggested by many concerned stakeholders including the donors. The International Monetary Fund (IMF) has asked for amendment of the Banking Company Act (BCA) giving full legal supervisory and regulatory authority of the BB over all commercial banks by September 2012 as a pre-condition for contracting a loan to Bangladesh for USD 987.06 million under the Extended Credit Facility (ECF) in April 2012. There has also been suggestion by many to dismantle the Banking and Financial Institutions Division at the MoF in order to keep the SCBs away from political influence. While this is necessary for smooth functioning of the banking sector the supervisory and monitoring role of the BB needs to be significantly strengthened as well.

Though the MoF is in the driving seat to monitor and control the SCBs, the BB has to perform audit and inspection in all commercial banks including the SCBs. As in the other previous financial chaos in the country such as the capital market debacle, the BB played a reactive role long after the irregularities have actually been in place. Firm supervision and effective monitoring could have controlled the damage suffered by the Sonali Bank Limited (SBL). The fact that clearing of SBL was going against the bank, the amount of loan was increasing, and finally the bank became a borrower from a lender in the inter-bank market, indicates the weak off-site supervision mechanism of the BB.

Need for a commission for the financial sector: Though the country's banking sector has achieved considerable success due to the reforms in the 1990s and 2000s, it still needs to be prepared well for the next generation global regulatory framework and to meet emerging clients' needs. In the coming days the banking industry will have to achieve the ability to absorb shocks arising from financial and economic stress, improve risk management and governance, and strengthen banks' transparency and disclosures through complying with Basel III requirements which is scheduled to be introduced from 2013 until 2018.

In view of the recent shocks in the banking sector and emerging challenges, a Commission for the financial sector should be formed which will scrutinise the overall performance of the sector, assess the need of customers and the economy, identify the current problems and emerging challenges, and suggest concrete recommendations for prudential banking to be implemented in the short to medium terms.

Considering the emerging need and in order to build up more transparent and responsible banking sector, the Commission can also include non-bank financial institutions such as insurance companies and capital market under its jurisdiction as they are interconnected. The broad terms of reference (ToR) of the Commission will be to critically assess the problems and weaknesses of the banking industry in order to find whether there is any disconnect between demand of the growing economy and the realities of a backdated financial system that is failing to meet the emerging need. On the basis of a comprehensive scrutiny, the Commission will prepare guidelines and make recommendations as regards automation, risk management, internal control, the role of various players in banks and other financial institutions.

Concluding remarks: The Hall Mark incidence is not only a case of financial loss, but also a deep dent on the confidence and trust of the customers of the bank. It is also not about the loss of good will of the particular bank only, but of the total banking industry. Such an erosion of reputation of banks could have multiple chain effect including reduction of deposit in the concerned bank and fall of share prices of the whole banking sector. This can also constrain the role of the banking sector in catalysing the growth of the economy. Without radical changes in the banking practices of the country such expectations may remain largely unfulfilled. During the run-up to attaining the ambition of being a middle-income country there is a need to significantly strengthen the banking industry if goals are to be realised.

From the 1990s onwards, the Bangladesh economy has evolved, and the banking sector has evolved as well. With the speed-up of economic growth through higher investment the demand on the banking sector will still be higher. This reiterates the need for improved efficiency of the sector in terms of resource allocation for the productive sectors and management. As the global regulatory environment is becoming tighter, global economic environment is facing more volatility and resources are getting more scarce, banks in Bangladesh will have to find innovative ways to conduct their business. There will be demand for higher capital and more skilled human resources for smooth functioning of banks and for ensuring compliance in the coming days.

Therefore, the banking sector in Bangladesh has to focus on using both its financial as well as human resources in a far more innovative and efficient way to cater to the demands of the future.

The writer is an Economist and the Head of Research at the Centre for Policy Dialogue (CPD). This write-up in three parts is a shorter version of the paper presented at a dialogue organized by CPD on November 05, 2012. fahmida@cpd.org.bd

News: The Daily Financial Express/Bangladesh/10-Nov-12

The state-owned Bangladesh Development Bank Limited (BDBL) is selling out foreclosed land at rates far below the market prices, people familiar with the matter have told the FE.

On an average each year the BDBL is selling land of 30 projects of its loan defaulters, worth more than Tk 1.0 billion, out of 330 such projects, since its inception through the merger of the Bangladesh Shilpa Bank (BSB) and the Shilpa Rin Sangstha (BSRS) in 2010. This year the number of sold-out industrial plots may rise to 40, according to official sources with the bank.

The industrial plots with all infrastructure facilities including those of power and gas connections are located in different industrial hubs at prime locations of the country.

Industrial upland with ready infrastructures is very scarce in the country and the prices are surging by leaps and bounds every year.

The sale of such ready industrial plots belonging to loan-defaulter entrepreneurs is reducing the BDBL's earnings to a large extent and also encouraging an unfair means in the country's key financial sector, sources said.

Sources in the real estate sector said prices of the land would be at least two to three times higher, if those had been sold competitively at the market prices.

Insiders said in many cases the financial institution has been abusing the government's order regarding recovery of the cost of fund, issued in February, 2008.

According to the government order, in cases like natural calamities and death of owners, the bank can accept prices below the cost of fund in selling the project land of defaulter-borrowers.

The BDBL has sold out a number of such plots over the last six months.

It sold out the Shah Mukdom Textile Mills in the BSCIC estate in Rajshahi at much lower prices.

Shah Mukdom Textile Mills, nearly two kilometres north of the Rajshahi City Corporation office, was established on 115 kathas or 82,500 square feet of land and it was an A-type industrial plot.

The market price of the land was Tk 80 million. But it was sold at only Tk 25 million and ruling party lawmaker Enamul Hoque bought it recently.

However, the local people said the market price was far higher, Tk 700,000 per katha, as it is located at the main industrial hub in the country's northern belt.

Enamul Hoque MP of the Baghmara constituency in Rajshahi, who bought the land, told the FE Thursday: "I've actually bought the land at Tk 60 million as I had to pay some money to the owners of the mill."

Mr Enam, who intends to set up a factory on the land, admitted that land prices in the area ranged between Tk 500,000 and Tk 700,000 per katha.

The BDBL sold another industrial plot of the Wase Leather in Gazipur recently at Tk 15 million or 1.5 crore. According to the industry insiders, it should have been sold at more than Tk 40 million.

Moreover, the BDBL has taken a move to sell out another lucrative industrial plot of the Sripur Textile Mills located on 10 acres of land near the Dhaka-Mymensingh Road in Gazipur.

The textile mill owned by late Agha Yusuf was one of the largest mills and it fell into the bad loan category in 1996.

Many influential people are now lobbying to purchase the industrial plot at a much lower price than the disbursed loan amount of Tk 620 million or 62 crore.

The BDBL has already paid Tk 300 million to the Islamic Development Bank (IDB), as the project has failed. The IDB financed the project under a deal executed in 1993.

Most of the projects of the BDBL's loan defaulters were undertaken during the late 1970s or 80s, and a number of their owners are no more alive. In many cases, land of these projects is being sold to close relatives of the loan defaulters through manipulation, sources said.

People familiar with such deals told the FE that while selling such land, the bank did not even comply with the last valuation prepared by its own survey firms.

They also alleged that the BDBL barely published advertisements in newspapers, inviting interested buyers to quote their prices.

A senior official at the bank told the FE: "We cannot avoid political pressure."

He, however, said they were happy over the amount of recovery equivalent to the cost of fund.

"We don't bother about market prices or competitive prices while selling the land. We sold an industrial plot at Tongi at a price that was, by any measure, very low."

He hinted that it was sold to a close relative of a board member of the bank.

The BDBL now has ten members on its board, all nominated by the government, as the state holds the cent per cent stake in the bank.

He said: "The board is the highest authority. We have no say about acceptance of any quotation on land prices. It's all up to them."

The BDBL usually publishes notices to auction off land of the project concerning the loan defaulters under the Section 12 (3) of the Ortho Rin Adalot 2003.

Soon after publication of a notice, the defaulter usually files a case with the higher court seeking status quo on the auction.

Then, if the court rejects the appeal, the BDBL files a case with the Ortho Rin Adalat. The court normally hands down its verdict in favour of the bank.

A senior official at the law department said: "The court takes nearly 18 months to award the bank the title of a loan defaulter's project land."

The FE also interviewed officials of five land survey firms enlisted with the BDBL, who said they quote different rates for the land to be sold, including market prices with the latest valuation.

"I've never seen the bank to follow the market prices," said an official of one of the survey firms said.

He raised a question about integrity of the bank's debt department, involved in calculating the cost of fund.

However, BDBL Managing Director Dr Md Zillur Rahman declined to comment on the issue of selling land below the market prices and said the bank was performing well.

"Our performance in every aspect including non-performing loans is quite all right," Mr Rahman added.

The BDBL was incorporated as a limited company in November 2009, following a government decision to merge the BSB and the BSRS, two public sector development financing entities.

The BDBL launched its commercial operation in January 2010, and is involved in development financing, commercial banking and capital market operation.

News: The Daily Financial Express/Bangladesh/10-Nov-12

HSBC, Europe’s biggest bank, said on Friday it was investigating the alleged loss of data for clients in Jersey but had not been notified of any investigation by tax authorities.

The Daily Telegraph has reported that British tax authorities were examining details of more than 4,000 UK clients of HSBC in Jersey after a whistle-blower handed them a list of names, addresses and account balances. HM Revenue & Customs (HMRC) said in a statement: “We can confirm we have received the data and we are studying it.

We receive information from a very wide range of sources which we use to ensure the tax rules are being respected.”

HSBC said it was investigating the alleged loss of client data “as a matter of urgency.”

“We have not been notified of any investigation in relation to this matter by HMRC or any other authority but, should we receive notification, we will cooperate fully with the authorities,” the bank said in a statement.

This could mark another potential blow for HSBC which has been slammed by U.S. regulators for lax anti-money laundering controls in Mexico and elsewhere, and last year saw thousands of its Swiss clients probed by the UK taxman.

The bank’s London-listed shares dipped 0.2 per cent by 4 a.m EDT, in line with a weak European banking index.

The Daily Telegraph report said Britain’s revenue service was combing through the list it had been given of HSBC’s Jersey clients to establish whether some used the offshore bank accounts to avoid paying UK taxes.

News: The Daily Independent/Bangladesh/10-Nov-12

WASHINGTON: The International Monetary Fund on Thursday urged the United States to quickly reach an agreement on a permanent fix to avoid automatic tax hikes and spending cuts early next year, saying a stop-gap solution could be harmful to the global economy.

Many analysts believe Washington will come up with a deal that would temporarily stave off what has become known as the fiscal cliff, although doubts persist as to whether Congress can agree on a timely compromise.

In a report prepared for the Group of 20 finance ministers’ meeting in Mexico on November 4-5 and published on Thursday, the IMF warned that the euro zone crisis and the threat of a political impasse in Washington over the looming fiscal cliff posed the biggest risks to the world economy.

The Fund said, however, there were signs that financial stress and global economic conditions “may be stabilizing” due to recent steps by major central banks to cut interest rates to spur growth, although economic activity remains sluggish.

The combined US government spending cuts and tax rises to be implemented under existing law at the start of 2013 are seen by many as threatening to tip the economy back into recession.

The IMF has estimated that the tax increases and spending cuts amount to $700 billion in 2013. Unless avoided, this could contract US gross domestic product by around 4.5 percent.

News: The Daily Sun/Bangladesh/10-Nov-12

HSBC Bangladesh yesterday struck a deal with Power Grid Company of Bangladesh Ltd (PGCB) to provide $60 million to help the state-run company improve its transmission network.

The British banking giant's credit facility includes $24 million in term loans.

Md Jamal Ullah, managing director of PGCB, and Md Mahbub-ur-Rahman, head of commercial banking of HSBC Bangladesh, signed the deal at Ruposhi Bangla Hotel in the city.

This is the first time a state-run energy company has obtained a commercial loan from a financial institution, Abul Kalam Azad, power secretary, told reporters. He said PGCB, a profit-making company whose revenue grew 14 percent last year, is being able to borrow the fund at commercial rate because of its strong financial health.

The interest rate is 4.5 percent and the loan is repayable within six years, said Jamal Ullah.

Andrew Tilke, chief executive officer of HSBC Bangladesh, expressed his bank's willingness to finance similar projects in the country's energy sector.

PGCB is responsible for operation, maintenance and development of the transmission system for the distribution of the electricity generated in the country.

The company is borrowing the fund mainly to construct the Barisal-Bhola-Borhanuddin 230kV double circuit power transmission line.

A part of the fund will also be used to finance other power sector projects, including a small power plant in Bhola, said Tawfiq-e-Elahi Chowdhury, energy adviser to the prime minister.

News: The Daily Star/Bangladesh/10-Nov-12