I met one of my long time friend some time last year while travelling in a morning flight to Chittagong. The gentleman always beams with vigour and energy, vibrates positive energy around and never in a single moment saw him dull or disturbed. He is my ex colleague in a multinational bank and have developed a sense of mutual respect and admiration so to say. Well behaved, knowledgable, prudent, always smiling and overall a fun person to mix with was looking very pale, down and disturbed during this flight. Chittagong was once the commercial hub of Bangladesh like Mumbai in India, Karachi in Pakistan, Lagos in Nigeria having the advantage of sea port city. Chittagong has the historic background of being trade Center since prehistoric days. People from Chittagong have gained the art of trading since time immemorial and have excelled in this line of business. Be it essential edible commodities, be it chemicals and ancillary, be it ship breaking, cement, rod or any other important import based products - the country used to depend on Chittagong as it's the gateway to Bangladesh. Chittagong specially Khatunganj and Chaktai or in that manner Bhatiari and Madam Bibi was once a bustling trade hub now has become almost lifeless. During the hey days it was even difficult to walk in and around Khatungaj/Chaktai area, now trucks can easily move in these places!!Banking: Operational efficiency and sustainability
Banking is a service-oriented industry and therefore the banks with knowledgeable, smart and efficient workforce will certainly perform better. Recruitment process needs to be as fair as possible
Masihul Huq Chowdhury
I met one of my long time friend some time last year while travelling in a morning flight to Chittagong. The gentleman always beams with vigour and energy, vibrates positive energy around and never in a single moment saw him dull or disturbed. He is my ex colleague in a multinational bank and have developed a sense of mutual respect and admiration so to say. Well behaved, knowledgable, prudent, always smiling and overall a fun person to mix with was looking very pale, down and disturbed during this flight. Chittagong was once the commercial hub of Bangladesh like Mumbai in India, Karachi in Pakistan, Lagos in Nigeria having the advantage of sea port city. Chittagong has the historic background of being trade Center since prehistoric days. People from Chittagong have gained the art of trading since time immemorial and have excelled in this line of business. Be it essential edible commodities, be it chemicals and ancillary, be it ship breaking, cement, rod or any other important import based products - the country used to depend on Chittagong as its the gateway to Bangladesh. Chittagong specially Khatunganj and Chaktai or in that manner Bhatiari and Madam Bibi was once a bustling trade hub now has become almost lifeless. During the hey days it was even difficult to walk in and around Khatungaj/Chaktai area, now trucks can easily move in these places!!
The slow down in business has created lot of challenges including servicing bank dues. Once revered business houses have even defaulted on their payment commitments. Being stationed in Dhaka, this friend of mine sits several days in Chittagong per month to manage the business including recovery.
January is that time of the year that shareholders, investors, employees, depositors and overall market waits to get the report on the operating profit for the year of all the listed banks. Despite the market value of the shares (even with a higher Net Asset Value) at its historic low, EPS of a major number of banks show that the industry still keeps the attraction to invest despite mounting pressure of increase in non performing portfolio. Moreover, the approaches and actions taken by Bangladesh Bank to bring the industry integrating with global compliance issues surely keep the banking industrys attractions to investors in comparison to other sectors.
What seems to be the main reasons for this specific Chittagong situation is not unique for Chittagong only. This in fact is apparent any where including Dhaka and other corners of the country. This has its fall out through out the banking industry in the country. This is due to various generic reasons. First we need to get the reasons diagnosed right and then can discuss the meaningful resolutions.
The evaluation of a proposal including purpose of the loan, the source of repayment, the industry/business analysis, know your customer, the genuineness of credit documentation and collateral are done by many banks/bankers as paperwork only with faster turnover time to disburse the amount. This band wagon of unhealthy competition and making super/extra profit took a number of banks into precarious situation that if the portfolio is kept adhering to Central Bank guideline will give an irrational classified portfolio eating away couple of years profitability together in terms of specific provisioning.
Digital products including mobile banking, chip based cards, Internet banking are making our lives more convenient.
With digitisation comes innovative ways to adopt frauds. The hackers are now able to break firewall, infringe chip codes and in a seamless manner can divert not only money but important documents. The deployment of agent banks also expose banks to external risks which are primarily operational risk. If not properly managed, this will not only make financial loss but reputation risks irreparable to mend. How much sensitive the banking industry appreciate and take proper measure to arrest operational loss.
Terrorist financing or even transacting on behalf of terrorists is a punishable act to the highest degree. Imprisonment, penalties, sanctions both against the bank and employee to the extent that the license of the respective bank may be at the threat of being cancelled. Anti money laundering is another area which bears the similar stringent requirements to be adhered.
Market risk is another point which needs careful strategy. The exposure on stock market itself by the subsidiary merchant banks owned by the banks has almost become a legacy portfolio through which banks continue to lose large sum of money. BDT/USD exchange rate is stable over last few years and the sizeable foreign currency reserves, the exchange rate risk is stable so far. But with significant downward trend in RMB, IC, THB and possible increase in fed rate, stability of BDT is just matter of time. There is no chance for complacency here.
Banking is a service oriented industry and therefore the banks with knowledgable, smart and efficient workforce will certainly perform better. Recruitment process needs to be as fair as possible; training both on the job, e-based and when possible overseas attachments. The exposure to outside world and networking with foreign counterparts will open the ways to two way migration of best practices. Performance management in order to take care of the best and be fair to the rest need in place. Bell curve is being popularly used globally for this purpose. While 5-10% top raters are taken well care of by various incentives, bottom 5-10% are under performance management to improve the shortcoming otherwise these employees go through exit process. The remaining 80-90% constitute the major chunk of workforce and they be trained properly to deliver desired results. This appraisal process is an annual process based on ACR of the respective staff.
Automation is another key area which requires adequate attention to improve operational efficiency of the bank. Core Banking has now become the backbone of the banks. Organisation structure, Job Role/Definition and other related processes are now designed taking the automated environment under context. Core Banking can either be sourced from local vendor or imported from renowned vendors outside. The capacity of our local vendors have significantly improved with prompt and high level of service even system up gradation. Imported Core Banking Product may be used depending on the complexity of the requirement. The recent situation with almost shutdown situation regarding transaction for 500!plus branches in Sonali Bank is an example. There are various IT based products which the banks use namely merchant banking, recovery, payroll, leave, performance appraisal, board/management affairs which may be in the Core Banking or may be hooked up. Data integrity, accuracy and safety is key. In this regard, well trained IT auditors with adequate aptitude to help must be recruited. Disaster Recovery Site and Disaster Recovery site must be well planned so that they be used to run the bank smoothly in case main frame becomes redundant. Alternate distribution channels including Mobile Banking, ATM, CDM also is dependent on robustness of IT platform.
Yes, Central Bank has provided adequate shield to protect the CEO of the banks. But this needs to be transpired accordingly as the CEOs must also be held for any lapses or failure and need to be accountable for these. The recent steps by Central Bank will enable the vigilance team to go stronger and the failures to comply with the policy/parameters may be recorded for future CAMELS rating.
Thats how the governance may be expected to get streamlined in the banking industry
per se.
With the annual closing, operating profit of different banks have started to come in newspapers. There are banks who have made operating profit in the fourth quarter of the year which they could not make in previous 3 quarters. What went so positive in the last quarter for those specific banks? It remains a real wonder!!
Coming back to the discussion with my friend on way to Chittagong, there seems to be a serious gap between demand and supply. Despite the international commodity prices at one of its historic lows, the demand led growth in the country is presently missing due to not so favourable investment climate. Thats why there is product glut. Importing the goods at higher prices are in the warehouse which the customers are not able to sell. Lack of infrastructure support, slow in bringing in correction/ reduction of international fuel price in local markets etc have slowed down the total cycle of operation. Supply creates its own demand. And due to this sluggishness, the country demand for goods/services have gone down.
Central Bank in its timely move has adopted automation in monitoring and supervision along with strengthening the manpower by deploying efficient and dynamic enforcers that the time is not that very far that the anomalies practiced will be placed for rectification and corrections. The recent directive on the banks and FI to report on facilities above BDT 500 million, 1. Whether the facility is renewal/ reschedule/ restructure; 2. Whether there is any overdue till 29 days; 3. Whether there is any overdue from 29 to 60 days. This will enable Central Bank to keep all the banks to remain on the same page on monthly basis rather than after a facility goes classified. Further vigilance and audit both through system and on site inspection will enable to bring in regularity.
Write off is a mechanism through which bank can write off partial or full outstanding of an impaired account subject to the following , 1. That the entire amount of specific provision has been taken against the account; 2. That the lender has all out efforts including initiating legal proceedings to recover the money. However, there needs to be dedicated and concerted efforts to recover the money and needs to be part of KPI.
The money so recovered will directly add to operating income. Even in case, the bank is able to repossess and can book the assets that will help the bank to reverse the loan and show the non banking asset at the cost price. Thus the bank will be able to replace the default loan with tangible assets under article 33(7) of the Money Loan Court.
Banks must do the following to keep their sustainability in profitability . The quality of human capital must improve without any question. Training, retraining, performance appraisal for reward/punishment, restricting quota for employment. In fact there is a clear direction on the roles and responsibilities on account of policy makers and management of a bank, if that segregation properly is followed, the getting back to proper health for any individual bank is just a matter of time. If the real provisioning requirement is taken as due to the periodicity principal of accounting, then the banks will not have to wait for failure of non compliance and risk of absorbing specific provisioning requirement as a surprise during any eventuality of audit. If recovered done properly, the liquidity of the individual bank will be in good shape making room for the bank to utilise the fund in profitable manner. Thus, proper translation of operating income to net income and realistic EPS will give the bank to have proper disciplined approach towards the institutionalising the steps to have a better CAMELS rating, Credit rating. However, each element of CAMELS need separate discussion so that the banks can strategise manpower, system, process and platform as necessary per the banks position to meet the Central Bank requirement.
The writer, a banker by profession, has worked both in local and overseas market with various foreign and local banks in different positions
