Is public money safe in bankers’ hands?

Banking is a highly regulated sector because banks promise the safekeeping of public money, but also use the deposits to fund loans (which poses risks that must be monitored). 

To streamline the functioning of commercial banks, central banks have thus created many rules and regulations (such as mandatory cash reserves and investment restrictions) that together form the machinery of modern bank regulation. 

Moreover, banks worldwide ensure the application of best practices and risk management processes.

Nevertheless, problems arise when banks working in the same industry begin to operate in a dissimilar manner. 

Huge documentation lapses and other limitations create provision requirements, so much so that banks making a profit of Tk1200 crores often have to keep provisions for Tk1000 crores. 

Young bankers who dream of bringing innovation to the sector become disillusioned over time when they see loans disbursed without proper scrutiny but cannot quit their jobs  for various reasons. 

This article argues that corrupt bankers handling public money are the root cause of instability and tries to offer some potential solutions.

The problem of corrupt bankers

Promotions officers are now serving at the upper hierarchy of all commercial banks. I am not suggesting that none of them are competent, but rather questioning how they have so quickly acquired the necessary ability, knowledge, or skill to become CEOs/MDs of commercial banks. 

I do know an LDC (Lower Division Clerk) who became MD of a private commercial bank by dint of their hard work, initiative and involvement in their professional career. 

A few exceptional bankers exist who started their career in lower-level positions became top performers in all aspects of banking over time. 

At present many meritorious students from various backgrounds are also choosing banking as a career after finishing their MBAs. 

Now many commerce graduates' dream job is to be a banker. They start their careers as Probationary Officers or Management Trainees and gradually reach top management positions. 

I believe that when competent, honest and capable officers dictate the banking sector, there will be a multiplier effect both on qualitative and quantitative aspects.

However, in my decades of experience, I have also witnessed the opposite. I have seen a top tier banker (DMD) who started his career in the Cash Department facilitate unscrupulous colleagues, unqualified officers and hinder the career growth of honest and capable employees. 

I have seen an LDC MD continuously support aged and incompetent officers despite the abundance of qualified and rated officers in their bank. 

Few are employed by dint of their hard work, merit and skill. There are many more who join by way of other means such as references, monetary considerations, relatives, etc. They seldom respect merit, skill and hard work because their employment was not gained through that. 

There is no scope for such occurrences in the public sector or defence careers. Third and fourth class officers who seriously jeopardise service quality and good credit quality are being picked over first-class officers. 

When such bankers handle public money, it cannot be 100% safe.

Hiring inexperienced, ill-trained personnel in the Board of Directors result in narrow vision, financial irregularities and crimes. Photo: Mumit M

Practical illustrative case studies

1. A Bank Guarantee (BG) Facility was issued by a large Authorised Dealer (AD) Branch to the tune of Tk21 crores. It was issued in such a way that no trace could be found at banking affairs or the balance sheet. While issuing the BG, the Branch Manager pocketed the commission. When the matter was disclosed, Audit Departments located a BG of Tk10 crores out of the Tk21 crores while the rest had already been defalcated. Maintaining a manual BG Register at the branch level facilitates the issuing of such unauthorised and unapproved BGs.

2. A large district Branch Manager (BM) disbursed funds by taking a deferral on documentation. After disbursement, the customer did not cooperate with the BM and could not be controlled as he had already received the money. The customer later objected to the waiver of pending documentation. When the deferral time expired, the penalty was charged on the customer account and BM claimed that Credit Risk Management (CRM) was responsible for charging penalty interest as they did not approve deferral waiver. CRM did not cooperate and did not provide approval. 

3. A large textile project was financed by a private commercial bank through compromised lending to the tune of Tk750 crores (Funded 500 + Non funded 250). It took one full year to disburse the whole fund. To execute this unscrupulous transaction, the bank recruited two higher officials as the head of CRM and CAD. When the disbursement process was complete, the CRM and CAD head resigned after fulfilling the required purpose. The customer already availed of the facility and invested an insignificant amount in machinery and land development. The rest of the amount was embezzled to a foreign country.

What would safe banking look like?

The Anti-Corruption Commission opines: "Non-professionals and persons inexperienced in the banking sector are included in the Board of Directors; multiple irregularities and crimes take place in the banking sector as a result of their capriciousness and narrow vision. 

Financial embezzlement and other crimes occur in the same sector due to lack of proper monitoring, deficiency of training and absence of accountability. 

With a view to resolving the aforementioned problems, the following recommendations may be implemented: 1) Constituting the Board of Directors in banks and financial institutions with core professionals; 2) Proper oversight in the banking sector and making necessary structural reforms; 3) Undertaking necessary measures to ensure staff training and accountability."

In my opinion, to mitigate corruption in banking services, there is no alternative to establishing centralised banking services, instead of the existing branch banking system. Preferable centralisation areas are trade finance and credit administration and branch operation. 

Moreover, Branch Manager-based banking operations should be closed down to avoid moral hazards. During the 70s and 80s, there seemed to be a respect for bankers which has now disappeared. 

Furthermore, unscrupulous people are hired at the top level for facilitating unscrupulous employees and actions. These people try to promote and support employees who will implement their ill motives. This must be stopped.

Additionally, there is no accountability in recruiting human resources in banking. It must be a transparent process. Effective recruiting of contractual employees for higher positions will not bring better results. Instead, mid-level recruitment must be reduced and staff must be gradually promoted to high-level positions from functional levels. However, during functional-level recruitment, recruiters have to be serious about selecting candidates based on qualification and skills only. 

Lastly, bankers' professional and personal lives are being impacted as they stress about their jobs. The loans and advances they are providing are all going to be classified soon. The fear of failure is resulting in dangerous levels of occupational stress.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.