Tuesday, September 4, 2012 OP-ED

Hallmark scam: Cracks in management and monitoring systems of banks

Salehuddin Ahmed For the last e! days !e ha"e been !itnessin# a urore $aused by T%&',(4) $rore loan s$am in a bran$h o the Sonali *an% !here a little-%no!n $ompany named +allmar% had alone siphoned o T%&2,(00 $rore& This is unpre$edented in the history o our ban%in# se$tor be$ause the borro!er is neither a !ell-%no!n nor a !ell-established $ompany& ,t is in the air that this hu#e amount o money has been #i"en to the $ompany by Sonali *an%, -uposhi *an#la bran$h, in $ompletely irre#ular !ay !hi$h has been misused by the $ompany& This is alarmin# ne!s or our ban%in# as !ell as the inan$ial se$tor as a !hole& .sually, ban%s $olle$t money rom depositors and pro"ide loan to business entities and other borro!ers& A ter this hu#e Sonali *an% s$am $ommon people mi#ht lose their trust in the ban%s& They !ill not ind it se$ure to %eep their money in the ban%s& /any o them may e"en be tempted to !ithdra! their deposits in ear o a $ollapse o the ban%in# se$tor li%e the share mar%et $ollapse& , $ommon people shy a!ay rom the ban%s this may $ause short all o money in our ban%in# se$tor as !ell as other inan$ial se$tors li%e in"estment, trade and $ommer$e& , people !ithdra! money rom ban%s then entrepreneurs !ould not #et money rom ban%s to in"est in produ$ti"e se$tors& Sin$e ban%s are "ery important institutions in inan$ial intermediation in e$onomi$ a$ti"ities, the la$% o trust in ban%s has a per"asi"e e e$t on the !hole e$onomy& 0o!, let us see as to ho! a s$am o this ma#nitude $ould be possible& , thin% this has been possible be$ause o !ea%ness in the mana#ement o the ban%, !ea%ness in internal o"ersi#ht and $ontrol and, most o all, due to $ollusion o some insiders in the ban% and outsiders& , see the situation also re le$ts the la$% o #o"ernan$e and o"erall $ontrol o the *an%s *oard o Dire$tors, be$ause they should ha"e e1er$ised their super"ision and $ontrol o"er su$h a hu#e amount o loan& .sually, ban%s $ondu$t audit o a bran$h on$e a year, sometimes t!i$e& So here it is important to loo% into ho! the *oard o Dire$tors as !ell as the mana#ement led by the mana#in# dire$tor super"ised the pro$ess o pro"idin# su$h a hu#e amount to a sin#le $ompany& 2enerally, the monitorin# and $ontrol by the ban%3s *oard o Dire$tors and its Audit 4ommittee and the Asset 5iability /ana#ement 4ommittee 6A54O7 are imperati"e in su$h a bi# transa$tion& , proper audit had been $ondu$ted in this $ase !hy did the mana#ement 6mana#in# dire$tor and the sta belo! that7 and the *oard o Dire$tors not e1amine the audit report8 And i they did, then !hy had they not e1pressed their opinion or ta%e a$tion a#ainst the perpetrators8 , audit reports !ere not pla$ed be ore the *oard,

!hy the *oard did not ta%e a$tion at the ri#ht time8 This is an instan$e o an ama9in# $ombination o ab:e$t la$% o super"ision, $ontrol, un!illin#ness to ta%e a$tion, ailure o poli$y dire$tion, #reed, or#ery and $orruption& *an#ladesh *an% has re$ommended re$onstitutin# the *oard o the Sonali *an%& As a ormer #o"ernor o the *an#ladesh *an% , !el$ome this step& On the other hand, , do not thin% that the inan$e minister3s initial $omment on *an#ladesh *an%3s authority to re$ommend the $han#e is :usti ied& Thou#h, later, he a$$epted *an#ladesh *an%3s step, but !e are yet to see ;ui$% and irm a$tion rom the #o"ernment& A$$ordin# to the Arti$les 4( and 4< o the *an% 4ompany A$t, *an#ladesh *an% is !ell !ithin its ri#hts to ma%e su$h re$ommendation& *ut in a sub-$lause o Arti$le 4< this po!er has been $urtailed in the $ase o the state o!ned ban%s& This is not #ood or re#ulatin# and super"isin# the ban%s by the $entral ban%& , thin% that this la! should be $han#ed to remo"e the limitation o the $entral ban%& Then the $entral ban% !ould be ully responsible or the monitorin#, $ontrol and dis$ipline o all the ban%s& People !ho ha"e e1perien$es in inan$e, e$onomi$s, mana#ement o inan$ial institutions and people !ho are not in"ol"ed dire$tly in politi$s, not loan de aulters, and people !ith honesty and inte#rity, should be nominated to the *oards o all the state o!ned ban%s as !ell as in the pri"ate ban%s& ,n some $ases dire$tors are appointed under politi$al $onsideration disre#ardin# these re;uirements& Due to su$h politi$al appointments su$h s$ams may o$$ur in the uture too& +o!e"er, this s$am should be in"esti#ated immediately and the $ulprits should be brou#ht to boo%& Suspension o o i$ials rom their :obs and dissolution o the *oard !ill not be enou#h or the perpetrators= they should be #i"en e1emplary punishment so that no one !ill dare to do it a#ain in the uture& ,n many $ountries e1emplary punishment !as #i"en to the perpetrators, e"en the a$$used politi$ians !ere not spared& The re#ular audit teams, spe$ial audit teams, and super"ision teams o all the #o"ernment, non-#o"ernment and spe$ialised ban%s should be trained to be better s%illed& *an%s should hire independent e1ternal auditors to #et better insi#hts into the state o a airs o all the ban%s in *an#ladesh& >e ha"e to $arry out these steps at the earliest possible time so that perpetrators $annot es$ape and others $an learn a lesson& The $ontrol and monitorin# system o the *an#ladesh *an% should be urther stren#thened and $oordinated, and timely a$tion !ithout ear o any politi$al and e1ternal in luen$e should be ta%en& The /inistry o Finan$e, spe$i i$ally the *an%in# Di"ision, must ta%e proper a$tion immediately in tandem !ith the a$tions o the *an#ladesh *an%& , these measures are ta%en at the earliest possible time the ban%in# se$tor $ould be prote$ted rom any uture disaster&
The writer is a former Governor, Bangladesh Bank.