Banking: Focus on transparency in credit operation

Dhaka,  Thu,  27 July 2017
Published : 19 May 2017, 21:42:54
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Banking: Focus on transparency in credit operation

Shah Md Ahsan Habib
Today, banks cannot solely rely on the risk management or auditing functions to identify the risks in different units. Strong leaders must be placed in key roles that involve risk management responsibilities. Focusing on compliance is not good enough. For an institution to be strong, it needs a chief risk officer who has a clear, highly regarded role within the organisation, a voice that drives the risk management-focused culture, and a willingness to challenge business executives as well as senior management team. Personnel at different levels and lines especially in the areas of risk management, compliance, credit review and internal audit must demonstrate similar sense of leadership. Alongside competency in risk subject matter, they must be inquisitive, confident, protective and adaptable. They must take the responsibility for identifying and recommending ways of strengthening weak points in their organisation's processes and controls. At the enforcement phase, while it is obvious that the chief executive and senior management team visibly support the risk team and all second lines of defence, it is equally important that executives at different levels be held accountable for the self-identification of and ownership of the risks in their individual units.

Network leadership in banks must act to handle uncomfortable business situation and environment. Top management of banks may have the tendency of neglecting the difficult and uncomfortable role of a leader.  They may prefer to move on with the status quo.  On the way to handling risks, the leaders are expected to consult with a mix of people, with different perspectives, backgrounds and knowledge that cover not only the people having own immediate spheres of influence but in other industries and sectors.  With the sudden success, sometimes top managers becomes isolated, and may start believing that they will never lose.  They come to believe that they are much smarter than everyone else, both inside and outside their firms.  Consequently, they do not listen to people who bring different points of view on the relevant issues. It is over-smartness and over-optimism that cause barriers to the leadership approach in risk management.  By contrast, good leaders welcome different opinions and points of views. Because of this, they are aware of potential risks and have the ability to make more informed and inevitably wiser decisions. Global financial meltdown showed that receptiveness to diverse viewpoints and opinions often defined the cultures of companies that survived the crisis and continue to thrive.

Those who suffered during the most recent crisis did not seem to anticipate the risks or problems ahead; especially when people speak about the banks which fared so poorly during the crisis, most of the questions revolve round risk. Several bank professionals, academics and researchers (as published during the period 2009-2011) believe that that the executives leading these organisations should have known about the risks and should have acted quickly.  There are evidences that the most effective leaders during the global financial meltdown were people with integrity, courage and compassion. They were careful, prudent and aware of their limitations.  As such, they were sensitive about the risks of harming their shareholders through shaky investments.  They made sure that any decision they made or any action taken by their firms would ultimately be good for their companies, their shareholders and their customers. Overall, they exhibited a relentless determination to contribute to the good of the organisation they served, the people who followed them and the communities in which they operated. The worst failing exhibited by some leaders before, during and after the crisis, is that they just did not care about what might happen to other people.  Some knew that their companies were on the verge of collapse.  They did not realise that people could get hurt, and that some investors could lose their life savings.  

The recent crisis revealed a surprising amount of opportunistic risk-taking in otherwise very profitable financial institutions. Traditional literature suggests that more profitable banks should have lower risk-taking incentives. However, during the recent crisis many profitable financial institutions seemed particularly exposed to risks from untested financial instruments and extremely aggressive behaviour. Several studies have identified irrational profit targets followed by excessive risk taking behaviour as the key culprit of the crisis that are clearly connected with weak corporate governance practices and fragile leadership. 

The global financial crisis and the credit crunch that followed put credit risk management into the regulatory attention, and regulators are now expecting more transparency in credit operation, thorough knowledge of customers, and even greater regulatory compliance under Basel regulation. Growing financial crimes and money laundering have become a key concern to the policy makers and regulators throughout the globe. Central banks and global financial regulatory setup have imposed considerably huge and stringent regulations and compliance requirements in recent years on the ground of enforcing anti-money laundering framework. Probably, compliance risk is the most critical risk the banking is facing today. The growing regulatory load and greater compliance imposed considerable cost burden to the banks. In such a scenario, bank shareholders and boards may need to accept lower returns, as profit growth is dampened by tougher regulation and rising charges for bad loans.

Considering the nature of the banks' exposure in Bangladesh it is obvious that credit risk is at the centre. Effective credit risk management is crucial for the good performance of the banks, and it is the factor that exposes true vulnerabilities of banks in the country. Especially some banks are heavily burdened with high percentages of non-performing loans. In such a scenario, it matters greatly how well our banks are managing credit risks in their lending activities. Thus, there is no way but to ensure appropriate credit risk governance by ensuring a comprehensive borrower selection and following the proper credit granting procedure. Irrational profit targets may offer incentive to the bankers to compromise with the processes of borrower selection and credit disbursements and thus situation of non-performing loans could be even worse.  The position is more sensitive for the newly established banks where boards and shareholders are required to demonstrate even more restraints in regard to expectations of returns on investments and in determining the profit targets. 

It is recognised that the effectiveness of the implementation of a bank's strategies improves when these are based on strong ethical foundations and in a culture that promotes ethical behaviour. In the absence of such an ethical culture staff and management may act opportunistically, taking advantage of their positions to benefit themselves. To create and ensure a strong ethical ethos in the bank, senior management must themselves set ethical example. They must also build a compliance and enforcement process around ethical behaviour. Ethical issues can lead to better risk management in banks by increased motivation of employees attracting higher talent, enhanced reputation in the marketplace, and reduced financial crimes.

Dr. Shah Md Ahsan Habib  is Professor and Director Training, Bangladesh Institute of Bank Management (BIBM).

 ahsan@bibm.org.bd
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