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Bank customers' risk management

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Khondkar Ibrahim Khaled :
Bank failure is not uncommon. We witnessed bank crises in the United States as well as in Europe. During first decade of present century, US economy underwent serious turbulence. Banks and Financial Institutions faced deep crisis. Some of the century old reputed banks and financial institutions were on the verge of collapse. Market economy preaches the principle of 'survival of the fittest' which means weak institutions should go out of market. But US government ignored this principle and came forward to rescue the collapsing financial institutions. In the midst of hot debates, the US law makers passed bills providing billions of dollars for rejuvenating the ailing banks. Principles of market economy were sacrificed to save the banks. Tax-payers money was drained to rescue privately owned institutions. There were two different assumptions behind such unethical action. It was argued that millions of customers will suffer huge amount of loss, if banks were allowed to collapse. Hence, the government came forward to safeguard the interest of customers who were common people. It was viewed as protecting citizens' rights. On the other hand, a different perception was observed. Critics suggested that the financial institutions were owned by top class rich people who exercised unavoidable influence on the government. It was suggested that 500 rich families run the US government form behind the scene. To safeguard this interest of owners belonging to this group, government had to come up with rescue package. Probably both the assumptions are valid, as the rescue package saved the owners as well as customers.
Bangladesh did not witness large scale bank failure scenario. However, one or two cases may be examined to understand problem solving measures and perceptions relating to those cases.
The only bank failure incident relates to local branch of a foreign bank, closed down in London by the central bank of UK. Bank of Credit Commerce & Industries Ltd (BCCI), a Pakistani owned foreign bank, was closed down by the
Bank of England for unethical banking. Hence its Dhaka branch became inoperative. During formative years of banking in independent Bangladesh, customers' confidence was critically important. Loss of money by the customers of the closed bank could have shaken the confidence of depositors of other banks. Senior bankers were in favour of protecting the BCCI customers. Government finally came up with a time bound solution. Government launched a new bank, named as Eastern Bank, to take over all assets and liabilities of the closed branch of BCCI. Shares of Eastern Bank were subscribed mainly by the government owned banks, while some shares were given to a few individuals against their funds. Time schedule was drawn to pay back all depositors money in phases. This innovative scheme worked so well that depositors really got back their money as per schedule. Customers of a closed bank were rescued by creating a new bank. It was a miracle solution!
Another incident of slightly different nature may be cited as an example of protecting customers. National Credit Ltd (NCL), a non-banking financial institution, established in 1985 faced serious crisis in 1993 reportedly for mismanagement and unethical practices. NCL failed to pay depositors' money and angry depositors started protesting in front of NCL office. Considering the gravity of situation, Bangladesh Bank came up with a solution for protecting the depositors of NCL. NCL was closed down and a new bank National Credit and Commerce Ltd. (NCCL) was established to take over the assets and liabilities of NCL. Owners of NCL brought in fresh enhanced capital to float the new bank NCCL. Practically NCL, a non-bank financial institution, was converted into  a full-fledged bank under a modified name. Customers were happy and owners were also satisfied for securing a bank licence.
In a market economy customers suffer, if a bank fails. Both the instances cited here demonstrate deep concern of central bank and the government to protect the depositors in challenging situations. These instances added to the confidence of customers. Depositors believe that their money is safe in a bank.
Recently unprecedented corruption crippled two government owned banks- Sonali Bank and Basic Bank. Government provided rescue package from national budget. Allocation of tax payers money for compensating corruption was unethical and aroused public criticism. Sonali Bank, being a large organization, could have survived without budgetary support. But Basic Bank would definitely collapse without such intervention. This is probably the only instance in our country to save a collapsing bank with budgetary allocation. Looking from another angle of view, government as owner of the bank, owns the responsibility to meet capital adequacy. Hence providing capital from tax payers money was legal but unethical. many consider government's action as financing of corruption.
Stake-holders of bank
Cited instances reflect government and central bank's concern, commitment and action to safeguard customers interest. Central bank acts as regulator and government acts on behalf of citizens. Except government banks, the government is not a stake-holder. Owners or shareholders are considered as stake-holders. This is a naïve perception. A close and critical interpretation suggests that customers have greater stake than owners of a bank.
European Union (EU) is the proponent of a new idea. EU has examined, how privately owned banks were rescued with tax-payers money in the name of safety of customers. On this account, US public exchequer suffered heavily, while instances are there in many other countries as well. After analyzing European instances in particular and global instances in general, EU concluded
that owners or shareholders are not the only stake-holders of banks, customers are greater stake-holders. Instead of government protecting the banks, the customers should protect their own banks. Unethical use of huge amount of tax payer's money in protecting banks might have prompted EU authorities to assign responsibility of protecting banks on their customers. EU have passed a law making owners as well as customers responsible for protecting their bank and suffer loss in case of bank failure. The new law will be effective from 2016 in the EU countries.
Since I am yet to know the details of the law, I shall not be able to explain the operational aspects. Management principle demands that responsibility and authority must co-exist together. I presume that customers must have been provided with appropriate 'authority' so that they can undertake legal responsibility. Meanwhile, Let us examine customers' risk, risk mitigation process and their responsibility in our country.
Customers' risks & safety measures
Total investment and statutory reserve of a bank may be roughly defined as its working capital. 10-12 per cent of the working capital is provided by the owner/shareholders as equity. Rest 88 to 90 p. c of the working capital is provided by depositors. From this point of view, customers' risk far exceeds the risk of owners, who not only own the bank but also from the Board of Directors and operate the bank. They take care of their own interest. Who will take care of interest of customers who provide about 90% of the bank's working capital? Over a period of time, legal and institutional system developed in our country to safeguard the interest of customers.
Unlike other industries, banking sector essentially operates under close supervision of the central bank. This institutional system is universal. In all countries, central bank is empowered and entrusted with the responsibility to safeguard the interest of customers of banks. Banks operate with customers money. but customers can not play any role in the management of banks. That is where central banks comes in. Central Bank creates balance between owners' interest and customer's interest. Without the vital role of central banks, owners might have swindled customers' money, rendered the banks bankrupt and satisfied their greed. This happened during the decades of 30s and 40s of last century. Many banks failed and depositors lost their hard-earned money. This led to introduction of 'scheduled bank' system. Over a period of time, central bank was gradually empowered to counterbalance the greed and mismanagement of bank-owners. In addition to Companies Act, separate Banking Companies Act was enacted for good governance of banks and safety of depositors' money.
Bangladesh Bank constantly operates on-site and off-site supervision of banks. Occasionally, strong actions are also taken. In recent years, Bangladesh Bank removed the Managing Director of Basic Bank and Chairman of IFIC bank. During the end of last century, Bangladesh Bank removed more than 30 Directors of privately owned banks and also removed the Board of Directors of a bank and appointed Administrator to safeguard customers' interest. Bangladesh Bank faced lot of hassle but did not retreat. These actions created positive impact on the governance of banks at that time.
In many developed countries, central banks are independent both legally and professionally. Without independence, central bank cannot function as an effective regulator. Bangladesh Bank suffers on this aspect. Apart from environmental disadvantages, Bangladesh Bank suffers legal constraints. Bank Companies Act empowers Bangladesh Bank to remove Directors or entire Board of Directors and appoint an Administrator. At the same stretch, law restrains Bangladesh Bank from removing Directors or Board of Directors, appointed by the government. This explains why Bangladesh Bank could not remove the Chairman or Directors of Basic Bank, Sonali Bank or any other government owned bank. Bank's functions are same, though ownership differs. This arbitrary clause of Banking Companies Act discriminates among same category of scheduled banks and restricts the central bank from protecting customers of govt. owned banks. The reason of unusual corruption and looting of customers money in govt. Owned banks can be attributed to such legal anomaly. Law needs immediate amendment to stop corruption & looting in govt. owned banks as well as to place all scheduled banks under one legal provision.
Bank management is another important safety valve for protection of customers' interest. It is often said that public officials are the servants of the State and they are not employees of the government. Government changes, but public officials continue to serve the State. Same analogy applies to bank officials. Bank professionals are the employees of the Bank and not of owners. To enforce this principle, Bangladesh Bank has issued appropriate instructions. Banks' Chief Executive Officer who is the Head of management and all employees, needs approval of central bank for appointment. Owners can select the CEO, but cannot appoint unilaterally. Similarly removal of CEO requires central bank's approval. An interesting example may be cited. In 2013, four CEOs tendered resignation, arousing suspicion. Bangladesh Bank enquired & found that the CEOs were forced to resign. BB immediately issued instruction requiring their consent even for resignation. That is how central bank protects the CEO from illegitimate influence of owners. In turn, it becomes CEO's responsibility to protect all officials from undue influence of owners and others. Thus Bank's professional cadre remains independent to safeguard the interest of customers as well as the institution.   
Yet another device to protect customers' interest is appointment of independent Directors, who are not share-holders. Independent Directors are expected to keep vigil in the Board. Directors of the Board normally select their own people. The system is yet to show notable examples in our country. However gradual development of the system will yield fruitful results in course of time.
Internal audit system has also been rationalized for improvement of governance. Board's Audit-Committee has been introduced so that irregularities committed by the management, are reported to the Board. External auditors also carry out sample inspection to trace the trend of operations and irregularities.
Everything said and done, ultimate responsibility to protect own interest lies with the customers. Customers must keep close watch on their own bank and lodge complains with the Central bank, if necessary. Bangladesh Bank has introduced a typical phone system for this purpose. Any customer or any person may use phone hot line number 16236, to proide any critical information or lodge a complaint with Bangladesh Bank. Proactive and vigilant customers can effectively contribute towards safety of their own money and own bank. Finally, we may mention about enactment of a new law, commonly known as 'whistle-blowers Act'. Under this law, an employee or a person is legally protected from the grudge of superiors or owners of bank or Institution for divulging malpractices within the organization.

(Khondkar Ibrahim Khaled is ex-Deputy Governor, Bangladesh Bank, ex-Chairman, Bangladesh Krishi Bank, ex-Chair Professor, Bangladesh Institute of Bank Management)

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