Free bank boards of outsiders

A recent report from the Bangladesh Institute of Bank Management (BIBM) found that outsiders are dominating the bank boards and influencing banking operations such as loan processing. The inclusion of outsiders is causing damage to the financial performance of the banks which eventually takes a toll on the economy.

Business groups and entrepreneurs with vested interests as well as politicians fall into this category. They are actively engaged in appointing their own people to the top positions such as the chairman, director and managing director.

Some banks allow outsiders to sit in during their board meetings. This is a breach of rules and shows a severe lack of corporate governance in the banking sector. Against this backdrop, Bangladesh Bank on November 12, warned banks to not permit non-members into their respective board meetings.

In most cases, the aforementioned non-members manage their loans from the banks without having adequate securities and in favour of companies that do not exist. They usually attend the meetings by using political influence.

Nowadays, the people who are appointed as the chairman, director or board members are not connected to the banking sector at all. They possess very little expertise in the field. It was also revealed in the report that the independent directors of banks (who were supposed to be put in the boards for the proper maintenance of corporate governance and the representation of general investors) had been selected from the directors' close friends, well-wishers and relatives. Being dummy independent directors, they work for the benefit of the sponsored directors or outsiders with some being barely qualified to sit on board.

What is happening in Bangladesh is the result of the senior management wanting the blessings of the chiefs. Often, senior personnel feel threatened that if they do not give consent to the wishes of the chairman, their jobs would be in peril. This is a serious fault in our system.

Bureaucrats, university professors or individuals from big business groups are appointed as the chairman. When the chairman is an outsider, they are more likely to prioritise their own interests when making decision investment decisions for the bank.

People who are coming from universities or the bureaucracy are not well versed on the dynamics and new changes which are mostly technological. They do not understand the need to adapt to these changes. They shy away from getting too involved and trying out new things. They just want the pass the short time for which they were appointed.

As no new horizons are expanded with investments, the banking sector remains stagnant. Bangladeshi banks are still lagging behind due to its traditional loan system. Ultimately, the financial sector has to suffer for that. If people with enough banking experiences were to sit in these positions, such problems would not have arisen.

Political interference is one of the main reasons for outsiders being appointed into the bank boards. Nowhere in the world can this be seen to the extent it does in our financial institutions. The banks should be governed by their own personnel who know the system very well and would try to serve the bank's interests as well as the investors'.

Whenever a board is constructed, the political back-up comes first. As a result, after being elected as the board members, they cannot break away from political influence. As a political appointee, they cannot decline many poor proposals. The prime reason for default and classified loans can be linked to political interference.

Bangladesh Bank has set many bindings and rules. The existing laws have many limitations. Additionally, in recent times, the rules are established without much consideration. Moreover, the implementations of the existing laws are not exercised properly.

Overfinancing is another big issue. To check this overestimation, there is no proper control mechanism. Rather than inspecting the business and profitability, the boards are more interested in name-lending. Many banks are willing to provide loans to big companies, in most cases, without proper assessment. This creates a huge risk for the banks which could ultimately lead them to bankruptcy if the big company fails to deliver. Even when big corporations do not need loans, the banks are more than willing to provide them to prove their competence and maintain their reputation.

A classified loan in a bank is one that is in danger of defaulting. Classified loans have unpaid interest and principal outstanding but do not necessarily need to be overdue. 

Bangladesh bank has no rules about financing promising businesses who have already been classified. As a result, many good businesses cannot fight back. When a company becomes classified, its sister concerns are also put in this category even though they may be profitable. Moreover, there should be policy guidelines about financing a generally good company which made temporary losses, for example, due to natural disaster or something else. Unfortunately, these concerns are not being taken into consideration.

In such cases, the Bangladesh Bank usually appoints an observer. But even the observers are not always able to perform their tasks independently because of the ruling party's influence. An experienced banker is more suitable to play the role of an observer than some former secretary or bureaucrat.

The financial health of the banking sector has been declining for years due to the absence of corporate governance. Non-performing loans went up to Tk96,116 crore in the first half of this year. It was Tk94,313 crore in December last year. The central bank should exercise its power to restore good governance in the banking sector. Or the country will face dire consequences in the days ahead.

Mirza Aminur Rahman is a Director at Finexcel