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7 years ago

Improving standard of banking practice

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In our banking industry, directors are elected on the basis of their own large number of shares or influence by their close relatives. So the Board of Directors is always represented by the majority shareholders and there is no representative from the smaller ones. Although small investors have a role to play by exercising their voting rights in electing directors, yet their direct representation has not been ensured under the Banking Companies Act. So provisions may be made to elect some directors from the small investors. In fact, there should be specific four categories of director, viz. directors elected or nominated by the majority shareholders, directors from the small investors, directors from professionals and directors from the depositors.. 
BB APPROVAL FOR APPOINTING MD: Another important aspect of the proposed amendment is to change the requirement of Bangladesh Bank's prior approval to post-approval for appointing or removing Managing Director (MD) of the bank. In fatc, there should not be any requirement of appointing or removing MD of the bank. The Board of Directors (BoD) is exclusively and collectively responsible for running the bank. No third-party involvement is required in this regard. Moreover, the purpose of placing this requirement by Bangladesh Bank was to strengthen MD's role so that he or she can independently run the bank without any fear from the Board for losing his/her job. In spite of having such job security, many MDs are said to have failed to run the banks independently. So the requirement of either prior or post approval from the Bangladesh Bank for appointment of MD is not necessary at all. Instead, MD's appointment should be governed by the terms and conditions of contract between MD and BoD because MD's job is always contractual. If either party breaches the contract, the aggrieved party may resort to legal remedy. 
MD'S QUALIFICATION:  MD's role is paramount in successfully running a bank. So emphasis must be given to his qualification. The Banking Companies Act does not specifically spell out qualification of appointing Managing Director (MD) of a bank.  So appointment of MD is governed by DFIM Circular No. 02 dated March 25, 2015 issued by Bangladesh Bank. Section 2 of this circular has specified minimum educational qualification and practical experience for the CEO (chief executive officer) position of a bank. Fifteen years' practical experience including two years in second-tier position in a bank or financial institution has been stipulated as minimum experience for appointing CEO. However, mere experience for a certain number of years does not serve the purpose of appointing competent person as CEO because only required experience in the core functional areas of the bank can enable the CEO to successfully run the financial institution. Therefore, minimum required years of experience should be redefined clearly stipulating that 15 years of experience must include minimum six years as Head of Credit, including one year at DMD level, three years as Head of Operation, including one year at DMD level, and one year's experience of policy formulation.  
Hiring MD from outside a bank has many limitations because he is neither familiar with the bank's atmosphere and work culture nor is he well aware of the strength and weakness of the bank. Even he does not have clear picture about the bank's asset (loans and advances) quality and liability position. So, hiring MD from outside the bank should be avoided and there must be a prudent succession plan for MD.  
The Section 5 of this circular has restricted the MD's tenure to three years only which seems to be inadequate, especially for those who are hired from outside. The new MD takes about one year's time to settle down, to be familiar with the bank's internal environment and consolidating his position. From the second year when he starts contributing, third and final year comes up leaving him in a dilemma of further renewing his term. So out of three-year tenure, new MD will have very limited time to contribute and demonstrate his leadership role. Therefore, the minimum tenure of MD should be five years so that he gets adequate time to show his performance. 
The circular, however, does not state roles and responsibility of MD, which is as important as qualification and experience because the organisation's corporate governance substantially depends on the MD's role and responsibility. In our country, many MDs perform all jobs from appointing/transferring of a teller to the approval of loan which cannot be the role and responsibility of a modern bank's MD. So alongside MD's qualification and experience, role and responsibility of bank's MD must be included in the Banking Companies Act which can be effective by incorporating in the proposed amendment 
CAPITAL BASE AND COMPLIANCE ISSUES: There are some core areas of banking where amendment is needed. Capital base and clear-cut demarcation between the role of management team and Board of Directors is inevitably required. In our country, BoD performs many operational responsibility and day-to-day operation which is sometimes considered as intervention in the management's role. At the same time, management always finds lame excuse and enjoys a kind of immunity by shifting the blame of their failure to the BoD. As a result, blame and counter-blame on the management and BoD are common phenomena in our country. Non-performing loan (NPL) is an acute problem in our country's banking industry. If the management is asked about rising NPL, it will say loan has been approved as directed by the BoD. Contrarily, BoD will say corrupt bankers are responsible for enormous NPL If there is a specific demarcation between the responsibility of management and BoD, such blame game would not have arisen at all. In order to establish accountability and responsibility, the periphery and jurisdiction of the management and the BoD will have to be determined and conspicuously spelt out in the Act. In a nutshell, BoD will provide required guidelines, directions, risk appetite, risk parameters and goal of maximising the value of shareholders and stakeholders. The management will run the bank based on the given guidelines, and directions so as to achieve the target and goal set by the bank. 
Amendment of the Banking Companies Act is a timely initiative. There have been phenomenal changes in the global regulation of banking. Scope, opportunity, product and services of the banking industry have rapidly changed. E-banking is taking dominant market share. At the same time, many new risk factors are being exposed which need to be well mitigated. Moreover, a bank is not only the custodian of public deposit but also it plays the role of circulating money in the economic arteries of the country. So banking is an unique business which is quite different from all other business activities. Therefore, careful consideration should be given to the proposed amendment so that it can be made very comprehensive and specific by removing the loopholes of banking business and thus improving the standard of our banking practice. Otherwise, the objective of this amendment will go in vain. We believe our policymakers and lawmakers will consider this issue.  
The writer is a banker based in Toronto.
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