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Can we not look for an alternative model of banking business where depositors would be placed in a new relationship, and lending conditionalities would change? Banks deal in money mostly owned by depositors while deposits are neither termed as equity fund nor borrowed fund, but the single largest source of a bank's life-blood. Money capital is primarily supplied by individuals and institutions popularly known as shareholders or owners of a bank. The size of paid-up capital contributed by traditionally and legally defined shareholders is very small in proportion to total capital of the bank. The fundamental question is: Who are the real owners of a banking firm- shareholders or depositors? Traditionally, historically and ostensibly, people holding shares of a bank (i.e., paid-up capital contributors) have been designated as owners of that bank just like a non-financial entity's shareholders who are lawfully called owners. The next question is about lending system. This revenue-generating function also requires to be revamped accordingly in quest of the alternative model.
OWNERSHIP VERSUS NON-OWNERSHIP CONTROVERSY: Bank depositors are treated as creditors who get a fixed rate ( sometimes changes with time and type of scheme) of return in the form of interest on their fund kept. The practice has been continuing for ages, and no one, as far as it is learnt, has raised any question regarding bank-depositor relationship. Now it is time to review the nexus since depositors enjoy little or no right to voice over their size of return on deposits and the bank has been exploiting depositors by giving poor return or negative return in times of higher rate of inflation. Besides, bank failures render them almost penniless while they provide more than three-fourths of total bank fund. Many people also hanker after satisfying their belongingness needs. It is also argued that depositors should have a control over utilisation of deposits as their deposits are deployed to generate profit. Against this backdrop, it is necessary to reassess depositors' status in the capital structure of a bank.
If depositors are given shareholder status, they would lose fixed, regular and certain return. Dividend may be higher, smaller or nil. There is no certainty of return but banks would have more stable capitalisation. Depositing shareholders would face the liquidity problem if deposits are not made tradable or withdrawable with short notice. Even if deposits are tradable in the market, shareholders would have to assume more risk. Besides, there is a problem of representation of millions of depositing shareholders. Deposit insurance would cease to exist. However, there remains a possibility of better management of credit or lending. A large section of depositors may also be reluctant to being owners of a bank as this system involves uncertain return and added risk.
It is argued that difference in the status of owners versus creditors is due to risk and control. Depositors are legally called creditors because money is repayable on demand or maturity. Other reasons are: (i) depositors expect safety and certainty, not profits'; (ii) they take very limited risk; (iii) they are protected by deposit insurance and regulations; (iv) depositors bear no responsibility for bank losses beyond their deposit. On the contrary, shareholders are termed as owners since (i) their money is not repayable; (ii) they can lose 100 per cent of their investment; (iii) they do not enjoy return preferentially; (iii) shareholders have voting rights and control; (v) they bear the first loss when things go wrong. Shareholders may contribute smaller amount of money capital, but they absorb losses, take responsibility and act as a buffer to protect depositors.
LENDING DILEMMAS: It is a well-known fact that basically a commercial bank engages in intermediation function -- deposit mobilising and lending to earn a suitable spread. Now-a-days, timely recovery of money lent has become very uncertain and challenging too. For example, NPLs are a great threat to banking. Consequently, a bank faces survival risk. Human-created risks are thus pre-dominating. Even then, we cannot but lend.
Borrowing groups belong to several categories. Recovery trends reveal that almost all large and medium borrowers are reported to be more reluctant to repaying loan dues; rather seek rescheduling . Legal loopholes and enforcement leniencies are big obstacles to fight against defaulters. A bank often grapples with defective security valuation and liquidation by auction. Valuations by external agencies, in many cases, are most likely to be biased and overvalued.
The cottage, micro, marginal and small entrepreneurs have little access to bank funding. Bank loans once sanctioned and disbursed are not supervised or monitored on regular basis. Projects or loan utilisation proposals are not seriously evaluated. An unholy alliance of business, politics and government often vitiates the fair practice of banking. Apart from such negative factors, the efficiency of banking management and other employees is not adequate in most cases.
PROPOSED ALTERNATIVE MODEL: Do we have any way out? We should think out. An alternative model of banking business may be experimented alongside the existing model. If depositors are given shareholder status, their deposit would not be securitised. The same rule would apply to traditional shareholders. Traditional shareholding procedure would be totally eliminated. All shareholders would be selected in exchange of a certain amount of qualifying deposits. Such owner- depositors would be entitled to buy all types of deposit products offered by the bank. All depositors except rich ones (deposit holding more than Tk 5 crore) can be turned into shareholders. However, it would not be mandatory for all depositors to become shareholders. One can remain a depositor like old tradition or practice and get only interest as usual.
Second, they (shareholders by deposit) would be given interest at a rate 1 per cent above the bank rate as minimum return on all deposit products, but additional return would be dividend (applicable only to time deposit products) from banks' lending income. Banks would provide adequately secured financing in viable projects submitted by borrowers. Borrowers' operations would be digitally monitored by the lending bank.
Third, one depositor would have one vote. There would be online voting for all depositing shareholders, but for face to face general meeting, voters would be shortlisted by lottery system. All depositor-shareholders (new and those converted from existing shareholders) would rank equally as capital- contributor. They would be together issued Capital-Contributor Scripts as proof of their investment in the bank. Company law as well as banking company law would require appropriate amendments to accommodate the new model of commercial banking.
Fourth, as already mentioned, traditional shareholding system would cease to exist. Whoever wills to be an owner or capital-contributor would be required to deposit a minimum amount of money (say, for example Tk. 20,000) which must be maintained to get and retain the status of ownership. Such ownership would automatically cease with fall in the balance on any day in an operating year. Renewal or restoration would be allowed in the next operating year if the balance is raised to the required minimum. This deposit would not be entitled to any interest or dividend but is to be treated as qualifying deposit for gaining ownership status. An owner-depositor may have savings account or fixed deposit account or any other deposit product which would be entitled to minimum interest at a rate 1 per cent more than the bank rate plus dividend from lending income based on the amount of time deposit weighted according to the type of deposit products.
Fifth, borrowers would continue to be borrowers. The bank would provide fund to borrowers at the interest rate of 5 per cent above the bank rate and share the profit of the borrowing firm in the ratio of bank's lending amount (for unamortised principal). Every branch would be a strategic business unit (SBU) to be operated independently under agreement with the Head office, and accountability framework. Mode of operation would be cashless and fully digitalised. Fully professional management would be employed.
No loan should be sanctioned and disbursed without 100 per cent secured status. Loan projects/ proposals must be appraised and evaluated minutely so that that income generation potentiality with appropriate sensitivity analysis can be identified. On that projection basis, all operations as well as transactions should be monitored and controlled digitally, seriously and regularly. Exclusively supervised lending can be allowed. Unflawed loan recovery laws and stringency in enforcement must be required for resolving NPLs. No substitute remedy would work as desired. In our context, we have no scope to be lenient and weak legally, disciplinarily and administratively.
In conclusion, it may be suggested that there shall be no undue influence from political quarter, or regulatory body, or bank's top management. An experimental bank branch will be conducted on agreement to be executed among the proposed branch, Head office, and regulatory body. Alternative model of banking would be launched afresh, as a branch of any traditional bank that is minimally or marginally viable on capital adequacy, liquidity and solvency grounds. Discourse on the alternative model should be continued.
Haradhan Sarker, PhD, is ex-Financial Analyst, Sonali Bank & retired Professor of Management.
sarkerh1958@gmail.com