Published on The Financial Express
Fahmida Khatun in the second of a three-part article on ‘State of governance in the banking sector: Dealing with the recent shocks’
Anatomy of the Hall-Mark Incidence: Higher credit expansion, increased profitability, lower non-performing assets and increased financial inclusion have contributed to an improved banking system during the past decade. The regulatory framework has supported this growth to a large extent. It may be worthwhile to note that at a time when major economies of the world are under tremendous pressure due to the second wave of financial crisis and bankruptcy of financial institutions and sovereign debt crisis, the banking sector of Bangladesh has been navigating through in a resilient manner.
However, the recent shocks in the banking sector have exposed the vulnerability of the seemingly resilient financial systems in the country. Despite some positive results initially after the reform in 2007, the state-owned commercial banks (SCBs) unfortunately could not sustain the momentum due to poor supervisory capacity and weak institutional framework. As a result, not only these banks are suffering from shortages of capital but their profitability has also started to decline. Additionally, incidences of irregularities have weakened the overall performance and threatened the stability of the banking industry.
The recently detected Hall-Mark case of forgery through inland bills trade involving the largest SCB of the country, Sonali Bank Limited (SBL), is a testimony to poor management, weak internal control and risk management, and above all, total lack of governance on the part of the bank. The shocks in the banking sector of such nature and extent will not only hamper the growth of the banking industry but can risk the economic growth of the country. This is the most despicable financial forgery in the banking history of Bangladesh which has surpassed all the earlier cases of misappropriation of resources from banks. One may recall some of the previous cases of bank frauds which include Taka 3.0 billion (300 crore) by Om Prakash Agarwal in 2002 through transfer from five banks, Tk. 5.96 billion (596 crore) through withdrawal without cheques by the owners of the Oriental Bank in 2006, and Tk. 6.22 billion (622 crore) by Nurunnabi in 2007 through fake letter of credit (L/Cs).
In a resource-constraint country such as Bangladesh where the government has to struggle for allocating resources among competing priorities, Tk. 3606 billion or to be exact, 3,606.48 crore have significant implications for public investment. This scam is too important and can not be ignored exclusively on economic grounds. One may also wonder why does the country bows down to stringent conditionalities of donors for the construction of infrastructural projects when domestic resources are being plundered in this manner.
It is also alarming to observe that Sonali Bank Limited (SBL) disbursed an amount equivalent to almost 237 per cent of the paid-up capital of SBL only to Hall Mark Group. This is an utter violation of the ‘Single party exposure limit’. Bangladesh Bank has determined that banks cannot give loan more than 35 per cent of its capital to any individual, enterprise or group, of which funded loan should not exceed 15 per cent of the bank’s capital. In case of the export sector, a client can be granted a loan up to 50 per cent of a bank’s capital, of which funded loan has to be kept within 15 per cent of a bank’s capital.
Fault-lines of the Hall-Mark episode: It is more or less clear now that weak risk management, pressure exerted by powerful sections, connivance and unholy alliance between senior managers of the bank and the client, lack of supervision from its head office, oversight of its Board and lack of regulatory hindsight had been the reasons behind the embezzlement of a huge amount of money from a small branch of Sonali Bank Limited (SBL). Irregularities were of various natures and on a large scale. This cannot be performed by a sole manager of a small branch.
A number of reasons have been identified by the audit team which helped this forgery to happen. These are summarised below:
a. The Branch Manager was posted in the same branch for five years exceeding the limit of three years at one branch. The Principal Office of the bank warned the manager back in 2007 about some irregularities. Again in 2010, serious irregularities relating to international trade were found by the GM office and International Trade Finance Division (ITFD) of the Head Office. However, no steps were taken by the ITFD to regularise the irregularities of the said branch of the bank.
b. Neither the budgeting and monitoring department nor the ITFD of the bank did inquire about the huge growth of loans and advances of the branch. No detailed inspection was carried out to investigate abnormal increase of loans and advances. On the contrary, Inspection and Audit Division (IAD)-2 of the Head Office graded the branch as ‘Low Risk’ branch in February 2011, and they did not mention any irregularities. More shocking is that the IAD-2 commended the branch manager saying that he was “managing the branch efficiently with his extraordinary talent, foresight and banking knowledge”. One can easily understand how the branch manager was encouraged to continue the unethical activities!
c. Since June 2010 the management of the bank introduced a detailed monthly report on branches containing 85 columns. A close scrutiny of this factsheet can reveal the status of branches. However, it seems these reports were not reviewed properly by the GM office and the CEO also overlooked these reports.
d. There was a general reluctance towards inspection and audit of the Ruposhi Bangla branch even after complains of irregularities were made. The Principal Office requested the DGM of IFTD and IAD-2 to carry out inspection of the branch on its irregularities. But none of the bodies acted on this. The branch was brought under the supervision of the GM office since July 2011. No quarterly inspection was undertaken until 31 January 2012. On 26 January 2012 the ITFD finally put up a note for inspection of the branch. However, the inspection began after two months.