M. Fazlur Rahman
Hall-Mark scam of Sheraton Branch of the Sonali Bank will go down in history as a certain raiser of the radical face of the evil in the banking industry of Bangladesh. How could this scam be made possible? Financial analysts, bankers, veteran columnists and academics have published bright articles and expressed their viewpoints, after-thoughts and forecasts. Those may be cautionary hints for an entrepreneur who wants to remain sane and rational, who alone or in a group aspires to set up a small & medium enterprise (SME) industry in Bangladesh in post-Hallmark times?
S/he may be advised to store permanently some signs and image which may act as signposts or floating buoys to mark the way. Some of the encounters may be comparable with mythical Homeric descriptions of acute struggles of Odyssey's home-coming to Ithaca. There may be an ever-smiling Finance Minister, who might gleefully dismiss the Taka 40 billion (4000 crore) scam as a small sum; such an assessment by a veteran public servant and a high-level intellectual created shivers in the spines of normal human beings.
We often hear pieces of advice from men and women of high positions, encouraging entrepreneurship in all conceivable areas. Business environment in Bangladesh is not encouraging, to say the least. International Finance Corporation's "Doing Business 2013 in terms of Business Environment" has shown Bangladesh at 129th position, out of a total of 185 economies surveyed. This report has considered data in eleven areas in the life-cycle of a business. Begin with starting a business, then proceed through construction permits, energy supply, property registration, getting a banks loan, insurance, taxes, maturing contracts, cross-border trade, recruiting employees and insolvency. IFC reports that average time required is 175 days in Bangladesh for registering a business. Compare this with 94 days in India. An entrepreneur in this country has to go through many hurdles before s/he can seen light at the end of turned.
Let us suppose s/he has a partnership in place. Inherited land is available. He is alert and mindful to get mutation of land in his name and pay up land development taxes following 'usual process'. A project document is prepared by hiring a consultant. To any bank, this document will meet a number of objections, which then are corrected by confidantes of bank and then a bankable project profile is ready. Let us assume that our entrepreneur is extremely lucky, and he gets a green CIB report and gets through credit committee and project proforma (PP) is submitted to the Board of Directors. The Board of Directors approves the project and allocates money for the machineries. The board prudently asks the entrepreneur to do all the civil constructions.
A letter of credit (LC) is then established for importing machineries. To keep things simple, our entrepreneur opts for Japanese or European technology. LC confirmation fee is settled at 0.75% or say 1.0% and after eight months goods arrive at Chittagong Port. Suppose LC was established in January 2011 with $1.0=Bangladesh Taka (BDT) 69.00. By July 2011, the value of BDT gets reduced, now $1.0=BDT 84.00. Now who pays the balance? A time-consuming 'mula-muli' (negotiation) takes place and ultimately the entrepreneur agrees to pay and the bank agrees to top up project loan. At Chittagong, the entrepreneur faces different music! Port authority and shipping line claim demurrage. These together amount to a substantial sum of money.
Presently, an informal syndicate appears, as if it raises ugly head out of the sea as a monster. But the syndicate is useful and our entrepreneur gets delivery of machineries through the syndicate, paying a fee. The machineries reach site, these are installed normally. Because of delay at this point or that point, expenditure for civil construction goes up. Now this factory is waiting for gas connection and electricity connection!! This a lucky story, where he faced minimum hassle in the bank. If the entrepreneur is not so lucky, he will have to spend time and effort, shuttling between desks of the bank, many times, before he can hope to reach the credit committee.
Could the bank advise the client to opt for accessing foreign exchange with same 'hedging"? Say, eight months into the future with 10% hedging, so that 1.0%=(69+6.9)=BDT 76.80 and then entrepreneur pays at BDT 76.80 for each USD after eight months of LC establishment. He then avoids paying at a punishing exchange rate of $1.0=BDT 84.00. But then, not all banks have this window of opportunity.
Our entrepreneur is obdurate and full of patience. He awaits. Perhaps an ever smiling Finance Minister will be kind to re-assure him that he may wait few more weeks, nay, months when freshly minted new nine private banks enter the market.
All entrepreneurs will then be happy. Knowledgeable people are keeping their fingers crossed. The largest of the scheduled banks, Sonali has suffered Hall-Mark scam. Most assuredly Sonali had a full blown risk management system in place. Their credit risk management manual serves as a guide to effectively avert risk involved in landing activities. They had the concepts of front, middle and back offices to ensure segregation of duties that calls for retaining individual's precise responsibilities within defined locations. Besides, bank's credit risk grading (CRG) system aids to reach proper lending decision.
At least six types of risks are assessed -- credit risk, forex (foreign exchange) management risk, asset-liability management (ALM) risk, internal control and management (ICM) risk, money laundering (ML) risk, information communication technology (ICT) risk. Over and above, there are layers of oversight. Oversight by the Board's Executive committee, Audit Committee, monitoring procedure supported by KYC [Know your customer] policy, even KYCC [Know your customer's customer) policy etc. How then was there a scam like that of Hall-Mark through all these check-points? Consider our mythical Lakhinder, bitten by "Kalnagini", in an abode of iron with no apparent opening!
Our entrepreneur should store images of Hall-Mark bosses claiming that they had had much larger assets than the embezzled amount! Now probes instituted by the Ministry of Finance have found out that those utterances were bogus and they have only about Taka 3.0-4.0 billion (300-400 crore) worth of asset value. Where goes the rest of the embezzled money -- good public money kept with the Sonali Bank? Probe reports indicate almost nothing about how the money is to be regained, as we learn from the media reports.
Has Sonali Bank created charge demanding loan amount and interest charges against Hall-Mark to pay up? Drawing rooms are abuzz with arguments for and against such a move. As soon as the bank does it, Hall-Mark goes to court of law and lengthy litigation follows. If you do not take such a step, the Hall-Mark does not pay any interest, and Sonali loses it. Sonali's loss is Hall-Mark's gain, thus even now Hall-Mark is benefiting from Sonali Bank, by not paying back the embezzled amount. Sonali fixed about 50% as the first tranche of payment. This has not happened. We have seen the Federation of the Bangladesh Chambers of Commerce & Industry (FBCCI) gets tired asking for the arrest of wrongdoers. When Sonali, the largest bank of Bangladesh gets into this problem, how the new entrants, will fare in this environment, is anybody's conjecture.
In post-Hall-Mark times, businesses are facing rising costs. Consider LC confirmation charge, this charge has risen to 4.0% of LC value, which was 0.75%-1.0% a year ago. Conservative Bankers say new banks may encourage more bad entrepreneurs who will go for overtrade. Banks with one-man show have grave risks of collapse -- as happened with First Security and Oriental. A senior banker told me to consider investment industry. For last several years, industrial investment is in a limbo. Mr. Majid, ex-chairman of National Board of Revenue (NBR) reminds us that investment/GDP ratio is hovering around 24% and noted economists and ex-Adviser to the caretaker government (CTG) Mirza Azizul Islam says that this ratio should be above 30% to be able to active desired growth rate to attain the status of a middle income country by 2021.
A young officer in a foreign bank tells me that after the great scam, they are have inereased vigilance. As a result, new entrepreneurs "need more time, more patience, more energy and move of luck to sustain". He will now have to submit assessment by a credit rating agency. In Bangladesh, banks now follow three pillars of BASEL II, BASEL III is coming and it will retain the pillars -- CAR i.e. credit adequacy ratio. Checking the LC operatinalising to reduce to zero any " accommodating financing" i.e. strong supervision of credit and to keep an eye on market discipline will remain BASEL III, but it will bring in some more fine-tuning. BASEL III may reduce long-term loan which will be critical say for ship-breaking industry.
I asked him about role of the central bank. He almost blurted out of text book, and to some extent, was bitter. He appreciated the monetary policy of Bangladesh Bank to squeeze money supply to rein in inflation. On oversight, he expressed unhappiness. With great reluctance, he said the Governor of Bangladesh Bank should give more time to his assigned job; he may do better not to accept each and every prize-giving occasion. He questioned me -- only a farmer gets "subsidy" in fertiliser, when his counterpart RMG exporter gets "incentive"? I was out of my wits and gradually realized that I should communicate with time more.
The writer is a former secretary to the Government of the Peoples Republic of Bangladesh and also a former chairman, Agrani Bank. e-mail: email@example.com or firstname.lastname@example.org