M S Siddiqui
Business of banking or commercial banking is different from all other types of businesses in terms of ownership pattern, agency arrangement, and governance structure; thus leadership should be perceived differently. The importance of leadership approaches received renewed focus in the context of bank failures during the 2007-2008 global financial and crisis. Unlike standard practice, the borrowers in Asian countries were less supervised by the bank and the situation was aggravated due to ownership of borrowing companies were also directors of the banks. Having a banker on the supervisory board may help reduce the problem of asymmetric information and lead to better credit support in times of financial distress.
Asian banks before crisis were predominantly family-based, even some largest business groups. Given the management control by family owners, corporate governance has typically been poor. Family owners have tended to oppose the introduction of proper corporate governance mechanisms in banks and borrowing companies, which would constrain their pursuance of family interests often at the expense of minority shareholders as well as bankers.
The corporate governance in borrowing companies and banks is different in many other countries. The supervisory board of German corporations is in charge of supervising management and appointing management board members. It consists of representatives of shareholders and workers in fixed proportions and bankers.
The Japanese main bank system as a nexus of relationships consisting of three elements: relationship between a major bank (MB) (out of few banks extend loan to borrower) and its clients; between a MB and other creditors; and between these parties and the government.
An MB is usually the largest lender for the client firm, providing rescue operations and dispatching directors in times of corporate financial distress. Also, the MB maintains transaction and settlement accounts of the borrowing firms and serves as the trustee of collateral or the guarantor for bond issues. Finally, it is a substantial shareholder of its corporate clients. MB system in specific terms, because the contracts involved are largely and use of legally unenforceable, discretionary financial contracts in circumstances where legally enforceable contracts are feasible.
In Bangladesh, industrialists and business people become shareholders and directors of banks, and borrow money from each other’s banks. BRPD Circular No.- 04 dated 23 February, 2014 on Transactions with Bank-Related Persons stated in section 2 (lll) of No bank-company shall have an aggregate amount outstanding on all funded exposure to, or for the benefit of, bank related persons in excess of 10% of the bank’s Tier-1 capital (the core equity assets of a bank or financial institution). Section 3.1. (i) restricted the total amount of loan & advances, guarantees and other credit facilities provided to a bank director, his/her sole proprietorship firms, his/her partnership firms, any private or public company where he/she is acting as a director should not exceed 50% of the face value of shares of that bank-company held in director’s own name. In case of public company’s exposure, a director’s exposure will be proportionate to his/her shareholding in that company.
According to Bangladesh Bank guideline in establishing a banking company in Bangladesh has impose a ceiling of 10% share of a bank applied to an individual, company or family member, either personally, jointly or both. “Family” is defined herewith to include spouse, father, mother, son, daughter, brother, sister of the individual or anyone dependent on that individual.
But Bangladesh is an exception to this as alleged that directors of the banks give loan to directors of other banks with mutual understanding. The law to restrict the loan to directors has become non-functional. There is no supervisory role for bankers in the management of borrowing companies. Policy makers are silent on the issue and bankers are also happy to have no liability of extending credit to the companies. Bankers used to file cases against defaulters without any accountability.
Indian Banking law has some restriction over qualification of directors of banks not only restriction on amount of total loan. India’s Banking Regulation Act, 1949 in clause no 10A. Board of directors to include persons with professional or other experience.—(1) Notwithstanding anything contained in any other law for the time being in force, every banking company,— that not less than fifty-one per cent of the total number of members of the Board of directors of a banking company shall consist of persons, who— (a) shall have special knowledge or practical experience in respect of one or more of the following matters, namely:— (i) accountancy, (ii) agriculture and rural economy, (iii) banking, (iv) co-operation, (v) economics, (vi) finance, (vii) law, (viii) small-scale industry, (ix) any other matter the special knowledge of, and practical experience in, which would, in the opinion of the Reserve Bank, be useful to the banking company: Provided that out of the aforesaid number of directors, not less than two shall be persons having special knowledge or practical experience in respect of agriculture and rural economy, co-operation or small-scale industry.
The law clearly states that shareholders and directors of banks have two completely different roles, and the law prevents them from mixing roles. The shareholders own the shares of a company while the directors, who would predominantly be professionals, manage the institution. A director doesn’t need to be a shareholder, and a shareholder has no right to be a director. The calculation of share and loan also have rules to consider the share of some other relatives and associates. Major shareholder is a person(s) individually or in concert with his family members (including his spouse, lineal ascendants and descendants and dependent brothers and sisters), group companies, subsidiaries, and affiliates/associates acquire share of any company.
It has been widely believed that the misguided resource allocation and poor corporate investment performance were largely responsible for the Asian crisis. It is not surprising that the post-crisis reform package puts high priority on improving the corporate governance system.
Concerning specific corporate governance mechanisms, however, the major focus has been placed on strengthening minority shareholder rights, improving the workings of the board of directors, and fostering the market for corporate control.
With the sharp increase in corporate defaults and non-performing loans, the attitudes of MBs and their corporate clients seem to have changed. Evidence shows that MBs have become more cautious about lending to risky firms, while many less creditworthy firms are more willing to accept MB monitoring in return for help in times of financial distress.
Government is in process of amending the Bank Companies Act and hopefully address the issues of conflict of interest of directors.
Banks play a role in corporate governance primarily through their representation on corporate boards of directors. Having a banker on the corporate board, therefore, has two major functions. First, it is a means of reducing information asymmetry and disciplining corporate management. This may allow the firm to have better access to bank credit. Second, given the cost of lender liability, a banker joining the board of a firm is likely to have a certification role. It is a signal to the market that the firm is sound and unlikely to face financial distress. This signal lowers the firm’s costs of external financing. Banks opt to maintain an “arm’s length” relation with their corporate clients and are very cautious about their officers being represented on corporate boards.
Banks in Bangladesh had some experience of deputing director in the board of directors of borrower. During Pakistan period, banks used to depute their officers in the board of directors of borrowing companies. In that situation, they had full control over the information and management of the borrowing companies. Unfortunately, it has been discontinued for reasons not known.
The writer is the CEO of Bangla Chemical
