That the failure of the top management is, to a large extent, responsible for the current uncomfortable state of the country's banking sector is an indisputable fact. Problems such as soaring non-performing loans (NPLs), liquidity and capital shortage, forgery and loan scams are rooted in the deficiency noted at the top management level of a number of banks. A seminar organised by the Bangladesh Institute of Bank Management (BIBM) on Monday last listed the absence of capable and efficient leaders as the root cause of management failure in banks.
The observation, obviously, would arouse an uncomfortable feeling in the top echelons of most banks, but they are unlikely to react to it. Unfortunately, the prevailing situation in the banking industry leaves enough room for anyone to shower criticism, only if he or she intends to do so.
Of the all the problems, the one concerning NPL has been hurting the banks most. None would dispute the fact that not all borrowers are expected to faithfully service their debts to banks. Even in efficient banking systems, there is some amount of default loans. But the problem becomes too difficult to handle when NPL volume overshoots the manageable level. If a bank is manned by capable leaders, its NPL would remain within the manageable limit, for they would ensure that the relevant officials of the bank are diligent in sanction, disbursement and recovery of loans.
The NPL problem is rather an acute one in Bangladesh. Even after window-dressing its share in the total outstanding loans is estimated to be more than 10 per cent. But the actual size of NPL would be much bigger in the case of state-owned banks. Though the public sector banks are only a few in numbers they have a big share in the NPL -- 40 private banks had NPL worth Tk 480 billion while NPL in only 8 (eight) public sector banks had soared to Tk 390 billion at the end of June last.
The very size of the NPL in any bank does actually highlights the efficiency level of the bank management. The profit earned by the bank may also be an indicator, but not always. Reasonable profit with low NPL level should be an ideal yardstick, for higher rate of NPL puts a bank in real trouble and shows the bank's top management's incompetence. Higher NPL not only erodes a bank's profitability, but also creates multifarious troubles, including capital shortage.
The quality of leadership at the management level is thus very important for banks. The first thing a competent leadership would try to do is to ensure good governance which is considered sine qua non for quality performance, financial or otherwise, by an entity. The banks have, in effect, a two-tier leadership: one is provided by the professional bankers and the other by the board of directors. When the constituents of the two tiers perform in unison to ensure good governance at all levels, the results are bound to be good for banks.
There is again the banking sector regulator, the Bangladesh Bank, which is legally empowered to facilitate healthy growth of banking sector and punish errant operators. It, however, enjoys limited power in the case of management affairs of the public sector banks.
Recruitment of competent professionals having high ethical standards at the professional management level is very important. And the top management of banks comprising professional bankers must also enjoy operational freedom and confidence of the board. This happens only when the board itself is represented by enlightened people having high level of honesty and integrity. The BIBM survey has detected the absence of strong leadership in the country's banking sector. The central bank, in particular, should search its soul whether it has done enough to get strong leaders at the forefront of the banking sector.
