Incidents of fraudulent mortgages can hardly be prevented although there are many stages of collateral security including legal opinion, physical verification of property by bankers and registered mortgage deed. Duplicate mortgage, fake property documents, discrepancy in property documents and redemption of registered mortgage are some of the common irregularities in the banking sector. Many bankers fell victim to this system.
Against this backdrop, the Bangladesh Bank (BB) is said to have undertaken up a programme of introducing collateral database. However, the proposed system may not serve the purpose at all. The BB should, instead, introduce collateral locking system.
Collateral locking system is the latest collateral arrangement. It not only simplifies the procedure of collateral security but also reduces collateral fraud to a great extent. All types of collateral, including bill assignment, receivable purchase, etc., may be covered under collateral locking system.
COLLATERAL LOCKING SYSTEM: Collateral locking is a technology-based collateral management which is legally binding for all stakeholders.
Instead of preparing a mere collateral database, Bangladesh should first enact a uniform collateral locking (UCL) act or law, which will govern entire collateral management process. There should be two parts of the proposed law - UCL body and online collateral locking.
The UCL body may be formed with independent members from Bangladesh Bank, Securities & Exchange Commission (SEC), Ministry of Land, Ministry of Commerce, business forums like Federation of Bangladesh Chambers of Commerce and Industries (FBCCI), Bank Owners' Association and bank's CEO/MD's association. This body will be empowered to take policy decisions and as such will provide policy support to the management team which will be responsible for maintaining collateral locking system. The team will be very small as the locking system will be managed through high technology. A qualified and competent technology team will be part of overall management team. A computerised programme will have to be developed for managing the collateral locking system. A web-based well secured programme, which is a very common banking application now-a-days, can be developed or other computer programmes can be set up to handle collateral locking.
COMPUTER-BASED COLLATERAL LOCKING: All collateral securities, whether primary security or secondary security, should be categorised into two or three groups depending on the nature and type of security. For example, all landed properties can be classified under one category, while assignment of bills can be included in another. Similarly, receivable purchase, if considered an acceptable banking product, may be categorised into one group. Even hypothecation for any tangible security, like machinery, can be categorised in one group. In the same way, more and more collateral categories can be created based on some common features. A unique codified number should be attached with each collateral security. This will be uniform codified number which will be used by all concerned or related departments of lenders, property registration office, work-order issuing authority for bills receivable, recognised companies or business units for receivables, payables etc. At the beginning, all existing tangible and transferable securities, which are submitted as collaterals against bank loan, must be codified with this unique number and this database will be merged with computer programmes to be developed and run by the UCL body. Thereafter, all tangible and transferable assets readily available in the country can be brought under this unique codified number and this number can be used in every office, including city corporation, municipality, RAJUK, land registration office, land office and another other related agencies. If the codified property is not deposited to the bank as collateral security, no locking will be required and these will remain as free assets.
LOCKING AND UNLOCKING OF COLLATERAL SECURITY: Once the web-based programme is developed and minimum database is built in the system, locking system can be made operative. Under this system, all lenders will have to be active member of the UCL body and they will have to get registered with the system. Once lender is granted registration, s/he will be given a user ID and a password with which s/he will be able to handle collateral locking. It may be mentioned here that locking can be done by the lenders themselves without prior authorisation from the UCL office. Using the uniquely codified number, the lender will manage collateral locking system. When such locking request is submitted, the system will automatically verify whether this number and some other unique parameters and collateral features already exist in the system. If not, the locking request will automatically be rejected. If matching or duplication is not found, the system will accept the locking request submitted by the lender showing the status pending. As soon as the system accepts the request, this will automatically reach the concerned officer of UCL office who will then apply their minimum due diligence and if found satisfied, the locking request will be accepted. Once the locking request is accepted, the system will automatically disseminate confirmation of locking to all the stockholders/related bodies so that they are well aware of the collateral locking.
Similarly, when loan is paid off and the lender is satisfied, it will submit request for unlocking collateral security by using the same technology platform. However, unlocking request will be verified. The law should be clear and stringent provisions should be made so that no transfer, ownership change or long-term lease can be allowed for any locking assent. Integrated database will automatically reject such move. Prior to changing ownership, transferring or entering a long-term lease agreement, the locked property will have to be unlocked.
FUNDING AND OPERATIONAL COSTS: Like any other system collateral locking also involves financial expenses. However, lion's share of this financial expense may be borne by the parties involved, particularly the lenders who will be using this facility and benefiting from it. Minimum charge and annual fee can be recovered from the lenders and this will provide sizeable revenue to meet operational cost of UCL. So the government will not have to bear substantial amount of financing burden for introducing this new collateral locking system. However, initial investment will be required for developing computer programmes for the new system. This investment should be provided by the government or Bangladesh Bank or can be realised through endowment collection from the lending members. Compared to the benefit of simplifying as well as streamlining collateral security management, this investment should be negligible.
Modern banking is based entirely on technology - from cash transaction to documentary control and from investment to reporting. Banks in developed economies have been making substantial investment in this field. Our banks should not lag behind in adapting technology and introducing digital collateral locking system.
Since Bangladesh Bank has undertaken the programme of introducing collateral database and is in the process of enacting a new law in this regard, measures should be taken to make the move more detailed, comprehensive and modernised. Moreover, changes in banking systems cannot be made too often. Once a system is established, changing, updating or modernising the same is another challenging task. Therefore, efforts should be made to establish a foolproof and modern collateral management system.
Nironjan Roy, CPA, CMA is a banker based in Toronto, Canada.
