There were in the past instances of scattered initiatives when banks helped affected people following some deadly natural disasters. The Bangladesh Bank (BB) also became active later. In the initial stage, the central bank mainly helped rehabilitation. For example, Bangladesh Bank provided fresh Agri-loan facilities for rehabilitation of agriculture sector in cyclone Aila-affected areas; agricultural loan to flood-affected people at Haor areas; relief/assistance to the landslide-affected people at Chittagong Hill Tracts, etc. However, the issue has now been addressed by the central bank as part of policy. The Sustainable Finance Department of Bangladesh Bank has been entrusted with the key responsibility of dealing with disaster risk management.
As a notable initiative, a check list on environmental risk was accommodated in audit guidelines and reporting formats in the 'Policy Guidelines for Green Banking, 2011'. Practically, this guideline is helping to mainstream Environmental Risk that covers possible sources of disaster risk such as land use and climate change-related events (cyclone, drought) etc.
In 2017, BB has redesigned and renamed the guideline as The Environment and Social Risk Management (ESRM). Irrespective of the source of fund, the 'Guidelines on ESRM' is the master framework for the banks and financial institutions (FIs) in assessing environmental and social (E&S) risks in their credit/investment proposals/ accounts; managing E&S risks in their credit/investment portfolio; and establishing Environmental and Social Management System within their organization. As per this guideline, banks should finance economic activities in the flood, cyclone and drought-prone areas at the regular interest rate without charging additional risk premium. In addition, banks should assess their environmental risks for financing in different areas by creating a Climate Risk Fund (CRF) to be used in case of emergency. The banks are expected to ensure regular financing flows in selected vulnerable areas and sectors. CRF can be used for events and projects related to environment, climate and disasters.
Corporate social responsibility (CSR) and green banking initiatives of BB are clearly connected with disaster risk management in banking-recovery, mitigation and adaptation. Other than these, disaster issue has also been addressed in some other guidelines of BB. According to the 'Credit Rating Methodology for Small and Medium Enterprise (SME)' and 'Guidelines on Risk-Based Capital Adequacy', both quantitative and qualitative factors should be considered in assessing the SME financing operation. Moreover, BB mentioned disaster risk as part of the broad definition of Operational Risk (Pillar 1) in the risk management guideline, and suggested measures under Supervisory Review Process of Pillar Two.
In banking, both banks and clients are affected by disasters immediately and also in medium/long term. Basically banks' infrastructure is vulnerable to disaster in short term. Their financial performance, credit recovery and other regular services are affected immediately after disaster. Asset damage, discontinuity in economic & business life and fall in quality of life of the clients are immediate impact of disaster which lead to credit default, lower saving attitudes, withdrawal of existing savings, etc. In long run, banker's long-term profitability, business outreach policy, lending and deposit services, quality of collateral, etc. are affected. Lending policy sometimes excludes disaster-vulnerable areas. Due to loss in standard of living, clients are unable to repay long-term loan and to draw new credit. Sometimes to cope up with post-disaster impact fund diversion takes place. Due to economic loss and inadequate support from other stakeholders, the business becomes weak in long run which leads to holding of less deposit and other assets by clients.
In addressing disaster risk, banks are addressing both its own and clients' disaster losses by their regular financial services and CSR activities. According to the existing relevant risk profile in banks, there is no scope to consider disaster risk as a tail-risk.
It is worth noting that though the Basel document does not precisely ask (noted only as part of environmental and operational risk in general) to focus on disaster risk, BB has explicitly mentioned about considering the associated risks in its several policy and supervisory documents. However, BB's initiatives have so far brought very negligible change on the ground in connection with the risk management processes in banking operation. Probably, it is time for mentioning specific capital requirement as a macro-prudential supervisory norm to ensure effective DRM in banks.
Banking sector of the country generally does not collect data on disaster incidents and losses and thus it is clearly impossible to quantify the volumes and extents of financial loss to the banks due to disasters. Banks are not, thus, in a position to identify disaster incidents as the reasons of non-performing loans or quality of collateral. Physical or infrastructural damage of bank branches or structures are remedied using the accounting head of 'Repair and Maintenance'. To understand the true extent of disaster risks and losses, banks are required to collect and maintain data base under separate and specific heads as the initial step of Disaster Risk Management in banks. A reporting requirement on the part of the Central Bank for the banking sector might help identifying overall systemic risks associated with natural and manmade disasters in the banking sector.
Global published data reveal that Asia, as a region, has been vulnerable and prone to disaster risk; and the region has significantly been impacted by very high financial losses due to natural and manmade disasters. It is really a matter of concern that in Asian countries the proportion of insured loss has been insignificant. This indicates the reluctance of using insurance or risk management tools in Asian countries. Though Bangladesh is amongst the top five vulnerable countries in the world, the proportion of insured risks appears to be even much lower than the Asian average. A developed insurance market and attractive targeted insurance products might be the true solution but this does not sound feasible in near future. The situation demands even more conscious approach on the part of the banks to address disaster risks.
Insurance and risk funds are essential tools and instruments to address disaster risks in any economy. Several innovative micro-insurance products have been contributing in addressing and transferring disaster risks of the vulnerable low-income section and rural clients of banking and financial industry. Considering the existing situation of the insurance industry of the country, selected micro-insurance products may be offered from the counters of banks; and such tools may also be tagged with lending products in the process of lending to the agricultural and small and micro sectors that are particularly prone to the disaster risk. Index-based micro-insurance might contribute to address disaster risk in agricultural lending in the country.
Banks generally use climate risk funds to support the disaster-affected people by distributing relief. The amount, mainly created out of CSR fund, is insignificant and targets are not achieved, as the published data indicate. Apparently, the fund cannot be distinguished from that of CSR fund. It would be more fruitful if the fund could be used to meet additional risk premium relevant for disaster-prone area; and to use for writing off loans in certain areas/regions following deadly natural disasters, if required. In addition, a portion of CSR funds can be used as a subsidy for low-cost rebuilding loans to the disaster-affected clients of banks. Certain volume of CSR funds may also be used to subsidise green financing activities related to mitigation and adaptation.
Disaster recovery planning and measures are becoming increasingly critical with the growing adoption of technology-based banking. There are instances where natural disasters resulted in network crash, data loss, interruption of regular banking activities, etc. Most of the data centres and disaster recovery systems of the banks in the country are located in Dhaka city. It is now a crucial need for banks to have proper disaster recovery plan with secured placement of central data centre and disaster recovery system. With the growing integration of technology in banking activities, the necessity of addressing disaster risk (both natural and manmade) will even go up sharply as part of IT security risk management.
To address disaster risk, it is important to realise that we are at risk; we are vulnerable; we could be affected by the natural and manmade disasters. And for that matter, information collection and dissemination, and raising awareness are crucial ways. The central bank, banks, and the associated training centres are required to come up with comprehensive awareness programmes for banks, and their clients. Each bank should have a concrete Banking Continuity Planning. Bangladesh Bank may think of issuing a guideline for banks to formulate customised Banking Continuity Planning based on their policy, operations, client base and portfolios.
Addressing disaster risk from banks' perspective is a relatively new field, and banks in global economies are yet to quantify and integrate disaster risk comprehensively in their risk management systems.
There is, thus, almost no concrete example to replicate. But, in the context of Bangladesh, which is one of the most disaster-prone economies in the globe, disaster risk deserves customised and vigorous consideration as part of the risk management arrangement in banking. Finally, it is the integrated and coordinated approach of the government, central bank, financial sector, corporate entities, business and consumer associations, media, and civil society groups that would ensure the best outcome. Disaster risk management (DRM) should be seen as part of the integrated whole.
Dr. Shah Md Ahsan Habib is Professor and Director (Training) at the Bangladesh Institute of Bank Management (BIBM)
