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Performance of banking system - Senate's disquietude.

The Standing Committee of the Senate on Finance and Economic Affairs, while reviewing performance of the nationalized commercial banks, observed that to restore the prestige of the banks and financial institutions is the most pressing need of the hour.

Eventually some meaningful concern has been evidenced about the degeneration in the banking system in Pakistan. The Standing Committee of the Senate on Finance and Economic Affairs, while reviewing performance of the nationalized commercial banks, observed that to restore the prestige of the banks and financial institutions is the most pressing need of the hour.

Decidedly, what the Committee observed, and resultantly desired, can not be disputed. Nevertheless, barley to desire without establishing cause and effect relationship is tantamount to wishful thinking. The chain of action that is needed to be pursued to obtain any positive results comprises: Identifying the symptoms; diagnosing the disease; and finally, prescribing the medication to which the patient tends to respond.

The Committee which met under the chairmanship of Senator Prof. Khurshid Ahmed in the Parliament House, Islamabad on 15th September 1996 diagnosed politicization as the main ailment, and prescribed complete abstinence. This analysis seems to be quite realistic. However, it lacks self-sufficiency. The harm that has already been done to the system can not be undone by preventing political influences alone. It calls for the extensive purging off the stinking areas through firm administrative actions.

One of the greatest evils that the banking industry is suffering from is its own top brass which, barring few exceptions, comprises inefficient, insincere, unchaste, and self-centered executives who reached the prime of the profession by dint of anything but merit. Cost wise they are white elephants; performance wise they are white ants. Their misdemeanours are no more a secret. Files have been opened on them in the MOF, Islamabad which seldom move ahead for action. But, whenever it so happens, they somehow or the other manage to get them retracted to the steel cabinets.

This element has to be eliminated forthwith if any improvement is desired in the system. But, the question is where are the clean hands which are required to bell these dirty cats? The Committee should make a search to find out one. We, on our part, wish them all success. The top management created second/third line of management (EVPs/SVPs) matching its own mettle. This is done by granting rapid and out-of-turn promotions to the "birds of the same feather", thereby creating a permanent class of frustrated, demotivated, and disgruntled employees at all levels. It has played the role of a double-edged sword, suppressing merit on the one hand and nurturing deficiencies on the other hand. This level of the executives is the backbone of management on whose health depends the health of the organization. In-depth search in each individual case, spread over a period of time, leading to optional/compulsory retirement or requitable elevations, as the case may be is perhaps the answer to the situation.

Trade unionism in its existing form is the third greatest factor responsible for the degeneration of the banking industry. It has many a deplorable facets each of which has to be severely dealt with on its merits in order to unearth a committed work force. Misconstruing of the cost-benefit relationship is yet another reason for the cracks in the financial discipline. A potent example may be quoted from Dawn of 16th September, 1996.

"NBP President was given a literal drubbing by an all charged-up Dr. Yaqub who wanted him to immediately stop the then ongoing vigorous marketing campaign of NBP's financial tools."

"- he (Mr. M.B. Abbasi) snapped back by telling the governor that as long as he was the president of the bank he would run it on commercial footing and the returns are already showing that the bank is on the right rack."

Expediency of this dialogue notwithstanding, there is no denying the fact that high risk transactions carry higher yield. Does the later justify the former? No. Prudent bankers would never encourage speculative deals. Had the "return" alone been the criterion for undertaking a venture, there would have been many more BCCIs and Berrings in the banking world. The Committee further desired that the management expenses should be controlled, strong discipline and professionalism should be adhered to, and strict system of accountability be introduced at all levels.

To achieve these and other objectives committed to organizational goals, certain calculated actions have to be taken. Such actions are long term in nature, and their results are not always quantifiable. But, they certainly pave the way for the enviable health and the lasting prosperity of the organisations. Some of these actions are outlined here. These shall not disappoint the Committee, should the Committee also repose its confidence in them. Efficiency is the end result of the multiple functions of which Organization structure is predominant. D. V. Woyer, former Chairman of Barclays Bank U.K. Limited and an ex-President of The Chartered Institute of Bankers, London, in his illustrious write-up reproduced in Management and people in banking, a publication of the Institute, has hit right at the target when he reiterated "Structure is a vital element in efficiency". A searching analysis of the structural set-up of NCEs might, therefore, unveil the cogent reasons of deterioration in our banking services.

Structure

The structure of a bank encompasses the framework within which it operates to provide the banking services required by the community. The key units of structural set up of Pakistani NCBs which are primarily responsible for making of policies and executing of policy decisions include:

* Board of Directors;

* Executive Committee;

* Divisions at Head Office; and

* Regional Headquarters.

Board of Directors

There must be sharp demarcation between the role of the board and the management. Strict marking off of the field of one craft from that of another is precisely inevitable to help either of them perform its functions consciously. Obviously enough, a board is charged with making of policies and monitoring and reviewing of implementation of its policies. The implementation itself is, however, left to the executives, jointly known as management of the bank. Directors also have to serve as the "Court of last resort" to which all unresolved problems and policy questions are referred.

The first thing that emerges from the above discussion is that the chief executive of the bank should not be allowed to hold the office of the chairman to the board. If it was not done, it would reduce the status of the board merely to a thumb impressing agency where the chief executive would be accountable to himself for all his deeds, defeating the very purpose of accountability - the main objective of the formation of the board.

Unfortunately, Presidents of our NCBs also hold the offices of the chairmen of the respective boards. The government changed the complexion of the boards in 1993 by relinquishing the serving executives from the directorship. However, even after this change, the presidents continued to hold offices of the chairman. Recently, at the time of entrusting UBL to the new management, the offices of the chairman and the president were separated. But, to one's utter disappointment, serving executives of the Bank were once again inducted to the board.

The serving executives being on the board, its independent status is put in jeopardy. Moreover, lack of accountability to an independent board tends to slacken these executive-directors on their operational responsibilities. One more drawback of this composition of the board is that the executives who are subordinates to the President in day-to-day operations of the bank sit at par with him in the board with full right to disagree and argue with him, and, at times, even to go to the extent of confrontation. This tends to spoil the relationship between the President and the SEVP-directors, and casts adverse repercussions on outside-the-board activities.

This anomaly, i.e. the same person being the Chairman and the President at NBP and HBL, and the serving executives appointed on the board at UBL, shows that the government has not yet been able to appreciate the difference between the functions of the board and those of the executive headed by the President. What is, therefore, desired is that the Presidents of NBP and HBL immediately vacate the offices of the chairmen. Simultaneously, independent chairmen are appointed from outside. Similarly, the executives serving on the board of UBL as directors should be replaced forthwith by outside directors.

Qualifications and Directors

Usually, successful businessmen, leading industrialists, and reputed professionals are considered suitable for directorship of the banks. It should be rewarding if the boards of our banks can encompass some of the following expertise.

* Finance, investment and stock market

* Capital raising

* Non-interest based financial operations, such as, leasing, modarabas etc.

* Human resources development

* Socio-political conditions

* Agriculture

* Broad based industrial skills

* International trade finance

* World economic trends.

Extensive practical knowledge of banking operations is not on the priority list for directors of banks. This expertise can be provided to the board by the management. In any case, presidents of the banks shall be on the boards who should be able to brief the directors on vital issues relating to the banking practices, although our traders and industrialists hardly need any such briefing. One more option may be to appoint retired bank executives as directors. Country wide selection of directors should be more useful than a selection from one or a few selected regions. Moreover, more than one director should not be drawn from one group of industrialists or traders.

State Bank of Pakistan and Pakistan Banking Council have the monitoring role. Their representation on the board of a bank would mean that these monitoring agencies subscribed to the decisions of the board. This is irregular. However, a representation of the Government, the major share holder in NCBs, is desirable. But, this would deprive the government of the right of questioning a decision to which its own representative was a party. Thus, except Government nominee and the bank's president, all the directors should be from outside, preferably those who meet the requirements outlined in paragraph 24. The Chairman to the board should be the most outstanding person from amongst the outside directors.

Executive Committees

The President and the SEVPs nominated by the Board of Directors make this Committee. Since the purpose of these committees is to look after day-to-day affairs of the bank at an appropriate level, a more functional approach to achieve this objective would be to nominate all the Divisional Heads on these Committees.

Divisional Chiefs at Head Office

Divisions at Head Office are headed by SEVPs or EVPs. There are also the situations where Divisional Heads are SEVPs, and EVPs are attached to them in subordinate positions. This is sheer waste of valuable human resource. EVPs and SEVPs are at par in all respects. Their salary grades are the same; their powers are identical. To superimpose one over the other is gross misuse of authority to serve the vested interests at the expense of the organization.

The more realistic position would be that a division was headed either by an EVP or SEVP who were made directly accountable to the President. This would have a positive three-fold impact: (i) an undue tier would be eliminated resulting in quicker decisions; (ii) a range of top executives being under utilized would be properly utilized; and (iii) undue excesses by a particular class of executives would be checked. The size and structure of a division must be realistic and objective-oriented. While determining the size of a division or of any of its components, principles of sizing and effective span of Control should be adhered to.

In any case, an executive should not hold charge of more than one division at a time. This would ensure improved quality of control which has a direct bearing on performance standards. With EVPs appointed Divisional Heads along with SEVPs, no justification remains for multiple incumbencies to satisfy the lust of power leading to corruption. The rules framed by the banks for rotation of jobs should be implemented in letter and spirit. Those who are in the game know very well how these rules are flouted. This must stop.

Regional Headquarters

This is a decentralization process according to which PHQs have been split into Area Regional Offices. It is a good change in as much as it helps in making early decisions. But, it does not guarantee quality of decision making. It also does not reduce the work load of the H.O. Credit Committees, or the Board of Directors. To overcome these short-comings, "Local Boards" may be established which should ensure: (i) early decision making; (ii) transparency in the decision making process; and (iii) sharing H.O. workload substantially.

The directors of these boards being "locals" or "localized residents" of the area are expected to have first hand personal knowledge about the intending borrowers and the prospects of their businesses to be financed by the bank. This should make positive contribution toward the health of the credit portfolio. of the bank, and should also do away with the need of the Regional Credit Committees whose performance is bound to be influenced by the H.O. representations, and/or the ARCs.

There may be not more than 4 local boards in the country, each having in its fold almost equal number of Area Regional Offices. Geographical set-up of a local board conforming with the politically drawn boundaries of the provinces does not fall in line with the needs of commercial organizations. Hence, allocation of Regions to these boards should be made on proximity basis than for any other consideration. Detailed modalities of local boards may be discussed at a later stage, as and when needed.

Audit and Inspection

Banks are the custodians of public money; while custodians of banks' integrity are its Auditors and Inspectors. Despite such a pivotal role which they have to play, the Inspection Division of our banks are not properly manned and managed. Without going into the details of how these divisions are being run, a three-fold framework is proposed for the audit operations of Pakistani banks which should sufficiently secure the independence and impartiality of Auditors.

* There should be separate Audit Service in the banks. Young and qualified accountants should be hired for this service.

* For senior positions, only those executives should be posted in Inspection Division whose integrity is above board and whose professional expertise is above average.

* The Chief of Inspection should be accountable directly to the Chairman to the Board.

Meaningful and Effective Training

Effective training starts with the identification of a need. It then gets along diluting that need gently and slowly and, ultimately, culminates with the need having been satisfied. The success of a training programme depends on how far the underlying training needs are satisfied by it.

The training activities, repeated year after year, have failed to bring about any visible improvement in the professional know-how and trade skill of the trained, or any positive change in their behaviours that could be distinctly identified as predominately instrumental in achieving the organizational goals, particularly in a service industry. It is indeed surprising that so much training, in whatever form, is embarked upon without any thoughts about its validation or evaluation. A practical approach, in contrast to an academic one, in probing into the causes of this ordeal would require a look through the smoke screen. This would present not-too-pleasant a view to a keen on-looker.

What is required is that value should be added to the training exercises by way of evaluating their yield against what was expected of them. Technically speaking, in order to assign creditability to a training programme, its effectiveness should be measured in terms of the predetermined training needs. Training programmes which are in line with career planning - the process of systematically grooming individuals to match future organisational needs - are highly rational, and carry great practical value.

Additional Legal Support

Establishing of institutions such as Banking Ombudsman, and Banking Services Tribunal, and introducing of disciplines like Code of Banking and Deposit Insurance Scheme would prove instrumental in securing the interests of depositors, borrowers, and employees. Moreover, the number of existing banking courts should be sufficiently increased to ensure maximum recovery in the shortest possible time.

Autonomy for the State Bank of Pakistan

The SEP should have sufficient legal powers to enforce its policies and decisions. The Bank should be made to work on the lines of the Dresdner Bank of Germany rather than in the style of the Bank of England.

SBP Versus PBC: Unity of Command

Effective control emerges from the unity of command. The more complete a reporting relationship to a single superior (person or body) is, the less is the problem of conflicting instructions, and greater is the feeling of responsibility for results. The only inference that can be drawn from this argument is that the monitoring role should vest only with SBP, and the PBC which is rendered infructuous should be disbanded.

Mushroom Growth of Bank and Financial Institutions in Private Sector

The expansion of private commercial banks, investment banks, leasing companies and modarabas is not in proportion to the base of the country's money market. The only alternative to save the country's economy from the adverse effects of this unnatural and artificial expansion is consolidation by way of merger of weaker units with more viable units.

S. SABIR ALI JAFFERY (61), a banker by profession holds Master in Business Administration (Gold Medalist), besides having bachelor of Law degree. He bears fellowships of British Institute of Management, London and Institute of Bankers in Pakistan with 41 years experience in the banking and financial operations. Before joining Allied Bank of Pakistan as Director General of Training and Statistics Wings, he has been retired from National Bank of Pakistan where he served as Executive Vice President.
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Author:Jaffery, S. Sabir Ali
Publication:Economic Review
Date:Sep 1, 1996
Words:2971
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