Published:  12:02 AM, 13 January 2025

Lending By Banks Under Banker-Customer Relationship: Source of Problems?

Lending By Banks Under Banker-Customer Relationship: Source of Problems?
 
With the change of political regime, banking sector of the country faced turbulence. Banks are reported to have undergone liquidity crisis. Banks' counters were found full of queues. Depositors rushed to bring back their money. But liquidity problems led them to withdraw a little money. Banks were not declared as runs. 'I cannot withdraw my money as much as I require. What is this?' was a common issue in the said situation. It is said that a very few persons looted banks in the form of loans. Regulators became facilitators, as per different media reports.

Banks deal with depositors' money which is used for on lending for productive uses. Deposits come from savings. This becomes a source of investment for which banks work as intermediary, a focal point to bridge between haves and have-nots. As such, foul plays cannot sustain banking system in the long run. Despite, banks were found functioning smoothly during the immediate past regime. How it was possible is a question. Answer is required to be sought. Answer became available with the change of regime. Central bank played its key role - last resort - to keep the operations of the particular banks afloat through injecting billions of Taka as a liquidity support. How it was possible? Was it through window dressing? This is another question. Regulator in the present situation can say that they were under pressure to extend what the then Government would ask. Maybe it was not possible on their part to protest?, but to accommodate. Another question comes as a supplementary. What roles multilateral agencies would do? They are found visiting Bangladesh in the name of 'Missions' regularly. Would not they trace malpractices in the banking system of the economy? Probably they were not aware of the situation. They might depend on what they were provided. Such dependency is a way of assessment based on off-site information. Central bank follows this method in addition to its on-site audit work. Media reports indicate that on-site audit framework is going to be replaced by risk based supervision. Under the method, assessment is to be made on information furnished by banks. It can be guessed what is to come out. This can be ascertained through different assessments like credit ratings of banks. These reports are well ornamental. Credit ratings reports of all banks indicate banks are in well shaped. But situation is found different after the resume of present regime.

All businesses do not need to be assessed from different points of views as banks are faced. The underlying reason is that banks' capital seems to be laughing if considered with their exposed size. As an intermediary, major sources of fund come from money deposited by savers. The money is used for mainline operations, lending activities. In this case, interesting method is used. Deposits are of different types in terms of time-tenure such as short, medium, and long. These are termed in different names like current deposits, savings deposits, time deposits, and so on. The nature of deposits gives banks hegemonic advantages. All depositors do not come to banks for withdrawal; an insignificant part of total deposits is needed for draws. Major portion remains idle.

Fractional reserve is a method used in banking. It says that lent money returns to banks as deposits, a part of which is again lent after retention of required money in liquid forms. What a nice proposition banks enjoy! In real sector, problems are observed in daily transactions. They become leveled as defaulters in case of failure to make repayments of loans payable to banks. Staff faces problems to get salary on time. But such problems are not found available in banking businesses. They are not classified as defaulters by regulators. No suffering is faced to pay out salary as real sector's employees face to receive. During the prevailing situation, depositors cannot withdraw their money but banks' officials are reported to have drawn their salary without hassles.

Banking is said to be a regulated business. It means that there require licenses to start banking businesses. In the open market economy, licenses are in place for such business!  Monetary authorities or central banks or other competent authorities, whatever the name is, work as licensing authorities which prescribe different regulatory frameworks. Banks need to comply with the regulations for their operations. Regulators set governance codes to be followed by banks. Despite, irregularities are found available in banking businesses ranging from service charges to loan operations. Availability of complaint management unit in central bank proves the presence of irregularities in banking system.

Banks are classified in different ways. Once banks become in problem, it is rarely possible to come out from. Only bailout model can reshape the situation. As it is known that banks deal with depositors' money, problems arise from money lent out. Money outside banks becomes stopped flowing in. As a result, there is a mismatch between inflows and outflows. Excess net outflows lead a bank to face liquidity crisis.

In reality, they are found operating in capital market, lending terms loans. Deposits are placed in banks for short term mainly. Few are for medium term. How banks find customers in real sense is a question. It is found that banks hunt customers. Relationship officials knock customers who are somehow known to them. They are managed to be included in the customers' list of the particular bank. Loans are sold. Once money is lent, supervision by lender's end is rarely conducted. Banker-customer relationship is a common word in banking businesses. As such, lending is made to known customers. In true sense, it seems to be related parties transactions whatever the regulations speak regarding the concept. Isn't it? If it holds true, money goes to the direction as per its wishes. Money is, as per banking formula, created out of nothing under fractional reserve mechanism. But it becomes out of something when the same is used by its beneficiaries. Nothing is a problem if it comes back to banks. Banks, when they are in capital market operators, are to undergo boom and burst situation.

Money is secular. Nothing is legal or illegal before it. Rather it acts in accordance with the desire of its holders. Banks' staff is a part of related parties. They are eligible to have loans from their banks where they work. Employees are entitled to have loan facilities for the tenure of their services. Loans are allowed at rebated rate of interest. How it is possible to extend at subsidy? Same facilities are reported to be available in the regulatory authority; where money comes from is a question. All are related parties. People become related parties when they are relatives to banking system. They become financially included in the financial system. Banks nurse them for their own interests. What is to happen if banks avoid all types of related parties transactions? Will banks face problems if their employees are to work without targets of deposits, loans, or fees? There are many questions arising, indicating the system with problems at the roots which requires to be uprooted.

 
Mehdi Rahman works in the development sector.



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