III. VINCULACIÓN CON LOS INSTRUMENTOS DE PLANEACIÓN Y
III.2. PLAN ESTATAL DE DESARROLLO 2005 – 2011
11 An example of such result can be found in “BANK PERFORMANCE AND CREDIT RISK MANAGEMENT” by Takang Felix
Achou Ntui Claudine Tenguh
0 5 10 15 20 25 -20.00 -10.00 0.00 10.00 20.00 30.00 40.00 50.00 60.00 2005 2006 2007 2008 2009 2010 Im p ai rm e n t as p e rc e n tage o f to tal l o an s Pr o fi t M ar gi n s in p e rc e n tages Years
Profitabilty vs. Impairment
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108 Source: Own Construction with figures from BBG’s Annual Reports (2007-2010)The data on BBG so far analyzed, also shows a negative correlation between ROE and IMP ALW/TL and also between ROA and IMP CHG/TL. This is vividly pictured below.
Chart. 4.4.2.3. The Relationship between ROE, ROA and IMP ALW/TL, CHG/TL
Source: Own Construction with figures from BBG’s Annual Reports (2007-2010)
Since Non- performing loans is an indicator of poor credit risk management, the above relationship so observed therefore suggests that there has been poor credit risk management at
-20 -10 0 10 20 30 40 50 60 2005 2006 2007 2008 2009 2010 P e rcen ta ge s (%) Title ROE vs. Impairment Allowance/Total Loans
ROE IMP ALW/TL
-2 0 2 4 6 8 10 12 2005 2006 2007 2008 2009 2010 P e rcen ta ge (%) Years
ROA vs. Impairment charge/Total Loans
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109 BBG which became more pronounced and exposed especially during the period it embarked on the expansion campaign spearheaded by the unprecedented aggressive lending. The next section therefore will take a quick review at the credit delivery process at BBG from credit generation through to collections and recoveries stage with particular focus on what might have gone wrong during the aggressive lending era.4.5 CREDIT ADMINISTRATION PROCESS AND MATTERS
ARISING FROM BBG’S 207/08 AGGRESSIVE LENDING
CAMPAIGN - FINDINGS
As stated earlier, BBG is a wholly owned subsidiary of Barclays Plc and many of its policies and practices including its Credit Risk Management Framework are group-wide in nature. A study conducted on Barclays Plc’s credit risk management techniques and practices in comparison with major Basel (1999a, 2000) regulations on Principles for the Assessment of Banks’ Management of Credit Risk revealed that the bank has comprehensively met most of the Basel regulations of: Establishing an appropriate credit risk environment; operating under a sound credit granting; process; maintaining an appropriate credit administration; measurement and monitoring process; ensuring adequate controls over credit risk and the role of supervisors. A summary of the findings which was based on Barclays 2006 Annual Report are summarized in the table below.
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110 Table 4.5. Summaries of credit risk management techniques and practices at Barclays Credit risk management governance Credit Risk Function carries directresponsibilities and a five-step risk management process is followed.
Credit granting N/A
Credit risk measurement PD, EAD and LGD models are used and a self- developed measure named Risk Tendency is also adopted for estimating expected losses. A 21-grade internal rating system, together with external ratings, is used for assessing credit risk.
Credit exposure management Analysis on credit exposure is made according to geographical area, industry and maturity. Credit concentration is given attention to and limits to sub-investment grade countries are clarified.
Credit quality management Potential credit risk loans are identified as either nonperforming loans or potential problem loans. Impairment is measured either individually or collectively.
Credit risk mitigation techniques All kinds of traditional techniques are used, including netting agreements and diversification. Loan sales, asset securitization and credit derivatives are also adopted for managing credit risk.
Source: Adapted from Credit Risk Management in Major British Banks (Xiuzhu Zhao, 2007)
What seems missing from the table above is information on the credit granting process which was not contained in the 2006 annual report used by the researcher. However there is a comprehensive information on the credit administration process contained in Barclays Africa &
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111Middle East Retail Credit Manual which is the standard operational process used by all the Barclays subsidiaries including BBG as shown in Fig 4.6 on the next page below.
The bank also has a group-wide comprehensive and detailed credit risk management policy document that addresses how credit risk is organized, identified, measured, monitored & controlled and reported within the bank. This 92 pager manual known as the Group Retail & Commercial Bank (GRCB) Retail Credit Risk Management Principles, Framework and Policy Manual which was purposefully designed to identify risk management principles and minimum standards by which all GRCB retail businesses must comply has clear guidelines on credit governance and control; regulatory compliance; risk appetite; risk governance structures; limit authority; impairment methodology, forecasting, loss recognition and conformance; collections & recoveries strategies and other relevant policies regarding the bank’s lending business.
Based on the above and other pieces of information from other internal policy documents, it is clear that bank from group level has a comprehensive credit risk management framework in place. Judging from the Basel regulations which are well mirrored by the comprehensive theory as espoused in Colquitt’s book “Credit Risk Management: How to Avoid Lending Disasters & Maximize Earnings” (2007), the bank seems to portray it has a strong Credit Culture for minimizing credit losses and upon which credit discipline, policies, and systems are established.
However, as stated elsewhere earlier, the phenomenal increases in BBG impairment charges recorded during 2006/07 and 2007/08 period clearly tells of the poor quality of its loan portfolio.
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112 The reason for the unprecedented abysmal performance of the bank can therefore be attributable to the fact that there were problems probably associated with the massive credit expansion process right from credit facilitation stage in 2006/07 and 2008.From the Retail Credit End to End Process Flow depicted by Fig. 4.5. below, it is clear that the credit organization process at BBG is largely in synch with Colquitt’s model (see chapter 3) and the Basel guidelines (see APPENDIX C) which when well followed could have largely prevented the lending disaster experienced by BBG.
My interrogation of the issues from internal sources revealed that the main cause of this abysmal performance was BBG’s imprudent venture in to retail expansion largely by use of credit as a bait to increase customer base and to make the bank more visible in the country in order to take advantage of the seemingly ripe opportunities in the economy at the time; basically driven by anxiety over income with little regard to adherence to sound credit principles.
The expansion which was to increase customer base was driven by new products such as Aba pa accounts for petty traders, Barclay loan for salary account holders and Scheme loans for both non-customers and customers. In deed by end of 2007, the bank’s loan book grew by 63% and 52.54% of the loan portfolio was made up of personal loans.
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114 Disclosures from sources available to me from within the bank (Credit Operations & Collections and Retail Banking Unit) revealed some serious hitches that inhibited the success of the expansion drive. The issues can be categorized under two broad areas: People/Personnel issues and Operational/Systemic issues.A typical valid credit cycle involves six (6) key functional areas;
Credit facilitation (comprising activities from credit generation to approval) Pre-billing management (billing and invoicing)
Remittance processing ( payment reconciliations) Collections management
Dispute management (root cause identification, refunds processing)
Reporting and analysis (exception reporting, customer intelligence management (MI) information and portfolio risk MI.
All these functional areas require effective human and adequate systems infrastructure resource capacity planning to be successful. However there was the problem of inadequate capacity to effectively deal with the huge volumes of loan applications that were churned out on a daily basis. The bank adopted the use of temporary staff especially at the facility generation stage. These temporary staff- referred to as Direct Sales Agents (DSAs) but subsequently called Lead Generators (LGs)- who had little or no training and were remunerated on commission basis ensured that large volumes of low-worth customers were recruited leading to high volumes of low quality loans (with high default risk) being booked. For example it came to light that even
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115 factory hands, ‘watchmen’ and other menial job workers who lived at most on minimum wages were also given loans with large amounts whose repayments they hardly could afford.Management at Scheme Loans Desk and Credit Operations Unit (COU) were under intense pressure to process and book a minimum of 1,000 loans a day. Staffs in these two departments were overwhelmed with the work load as they were understaffed. The result was that the quality of the vetting, scoring and assessment suffered as most guidelines and requirements were relaxed or overlooked resulting in the booking of huge volumes of sub-standard loans.
The above phenomena directly affected the integrity of the work done at the billing and remittances stage and which eventually made a dumping ground out of the Collections and Recoveries sections. In fact even Barclay Loans collections which did not have much to do with billing and remittance processing in that Standing Order payments were automatically directed from customers’ salary accounts on to the loan, was not spared as in some cases Standing Orders were inadvertently set on wrong accounts. Scheme Loans which constituted over 50% of the retail book, suffered the most and the huge impairments were mostly coming from this sector as most of the beneficiaries were non-Barclays account holders. Data integrity was nothing to write home about which led to a flawed billing and remittances management with lots of errors such as wrong billing/invoicing, wrong reconciliation of repayments and crediting of wrong loan accounts among other things; leading to high delinquency and default rates.
Whilst credit assessment and poor documentation ensured recruiting and booking of poor quality loans, the post-approval job of credit administration (of ensuring on time payments, monitoring of the loans’ credit quality and ensuring that borrowers’ complaints are adequately and timely addressed to ensure borrowers’ continued commitment to payment) was not gotten right. Until
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116 September, 2008 there was no well-structured and dedicated team with clear responsibilities to ensure avoidance of First Installment Defaults (FID), late payments, non-payments and underpayments/incomplete payments from Scheme Companies who either undertook or guaranteed to do ‘from source’ deductions for the Bank from their employees who were beneficiaries of the Barclays Scheme Loans. The Scheme Loan Desk which was already overwhelmed by their pre-vetting and documentation work volumes seemed to be tacitly tasked with all these tasks. From all indications, the assumption was that the Scheme Companies would on their own volition do correct deductions and then bring the remittances to Barclays. The result of this was a piling up of payment cheques with Scheme Companies, and even in few cases where companies brought in their remittances; they were left un-reconciled and unprocessed for right crediting of the individual loan accounts.The Collections Team (over 80% being contract staff) which was set up mid-2007 to manage and normalize overdue loan accounts, per policy were to have a monthly Accounts-Collector-Ratio (ACR) of 200. However by the last quarter of 2007, Collections Officers were getting ACRs of over 1500 delinquent accounts which were mostly Scheme Loans; owing to the deterioration of the credit administration activities at the Scheme Loan Desk. The result was a grave deterioration of the credit portfolio leading to such impairments charges and allowances of a gargantuan magnitude witnessed in the history of the bank in particular and the banking industry in general.
The people and systemic operational hiccups were not limited to the Scheme Loans Desk and Credit Operations Unit (COU) alone. As the ACRs began to skyrocket, more Collections Officers were recruited on contract bases. The number of the new recruits out-numbered the available equipment like computers, work stations, telephones and even work desk space. This
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117 led to running of a shift system whereby a set of the Collection team operated between 7 am to 2 pm and the other set came in at 2 pm and closed at 9 pm each week day. Additionally, there was also weekend duty in which the two sets rotated every Saturday and Sunday. Judging from the socio-cultural orientation of the typical Ghanaian, one could really doubt if any meaningful dividends came out of these work policy. The Ghanaian would be more than uncomfortable with calls from a bank in the night asking him/her to pay their loan arrears; not to even talk about weekends where they get busy with socio-cultural and religious events and activities such as ‘child-naming ceremonies’, funerals, weddings and church programs.Inappropriate and inadequate systems infrastructure needed for prioritizing collections activities, printing of customer accounts statements, re-printing of invoices for the Scheme Companies and collector activity logs were not immediately available. Collections Officers bemoaned their inability to access comprehensive information on debtors; some accounts did not even have physical address, and telephone or mobile numbers on them and some contact numbers were either wrong or perpetually unreachable. This is suggestive of non-adherence to proper Know Your Customer (KYC) and Know Your Borrower (KYB) due diligence during the aggressive lending campaign embarked on by BBG in 2007-2008 period.
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118CHAPTER FIVE
CONCLUSIONS AND RECOMMENDATIONS
Among all the books and articles about bank management, almost all of them have declared credit risk to be the major risk faced by the banking sector. Evidence in literature is clear that only few banks have been left untouched by the consequence of poor lending and other credit risk management practices. Although it should be understood that perhaps banks can never fully know their customers or borrowers as well as they should, an appropriate credit risk management can help to minimize losses, while on the contrary, a poor one can be extremely damaging; leading to lending disasters and bank failures.
5.1 SUMMARY OF FINDINGS AND CONCLUSIONS
From the environmental analyses, one could deduce that the massive expansionist campaign embarked on by BBG between 2006 and 2008 was a clear attempt by Bank Management to take advantage of the seemingly attractive Ghanaian banking industry with lots of opportunities for growth and profitability, especially with the seeming conducive macro-economic environment coupled with favorable regulatory developments from 2004 to 2008.
Growth within the economy coupled with relatively lower interest and inflation rates gave cause to believe all was well and the average Ghanaian could afford credit and its repayment. More so, the abolishing of the 15% secondary reserve requirement freed bank capital for lending business.
A review of BBG’s Credit Risk Management Framework shows the bank leveraging on its group-wide policies has adequate policy guidelines in place to ensure effective credit risk
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119 management. The bank’s GRCB Retail Credit Risk Management Manual and Retail Credit End to End Process Flow Manuals all together have ensured that an appropriate and conducive environment has been established, which if thoroughly adhered to would ensure a sound and effective managing of credit risk. This include, a solid governance structure with clear obligations and lines of authority and policy documents approved by the board containing procedures, processes and techniques for handling credit risk which largely follow the Basel guidelines.However, from the issues arising from BBG’s aggressive lending expansionist campaign during the 2006-2008 period, it is evidently clear that this sound credit risk management policies have in most part been breached or compromised advertently and/or inadvertently. The reasons for the compromise was chiefly due to anxiety over income and competitive pressures in the bank‘s key markets.
Lack of proper anticipation of work volumes associated with the lending targets exposed the bank’s poor resource capacity planning and readiness for the expansion. The use of untrained and unmotivated contract staff (Direct Sales Agents) mostly remunerated on commission basis contributed greatly to acquisition of poor quality (high risk) loans. Under resourced teams at the credit facilitation and assessment stages of the credit cycle ensured that proper credit due diligence was not done leading to booking and granting of sub-standard loans.
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120 Credit administration-post approval suffered from the lack of proper customer and borrower due diligence- KYC and KYB - at the credit scoring, vetting and assessment stages as inaccurate and incomplete information bedeviled data compilation at those stages.Additionally inadequate systems infrastructure coupled with poorly structured and ill-equipped teams at the collections department ensured further deterioration of the retail loan portfolio. Consequently, inadequate management of collections and recoveries of overdue/delinquent loans gave rise to skyrocketing impairment charges & allowances culminating into historic losses in 2008 and 2009.
This study shows that there is a significant relationship between bank profitability (in terms of ROA and ROE) and credit risk management (in terms of loan performance indicated by the ratio of impairment charges and allowances to gross loans). The observed negative relationship (correlation) between BBG’s ROA and ROE on one hand and the ratio of impairment charges and allowance to gross loans on the other hand; against the backdrop of the myriad of signs of a distorted credit culture explained above, leads me to conclude;
That better credit risk management practices result in better bank performance (profitability) and poor credit risk management practices translate into poor bank performance (profitability)
That whilst having sound and comprehensive Credit Risk Management Frameworks Manuals in place is important, non-compliance and non-enforcement of the laid down principles in such manuals (most especially at the credit generation and assessment
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121 stages) coupled with grave credit operational lapses would lead to poor loan portfolio quality which constitutes poor credit risk management and hence poor bank performance.5.2 RECOMMENDATIONS
BBG is a strong brand. My findings have shown that over the 94 years of its operation in Ghana, BBG has largely been a market leader in terms of profitability, capital adequacy, market share of deposits and assets.
Despite BBG has a fairly comprehensive credit risk management framework in place to adequately manage the risk associated with the bank’s lending business, the historic losses made in 2008 and 2009 which accompanied the massive credit expansion drive in 2007/08 suggest that the bank lost the balance between profitability and growth on one hand and the basics of sound credit management in banking on the other hand. To turn the table around, management must adopt a disciplined approach with much focus on addressing the key functional areas of the credit cycle with much integration of credit risk management considerations in lending decisions by business units.
I would therefore like to propose the following recommendations as measures that bank management could undertake to prevent the reoccurrence of credit failure experienced by the bank and to minimize credit risk exposure in the future.
1. Ensure proper and strict integration of risk management considerations in to business and credit expansion decisions.
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122 The BBG experience shows that credit risk management function’s role was so limited in the granting of loans over the period as they were unable to influence business decisions and the fact that their considerations were subordinate to increased interest incomes or profitability interests. A well-equipped credit risk function with capacity to adequately make timely and accurate forecasts; when properly harmonized with business generation units would often times ensure the bank observes good credit due diligence in their