Credit Management Weaknesses in Emerging Economy Banks

Article excerpt

Extraordinarily high problem loan levels in the troubled Asian economies have led correspondent bankers, fund analysts, and rating agency specialists to reassess their methodology for analyzing emerging economy banks. This article identifies and recommends precautions for common credit management weaknesses observed among emerging economy banks. These weaknesses encompass organizational and corporate culture issues, analytical approaches, and information shortcomings.

Organizational Issues

Three major organizational weaknesses often found in emerging economy banks prevent the development of an effective credit culture. It is important for correspondent bankers, fund analysts, and rating agency specialists to understand these problems in order to evaluate these banks appropriately.

Communication. There is often a bifurcation between senior management and other levels of management and staff that inhibits effective communication. Senior management of emerging economy banks typically does not perceive the value of keeping mid-level management and other staff informed of key issues or decisions. Relatedly, it does not create an environment in which individuals below senior management feel able or qualified to bring issues to the senior management level. The result is that these banks function on two relatively unconnected planes.

Problem loan management is one area often affected by this weakness. Once a major problem loan emerges, it is not unusual for a member of the bank's senior management to assume sole management of the loan, to the exclusion of all other participants in the previous loan decision-making and management process. Not only is this assumption of sole management often an inappropriate use of the senior management member's time, it also prevents bank employees from learning the lessons that problem loans can teach. Tellingly, credit department staff in such banks typically have little sense that it would be useful or interesting for them to be able to follow the fate of such loans.

Responsibility. A second and related organizational shortcoming is that employees in emerging economy banks tend to define their responsibilities narrowly. When employees are not encouraged to interact with senior management, they typically do not conceive of their responsibilities in expansive terms. In addition, emerging economy banks usually do not have a policy of exposing the staff to varied responsibilities so that they will develop a more inclusive understanding of the bank's operations. Even when employees do move to different functional responsibilities, they are not encouraged to cross-fertilize their experience. This narrow approach to job responsibilities has a negative effect on the bank's credit culture, because employees are not encouraged to see and take responsibility for the big picture.

Group decision-making. The emerging economy bank emphasis on group decision-making, particularly with regard to lending decisions, could be portrayed as reflecting a corporate culture that values consensus. It could also be evaluated more critically, however, as avoidance of individual accountability. There is considerable evidence that the latter motive often dominates. The group decision-making emphasis can be seen most readily in the widespread preference for credit committees. While credit committees function effectively in many banks in developed economies, they can be almost dysfunctional in some emerging economy banks.

One frequent problem with credit committees in these banks is that the number of members is excessively high. Sometimes the precise number of credit committee members is not even clear; one bank estimated that the figure was greater than 20! In addition, the criteria for credit committee membership are not well defined; credit committee members are often synonymous with the bank's senior management ranks, regardless of an individual's functional responsibilities or actual ability or need to participate in credit decisions. …