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Submitted by Jawad Iqbal on
Lending to insiders is more or less like lending to oneself. A bank job is to extend credit to the segments which need it most, keeping in view its profitability and risk concerns. A bank which is involved in lending to its the associates of its management is behaving irrationally and short sighted. It is a common practice, as observed during my experience of banking, that those customers who are in contact with managment tend to get favorable credit conditions, and this favor increases as the contacts and references of the customer rise through the hierarchy of the bank. As an industry, where character is considered most important in the repayment analysis of the borrower, it is necessary for a banker to have interaction with the customer to judge the character, in a way which is not yet scientifically taught to anyone due to its complex nature and different human behaviors. As a matter of good corporate governance, lending to associated concerns are and should be reported in the financial statements and made publicaly available. Lending to the customers who have links inside the management is a different issue. A bank cannot publicaly disseminate this information, due to privacy of its clients as well as competition with other banks. But internal protocol of good governance should include reporting of the interaction of management with customers. Presently, banks are making risk managers as the deciding authority for extension of credit to any customer, and the risk managers are never allowed to have interaction with customer to avoid any favor. This has been tampered by influencing the risk manager through colleagues and associate inside the bank. So, my point is simple. You cannot remove the human touch of a banker to decide upon its credit extending policies, but it can be controlled through multiple direct and indirect measures such as nurturing of culture where prime importance is given to honesty and prudence.. Thus, we should allow the bankers to have personal contact, trust their judgement but never close our eyes to the phenomenon highlighted in the above mentioned blog. After all, practical world is not ideal, but we can strive for the ideal situation.