Disaster Risk: Addressing Disaster Risk in Banking in Bangladesh
(Published in the Financial Express in 2018)
Dr. Shah Md Ahsan Habib
Bangladesh Bank became active in addressing disaster and related risks mainly in recent time, though there were instances of scattered initiatives to help the disaster affected people following some deadly natural disasters. At the initial stage, the Central Bank primarily played roles for rehabilitation. For example, Bangladesh Bank provided fresh Agri-loan facilities for rehabilitation of agriculture sector in cyclone ‘Aila’ affected areas; agricultural loan to flood affected people at Haor areas; relief/assistance to the flood affected people particularly at north-east part of Haor areas under CSR activities; relief/assistance to the landslide affected people at Chittagong Hill tracts in recent time, etc. However, the issue is considered more as part of policy and guideline documents in recent time by the Central Bank. The existing administrative set up of Bangladesh Bank allocates relevant key responsibility associated with disaster risk to the Sustainable Finance Department of Bangladesh Bank. As a notable initiative, a checklist on environmental risk was accommodated in audit guidelines and reporting formats in the ‘Policy Guidelines for Green Banking, 2011’. Practically, thisguideline is helping to mainstream Environmental Risk that cover possible sources of disaster risk such as land use and climate change related events (cyclone, drought) etc. In 2017, BB has redesigned and renamed the guideline as The Environment and Social Risk Management (ESRM). Irrespective of the source of fund, the ‘Guidelines on ESRM’ is the master framework for the banks and FIs in assessing E&S risks in their credit/investment proposals/accounts, managing E&S risks in their credit/investment portfolio and establishing Environmental and Social Management System within their organization. As per this guideline, bank should finance economic activities in the flood, cyclone and drought prone areas at the regular interest rate without charging additional risk premium. In addition, banks should assess their environmental risks for financing in different areas by creating a Climate Risk Fund (CRF) to be used in case of emergency. The banks are expected to ensure regular financing flows in selected vulnerable areas and sectors. CRF can be used for event and projects related to environment, climate and disasters. CSR and green banking initiatives of BB are clearly connected with disaster risk management in banking-recovery, mitigation and adaptation. Other than these, disaster issue has also been addressed in some other guidelines of BB. According to the ‘Credit Rating Methodology for Small and Medium Enterprise (SME)’ and‘Guidelines on Risk Based Capital Adequacy’,both quantitative and qualitative factors should be considered in assessing the SME financing operation. Moreover, BB mentioned disaster risk as part of the broad definition of Operational Risk (pillar 1) in the risk management guideline, and suggested measures under Supervisory Review Process of Pillar Two.
In banking, both banks and clients are affected by disasters immediately and also in medium/long term. Basically banks’ infrastructure is vulnerable to disaster in short term. Their financial performance credit recovery and other regular services are affected immediately after disaster. Asset damage, discontinuity in economic & business life and fall in quality of life in the clients are immediate impact of disaster which lead to credit default, lower saving attitudes, withdrawal of existing savings etc. In long run, banker’s long term profitability, business outreach policy, lending and deposit services, quality of collateral etc. are affected. Lending policy sometimes excludes disaster vulnerable areas. Due to loss in standard of living, clients are unable to repay long term loan and to draw new credit. Sometimes to cope up with post disaster impact fund diversion takes place. Due to economic loss and inadequate support from other stakeholders, the business becomes weak in long run which leads to holding of less deposit and other assets by clients.
In addressing disaster risk, banks are addressing both its own and clients’ disaster losses by their regular financial services and CSR activities. According to the existing relevant risk profile in banks, there is no scope to consider disaster risk as a tail-risk. It is good to observe that though the Basel document does not precisely ask (noted only as part of environmental and operational risk in general) to focus on disaster risk; BB has explicitly mentioned about considering the associated risks in its several policy and supervisory documents. It is also true that BB’s relevant initiatives brought very negligible change on the ground in connection with the risk management processes in banking operation. Probably, it is time for mentioning specific capital requirement as a macro-prudential supervisory norm to ensure effective DRM in banks. There is no doubt that any level of capital cannot offer complete protection from incidences like disaster, however, such requirement might offer bank authorities the due hints of concerns of the policy makers on the issues.
Banking sector of the country generally does not capture data on disaster incidences and losses and thus it is clearly impossible to quantify the volumes and extents of financial loss to the banks due to disasters. In the absence of data capturing arrangement, banks are not in a position to identify disaster incidences as the reasons of non-performing loans or quality of collateral. Physical or infrastructural damage of bank branches or structures are met up using the accounting head of ‘Repair and Maintenance’. To understand the true extent of disaster risks and losses, banks are required to capture and maintain data base under separate and specific heads as the initial step of Disaster Risk Management in banks. A reporting requirement on the part of the Central Bank for the banking sector might help identifying overall systemic risks associated with natural and manmade disasters in the banking sector.
Global published data reveal that Asia-as a region has been vulnerable and prone to disaster risk; and the region has significantly been impacted by very high financial losses due to natural and manmade disasters. It is really concerning that in Asian countries the proportion of insured loss has been insignificant. This indicates the reluctance of using insurance or risk management tools in Asian countries. Though Bangladesh is amongst the top five vulnerable countries of the Globe, the proportion of ensured risks appeared to be even much lower than the Asian average. A developed insurance market and attractive targeted insurance products might be the true solution which does not sound feasible in near future. The situation demands even more conscious approach on the part of the banks to address disaster risks.
Insurance and risk funds are essential tools and instruments to address disaster risks in any economy. Several innovative micro insurance products have been contributing in addressing and transferring disaster risks associated with vulnerable low income section and rural clients of banking and financial industry. Considering the existing situation of the insurance industry of the country, selected micro insurance products may be offered from the countries of banks; and such tools may also be tagged with lending products in the process of lending to the agricultural and small and micro sectors that are particularly prone to the disaster risk. Index –based micro insurance might contribute to address disaster risk in agricultural lending in the country.
Banks generally use climate risk funds to support the disaster affected people mainly by distributing reliefs. The amount, mainly created out of CSR fund, remained insignificant and given targets were not achieved, as the published data indicate. Apparently, the fund cannot be distinguished from that of CSR fund. It would be more fruitful if the fund could be used to meet additional risk premium relevant for disaster prone area; and to use writing off loans in certain areas/regions following deadly natural disasters, if required. In addition, a portion of CSR funds can be used as a subsidy for low-cost rebuilding loans to the disaster affected clients of banks. Certain volume of CSR funds may also be used to subsidize green financing activities related to mitigation and adaptation.
Disaster recovery planning and measures are becoming increasingly critical with the growing adoption of technology based banking. There are instances where natural disasters resulted in network crash, data loss, interruption of regular banking activities etc. It has been found that, most of the data center and disaster recovery system of the banks are located in Dhaka city in the country. It is now crucial need for banks to have proper disaster recovery plan with secured placement of central data center and disaster recovery system. With the growing integration of technology in banking activities, the necessity of addressing disaster risk (both natural and manmade) will even go up sharply as part of IT security risk management.
To address disaster risk, it is important to realize that we are at risk; we are vulnerable; we could be affected by the natural and manmade resources.And for that matter, information capturing and dissemination, and awareness are crucial ways. Central bank, banks, and the associated training centers are required to come up with comprehensive awareness programs for banks, and their clients. Each bank should have a concrete Banking Continuity Planning. Bangladesh Bank may think of issuing a guideline for banks to formulate customized Banking Continuity Planning based on their policy, operations, client base and portfolios.
It is true that addressing Disaster Risk from banks’ perspective is a relatively new field, and banks in global economies are yet to quantify and integrate the disaster risk comprehensively in their risk management systems, and thus there is almost no concrete example to replicate. However, our country context, as one of the most disaster prone economy in the globe, demands customized and vigorous consideration of disaster risk as part of the risk management arrangement in banking. Finally it is the integrated and coordinated approach of government, central bank, financial sector, corporate entities, business and consumer associations, media, and civil society groups that would ensure the best outcome; and DRM should be seen as part of the integrated whole.