Published: Tuesday, April 30, 2013

Could financial institutions have played a role?

MEDIA in the past few days have looked at the Savar tragedy from numerous possible angles. Discussions about who is responsible for the death of the 350 workers have been the main topic of talk shows and print media. Starting from the building owner to the RMG factory owners to the political parties to the engineers and construction companies, all have been blamed to a certain extent for this tragedy.

But who exactly is to be blamed is subject to proper investigation, so I am not going to speak about it.

My point is, in a country where rules don’t work and results into death of hundreds regularly, what options do we have?

Industrial casualty related death is one of the highest in our country. In setting up an industry, starting from building design approval to getting a Department of Environment (DOE) clearance certificate, everything can be managed by paying bribes — to put it in plain language.

The person who provides the certificate for money has nothing to lose if the building comes crashing and hundreds are killed. For him it is an absolute monetary benefit. Now in an ideal situation a regulator would not provide clearance until and unless the plan is sound but we don’t live in an ideal world where systems work for the benefit of the people.

In order to regulate such mechanisms, someone would need to face severe consequences if the planning proceeds poorly, if the business collapses, if there is death and if there is loss of lives. That stakeholder is clearly not any of our public institutions, however, this role can be played by the financial institutions, and in many countries it works very well.

There were five garments factories operating in the Rana Plaza, some exporting to the US and European markets. They for sure have a banking relationship with the banks in Bangladesh. Now that their business has gone down, it is the bank’s money that has been jammed. Most likely they will have to write it off as debt, at least in the short-term. Before the loan was sanctioned (be it working capital loan or for capital expenditure), the bank definitely did its due diligence. They looked at the balance sheet of the company, they looked at past track records, they looked at future orders and so on. Based on their due diligence they decided to finance this RMG factory.

In the due diligence form there is always a question on whether the business is environmentally and socially compliant; most of the banks have this in their forms. We can be rest assured that the relationship manager just quickly ticked the box next to the question.

The Department of Environment has a list of high-risk sectors categorised as ‘red,’ and the RMG sector does not fall into that category. So why bother asking questions about the environmental and social issues? If you ask a financial institution on what percentage of their “Non-Performing Loans (NPL)” have resulted from environmental and social (E&S) issues? The answer would be “none.”

If the bank was actually serious about the environmental and social due diligence, they would have asked questions about whether the building was established in a legal piece of land (pond or land-filled water bodies are risky at the same time might not have legal documents), fire exit/ alternate exit, worker to space ratio, proper ventilation, clean drinking water provision for every 20 workers — the typical parameters international buyers look for in compliant factories.

Now one might ask that since the bankers provide money why they should ask these questions. It is not a banker’s job to get into details about the E&S compliance. In order to safeguard the bank’s finances and reduce the NPL, the bankers will have to ask these questions whether they would like to do it or not. At the end of the day, it is the bank that is writing off the debt.

When a business would fail to repay the loan, there would not be much point in looking for who approved the building plan or why so many workers were forced into that building, etc.

In this regard, the Bangladesh Bank is taking some radical steps in collaboration with the development partners to ensure that the E&S risk management by the banks is not a mere box-ticking exercise. The banks will need to include the ‘E&S risk’ as one of their core credit risk and should reflect it in their credit policy. They will have to have a process in identifying and managing these risks; there should also be a proper monitoring and reporting framework.

In order to make this a reality, a lot of awareness raising and skill development of the bankers would be required so that they can be equipped to identify and manage the E&S risks. In a country where rules don’t work and the safety of workers can be jeopardised by petty bribes at multiple levels — the financial institutions can take a pragmatic role in saving their bottom line at the same time saving the lives of hundreds of misfortune workers.

The writer is a Sustainable Energy Finance Specialist.