By K. C. Soares, ContributorIN DAYS gone by people had complete trust in three professional groups - teachers, pastors and bankers.
Whatever a teacher or a pastor told you was considered gospel. Whenever a banker instructed you to sign a document, it was thought to be in your best interest.
Even today most persons tend to sign bank documents without first reading them thus putting complete trust in the bank, a practice which should be discontinued.
With the advances in technology and the seemingly increasing pressure on persons in the battle for survival, there have been notable deviations from what is considered correct and just in banking transactions. This has given rise to what is now known in banking circles as operational risk.
Simply defined, operational risk is the risk of loss from human error, systems failure and fraud. This is of growing concern to the banking industry and should also be of concern to customers of the individual banks.
The small businessman in particular is at a distinct disadvantage as far as operational risk is concerned. Errors by the bank in many instances go unnoticed and this is mainly because the customer is unable to recheck the calculations of the different bank charges. Take for instance the matter of interest charges. Banks nowadays tend to quote interest rates on an add-on basis. They grant a loan and quote the interest as 16 per cent add-on. How many customers understand the effective interest rate on this basis? Only a few.
If the customer does not know the effective rate charged then how can he check whether or not the bank is correct in its charges?
When faced with losses from operational risk, the bank can buffer the effects with capital injected from its own resources or from insurance claims. Usually the small businessman cannot. In most cases his only recourse is to check the computations made by the bank.
To reduce the effects of errors made by the bank it is also important for the small businessman to follow-up on the cancellation of arrangements that had been put in place to firm up a particular deal when such a deal expires. Let me explain by referring to a situation involving one of the largest banks in the island.
A small businessman approached this bank for a loan, and to collateralise the loan the bank requested an assignment of receivables from one of the businessman's largest customers - a bauxite company. The relevant documents were drawn up and signed by all parties involved. On the execution of the assignment documents, the bauxite company was now obligated by an irrevocable letter of undertaking to make monthly remittances of a certain amount to the bank. This undertaking could only be cancelled with a written request from the bank. The customer therefore could not revoke such an undertaking.
The bank took about four months to process the loan and declined it after this time. However, they did not revoke the letter of undertaking signed by the bauxite company and for three years the amount agreed on was deducted and remitted to the Bank. The customer was shocked to learn that over $3,000,000 was sent to the bank and this amount went undetected. He was even more shocked when the bank could not account for the money sent to them. The bank did acknowledge receiving the disbursements but the whereabouts of this money is still to be ascertained - as far as I know.
While the bank should bear the brunt of the blame the customer is also at fault. He should have ensured that the agreements made pending the approval of the loan be cancelled with immediate effect when the loan was declined. Better still, he should not have signed any documents before receiving a commitment letter from the bank.
Bankers, like everyone else, do not like to admit to mistakes. If a mistake is made on a customer's account this usually goes unnoticed unless the customer himself identifies such a mistake. While I do appreciate that auditors from time to time uncover mistakes and what may be termed malpractices, this is usually long after the act is committed. The customer may be denied the use of funds for long periods. In some cases this helps to determine the success or failure of the business enterprise.
I consider it of utmost importance that customers of the bank be acquainted with how charges are computed and their rights (especially for married women) when signing documents.
K. C. Soares is a former banker and is now a business consultant with Soledad Financial Services Limited. E-mail: soledad@netcomm-jm.com
