Rundheersing Bheenick: Strong regulatory measures... the prerequisites
for banks to do business, stay in business, thrive in business
Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Annual
Dinner of the Mauritius Bankers Association, Port Louis, 6 June 2013.
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I am delighted to be in your midst this evening. Thank you for your kind invitation to say a few
words on the occasion of the Annual Dinner of the Mauritius Bankers Association (MBA). It is
indeed a great honour for me. Those of you who were present, the week before, at the
function during which I granted Barclays Bank Mauritius Limited its banking licence, would
remember that I had highlighted that there was a gap of two generations between the Bank
of Mauritius (Bank) and Barclays. Tonight we are on an equal footing - the MBA and the
Bank are both 46 years old - and the occasion is very auspicious for a man-to-man chat.
Tonight's function demands that I touch upon the relationship between the central bank and
commercial banks. Almost two decades ago, a Fed Governor1 observed that the relation
between commercial banks and the central bank is an important and far-reaching one, with
potentially significant implications for a country's economic performance. I quote from his
address: "...a nation's commercial banks and central bank are reflections of each other. They
are likely to succeed or fail together. A healthy, efficient banking system goes hand-in-hand
with a dependable, independent central bank. The activities of both are inextricably
intertwined, and the institutions undeniably share a commonality of interests." How relevant
such a statement is in our current environment!
Tonight we are here to celebrate the strong bond of partnership that exists between the MBA
and the Bank and for which we have every reason to rejoice. In 2007, a month after I had
joined the Bank, I chaired my first Banking Committee Meeting. At the time, there were the
CEO's of 17 banks sitting around the table and of course, our Chief Executive of the MBA.
Since then, four banks have joined in, AfrAsia Bank, ABC Bank, Century Bank and Banyan
Tree Bank. So far we have held nearly 25 meetings of the Banking Committee, and since
2008, in between the quarterly meetings of the Banking Committee, we have had in all nine
meetings of the Bureau of the MBA. A strong regulator and regulatee bond has thus been
nurtured. However strong our bond is, our relationship is not an easy one to manage. Our
perspective does not necessarily converge at all times. Tension arises between us from time
and time.
There are times when the regulator takes measures that banks may believe to be wrong or
misconceived. We understand your fears that the proposed regulations may be too complex,
inappropriate in geographical scope, or not conducive to level playing fields. We, as
regulator, may not only see strong regulatory measures as the prerequisites for banks to do
business, stay in business and thrive in business, but essential for the stability of the financial
system as a whole. Sometimes, banks may decide not to challenge or criticise existing or
new regulatory requirements in order not to upset the regulator - of this also we are aware.
But it is important that you understand that criticisms of regulations which you believe are
going to impact the sector, are wholly welcome as part of the constructive dialogue to get
regulation right. Nonetheless, together we have been able to take forward the banking
sector. The banking industry in Mauritius has traversed a long way to assume its present
stature.
Following the biggest financial tremor in the history of banking in Mauritius in 2003, many
efforts have been made by banks to step up their internal control systems. Despite all care
and diligence, banks are not totally shielded from fraud risks or financial crimes. Recently the
banking sector has been shaken again out of its comfort zone. It was not a moment of glory
for bankers and the central bank to realize that they have been outwitted by scammers using
the loop holes in the regulatory framework. As of date, the total amount reported at our help
desk has crossed Rs769 million, with 2,031 victims and if you take into account those who
did not come forward, the total amount of the scam may be estimated as being quite close to
the billion. It was certainly not flattering to any of you to learn that a number of your bankers
may have fallen prey to the Ponzi Schemes - we cannot put this on their financial illiteracy,
can we? It is rather a worrisome fact.
It is my duty as regulator to remind you of the importance of stepping up your compliance
functions to protect your institutions from being used as conduit for illicit activities. It is a
matter of focusing on the "Know Your Customer" principles and applying them to your
internal customers as well. It should not be just a 'tick-box' approach but rather a
'judgmentbased' approach. Most of the time, it is at the level of the front-liners that the application of
this 'judgment-based' approach starts. The front-liners need to be well-versed in compliance
legislation, manuals and procedures and be able to detect suspicious transactions at an early
stage, thus minimising the risks of fraud. It is important that ongoing reviews of bank
personnel are conducted at all levels as bank officers may be involved in promoting such
schemes. Our investigation has revealed that some banks have not been abiding
scrupulously by anti-money laundering laws and guidelines. Five of them would be imposed
hefty fines with the concurrence of the Director of Public Prosecutions.
Recently four of our banks made a very bad deal with Indian corporates. Rs2.7 billion out of
total facilities of Rs3.5 billion turned out to be impaired. They represent 0.9% of the total
assets of the four banks and if we take into account provisioning already made, this ratio
comes down to 0.3% only. This is only a drop in the bucket and there is no need for the
public to be alarmed. Depositors' money is not at risk.
This bad deal sends a warning signal to the banking sector about the level of non-performing
loans (NPL). Historically the NPL of the Segment B business has been low, dragging down
the overall NPL of the banking sector. Banks need to be extra careful when extending
crossborder credit. They need to have a proper understanding of the legal infrastructure, the
banking and regulatory landscape and the debt recovery processes of the country with which
they intend to do business. In India, the cumbersome process of crystallizing collateral led
some banks to resort to naming and shaming their non-performing corporate customers. In
the midst of growing protest, the Central Information Commission of India "is convinced that
the benefits accruing to the economic and moral fabric of the country far outweigh any
damage to the fiduciary relationship of bankers and their customers if the details of the top
defaulters are disclosed". The naming and shaming of bad borrowers apply to wilful
defaulters of public sector banks, who, according to the Reserve Bank of India Guidelines,
are those who do not repay deliberately despite having sufficient funds and a solid net worth.
The public sector banks have even started publishing photographs of the borrowers in
newspapers. Maybe it is high time that we start considering to bring amendments to our own
law to disclose the name of the top defaulters. Or even consider the coordinated efforts of
the four banks, with or without the blessing of the central bank so as to ensure a favourable
and rapid outcome.
The bad experience of our bankers sheds light on the fact that however meticulous they may
have been, banking remains a risky business. The Bank has lately been considering a
system of information-sharing on cross-border loans although we do recognize the difficulty
of accessing information on foreign clients.
A good reputation requires conscientious regulatory compliance. The rapidly evolving
financial landscape is keeping the regulator on its toes to ensure that we are up to the mark
when it comes to international best practice. We champion a proactive and thorough
approach to fraud risk management which includes among other things, putting in place a
whistleblowing procedure and where it already exists to review it, and educating staff about
fraud. We need to be alert to the growing impact of the prevalence of gambling in our country
for it is l'appât du gain which motivated the public to invest in placements that offered
unrealistically high returns.
Over the years, the Bank of Mauritius and the Mauritius Bankers Association have developed
a strong partnership. More than ever, we need to consolidate this partnership and live up to
the four Rs of a sound banking sector - Regulation, Reputation, Results and Resilience.
Together we can continue facing the daunting challenges that await the financial sector when
it comes to the next-generation regulation.
Thank you.