A consistently growing banking institution survives on perfecting its systems. Here I am writing about one such system that needs to be perfected by banks for perpetual existence. Delegating financial powers to officers (DFP) is the most significant system to manage according to me,  after core business process systems. I would place DFP above the inspection/audit system and the MIS though both of these enhance the efficiency of the DFP.

The idea behind DFP system is that there has to be a single official in the bank (or as a chairman of a committee) who is responsible to approve proposals for

• making investments
• loans 
• incurring expenditure 
• discounting receivables. 

Therefore a chart containing hierarchy of officials with powers for various approvals are in place and various processes are built into a system. The system also covers the processes of reporting instance by instance exercise of power to designated senior authority. This report is referred to as a control report and is meant for scrutiny to ensure that the approver has the power. A review of the decision jeopardizes the system. This is because of two side effects. 

1. Processes after approval hangs on till control report is reviewed
2. In essence, such review operates as if the power of the approver has been withdrawn

Who delegates? 

Board of directors primarily have the authority. They approve such delegation among various functions to its officers. Depending upon the quality of the Board, DFP comes out as a comprehensive document, covering all probable instances and for all hierarchical positions.  The powers are mentioned as an upper limit and mostly in numbers specifically to avoid misinterpretation at the time of exercise,  scrutiny,  and for accountability.

Spanning across various positions based on designations inside the bank hierarchy from junior most level to senior most level officers and fixing limits for all categories of approvals, the DFP ultimately ends up with unlimited power resting with the Board which they possess by virtue of the license. While the powers are vested with officers linked to their official status, every instance of approval becomes their personal responsibility.  It is like your car driver has a license but accidents become his personal problem.

It is a risk area.

Risk management is something possible when we know:

1. There is a loss arising from it 
2. The loss is measurable
3. Probability of happening can be studied to mitigate the loss

Since banks can identify the loss due to poor practice of exercising the delegation and control reporting, a good system to manage DFP can reduce bank loss. It is an operational risk and it involves Human Resources. 

Since Chief Financial Officer (CFO), Chief Credit Officer (CCO) manage to mitigate investment risk and credit risk respectively, Chief Development Officer (CDO) may be the right personnel to manage operational risk by means of DFP. Banks may have their own designations but I have named it for understanding the distinction. 

If we look at this particular area of operational loss, the loss happens from the inability of the management to fix accountability for loss incurred due to  poor quality of work, misconduct and insufficient knowledge of employees.  Interestingly a poor DFP system offers lavishly opportunities to officers in positions, to apply discretion and misuse their delegated powers to grant approvals and spend in excess. Discretions are deadly for a Risk Manager whose job is to fix uncertainties. Again,  excess spending without control is deadly for profit managers. Many employees in the lower and middle management get sidelined  because of the poor DFP system. Superiors can get a wrong job carried out by a junior whose job is at stake if not obeyed, and later push him into trouble. The enquiry and disciplinary processes goes on and on and the organisation loses an employee who becomes a baggage after losing the initial job aspiration. 

A namesake DFP system is as bad as not having a  system. A good DFP system can prevent such interventions,  and save good employees in the early vulnerable  stage. 

Banks following loan processing systems probably do their system audit to ensure that the required rigidity is in place. Systems are mapped versions of policies. System audits must be used to certify one hundred percent adaptation. So flexibility required to run a bank must be brought out clearly in the policy and not made up in the software systems.

Delegation distinctly means 

From my observations during various bank inspections,  I found that the term ‘delegation’  has not been generally  understood the way it should be. I will put the meaning as ‘in my place who will do’. It is not a work or job distributed to someone. It goes not only with the designation but also with the person placed in that position. A temporary officiating to a senior position does not gain that power, though it can be done with a proper posting order. Fraudulence emanating from officials officiating temporarily in higher positions is not insignificant by volume. Similarly, further delegation being not prima facie lawful, senior exercising the powers of a junior is exceptional.

The system of communication is very important. The system will be found wanting if a regular periodical submission of control report even if it is nil, is not insisted or put into operation across the organization and monitored. Control reports functions like the cap (top) of a fountain pen. The cap never helps in writing but without it, one can imagine the chaos.  Similarly loans can be granted, investments can be made or expenditure incurred. But control reporting prevents leakage in the system. 

The risk volume calls for the rigidity. Roughly a million employees of Indian banks handle one hundred twenty trillion rupee loans and investments forming most of their assets and produce almost two trillion rupee operational profit.

Perfect the DFP

DFP can be perfected if attention is made  on the following : 

• Compile the document unambiguously using plain language and avoid misinterpretation.
• Cover comprehensively all instances and avoid supplements 
• Describe vividly the regular system of reporting for control
• Describe the filing procedure for both original and copies of approvals and controls 
• Restrain from frequent reviews. For pan India operating banks, a specific date annually is ideal for monitoring and prompt correction.
• Maintain a consistent hierarchical structure of officers and committees.
• Ensure that all position holders keep with them a copy of the document. 
• Match the limits with the experience and maturity of the official eligible for the positions.

Watch the risk areas: illustrative

• Misconduct by exceeding the power delegated
• Inability to reverse a wrong approval once committed with customers. (Unlike govt, a customer of a bank or companies,  can presume that the official had done his part lawfully.)
• Giving operational assignment a couple of years before retirement. 

Common observations : employees

• Officers holding positions do not have adequate powers. Due to centralization of loan processing and other operations for better management, the customer -branch manager relationship concept has failed without perfecting banking processes like banks in the west. Disabled officials hold a tendency to handle with post facto approvals,  release ad hoc funds and follow up systems and responsibility going hazy,  monitoring and follow up suffer.
• Inability of officials to avoid delay in obtaining approvals from those who have the powers,  the senior or other outfits. One reason can be that it is not easy to see eye to eye with those having powers. It can be instances of self interest,  poor exposure or risk aversion.
• Reporting for control is often discouraged so as not to involve in others’ decisions.
• Not reported promptly
• Reported but not returned for filing
• Ignorance about where to keep the original scrutinised copy of control statement.

Common observations:  management 

• The powers are not communicated or all are not aware of. Perhaps the training system or HR has some say on this.
• Powers derived from RBI,  govt  for agency work carried out are not available or accessible
• Latest powers not available
• Varying the powers not as a policy for a year but often

Commonly delegated areas 

• For govt business from state govt, RBI or central govt. Banks handle govt accounts like PPF etc.
• For Loan sanction
• For settlement of deceased accounts
• For premature termination of contract-  commonly the fixed deposits 
• Incur expenditure
• For approval of  write off or waive interest commision exchange etc
• Forex waive realisation of export bills
• For approval of Overseas inv,  FDI,  ECB advised by RBI 

This is a topic that is less discussed and understood than it deserves as it directly impacts morale of employees,  productivity of employees  and profitability of banks. The topic surfaces among vigilance committee meetings and ends private notings and communications. Strategic measures to stem the rot is rarely seen.  

A good braking system and steady steering wheel,  matching with the speed and strength of a vehicle,  provide comfort even if we race at a speed of one or two hundred miles per hour. Like that, banks’ internal systems have to cope up with the number of officers they have and the volume of assets both inside and outside the balance sheet. And the DFP system is one that can be improved in isolation bringing major improvement and discipline.