BANKS everywhere are engaged in re-shaping themselves for what they perceive to be the unfolding challenges of the time, the biggest of which is expanding their operations without “collapse” under the strains that this effort involves.

They have been innovating, which is manifested by the increasing array of banking products and services on offer. This trend escalates the demand for skilled workforce, which is usually in short supply in the developing countries and therefore threatens banks’ stability.

The less clever among them struggle under the self-created strain of expansion but the smarter ones opt for rational consolidation and centralization of high-risk functions.

In recent years, banks have expanded their networks too rapidly, some going as far as increasing their networks over eight times in less than five years.

Pressures generated by such rapid pace of expansion become more intense if bulk of the expanded network is also required to offer the full array of banking services, especially the high-risk trade finance services involving the full array of risks including credit, market, operational and exchange risks.

Offering trade finance services calls for a high level of both expertise and hands-on experience. What makes it more demanding is the fact that, in spite of the many improvements in inter-bank communication supports (e-mail and SWIFT), financing trade and handling trade transactions remains manpower-intensive. The larger the number of branches offering this service higher will be the demand for skilled and experienced workforce.

If the policy of offering trade finance services through an expanded branch network is continued without concern for containing the risks inherent therein, banks will end up spreading their skilled workforce thinly over their large networks, and this otherwise capable workforce will be handicapped in guiding and controlling operations at the branch level because of its diluted strength in the branch management hierarchy.

Some banks overcame this challenge by centralizing the processing of trade transactions. On the one hand this strategy helped to bring together in one place their limited skilled workforce and on the other separated customer servicing from the purely desk-job of transaction processing besides, of course, streamlining and speeding up vitally important communication within the banks’ risk management units.

This, however, is not to suggest that banks and, more importantly, their customers did not face problems in getting used to this changed mode of inter-action. As a matter of fact, this was truly a ‘culture’ change because it meant that importers and exporters accepted the fact that the profile of the bank officers they were to deal with changed radically – they became mere liaison officers acting as the link to the transaction processing unit – the place where real action took place.

Banks with large networks went about implementing this radical change in a rational manner by refraining from centralizing trade processing services to a point where importers and exporters were placed under undue strain.

These banks identified major industrial and trading centres, and set up a centralized processing unit in each of those centres. While the strategy diluted the spirit of centralization, it contained the harsh impact of centralization within manageable parameters. Yet these banks reaped most of the benefits of centralization.

It is worth noting that, in spite of the unavoidable teething problems faced by these banks, the experiment proved successful and helped to overcome the shortage of skilled workforce, substantially reduced operational errors (and the heavy penalties they entail) besides cutting down on operating costs.

Banks that opted for this solution ended up with significant advantages making this experiment worth trying. Banks with large networks need to look at it closely because it offers a host of benefits that they will need badly in the months and years to come.

Besides, making optimal use of the available levels of workforces with requisite skills and experience, centralizing the processing of trade transactions offers a wider variety of advantages beginning with consolidation of foreign exchange exposures in the shortest possible time. This facilitates exposure coverage from the global foreign exchange markets without loss of time and thus results in definite avoidance of exchange losses resulting from delays and piecemeal reporting of exchange exposures by branches running into hundreds.

Consolidation of the bulk of exchange exposures in real-time also facilitates cash management – an expression that implies timely funding of accounts abroad and short-term investment of almost every penny of the surplus balances in those accounts that would otherwise be lying idle earning nothing for the bank while other accounts could be overdrawn costing the bank large and wholly avoidable interest charges. This is the area wherein banks could reap substantial benefits resulting from optimal utilization of available funds.

A major risk that banks carry without knowing its full impact is concentration of their loan funds tied up in limited ranges of commodity types on behalf of their trading customers. So long as these loans remain scattered in hundreds of branches, bank’s total risk on a commodity can’t be consolidated credibly; its downside surfaces when volatile prices of commodities fall rapidly eroding the customers’ can’t repay. Centralizing trade processing will afford banks to see more accurately the build-up of these concentrations and contain them within safe limits.

Centralization of transaction processing offers a unique advantage that bankers often don’t pay much attention to i.e. getting a hang of the real measure of lines of credit they need from banks abroad to accommodate the short-term financing needs of their trading customers; this holds the key to facilitating them in offering attractive terms of trade to their buyers and sellers abroad.

In a world market that grows intensely more competitive, this vital support can give Pakistan’s trading community the crucial lever they need to compete more aggressively.

The prevailing environment of the financial services clearly indicates a shortage of trained bankers, especially in the complex areas of trade financing and transaction processing. Proof thereof is provided by the high level of employee mobility in this sector. Given the fact that management development activities in banks (especially the smaller ones) are yet to reach the requisite level, the prevailing skill gap may not be filled quickly enough.

The pressure for implementing the stiff risk measurement and management requirements of Basle Accord-II will only exacerbate these strains.

In the developing scenario, centralizing trade services makes sense, not just for the large but the smaller banks as well. Banks don’t need to simply copy each other. What every bank needs to do is a dispassionate assessment of its business niches, areas of trade finance specialization, and its trading customers’ profiles to decide on a workable centralization strategy.