Role of Commercial Banks in Development Financing in Bangladesh

- SUJIT SAHA* - M. SAIFUL KARIM CHOWDHURY* Abstract

Commercial banks as the most important functionary of the financial system play a dynamic role in the economic development of a nation through mobilization of savings and allocation of credit to productive sectors. However, directed and inefficient credit allocation by the commercial banks of Bangladesh in various economic sectors without adequate credit appraisal and monitoring, inter alia, ultimately led to the widespread loan delinquency, and deteriorating health of the entire financial system. An attempt has been made in this paper to examine and evaluate the nature and extent of involvement of commercial banks in development financing in Bangladesh using different performance indicators like branch expansion, mobilization of savings, sectoral and regional distribution of advances, etc. In their noble effort of development financing, commercial banks are facing various problems such as mismatch of sources and uses of funds, extreme dependence on traditional collateral securities, politicization of credit delivery system, absence of sound legal system for recovery of loans, lack of governments extension facilities in the form of data base, investment counseling, appropriate technology, infrastructure, marketing of products, etc. However, they should increasingly involve themselves in development financing in order to gain long-term viability benefitting themselves as well as the economy, but that should not occur at the cost of viability of the total financial intermediation process.

I.

Introduction

The problem of development is a continuing one. No country, be it developed or developing, can regard itself as having reached the peak of its development effort. Attainment of the desired level of economic development is targeted by the developing economies for a number of reasons viz. increasing population, scarce resources, high rate of unemployment, technological backwardness, low level of the standard of living, etc. The process of economic development needs capital formation besides other structural changes like improvement in skill and efficiency of manpower, better organization, health and education system, etc. Capital formation is deemed as the most significant variable of economic development. An efficient and well-organized financial system contributes to the much-desired economic development through capital formation which can be divided into three stages viz., savings, financing and investment. Commercial banks constitute the most important functionary in the whole network of the financial system for mobilization of savings, intermediation between savers and investors and allocation of credit to productive sectors and thus play a dynamic role in the economic
*

The authors are Professor and Assistant Professor of BIBM respectively. The views expressed in the paper are the authors own. The paper was jointly prepared and submitted to a National Seminar held at BIBM on February 14, 2000.

development of a nation. Schumpeter regarded the banking system as one of the two key agents (the other being entrepreneurship) in the whole process of development. Commercial Banks divert and employ the funds in such avenues which are aimed to develop a countrys economy and adds to national wealth. Banks transfer the funds from regions where it is available in plenty to where it can be efficiently utilized. The distribution of funds between regions paves the way for the development of backward regions. Commercial Banks are catalytic agents which can create opportunities for the development of national resources and provide employment on a large scale. Banks offer necessary finance to set up and run the industries, and provide finance to agriculture and other sectors of the economy also. In recent years, banks have assumed the role of developing entrepreneurship, especially in developing countries. Development of entrepreneurship includes, in addition to the traditional functions of providing loans and working capital, the formation of project ideas, identification of specific projects suitable to local conditions, provision of counseling services including technical and managerial guidance. Historically, the focus of the commercial banking system was entirely short term, providing only working capital and trade finance. But the areas of commercial banking have been expanded over time. In the universal banking system of Germany, commercial banks are also an important source of investment finance. They function like investment banks and provide underwriting and brokerage, and they also have considerable control over firms both through their own equity holding and proxy votes for private investors, and by appointing representatives on the boards of firms. Even in the USA, the strict demarcation between commercial banking and investment banking is now the event of the past. The US Senate on November 5, 1999 passed a historic legislation to overhaul US banking laws to allow some US banks into securities and insurance business. Brokers and insurers will now, in turn, be able to target banks. The legislation repeals parts of the 1933 Glass-Steagall Act and 1956 Bank Holding Company Act to level the domestic playing field for US financial firms. Moreover, an increasing demand on the commercial banks is being noticed in the developing economies for contribution to economic development through expansion of branch network, particularly to rural and semi-urban areas, reorientation of credit flows to the preferred sectors beyond short term maturity and increased mobilization of savings. The emergence of the independent Bangladesh in 1971 witnessed a major shift in the banking system in 1972 in terms of change of ownership i.e., establishment of social control over the banks through nationalization and change in objectives. The objectives were very clear--to expand the branch network in unbanked and underbanked rural and semi-urban areas, to step-up monetisation activities by having access to untapped savings and extend flow of credit to hitherto neglected agriculture and allied areas and small and cottage industries. As the commercial banks have structural limitations (short-term sources of funds, lack of adequately skilled man-power, etc.) in making an entry into term financing for 2

financing agro-based and industrial projects, specialized financial institutions were created to fill the vacuum for financing agricultural and industrial development. These were also known as Development Financing Institutions (DFIs) e.g., Bangladesh Krishi Bank, Bangladesh Shilpa Bank, Bangladesh Shilpa Rin Sangstha, etc. Unlike commercial banks, DFIs did engage themselves in providing long term finance to the designated sector being heavily dependent upon the national exchequer and credit lines for generation of funds. In most cases, they did not have own source of funds for term financing. DFIs have failed to become self-supporting, autonomous financial institutions capable of mobilizing resources entirely on commercial terms. Experience indicates that the DFIs could not continue their financing operations the way they started. The reasons being, to some extent the politically motivated directed credit and to some extent the inefficient credit delivery system, poor monitoring system and poor entrepreneurship, which ultimately resulted in very low recycling of funds. This trend has either stopped the DFIs to function at the desired level or down-sized their scale of operations putting them in a limping state. The failure of the DFIs to live upto the expectations created a situation in which the commercial banks, particularly the Nationalized Commercial Banks were asked to involve themselves in development financing (lending to various economic sectors) by providing both term loan and working capital. They expanded credit to those economic sectors mostly with the help of the concessional funds available to them from the central bank under refinancing arrangement. However, such directed credit expansion was in many cases flawed and made without due regard to quality, ultimately leading to inefficient resource allocation, widespread loan delinquency and deteriorating health of the financial system. It is really difficult on the part of the banks to play the essential role of supporting the economic development of a country with such a state of health. Now, one pertinent question may be raised here--what does Development Financing actually mean ? Two viewpoints can be used to answer this question, viz., Conventional and Modern. Development financing in the conventional sense includes provision of both term loan and working capital for financing agriculture, agro-based projects, small and medium industries, cottage industries, export, capital market, micro credit for poverty alleviation, etc. On the other hand, the modern concept of development financing embraces all types of intermediation activities contributing to the saving-investment process and allocation and recycling of any type of credit which have direct and indirect bearing on development. Virtually, bank finance for any activity which is not counterproductive, upholds the principle of diversified lending with the minimum of risk and is viable, leads to economic development. The present day banking predominantly aims at allocating the loanable funds to any economic activity which ensures viability of the same and recycling of the funds along with interest.

At the advent of the market economy approach to financial sector development, the modern concept of credit allocation is gradually gaining popularity among the participating institutions of the banking market in the developing countries. The traditional viewpoint of credit for financing development is, however, still dominant amongst the economic and financial policy makers for expediting economic development through banking window. This appears to be quite logical and realistic in the developing economy context, let alone Bangladesh. The development of the rural economy in Bangladesh through formal financing ought to be the major focal point and in no way be given residual importance and low profile. The reasons are well-pervaded to support the contention (i) around 30 per cent of the gross domestic product comes from agriculture and a good harvest keeps the economy well with a comfortable growth rate; (ii) export promotion (considered to be a breakthrough) depends directly or indirectly on agriculture; (iii) incidence of rural poverty is significantly higher necessitating the implementation of effective poverty alleviation programs; (iv) marketing opportunities for industrial products have to be found out by increasing the purchasing power of the rural population; (v) viable small and cottage industries will not only ease the employment problem and also help establish forward linkages with the technology-driven medium and large industries and backward linkages with the growers of the farming and nonfarm products; and (vi) slowing down the migration of the rural people into urban areas by creation of job opportunities. II. Three Decades of Commercial Banking in Bangladesh

The banking in Bangladesh has passed three decades through different policy environments and comprises central bank at the apex, nationalized commercial banks (NCBs), private commercial banks (PCBs), foreign commercial banks (FCBs) and specialized financial institutions (SFIs). In the decade of seventies, in an atmosphere of fully regulated banking, the nationalized commercial banks played the active role in intermediation and allocation of credit along with the specialized financial institutions. The decade of the eighties witnessed the active operation of both the NCBs and PCBs (local and foreign) in the banking market. In the early eighties, two NCBs (Pubali Bank and Uttara Bank) were denationalised and the PCBs were allowed to function in order to provide a competitive environment to the NCBs with the major consideration of improving the customer services. During this period, the banks operated under strict regulatory framework. NCBs primarily lent to agricultural, industrial and export sectors following the Govt. directives while private and foreign banks lending primarily went to trade and commerce. A number of problems were manifested in the banking sector at that time. To mention a few, these are inadequate mobilization of savings, widespread loan defaults and delinquencies, and inefficient credit delivery which ultimately resulted in a retarded economic growth. In the mid-eighties, revamping the financial sector was felt as a step in the right direction. The

Bangladesh Govt. appointed a National Commission on Money, Banking and Credit (NCMBC) to undertake a major study of the financial sector in late 1984 which submitted its report in 1986 suggesting the reforms to be brought about for addressing the problem of loan delinquencies and restoring the financial stability. In the early nineties, the economy underwent liberalization process as has been adopted in different fields through launching structural adjustment program. In order to redress the structural and operational problems facing the financial sector (as identified by NCMBC), a good number of reform measures were introduced in 1990 via World Banksupported Financial Sector Reform Project (FSRP). At the initial stage two major policy reforms viz. flexible interest rates and loan classification and provisioning were put in place. Other reform measures include abolition of refinancing system and introduction of rediscounting facility by the central bank, establishment of capital adequacy standards, recapitalization of the NCBs, strengthening of central bank supervision, enactment of banking related legislation and amendments thereto providing wider powers to the central bank, checking insider lending, incorporating legal provisions for loan recovery, development of human resources through training, etc. The commercial banks were allowed adequate freedom in various areas of banking operations including fixation of deposit and lending rates, service charges, selection of loan portfolio, etc., which were then administered and regulated by the central bank. The FSRP continued its operations till 1996. In May 1997, another project named Commercial Bank Restructuring Project (CBRP) funded by the World Bank was undertaken to further consolidate, strengthen and make the banking sector more dynamic. Besides, a high-powered Banking Reform Committee (BRC) was constituted in order to carry forward the reform process in the financial sector. The committee submitted its report in December, 1999 and their recommendations are under active consideration of the Government. III. Nature and Extent of Involvement of Commercial Bank in Development Financing in Bangladesh An attempt will be made in this paper to examine the nature and extent of involvement by commercial banks in conventional development financing in Bangladesh. In this endeavour, we have considered the following performance indicators of commercial banks on the basis of availability of data during the period of the nineties : 1. 2. 3. 4. 5. 6. 7. 8. Network of Branches; Share of Deposits and Advances; Regional Distribution of Deposits and Advances; Financing Agriculture and Allied Activities; Financing Industries Term Loan and Working Capital; Financing of Export and Import; Financing for Infrastructure; and Financing for Poverty Alleviation. 5

In many cases, the published data did not enable us to find out the disbursement trend of the commercial banks for various types of financing. The outstanding advance figures have been used to indicate the extent of involvement in any particular sector/activity. However, the increase or decrease of such figures can not always be attributed to the real increase or decrease of involvement of financing in any activity during a particular period due to nonrepayment of principal and interest of loan amount fallen due as per schedule. Nevertheless, an indicative picture may be drawn regarding the involvement of banks in development financing on the basis of outstanding figures. [Though the scheduled banks data have been published as on June 30, 1999, most of the analysis was done as on December 31, 1998 because of non-availability of data for all categories. Moreover, the analysis was mostly based on the calendar year figures.] Network of Branches The NCBs have the largest branch network among the commercial banks of Bangladesh. The network rapidly increased during the years of concentration on deposit mobilization and provision of banking services in rural areas. As on June 30, 1999 they had a total of 3616 branches. But the share of NCBs in total branch network of the banking sector has decreased over the 1990s from 64.1 per cent in 1989/90 to 60.7 per cent in 1998/99 (Table 1). The respective share of PCBs in the network has increased during the period from 14.8 per cent (824 branches) to 19.4 per cent (1160 branches). The number of branches of FCBs as percentage of branch network of the banking sector is almost stable over the period (0.5 per cent), having only 32 branches as on June 30, 1999 (Table 1). However, in the recent years, the FCBs have emphasized on retail banking through branch expansion in the urban areas. In regard to distribution of branches in urban and rural areas, NCBs occupy about two thirds of their branch network in rural areas, while PCBs have very little presence in the rural outlets. The FCBs, however, have no rural branch network. As on 30 June 1999, 60.6 per cent of total bank branches are located in the rural areas. However, the overall exposure of the banks to rural areas is now showing a decreasing trend. It should be noted that initially rural branch expansion was done in many cases without proper feasibility studies. This has led to the increase of rural loss-incurring branches. Share of Deposits and Advances The nationalized and private commercial banks are the backbone of the financial system of Bangladesh. Till now four NCBs dominate the banking sector. However, the private banks (local and foreign) are growing and increasing their market shares. Compared 6

with the distressed nationalized banking sector, the growth of private banking is a healthy development for a sound financial system. In the 1990s, the share of NCBs in total deposits has decreased slightly. As on Dec. 31, 1990 the NCBs accounted for 62.4 per cent of total deposits of the banking sector, but the share has fallen to 60.2 per cent on Dec. 31, 1998. The share of PCBs, on the other, has risen from 26.1 per cent to 27.2 per cent . During this period, FCBs eyed a marginal increase in market share in deposits from 7.1 per cent to 7.4 per cent (Table 2). The share of NCBs in total outstand ing advances of the banking sector has slightly shrunken from 52.8 per cent to 51.1 per cent during this period. On the other hand, the market share of PCBs has increased from 21 per cent to 25.6 per cent and the share of FCBs has fallen slightly from 5.7 per cent to 5.4 per cent during this period. As on Dec. 31, 1998 NCBs mobilized 71.2 per cent of total deposits from urban areas. But the share of rural areas in total deposits mobilized by NCBs has risen from 26.8 per cent on Dec. 31, 1990 to 28.8 per cent on Dec. 31, 1998. On the other hand, only 9.7 per cent of total deposits of PCBs were mobilized from rural areas as on Dec. 31, 1998. The FCBs are completely absent in rural deposit mobilization activities as they have no rural branch network (Table 2). The local PCBs, not to speak of the FCBs, have never been involved in rural banking in any substantial way. One of the by-products of the denationalisation of both Uttara and Pubali Bank was their move to reduce the number of their rural branches rapidly. The reasons for gradual withdrawal from rural banking have been identified as low income generation, high classified credit incidence and higher transaction cost for finance that transform rural bank branches into loss incurring units. Having about 61% of total branches, the rural areas are commanding only around 23% of total deposits. The overall socio-economic condition of rural areas is responsible for the low level of rural deposit mobilization. In addition, the bank marketing approach in rural areas is not customized. Banks have tried to reach the rural customers with the financial products which they market for urban customers resulting in non-fulfillment of rural customers needs. The share of rural areas in total advances of NCBs is lagging far behind the corresponding share in total deposits. As we have shown earlier, 28.8 per cent of total deposits of NCBs were mobilized from rural areas as on Dec.31, 1998, but only 18.9 per cent of total advances of NCBs went to rural areas. The share of rural areas in advances by PCBs is negligible i.e. 2.2 per cent only as on Dec. 31, 1998. The lending operations of FCBs is completely concentrated in the urban areas (Table 2).

Regional Distribution of Deposits and Advances The mobilization of deposits from and dispersal of advances to the various regions other than the geographical areas of traditional concentration reflect the policy of following the balanced development financing approach. The share of Dhaka and Chittagong divisions in total deposits of NCBs, PCBs and FCBs were 73.3 per cent, 77.2 per cent and 98.9 per cent respectively as on Dec. 31, 1998. The share of other four administrative divisions in total outstanding advances of NCBs, PCBs, and FCBs were only 26.7 per cent, 22.8 per cent and 1.1 per cent respectively (Table 3). On the other hand, as on Dec. 31, 1998 the share of Dhaka and Chittagong divisions in total outstanding advances of NCBs, PCBs and FCBs were 77 per cent, 89.3 per cent and 99.5 per cent respectively. The share of other four administrative divisions in total outstanding advances of NCBs, PCBs, and FCBs were only 23 per cent, 10.7 per cent and 0.5 per cent respectively (Table 3). This indicates a very high concentration of deposit mobilization and lending operations in Dhaka and Chittagong divisions by all types of banks (especially in case of PCBs and FCBs) at the cost of development of other divisions and results in pumping out of money from underdeveloped to developed areas which is contrary to a decentralized development financing strategy. Agricultural Financing Given the role of the agriculture in the economic development of Bangladesh, it is imperative to invest considerable resources for agricultural development of the country. The agriculture sector, the lifeline of the rural economy, which contributes about 30% to the GDP of the country and constitutes the chief source of supply of food, is continuously being deprived of the needed capital. The share of agriculture, fishing and forestry in total outstanding advances of NCBs was 13.2 per cent as on Dec. 31, 1998. The role of PCBs in agricultural financing is meager due to lack of rural branch network and risk averse behavior. The share of this sector of the economy in total outstanding advances of PCBs was only 1.6 per cent as on Dec. 31, 1998. FCBs are almost absent in agricultural financing (Table 4). On the other hand, the share of NCBs in the total outstanding advances in this sector has increased from 40.4 per cent on Dec.31, 1990 to 46.6 per cent on Dec. 31, 1998. The PCBs account for only 2.7 per cent of total outstanding advances in this sector (Table 6). 8

In the 1990s, the share of NCBs in agricultural credit disbursement has been decreased gradually from 33.6 per cent in 1991/92 to 24.5 per cent in 1997/98. From 1994/95 the role of PCBs in agricultural credit disbursement has been sharply increased. In 1992/93 the PCBs constituted only 0.5 per cent of total agricultural credit disbursement in the country, which increased to 9.5 per cent in 1997/98 (Table 7). The share of private sector in outstanding advances of all banks in agriculture and allied activities was 90.1 per cent as on Dec. 31, 1998 (Table 5). It is revealed from the various studies regarding agricultural financing that the target beneficiaries do not get the required credit at all or receive much less than the required amount. A few rural rich get most of the loans with the connivance of bank officials. Those rich farmers who take loan from commercial and agricultural banks borrow not because they need working capital for agricultural activities, but because they take the advantage of low priced institutional credit which they are able to divert to other profitable activities. In a study on Grameen Bank, Hossain (1988) reported that 7 per cent of the rural poor took only 8 per cent of rural institutional loans. Although exploitative in nature, the rural informal credit system has still been effective in meeting the short-term credit needs of the poor.

Industrial Term Loans and Working Capital Financing This is a new phenomenon in commercial bank lending in Bangladesh. Term loans are designed to fund long and medium term business investments, such as the purchase of equipment or the construction of physical facilities, covering a period of more than one year. Bangladesh does not have a developed capital market. The bulk of the financing for longterm investment is currently supplied by commercial banks as term loans. As on Dec. 31, 1998, 33.1 per cent of total outstanding advances of NCBs went as industrial term loan and 13.1 per cent in working capital financing. The share of industrial term loans and working capital financing in total loan portfolio of NCBs has increased in the 1990s (46.2 per cent on Dec.31, 1998 from 42.7 per cent on Dec. 31, 1990). But the small scale and cottage industries are continuing to be deprived of getting desired formal sector financing. This sub-sector constitutes only 3.6 per cent of total loan portfolio of NCBs as on Dec.31, 1998 (Table 4). Recent studies have shown that informal financing involving high interest rates has played a critical role in the emergence, survival, and growth of many small-scale industries in Bangladesh. Availability, rather than cost of credit is thus the most binding constraint to growth in industrial investment. 9

As on Dec. 31, 1998, 25.5 per cent of total loan portfolio of PCBs went as industrial term loan and working capital financing. But the share of small scale and cottage industries was only 2.7 per cent of total loan portfolio of PCBs. Industrial term loans and working capital financing accounted for 39.1 per cent of total outstanding loans of FCBs as on Dec.31, 1998, which has been concentrated in large and medium scale industries (Table 4). The share of NCBs, PCBs and FCBs in total outstanding advances in industrial term loan financing were 57.2, 14.4 and 3.8 per cent respectively as on Dec. 31, 1998. In working capital financing, NCBs, PCBs and FCBs accounted for 64 per cent, 21.8 per cent and 9.5 per cent of total outstanding advances respectively (Table 8). Table 9 shows the year-wise disbursement of industrial term loans by banks and nonbank financial institutions from 1990-91 to 1998-99. Here we can observe an accelerated credit expansion from 1992-93 onwards. The total disbursement of industrial term loan from institutional sources had increased from Tk 357.92 crore in 1990-91 to a record figure of Tk 1388.13 crore in 1993-94 and then it has more or less stabilized. The major role in such credit expansion was played by the NCBs, whose industrial term loan disbursement had increased from a meager amount of Tk 44.75 crore in 1990-91 to Tk 810.68 crore in 199495. The share of NCBs in total disbursement of industrial term loans had increased during the period from 12.5 per cent to 67 per cent. From 1995-96 the dominant share of NCBs in industrial term loan financing has been gradually decreasing and in 1998-99, it constitutes only 26.2 per cent. In the late nineties, on the other hand, the PCBs and FCBs have enhanced their contributions in industrial financing. The share of PCBs in total disbursement of industrial term loans has increased from 10.7 per cent in 1995-96 to 22.5 per cent in 1998-99. The absolute disbursement figure during this period has been increased from Tk 131.28 crore to 299.11 crore. The share of FCBs also increased from 11.3 per cent (Tk 139.14 crore) in 199596 to 20.2 per cent (Tk 269.28 crore) in 1998-99 (Table 9). It is worthwhile to mention that in the late nineties the NBFIs have increased the share in industrial term loan financing from 7.2 per cent (Tk 88.39 crore) to 26.2 per cent (Tk 348.45 crore) through lease financing and equity participation making it the largest source of institutional financing in this area (Table 9). The share of private sector in outstanding industrial term loans has increased from 68.8 per cent to 86.9 per cent during 1990-1998 (Table 5). So far the maturities of funds are concerned, the commercial banks are ill-suited to meet the demands of industrial financing. In fact, the practice of borrowing short and lending long has created a serious mismatch between the assets and liabilities of the banks. Fixed deposits of more than one year maturity period constituted 22.2 per cent in NCBs, 20.7 per cent in PCBs and 28.9 per cent in FCBs respectively (Table 10).

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The NCBs, given their present liquidity position, are barely able to service the demand for investment in this sector. The private banks are even less equipped to undertake term financing on an adequate scale and accordingly had less involvement. But, it should be noted that attempts to stimulate private industrial investment with public financing and administered interest rates during the late 1970s and early 1980s resulted in many pitfalls including inappropriate investments, inadequate project appraisal, overcrowding in certain sectors, and widespread debt defaults. In the context of deregulated environment of present-day banking business, sectoral allocation of credit based on total reliance on market mechanism may not yield the desired results. For example, in the case of private banks, trade financing may be preferred over industrial finance because of quick liquidation of loans and higher turnover rates. Industrial term lending may get the least preference because of short deposit maturities. This would definitely put a large majority of the potential industrial borrowers outside the orbit of industrial credit. Again, the small and cottage industry sub-sector would hardly get any attention of the private sector institutional lenders for their preference to asset-based lending. In order to obviate the difficulty of extending industrial term loan out of the deposit funds having shorter maturities, Agrani Bank has floated a bond to raise Tk 500 crore as a part of a Govt. program to finance new industrial ventures. One fourth of the Tk. 500 crore would be directly invested by the Agrani Bank while other banks would use the rest of the capital for lending money for industries on a long-term basis. Foreign Trade Financing Trade financing may be both domestic and international. Financing of international trade has direct relevance to the development of our economy, particularly in the context of developing countries. In Bangladesh, export being the thrust sector is financed at the administered interest rate within a band of 8-10 per cent. Again, import of capital goods, industrial raw materials, semi-processed inputs, etc are directly linked to economic development. Considered from this standpoint, if we examine the performance of commercial banks, it reveals that the share of NCBs and FCBs in the outstanding export credit has decreased in the nineties (NCBs from 67.5 per cent to 59.2 per cent and FCBs from 9.6 per cent to 3.2 per cent during 1990-1998) over time while PCBs have registered a slight increase in their share (from 22.4 per cent to 35.3 per cent) during the period (Table 11). In the area of import financing, the share of PCBs in outstanding import credit appears to be much higher relative to other groups of banks and their share has increased over time in the nineties from 44.6 per cent to 50.3 per cent. The share of NCBs and FCBs have slightly decreased over the period (Table 11).

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But it should be noted that an increasing trend of outstanding advances in foreign trade financing does not necessarily indicate the increasing contribution in this area and may not be a healthy trend indeed. It may be increased due to stocklot factor and resultant creation of forced loans. For example, it has recently been reported in The Daily Star appearing on November 13, 1999 that forced loans worth Tk 882.64 crore, which is 30 per cent of the total loan amount provided by the NCBs to 1,109 RMG units were created as on September 15, 1999 after the NCBs were compelled to shoulder the import liabilities of back-to-back L/Cs as per the banking system and paid this money from their own funds, as garments owners did not export their products in time. Instead of exporting finished products, these garments manufacturers sold their raw materials in the local market subjecting the banks to forced loans. Financing for Infrastructure Availability of infrastructure is one of the objective conditions of undertaking development efforts in an economy. A well-knit transport and communication network facilitates the quick movement of people and goods. Besides, increasing construction activities comprising housing, office premises and other ancillary buildings are the manifestations of development. The share of construction, transport and communication in the loan portfolio of commercial banks constitutes 6.5 per cent for NCBs, 10.4 per cent for PCBs and 4.9 per cent for FCBs as on Dec. 31, 1998. On the other hand, the share of NCBs in total outstanding advances of all banks in this sector of the economy was 49.1 per cent. The corresponding shares of PCBs and FCBs were 39.4 per cent and 3.9 per cent respectively (Table 4).

Financing for Poverty Alleviation The major objective of economic development has been to alleviate poverty by uplifting bottomline population to the development stream through institutional credit. The attainment of this objective deserves urgent attention when about half of the population of Bangladesh is considered as poor and one fourth of the population as hard core poor. In this endeavour, the role of commercial banks does not appear to be commendable. As on Dec. 31, 1998 the NCBs and PCBs accounted for 66.5 per cent and 3.1 per cent of total outstanding loans in poverty alleviation programs of all banks. FCBs did not provide any loan in such programs. The share of poverty alleviation programs in total outstanding advances of NCBs and PCBs were only 1.8 per cent and 0.2 per cent as on Dec.31, 1998, which reflects their meagre involvement in this area (Table 12). 12

From the above analysis of involvement of commercial banks in development financing in Bangladesh we can draw the following conclusions: i. NCBs have the largest branch network. However, PCBs branch expansion has taken place at a faster rate during the period as their share in total branch network is increasing. Although more than 60 per cent of bank branches are located in the rural areas, the current trend shows that the number of rural branches is decreasing. ii. As on Dec. 31, 1998, NCBs, PCBs and FCBs accounted for 60.2 per cent, 27.2 per cent and 7.4 per cent of total deposits of the banking sector respectively. On the other hand, the share of NCBs, PCBs and FCBs in total outstanding advances of the banking sector were 51.1 per cent, 26.6 per cent and 5.4 per cent respectively. iii. 28.8 per cent of deposits of NCBs were mobilized from rural areas, but only 18.9 per cent of total advances went to rural areas as on Dec. 31, 1998,. On the other hand, 9.7 per cent of deposits of PCBs were mobilized from rural areas, but only 2.2 per cent of advances of PCBs went to rural areas during the period. This indicates a net resource flow from rural to urban areas. iv. Deposit mobilization and lending operation of commercial banks are highly concentrated in Dhaka and Chittagong divisions. Other four administrative divisions are getting much less access to credit than their share in deposit mobilization. This may lead to regional disparity in the economy. v. The share of agriculture in loan portfolio of all banks (15.4 per cent as on Dec. 31, 1998)is much less than the contribution of agriculture to GDP of the country. Agriculture constitutes a very negligible share in the loan portfolio of PCBs (1.6 per cent only). FCBs are almost absent in agricultural financing. vi. The share of NCBs in outstanding advances in agriculture has increased in the nineties, but their share in disbursement of agricultural credit has decreased. This can be explained by non-recovery of agricultural loans by NCBs. vii. Rural poor get much less agricultural credit than their rich counterpart. Experiences have shown that rich borrowers often divert low-priced institutional credit to other profitable activities. viii. The share of industrial term loan and working capital financing in total loan portfolio of NCBs, PCBs and FCBs were 46.2 per cent, 25.5 per cent and 39.1 per cent respectively as on Dec.31, 1998 (Table 4). ix. Small scale and cottage industries (SCIs) accounted for only 4.9 per cent of outstanding advances of NCBs in industrial term lending as on Dec. 31, 1998. The corresponding share for PCBs and FCBs are 11.2 per cent and 1.1 per cent respectively. The share of 13

SCIs in outstanding advances in working capital financing of NCBs and PCBs were 14.6 per cent, 8.7 per cent respectively. The FCBs did not provide any working capital financing in SCIs. x. From the beginning to mid-1990s NCBs played dominant role in industrial term loan financing. But in the late 1990s the contribution of NCBs has gradually decreased understandably due to increase of overdue loans. However, the share of PCBs, FCBs and NBFIs in disbursement of industrial term loans have increased during the period. xi. Increasing trend of outstanding advances in foreign trade financing does not necessarily indicate the increasing contribution of banks in this area. It may be increased due to stocklot factor and resultant creation of forced loans. xii. Infrastructure i.e. construction, transport and communication have relatively lower share in the loan portfolio of commercial banks during the period under study. xiii. Commercial banks involvement in financing for poverty alleviation of bottom line population of the country is very insignificant.

IV. Major Problems of Commercial Banks in Development Financing in Bangladesh It appears from the findings of the analysis that the involvement of commercial banks in conventional development financing has not been upto the desired level. The reasons behind such low profile may be explained below : 01. NCBs inefficient credit allocation and low recovery performance in development financing rendered the impression in the banking sector that such financing is unviable. The fact remains that NCBs in majority cases acted on govt. directives in lending to thrust and priority sectors, much less on the basis of viability of the projects and the entrepreneurs. 02. NCBs deployed the short-term maturity funds to long term uses while extending termfinance to the projects. This mismatch of maturities created liquidity problem. 03. The presence of PCBs and FCBs in rural areas is low and virtually nil respectively. As a result, financing rural development by them could not be effected. 04. Since the target group of development financing mostly lack capability to provide collateral, insisting upon collateral by the NCBs had resulted in the credit going to the inappropriate hands. On the other hand, collateral-free credit to some portion of the target group was also not handled properly and increased the risk of recovery for the banks in case of genuine/wilful default.

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05. Sometimes, the Govt. showed upperhand in politicizing the credit both in loan disbursement and waiver, though it had no stake in the loanable funds. 06. Commercial banks attach importance to the strategy for short run profit making rather than long- run development outlook. 07. Bank owners and employees do not hold positive attitude towards development financing on the plea that the same is the responsibility of the Government. 08. Central Banks moral suasion policy for increasing involvement of commercial banks in development financing did not work well. 09. Govts support and extension facilities in the form of provision of data base, investment counseling, appropriate technology, infrastructure, marketing of products, etc. appear to be inadequate. 10. Dearth of good/viable entrepreneurs is also responsible for not turning the bank-financed development activities/projects a success. 11. Huge amount of classified loan on the part of both NCBs and PCBs have restricted their lending to only selective viable areas. 12. Cost of operation for development financing is relatively high pushing up the lending rates which sometimes turns the bank-financed projects unviable. 13. Development financing projects are by and large prone to natural hazards and also to small extent exposed to marketing hazards. 14. Legal support for recovery is still weak despite the introduction of a number of legal reforms. 15. Commercial banks credit allocation is not based on systematic analysis of potential economic activities.

V.

Conclusions and Recommendations

NCBs having a large network of branches have opened up their financing windows to almost all areas of development activities. Though directed credit has been discontinued, they are under indirect pressure to channel loanable funds to different sectors and prodevelopment activities. Development financing activities are not, by nature, necessarily unviable. The banks being the vital organ of the economy should be imbued with the spirit of patriotism to finance the developmental activities in the interest of the country as well as their survival. But one has to establish the viability of those activities undertaking realistic analysis before releasing the funds for the purpose. The NCBs should not make the same mistakes as 15

were committed in the past for extending directed credit. They should reckon with the three things in enhancing the quality of lending/investment -- (i) developing adequate professionals, (ii) uncompromising attitude with the viability of the projects and entrepreneurs and monitoring system and (iii) avoidance of gross mismatch between the maturities of deposits and loans. Directed credit itself is not an unwelcome proposition at the initial stage of development of an economy. Directed credit made an important contribution to the successful industrialization of some East-Asian countries, particularly of South Korea, during the 1960s and 1970s. In such a situation, provision of support (and protection) to industries was strictly conditional upon good performance. It is regrettable that in our country directed credit was backed by political motivation and inefficiency in credit allocation. In a competitive market, NCBs should be given more operational autonomy to carry out lending and management independently and professionally. Autonomy is essentially the freedom (i) to hire and compensate professionals based on market conditions, (ii) to undertake expenditures based on objectives for financial performance and more important, (iii) to make loans based on an evaluation of risk and efficiency. The Board of Directors should be manned with the professionals having high order of integrity. Members of the political parties should be barred from the membership in the boards of the banks. In order to restore financial discipline, trade unions should not be backed by political parties. In the same breadth, the issues of a low profile of the PCBs and almost no response of the FCBs to development financing have to be critically reviewed. It is true that in the market mechanism, the choice of the loan portfolio of the banks is left to their discretion. Nevertheless, the PCBs and FCBs can not withdraw from development financing on the plea that this is not their domain. If the development sectors/activities are found potentially viable, they should not shy away, rather seek way outs for channeling funds benefiting the economy as well as themselves. While development financing has to be a part of the loan-portfolio of all banks regardless of the ownership, politicization of credit in loan disbursement and recovery should not prevail in any form. There might be occasions when some sector/ economic activity has to be financed at concessional interest rates (as is now the case with the export sector), but in such cases, the extent of subsidy (the difference between the shadow lending rates and the administered interest rates) should be borne by the Government through provision of budgetary allocation. The same policy may also be followed for any waiver of loan (as warranted by the natural calamities) enforced at the instance of the Government. It should, however, be noted that as the commercial banks are free to set up lending rates, they should not favour a higher lending rate (beyond the repaying capacity of the borrowers) burdened by high risk premium being guided by the risk aversion attitude. The loan pricing policies 16

followed by the NCBs seem to be driven by their compulsion to recoup the past losses. With a view to maintaining the quality of future lending, loan pricing should be immune from any past hangover. In case of private banks, the cost of borrowings vary from one borrower to another in the same lending category not depending upon risk perceptions but based on the intimate relationship prevailing with the closely held borrowers. This undesirable discrimination should be done away with for upholding healthy and competitive banking system. Contrary to the norms of development financing, the commercial banks are found to have been placing the deposits of small account holders, rural and underdeveloped areas to the large loan borrowers, urban and developed areas as loans respectively in a grossly disproportionate manner. The incidence of such cases is highly common in case of private sector banks. Even admitting the fact that money should go to the person/area who/which can make the best use of it, there should be minimum equitable distribution of wealth through deployment of loanable funds. Development financing and collateralised credit should not mandatorily co-exist in all cases if the credit has to reach the target sectors/ activities and target beneficiaries. Collateralfree micro credit in rural areas and consumer credit in urban areas performed much better as compared to the sluggish performance by the collateralised credits. The factors contributing to this scenario are group guarantee and supervision in case of micro credit and clients income generation capacity in case of consumer credit. However, the share of micro credit in the total outstanding advances of all banks stand at only 1.4 per cent as on 31-12-1998 which is too small a stake of the banking sector in alleviating poverty. Now the major development challenge for our economy has been to extend credit/venture capital to agriculture, agrobased sub-sectors, small and medium enterprises introducing innovative projects (e.g. software, electronics), new technology, etc. Collaterals should be done away with in financing such sectors and activities upto a certain limit, say, Tk. 5 million. Entrepreneurs technical knowledge and integrity, project viability and adequate supervision and monitoring should be emphasized in lending decision instead of reliance on collateral. The government may actively consider forming a Venture Capital Company in order to facilitate easy access to capital for launching new ventures/ ventures introducing new technology by the prospective entrepreneurs. The conventional view of development financing focuses mainly on rural lending and small sector financing. NCBs are already operating in the field, though they would have to revamp their operations by streamlining the credit allocation policy and strengthening the supervision and monitoring system. However, PCBs and FCBs should not lag behind in the same soil of banking in this regard. Gradually, they should expand the semi-urban and rural branch network following the process of consolidation. In the absence of such arrangement,

17

they might establish linkage program with the NGOs, enter into wholesale banking with PKSF or similar institution for loaning out funds to them for onward retail lending to the rural areas and small scale projects or may open subsidiaries, if found feasible. NCBs also may follow the above arrangements on the basis of working out of the cost-effectiveness of the development financing programs through using their own outlets. A sizeable amount of loanable funds has to be channeled for development financing in the form of term finance. As the commercial banks deposit maturities are relatively short in nature, they find it difficult to lend long to the projects by borrowing short. Although, currently there is no mandatory limit on term loan financing by the commercial banks, financial prudence suggests that the exposure on this account should not exceed 20% of the loanable funds. In a bid to increase the flow of term loan by the banks as demanded by the industrial and agro-based sectors, floatation of industrial development bond may be resorted to as has been done by Agrani Bank. The financial health of the banks, particularly, the NCBs have deteriorated in terms of capital adequacy, loan classification and provisioning requirement over time while PCBs have registered relatively better performance in all the areas. However, PCBs also have huge provisioning shortfall. FCBs have demonstrated superiority in terms of all the indicators under study (Table 13). The BRC in its final report has mentioned that the net worth of four NCBs became negative as instead of operating purely on business grounds they acted as the main source of loans for the Govt.s thrust and priority sectors. While agreeing partially with the above contention, it can be said that thrust or priority sectors by themselves are not unviable for the purpose of financing. It is politicization of credit, inefficient credit allocation, high emphasis on disbursement and much less on recovery, absence of professionalism, poor monitoring, etc. which have made such financing unviable. The NCBs could also professionally deal with financing of such sectors on the basis of viability of the projects. According to the report, the conditions of the PCBs were also fragile. Many irregularities occurred in the absence of transparency, accountability and good governance and as a result, seven banks were identified as problem banks. The BRC report observed that the assets of the NCBs had deteriorated creating an adverse impact on their earnings. It has now become impossible to make profits due to huge provisioning requirement against classified loans and interest expense. The BRC after examining the CAMEL ratings of the banks, commented that the overall situation is still deteriorating though there had been some improvements in the management of the PCBs. The PCBs have successfully reduced their provision shortfalls. Despite this improvement, their earning powers are not comparable to the international standard or those of the foreign banks operating in Bangladesh. With a view to checking further deterioration of the financial health of the banks, it is urgent that the banks, particularly the NCBs, should provide serious attention to the

18

improvement of the quality of lending. In this context, the successful involvement of commercial banks in development financing largely depends on the establishment of sound structure of prudential regulation and supervision by the central bank. This entails overhauling of accounting, auditing, and information disclosure rules and bringing these items in line with current financial technology. The focus of bank supervision should shift from the implementation of Govt. directives such as credit allocation, to the quality of loan portfolio, adequacy of capital, and the soundness of bank management. In the competitive banking environment the need for product diversification can hardly be overemphasized in view of the assumption of the functions of development financing as the modern view suggests. Planned diversification, both in relation to sources and uses of funds, would help improve the liquidity position of the banks and accessing to the funds of compatible maturities for term lending on the one hand, and find out the various potentially viable uses of funds on the other. The products which may be tipped for launching by the commercial banks include Asset Securitisation, Merchant Banking, Lease Financing, Factoring, etc. The recent changes in the global financial arena necessitates the introduction of electronic devices used in international banking operations e.g. E-commerce which represents paperless method of undertaking commercial transactions over the computer network. E-commerce has vast potentiality and will revolutionize the economy and trade. The commercial banks should not confine their activities in the money market, rather they should seek opportunities for establishing linkage with the capital market. Floatation of securities against the package of good loans and increasing participation in merchant banking/investment banking activities like underwriting, portfolio management, issue management, venture capital financing, etc. would definitely broaden the horizon of the development functions of commercial banks and lessen the incidence of liquidity and default risk. Commercial banks of both developed and developing countries have also expanded their activities by including investment banking functions. In Bangladesh perspective, the flourishing of investment banking activities would depend on the healthy growth of the capital market which prevails now at an all-time low confidence index because of the very poor response of the investors. Lease financing has already been recognised as a popular alternative mode of investment financing. In addition to leasing companies, some local private banks have meanwhile been involved in extending lease financing facilities to different corporate clients and their experiences have so far been good in terms of realisation of dues as compared to the conventional cash mode of financing. The commercial banks should also extend lease financing facilities to the small industries and agro-based sectors. The banks must conduct risk assessment of the projects in a professional manner. They can reduce risk substantially in project financing through loan syndication arrangements.

19

Development financing should in no way be the sole responsibility of the government. Having said so, it has to be seen that the Govt. creates objective conditions for banks positive attitude and increasing participation in development financing to serve their own interest. Development of entrepreneurship, data bank, infrastructual facilities, extension services, etc. have to be undertaken in a planned way by the Govt. and private sector representatives like chambers of commerce and industry to facilitate the banks for financing. Though, in the deregulated banking environment there should be no scope for intervention in the credit portfolio of the banks, the moral suasion policy of the Bangladesh Bank can be activated from time to time in order to monitor the participation of the various commercial banks (even of the FCBs) in development financing in cases where it is deemed necessary. The scope of Credit Guarantee Fund as instituted by the Bangladesh Bank should be enlarged for financing the small and medium enterprises (SMEs) and the procedures of having access thereto should be made easier for increasing use of this facility. In the sphere of agricultural financing, the introduction of Crop Insurance Scheme should be actively considered. In our economy, floods and other natural calamities are almost regular visitors. Having considered such phenomena, the Bangladesh Bank may consider instituting a Disaster Management Fund for facilitating the uninterrupted credit flow to the pro-development sectors prone to natural hazards. As stated earlier, the commercial banks should in no way compromise with the quality of lending even if those are channeled to the development sectors/activities including public sector financing. Henceforth, the newly created loans of the banks should not succumb to classification exceeding 10 per cent of the exposure. Restoring the financial stability of the banks is deemed to be very important at this critical juncture for pursuing sound banking including the management of the portfolio of development financing. This will warrant expeditious handling of the non-performing loans lying with the portfolio of the banks. The banks should undertake a detailed scrutiny of their respective problem loans in order to figure out which could be made performing and which has to be off-loaded from the banks portfolio. For the second course of action, enforcement of the laws related to recovery, expeditious settlement of cases and writing-off some bad loans remain as the only viable way outs for helping the banks to clean up their portfolios. However, the pursuit of efficient credit delivery system and intensive monitoring by the banks with the help of adequately trained professionals should top the agenda for future development outlook. In the modern competitive banking, it is obvious that the focus of commercial bank lending would be on profit. Naturally, whatever activities they lend to, if turned as viable for financing ensuring the recovery of the loan, these would no doubt be considered as development financing. However, they should increasingly involve themselves in conventional development financing in order to gain long term viability benefiting themselves as well as the economy, but that should not occur at the cost of viability. 20

REFERENCES Adams, D. W., and R.C. Vogel. (1986). Rural Financial Markets in Low Income Countries: Recent Controversies and Lessons. World Development 14(4): 477-487. Ahmad, Muzaffer. (1997). The Political Economy of Loan Default A Quest for a SocioPolitical Explanation. Bank Parikrama, Vol. XXII, No. 2, 1997. Bangladesh Bank. Annual Report, 1998/99. Bangladesh Bank. Economic Trends. June 1999. Bangladesh Bank. Scheduled Banks Statistics. Various Issues. Center for Policy Dialogue.(1996). Growth or Stagnation? A Review of Bangladeshs Development. Dhaka: University Press Ltd.. Centre for Policy Dialogue.(1998).Crisis in Governance: A Review of Bangladeshs Development. Dhaka: University Press Ltd.. Centre for Policy Dialogue.(1998). The State of Governance in Bangladeshs Banking Sector: Perspectives on the Reform Measures.Dhaka: University Press Ltd., . Chaudhury, A.J. (1998). Commercial Bank Restructuring in Bangladesh: Some Issues. A paper presented on a National Seminar, BIBM, Dhaka. Choudhury, T.A. And L.H. Moral. (1998). Commercial Bank Restructuring in Bangladesh: From FSRP to BRC/CBRP. A paper presented on a National Seminar, BIBM, Dhaka. Financial Sector Reform Project.(1991). The Report of the Task Forces. Vol. 1. GOB, Dhaka: University Press Ltd.. Government of Bangladesh. Resume of Activities of Financial Institutions of Bangladesh, 1998-99. Ministry of Finance, GOB. Gupta, K.I.(1984). Finance and Economic Growth in Developing Countries. U.K.: Croom Helm Ltd. Hassan, M. Kabir. (1993). Banking and Finance in Bangladesh. Dhaka. Hossain , M. (1988). Credit for alleviation of Rural Poverty: The Grameen Bank in Bangladesh. Research Report 65. International Food Policy Research Institute, Washington, D.C. Quibria, M. G.(1997). The Bangladesh Economy in Transition. Dhaka: University Press Ltd. USAID. (1991). Financial Sector Reform Project Technical Assistance. Ref. No. Bangladesh 91-02. United States Agency for International Development, Dhaka. Westphal, L.E.(1990). Industrial Policy in an Export-propelled Economy: Lessons from South Koreas Experience. Economics Perspectives, Summer.

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Table 1: Number of Branches of Different Types of Banks (1989/90 1998/99) Types of Banks NCBs PCBs FCBs SFIs All Banks 1989-90 3560 (64.1) 824 (14.8) 22 (0.4) 1146 (20.6) 5552 (100.0) 1991-92 3596 (63.3) 902 (15.9) 18 (0.3) 1167 (20.5) 5683 (100.0) 1993-94 3612 (62.7) 943 (16.4) 18 (0.3) 1186 (20.6) 5759 (100.0) 1995-96 3628 (61.8) 1065 (18.2) 23 (0.4) 1151 (19.6) 5867 (100.0) 1997-98 3617 (60.8) 1133 (19.0) 29 (0.5) 1173 (19.7) 5952 (100.0) 1998-99 3616 (60.7) 1160 (19.4) 32 (0.5) 1175 (19.6) 5983 (100.0)

Note : Figures in parentheses show percentage of total number of branches. Source : (i) Economic Trend, Bangladesh Bank, July 1999. (ii) Annual Report, Bangladesh Bank, 1998-1999. Table 2 : Percentage Share of Different Types of Banks in Total Deposits and Advances (1990-1998)
Urban Types of Banks 31-12-90 D NCBs PCBs FCBs SFIs All Banks 73.2 91.3 100.0 49.9 78.8 A NCBs PCBs FCBs SFIs All Banks 79.3 96.8 100.0 42.3 76.6 31-12-95 E 73.7 90.9 100.0 53.3 78.6 D 80.4 97.7 100.0 44.9 80.2 31-1298 P 71.2 90.3 100.0 48.6 77.4 V 81.1 97.8 100.0 61.5 82.9 31-12-90 O 26.8 8.7 0.0 50.1 21.2 A 20.7 3.2 0.0 57.7 23.4 Rural 31-12-95 S 26.3 9.1 0.0 46.7 21.4 N 19.6 2.3 0.0 55.1 19.8 31-12-98 I 28.8 9.7 0.0 51.4 22.6 C 18.9 2.2 0.0 38.5 17.1 31-1290 T 62.4 26.1 7.1 4.4 100.0 E 52.8 21.0 5.7 20.4 100.0 52.4 25.1 5.3 18.3 100.0 51.1 25.6 5.4 17.9 100.0 61.5 27.8 4.9 5.9 100.0 60.2 27.2 7.4 5.2 100.0 Total 31-12-95 31-12-98

Source : Scheduled Banks Statistics, Bangladesh Bank, Various Issues.

22

Table 3 : Percentage Share of Administrative Divisions in Total Deposits and Advances of Different Types of Banks (1990-1998)

NCBs 31-12-90 31-12-95 31-12-98 31-12-90 Divisions

PCBs 31-12-95 31-12-98 31-12-90

FCBs 31-12-95 31-12-98 31-12-90

SFIs 31-12-95 31-12-98 31-12-90

All Banks 31-12-95 55.6 59.8 21.1 18.4 6.3 8.3 8.7 10.3 2.3 1.6 5.9 1.7 31-12-98 54.9 63.9 21.1 17.1 6.3 7.4 8.5 8.3 2.4 1.6 6.7 1.6

Dhaka

Deposits

51.8

53.8 58.4 20.9 16.8 7.3 10.9 10.0 11.0 2.7 1.7 5.2 1.2

52.9 60.4 20.4 16.6 7.6 9.8 10.4 10.3 2.9 1.7 5.8 1.2

57.6 70.9 30.3 21.0 6.5 5.4 5.6 2.7 0.0 0.0 0.0 0.0

57.3 67.9 21.3 22.8 4.6 4.4 6.7 2.9 1.7 0.7 8.4 1.2

55.9 68.4 21.3 20.9 4.3 5.1 6.1 3.1 1.8 0.9 3.0 1.5 100.0 100.0

68.9 69.7 29.1 27.2 2.0 3.1 0.0 0.0 0.0 0.0 0.0 0.0

81.9 65.9 17.3 33.6 0.8 0.5 0.0 0.0 0.0 0.0 0.0 0.0

78.2 77.0 20.7 22.5 0.7 0.5 0.0 0.0 0.0 0.0 0.4 0.0

40.3 45.7 35.5 18.5 12.9 13.7 11.2 22.0 0.0 0.0 0.0 0.0

39.6 50.0 28.0 12.0 9.4 8.5 12.1 22.0 4.8 2.9 6.1 4.5 100.0 100.0

40.5 63.5 28.1 11.3 9.0 6.6 11.6 12.3 4.3 3.0 6.4 3.3 100.0 100.0

54.0 59.7 28.0 18.2 9.2 10.4 8.8 11.7 0.0 0.0 0.0 0.0

Advances 59.5 Chittagong Deposits 26.4

Advances 16.0 Khulna Deposits 10.8

Advances 11.9 Rajshahi Deposits 10.9

Advances 12.5 Barishal Deposits Advances Sylhet Deposits Advances Deposits Total 0.0 0.0 0.0 0.0

100.0 100.0 100.0 100.0 100.0

100.0 100.0 100.0 100.0

100.0 100.0 100.0 100.0

100.0 100.0 100.0 100.0 100.0 100.0

Advances 100.0 100.0 100.0 100.0 100.0

Source : Scheduled Banks Statistics, Bangladesh Bank, Various Issues.

23

Table 4 : Outstanding Advances of Different Types of Banks by Economic Purposes (19901998) (Amount in Tk. Crore)
NCBs Economic Purposes 31-12-90 31-12-95 31-12-98 31-12-90 PCBs 31-12-95 31-12-98 31-12-90 FCBs 31-12-95 31-12-98 31-12-90 SFIs 31-12-95 31-12-98 31-12-90 All Banks 31-12-95 31-12-98

A. Agriculture, Fishing & Forestry B. Industry (Term loan)

1930 2611

3448

116 (2.6) 800

178 (2.0) 1830

205 (1.6) 2160

20 (1.6) 147

12 (0.7) 515

3 (0.1) 568

2712

3348

3790

4777

6149 (17.6) 9839 (28.2) 9313 (26.7) 526 (1.5) 3262 (9.4) 2793 (8.0) 468 (1.3) 1884 (5.4) 543 (1.6) 10316 (29.6) 2875 (8.2)
34868

7842 (15.4) 15038 (29.5) 14257 (28.0) 780 (1.5) 5321 (10.4) 4627 (9.1) 694 (1.4) 2729 (5.4) 717 (1.4) 14470 (28.4) 4825 (9.5)
50942

(17.4) (14.3) (13.2) 3561 5665 8604

(63.1) (55.9) 1073 1829

(41.5) (22.7) 3706 5582

(32.1) (31.0) (33.1) (18.0) (20.9) (16.6) (12.1) (27.7) (20.6) (25.0) (30.5) 1. Large & Medium Scale 3427 5352 8178 734 1702 1919 147 515 562 1036 1744

(40.6) (26.5) 3599 5344

(30.8) (29.3) (31.4) (16.6) (19.4) (14.7) (12.1) (27.7) (20.4) (24.1) (29.1) 2.Small Scale & Cottage 134 (1.3) C. Working Capital Financing 313 (0.7) 426 (1.7) 3407 66 (1.4) 343 (7.7) 325 (7.3) 18 (0.4) 306 (6.9) 100 (2.3) 2598 (5.9) 165 (3.7)
4430

(39.4) (25.4) 107 (1.2) 245 (2.7) 148 (1.6) 96 (1.1) 64 (0.7) 196 (2.1) 369 (4.0) 762 (8.3)
9132 (100.0)

128 (1.5) 797 (9.1) 715 (8.2) 82 (0.9) 755 (8.6) 205 (2.3) 4377

241 (1.9) 1162 (8.9) 1061 (8.1) 101 (0.8) 1130 (8.7) 227 (1.7) 6720

0 (0.0) 400

0 (0.0) 346

6 (0.2) 508

37 (0.9) 119 (2.8) 69 (1.6) 50 (1.2) 18 (0.4) 72 (1.7) 74 (1.7) 229 (5.3)
4297

85 (1.4) 141 (2.4) 86 (1.4) 55 (1.0) 0 (0.0) 71 (1.2) 161 (2.7) 441 (7.4)
5991

237 (1.1) 2046 (9.7) 1830 (8.7) 216 (1.0) 820 (3.9) 326 (1.5) 6520 (31.0) 937 (4.4)
21046

1184 1977

(10.6) (10.8) (13.1) 1. Large & Medium Scale 1040 1649 (9.4) 2. Small Scale & Cottage 144 (1.2) D. Construction 449 (4.0) E. Transport & Communication 136 (1.2) F. Trade 2911

(33.1) (18.6) (18.5) 395 343 508

(9.0) (11.2) 328 (1.8) 1065 (5.8) 231 (1.3) 496 (1.9) 1494 (5.7) 199 (0.8) 6617

(32.6) (18.5) (18.5) 5 (0.5) 47 (3.9) 18 (1.5) 559 (4.6) 14 (1.2)

1210

3 (0.2) 30 (1.6) 36 (1.9) 676

0 (0.0) 40 (1.4) 96 (3.5) 764

3288 5102

(29.6) (27.9) (25.4) G. Miscellaneous 529 (4.8) Total 1607 (8.8) 2259 (8.7)

(50.0) (51.6) 621 (7.1)

8763

(36.4) (27.8) 241 773

1377 (10.6)
13031

(13.0) (28.1)
1856 2752

11109 18258 26028

(100.0) (100.0) (100.0) (100.0) (100.0) (100.0) (100.0) (100.0) (100.0) (100.0) (100.0)

(100.0) (100.0) (100.0)

Note : Figures in parentheses indicate percentages of total amount. Source : Scheduled Banks Statistics, Bangladesh Bank, Various Issues.

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Table 5 : Percentage share of Public and Private Sectors in Outstanding Advances of All Banks by Major Economic Purposes (1990 1998)
31-12-90 Private Sector Public Sector Public Sector Total Economic Purpose 31-12-95 Private Sector Public Sector Total 31-12-98 Private Sector 90.1 86.9 86.3 97.2 76.2 74.0 91.5
All Banks 31-12-98 31-12-90 31-12-95 31-12-98

A. Agriculture, Fishing & Forestry B. Industry (Term Loan) 1. Large & Medium Scale 2.Small Scale & cottage C. Working Capital Financing 1. Large & Medium Scale 2. Small Scale & Cottage

9.6 31.2 32.2 8.4 25.3 27.8 3.7

90.4 68.8 67.8 91.6 64.7 72.2 96.3

100.0 100.0 100.0 100.0 100.0 100.0 100.0

7.9 17.6 18.4 3.4 23.8 27.4 2.1

92.1 82.4 81.6 96.6 76.2 72.6 97.9

100.0 100.0 100.0 100.0 100.0 100.0 100.0

9.9 13.1 13.7 2.8 23.8 26.0 8.5

100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source : Scheduled Banks Statistics, Bangladesh Bank, Various Issues.

Table 6 : Outstanding Advances of Different Types of Banks in Agriculture and Allied Activities (1990-1998) (Amount in Crore Tk.)
NCBs 31-12-90 31-12-95 31-12-98 31-12-90 Sub-Sectors PCBs 31-12-95 31-12-98 31-12-90 FCBs 31-12-95 31-12-98 31-12-90 SFIs 31-12-95

Crop sub-Sector Livestock Fishing Forestry & Logging Total

1838 2390 3038 (45.7) (46.6) (50.3) 21 81 194 (5.1) (14.6) (27.6) 70 138 251 (20.6) (30.7) (34.3) 1 2 (33.3) (16.7) 1 (9.1)

102 (2.5) 2 (0.5) 12 (3.5)

143 (2.8) 3 (0.5) 22 (4.9)

138 (2.3) 12 (1.7) 55 (7.5) 0 (0.0) 205 (2.7)

0 (0.0) 1 (0.2) 19 (5.6) 0 (0.0) 20 (4.2)

8 3 2084 (0.1) (0.04) (51.8) 3 (0.5) 1 (0.2) 0 (0.0) 0 387 (0.0) (94.2) 0 239 (0.0) (70.3) 0 2 (0.0) (66.6)

2589 (50.5) 469 (84.4) 289 (64.2) 0 (0.0) 3347 (54.4)

2862 4024 5130 6037 (47.4) (100.0) (100.0) (100.0) 494 411 556 703 (70.3) (100.0) (100.0) (100.0) 424 340 450 731 (58.1) (100.0) (100.0) (100.0) 10 3 12 11 (90.9) (100.0) (100.0) (100.0) 3790 4777 6148 7482 (50.7) (100.0) (100.0) (100.0)

0 10 (0.0) (83.3) 178 (2.9)

1930 2611 3484 116 (40.4) (42.5) (46.6) (24.3)

12 3 2712 (0.2) (0.04) (56.8)

Note : Figures in parentheses indicate percentages of total amount. Source : Scheduled Banks Statistics, Bangladesh Bank, Various Issues.

25

Total

Table 7 : Disbursement of Agricultural Credit by Different Types of Banks and Fina ncial Institutions ( 1990/91 - 1997/98) (Amount in Crore Tk.)
NCBs Year 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 Amount 179 267 259 345 457 438 447 444 Share (%) 30.0 33.6 30.8 31.3 28.5 26.8 26.7 24.5 PCBs Amount 4 4 4 0 115 154 155 172 Share (%) 0.7 0.5 0.5 0.0 7.2 9.4 9.3 9.5 SFIs Amount 361 503 563 742 958 951 958 1058 BSBL + BRDB Share (%) 8.7 2.5 1.8 1.2 4.7 5.7 6.7 7.8 Overall Amount 596 795 842 1101 1605 1636 1672 1815 Share (%) 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Share Amount (%) 60.6 63.3 66.9 67.4 59.7 58.1 57.3 58.3 52 20 15 13 75 93 113 142

Source : Computed from Scheduled Banks Statistics, BB, Oct Dec, 1998 PP 168 172 Table 8 : Outstanding Advances of Different Types of Banks in Industry (Term Loan and Working Capital Financing) (1990-1998) (Amount in Crore Tk.)
NCBs 31-12-90 31-12-95 31-12-98 31-12-90 Sub-Sectors/Type of Financing PCBs 31-12-95 31-12-98 31-12-90 FCBs 31-12-95 31-12-98 31-12-90 SFIs 31-12-95 31-12-98 31-12-90 All Banks 31-12-95 9839 9313 526 3262 2793 469 31-12-98 15038 14257 780 5321 4627 694

A. Term Loans i. Large & Medium Scale Ii. Small Scale & Cottage B. Working Capital Financing i. Large & Medium Scale Ii. Small Scale & Cottage

3561 (63.8) 3427 134 1184 (57.9) 1040 144

5665 5352 313 1977 1649 328

8604 8178 426 3407 2911 496

801 735 66 343 325 18

1830 1702 128 797 715 82

2160 1919 241 1162 1061 101

147 (2.6) 147 0 400 395 5

515 (5.2) 515 0 346 343 3

568 562 6 508 (9.5) 508 0

1073 1036 37 119 (5.8) 69 50

1829 1744 85 141 (4.3) 86 55

3706 (24.6) 3599 107 245 148 96

5582 5344 237 2046 1830 217

(57.6) (57.2) (14.3) (18.6) (14.4)

(3.8) (19.2) (18.6)

(100.0) (100.0) (100.0)

(60.6) (64.0) (16.8) (24.4) (21.8) (19.6) (10.6)

(4.6) (100.0) (100.0) (100.0)

Note : Figures in parentheses indicate percentage shares of different types of banks in total amount. Source : Scheduled Banks Statistics, Bangladesh Bank, Various Issues.

26

Table 9 : Year-wise Disbursement of Industrial Credit (Term Loan) by Banks and Financial Institutes. ( Tk. in Crore )
Year 1990-91 Nationalized Private ComCommercial mercial Banks Banks (Local) 44.75 (12.5) 1991-92 57.97 (18.5) 1992-93 449.26 (61.8) 1993-94 778.55 (56.1) 1994-95* 810.68 (67.0) 1995-96 68815 (55.9) 1996-97 278.39 (23.2) 1997-98 253.28 (22.6) 1998-99 347.97 (26.2) 102.59 (28.7) 96.82 (30.9) 121.42 (16.7) 308.75 (22.2) 225.10 (18.6) 131.28 (10.7) 235.27 (19.6) 233.26 (20.8) 299.11 (22.5) Foreign Commercial Banks 54.31 (15.2) 59.16 (18.9) 67.47 (9.3) 106.5 (7.7) 33.94 (2.8) 139.14 (11.3) 105.20 (8.8) 238.73 (21.3) 269.28 (20.2) Specialized Financial Institutions 130.47 (36.4) 78.37 (25.1) 88.96 (12.2) 138.89 (10.0) 91.97 (7.6) 183.48 (14.9) 345.28 (28.8) 153.86 (13.7) 65.29 (4.9) Non-bank Financial Institutions 25.80 (7.2) 20.51 (6.5) 0.0 (0.0) 55.38 (4.0) 48.40 (4.0) 88.39 (7.2) 235.86 (19.7) 241.21 (21.5) 348.45 (26.2) Total 357.92 (100.0) 312.83 (100.0) 727.11 (100.0) 1388.13 (100.0) 1210.09 (100.0) 1230.44 (100.0) 1200.00 (100.0) 1120.34 (100.0) 1330.10 (100.0)

Note : * Up to February, 95 Source : 1. 2. Experience with Economic Reform. A Review of Bangladeshs Development, 1995. CPD : Dhaka, 1996. Industrial Credit Division, Bangladesh Bank.

27

Table 10 : Deposits of Different Types of Banks by Maturities (1990-1998) (Amount in Tk. Crore)
NCBs Types of Deposits 31-12-90 31-12-95 31-12-98 31-12-90 31-12-95 31-12-98 31-12-90 31-12-95 31-12-98 1. Current and Cash Credit Ac. Deposits 2. Savings Deposits 1874 (13.7) 3461 (25.4) 3. Fixed Deposits 5526 (40.5) i. Less than 1 Year 1208 (8.9) ii. 1 year to less than 3 years 1938 (14.2) iii) 3 years and above 2380 (17.5) 4. Other Deposits 2773 (20.3) Total 13634 (100.0) 3633 (14.3) 8116 (31.9) 7216 (28.4) 2379 (9.3) 2981 (11.7) 1856 (7.3) 6489 (25.5) 25454 (100.0) 4716 (13.7) 11040 (32.2) 9293 (27.1) 2349 (6.8) 3504 (10.2) 3439 (10.0) 9280 (27.0) 34329 (100.0) 823 (14.5) 1194 (21.0) 2565 (45.0) 840 (14.8) 1156 (20.3) 568 (10.0) 1109 (19.5) 5691 (100.0) 1559 (13.7) 2909 (25.5) 4243 (37.1) 1815 (15.9) 1902 (16.7) 527 (4.6) 2712 (23.7) 11423 (100.0) 2004 (12.9) 4356 (28.1) 5704 (36.8) 2502 (16.1) 2324 (15.0) 878 (5.7) 3454 (22.2) 15518 (100.0) 179 (11.5) 181 (11.6) 607 (38.9) 416 (26.7) 169 (10.8) 22 (1.4) 593 (38.0) 461 (21.7) 383 (18.0) 590 (27.8) 458 (21.5) 102 (4.8) 30 (1.5) 690 (32.5) 2124 (100.0) 584 (13.9) 733 (17.5) 1961 (46.8) 749 (17.9) 939 (22.4) 273 (6.5) 916 (21.8) 4194 (100.0) PCBs FCBs

Note : Figures in parentheses show the percentages of total amount. Source : Scheduled Banks Statistics, Bangladesh Bank, Various Issues.

28

Table 11 : Outstanding Advances of Different Types of Banks in Foreign Trade Financing (1990-1998) (Amount in Crore Tk.)
NCBs 31-12-90 31-12-95 31-12-98 31-12-90 Major Items PCBs 31-12-95 31-12-98 31-12-90 FCBs 31-12-95 31-12-98 31-12-90 SFIs 31-12-95 31-12-98 31-12-90 All Banks 31-12-95 2026 521 80 221 762 442 2285 4311 31-12-98 3046 483 121 499 1310 633 3416 6462

1. Export Financing

771

1331

1804

256

544 (26.9) 49

1074 (35.3) 38

110 (9.6) 10

100 (4.9) 5

96 (3.2) 4

5 (0.4) 0

51 (2.5) -

71 (2.3) -

1142

(67.5) (65.7) (59.2) (22.4) i. Jute & Jute Products 429 468 441 64

(100.0) (100.0) (100.0) 503

ii. Tea

26

38

46

26

45

30

37

iii. Hides & Skins

138

202

479

50

13

11

20

195

iv. Readymade Garments

86 92 513

368 255 811

527 311 1150

66 73 605

350 106 1205 (52.7) 1749 (40.6)

737 243 1718

24 63 238

5 69 269

31 22 462

0 4 1 (0.1) 6 (0.2)

48 254 (11.1) 305 (7.1)

14 57 86 (2.5) 157 (2.4)

177 230 1356

v. Others 2. Import Financing

(37.8) (35.5) (33.7) (44.6) Total 1284 2142 2954 861

(50.3) (17.5) (11.8) (13.5) 2792 348 369 (8.6) 558 (8.6)

(100.0) (100.0) (100.0) 2498

(51.4) (49.7) (45.7) (34.5)

(43.2) (13.9)

(100.0) (100.0) (100.0)

Note : Figures in parentheses indicate percentage shares of different types of banks in total amount. Source : Scheduled Banks Statistics, Bangladesh Bank, Various Issues.

29

Table 12 : Outstanding Advances of Different Types of Banks in Poverty Alleviation Programs. (Amount in. Tk Crore) Outstanding Advances in Poverty Alleviation Programs 1997 NCBs 293 (59.7) PCBs 9 (2.0) FCBs 0 (0.0) SFIs 155 (33.9) All Banks 457 (100.0) 1998 467 (66.5) 22 (3.1) 0 (0.0) 213 (30.3) 702 (100.0) Total Outstanding Advances * 1997 23488 (1.2) 11197 (0.08) 2378 (0.0) 6720 (2.3) 43783 (1.0) 1998 26028 (1.8) 13031 (0.2) 2752 (0.0) 9132 (2.3) 50942 (1.4)

Types of Banks

Note : Figures in parentheses show the percentages of amount of all banks. * Figures in parentheses show the percentage share of financing poverty alleviation programs of different types of banks in total outstanding advances.

Source : Activities of the Resume of Bank and Financial Institutions of Bangladesh, Ministry of Finance, GOB, 1998-99.

30

Table 13: Trend of the Indicators of Financial Health of Different Types of Commercial Banks (1990-1999)

Actual Capital as % of Year NCBs 1990 1992 1994 1996 1998 1999 June, 30 66 112 187 N/A 67 57 92 70 81 Required Capital PCBs 68 89 87 80 110 FCBs N/A 112 135 200 168 All Banks N/A 69 93 80 92

Loans Classified as % of Total Outstanding Loans All Banks 27 31 35 31 39

Actual Provision as % of required Provision All Banks N/A 68 60 50 54

NCBs 29 32 32 33 39

PCBs 25 31 45 35 33

FCBs 21 13 9 5 3

NCBs N/A 68 67 45 40

PCBs N/A 64 45 54 56

FCBs N/A 103 103 121 136

47

29

43

N/A

N/A

N/A

N/A

Source : (i)

Choudhury & Moral, Commercial Bank Restructuring in Bangladesh: from FSRP to BRC/CBRP. October, 1998. P. APP.- 1. The Daily Star.

(ii)

31