CSR activities by state-owned banks

State-owned banks (SoBs) are not faring well in their core banking business in the last few years, which was reflected in the growth of classified loans. They underwent capital shortfall.
When do banks undergo capital shortfall? The answer is: when provisioning against the bad loans cannot be provided by the banks. Again, when are banks unable to provide provisioning against bad loans? The answer: when the amount of bad loan is larger than the profit made by the banks. In those cases, bad loan eat up the bank's capital. The Bangladesh Bank (BB) - the regulator in the banking industry -- does not allow any distribution of dividend among the shareholders until bad loans are fully provisioned. Who supply the capital to the banks or any other business? The answer is: shareholders. In case of SoBs the government of Bangladesh is the lone shareholder, and if the any shortfall in the capital adequacy occurs, the government is to make up the capital and abstain from taking any sort of profit from these banks.
 SoBs once used to control the whole of banking business, now things have changed, their share of business has come down to less than 30 per cent. But still they are doing a big business, taking millions of taka from the public as deposits and re-loaning the money to the public for business. But they have proved to be bad collectors of the loaned-out money.
Many businessmen in the past became rich simply by not paying back the borrowed money from the SoBs. In many cases, the SoBs failed to collect the principal amount they lent, not to speak of the interest income against lending. That means, in those cases SoBs had to forgo both the principal amount they lent and also the expected income from interest receipt.
The government runs the SoBs by appointing the directors of its choice to the Board of Directors and also the Managing Directors - the Chief Executives. If the directors, including the Chairman of the Boards, are, to an extent, honest and at the same time efficient, then the SoBs can fare better in the business. But if the nominated directors are always up there for personal gains, then bad luck will strike these banks and the particular SoBs will turn to be losing concerns. The SoBs' financial health was much better when this government took power in 2009. But it slowly deteriorated in the last five years, leading to a condition that these banks are now asking for additional money from the government to make up the lost capital.
Asking for capital by the SoBs means that they are not making profit in real sense. Now, the important question is: can the losing SoBs undertake CSR (Corporate Social Responsibility) activities? No, they cannot. CSR activities are carried out world over by the profit-making business entities only.
The business entities, which do not make profit, cannot distribute any dividend to the shareholders. And if they lose in consecutive years, those businesses become sick, and at one point are abandoned by the management and sent to liquidation. CSR activities are normally undertaken by the healthy business organisations. But how can the SoBs distribute so much money for CSR activities when they are facing capital shortage? No business entity undertakes CSR activities if it does not have any net profit surplus.
Funds spent for CSR can be a portion of the net profit only. It should not be an expenditure tied to the business's turnover or gross profit. If the expenditure under CSR is allowed against turnover or gross profit, then losing business entities will also be eligible for CSR activities. But nowhere in the world losing businesses undertake any CSR activities. As the SoBs are not making any profit, they should be barred from undertaking CSR activities until the time they begin making profit.
The best of the CSR is handing down the ownership of the business to the people in the way of share sale. The SoBs were made limited companies in 2007 having one objective in mind, that is, these banks will off-load the equity or permanent capital through the stock exchange. But share sale is now a forgotten issue. If the shares were off-loaded, the constitution of Board of Directors would have been different.
 CSR activities by the SoBs should be kept pending until they make real profit and also pay back all the borrowed money they took from the government.
The writer is a professor of Economics, University of Dhaka. abuahmedecon@yahoo.com