Way back in 1972 the banking sector was in an absentee ownership regime. At that critical juncture, the government decided to take over all the banks. Sonali, Janata, Agrani, Rupali, Pubali and Uttara -- all the banks were taken under the control and ownership of the government.
The banks, in other words, were nationalised by the government. Consequently these got a nomenclature of NCBs - nationalised commercial banks. The banks were taken over by the government more under circumstantial compulsion than socialistic approach. Subsequently, however, Uttara and Pubali were denationalised. Uttara was transferred to original owners while an entrepreneur group took over Pubali bank in early eighties. The first four private sector banks (PCBs) came in around 1983. Those four took the lead in the journey of private sector banks - PCBs, a paradigm shift. These are IFIC, Arab Bangladesh Bank (now AB Bank Ltd.), Islami Bank Bangladesh Ltd. and Social Islami Bank Ltd (SIBL)-- all public limited companies. As a consequence, the banking sector started growing in a competitive landscape - private versus public.
Gradually, the PCBs grew in number and the volume of their banking finance began to occupy larger share in the country's bank financing schemes. During 1991 to 1996, 1996 to 2001, 2001 to 2006, and 2008 to 2017 many new PCBs came into banking business. Capital market started seeing new PCBs heating the price interactions in stock market. And they grew at a faster speed earning laurels from entrepreneurs for business growth.
These banks, later known as state-owned commercial banks (SoCBs), have been getting favour from the government regularly. However, it is true that these banks created bankers who after a while joined the newly emerging PCBs. Being in the private sector, these bankers soon began to demonstrate high professional excellence. While in the NCB sector, they could not excel well due to either the regulated regime or undesirable interventions. This growth of professional bankers helped the private sector grow at a much better and faster pace compared with their tenure in the public sector.
The public sector banks were in a shambles due to absence of professionals who moved to the private sector with higher packages. Those who remained in the SoCBs were mostly reluctant to take new challenges in the private sector. Gradually, however, the central bank took measures to recruit new generation bankers for the SoCBs.
The SoCBs, too, are now offering competitive remuneration packages for employees. The officials are getting car loans and also incentives-the latter, however, not related to performance, which is not the case with the PCBs where incentives are tied to performance.
Incentives should have been linked with performance. The SoCB branches, mostly opened at the behest of bureaucracy and politicians without viability study, are for the most part liabilities to the banks' branch network. Less than 10 per cent of the branches earn profit from portfolio loans. Deposit based branches lend funds to Head Office (HO) which in turn lends to the loan disbursing branches. Bankers in the SoCBs, by and large, hardly think about individual branch profits rather than safely lending to HO. The loan portfolios are concentrated in 5.0 per cent or less branches in all SoCBs. Coupled with this, lack of governance has caused non-performing loans (NPL) to rise recklessly.
The average rate of NPL is reported at 10+ per cent. Besides, there is the case of colossal volume of loans disbursed which are consistently being re-phased or restructured only to be prevented from being categorised as classified loans. The delinquent borrowers avail the easiest resort by obtaining court verdicts in their favour. The SoCBs' law enforcement mechanism is deplorably poor due to absence of monitoring, transparency and accountability. The management bodies are not free from cronyism and nepotism. The regulatory body, the central bank gives them lenient scope for evading compliance. These favours have made them uncompetitive.
The SoCBs were turned into limited companies but the control remained with the government, the owner. Their Boards are made of government nominations but not with liberty, accountability and the onus of earning profit. Those banks render various kinds of free services to the government. The cost of funds are not cushioned to these banks by government when these are having obligatory requirements to invest in treasury bills, bonds etc which bear a modest 2.5 to 5 per cent interest. The cost of fund is over 8 per cent-- mainly due to NPL due to lending at the rate of 5 per cent or even less. These have been in practice since long.
The SoCBs are to persistently bear the blame of fund injection by the government. Their portfolio to the extent or over of 20 per cent goes to NPL. Another 30+ per cent goes to government's low income investments. In all national budgets, substantial amounts in the name of new capital are sanctioned for these banks. This fund injection brings in concerns often further damaging the persistent negative public image of these banks.
As a result, the SoCBs have more foes than friends. The government wants them to run well but does not empower them with liberty and accountability to perform. Consequently, welfare motive dominates over profit but the non-performing of SoCB bankers' accountability remains a far cry.
In different locations of the country, each of the four SoCBs has more than one branch. It is very often seen that four branches from four banks exist in the same Upazilla. Almost 90 per cent, if not more of these branches, are run at loss.
The government is the owner of these banks, and hence it should expect better and cheaper services from the SoCB's. But free services to the government and fund injections to make up for the loss do not appear to complement banking practices.
Because of being in a protected environment, the SoCBs' bankers have developed personal relationship with NPL delinquents. The NPL borrowers are not even taken seriously and professionally by the SoCB management.
It is high time the government looked into the governance aspects of the SoCBs. A Task Force comprising senior representatives of the SoCBs as well as experts in financial matters can be formed to bring changes towards the desired direction. NPLs should be separately dealt with keeping in view the experience of neighbouring countries. It is said that when 'going gets tough, the tough keeps going'.
Masih Malik Chowdhury, past President (2015) of ICAB, is Founder Partner of Masih Muhith
Haque & Co. Chartered Accountants.
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