The state-owned banking sector was key to the creation of the industrial sector in Bangladesh. This fact cannot be disputed by students of the industrialisation of the Bangali nation.
The formation of the four banks, Sonali, Agrani, Janata, and Rupali, including Pubali Bank, which was later privatised, have been critical to the allocation of capital for large scale industrial projects in East Pakistan and then Bangladesh. In fact, after independence, it is access to capital from these banks, which have provided a platform for Bangali entrepreneurs to emerge as industrialists.
The current state of affairs of the state-owned banks, where deposit is growing, and lending has been held up in a challenging environment, and their declining market share, begs the question whether the state owned banks should still be mandated to be the industrialisation pioneers or each become specialised banks, with specific areas of concentration.
One idea may be that specific industries, such as infrastructure, textiles, SME or other thrust sectors should be their specific focus. Another idea may be that they ought to become channels for mediation of deposits and act as intermediaries, whereby they lend to private banks who will onward lend to the private sector.
State-owned enterprises borrowing or large infrastructure projects may remain as an on-going specialised in-house scope of activity for these banks.
This though process, may be standing as an anathema to leading government and private intellectuals, is the dire inefficient use of resources by the state-owned banks when compared to the private sector banks.
This has continued even when the state owned banks have continued to attract deposits by common folk, who believe in these institutions, even after their dismal performance, but the banking sector simply failing to hold their trust in due regard.
Over the past thirty years, the decline of the state banks, and the rise of the private sector banks have completely changed the banking landscape in the country.
The sector is currently made up of 30 private commercial banks (PCBs), including 6 Islami shariah based banks, 4 state-owned banks (SCBs), 9 foreign commercial banks (FCBs), 4 specialised banks and 9 newly licensed commercial banks.
The growth of total lending has been robust, with total credit in the banking sector being Tk4.4tn (US$56.4bn) as of March 2013. During the last five years, the sector grew at a rate of 19.7%. Sector deposit stood at Tk5.5tn ($70.5bn) as of March 2013.
It registered 20.5% CAGR during last the five years. That is double digit sector growth, which is impressive given GDP growth of 5-6% on average.
Interesting, and standing as a challenge for the state owned banks, private commercial banks (including Islami shariah based banks) hold almost 67.8% market share while Islami banks, foreign banks, state-owned banks hold 21.3%, 5.0% and 21.1% respectively.
More challenging, the amount of default loans in the banking system hovered around Tk220bn in three consecutive years, starting from 2009. But it made a quantum jump in 2012 to reach Tk430bn at the end of the year.
The uptrend continued and the Bangladesh Bank figures showed the classified loan amount at Tk510bn at the end of March last.
The failure of the state-owned banks, which account for almost half of the classified loans in the banking sector, is shown by the simple math then that 21% of the lending holds 50% of the defaulted loans.
While these may be legacy issues that the current banks’ leaders should not be held responsible, the discussion regarding their true effectiveness may be paramount.
Most interesting is the recent World Bank aide memoire that showed that the deposit in state owned banks actually increased in the period after the revelation of the bad loans. The banks’ deposit growth increased 18.14% year-on-year on August 1, 2013.
While this may be a dwindling trend in the long run, as the private banks open their banking access to the rural areas due to admirable regulatory guidelines, the deposit growth in the state-owned banks means more liquidity in these banks to lend.
However, given their dismal lending record, the future risk associated with the banking sector, and simple capital allocation, in a capital deficit economy, is compelling.
As a poor country, we simply must do better to manage and provide returns on the savings of common people. A revamping of their mandate, to refocus the state banks vast deposit resources and network, to infrastructure, SME or export growth, or even to be a long term lender to the private sector banks as a major focus, will provide all of us with a healthier financial future.