Propensity And Growth Pattern Of Bank Credit In Bangladesh

PROPENSITY AND GROWTH PATTERN OF BANK CREDIT IN BANGLADESH Mohammad Shamsuddoha Assistant Professor Department of Marketing University of Chittagong E- mail: m mddssddoohhaa@ @ffaassttm maaiill..ffm m sshhiippuull@ @bbttttbb..nneett..bbdd Abstract The basic purpose of commercial banks is financial intermediation between savers and borrowers. Banks are financial intermediaries that mobilize funds from surplus economic units and allocate those funds to deficit economic units. Bank mobilizes fund mainly through collecting deposits and allocate those funds by providing credit. Thus, providing credit is one of the primary functions of a bank. Bank credit is the principal sources of loanable fund for millions of households and the government. Therefore, it is very important to an economy. Agricultural, commercial, and industrial activities of a nation are often financed by bank credit. Without adequate financing, there can be no growth or maintenance of stable output. Thus, the bank credit influences total macroeconomic environment by affecting money supply, investment, total output, and employment. Therefore, it is very essential to know about the trend and growth of credit. Trend of credit refers to the general tendency or direction of credit. Growth of credit means the process of growing or the development of the credit. The growth in credits is an important indicator of an expanding commercial banking structure of a country. Since the bank credit is the most important earning asset on the part of a commercial bank, the trend and growth of the bank credit has the direct impact on the net income of a bank. Ultimately, it affects the profitability of the total banking system. As the banking sector is the major part of the financial system, the trend and growth pattern of bank credit also influences the total financial system.

Objectives of the Study The objectives of the study were as follows: 1. To evaluate the trend of bank credit since nationalization to financial liberalization period. 2. To identify the economic purpose wise trend of credit over time. 3. To make possible suggestions to improve present credit situation prevailing in the banking sector.

Methodology of the study The study represents all the scheduled banks in Bangladesh. The banks are divided on the basis of ownership pattern like nationalized commercial banks, private commercial banks, and foreign commercial banks. Total credit allocated area size in Bangladesh is divided into rural area and urban area. Sectors receiving credit are broadly divided into public sector and private sector. Total advances are classified on the basis of economic purposes such as agriculture, industry, trade, transportation, and so on. There is no use of primary data in the research. All the data are collected from secondary sources. The secondary sources included Bangladesh Bank Bulletin, Scheduled Bank Statistics, Economic Trend, publications of the ministry of finance, and different books, articles and seminar papers of home and abroad.

Limitations of the study The time allocated for the study was very limited. It is very tough to work with twenty eight-year data only within three months in the midst of two other courses. There was no scope of using primary data. All the data are secondary data. There was no scope for the researcher to physically visit the commercial banks to watch the credit policy of different commercial banks.

Introduction The financial structure of Bangladesh consists of financial institutions, financial instruments and financial markets. The financial institutions consist of two components: banking and non-banking financial institutions. The growth and evaluation of financial system of Bangladesh since liberation can be viewed in the three broad phases. The decade of 1970s can be called the period of reconstruction and rehabilitation. The period from 1972 to 1982 was marked by expansion of bank branches, particularly, Nationalized Banks branches to cater the needs of the war torn economy. The period from 1983 to 1990 was the period of denationalization of banks and allowing new banks in the private sector to augment competition in the banking sector. The period from 1990 up till now can be termed as the period of financial liberalization and consolidation of the banking system.

Review of literature The following literatures are explaining the performance of commercial bank advances during the nationalized and denationalized period: Since 1972 the banks of Bangladesh used to operate under a regime of rigid government control and central bank regulations. The regulation covered fixation of interest rate on deposits and credits, direction, of credit to public sector enterprises and to priority sectors, directed expansion of banks branches. During the period, 1972-82 the bank services i.e. deposits mobilization; deployment of credit and branch expansion was significantly in favour of the rural areas compare to the urban areas. Nevertheless, there was no prudential and informational regulation on the banking sector. As a result, the banks persuade a policy of rapid credit expansion without analysis was replaced with socio-economic considerations. On the other hand, the lending rates on priority sectors were kept such a lower rate, which did not cover the risk and cost. Consequently, a huge proportion of assets profile became overdue and profitability of the banks declined. Since 1982, the government of Bangladesh for the first time decided to take restructuring measures in the form of denationalization and privatization of the banks. Nevertheless, they estimated that the operational efficiency and customer service was not improved because of absence of prudential and informational regulations. (Choudhury & Moral (1998). Financial repression is the main cause for poor performance of growth and investment in developing countries. They mentioned that directed credit program: interest rate ceiling and high reserve ratios are the main sources of financial repression, which ultimately produce low investment and credit rationing. According to them due to financial repression not only the quantitative term also suffer, since considering the marginal productivity of investment fund is not disbursed. They suggest liberalized financial system, so that demand and supply could determine the real of interest and increase both savings and investment. (McKinnon, 1973). The impact of financial reform program does not seem to be generally positive in Bangladesh. With the implementation of reform program since January, 1990 the rate of growth of assets and liability of the banking system in Bangladesh has slowed down to some extent. He also noticed that despite the real interest, rates remained positive and the banking system had huge liquidity, sluggish growth in credit by both SBs and NCBs in Bangladesh during the implementation period of reform thus creating a cause for concern. However, the welcome aspect of the financial reform is that it has introduced transparency in the profit and loss statement and the balance sheet of the banks (Ahmed (1995). Banks are concerned about the interest rate they receive on loan and the riskiness of loan. To identify the good borrowers bank use interest rate as a screening device. Those who are willing to pay higher interest rate may be "worse risk", since they are willing to borrow even at higher rate because they perceive their probability of repaying loan to be low. As the interest rate rises, the average riskiness of those borrower increases, possibly lowering the bank's profit (Sitiglitz & Weiss, 1981). Murshid Kuli Khan (1993), in his study named "Credit flow after interest rate liberalization: issues and problems” has observed that the theory of liberalization now appears to be in

complete and came under reconsideration. Experiences from the liberalized countries put forwarded new thinking. It has been shown that even under withdrawal of credit ceilings and other restriction, banking system are not able to allocate credit efficiency in the presence of imperfect information. He also argued that the withdrawal of ceiling on deposit and credit rates might be too early to determine the benefit of the liberalization.

Bank Credit Banks play an important role to the economy of a country by providing facilities for the pooling of savings and making them available for economically and socially desirable purposes in the form of credit. Banking is a business where banks try to earn revenue primarily by lending money to worthy borrowers. According to the Encyclopaedia of Banking & Finance by Charles J. Woelfel Bank credit is “ the earning asset of the commercial banks, including the variety of short and long term loans made to individuals, partnership, corporation, other business firms, banks, and governmental units and agencies; the banks’ holdings of investments.”

Components Of Bank Credit Banks use to lend two ways- discounting bills and advances. Hence, Bank credit can be classified in two broad categories1. Advances 2. Bills discounted and purchased.

Advances An advance is, “ In general a loan although an advance may be an open account as well as being evidenced by a note, with or with out collateral.” [Encyclopedia of Banking & Finance by Charles J. Woelfel] “Advances are lending of money by banks against promissory notes executed by the customer with or without collateral security.” [Radhaswami and Vasudevan, 1985]. Advances may be in the form of – Loans, Overdrafts, and Cash Credit. Whatever the form, advances are primary types of bank lending and major sources of income for banks. In Bangladesh, amount of advances (excluding the inter-bank) by the scheduled bank is about 97 percent of total credit. Loans: When an advance is made, with or without security, in a lump sump repayable either in fixed monthly installment or in lump sump and no subsequent debit is ordinarily allowed except by the way of interest, incidental charges etc, it is called a loan. A loan, once repaid in full or in part, cannot be drawn again by the borrower. It is given for a fixed period at an agreed rate of interest. The whole amount of loan is debited to the customer’s name on a loan account to be opened in the ledger and, is paid to the borrower either in the form of cash or by the way of credit to his current or savings account. Overdrafts: The overdraft is a kind of advance always allowed on a current account operated upon by cheques. The customer may be sanctioned a certain limit upon which, he/she can overdraw his current account within a stipulated period. Here, withdrawals or deposit can be made any number of times at the convenience of the borrower, provided that the total amount of overdrawn does not, at any time, exceed the agreed limit. Interest is calculated and charged only on the actual debit balance on daily product basis. Cash credit: A cash credit is an arrangement by which a banker allows his customer to borrow money up to a certain limit. Cash credit arrangements are usually made against the security of commodities hypothecated or pledged with the bank.

Hypothecation: In case of hypothecation the possession of goods remain at the disposal and in the godown of the borrower. The borrower is given access to goods whenever it so desires. The borrower furnishes periodical return of stock with the bank. Pledge: In case of pledge, the goods are placed in custody of the bank with its name on the godown where they are stored. The borrower has no right to deal with them. Bills discounted and purchased Bill discounted is “ The aggregate of notes, acceptances and bill of exchanges which a bank has discounted for its customers, as distinguished from loans.” [Encyclopedia of Banking & Finance by Charles J. Woelfel]. The banks also give advances to their customers by discounting or purchasing their bills of exchange. Such bills of exchange arise out of commercial transactions both in inland trade and foreign trade. Bills are classified into – Clean bills and Documentary bills. When the drawer of a bill encloses with the bill the documents of title to the goods, such as, Bill of Lading, Railway Receipt, Steamer Receipt, to be delivered to the drawee of the bill on payment against acceptance of bill, as the case may be, the bill is called a documentary bill. In the absence of such document it is termed as a clean bill. By the nature of payment, bills can also be classified into two categories – Demand bills and Usance bills

BANK CREDIT ADVACES

LOANS

OVERDRAFTS

BILLS PURCHASED & DISCOUNTED

CASH CREDIT

HYPOTHECATION

PLEDGE

Ownership basis composition of bank credit On the basis of ownership there are broadly two types of banksNationalized Banks: These are the government owned banks. Government owns the full or maximum portion of share of these banks. Nationalized banks are of two typesi) Nationalized Commercial Banks (NCB) and Specialized Banks (SB). NCBs are the government owned commercial banks. At present, there are four NCBs operating in Bangladesh. They arei) Agrani Bank ii) Janata Bank iii) Rupali Bank Ltd. Iv) Sonali Bank Specialized banks are government owned Development Financial Institutions (DFI). They do not provide credit for the commercial purposes; rather they finance the special sectors. Now there are five specialized banks in Bangladesh. They are i) Bangladesh Krishi Bank ii) Bangladesh Shilpa Bank iii) Rajshahi Krishi Unnayan Bank ii) Bank of small Industries and cottage Limited v) Bangladesh Shilpa Rin Sangtha. Private Banks: Owners of the private banks are the individuals or the corporate bodies other than the government. In Bangladesh, all banks other than the NCBs and SBs are the Private banks. Among the private banks there arei) Foreign Commercial Banks (FCB) ii) Islamic Banks (IB) iii) Private Commercial Banks (PCB)

FCBs are operating in Bangladesh but owned by the foreign entrepreneurs. Islamic Banks are the indigenous private banks that follow the Shariah based banking. PCBs are the indigenous private banks incorporated in Bangladesh excluding the Islamic Banks. In this research Islamic banks are included in the PCBs. Generally, total bank credit is deployed by four types of banks on the basis of ownership. They arei) Nationalized Commercial Banks (NCB) ii) Specialized Banks (SB). Iii) Private Commercial Banks (PCB) iv) Foreign Commercial Banks (FCB) Scheduled Banks in Bangladesh

Nationalized Banks

NCBs

SBs

Private Banks

PCBs

FCBs

As June 2001, the financial system of Bangladesh was comprised of four Nationalized Banks, five Specialized Banks, twenty-seven domestic Private Commercial Banks (including Islamic Banks), and Twelve Foreign Private Commercial Banks. Source: Scheduled Bank Statistics: January-March, 2001

Area wise composition of bank credit Total credit disbursement area in Bangladesh is broadly divided in two parts. 1. Urban Area 2. Rural Area Bank branches operating in municipal areas are treated as urban branch while the branches located outside the municipal area are treated as urban branches. The urban-rural ratio of bank credit is changed several times due to several factors.

Sector based composition of bank Total advances are classified to two major sectors for various economic purposes. They are Public sector and Private sector. Public sector: Public sector lending includes Government sector and Sectors other than government. Government’s borrowings from the banks are accounted in the government sector lending and sectors other than the government includes lending to the public enterprises, nationalized sector corporations, local authorities etc. Private sector: Private sector lending includes sector other than public such as different professionals, manufacturing companies, commerce and trade, NGOs etc. In composition of bank credit public -private sector lending ratio changes different time for different reasons.

Economic purpose based composition of bank credit In any acceptable model of demand for money one common variable is the gross notional product of some other variant of it in real terms. Therefore, commercial bank credit and even other institutional credit to any economic sector have to have some relationship with real output in that sector (Shetty 176). The rationale behind such an argument is that since commercial bank and other institutional credit is a scarce resource; the access to it ought to be rationed among sectors prima facie in accordance with their contribution to GNP or some other variant of it in real terms (Lipton 1976). In this context, the allocation of credit of the commercial banks of Bangladesh among major economic sectors has been analyzed in this research. Bank lending makes possible the financing of the agriculture, commercial and industrial activities of a country. Total bank advances are provided for different economic purposes. The major economic purposes of bank credit are1. Agriculture, Fishing, and Forestry 2. Industry 3. Trade 4. Working capital Financing 5. Construction 6. Transport & Communication 7. Electricity, Gas, Water, and Sanitary services.

Observations and recommendations From the present research, many significant as well as important findings have been obtained. These findings and observations are enumerated below – 1. Thousands of small-scale savers in both rural and urban area still go to NCBs to deposit their fund. As a result, NCBs have got more funds for deploying credit an d still hold around 50 percent share of total bank credit. To compete with the NCBs, PCBs and FCBs should operate in every region of the country. 2. Both real and nominal growth of credit was seen uneven over the years. The growth rate decreased after adopting the reform measure. 3. In a open market economy, government is not required to own and run the economic enterprises. Being guided by the philosophy of the market economy, the government of Bangladesh has also decided to denationalize the rest of the NCBs a nd thus to privatize the total banking structure with a view to improving the efficiency of the banks .The results of denationalization and privatization in the banking sector of Bangladesh so far do not indicate clear-cut improvement in the trend and growth of bank credit. The efficiency of the three denationalized banks deteriorated in all respects during last 10(ten) years. 4. The banking system of Bangladesh is overwhelmingly dependent on cash mode of finance and some traditional loans and advances. In ad dition to allowing new commercial banks, government should also encourage establishment of more and more different types of NBFIs, which would not only diversify the present financial product base, but also generate competition among banks and non-banks. 5. In terms of accountability of borrowers, lending in the form of bank credit (cash mode of finance) has least accountability. Therefore, dependence on bank credit should be reduced by introducing other forms of lending such as leasing, security market operation etc. Introduction of factoring services, securitization, loan selling etc. would also reduce banks risk of handling huge amount of credit. All these will constitute an "automatic check" to loan default attitude of borrowers. 6. Rural people (Poor) ate bankable; they save and possess good credit risks Grameen Bank and BRAC models of rural banking proved it. Banks will not be able to make their rural banking viable, if they go by their traditional approach. Rather, they will have to change their existing at titude and strategy and adopt models given by

Grameen Bank and BRAC. But, in no case, they (banks) should leave rural areas, because rural sector is the largest real sector. 7. It is observed that the credit to the Agriculture, Forestry and Fisheries and cott age industries has stagnated and has been declining while credit flow to commercial sector gave been increasing significantly. This indicates that the banks are becoming more and more commercially profit and market oriented. To ensure the balanced flow of credit among the sectors the existing concessional interest band for agriculture, export, small and cottage industries have been abolished.

Tables & Graph: Table1: Deposit of the scheduled banks distributed by types Deposit of the scheduled banks distributed by types: All banks Amount (taka in Lacs) Types of deposits 30.12.96 31.12.97 31.12.98 Current and cash credit account deposits 602800 652989 747590 Call deposits 24809 20023 23241 Deposit withdrawals on sight 148389 162407 219027 Saving deposits 1376896 1558254 1704152 Convertible taka accounts of foreigners 7645 5816 7141 Foreign currency accounts 50081 46587 47653 Deposit withdrawals at notice 574627 592417 629516 Fixed deposits 1439285 1528992 1802737 Pension scheme deposits 313909 407136 493332 Negotiable certificate of deposits 21414 21105 26265 Total deposits 4559855 4995726 5700654 Source: Bangladesh bank bulletin-1999 (October -December)

Table2: Growth of Bank Deposit End of period 1995-1996 1996-1997 1997-1998 1998-1999 1999-2000 2000-2001(March)

Total deposits (Taka in Crores) Demand deposits Time deposits 7336,07 31300,67 38636,74 7592,37 35544,00 43136,36 7735,02 39980,50 47715,52 8562,729 45776,96 54339,68 9705,30 54881,10 64586,40 9808,60 60641,81 70450,40 Source: Economic Trend (September-2001)

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