PROPENSITY AND GROWTH PATTERN OF BANK CREDIT IN BANGLADESH

Mohammad Shamsuddoha
Assistant Professor
Department of Marketing
University of Chittagong
E- mail: m
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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 categories-
1. 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 BILLS PURCHASED &

DISCOUNTED

LOANS OVERDRAFTS CASH CREDIT

HYPOTHECATION PLEDGE

Ownership basis composition of bank credit

On the basis of ownership there are broadly two types of banks-
Nationalized Banks: These are the government owned banks. Government owns the full or maximum
portion of share of these banks. Nationalized banks are of two types-
i) 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 are-
i) 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 are-
i) 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
are-
i) Nationalized Commercial Banks (NCB) ii) Specialized Banks (SB). Iii) Private Commercial Banks
(PCB) iv) Foreign Commercial Banks (FCB)

Scheduled
Banks in
Bangladesh

Nationalized Private
Banks Banks

NCBs SBs 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 out-
side 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 are-
1. 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 Demand deposits Time deposits Total deposits (Taka in Crores)
1995-1996 7336,07 31300,67 38636,74
1996-1997 7592,37 35544,00 43136,36
1997-1998 7735,02 39980,50 47715,52
1998-1999 8562,729 45776,96 54339,68
1999-2000 9705,30 54881,10 64586,40
2000-2001(March) 9808,60 60641,81 70450,40
Source: Economic Trend (September-2001)

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