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Today’s fast growing companies need business banking services that fully meet their expectations for speed, convenience, efficiency and security. To ensure their optimum level of satisfaction, regarding their necessity for this type of affluent banking services different types of local as well as multinational banks are coming up with diverse and dynamic corporate banking services. The term “Bank” originally referred to an individual or organization, which acted as a money changer and exchanged one currency for another. According to Prof. Sayers - “Banks are institution whose debt usually referred to as ‘Bank Deposit’- are commonly accepted in final settlement of other peoples debts”. According to the Banking Regulation Act, 1949 – “ Banking means the accepting money for the purpose of lending or investment of deposit of money from the public repayable on demand or otherwise and withdraw able by cheques, drafts order or otherwise”. Banks are playing a vital role in the economic progress of our country. Now-a-days, the banks try to give priority in the perspective of our national interest. The Banking Industry in Bangladesh is one characterized by strict regulations and monitoring from the central governing body, the Bangladesh Bank. The chief concern is that currently there are far too many banks for the market to sustain. As a result, the market will only accommodate only those banks that can transpires the most competitive and profitable ones in the future. Bank perform the in dispensable task of intermediating between the two groups and offering convenient financial service to surplus-spending individuals and institutions in order to attract fund and these loaning those funds to deficit- spending individuals and institutions. Another contribution of bank make their willingness to accept risky loan from borrower, while issuing low risk securities to their depositors. Bank also satisfies the strong needs of much customer’s liquidity. It is true thus clear that the underlying principle of a business of banking is that the resources mobilized through the acceptance of deposit must contribute the main stream of funds which are to be utilized for lending or investment purpose. Privatization of banking sector is an outcome of the deliberate policy change by the government of Bangladesh in the late 1970. The present day banking structure has evolved over several decades. The far-reaching program of economic reform is being carried out at present towards efficient utilization of scare resources and the development of private entrepreneurship. In a fast changing business environment, financial intermediaries are gradually being left to be guided by market forces rather than regulations. Competition is
strengthened by the entry of new and innovative providers of financial services, through the development of Money market and Capital market. Private sectors commercial Banks are private companies operate under the legislative framework, which covers both Company Act and Banking Company Act.
Size, Structure and Composition of Banks
After the independence, banking industry in Bangladesh started its journey with 6 nationalized commercialized banks, 2 State owned specialized banks and 3 Foreign Banks. In the 1980's banking industry achieved significant expansion with the entrance of private banks. Now, banks in Bangladesh are primarily of two types:
Scheduled Banks: The banks which get license to operate under Bank Company Act, 1991 (Amended in 2003) are termed as Scheduled Banks.
Non-Scheduled Banks: The banks which are established for special and definite objective and operate under the acts that are enacted for meeting up those objectives, are termed as NonScheduled Banks. These banks cannot perform all functions of scheduled banks.
There are 47 scheduled banks in Bangladesh who operate under full control and supervision of Bangladesh Bank which is empowered to do so through Bangladesh Bank Order, 1972 and Bank Company Act, 1991. Scheduled Banks are classified into following types:
State Owned Commercial Banks (SCBs): There are 4 SCBs which are fully or majorly owned by the Government of Bangladesh.
Specialized Banks (SDBs): 4 specialized banks are now operating which were established for specific objectives like agricultural or industrial development. These banks are also fully or majorly owned by the Government of Bangladesh.
Private Commercial Banks (PCBs): There are 30 private commercial banks which are majorly owned by the private entities. PCBs can be categorized into two groups:
Conventional PCBs: 23 conventional PCBs are now operating in the industry. They perform the banking functions in conventional fashion i.e. interest based operations.
Islami Shariah based PCBs: There are 7 Islami Shariah based PCBs in Bangladesh and they execute banking activities according to Islami Shariah based principles i.e. Profit-Loss Sharing (PLS) mode.
Foreign Commercial Banks (FCBs): 9 FCBs are operating in Bangladesh as the branches of the banks which are incorporated in abroad.
Banking System Structure: The number of banks declined from 48 in 2009 to 47 in 2010. These banks had a total number of 7729 branches as of December 2010. The number of bank branches increased from 7095 in 2009 to 7729 in 2010 due mainly to opening of new branches by the PCBs during the year. At the end of FY11, the total number of bank branches increased to 8522, with total number of banks remained unchanged at 47.Structure of the banking sector with breakdown by type of banks is shown in Table 1:
TAKA IN BILLION Bank Types Number of Banks 4 4 30 9 47 Number of Branches 3447 1382 2828 72 7729 Total Assets 1384.30 295.40 2854.60 320.80 4855.10 2010 % of Industry Assets 28.50 6.10 58.80 6.60 100.00 % of Deposits 28.10 4.90 60.90 6.10 100.00 Number of Banks 4 4 30 9 47 Number of Branches 4148 1388 2912 74 8522 2011(JUNE) Total % of Assets Industry Assets 1564.90 317.00 3205.40 344.20 5431.50 28.80 5.90 59.00 6.30 100.00 % of Deposits 27.50 5.00 61.40 6.10 100.00
Deposits 1044.90 183.40 2266.50 227.10 3721.90
Deposits 1123.60 205.90 2505.90 247.30 4082.70
SCBs DFIs PCBs FCBs TOTAL
Table 1: Banking System Structure Composition of Banking Industry: In 2010, the SCBs held 28.5 percent of the total industry assets as against 28.6 percent in 2009. PCBs' share rose to 58.8 percent in 2010 as against 57.4 percent in 2009. The FCBs held 6.6 percent
of the industry assets in 2010, showing a declining trend of 0.8 percentage point over the previous year. The DFIs' share of assets was 6.1 percent in 2010 against 6.6 percent in 2009.
Figure 1: Aggregate Bank industry’s Asset & Liability as of Dec 2010
Balance Sheet of Banks
A bank's balance sheet is different from that of a typical company. You won't find inventory, accounts receivable, or accounts payable. Instead, under assets, you'll see mostly loans and investments, and on the liabilities side, you'll see deposits and borrowings. Let's take a closer look at the balance sheet of the Commercial Bank. Head Assets Cash Securities Loans Other Assets Total Assets Liabilities & Equity Deposits Borrowings Shareholder's Equity Total Liabilities and Equity For Assets Side of Balance Sheet: Cash: Surprisingly, cash represents only 2% of assets. That's because the bank wants to put its % of Assets 2% 22% 67% 9% 100% 62% 27% 11% 100%
money to work earning interest. If the bank simply sticks its cash in a vault and forgets about it, it will have a hard time making a profit. Thus, a bank keeps most of its money tied up in loans and investments, which are called "earning assets" in bank-speak because they earn interest. Securities: Banks don't like putting their assets into fixed-income securities, because the yield isn't that great. However, investment-grade securities are liquid, and they have higher yields than cash, so it's always prudent for a bank to keep securities on hand in case they need to free up some liquidity. Loans: Loans represent the majority of a bank's assets. A bank can typically earn a higher interest rate on loans than on securities, roughly 6%-8%. You can find detailed information about the rates earned on loans and investments in the financial statements. Loans, however, come with risk. If the bank makes bad loans to consumers or businesses, the bank will take a hit when those loans aren't repaid. Because loans are a bank's bread and butter, it's critical to understand a bank's book of loans. In their 10-Ks, banks characterize their loans in easily readable charts. For example, M&T tells us that at the end of its last fiscal year, 36.5% of its average loans were backed by commercial real estate. We also know that of its $14.5 billion in commercial real estate loans outstanding, $4.5 billion was in metropolitan New York. Other Assets: Other assets, including property and equipment, represent only a small fraction of assets. A bank can generate large revenues with very few hard assets. Compare this to some other companies, where plant, property, and equipment (PP&E) is a major asset. Assessing Assets: A bank's assets are its meal ticket, so it's critical for investors to understand how its assets are invested, how much risk they are taking, and how much liquidity the bank has in securities as a shield against unforeseen problems. In general, investors should pay attention to asset growth, the composition of assets between cash, securities, and loans, and the composition of the loan book. Also, investors should note a bank's asset/equity (equity multiplier) ratio, which measures how many times a dollar of equity is leveraged. As of the latest quarter, SunTrust, Wells Fargo, and Corus had equity multiplier ratios of 9.9, 10.7, and 12.25. Paying attention to these trends is critical to making money in bank stocks. For Liability Side of Balance Sheet:
If a bank's yield-producing earning assets are its meal ticket, then its liabilities and shareholder equity are its lifeblood. Basically, a bank borrows at low interest rates from depositors, creditors, and other banks, and it lends at a higher interest rate to real estate developers, homeowners and small businesses (which is why banks are referred to as "spread lenders"). As a result, a bank's financing base is critical. The more financing it gets at a lower rate, the more money it can make by lending that money out and collecting the spread. The best way to judge the strength of a bank's financing base is to check out its "sources of funds" footnote. Deposits: Deposits are a bank's most important source of financing. Not only do most checking, demand, NOW, and savings deposits yield low or no interest rates, which means the bank is paying almost nothing for the use of this money, but they are often a stable and growing financing base. Commerce Deposits Non-interest-bearing Savings Demand Time deposits % of Avg. Assets 20% 17% 37% 8% Rate 0.00% 2.60% 3.50% 3.90%
PNC Deposits Non-interest-bearing Demand Savings Money market Retail time deposits
% of Avg. Assets 15% 9% 2% 21% 15%
Rate 0.00% 1.00% 0.50% 3.60% 4.30%
Borrowings: Banks tend to shun the use of other sources of borrowings, such as borrowings from other banks through federal funds purchases and repo agreements, bank notes, long-term debt, and commercial paper. Unlike core depositors, who for the most part are happy to receive any, interest at all, these lenders demand and receive higher yield, so banks try not to use too much in the way of "other borrowings." Commerce, a bank renowned for its ability to attract deposits, used other borrowings for only 6.5% of its borrowing base. PNC, which has a more complicated mix of business requiring more diverse funding sources, had 15.1% of funds from other borrowings, with yields ranging from 3.9% to 6%.
Shareholder's equity: Shareholder's equity is the part that you, the shareholder (as opposed to depositors and other creditors), are financing. Because banks, after paying depositors and creditors, only earn a small return on their assets, often only 0.75% to 1.5%, they must leverage each dollar of equity into $10 to $15 worth of assets to achieve a satisfactory return on equity of 10% to 15%. Bottom line: The larger a bank gets, the more complex its balance sheet. Mix of its asset base is funded by non-interest-bearing deposits, as well as other low-cost sources, and check out the trend in the funding composition over time. A bank that can grow its low-cost deposit base over time should do well, but a bank that increasingly has to resort to offering high-yield CDs could see its margins squeezed.
Regulation of Commercial Banks
Bangladesh Bank (BB) regulates and supervises the activities of all banks. The BB is now carrying out a reform program to ensure quality services by the banks. Bangladesh Bank (BB) has been working as the central bank since the country's independence. Its prime jobs include issuing of currency, maintaining foreign exchange reserve and providing transaction facilities of all public monetary matters. BB is also Bangladesh Bank (BB) has been working as the central bank since the country's independence. Its prime jobs include issuing of currency, maintaining foreign exchange reserve and providing transaction facilities of all public monetary matters. BB is also responsible for planning the government's monetary policy and implementing it thereby. Establishment: Bangladesh Bank (BB), the central bank and apex regulatory body for Bangladesh's monetary and financial system including Commercial Banks, was established in Dhaka as a body corporate vide the Bangladesh Bank Order, 1972 (P.O. No. 127 of 1972) with effect from 16th December, 1971. At present it has nine offices located at Motijheel, Sadarghat, Chittagong, Khulna, Bogra, Rajshahi, Sylhet, Barisal and Rangpur in Bangladesh; total manpower stood at 4926 (officials 3910, subordinate staff 1016) as on December 31, 2011. Functions: BB performs all the core functions of a typical monetary and financial sector regulator, and a number of other non core functions. The major functional areas include:
Formulation and implementation of monetary and credit policies.
• • • • • • • • •
Regulation and supervision of banks and non-bank financial institutions, promotion and development of domestic financial markets. Management of the country's international reserves. Issuance of currency notes. Regulation and supervision of the payment system. Acting as banker to the government. Money Laundering Prevention. Collection and furnishing of credit information. Implementation of the Foreign exchange regulation Act. Managing a Deposit Insurance Scheme.
Regulatory Acts for Commercial Banks
Relevant Laws/Acts/Order for Bankers/Financial Institutions: The following Law, Acts and Order are guiding Banks and Financial Institutions operating in Bangladesh: 1. The Aretha Rin Adulate Act - 1990 2. The Bangladesh Bank Order - 1972 3. The Bankers' Books Evidence Act - 1891 4. The Banking Companies Act - 1991 5. The Bankruptcy Act - 1997 6. The Bangladesh Banks (Nationalism) Order - 1972 7. The Bill of Exchange Act - 1882 8. The Companies Act - 1994 9. The Contract Act - 1872 10. The Co-operative Societies Act - 1940 11. The Co-operative Societies Rules - 1942 12. The Financial Institution Act - 1993 13. The Guardian and Wards Act - 1890 14. The Insurance Act - 1938 15. The Limitation Act - 1908 16. The Licenses and Permits Fees Order - 1985 17. The Marine-Insurance Act - 1963 18. The Majority Act - 1875 19. The Negotiable Instruments Act - 1881 20. The Pre-Shipment Inspection Order - 1999 21. The Partnership Act - 1932 22. The Succession Act - 1925 23. The Societies Registration Act - 1860
24. The Stamp Act - 1899 25. The Trusts Act - 1882 26. The Transfer of Property Act - 1882 27. The Securities & Exchange Commission Act - 1993 28. The Foreign Exchange Regulation Act - 1947 29. The Bangladesh Export Processing Zones Authority Act - 1980 30. The Export Policy, 1997 - 2002 31. The Guidelines for Foreign Exchange Transaction - 1996 (Bangladesh Bank) 32. The Import Policy Order, 1997 - 2002 33. The Import & Export (Control) Act - 1950 34. The Import trade Control Schedule - 1988 35. The Importer, Exporters and Indentures (Registration) Order - 1981 36. The Uniform Customs and Practice for Documentary Credits (1993 revision, ICC publication - 500) 37. The Uniform Rules for Collection etc. Important Regulatory Acts for Commercial Banks are listed belowBanking & Financial Institution Laws The Bank Company Act, 1991 Amendment(s) The Bank Companies (Amendment) Act, 1993 (13 of 1993) Rule(s) and Regulation(s) Guidelines for Islamic Banking-2009 SRO No.315-Law/2000 SRO No.176-Law/1996 SRO No.101-Law/1996 SRO No.342-Law/1994 SRO No.331-Law/1994 The Bank of Credit and Commerce International (Overseas) Limited (Reconstruction) Scheme,1992 SRO NO. 200-Law/1992 The Money Laundering Prevention Act, 2009 The Aretha Rin Adulate Act - 1990 This law is related to the establishment of the Artha Rin Adalats (Money Loan Courts) in Bangladesh to adjudicate the cases relating to the recovery of loans of financial institutions and for the settlement of disputes between the borrowers and the lenders. Earlier, the cases for loan recovery were the jurisdiction of the general civil courts.
The Bangladesh Bank Order - 1972 Establishing a central bank in Bangladesh to manage the monetary and credit system of Bangladesh with a view to stabilizing domestic monetary value and maintaining a competitive external par value of the Bangladesh Taka towards fostering growth and development of country’s productive resources in the best national interest. The Banking Companies Act - 1991 This law is related to the construction, management and regulation of the banking companies in Bangladesh. The Bankruptcy Act - 1997 Consolidating laws relating to Bankruptcy and establishing a Bank reconstructing Bangladesh Commerce and Investment Ltd. The Contract Act – 1872 This law is related to certain parts of the substantive law dealing the formation and breach of contracts, awarding damages etc. The Foreign Exchange Regulation Act - 1947 This law is for regulating payments, dealings in foreign exchange and securities and the import and export of currency and bullion in Bangladesh. The Stamp Act – 1899 Consolidating and amending the law relating to stamps in Bangladesh. The Securities & Exchange Commission Act – 1993 Providing laws for establishing securities and exchange commission to protect the investor's interest, development of securities market and matters ancillary thereto.
The Export Policy, 1997 – 2002 The Export Policy 1997-2002 has been designed to operate in the imperatives and opportunities of the market economy with a view to maximizing export growth and narrowing down the gap between import payment and export earning. The Guidelines for Foreign Exchange Transaction - 1996 (Bangladesh Bank)
Instructions to be followed by the authorized dealers & their constituents, money Changers in transactions relating to foreign exchange. SRO No.315-Law/2000 Rules for the provisions of the Bank Companies Act of 1991 will not be applicable for the merchant banks in Bangladesh. SRO No.176-Law/1996 Inapplicability of section-13 of the Bank Companies Act of 1991 to the Bank of Small Industries & Commerce Bangladesh Ltd. SRO No.342-Law/1994 The provision of capital reservation under Section 13 of the Bank Companies Act,1991 will not be applied for BASIC Bank Ltd. (Bangladesh Small Industries and Commerce Bank Limited) till 31-12-1995. The Money Laundering Prevention Act, 2009 This law is related to the prevention of money laundering in Bangladesh.
Industry Performance of Commercial Banks
Performance and financial conditions of the scheduled banks are evaluated through CAMELS rating system, which involves analysis and evaluation of the six crucial dimensions of banking operations. The six indicators used in the rating system are• • • • • • Capital adequacy, Asset quality, Management efficiency(including implementation status of Core Risk Management Guidelines), Earnings, Liquidity, and Sensitivity to market risk.
Capital Adequacy: Capital Adequacy focuses on the total position of banks' capital and protection of depositors and other creditors from the potential shocks of losses that a bank might incur. It helps absorbing all possible financial risks like credit risk and other core risks, market risk, operational risk, residual risk, credit concentration risk, interest rate risk, liquidity risk,
reputation risk, settlement risk, strategic risk, environmental & climate change risk etc. Under Basel-II, banks in Bangladesh are instructed to maintain minimum capital requirement (MCR) at 10.0 percent of the risk weighted assets (RWA) or Taka 4.0 billion as capital, whichever is higher, with effect from July-September 2011 quarter. It may be mentioned that in the fourth quarter of 2010 banks were required to maintain MCR at 9.0 percent of RWA or Taka 2.0 billion, whichever was higher.
Asset Quality: The asset composition of all commercial banks shows the concentration of loans and advances (65.9 percent). The high concentration of loans and advances indicates vulnerability of assets to credit risk, specially because of having significant portion of nonperforming assets. A huge nonperforming loan portfolio has been the major predicament of banks particularly of the SCBs and DFIs. However, investment of banks in bills, bonds, shares etc. also demonstrates somewhat concentrations, which are 12.1 percent of total assets.
Management Efficiency: Sound management is the most important pre-requisite for the strength and growth of any financial institution. Since indicators of management quality are primarily specific to individual institution, these cannot be easily aggregated across the sector. In addition, it is difficult to draw any conclusion regarding management soundness based on monetary indicators, as characteristics of a good management are rather qualitative in nature. Nevertheless, the total expenditure to total income, operating expenses to total expenses, earnings and operating expenses per employee, and interest rate spread are generally used to gauge management soundness. In particular, a high and increasing expenditure to income ratio indicates the operating inefficiency that could be due to flaws in management. Earnings: Strong earnings and profitability profile of a bank reflect its ability to support present and future operations. More specifically, this determines the capacity to absorb losses by building an adequate capital base, finance its expansion and pay adequate dividends to its shareholders. Although there are various measures of earning and profitability, the best and widely used indicator is return on assets (ROA), which is supplemented by return on equity (ROE) and net interest margin (NIM). Earnings as measured by return on assets (ROA) and return on equity (ROE) differ largely within the industry below chart shows the aggregate position of these two indicators for all banks. Analysis of these indicators reveals that the ROA of the SCBs was less than industry average considering huge provision shortfall and that of the DFIs even worse. PCBs' ROA shows consistently strong position during last five years. FCBs' ROA has been consistently strong during the last couple of years.
Liquidity: Commercial banks' demand and time liabilities are at present subject to a statutory liquidity requirement (SLR) of 19.0 percent inclusive of average 6.0 percent (at least 5.5 percent in any day) cash reserve ratio (CRR) on bi-weekly basis. The CRR is to be kept with the BB and the remainder as qualifying secured assets under the SLR, either in cash or in Government securities. SLR for the banks operating under the Islamic Shariah is 11.5 percent. The specialized banks (except Basic Bank Ltd.) are exempted from maintaining the SLR. Liquidity indicators measured as percentage of demand and time liabilities (excluding inter-bank items) of the banks indicate that although all the banks had excess liquidity but the amount was lower than the previous two years.
Sensitivity to Market Risk: Sensitivity to market risk is generally described as the degree to which changes in interest rates, foreign exchange rates, commodity prices, or equity prices can adversely affect earnings and/or capital. Market risk for a bank involved in credit card lending frequently reflects capital and earnings exposures that stem from changes in interest rates. These lenders sometimes exhibit rapid loan growth, a lessening or low reliance on core deposits,
or high volumes of residual interests in credit card securitizations, any of which often signal potential elevation of the interest rate risk (IRR) profile. Management is responsible for understanding the nature and level of IRR being taken by the bank, including from credit card lending activities, and how that risk fits within the bank’s overall business strategies. The adequacy and effectiveness of the IRR management process and the level of IRR exposure are also critical factors in evaluating capital and earnings. A well-managed bank considers both earnings and economic perspectives when assessing the full scope of IRR exposure. Changes in interest rates affect earnings by changing net interest income and the level of other interest-sensitive income and operating expenses. The impact on earnings is important because reduced earnings or outright losses can adversely affect a bank’s liquidity and capital adequacy. Changes in interest rates also affect the underlying economic value of the bank’s assets, liabilities, and off-balance sheet instruments because the present value of future cash flows and in some cases, the cash flows themselves, change when interest rates change. The combined effect of the changes to these present values reflects the change in the bank’s underlying economic value. An adverse change in the economic value of equity can signal future earnings and capital problems. It can also affect the liquidity of assets because the cost of selling depreciated assets to meet liquidity needs or to access market-based funding may be prohibitive.
The role of banking sector in the process of economic development of a country is well recognized. The role of banking sector of a country in its economic growth is now an established literature. A competitive and hence efficient banking sector channels the society’s savings into most productive investments, thus make proper use and allocation of resources. Implication of a competitive banking sector for a developing country like Bangladesh is enormous. Stock market is highly concentrated and performed through banks. So development of banking sector is of paramount importance for the growth of the economy.
In Bangladesh, Private Commercial Banks have a great contribution to the national economy. With three different generation process, the PCBs structure reaches at this status. In 1990, Financial Sector Reform measures have been instrumental in restoring banking discipline to a reasonable extent as private commercial banks were growing on that time. But due to some drawbacks of the disciplinary steps the reform measure did not provide a good result. Then, government thought to develop 3rd generation of banks to make more intense competition in this sector. After the development of 3rd generation banks, total banking system changes a lot in different aspects. Mostly due to the advancement of mobile technology and information technology, banks want to provide different types of customized services to their clients. Beside the traditional banking system, Islamic banking system changed a lot in their services. So, we can see that banking sector become more competitive and attractive than previous time. Government should also provide some special concentration regarding lacking of Islami banking operation. They should build up a guideline for Islami banking system as soon as possible. To survive in this competitive business environment this year 2 Nationalized Commercial Bank converted into corporation with a view to increase their efficiency. Thus, 3rd generation banks are able to change the nature of banking system with a great extent.
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