Home ›› 07 Aug 2021 ›› Editorial
During the ongoing global Covid-19 pandemic, online banking has become very popular. The app-based banking solution has brought banking into the palm of consumers, hence making contactless and cashless banking possible from the convenience of home at anytime of the day. The government last year at the beginning of the pandemic was able to disburse salary to more than 1.5 million of readymade garments as a part of the incentive to face the Covid.
Banks operate by borrowing funds-usually by accepting deposits or by borrowing in the money markets. Banks borrow from individuals, businesses, financial institutions, and governments with surplus funds (savings). The most common uses of these funds are to make real estate and commercial and industrial loans. Economic history shows that development has started everywhere with the banking system and its contribution towards financial development of a country is the highest in the initial stage. Schumpeter (1933) regarded the banking system as one of the two main agents (other being entrepreneurship) in the whole process of development. Keynes also emphasised the role of banking services in the process of economic development of a country, while SHE was addressing the House of Lords regarding International and Monetary System (quoted in Sharma 1985). Moreover Alexander Gerashchenko (1962) in his popularly known “Gerschenkron’s Hypothesis” explained the banking system as the key role player at certain stage of the industrialisation process.
Although there is no formal evidence of the existence of banks in Bengal during the period before 400 BC, traders of this period were known to have carried out activities to provide financial assistance among themselves. The wealthy people of that period used to put their surplus money and valuables under the soil in brass-made pitchers and maintained accounts for them by writing on the body of dishes made of gold or silver. The Vedas mentions the practice of informal banking in the form of borrowing and lending during the Vedic period. Such activities, however, were centred in temples and other religious places. Borrowing and lending gave way to banking during the period of Manu, who believed that wise men should deposit money with a person bearing good moral character, having respectable and rich relatives, and well conversant with law. Koutilya's Artha Shastra also suggests the existence of banking and payment of interest on deposits in the Vedic period.
There were no domestic private commercial banks in Bangladesh until 1982; When the Arab-Bangladesh Bank Ltd. commenced private commercial banking in the country. Five more commercial banks came up in 1983 and initiated a moderate growth in banking financial institutions. Despite slow growth in number of individual banks, there had been a relatively higher growth of branches of nationalized commercial banks (NCBs) during 1973-83. There number had increased from 1512 in 1973-74 to4603 in 1982-83. Established in 1784, the Bengal Bank was the first British-patronised modern bank in India. Dhaka Bank started to operate as a commercial bank in 1806. The Bengal Bank opened its first branch in Dhaka by purchasing Dhaka Bank in 1862. In 1873, it opened its two branches in Sirajganj and Chattogram. Another branch of Bengal Bank was opened in Chandpur in 1900. Six branches of Bengal Bank were in operation in the Bangladesh region until the partition of Bengal in 1947 and these branches were located at Dhaka, Chattogram, Mymensingh, Rangpur, Chandpur and Narayanganj.
The three Presidential banks that followed the establishment of the Bengal Bank were the Bank of Calcutta (1806), Bank of Bombay (1840) and Bank of Madras (1843). Combining these three banks, the Imperial Bank of India was set up in 1921. The Reserve Bank of India came into being in 1935. In addition to the above, there were other banking and financial institutions throughout British India, including the territory of Bengal.
The banking system at independence (1971) consisted of two branch offices of the former State Bank of Pakistan and seventeen large commercial banks, two of which were controlled by Bangladeshi interests and three by foreigners other than West Pakistanis. There were fourteen smaller commercial banks.
The government's encouragement during the late 1970s and early 1980s of agricultural development and private industry brought changes in lending strategies. Managed by the Bangladesh Krishi Bank, a specialised agricultural banking institution, lending to farmers and fishermen dramatically expanded. The number of rural bank branches doubled between 1977 and 1985, to more than 3,330. Denationalisation and private industrial growth led the Bangladesh Bank and the World Bank to focus their lending on the emerging private manufacturing sector. Scheduled bank advances to private agriculture, as a percentage of sectoral GDP, rose from 2 per cent in FY 1979 to 11 per cent in FY 1987, while advances to private manufacturing rose from 13 per cent to 53 per cent.
Bangladesh has eight Islami banks, while several non-Islamic banks offer Islamic banking services alongside their normal operations. As of 2017, Islamic banking, led by Islami Bank Bangladesh controls 20 per cent of deposits in Bangladesh. Bangladesh operates the world’s biggest Islamic Microfinance scheme. According to Bangladeshi government polling, Islamic banking has an overall approval rating of 84 per cent among the country's population.
The eight state-owned commercial and specialised banks suffer from problems related to high levels of non-performing loans (NPLs), low profitability, large capital shortfalls and balance sheet weaknesses. The root of the problem is poor risk management. For decades, state-owned banks have lent large amounts to big, influential borrowers, who have been known to be lax with repayments. Defaulters are rarely penalised; instead, loans are routinely restructured to permit further lending to the same borrowers. According to a study by the Bangladesh Institute of Bank Management, on average banks rescheduled bad loans of Tk 109.1bn annually during 2010–14.
In its report, the IMF said that there were weaknesses in the banking sector owing largely to the legacy of loans to large borrowers, who lack incentives to repay, and legal limitations that hamper recoveries. Six state-owned commercial banks account for about a quarter of total banking sector assets. They are supplemented by two state-owned specialised development banks, 40 private commercial banks and nine foreign banks. As a result of these issues, non-performing loans (NPLs) at state-owned banks have risen sharply in recent years. In January-March 2017, overall, bad loans in the banking sector rose by 18 per cent from the previous quarter, to Tk 734.1bn. NPLs at the six state-owned commercial banks rose by 15.1 per cent quarter on quarter, to Tk 357.2bn, accounting for just under half of total NPLs. It is possible that the problem may be larger than these numbers suggest. The central bank has correctly come out with a note of caution regarding the repayment of the money disbursed as the stimulus package to the business houses to fight the corona pandemic. Has the money been diverted to any area other than the business itself needs to be seen over time.
The writer is MD and CEO of Community Bank
