Table of Contents
Contents
INTRODUCTION......................................................................................3
BRIEF OVERVIEW...................................................................................4BANGLADESH BANK.........................................................................4SERVICES..............................................................................................5
CURRENT ACCOUNT......................................................................5SAVINGS BANK ACCOUNT...........................................................5INTERNET BANKING......................................................................5AUTOMATED TELLER MACHINE (ATM)....................................6TELE BANKING................................................................................6
ANALYSIS................................................................................................7Performance of Banking Sector..............................................................7Balance Sheet Performance.....................................................................7
Assets...................................................................................................7Liabilities.............................................................................................8
Performance and Rating of Banks...........................................................8Capital Adequacy.................................................................................8Asset Quality.......................................................................................9Management Soundness....................................................................11Earnings and Profitability..................................................................11Liquidity............................................................................................12CAMELS Rating...............................................................................13
CONCLUSION........................................................................................15
REFERENCE...........................................................................................16
INTRODUCTION
The Jews in Jerusalem introduced a kind of banking in the form of money lending
before the birth of Christ. The word 'bank' was probably derived from the word
'bench' as during ancient time Jews used to do money -lending business sitting on
long benches.
First modern banking was introduced in 1668 in Stockholm as 'Svingss Pis Bank'
which opened up a new era of banking activities throughout the European Mainland.
In the South Asian region, early banking system was introduced by the Afghan traders
popularly known as ‘Kabuliwallas’. Muslim businessmen from Kabul, Afghanistan
came to India and started money lending business in exchange of interest sometime in
1312 A.D. They were known as ‘Kabuliwallas’.
In Bangladesh, after its independence in 1971, Bangladesh Bank was formed as the
Central Bank of Bangladesh in 1972. It is responsible for monitoring all the banks and
also setting up rules and guidelines for the banks.
In this report, I will look to put forward the analysis on the performance of the
Commercial Banks of Bangladesh. This analysis will be done with the overall
scenario of all the banks in Bangladesh
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BRIEF OVERVIEW
The number of banks now stands at 52 in Bangladesh. Out of the 52 banks, four are
state-owned commercial banks (SCBs), 30 private commercial banks (PCBs), 9
foreign commercial banks (FCBs) and the rest 9 are Development Financial
Institutions (DFIs).
Sonali Bank is the largest among the SCBs while Pubali is leading in the private ones.
Among the 9 foreign banks, Standard Chartered has become the largest in the country.
Besides the scheduled banks, Samabai (Cooperative) Bank, Ansar-VDP Bank,
Karmasansthan (Employment) Bank and Grameen bank are functioning in the
financial sector. The number of total branches of all scheduled banks is 6717 branches
as of December 2007. The number of bank branches increased from 6562 to 6717
owing to opening of new branches by the PCBs during the year.
BANGLADESH BANK
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.
Bangladesh Bank is also responsible for planning the government's monetary policy
and implementing it thereby.
The BB has a governing body comprising of nine members with the Governor as its
chief. Apart from the head office in Dhaka, it has nine more branches, of which two in
Dhaka and one each in Chittagong, Rajshahi, Khulna, Bogra, Sylhet, Rangpur and
Barisal.
3
SERVICESCURRENT ACCOUNT
Generally this sort of account opens for business purpose. Customers can withdraw
money once or more against their deposit. No interest can be paid to the customers in
this account. If the amount of deposit is below taka 1,000 on an average the bank has
authority to cut taka 50 from each account as incidental charge after every six months.
Against this account loan facility can be ensured. Usually one can open this account
with taka 500. One can open this sort of account through cash or check/bill. All the
banks follow almost the same rules for opening current account.
SAVINGS BANK ACCOUNT
Usually customers open this sort of account at a low interest for only security. This is
also an initiative to create people's savings tendency. Generally, this account is to be
opened at taka 100. Interest is to be paid in June and December after every six
months. If money is withdrawn twice a week or more than taka 10,000 is withdrawn
(if 25% more compared to total deposit) then interest is not paid. This account
guarantees loan. Almost all the banks follow the same rules in the field of savings
account, except foreign banks for varying deposit..
INTERNET BANKING
Customers need an Internet access service. As an Internet Banking customer, he will
be given a specific user ID and a confident password. The customer can then view his
account balances online. It is the industry-standard method used to protect
communications over the Internet. To ensure that customers' personal data cannot be
accessed by anyone but them, all reporting information has been secured using
Version and Secure Sockets Layer (SSL).
4
AUTOMATED TELLER MACHINE (ATM)
Automated Teller Machine (ATM), a new concept in modern banking, has already
been introduced to facilitate subscribers 24 hour cash access through a plastic card.
The network of ATM installations has already been extended to enable customers to
non-branch banking beyond banking.
TELE BANKING
Tele Banking allows customers to get access into their respective banking information
24 hours a day. Subscribers can update themselves by making a phone call. They can
transfer any amount of deposit to other accounts irrespective of location either from
home or office.
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ANALYSIS
Performance of Banking Sector
In 2007, the state-owned commercial banks (SCBs) held 33.1 percent of the total
industry assets as against 32.7 percent in 2006. PCBs' share rose to 51.4 percent in
2007 as against 47.7 percent in 2006. The foreign commercial banks held 8.2 percent
of the industry assets in 2007, showing a declining trend by 3.6 percentage point over
the previous year. The DFIs' share of assets was 7.3 percent in 2007 against 7.8
percent in 2006. Total deposits of the banks in 2007 increased by 15.5 percent to Taka
2148.9 billion from Taka 1860.6 billion in 2006. The SCBs' (comprising largest 4
banks) share in deposits decreased from 35.2 percent in 2006 to 32.6 percent in 2007.
On the other hand, PCBs' deposits in 2007 amounted to Taka 1150.2 billion or 53.5
percent of the total industry deposit against Taka 955.5 billion or 51.3 percent in
2006. FCBs' deposits in 2007 rose by Taka 32.6 billion or 21.6 percent over the
previous year. The DFIs' deposits in 2007 were Taka 115.6 billion against Taka 100.2
billion in 2006 showing an increase of 15.4 percent over the year.
So from the above information, we can say that in terms of deposits, PCBs, FCBs and
DFIs have all experienced an increase in deposits compared to the previous years and
only SCBs have experienced a slight decrease in deposits.
Balance Sheet Performance
AssetsAggregate industry assets in 2007 registered an overall increase by 15.3 percent over
2006. During this period, SCBs' assets increased by 16.7 percent and those of the
PCBs rose by 24.3 percent. Loans and advances played a major role on the uses of
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fund. Loans and advances amounting to Taka 1724.3 billion out of aggregate assets of
Taka 2773.9 billion constituted significant portion (62.2 percent).
LiabilitiesThe aggregate liability portfolio of the banking industry in 2007 was Taka 2773.9
billion of which deposits constituted Taka 2148.9 billion or 77.5 percent and
continued to be the main sources of fund of banking industry. Capital and reserves of
the banks were Taka 180.0 billion or 6.5 percent of aggregate liabilities in 2007, as
against Taka 122.9 billion or 5.1 percent in 2006.
Performance and Rating of Banks
Performance of the banking sector under CAMELS framework, which involves
analysis, and evaluation of the six crucial dimensions of banking operations, has been
discussed in this chapter. The six indicators used in the rating system are (i) Capital
adequacy, (ii) Asset quality, (iii) Management soundness, (iv) Earnings, (v) Liquidity
and (vi) Sensitivity to market risk.
Capital AdequacyCapital adequacy focuses on the total position of bank capital and protects the
depositors from the potential shocks of losses that a bank might incur. It helps
absorbing major financial risks (like credit risk, market risk, foreign exchange risk,
interest rate risk and risk involved in off-balance sheet operations). Banks in
Bangladesh have to maintain a minimum Capital Adequacy Ratio (CAR) of not less
than 10.0 percent of their risk-weighted assets (with at least 5.0 percent in core
capital) or Taka 2.0 billion, whichever is higher. As on 31 December 2007, the SCBs,
DFIs, PCBs & FCBs maintained CAR of 7.9, -5.5, 10.6 and 22.7 percent respectively.
The CAR of SCBs showed 7.9 percent in 2007 after transferring the cumulative loss
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for Taka 87.9 billion by creating goodwill (valuation adjustments account) at the time
of corporatization of 3 SCBs. The valuation adjustment account will be amortised
within 10 years. Meanwhile, the CAR of DFIs stood at -5.5 percent in 2007 after
adjusting the cumulative losses of Taka 24.8 billion of Bangladesh Krishi Bank
(BKB) and Rajshahi Krishi Unnayan Bank (RAKUB). The adjusted CAR of DFIs in
2005 and 2006 also stood at -7.5 percent and -6.7 percent considering their
cumulative losses of Taka 21.9 billion and Taka 24.4 billion respectively. 5 PCBs
(including 2 problem banks) also could not maintain required CAR in 2007. FCBs
maintained 22.7 percent CAR in 2007 though 6 FCBs out of 9 FCBs could not
maintain minimum capital for Taka 2.0 billion but they were permitted to adjust those
shortfall within 30 June 2009. The CAR of the banking industry was 9.6 percent in
2007 as against 6.7 percent in 2006. The CAR of the industry showed downturn in
2005 due to the adjustment of cumulative losses by the DFIs and thereafter it has
increased further positively.
Asset QualityThe asset composition of all scheduled banks shows the concentration of loans and
advances (62.2 percent as of December 2007). The high concentration of loans and
advances indicates vulnerability of assets to credit risk, especially since the portion of
non-performing assets is significant. A huge non-performing loan portfolio has been
the major predicament of banks particularly of the state-owned banks. In the total
assets the share of loans and advances is followed by the investment in Government
securities covering 13.7 percent. The most important indicator intended to identify
problems with asset quality in the loan portfolio is the percentage of gross and net
nonperforming loans (NPLs) to total advances. FCBs have the lowest and SCBs have
the highest ratio of NPLs. SCBs have gross NPLs to total Loans of 29.9 percent
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whereas in case of PCBs, FCBs and DFIs, the ratios are 5.0, 1.4 and 28.6 percent
respectively. Similarly NPLs net of provisions and interest suspense to the total loans
is 12.9, 1.4 and 19.0 percent for SCBs, PCBs and DFIs respectively. FCBs are having
excess provision for loan losses.
The ratio of NPL to total loans of all the banks shows an encouraging trend since its
decline from the peak (41.1 percent) in 1999, although the aggregate ratio was still as
high as 13.2 percent in December 2007. The reason is being very high NPL of the
SCBs and the DFIs. The SCBs and DFIs continue to have very high NPLs mainly due
to substantial loans provided by them on considerations other than commercial and
under directed credit programmes during the 70s and 80s. Poor appraisal and
inadequate follow-up and weak supervision of the loans disbursed by the SCBs and
DFIs in the past eventually resulted in large amount of poor quality assets which still
continue to remain significant in the portfolio of these banks. Furthermore, the banks
were reluctant to write off the historically bad loans because of poor quality of
underlying collaterals. Recovery of NPLs however witnessed some signs of
improvement; mainly because of the steps taken with regard to internal restructuring
of these banks to strengthen their loan recovery mechanism and recovery drive and
write off measures initiated in recent years.
The net non performing loansto total loans after adjustment of actual provision and
interest suspense stands at 12.9 percent (SCBs), 19.0 percent (DFIs), 1.4 percent
(PCBs) and 5.1 percent (banking sector) in 2007. SCBs' and DFIs' nonperforming
portfolio were still high after adjustment of actual provision and interest suspense,
whereas FCBs have excess provision on their classified loans.
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Management SoundnessSound management is the most important prerequisite 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 on
the basis of 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. Expenditure-income (EI) ratio of the DFIs
was very high at 175.3 percent in 2000. This was mainly because the DFIs made loan
loss provisions by debiting 'loss' in their books. The position however improved after
2000 and the ratio came down to 89.1 percent and 95.9 percent in 2001 and 2002
respectively but again rose to 101.1 percent in 2003 and later on 107.7 in 2007 due to
operating loss incurred by BKB & RAKUB. The EI ratio of the SCBs exceeded 100.0
percent in 2004; the ratio stood at 100.0 percent in 2007. Very high EI ratio of SCBs
was mainly attributable to high administrative and overhead expenses; suspension of
income against NPLs. EI ratio of PCBs is substantially high due to deduction of
provision for loans, other assets and corporate tax from current income.
Earnings and ProfitabilityStrong 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 earnings and
profitability, the best and widely used indicator is return on assets (ROA), which is
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supplemented by return on equity (ROE) and net interest margin (NIM). Earnings as
measured by return on assets (ROA) and return on equity (ROE) vary largely within
the industry. Analysis of these indicators reveals that the ROA of the SCBs have been
almost zero percent considering huge provision shortfall and that of the DFIs even
worse. PCBs had an inconsistent trend but satisfactory and FCBs' return on assets
ratio has been consistently strong during last 8 years. SCBs return on equity ratio was
3.0 percent in 2003 but have been shown almost zero percent in 2007 considering
provision shortfall. In case of DFIs, the ROE position remained worse (-3.4 percent)
in 2007. The ROE of PCBs and FCBs were satisfactory in 2007. BKB, RAKUB and
Bangladesh Commerce Bank Ltd. incurred loss only due to their huge operating
expenses. Aggregate net interest income (NII) of the industry has been positive and
consistently increased from Taka 8.4 billion in 2000 to Taka 54.8 billion in 2007.
However, the NII of the SCBs sharply declined to a negative amount of Taka 1.2
billion in 2000. The trend continued and the SCBs' NII was -1.8 billion (2001) , -1.5
billion (2002), -0.3 billion (2003), -1.1 billion (2004) but in 2005 their positive NII
was Taka 7.7 billion and it was Taka 7.4 billion in 2007. The DFIs had a consistent
positive trend since 2000 and it was Taka 1.4 billion in 2007. Since 2005, SCBs have
been able to increase their net interest income (NII) by reducing their cost of fund.
The NII of the PCBs and FCBs has been very high over the period from 2000 through
2007. Overall industry NII shows a consistently upward trend. The trend of NII
indicates that the PCBs and the FCBs are charging interests at very high rates on their
lending as compared to the interest they are paying to the depositors.
LiquidityAt present the demand and time liabilities of the commercial banks are subject to a
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statutory liquidity requirement (SLR) of 18 percent inclusive of average 5 percent (at
least 4 percent in any day) cash reserve requirement (CRR) on bi-weekly basis. The
CRR is to be kept with the Bangladesh Bank and the remainder as qualifying secure
assets under the SLR, either in cash or in Government securities SLR for the banks
operating under the Islamic Shariah is 10 percent and the specialized banks 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 all
the banks had excess liquidity.
CAMELS RatingPerformance indicators of the banking industry depict a trend similar to that of the
state-owned banks, which is understandable due to their predominant market share.
Ratings done on the basis of the various indicators discussed hereinbefore indicate
that financial performance of the PCBs and FCBs in general has been better than that
of the industry average. Under the Financial Sector Reform Programme, the
Bangladesh Bank strengthened the supervision and monitoring of the scheduled banks
since 1990. Any bank rated 4 or 5 i.e., 'Marginal' or 'Unsatisfactory' under composite
CAMELS rating is generally identified as Problem Bank. Activities of the problem
banks are closely monitored by the Central Bank. Bangladesh Bank issues directives
from time to time to the problem banks to bring them in good shape. Now there are
two problem banks and it is expected that in the near future under the proper
monitoring and guidance of Bangladesh Bank both the existing problem banks will
come out from the list of problem banks. To assess the degree to which a bank might
be exposed to adverse financial market conditions, the Bangladesh Bank added a new
characteristic named as "Sensitivity to market risk" to what was previously referred to
as the CAMEL rating. In particular, BB started placing much emphasis on banks
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sensitivity to interest rate movement through the introduction of revised CAMELS
rating system since 1 July 2006.
Bangladesh Bank introduced Early Warning System (EWS) of supervision from
March 2005 to address the difficulties faced by the banks in any of the areas of
CAMELS. Any bank found to have faced difficulty in any areas of operation, is
brought under Early Warning category and monitored very closely to help improve its
performance. Presently 8 banks are monitored under EW system. Interface of
dialogues with the management of scheduled banks have been organized in more
structured way to address various compliance issues those seem to be as early signal
to delinquent key performance areas in banking operation.
As of end 2007, CAMELS rating of 6 banks was 1 or Strong; 29 banks were rated 2
or Satisfactory; rating of 5 banks was 3 or Fair; 6 (including 4 SCBs) were rated 4 or
Marginal and 1 bank got 5 or Unsatisfactory rating.
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CONCLUSION
After analyzing the performance of the commercial banks of Bangladesh we can
conclude the following points. The commercial banks have experienced a increase in
performance in terms of deposit. In terms of assets, we can see that a increase of
15.3% and liabilities increased to around 46% in terms of capital and reserves of the
bank.
Again for capital adequacy ratio (CAR), in 2007 there was an increase in the overall
CAR of all the banks in comparison to 2006. As for the asset quality and judging it by
the nonperforming loans (NPLs) ration, the commercial banks have shown signs of
continuous improvement. Expenditure – income (EI) ration indicates that all the
banking sectors had high EI ration and that they can work to reduce the rates.
Return on assets (ROA) and return on equity (ROE) had different results for different
sectors. The net interest income (NII) of all the banking sectors has increased
consistently. And finally in CAMELS rating, we also see improvement in terms of
problem banks and also that Bangladesh Bank is continuously working on improving
the situations of the problem banks.
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REFERENCE
1. “Performance Evaluation of Selected Private Commercial Banks in Bangladesh”. Retrieved from www.ccsenet.org/journal/index.php/ijbm/article/view/1179/1127
2. Wikipedia. Retrieved from http://en.wikipedia.org/wiki/List_of_banks_in_Bangladesh
3. Bangladesh Bank. Retrieved from www.bangladeshbank.org.bd
4. “Performance Measurement of Banks : An Application of Balanced Scorecard”. Retrieved from www.icmab.org.bd/20- Performance - Measurement -of- Banks -An-Application-of-Balanced-Scorecard.html
5. Other Data collected from different Commercial Banks sites.
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