Term Paper On

Role of Commercial Banks for Economic Sustainability

Term Paper On
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Role of Commercial Banks for economic Sustainability

(This Term paper is Submitted For the Partial Fulfillment of the Degree of Executive master 0f Business Administration ith a !a"or in Finance#

Submitted To:
Mr. Rajib Datta Lecturer Department of Finance Faculty of Business Studies Premier University

Submitted By
Student ame! "are#ul $slam Student $D! 1172140280 Pro%ram! &MB' Semester! (rd Batc) no! *+ Major! Finance

PR&M$&R U $,&RS$"./$""'01 0
Date of Submission! 234*(42*15

Letter of Transmittal Date: March 2 ! 2"#$

"o ")e Supervisor Mr.Rajib Datta Lecturer Department of Finance Faculty of Business Studies Premier University .)itta%on%6 Ban%lades) Sub%ect: "erm Paper on 7Role of .ommercial Ban8s for economic Sustainability9

Sir
$ am %rateful to you for t)e submission of t)e "erm paper on9 Role of commercial ban8 for economic stability9. ")is is an e:cellent opportunity for me to ac#uaint more closely ;it) t)e or%ani<ation. ")e association and coordination of all respective officers = staffs ;it) me are full of e:citin%6 re4discoverin% and entertainment. Durin% t)e period of doin% t)is paper $ )ave discovered and %ained ne; = practical feelin%s6 observations and learnin%. $ )ave my utmost effort to reflect e:perience6 s8ill and 8no;led%e6 ;)ic) $ ac#uired at t)e time of ;or8in%. $ )ave tried my best to furnis) t)e report ;it) relevant data6 ;)ic) $ )ave collected durin% my period. $ s)all be %lad if you 8indly accept t)is report6 and $ am ready to e:plain anyt)in% to you if you feel necessary.

")an8in% you -ours Fait)fully

ame! "are#ul $slam Student $D! 1172140280 Pro%ram! &MB' Batc)! *+ Semester! (rd Major in finance

Premier University .)itta%on%.

(

&ckno'le()ement
't first $ am very muc) %rateful to 'lmi%)ty 0od6 ;)o made me able to complete t)is report. $t is very difficult to e:press my feelin%s t)at )elped me in completion of t)is report. But $ t)in8 t)ere is no ot)er ;ord e:cept t)an8s6 ;)ic) can compliment my sentiments. $ pay %ratitude to t)e Supervisor of my report6 Mr. Rajib Datta 6 lecture of faculty of Business Studies6 Premier University .)itta%on%. $ also pay )onor to t)e faculty members of Finance Department for t)eir contribution. Last but not t)e least6 $ am t)an8ful to offices of different commercial ban8s and my family and my friends ;)o )ave been )elpful by %ivin% me t)eir co4operation and efforts in completin% t)is report.

Table of Contents
Title Pa)e Co*er Pa)e +etter of Transmittal &ckno'le()ement Table of contents E.ecuti*e Summary # 2 , $ /

Chapter 012

3 45 #" ## ##

1ntro(uction Statement of the problem Ob%ecti*es of the stu(y

Brief o*er*ie'

Chapter 0112
+iterature re*ie'

#2 #,422
2,

Chapter 01112
MET6ODO+O78 O9 T6E ST:D8 Chapter 01;2 Research 9in(in)s
+1M1T&T1O<S O9 T6E ST:D8

2$4,$

,,/4, , 4,5

Chapter 0;2

$"

>

Recommen(ation Conclusion References

$# $2 $,

Executive summar$
$n order to provide a student ;it) job e:posure and an opportunity of t)e transition of t)eoretical 8no;led%e into real life e:perience6 an term paper is a must. ' better balance bet;een t)eory = practice can be %ained t)rou%) t)is pro%ram. Ban8in% system of Ban%lades) )as %one t)rou%) t)ree p)ase of development ationali<ation6 Privati<ation and Financial Sector Reform. ational .redit and .ommerce Ban8 is t)e lar%est Private .ommercial Ban8 from 1??( ;it) ne; )ope and promise to serve t)e countrymen. ' sustainable economy %enerates t)e capital necessary for %ro;t) as ;ell as t)at necessary to support t)e current needs of t)e community. ")e %oal of ac)ievin% sustainable economic vitality is to establis) an economy ;it) sufficient jobs6 products6 and services to support t)e community. $t is clear t)at e:ploitin% )uman or natural resources ;ill not provide a sustainable economic plan. Similarly6 too muc) spendin% on employee benefits and environmental protection ;ill undermine economic stability. ")e economic plan in a sustainable community must t)erefore balance t)e allocation of resources bet;een society6 business and t)e environment.

Chapter 012

Introduction
Ban8s are essential for eac) countryAs economy6 since no %ro;t) can be ac)ieved unless savin%s are efficiently c)anneled into investment. $n t)is respect6 t)e lac8 of a full4 fled%ed ban8in% system )as often been identified as a major ;ea8ness of t)e centrally planned economies. ")erefore6 reformin% t)e ban8in% sector in t)e former communist countries and creatin% a ne; culture of trust and confidence )as been a crucial tas8 in t)e process of transition to a mar8et economy. Ban8in% system and t)e financial institutions play very si%nificant role in t)e economy. ")e )ealt) of et) economy is closely related to t)e soundness of its ban8in% system. 'lt)ou%) ban8s create no ne; ;ealt) but t)eir borro;in%6 lendin% = related activities facilitates t)e process of production6 distribution6 e:c)an%e = consumption of ;ealt). $n t)is ;ay t)ey become very effective partners in t)e process of economic development. "oday modern ban8s are very useful for t)e utili<ation of t)e resources of t)e country. ")e ban8s are mobili<in% t)e savin%s of t)e people for t)e investment purposes. $f t)ere ;ould be no ban8 t)en a %reat position of t)e capital of a economy ;ould remain idle. ' ban8 as a matter of fact is just li8e a )eart in t)e economic structure and t)e capital by it is li8e blood in it. 's lon% as t)e blood ;ill be in circulation6 t)e or%ans ;ill remain sound and )ealt)y. $f t)e blood is not supplied to any or%an t)en t)at part ;ould become inactive. So if financin% is not made in industrial or a%ricultural sectors6 t)ese sectors ;ill be destroyed. Loan facilities provided by ban8s ;or8 as an incentive to t)e producer to increase t)eir production. Many difficulties in t)e international payments )ave been overcome and t)e volumes of transaction )ave been increased. ")e modern economies in t)e ;orld )ave been developed primarily by ma8in% t)e best use of t)e credit availability in t)eir systems. 'n efficient ban8in% system must cater to t)e needs of )i%) end investors by ma8in% available )i%) amounts of capital for bi% projects in t)e industrial6 infrastructures = service sectors. 't t)e same time credit s)ould be made available to t)e medium = small ventures.

Development of ban8in% sector is t)e 8ey to improve t)e financial condition of a country. Moreover not only t)e economy or t)e financial sector but also all t)e sectors of a country are directly or indirectly related to t)e smoot) operation of ban8in% sector.

LetAs analy<e some of t)e 8ey factors ;)ic) are affected by t)e ban8in% sector of a country! 'n effective commercial ban8in% system ma8es t)e credit available to t)e entrepreneurs. ")e entrepreneurs use t)e credit to produce %oods and services. 's a result t)ey can contribute to t)e %ro;t) of t)e economy. Mobili<ation of resources ;ould only be possible if ne; branc)es of ban8s are opened in bot) urban and rural areas. ")is ;ould open doors to t)e e:ternal ;orld ;)ic) means development in all aspects. Ban8s finance ne; = innovative ideas. $n t)is ;ay t)ey accelerate t)e economic %ro;t). Ban8s offer credit facilities ;)ic) are t)e drivin% force for any business project to be put into action. $n a developin% nation suc) as Ban%lades) ;)ere in a%riculture is main liveli)ood for a major part of t)e population6 investin% in suc) sectors is of )i%)ly important. So ban8s can play a vital role for t)e development of a%riculture by investin% in a%ricultural projects. Ban8s are t)e sources of loans and advances.

")e ;orld ;ould come to a standstill if t)e ban8s cease t)eir operation. /o;ever t)e ban8s are just one aspect of a nationAs financial sector6 alt)ou%) t)e most important oneB

Statement of the Problem

$t is a 8no;n fact t)at ban8s play several vital roles in any economy. 'nd t)ese roles are aimed at ensurin% sound financial system and economic stability. $t is incontrovertible t)at t)e ban8in% system is t)e en%ine of %ro;t) in any economy6 %iven its function of financial intermediation. ")rou%) t)is function6 ban8s facilitate capital formation6 lubricate t)e production en%ine turbines and promote economic %ro;t). /o;ever6 ban8sA ability to en%ender economic %ro;t) and development depends on t)e )ealt)6 soundness and stability of t)e ban8in% system itself. ")e need for a stron%6 reliable and viable ban8in% system is underscored by t)e fact t)at t)e industry is one of t)e fe; sectors in ;)ic) t)e s)are)oldersA fund is only a small proportion of t)e liabilities of t)e enterprise. $t is6 t)erefore6 not surprisin% t)at t)e ban8in% industry is one of t)e most re%ulated sectors in any economy. -et it )as been ar%ued in t)e public domain t)at t)e commercial ban8s )ave not been performin% t)e desired roles in improvin% capital formation and promotin% economic %ro;t) in t)e country. .apital formation refers to t)e net addition to t)e capital stoc8 after of any nation after depreciation. $t is defined as an addition to stoc8 of capital assets set aside for future productive endeavours in real sector ;)ic) ;ill lead to more %ro;t) in p)ysical capital assets of t)e country. .apital formation captures all t)e real4value4added to t)e economy in real4asset4terms ;)ic) ;ill lead to furt)er en)ancement of savin%s6 investment and %eneration of more ;ealt) in future. .apital formation derives from savin%s accumulation. $t )as a positive impact on private savin%s accumulation in t)e sense t)at increase in capital formation ;ill lead to more savin%s. C)en savin%s accumulate it ;ill lead to an increase in %ross domestic investment D0D$E and income %enerated as a result of t)e investment projects made ;ill6 in turn6 lead to 0DP %ro;t) F+6 (>@4(@+G. o;6 t)e supposed relations)ip bet;een ban8in%6 capital formation and economic %ro;t) is t)at ban8in% t)rou%) its activities suc) as savin%s and deposit mobili<ation6 credit creation6 etc increases t)e accumulation of capital formation ;)ic) in turn is e:pected to en)ance economic of t)e country.

Objectives of the Study

")e central objective of t)e study is to empirically investi%ate t)e role of i%erian ban8s in .apital Formation and economic %ro;t). ")e specific objectives are as follo;s!

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i. "o analy<e t)e impact of ban8sA deposit mobili<ation on capital formation and economic %ro;t) in Ban%lades). ii. "o investi%ate t)e impact of ot)er ban8sA performance indicators suc) as credits to t)e economy and ban8s investment on Ban%lades) economic %ro;t). iii. "o determine t)e association e:istin% bet;een capital formation and economic %ro;t) in Ban%lades). iv. "o evaluate t)e role ban8s )ave played in mobili<in% %ross domestic savin%s to;ards fillin% t)e e:istin% savin%s 4 investment %ap in a bid to ac)ieve desired investment %oals andHor %ro;t) objectives in t)e years a)ead.

Brief Overview

"o presentation of t)e report is proper order of arran%ement. ")is paper is divided in to five parts. $n t)e first part introduction of t)e paper )as been placed. Literature revie; and strate%y mana%ement )as been described in t)e section one. $n t)e t)ird part6 special reference to Ban8in% sector. ")e industry situation of ban8in% business )as been described in t)is section and comparative status of some prominent ori%ination is portrayed. Findin%s of t)e study are also described in t)e fift) section. 't last6 based on t)e findin%s conclusion and recommendation ;as %iven.

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Chapter 0112

12

Role of Central Bank in Economic De*elopment

")e central ban8 in a developin% country aims at t)e promotion and maintenance of a risin% level of production6 employment and real income in t)e country. ")e central ban8s in t)e majority of underdeveloped countries )ave been %iven ;ide po;ers to promote t)e %ro;t) of suc) economies. ")ey6 t)erefore6 perform t)e follo;in% functions to;ards t)is end.

Creation an( E.pansion of 9inancial 1nstitutions

1ne of t)e aims of a central ban8 in an underdeveloped country is to improve its currency and credit system. More ban8s and financial institutions are re#uired to be set up to provide lar%er credit facilities and to divert voluntary savin%s into productive c)annels. Financial institutions are localised in bi% cities in underdeveloped countries and provide credit facilities to estates6 plantations6 bi% industrial and commercial )ouses. $n order to remedy t)is6 t)e central ban8 s)ould e:tend branc) ban8in% to rural areas to ma8e credit available to peasants6 small businessmen and traders. $n underdeveloped countries6 t)e commercial ban8s provide only s)ort4term loans. .redit facilities in rural areas are mostly non4e:istent. ")e only source is t)e villa%e moneylender ;)o c)ar%es e:orbitant interest rates. ")e )old of t)e villa%e moneylender in rural areas can be slac8ened if ne; institutional arran%ements are made by t)e central ban8 in providin% s)ort4term6 medium term and lon%4term credit at lo;er interest rates to t)e cultivators. ' net;or8 of co4operative credit societies ;it) ape: ban8s financed by t)e central ban8 can )elp solve t)e problem. Similarly6 it can )elp t)e establis)ment of lead ban8s and t)rou%) t)em re%ional rural ban8s for providin% credit facilities to mar%inal farmers6 landless a%ricultural ;or8ers and

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ot)er ;ea8er sections. Cit) t)e vast resources at its command6 t)e central ban8 can also )elp in establis)in% industrial ban8s and financial corporations in order to finance lar%e and small industries.

Proper &(%ustment bet'een Deman( for an( Supply of Money

")e central ban8 plays an important role in brin%in% about a proper adjustment bet;een demand for and supply of money. 'n imbalance bet;een t)e t;o is reflected in t)e price level. ' s)orta%e of money supply ;ill in)ibit %ro;t) ;)ile an e:cess of it ;ill lead to inflation. 's t)e economy develops6 t)e demand for money is li8ely to %o up due to %radual moneti<ation of t)e non4moneti<ed sector and t)e increase in a%ricultural and industrial production and prices. ")e demand for money for transactions and speculative motives ;ill also rise. So t)e increase in money supply ;ill )ave to be more t)an proportionate to t)e increase in t)e demand for money in order to avoid inflation. ")ere is6 )o;ever6 t)e li8eli)ood of increased money supply bein% used for speculative purposes6 t)ereby in)ibitin% %ro;t) and causin% inflation. ")e central ban8 controls t)e uses of money and credit by an appropriate monetary policy. ")us in an underdeveloped economy6 t)e central ban8 s)ould control t)e supply of money in suc) a ;ay t)at t)e price level is prevented from risin% ;it)out affectin% investment and production adversely.

& Suitable 1nterest Rate Policy

$n an underdeveloped country t)e interest rate structure stands at a very )i%) level. ")ere are also vast disparities bet;een lon%4term and s)ort4term interest rates and bet;een interest rates in different sectors of t)e economy. ")e e:istence of )i%) interest rates acts as an obstacle to t)e %ro;t) of bot) private and public investment6 in an underdeveloped economy.

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' lo; interest rate is6 t)erefore6 essential for encoura%in% private investment in a%riculture and industry. Since in underdeveloped country businessmen )ave little savin%s out of undistributed profits6 t)ey )ave to borro; from t)e ban8s or from t)e capital mar8et for purposes of investment and t)ey ;ould borro; only if t)e interest rate is lo;. ' lo; interest rate policy is also essential for encoura%in% public investment. ' lo; interest rate policy is a c)eap money policy. $t ma8es public borro;in% c)eap6 8eeps t)e cost of servicin% public debt lo; and t)us )elps in financin% economic development. $n order to discoura%e t)e flo; of resources into speculative borro;in% and investment6 t)e central ban8 s)ould follo; a policy of discriminatory interest rates6 c)ar%in% )i%) rates for non4essential and unproductive loans and lo; rates for productive loans. But t)is does not imply t)at savin%s are interest4elastic in an underdeveloped economy. Since t)e level of income is lo; in suc) economies6 a )i%) rate of interest is not li8ely to raise t)e propensity to save. $n t)e conte:t of economic %ro;t)6 as t)e economy develops6 a pro%ressive rise in t)e price level is inevitable. ")e value of money falls and t)e propensity to save declines furt)er. Money conditions become ti%)t and t)ere is a tendency for t)e rate of interest to rise automatically. ")is ;ould result in inflation. $n suc) a situation any effort to control inflation by raisin% t)e rate of interest ;ould be disastrous. ' stable price level is6 t)erefore6 essential for t)e success of a lo; interest rate policy ;)ic) can be maintained by follo;in% a judicious monetary policy by t)e central ban8.

Debt Mana)ement
Debt mana%ement is one of t)e important functions of t)e central ban8 in an underdeveloped country. $t s)ould aim at proper timin% and issuin% of %overnment bonds6 stabili<in% t)eir prices and minimi<in% t)e cost of servicin% public debt. $t is t)e central ban8 ;)ic) underta8es t)e sellin% and buyin% of %overnment bonds and ma8in% timely c)an%es in t)e structure and composition of public debt.

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$n order to stren%t)en and stabili<e t)e mar8et for %overnment bonds6 t)e policy of lo; interest rates is essential. For6 a lo; rate of interest raises t)e price of %overnment bonds6 t)ereby ma8in% t)em more attractive to t)e public and %ivin% an impetus to t)e public borro;in% pro%rammes of t)e %overnment. ")e maintenance of structure of lo; interest rates is also called for minimi<in% t)e cost of servicin% t)e national debt. Furt)er6 it encoura%es fundin% of debt by private firms. /o;ever6 t)e success of debt mana%ement ;ould depend upon t)e e:istence of ;ell4developed money and capital mar8ets in ;)ic) ;ide ran%e of securities e:ist bot) for s)ort and lon% periods. $t is t)e central ban8 ;)ic) can )elp in t)e development of t)ese mar8ets.

Cre(it Control
.entral Ban8 s)ould also aim at controllin% credit in order to influence t)e patterns of investment and production in a developin% economy. $ts main objective is to control inflationary pressures arisin% in t)e process of development. ")is re#uires t)e use of bot) #uantitative and #ualitative met)ods of credit control. 1pen mar8et operations are not successful in controllin% inflation in underdeveloped countries because t)e bill mar8et is small and undeveloped. .ommercial ban8s 8eep an elastic cas)4deposit ratio because t)e central ban8As control over t)em is not complete. ")ey are also reluctant to invest in %overnment securities due to t)eir relatively lo; interest rates. Moreover6 instead of investin% in %overnment securities6 t)ey prefer to 8eep t)eir reserves in li#uid form suc) as %old6 forei%n e:c)an%e and cas). .ommercial ban8s are also not in t)e )abit of rediscountin% or borro;in% from t)e central ban8. ")e ban8 rate policy is also not so effective in controllin% credit in LD.s due to! DaE t)e lac8 of bills of discountI DbE t)e narro; si<e of t)e bill mar8etI DcE a lar%e non4monetised sector ;)ere barter transactions ta8e placeI DdE t)e e:istence of a lar%e unor%anised

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money mar8etI DeE t)e e:istence of indi%enous ban8s ;)ic) do not discount bills ;it) t)e central ban8sI and DfE t)e )abit of commercial ban8s to 8eep lar%e cas) reserves. ")e use of variable reserve ratio as met)od of credit control is more effective t)an open mar8et operations and ban8 rate policy in LD.s. Since t)e mar8et for securities is very small6 open mar8et operations are not successful. But a rise or fall in t)e reserve ratio by t)e central ban8 reduces or increases t)e cas) available ;it) t)e commercial ban8s ;it)out affectin% adversely t)e prices of securities. '%ain6 t)e commercial ban8s 8eep lar%e cas) reserves ;)ic) cannot be reduced by a raise in t)e ban8 rate or sale of securities by t)e central ban8. But raisin% t)e cas)4reserve ratio reduces li#uidity ;it) t)e ban8s. /o;ever6 t)e use of variable reserve ratio )as certain limitations in LD.s. First6 t)e non4ban8in% financial intermediaries do not 8eep deposits ;it) t)e central ban8 so t)ey are not affected by it. Second6 ban8s ;)ic) do not maintain e:cess li#uidity are not affected t)an t)ose ;)o maintain it. ")e #ualitative credit control measures are6 )o;ever6 more effective t)an t)e #uantitative measures in influencin% t)e allocation of credit6 and t)ereby t)e pattern of investment. $n underdeveloped countries6 t)ere is a stron% tendency to invest in %old6 je;ellery6 inventories6 real estate6 etc.6 instead of in alternative productive c)annels available in a%riculture6 minin%6 plantations and industry. ")e selective credit controls are more appropriate for controllin% and limitin% credit facilitates for suc) unproductive purposes. ")ey are beneficial in controllin% speculative activities in food4%rains and ra; materials. ")ey prove more useful in controllin% Jsectional inflationsA in t)e economy.

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")ey curtail t)e demand for imports by ma8in% it obli%atory on importers to deposit in advance an amount e#ual to t)e value of forei%n currency. ")is )as also t)e effect of reducin% t)e reserves of t)e ban8s in so far as t)eir deposits are transferred to t)e central ban8s in t)e process. ")e selective credit control measures may ta8e t)e form of c)an%in% t)e mar%in re#uirements a%ainst certain types of collateral6 t)e re%ulation of consumer credit and t)e rationin% of credit.

Sol*in) the Balance of Payments Problem

")e central ban8 s)ould also aim at preventin% and solvin% t)e balance of payments problem in a developin% economy. Suc) economies face serious balance of payments difficulties to fulfil t)e tar%ets of development plans. 'n imbalance is created bet;een imports and e:ports ;)ic) continue to ;iden ;it) development. ")e central ban8 mana%es and controls t)e forei%n e:c)an%e of t)e country and also acts as t)e tec)nical adviser to t)e %overnment on forei%n e:c)an%e policy. $t is t)e function of t)e central ban8 to avoid fluctuations in t)e forei%n e:c)an%e rates and to maintain stability. $t does so t)rou%) e:c)an%e controls and variations in t)e ban8 rate. For instance6 if t)e value of t)e national currency continues to fall6 it may raise t)e ban8 rate and t)us encoura%e t)e inflo; of forei%n currencies.

.ommercial Ban8s! + $mportant Role of .ommercial Ban8s in a Developin% .ountry Some of t)e major important role of commercial ban8s in a developin% country are as follo;s! Besides performin% t)e usual commercial ban8in% functions6 ban8s in developin% countries play an effective role in t)eir economic development. ")e majority of people in suc) countries are poor6 unemployed and en%a%ed in traditional a%riculture.

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")ere is acute s)orta%e of capital. People lac8 initiative and enterprise. Means of transport are undeveloped. $ndustry is depressed. ")e commercial ban8s )elp in overcomin% t)ese obstacles and promotin% economic development. ")e role of a commercial ban8 in a developin% country is discussed as under. 1. Mobilisin% Savin% for .apital Formation! ")e commercial ban8s )elp in mobilisin% savin%s t)rou%) net;or8 of branc) ban8in%. People in developin% countries )ave lo; incomes but t)e ban8s induce t)em to save by introducin% variety of deposit sc)emes to suit t)e needs of individual depositors. ")ey also mobilise idle savin%s of t)e fe; ric). By mobilisin% savin%s6 t)e ban8s c)annelise t)em into productive investments. ")us t)ey )elp in t)e capital formation of a developin% country. 2. Financin% $ndustry! ")e commercial ban8s finance t)e industrial sector in a number of ;ays. ")ey provide s)ort4term6 medium4term and lon%4term loans to industry. $n $ndia t)ey provide s)ort4 term loans. $ncome of t)e Latin 'merican countries li8e 0uatemala6 t)ey advance medium4term loans for one to t)ree years. But in Korea6 t)e commercial ban8s also advance lon%4term loans to industry. $n $ndia6 t)e commercial ban8s underta8e s)ort4term and medium4term financin% of small scale industries6 and also provide )ire4 purc)ase finance. Besides6 t)ey under;rite t)e s)ares and debentures of lar%e scale industries. ")us t)ey not only provide finance for industry but also )elp in developin% t)e capital mar8et ;)ic) is undeveloped in suc) countries. (. Financin% "rade! ")e commercial ban8s )elp in financin% bot) internal and e:ternal trade. ")e ban8s provide loans to retailers and ;)olesalers to stoc8 %oods in ;)ic) t)ey deal. ")ey also )elp in t)e movement of %oods from one place to anot)er by providin% all types of 1?

facilities suc) as discountin% and acceptin% bills of e:c)an%e6 providin% overdraft facilities6 issuin% drafts6 etc. Moreover6 t)ey finance bot) e:ports and imports of developin% countries by providin% forei%n e:c)an%e facilities to importers and e:porters of %oods. 5. Financin% '%riculture! ")e commercial ban8s )elp t)e lar%e a%ricultural sector in developin% countries in a number of ;ays. ")ey provide loans to traders in a%ricultural commodities. ")ey open a net;or8 of branc)es in rural areas to provide a%ricultural credit. ")ey provide finance directly to a%riculturists for t)e mar8etin% of t)eir produce6 for t)e modernisation and mec)anisation of t)eir farms6 for providin% irri%ation facilities6 for developin% land6 etc. ")ey also provide financial assistance for animal )usbandry6 dairy farmin%6 s)eep breedin%6 poultry farmin%6 pisciculture and )orticulture. ")e small and mar%inal farmers and landless a%ricultural ;or8ers6 artisans and petty s)op8eepers in rural areas are provided financial assistance t)rou%) t)e re%ional rural ban8s in $ndia. ")ese re%ional rural ban8s operate under a commercial ban8. ")us t)e commercial ban8s meet t)e credit re#uirements of all types of rural people. >. Financin% .onsumer 'ctivities! People in underdeveloped countries bein% poor and )avin% lo; incomes do not possess sufficient financial resources to buy durable consumer %oods. ")e commercial ban8s advance loans to consumers for t)e purc)ase of suc) items as )ouses6 scooters6 fans6 refri%erators6 etc. $n t)is ;ay6 t)ey also )elp in raisin% t)e standard of livin% of t)e people in developin% countries by providin% loans for consumptive activities. @. Financin% &mployment 0eneratin% 'ctivities! ")e commercial ban8s finance employment %eneratin% activities in developin% countries. ")ey provide loans for t)e education of youn% personAs studyin% in en%ineerin%6 medical and ot)er vocational institutes of )i%)er learnin%. ")ey advance loans to youn% 2*

entrepreneurs6 medical and en%ineerin% %raduates6 and ot)er tec)nically trained persons in establis)in% t)eir o;n business. Suc) loan facilities are bein% provided by a number of commercial ban8s in $ndia. ")us t)e ban8s not only )elp in)uman capital formation but also in increasin% entrepreneurial activities in developin% countries. +. /elp in Monetary Policy! ")e commercial ban8s )elp t)e economic development of a country by fait)fully follo;in% t)e monetary policy of t)e central ban8. $n fact6 t)e central ban8 depends upon t)e commercial ban8s for t)e success of its policy of monetary mana%ement in 8eepin% ;it) re#uirements of a developin% economy. ")us t)e commercial ban8s contribute muc) to t)e %ro;t) of a developin% economy by %rantin% loans to a%riculture6 trade and industry6 by )elpin% in p)ysical and )uman capital formation and by follo;in% t)e monetary policy of t)e country.

21

22

.)apterD$$$E

2(

MET6ODO+O78 O9 T6E ST:D8

Specific proce(ure:
$nformation collected to furnis) t)is report is bot) from primary and secondary in nature. ")e secondary information ;as collected from t)e different publication6 and boo8s. ")e report is prepared usin% #ualitative researc) met)od. ")e data ;ere relatively disor%ani<ed and collected based on our limited 8no;led%e. ")e report )as been prepared based on secondary data suc) as4t)e publis)ed reports6 various articles6 and related documents as ;ell as do;n loaded data from ;ebsite t)rou%) internet. $ )ave studied t)e sources of information6 t)en all t)ese reports and documents are also been analy<ed and or%ani<ed to ma8e report possible accordin% to t)e topic.

25

Pri*ate Commercial Banks: Ban)la(esh Conte.t: ")e ban8in% system at independence consisted of t;o branc) offices of t)e former State Ban8 of Pa8istan and seventeen lar%e commercial ban8s6 t;o of ;)ic) ;ere controlled by Ban%lades)i interests and t)ree by forei%ners ot)er t)an Cest Pa8istanis. ")ere ;ere fourteen smaller commercial ban8s. ,irtually all ban8in% services ;ere concentrated in urban areas. ")e ne;ly independent %overnment immediately desi%nated t)e D)a8a branc) of t)e State Ban8 of Pa8istan as t)e central ban8 and renamed it t)e Ban%lades) Ban8. ")e ban8 ;as responsible for re%ulatin% currency6 controllin% credit and monetary policy6 and administerin% e:c)an%e control and t)e official forei%n e:c)an%e reserves. ")e Ban%lades) %overnment initially nationali<ed t)e entire domestic ban8in% system and proceeded to reor%ani<e and rename t)e various ban8s. Forei%n4o;ned ban8s ;ere permitted to continue doin% business in Ban%lades). ")e insurance business ;as also nationali<ed and became a source of potential investment funds.

.ooperative credit systems and postal savin%s offices )andled service to small individual and rural accounts. ")e ne; ban8in% system succeeded in establis)in% reasonably efficient procedures for mana%in% credit and forei%n e:c)an%e. ")e primary function of t)e credit system t)rou%)out t)e 1?+*s ;as to finance trade and t)e public sector6 ;)ic) to%et)er absorbed +> percent of total advances. ")e %overnmentLs encoura%ement durin% t)e late 1?+*s and early 1?3*s of a%ricultural development and private industry brou%)t c)an%es in lendin% strate%ies. Mana%ed by t)e

2>

Ban%lades) Kris)i Ban86 a speciali<ed a%ricultural ban8in% institution6 lendin% to farmers and fis)ermen dramatically e:panded. ")e number of rural ban8 branc)es doubled bet;een 1?++ and 1?3>6 to more t)an (6((*. Denationali<ation and private industrial %ro;t) led t)e Ban%lades) Ban8 and t)e Corld Ban8 to focus t)eir lendin% on t)e emer%in% private manufacturin% sector. Sc)eduled ban8 advances to private a%riculture6 as a percenta%e of sectoral 0DP6 rose from 2 percent in F- 1?+? to 11 percent in F1?3+6 ;)ile advances to private manufacturin% rose from 1( percent to >( percent. ")e transformation of finance priorities )as brou%)t ;it) it problems in administration. o sound project4appraisal system ;as in place to identify viable borro;ers and projects. Lendin% institutions did not )ave ade#uate autonomy to c)oose borro;ers and projects and ;ere often instructed by t)e political aut)orities. $n addition6 t)e incentive system for t)e ban8s stressed disbursements rat)er t)an recoveries6 and t)e accountin% and debt collection systems ;ere inade#uate to deal ;it) t)e problems of loan recovery. $t became more common for borro;ers to default on loans t)an to repay t)emI t)e lendin% system ;as simply disbursin% %rant assistance to private individuals ;)o #ualified for loans more for political t)an for economic reasons. ")e rate of recovery on a%ricultural loans ;as only 2+ percent in F- 1?3@6 and t)e rate on industrial loans ;as even ;orse. 's a result of t)is poor s)o;in%6 major donors applied pressure to induce t)e %overnment and ban8s to ta8e firmer action to stren%t)en internal ban8 mana%ement and credit discipline. 's a conse#uence6 recovery rates be%an to improve in 1?3+. ")e ational .ommission on Money6 .redit6 and Ban8in% recommended broad structural c)an%es in Ban%lades)Ls system of financial intermediation early in 1?3+6 many of ;)ic) ;ere built into a t)ree4year compensatory financin% facility si%ned by Ban%lades) ;it) t)e $MF in February 1?3+. 1ne major e:ception to t)e mana%ement problems of Ban%lades)i ban8s ;as t)e 7rameen Bank6 be%un as a %overnment project in 1?+@ and establis)ed in 1?3( as an independent ban8. $n t)e late 1?3*s6 t)e ban8 continued to provide financial resources to t)e poor on reasonable terms and to %enerate productive self4employment ;it)out e:ternal assistance. $ts customers ;ere landless persons ;)o too8 small loans for all

2@

types of economic activities6 includin% )ousin%. 'bout +* percent of t)e borro;ers ;ere ;omen6 ;)o ;ere ot)er;ise not muc) represented in institutional finance. .ollective rural enterprises also could borro; from t)e 0rameen Ban8 for investments in tube ;ells6 rice and oil mills6 and po;er looms and for leasin% land for joint cultivation. ")e avera%e loan by t)e 0rameen Ban8 in t)e mid41?3*s ;as around "826*** DUSM@>E6 and t)e ma:imum ;as just "8136*** Dfor construction of a tin4roof )ouseE. Repayment terms ;ere 5 percent for rural )ousin% and 3.> percent for normal lendin% operations. ")e 0rameen Ban8 e:tended collateral4free loans to 2**6*** landless people in its first 1* years. Most of its customers )ad never dealt ;it) formal lendin% institutions before. ")e most remar8able accomplis)ment ;as t)e p)enomenal recovery rateI amid t)e prevailin% pattern of bad debts t)rou%)out t)e Ban%lades)i ban8in% system6 only 5 percent of 0rameen Ban8 loans ;ere overdue. ")e ban8 )ad from t)e outset applied a speciali<ed system of intensive credit supervision t)at set it apart from ot)ers. $ts success6 t)ou%) still on a rat)er small scale6 provided )ope t)at it could continue to %ro; and t)at it could be replicated or adapted to ot)er development4related priorities. ")e 0rameen Ban8 ;as e:pandin% rapidly6 plannin% to )ave >** branc)es t)rou%)out t)e country by t)e late 1?3*s. Be%innin% in late 1?3>6 t)e %overnment pursued a ti%)t monetary policy aimed at limitin% t)e %ro;t) of domestic private credit and %overnment borro;in% from t)e ban8in% system. ")e policy ;as lar%ely successful in reducin% t)e %ro;t) of t)e money supply and total domestic credit. et credit to t)e %overnment actually declined in F- 1?3@. ")e problem of credit recovery remained a t)reat to monetary stability6 responsible for serious resource misallocation and )ars) ine#uities. 'lt)ou%) t)e %overnment )ad be%un effective measures to improve financial discipline6 t)e draconian contraction of credit availability contained t)e ris8 of inadvertently discoura%in% ne; economic activity. Forei%n e:c)an%e reserves at t)e end of F- 1?3@ ;ere USM5+@ million6 e#uivalent to sli%)tly more t)an 2 mont)s ;ort) of imports. ")is represented a 2*4percent increase of reserves over t)e previous year6 lar%ely t)e result of )i%)er remittances by Ban%lades)i ;or8ers abroad. ")e country also reduced imports by about 1* percent to USM2.5 billion.

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Because of Ban%lades)Ls status as a least developed country receivin% concessional loans6 private creditors accounted for only about @ percent of outstandin% public debt. ")e e:ternal public debt ;as USM@.5 billion6 and annual debt service payments ;ere USM5@+ million at t)e end of F- 1?3@. $n Marc) 1?3+ Ban%ladse) Kris)i Ban8 ;as bifurcated and anot)er speciali<ed ban8 emer%ed as Rajs)ai Kris)i Unnayan Ban8 for Rajs)ai Division. Ban8 of Small $ndustries and .ommerce Ltd. DB'S$.E started its operation as a private ban8 from September 1?33. Later on B'S$. ;as brou%)t under direct control of t)e %overnment and ;as rec8oned as a speciali<ed ban8 ;it) effect from Nune 1??(. From Nuly 1??> a%ain B'S$. ;as cate%ori<ed as a 1**O state o;ned ban8. $n 1??+6 0overnment decided to treat t)is ban8 as a speciali<ed ban8 a%ain. So in it boo8let6 t)e B'S$. )as been treated as a speciali<ed ban8. o; t)e commercial ban8in% system dominates Ban%lades)As financial sector. Ban%lades) Ban8 is t)e central ban8 of Ban%lades) and t)e c)ief re%ulatory aut)ority in t)e sector. $ts prime jobs include issuin% of currency6 maintainin% forei%n e:c)an%e reserve and providin% transaction facilities of all public monetary matters. BB is responsible for plannin% t)e %overnmentAs monetary policy and implementin% it t)ereby. ")e ban8in% system is composed of four state o;ned commercial ban8s6 five speciali<ed development ban8s6 t)irty private commercial ban8s and nine forei%n commercial ban8s. $n 2*126 t)e central ban8 )as ta8en a decision to %ive licenses to si: private ban8s and t;o RB Ban8s. ")e ne; private ban8s are! Union Ban8. Midland Ban8. Mad)umati Ban8. FarmersA Ban8. Sout) Ban%la '%riculture and .ommerce Ban8.

23

 Ma%)na Ban8.

<umber of Banks in Ban)la(esh:

")e ban8in% system of Ban%lades) is dominated by t)e 5 ationali<ed .ommercial

Ban8s in ;)ic) 2 is totally controlled by %overnment and 2 DRupali Ban8 = Nanata Ban8E are controlled by bot) %overnment and private sector ;)ic) to %at)er controlled about >5O of deposits and operated +>(@ branc)es D >5O of t)e total E as of December (16 2*1*. ")e nationali<ed commercial ban8s are! Sonali Ban8 Ltd. '%rani Ban8 Ltd. Rupali Ban8 Ltd. Nanata Ban8 ltd. Services provided by nationali<ed ban8s are stated belo;! Personal Ban8in%. .orporate Ban8in%. Project Finance. SM& Finance. .onsumer .redit. $nternational Ban8in%. "rade Finance. Loan Syndication. Forei%n &:c)an%e Dealin%. Rural and Micro .redit. 2?

014Lin8a%e Loan. $nvestment. 0overnment "reasury Function. Money Mar8et 1peration. .apital Mar8et 1peration. Forei%n Remittance.

Pri*ate Commercial Banks: ")ese types of ban8s are re%ulated by Ban%lades) Ban8. Private Ban8s are t)e )i%)est %ro;t) sector due to t)e dismal performance of %overnment ban8s above. ")ey tend to offer better services and products. )as been placed in J'ppendi:4BA. The main ser*ices pro*i(e( by these banks are state( belo': Retail Ban8in%. .orporate Ban8in%. SM& Ban8in%. RB Ban8in%. $nvestment Ban8in%. Merc)ant accounts and merc)ant ban8in% services. Project Finance. Loan Syndication. Money "ransfer. .ustodial Services. (* o; (2 private commercial ban8s are runnin% t)eir operations in Ban%lades). ' list of private commercial ban8s operatin% in Ban%lades)

Bro8era%e Services. Loc8er Service.

9orei)n Commercial Banks: o; 1* Forei%n .ommercial ban8s are runnin% t)eir operations in Ban%lades). ")ese ban8s are also providin% modern ban8in% facilities to t)eir clients. ' list of forei%n commercial ban8s operatin% in Ban%lades) )as been placed in J'ppendi:4BA. De*elopment Banks: ' list of development ban8s or speciali<ed ban8s operatin% is %iven belo;! Ban%ladse) Kris)i Ban8. Rajs)a)i Kris)i Unnayan Ban8. Ban%lades) Development Ban8 Limited. Ban8 of Small $ndustries and .ommerce. Other speciali=e( banks are: 'nsar ,DP Unnayan Ban8. Ban%ladse) Samabai Ban8 Ltd. 0rameen Ban8. Karmasanst)an Ban8

Responsibility for Ban)la(esh as a pro(uction center ")e supply of loans to small and medium4si<ed companies6 t)e bac8bone of economy of a country economy6 is inade#uate. &:pansion and consolidation loans are subject to unrealistically )i%)4ris8 premiums ;)en t)ey are available at all. Small and medium4 si<ed companies pay t)e price for completely e:a%%erated e:pectations in terms of yield in t)e boom4and4bust cycles of t)e international capital mar8ets. Labor4 and ener%y intensive companies bot) in t)e small4trade and t)e industrial sector are not capable of %eneratin% double4di%it yields. ")e severe losses in t)e real4estate sector in t)e 1?3*s )ave caused ban8s to develop a veritable ris8 aversion. Small and medium4si<ed companies suffer most from t)is. &ven

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t)ou%) by no; some commendable efforts )ave been made6 too fe; ban8s )ave done a;ay ;it) t)e centrali<ed credit c)ec8in% t)at ;as introduced as a result. Small and medium4si<ed companies can only be %iven t)e service t)ey need locally6 ;it) a 8no;led%e of local structures and t)e personality of t)e o;ner. 2> Responsibility for risk mana)ement n")e )i%)est cluster ris8s are no lon%er to be found ;it)in t)e sp)ere of small and medium4si<ed companies. Cit) t)e %lobali<ation of t)e financial mar8ets6 more and more ban8s are becomin% increasin%ly involved in ever more ris8y areas of business. ,> Responsibility as an employer ")e ban8s are relatively pro%ressive employers in terms of bot) salary and social frin%e benefits6 one reason bein% t)at t)eir added value is so %reat. $> Responsibility for sustainable economic (e*elopment an( )oo( )o*ernance $n todayAs financial industry6 t)ere is a blurred line bet;een )ealt)y competition and rapacious %reed combined ;it) criminal ener%y. ")e latter is a %reat ris8 for financial institutions as ;ell as t)e economy. .)ec8s and ris8 mana%ement are one remedy6 but even more important is a compre)ensive reform of t)e entire economic system. C)at $ mean is a reorientation focusin% on sustainability. $n t)is conte:t6 t)e ban8s must play a 8ey role as financial intermediaries. -> Responsibility in the )lobali=e( financial markets 'ny furt)er liberali<ation of t)e financial mar8ets ;it)out international re%ulations and ;it) a lac8 of supervisory aut)orities ;ould increase t)e economyAs susceptibility to crises suc) as t)ose of 'sia6 Russia and 'r%entina. Mo(ern Day Role ")e financial system of Ban%lades) consists of Ban%lades) Ban8 DBBE as t)e central ban86 5 State 1;ned .ommercial Ban8s DS.BE6 > %overnment o;ned speciali<ed ban8s6 (* domestic private ban8s6 ? forei%n ban8s and 2? non4ban8 financial institutions. Moreover6 MR' )as %iven license to 2?3 Micro4credit 1r%ani<ations. ")e financial system also embraces insurance companies6 stoc8 e:c)an%es and co4operative ban8s. Ban8in% system and t)e Financial $nstitutions play very si%nificant role in t)e economy. First and foremost is in t)e form of caterin% to t)e need of credit for all t)e sections of society. ")e modern economies in t)e ;orld )ave developed primarily by ma8in% best use of t)e credit availability in t)eir systems. 'n efficient ban8in% system must cater to t)e needs of )i%) end investors by ma8in% available )i%) amounts of capital for bi% projects in t)e industrial6 infrastructure and service sectors. 't t)e same time6 t)e medium and small ventures must also )ave credit available to t)em for ne; investment and e:pansion of t)e e:istin% units. Rural sector in a country li8e $ndia can %ro; only if c)eaper credit is available to t)e farmers for t)eir s)ort and medium term needs. C)ile t)e commercial ban8s cater to t)e ban8in% needs of t)e people in t)e cities and to;ns6 t)ere is anot)er cate%ory of ban8s t)at loo8s after t)e credit and ban8in% needs of t)e people livin% in t)e rural areas6 particularly t)e farmers. Re%ional Rural Ban8s DRRBsE )ave been sponsored by many commercial ban8s in several States. ")ese ban8s6 alon% ;it) t)e cooperative ban8s6 ta8e care of t)e farmer4specific needs of credit and ot)er ban8in% facilities. (2

+en(in) an( (eposit business ' ban8As role as an 7intermediary9 is clearest in t)e credit and deposit business. .lients 7brin%9 to t)e ban8 t)eir savin%s6 i.e. t)e money t)ey )ave c)osen not to spend. ")e ban8 transfers t)is money to its credit clients in t)e form of loans. C)at is on t)e face of it e:tremely simple is nevert)eless frau%)t ;it) a %reat many ris8s. ' ban8As loans lac8 li#uidity6 eit)er partially or totally. ")is means t)at t)e ban8 cannot sell t)em in return for demand deposits or central ban8 funds ;)enever it li8es. 1n top of t)is6 a borro;erAs credit ratin% may c)an%e durin% t)e life of a loan6 t)ereby c)an%in% t)e value of t)e loan at t)at point in time6 ;)ic) reflects t)e interest and amorti<ation payments e:pected in t)e future. Due to t)e lac8 of a secondary mar8et6 credits are mostly carried in balance s)eets at t)eir nominal value6 ;it) provisions and ;rite4offs only bein% formed or effected if t)ere are any indications t)at t)e borro;er may )ave trouble meetin% payments or is actually in arrears. $n some cases6 credits may even become entirely ;ort)less if borro;ers become insolvent and ban8rupt. Securities issuin) ")e universal ban8s active in t)e issuin% sector face a ;)ole ran%e of potential conflicts of interest6 %iven t)at issues often involve various parties from ;it)in and outside t)e ban8 and t)at t)ese parties are not motivated by t)e same interests! t)e issuance unit is interested in t)e offerin%6 securities tradin% is loo8in% for )i%) revenues6 asset mana%ement clients e:pect t)e ban8 to safe%uard t)eir interests irrespective of its role in t)e issuin% transaction6 t)e lendin% unit may )ave information on t)e issuer t)at is ot)er;ise not in t)e public domain6 etc. Defusin% and controllin% potential conflicts suc) as t)ese places enormous demands on a ban8As or%ani<ational structure6 processes and compliance activities. 1nly ;)en a ban8 succeeds in controllin% t)e potential conflicts and mana%in% t)em on a transparent basis can t)e different sta8e)olders involved be sure t)at t)eir le%itimate interests are e#uitably up)eld. &sset mana)ement 'sset mana%ement covers a ran%e of ban8in% activities! portfolio mana%ement6 investment advisory6 securities tradin% and lendin% business Dcollateral loans6 securities lendin% and borro;in%E. Cit) a discretionary portfolio mana%ement a%reement6 clients aut)ori<e a ban8 to underta8e6 for t)eir account and at t)eir ris86 all t)e actions it deems appropriate ;it)in t)e frame;or8 of t)e normal asset mana%ement activities of a ban8. .lients e:pect t)eir assets to be mana%ed professionally and in t)eir best interests. ")e ban8 contracts to e:ercise its underta8in% to t)e best of its 8no;led%e and abilities6 ta8in% into account clientsA circumstances but actin% as it sees fit ;it)in t)e scope outlined as part of t)e investment %oals defined ;it) t)e client. 9orei)n e.chan)e tra(in) ")e last business $ mentioned ;as forei%n e:c)an%e tradin%6 an activity ;)ic) )as been unjustly attac8ed as 7casino capitalism9. ,arious factors )ave %iven rise to t)is ((

perception. First6 ;it)out a doubt t)e massive amounts traded in t)e forei%n e:c)an%e mar8ets every day. 'ccordin% to fi%ures from t)e S;iss ational Ban86 for e:ample6 in 'pril 2**1 forei%n e:c)an%e trades in Ban%lades) alone amounted to ./F 121 billion eac) ;or8in% day. DFor t)e purposes of comparison6 t)e %lobal fi%ure ;as USD 1621* billion.E ")e vast majority of t)is tradin% ta8es place bet;een financial intermediaries6 t)e aim bein% to e:ploit even t)e sli%)test differences bet;een e:c)an%e rates Darbitra%eE. 1nly a very small proportion of t)is trade issued to finance forei%n trade and )ed%e forei%n currency positions. Furt)ermore6 t)e fact t)at serious economic crises suc) as t)e one 'r%entina is e:periencin% at present are almost al;ays currency crises may fuel suspicions t)at it is currency traders ;it) t)eir speculative attac8s t)at tri%%er suc) developments. n$n fact6 t)e very opposite is true. Many people may fail to see t)e point of t)e vast amounts of arbitra%e transactions6 since t)ey are not primarily used for financin% purposes. $n reality6 )o;ever6 t)ey underpin li#uidity in t)e mar8ets6 t)us )elpin% t)em to function smoot)ly. $n less li#uid mar8ets6 ne; information ;ould inevitably lead to muc) %reater volatility in rates. ' distinction )as to be made in t)e case of protracted currency over4 or undervaluationAs Din terms of interest rates and purc)asin% po;er parityE6 ;)ic) are a %enuine problem6 as t)ey could result in t)e misallocation of resources. The scope a*ailable to banks evert)eless6 t)e economic benefits %enerated by a ban8 are basically no different from t)e economic benefits %enerated by a doctor6 teac)er or train driver! by e:ercisin%6 to t)e best of t)eir 8no;led%e and abilities6 t)eir specialist function in competition ;it) ot)ers6 companies and t)eir employees ma8e t)eir contribution to economic benefit. 'nd t)eir motivation need not be a selfless one. Pilots do not fly planes to %enerate economic benefit6 just as ban8ers do not %rant credits for any suc) selfless reasons. &conomic utility is created as a 7by4product9 any;)ere ;omen and men function successfully6 and t)is does not apply solely to t)eir jobs. &ven t)ou%) a ban8er %rants loans to many companies and sectors of t)e economy6 t)is does not mean )e can do t)eir ;or8 or bear t)eir responsibilities. ")e ar%ument of economic %oals and responsibility is %enerally sei<ed on by politicians ;)en it is a matter of re4distributin% capital6 ris8s6 profits or costs. 'lt)ou%) not strictly ;ron%6 t)e economic responsibility ar%ument )as t)e major political advanta%e t)at it can be fle:ibly deployed for absolutely anyt)in%. -ou ;ill loo8 lon% and )ard P and probably in vain P for any 7)andy9 definition of a ban8As economic responsibility t)at is at t)e same time %eneral enou%). C)ic) is ;)y my su%%estion is t)e follo;in%! ban8ers act responsibly ;)en t)ey ensure t)at t)eir )ouse is in order and resist t)e temptation to pass off poor financial performance as a contribution to t)e economy.

(5

.)apterD$,E

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Research 9in(in)s:

Contribution Of The Bankin) Sector To The Economy Of Ban)la(esh Ban%lades) appeared as a ne; nation on t)e ;orld map in t)e year1?+1. 'fter independence financial institutions6 especially ban8s played a vital role in re4constructin% t)e ;ar P torn economy of Ban%lades). ")e Ban%lades) ban8in% sector relative to t)e si<e of its economy is comparatively lar%er t)an many economies of similar level of development and per capita income. ")e total si<e of t)e sector at 2@.>5O of 0D dominates t)e financial system6 ;)ic) is proportionately lar%e for a country ;it) a per capita income of only about USM(+*. ")e non4ban8 financial sector6 includin% capital mar8et institutions is only (.22O of 0DP6 ;)ic) is muc) smaller t)an t)e ban8in% sector. .ommercial ban8s as t)e most important functionary of t)e financial system play a dynamic role in economic development of t)e country by providin% funds to various economic sectors li8e a%riculture6 industry6 po;er6 transport6 trade service etc. $n mid 3*s Ban8in% = insurance contributed 1.@?O of 0DP and %radually t)e fi%ure ;as increasin%. $n t)e year its contribution to t)e 0DP ;as 2.*?O. '%ain t)e sector ma8es a positive impact on t)e economic development of t)is country by creatin% employment opportunity for people. $n t)e year 1?3* total number of employees in t)is sector ;as >?2(> but ;it)in 1> years of time t)e fi%ure became appro:imately double to 1*16555. ")e avera%e %ro;t) rate of employment %eneration ;as (.+@O D1?3*41??>E. .ountries li8e Ban%lades) )ave abundance of unemployment6 ;)ere as ban8in% sector still 8eep certain impact on employment %eneration. Branc)es of t)e ban8s are also %ro;in% si%nificantly. $n early 3*s for t)e first time t)e 0overnment of Ban%lades) D01BE allo;ed private sector to operate commercial ban8s. 't t)at time number of ban8 branc)es ;as %ro;in% rapidly. ")e number of ban8s )as %ro;n from 1+ in 1?3* to 5+ in

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2*1* and t)e number of branc)es ;as about ++**. $ndividuals and business or%ani<ations deposit t)eir savin%s in t)e ban8 and borro; money from it. ")ere are >( ban8 branc)es per 1*** s#uare 8m. in Ban%lades) as compared ;it) 1* in Pa8istan and 25 in $ndia. ")ere is one ban8 branc) for every 2**** people in Ban%lades) as compared ;it) 2*(5* people per branc) in Pa8istan and 1553> people in $ndia. .ommercial ban8s are one of t)e profit ma8in% institutions. ")ey are also ma8in% money by investin% t)eir deposits to t)e profitable ventures t)rou%) lendin% to entrepreneurs. .ommercial ban8s earn money t)rou%) interest6 commission = service c)ar%es for t)e services and it also incurred e:penditures as ;ell. Ban8sA income is %enerated by t)e effort of t)eir employees. &fficient employees can earn more ;)ic) observed a positive impact to profit %eneration. $ncome per employee can be one of t)e indicators of commercial ban8sA performances. 'vera%e income per employee from 1?3* to 1??> ;as "8. 2++*5@6 i.e. per employeeAs contribution to income more t)an "8. 2 lacs. ")e ratio ;as increasin% si%nificantly ;it) t)e avera%e %ro;t) rate of 12O to "8. (+162?+ in t)e year 1??>. ' country leads itself to t)e economic development by investin% and producin% more in t)e local area. $nvestment can be ensured t)rou%) increased savin%s rate. Moneti<ation ratio indicates a positive impact to t)e economic %ro;t). ")is ratio is Broad Money to 0DP. 'vera%e moneti<ation ratio ;as 23O of 0DP6 and it ;as %ro;in% si%nificantly from 1+O in t)e year 1?31 to (>O in t)e year 1??>..ommercial ban8s as a ;)ole performin% ;ell and contributin% to t)e economic development of t)e country. ")e avera%e profitability of all ban8s collectively ;as *.*?O durin% 1?3* to 1??>6 ;)ic) means profit "8. *.*? earned by utili<in% assets of "8. 1**. "otal operatin% profits of all commercial ban8s stood at "8. 1?+.(3 billion by end of December (16 2*116 BB data s)o;ed. ")e ban8s )o;ever6 earned "8. ?1.21 billion as net profit in 2*11 after adjustment of t)eir re#uirements for provisionin% a%ainst bad debts and also ma8in% provision for ta: payments6 ;ort) "8. ((.(> billion and "8. +2.@2 billion respectively. $n every aspect of profit6 ban8in% sector contributes to national economy as ;ell as to t)e individual or%ani<ation. Despite overall %ro;t) of t)e ban8in% sector ;as positive6 but t)e performances of different cate%ories of ban8s ;ere not e#ually attractive.

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")e ban8in% sector especially t)e private sector ban8s made si%nificant pro%ress and %ro;t) in terms of si%nificant mar8et s)are of deposits and advances t)rou%) customer service6 introduction of ne; products and s;itc)in% over to online ban8in% 8eepin% pace ;it) t)e %lobali<ation process. ")e (* ban8s in t)e private sector posted a 25O in operatin% profits in 2**? over t)e previous year. Ban%lades) Ban8 )as been playin% an important role for brin%in% out discipline and dynamism in t)e ban8in% sector of t)e country. Due to strin%ent supervision and control e:ercised by central ban86 t)ere )ad been a continuous pro%ress in reduction of percenta%e of classified loans in t)e ban8in% sector ;it) recovery of default loans. +1M1T&T1O<S O9 T6E ST:D8: ")is study is mainly depended on t)e secondary data. Limited primary data are also used. ' time constraint ;as anot)er limitation in comparison of t)e vastness of t)e topic. Muc) information ;as possible to %at)er but ;e canAt %at)er ;it) our limited 8no;led%e .But $ )ave tried our level best to ma8e t)is report possible. ")e researc) )as some samplin% errors as t)e time6 bud%et and e:perience in c)oosin% t)e sample are deemed to be inade#uate. Time: "ime is an important issue in report ;ritin%. 's a specific deadline )as been %iven for submission so could not perform all t)e researc)es. 'nd ;e )ardly found time to sit and do more libraries ;or8s and to e:plore more ne; t)in%s6 as $ )ad to do a re%ular office job beside t)is project. +ack of e.perience: ' compre)ensive result of practice of mar8etin% study could not be found6 as )ad some pivotal limitations li8e ine:perience. Sometimes it is necessary to evaluate t)e primary data

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t)rou%) investi%ations6 ;)ic)6 if $ could )ave done6 certainly made our report a better one.

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.)apter DvE

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Recommendations Based on t)e findin%s of t)is researc) ;)ic) )ave been above stated and implications emanatin% t)ere from6 t)e researc)er t)erefore proffers t)e follo;in% matc)in% recommendations put do;n )ereunder for ur%ent policy action! 1. ")at efforts s)ould be made by t)e monetary aut)orities to effectively mana%e t)e ban8sA ma:imum lendin%. ")is policy t)rust ;ill most li8ely result into increased investment activities ;)ic) ;ill en)ance capital formation in needed for its real sector investments and industrial %ro;t). 2. 'not)er policy recommendation ;it) respect to t)e findin%s is t)at to optimally increase t)e level of capital formation in i%eria6 t)e monetary aut)orities )ave to maintain a sound ban8in% sector. Ce cannot raise capital formation and national productivity level ;it)out maintainin% a sound ban8in% system. (. ")e researc)er also recommends t)at ade#uate efforts be made by ban8s to increase t)eir level deposits as t)at ;ill )elp in increasin% t)e nationAs capital formation. 5. Ban8s s)ould also be made to increase t)eir investment portfolio ;it)in t)e country as t)at ;ill e#ually )elp in increasin% t)e nationAs capital formation and economic %ro;t). >. '%ain6 t)e ban8in% sector re%ulatory aut)orities )ave a duty to perform in ensurin% %ood corporate %overnance and t)e best of ban8in% practices are obtainable in t)e nationAs ban8in% industry. @. Finally6 t)e furt)er researc) s)ould be carried out to investi%ate t)e non4conformity of t)e coefficient investment by commercial ban8s to t)e a4priori e:pectation of )avin% a positive relations)ip ;it) capital formation.

Conclusion Private commercial ban8s of Ban%lades) )ave dealt ;it) some adverse political situations in t)e past6 and t)ey still face many problems ;)ic) are out of t)eir control. ")ese problems mainly stem from t)e fact t)at Ban%lades) is still %oin% t)rou%) t)e sta%es of development6 and some of t)e sectors are still underdeveloped. .ontrol of corruption and re%ulatory #uality are t;o main aspects ;)ic) need furt)er improvement in Ban%lades). C)en compared to private ban8s of $ndia6 t)e ten randomly selected

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private commercial ban8s are performin% ;ell in terms of profitability. ")eir performance is reasonably ;ell in terms of efficiency6 but asset #uality needs improvement6 since t)e percenta%e of classified loans is comparatively )i%)er. ")is a%ain reflects t)e lac8 of control over corruption and ;ea8 re%ulatory control. evert)eless6 t)e strate%ies pursued by t)e ban8s to deal ;it) t)e problems of t)e economic environment of a developin% country li8e Ban%lades) is commendable. $n fact6 t)ese strate%ies )ave enabled t)em to ma8e profits in adverse situations. ")erefore6 t)e study of t)e ten randomly selected ban8s reveals t)at operatin% a ban8in% business in t)e economic environment of a developin% economy li8e Ban%lades) re#uires full understandin% of t)e c)an%in% economic situations6 sound strate%y ma8in% for tac8lin% adverse situations6 and efficient ris8 mana%ement. Since t)e political situation of t)e country and t)e policy measures of t)e %overnment c)an%e drastically from time to time6 ban8s )ave to %ive more importance to s)ort term plannin% t)an lon% term strate%ic plannin%. ")eoretically6 lon% term plannin% is important6 but for economies li8e Ban%lades)6 plannin% for s)ort term adjustments is more important6 since t)e economic and political scenario c)an%es every day. 's a result6 successful operation of commercial ban8s in a developin% economy re#uires %ood strate%ic t)in8in%6 efficient mana%ement of ris8s6 intensive monitorin% of t)e movements of economic a%%re%ates as ;ell as capabilities to adjust to c)an%in% circumstances.

References:

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