Main Report(Macro)

7/30/2019 Main Report(Macro)

1/32

TABLE OF CONTENTS

Executive Summary

Chapter 1: Introduction1.1. Origin of the report

1.2. Scope1.3. Objective1.4. Methodology1.5. Limitations

Chapter 2: Literature review

Chapter 3: Introduction to privatization

Chapter 4: Privatization in Bangladesh4.1. Objectives of privatization4.2. Privatization policy in Bangladesh

Chapter 5: Overview of the financial sector in Bangladesh

Chapter 6:Overview of a privatized bank: Uttara Bank LimitedY.1. Background and history of Uttara Bank LimitedY.2. Objectives of privatization (Uttara Bank Limited)Y.3. Development of Uttara Bank Limited after privatizationY.4. Problems persisting from the pre-privatization period

Chapter 7: Comparison between a privatized and a nationalizedbank: Uttara vs JanataZ.1. Problems generally faced by NCBsZ.2. Background and history of Janata BankZ.3. Comparison of performance between Uttara and JanataZ.4. Camel rating: a global approach of evaluating bank performance

Chapter 8: Conclusion and Recommendation


2/32

CHAPTER 1: INTRODUCTION

1.1 Origin of the Report:This report has been prepared for Sheikh Morshed Jahan, course instructor,

Macro Economics (G 203) as a partial requirement for the course.

1.2 Scope:This study aims to focus on the impact of privatization on the financial sectorof Bangladesh. It is limited to the comparison between Uttara Bank Ltd, arepresentative of privatized banks and Janata Bank as a representative ofnationalized commercial banks (NCB).

1.3 Objective:

The primary objective of the report is to focus on the effects of privatizationin the banking arena of our country in terms of the performance of twoselected banks.

The secondary objective includes

To analyze the growth and development of privatized banks on the

basis of observation on pre & post privatization period.

To compare the present performance of Privatized banks and NCBs .

1.4 Methodology:

Primary Data

We have conducted formal interviews with the officials of various NCBsand privatized banks operating in the country in order to find out inwhat specific ways the two types differ.

Secondary DataWe have collected relevant information from websites, annual reportsof the companies, previous literature and research papers in this field,articles from news papers. The reference sources have been properlyattributed.

1.5 Limitations:

Perfect picture of the privatized banks could be obtained if all three

privatized banks were considered in the study. However we focused ononly one privatized bank to concentrate on various angles ofprivatization.

Janata Bank does not maintain their online database properly and so it

was somewhat difficult to obtain all the informations. While interviewing the bank officials and taking reference from

journals, we came across some technical terms which we failed tograsp.

The banks were understandably cautious to criticize their present

internal management related problems.


3/32

We tried to collect information on changes in customer service after

privatization in Uttara Bank. However we couldnt interview anycurrent customer who also received service in 1983.


4/32

CHAPTER 2: LITERATURE REVIEW

Privatization of the Banking Sector in Bangladesh

Generally, privatization is regarded as a positive phenomenon becauseonly the privatized sector can provide quality products and services at thelowest price possible. However, observed from the vigilant perspective ofeconomics, privatization is a much more complicated process. According toWhat is Privatization? a publication of http://www.privatization.org/database.html privatization can be defined asthe transfer of delivery of goods and services from the government to theprivate sectors. The publication also states that there can be differentcategories of privatization, depending upon the level of governmentinvolvement. The government may decide to have very little involvementwith the private sector, or create partnership with the private sector where

the government itself plays a dominant role.

Elaine Kamarck, who headed Al Gores National Performance Review, isquoted saying:

When we talk about privatization, we don't mean contracting out. Wemean purely divesting the government function.

This is often carried out by selling government-owned assets to theprivate sector, and often by creating a private-public partnership in differentsectors of the economy.

The impact of privatization may vary according to the sector it is beingimplemented upon. According to Empirical Studies of Bank Privatization:

Some Lessonsby George R.G. Clarke, Robert Cull, and Mary Shirley, when itcomes to the finance sector the privatized banks outperform the state-ownedbanks by a significant margin. The paper argues that there was a time whenstate-owned banking system was considered to be a more tangible means ofensuring greater financial development. However, recent observations haverevealed that state-owned banking sector is associated with less financialdevelopment and lower productivity. This is more predominant in developingcountries where the government has been guilty of exploiting the bankingsector for political benefit. Privatization of banks, particularly in thedeveloping countries, stops such malevolent government intervention, andcreates a more professional and competent finance-sector that contributes tothe growth of the economy. Privatization of the banking sector, however, has

very little or no performance benefit if the government retains a considerableamount of control in the stake ownership of the banks. The paper (EmpiricalStudies of Bank Privatization: Some Lessons) argues that privatization of thebanking sector performs well even in poor regulatory environments. Hence, itis better to privatize even with poor regulations than wait for reforms thatmay arrive too late.
http://www.privatization.org/database.htmlhttp://www.privatization.org/database.html


5/32

Reform often acts as an incentive to privatize. As quoted fromPrivatization in Bangladesh Opportunities and Potential published atwww.pc.gov.bd/brochure.pdf:

Privatization programs got its virtual start in Bangladesh in the mid-seventies. The first round of privatization was put to work following the post

independence thrust on economic growth. The second phase of privatization(or denationalization) took place in the first half of the 1980s and coveredjute and textile mills owned originally by Bangladeshi citizens prior toindependence.

As the years progressed, more and more industries in Bangladesh havebeen privatized, and finally in 20 th March 1993 the Privatization Board wasformed. On 30th July 2000, Privatization Commission replaced the PrivatizationBoard.

The paper (Privatization in Bangladesh Opportunities and Potential)goes on to state that one of the major objectives of privatization inBangladesh is to alleviate the social and economical infrastructure of the

country with efficiency gains. Privatization is also expected to increaseforeign inflows and create more employment opportunities. The Governmentof Bangladesh (GOB), in consultation with the Privatization Commission,designs policies on privatization of public, industrial and commercialenterprises. Following which, eligible investors participate to bid in tenders.

The money obtained from privatization is first expected to meet the liabilitiesof the organization concerned. Any remaining amount is deposited in theconsolidated fund of the Peoples Republic of Bangladesh.

As far as the banking sector is concerned, there are 4 NationalizedCommercial Banks (NCB), 5 Nationalized Specialized Banks, 30 PrivateCommercial Banks, 9 Foreign Commercial Banks and 28 non-bank financialinstitutions in Bangladesh. According to the paper Financial Sector Policy

Stance published at http://www.bangladesh-bank.org/pub/halfyearly/financialsrevdec06/chap6.pdf in order to establish asustainable economic growth, the finance sector of Bangladesh has to soonreach the fast growing economy standards of the rest of the world. Theperpetual failure of the Nationalized Commercial Banks (NCB) in Bangladeshhas ruined competitiveness in the banking sector. As a result, the bankingsector of Bangladesh has proceeded in two separate directions: state-ownedbanks in one and private banks in another. Under such circumstances, theproposed sale of Rupali Bank to an international buyer and the recentdecision to mould the remaining three NCBs into a corporate-structure mightas well be considered vigilant.

The paper also suggests that converting NCBs into corporate entitiesmight see the advent of new entrants in the stock market. However, suchprivatization must be carried out under strict regulations, and be madetransparent to the public. Once the state-owned banks have beenrestructured the general public, especially the poorer people, will not onlyhave an access to better financial services, but the overall economy of thecountry will alleviate due to a strengthened financial infrastructure.
http://www.pc.gov.bd/brochure.pdfhttp://www.bangladesh-bank.org/pub/halfyearly/financialsrevdec06/chap6.pdfhttp://www.bangladesh-bank.org/pub/halfyearly/financialsrevdec06/chap6.pdfhttp://www.pc.gov.bd/brochure.pdfhttp://www.bangladesh-bank.org/pub/halfyearly/financialsrevdec06/chap6.pdfhttp://www.bangladesh-bank.org/pub/halfyearly/financialsrevdec06/chap6.pdf


6/32


7/32

Chapter 3: Introduction to Privatization

In 1969, famed management guru Peter Drucker published a paper calledThe Age of Discontinuity, in which he predicted the modern day transitionfrom the industrial age to the information age. According to Drucker, thistransition was to be accompanied by profound, transformation in society,

business, and government. Ducker also predicted in that publication that thegovernment would eventually repirvatize its state run organizations andreturn it to its private market place. Robert Poole, founder of the reasonfoundation, was so intrigued by the term reprivatize that when he beganwriting about outsourcing municipal services in the early 1970s. hepopularized this whole concept of turning State Operated Enterprises(SOE)into private firms by calling it Privatization

Thus the term Privatization was formed. Over the years, privatization hastaken many meanings. But what does it actually mean? In its purest form, theterm refers to the divestiture of government owned assets like airports, railsystems, real estate holdings, and oil production facilities*. This means that

the private sector would take over some of the government run enterprisesand run them as business entities. As this concept has got along and settleditself among the society, it is now used virtually to describe the greateramount of private sector participation in providing services. Using thisconcept alone, multi-billion dollar public-private highway, bridge, and tunnelprojects are operating or under construction across the United States, inAustralia, Canada, Italy, France, and other countries. Privatization in all formsintroduces market based competition in government enterprises. Thisbenefits the general public because it leads to better, cheaper and higherquality of services provided to them and in greater varieties. Adrian Moore,Vice President of Reason, offers a concise articulation of the benefits ofprivatization:

Privatization exposes things we otherwise would not seeideas, processes,innovations in service delivery. Within government rarely is successadequately rewarded, and innovation and new ideas are often quashed. Butwhen privatization brings competition, accountability, and a chance forcustomers to have a say, then excellence and innovation are rewarded, andmediocrity and failure are penalized.

A variety of alternative service delivery techniques can be employed tomaximize efficiency and increase service quality. Some methods will be moreappropriate than others depending on the service. In searching for ways ofcutting costs and increasing delivery, consider using a combination of thesetechniques:

Contracting Out (also called "outsourcing"). The governmentcompetitively contracts with a private organization, for-profit or non-profit, to provide a service or part of a service.


8/32

Management Contracts. The operation of a facility is contracted outto a private company. Facilities where the management is frequentlycontracted out include airports, wastewater plants, arenas andconvention centers.

Public-Private Competition (also called "managed competition," or"market testing"). When public services are opened up to competition,

in-house public organizations are allowed to participate in the biddingprocess.

Franchise. A private firm is given the exclusive right to provide aservice within a certain geographical area.

Internal Markets. Departments are allowed to purchase supportservices such as printing, maintenance, computer repair and trainingfrom in-house providers or outside suppliers. In-house providers ofsupport services are required to operate as independent business unitscompeting against outside contractors for departments business.Under such a system, market forces are brought to bear within anorganization. Internal customers can reject the offerings of internalservice providers if they dont like their quality or if they cost toomuch.

Vouchers. Government pays for the service; however, individuals aregiven redeemable certificates to purchase the service on the openmarket. These subsidize the consumer of the service, but services areprovided by the private sector. In addition to providing greaterfreedom of choice, vouchers bring consumer pressure to bear, creatingincentives for consumers to shop around for services and for serviceproviders to supply high-quality, low-cost services.

Commercialization (also referred to as "service shedding").Government stops providing a service and lets the private sectorassume the function.

Self-Help (also referred to as "transfer to non-profit organization").Community groups and neighborhood organizations take over a serviceor government asset such as a local park. The new providers of theservice also are directly benefiting from the service. Governmentsincreasingly are discovering that by turning some non-core servicessuch as zoos, museums, fairs, remote parks and some recreationalprogramsover to non-profit organizations, they are able to ensurethat these institutions dont drain the budget.

Volunteers. Volunteers are used to provide all or part of agovernment service. Volunteer activities are conducted through agovernment volunteer program or through a non-profit organization.

Corporatization. Government organizations are reorganized along

business lines. Typically they are required to pay taxes, raise capital onthe market (with no government backingexplicit or implicit), andoperate according to commercial principles. Government corporationsfocus on maximizing profits and achieving a favorable return oninvestment. They are freed from government procurement, personneland budget systems.

Asset Sale or Long-Term Lease. Government sells or enters intolong-term leases for assets such as airports, gas utilities or real estateto private firms, thus turning physical capital into financial capital. In a


9/32

sale-leaseback arrangement, government sells the asset to a privatesector entity and then leases it back. Another asset sale technique isthe employee buyout. Existing public managers and employees takethe public unit private, typically purchasing the company through anEmployee Stock Ownership Plan (ESOP).

Private Infrastructure Development and Operation. The privatesector builds, finances and operates public infrastructure such as roadsand airports, recovering costs through user charges. Severaltechniques commonly are used for privately building and operatinginfrastructure.

o With Build-Operate-Transfer (BOT) arrangements, the privatesector designs, finances, builds, and operates the facility overthe life of the contract. At the end of this period, ownershipreverts to the government.

o A variation of this is the Build-Transfer-Operate (BTO) model,under which title transfers to the government at the timeconstruction is completed.

o Finally, with Build-Own-Operate (BOO) arrangements, the privatesector retains permanent ownership and operates the facility oncontract.


10/32

Chapter 4: Privatization in Bangladesh

Privatization programs got its virtual start in Bangladesh in the mid-seventies.The first round of privatization was put to work following the postindependence thrust on economic growth. The second phase of privatization(or denationalization) took place in the first half of the 1980s and covered

jute and textile mills owned originally by Bangladeshi citizens prior toindependence. The Revised Investment Policy designed in 1975 put muchemphasis in the development of private sector providing enormous incentivesto spur private investment. A Disinvestment Board was set up and a total of255 SOEs were privatized in between 1975 to 1981 and about 115 of theseSOEs, were divested through the office of the then Director General ofIndustries (DGI). The New Industrial Policy (NIP) of 1982 marked a major shifttowards privatization where total of 222 SOEs got privatized under the NIP1982. The privatization programs gained gradual momentum andgovernment made liberal Industrial Policy in 1991, where 42 enterprises wereidentified for privatization. On its further move, the number of enterpriseswas increased to 62 by adding 20 textile mills under the Asian Development

Bank (ADB) sponsored Industrial Sector Program. In the meantime, thegovernment created an Inter-Ministerial Committee on Privatization (ICOP) inthe year 1991 to develop a privatization policy. In 1993 Privatization Boardwas setup and assigned with the responsibility of privatizing State OwnedEnterprises identified by the Government. Subsequently, the PrivatizationBoard was converted into a Commission delegating more administrative andfinancial authority to intensify the privatization program drive.

4.1. Objectives of privatization:

1. Social welfare through efficiency gains.

Realizing the growth and increasing role of private sector Industrial,commercial and service enterprises in terms of their quality, quantity,management efficiency. Privatization of SOES assumed as a better solution tocontribute to the expansion of existing units, GDP, increase in employmentopportunities including other socio economic benefits.

2. Inflow of foreign investment, improvement of efficiencies & developmentOf mutual ties.A well founded privatization program is better able to attract foreigninvestment having far reaching effects on management efficiency &technology.

3. Receipt of Revenue.Minimizing the financial pressure on the Government-exchequer, stimulatingthe proactiveness to face constraints to respond to the market demand dueto obsolete machinery, poor productivity, poor management, costineffectiveness and under capacity utilization etc. and also to maximizeproductivity and revenue earnings from the sales proceeds of the products,privatization program sounds effective.


11/32

4. Diversification of the public sector resources from loss-making enterprisesto other socially useful enterprises.

To carry out paradigm shift in reduction of continuous financial loss, it iscrucial to transfer the SOES to the private sector where efficiency andpotential re-investment scope is available. It will immediately help thegovernment to tighten the money burden and free to grant enormous subsidy

to the losing sector. More over the privatization will assist the government todivert the fund to the socially useful project like education, health service,defense, social security and poverty alleviation.

5. Creation of employment opportunities and its protection throughwidespread competitiveness.Privatization is helpful to create more employment opportunities improvingoperational, production, management and plant utilization efficiency. Ittherefore, in the long run will tremendously be useful to create moreemployment opportunity and make substantial contribution to GDP.

4.2. Privatization policy in Bangladesh:

Objectives

The stated objective of the authorities privatization policy is to increase therole of the private sector in order to accelerate economic development. Thepolicy states that any public enterprise may be sold, irrespective of the sizeof its fixed asset, market share, or profitability. An implicit assumption of thepolicy is that the financial rate of return to capital in the private sector is orshall be greater than the financial rate of return in the public sector. Theauthorities want to privatize because they assume that the social gains fromprivate sector profits will be greater than the social gains from the public

sector profits. The authorities expect that as the share of the private sector inthe level of activity increases the rate of economic growth will rise.

Institutional Setting

The state has given the Privatization Board the authority for privatizing publicenterprises in Bangladesh. In the near future substantial number of publicenterprises will be privatized. The Board announced that its goal is toprivatize, during the financial year 1997-98, 54 public enterprises in varioussectors. The list of firms to be privatized include textile mills (15 firms); jutemills (7 firms); steel & engineering companies (9 firms); sugar & foodcompanies (9 firms); chemical companies (8 firms); forestry-relatedcompanies (4 firms); and two firms in other sectors. In order to strengthen itsprogram, the authorities shall soon introduce a Privatization Bill in theNational Parliament for its approval.

The Method of Privatization

The policy states that the enterprises can be sold either by internationaltender or public offer of shares. The authorities are expected to use a variety


12/32

of methods in privatization: International tendering, offloading of shares inthe capital market, auctioning, negotiated sales, and so forth. The authoritieshave declared that they would prefer to use Employee Stock Option Program(ESOP) if the workers of the enterprise are willing to buy it.

Preparation for Privatization and Valuation

The assets and the liabilities of the enterprises will be valued by a selectedaccounting firm, using one or more generally accepted accounting methods,subject to review by the authorities and, if necessary, revaluation by anotherselected accounting firm. The authorities will provide the valuation report andother relevant documents, including three years financial and performancedata of the firm, to potential buyers. The authorities should try to ensure thatthere is no collusion between the accounting firm and the potential buyer.Collusive practice would undermine the point of carrying forth the valuationexercise.

Terms and Conditions of the SaleThe policy states that there shall be no provision for writing-off long-termdebt of the enterprise that will be privatized. The buyer shall assume thelong-term liabilities for the firm upon transfer. The short-term liabilities, suchas claims of workers and incomes taxes, shall be assumed and be written-offby the state. If the value of the assets exceed bank loans, then the buyer willhave to pay the excess amount either in cash or within one year along with asimple interest rate of 10 percent. Short-term and long-term liabilities have tobe clearly defined prior to privatization. A clear and consistent demarcation ofliabilities needs to established and upheld. The policy also states the buyershall assume full legal responsibility for all pending court cases against the

enterprise.

Bank Guarantees

When the price is not paid in cash, the buyer is required to provide a bankguarantee. But a guarantee from a bank with poor asset quality, lowprofitability, and poor management is worth very little. Discipline in thebanking and the non-banking financial system is necessary for the success ofthe privatization policy because otherwise there will be both incentives andmeans for rent-seeking. Without proper incentives, buyers may borrow frombanks against collateral of little value, refuse to repay bank loans, try todelay payments to the state, and so forth.

Land Use Constraint

The policy states the land of the firm may be used only for industrialpurposes. This provision may have been set to deter buyers from buying theenterprise for its land value rather than for operating the given enterprise asa manufacturing unit.


13/32

Market Valuation and Tendering

Generally the market price reflects the "value" of the firm, provided it isbeing valued in a well-functioning and informed market place, composed of arather large number of agents. The authorities can establish an appropriate

reservation price for the firm to be privatized. If the bid price is lower thanthe reservation price, then the authorities can convert the public enterpriseinto a joint stock company and sell its shares. When a strategic buyer, who iswilling to pay above the reservation price, is not forthcoming, the state canuse initial public offer scheme. The policy has provisions for such proceduresto be followed.

Features of the Fledging Capital Market in Bangladesh and its Effecton Privatization

The capital market in Bangladesh is attenuated. It does have potential forgrowth; it is evolving. There are two stock exchanges in Bangladesh: Dhaka

Stock Exchange and Chittagong Stock Exchange. Dhaka Stock exchange,based in the capital city, is older of two, whereas Chittagong Stock Exchange,based in the main port city, is recently established. Dhaka Stock Exchangewas incorporated in April 1954 as East Pakistan Stock Exchange andcommenced trading in 1956. Chittagong Stock Exchange was incorporated inApril 1995 and commenced trading in October 1995. Dhaka Stock Exchangehas 195 members and Chittagong Stock Exchange has 124 members. At bothexchanges, trading is now automated. Both exchanges trade in equity shares,debentures, and mutual funds. The privatization policy assumes a developed,fairly competitive, and efficient capital market, including a market forcorporate control.

The Proceeds from Privatization and Labor Issues

Under present policy, the revenue from privatization accrues to theGovernment of Bangladesh. Funds from privatization should be used for (a)workers compensation (severance payments), and (b) labor training andrelocation programs. Labor retraining program shall improve laborproductivity.

Privatization of Monopolies and Regulatory Framework

The present policy framework does not contain any mechanism for creatingand enforcing regulatory and competition policies. If the authorities carryforth the privatization program, then the state would eventually also transferpublic monopolies in utilities, infrastructure, and communications to theprivate sector.

Speed, Time Framework, and Program Effectiveness

The authorities had announced that 54 firms are to be privatized within thefinancial year 1997-98. The parameters and scope of privatization has not yet


14/32

been agreed upon at the highest level. The policy does not provide a timeframework for the completion of the privatization program in Bangladesh. Iffollowed accordingly, an indicative timetable for privatization, with set goalsfor each stage of privatization, would send strong signals to investors andcreate confidence in the authorities commitment to an effective and goal-oriented privatization program. According to the policy, the state shall ensure

that the transfer of the privatized enterprises is complete within 90 days ofsigning of the agreement. The less delay there is in the transfer process, thebetter it is for corporate management.


15/32

Chapter 5: Overview of the financial sector in Bangladesh


16/32

Chapter 6:Overview of a privatized bank: Uttara Bank Limited

6.1. Background and history of Uttara Bank Limited:Uttara Bank-one of the largest and oldest private-sector commercial bank inBangladesh, with years of experience. Adaptation of modern technology both

in terms of equipment and banking practice ensures efficient service toclients. 207 branches at home and 600 affiliates worldwide create efficientnetworking and reach capability. Uttara is a bank that serves both clients andcountry.

Uttara Bank formed in 1972 as a scheduled bank with assets and liabilities ofthe Eastern Banking Corporation set up in East Pakistan on 28 January 1965.It started banking business 22 June 1965 and became a member of theDhaka Clearing House on 17 September 1965. At the time of establishment,Eastern Banking Corporation had a paid up capital of Tk 1.42 million anddeposit resources of about Tk 10 million. It was the only scheduled bankformed with capital raised entirely from the small income group of people ofEast Pakistan.

Eastern Banking Corporation was nationalized under the Bangladesh BanksNationalization Order 1972 and its name was changed to Uttara Bank. At thattime, the bank had 182 branches. The government retracted 95% of its sharecapital and allowed it to operate as a private bank. It was transformed into alimited company on 15 September 1983. On 31 December 2000, theauthorized capital of the bank was Tk 200 million divided into 2 millionordinary shares of Tk 100 each. Its issued and paid up capital was Tk 100million, of which Tk 5 million is subscribed by the government. The bank islisted with both Dhaka and Chittagong Stock Exchanges.

The bank performs all traditional commercial banking functions. It rendersagency services to the government in food procurement and collection ofgovernment revenue through the network of its branches all over thecountry. The total volume of foreign exchange business handled by the bankduring 2005 amounted to Tk. 68560.2 million which comprised exportsservicing Tk. 18191.8 million, imports financing Tk. 23092.4 million andremittances facilities Tk. 27276.0 million. The bank has correspondentrelationships with 300 foreign banks/bank offices and exchange houses in 72countries. With the objective of attracting the Bangladeshi wage earnersabroad and the non-resident foreigners to invest in Bangladesh, the bankoffered them the opportunity to open non-resident foreign currency deposit

accounts and foreign currency current deposit accounts with it. Further, thebank floated Wage Earners' Development Bond and established WageEarners Investment Cell. The bank has some other schemes to induce thewage earners to invest their savings in the securities market of the country.

The volume of deposits at the bank in 1972 was Tk 4.43 million of which Tk2.44 million comprised demand deposits. Prior to privatization in 1983, thedeposits were Tk 21.81 million and their volume increased to Tk. 3689.19million in December 2005. Total loans and advances including bills purchased


17/32

and discounted amounted to Tk 2.34 million in 1972 and Tk 21851.5 millionin December 2005. The broad economic areas in which the bank providedlending and the total outstanding amount of advances to those areas up to2005 were (a) agriculture and fisheries, (b) small and cottage, large andmedium sized industry, (c) retail/wholesale trade and hotels and restaurants,(d) transport/communication and storage, (e) special credit programmes

including POVERTY alleviation, (f) INSURANCE, real estate and business services,and (g) others.

The management of the bank is vested in a 13-member board of directorsconsisting of a chairman and 12directors. The managing director is the chiefexecutive assisted by a deputy managing director and 2 assistant managingdirectors. In 2005, the bank had 207 fully computerized branches (159 urbanand 48 rural) ensuring best possible and fastest services to its valued clientsand the number of employees in all its branches 2,822 including 84executives, 1,756 officers, 326 assistant officers, and 656 employees of non-officer grades. The bank's branch banking is supervised through its 12 zonaloffices in different parts of the country. The bank has more than 600 foreigncorrespondents world wide. The Head Office is located at Banks own 18-storied building at Motijheel, the commercial center of the capital, Dhaka.

6.2. Objectives of privatization (Uttara Bank Limited):As discussed before, the primary objective of privatization is to utilizecompetition to improve efficiency and ensure that the resources employedearn the maximum returns. As such, the most important consideration inprivatizing an enterprise is to ensure that once privatized, it will faceadequate completion from other domestic and foreign enterprises and therewill be incentive for profit and hence for cost reduction.***( Economic PolicyReform: The Second Stage by Anne O.) Other than these, there were a fewspecific facts that acted as reasons for choosing Uttara Bank for privatization:

1. Financial Sector Reform:

(The military government, established after the coup on 7th November

1975 under the leadership of Gen. Ziaur Rahman, opted for a much

greater role for the private sector. The industrial policy was revised in

order to increase the boundaries of private investment while cutting

the size of public enterprises. After Zia was killed in 1981, Gen. Ershad

(Chief of Army) came into power and he also encouraged the private

sector in a similar manner. During this time, the government

denationalized a number of banks and industrial units.)***(PRIVATISATION IN BANGLADESH: A CASE OF PLACING THE

CART BEFORE THE HORSE

A.K.M. Masudul Haque )

(In the early 1980s, the Government began to reform the financial

sector. Interest rates on deposits were raised to provide a positive real


18/32

return on deposits, private banks were allowed to enter, two NCBs

were denationalized (Uttara and Pubali) and another nationalized bank

was converted into a limited liability company and partially privatized.

)( Privatization of Nationalized Commercial Banks in

Bangladesh)

2. Bad Loans:

One of the reasons for privatizing Uttara Bank was that it was suffering

from plenty of bad loans or debts. Bad debt is the portion of

receivables that can no longer be collected, typically from accounts

receivable or loans. (Until the early 1980s, the Government owned,

controlled and directed Bangladeshs financial system with the

objective of allocating funds to priority sectors. Loan recovery was not

emphasized because loans were collateralized and considered

ultimately collectable. The quality of financial intermediation, judged

by loan recovery rates, was dismal.)***(Privatization of

Nationalized Commercial Banks in Bangladesh)

Uttara Bank was privatized with the goal that it will no longer have to

bear the funding of governments priority sectors like agriculture and

other such areas, which eventually created a major portion of the bad

loans. To minimize its losses, monitoring and collection of loans

seemed necessary to be streamlined which was apparently possible

under the hands of a privatized management.

3. Others:

(The primary objective of privatization was to streamline and improve

the operative efficiency of management of the remaining public

enterprises and to reactivate and invigorate the private sector.)

(UTTARA) Initially, as a nationalized bank, Uttara Banks principal

objectives were to mobilize national savings and finance industries,

agriculture and other productive undertakings. But after privatization,

its objectives focused more towards profit earning than for socio-

economic development of the country.

Before privatization Uttara Bank received complaints about lack of

transparency within the management. Internal information about the

management decisions was not disclosed to public. Therefore,

nepotism and preferential treatment was a common practice when it

came to sanctioning loans. Customer satisfaction was not much of a


19/32

priority because employees were not motivated or reinforced to focus

on the benefit of the customer and nothing particularly depended on

the bank-customer relationship. Demanding bribe for releasing a file

was a frequent problem. To improve the scenario the government

decided to privatize this bank.(UTTARA)

6.3. Development of Uttara Bank Limited after privatization:

1.Profit:

Profitability is a very important concern for all banks because

satisfactory profits preserve the banks capital, providing it with a base

for future survival and growth. The change in profit of Uttara Bank

before and after privatization is quite significant which is shown by thereturn on assets in various years.

Margins at NCBs have been consistently lower than at private banks,

and furthermore, have been declining since 1989. These differences

are due to their non-commercial approach to pricing loans,

exacerbated by direct credit to jute and other sectors, their higher

share of non-earning assets and their lower fee income. Private banks

are charging higher lending rates and more fee income, so that they

can afford to pay slightly higher interest rates and still earn higher

gross profit margins.(report bd)

After privatization the bank also looked for other ways to generate

more profit. As it was no more under the government, it stopped giving

free of charge services, such as taking bills on behalf of PDB, T&T, etc.

Instead the bank put a percentage of charge for this kind of services

thus creating a new sector for earning revenue.

2. Foreign exchange business:

Initially Uttara Bank did not have much impressive record on earning

from its foreign exchange businesses. From the graph it can be seen

that immediately after the privatization the growth rate of foreign

exchange business of the bank started showing some positive signs.

This drive was mainly initiated by an increasing inflow of remittances

earned.


20/32

Currently the bank has correspondent relationships with 300 foreign

banks/bank offices and exchange houses in 72 countries. With the

objective of attracting the Bangladeshi wage earners abroad and the

non-resident foreigners to invest in Bangladesh, the bank offered them

the opportunity to open non-resident foreign currency deposit accounts

and foreign currency current deposit accounts with it. Further, the

bank floated Wage Earners' Development Bond and established Wage

Earners Investment Cell. The bank has some other schemes to induce

the wage earners to invest their savings in the securities market of the

country.

3. Management efficiency:

Privatization had quite a good impact on the management of Uttara

Bank. As it has already been noted that improving the quality of

management is one of the top priorities of privatization, Uttara Bank

also focused first on the management. To start with the bank tried to

get out of the usual habit of delaying decisions or works. Presently,

regarding any important decisions quick meetings are called and

prompt actions are taken as and when required.

The management also enforced employee motivation. Before

privatization employees were indifferent towards the performance of

the bank. But now employees fear losing their jobs if any such attitude

is shown. Employees are set individual goals that must be finished in

due time. In order to do that employees sometimes work overtime,

which is a rare scenario in NCBs. On the other hand, employees are


21/32

also encouraged or positively reinforced when they help achieving the

banks strategic goals. All these also increase customer satisfaction

and help to build a better customer-bank relationship.

To further enhance customer satisfaction, Uttara Bank has introduced

a complain cell where customers can express their grievances withoutany hesitation. If any serious complain arise immediate investigation is

carried out in order to resolve the problem.

According to the employees, Uttara Bank has seen its best

management during the period 1997 to 2001 when the main changes

took place. Before privatization, Uttara Bank experienced a very slow

growth rate in profit earning. After privatization some initiatives were

taken to fulfill the new objective. It was in 1997 when the Managing

Director M. Aminuzzaman took charge and brought about many

significant changes in the bank. Under his regime, the bank changed

from its conservative mode to risk taking mode of operating business.During this time it dramatically increased its profit from Tk. 5 to 7

crores to an astonishing Tk. 160 crore. It was at this time when Uttara

Bank could touch the milestone of being the second best performer

among the commercial banks of Bangladesh.

4. Renovation:

Currently Uttara Bank has 198 branches operating throughout the

country. During the period 1997 to 2001, the banks then MD M.

Aminuzzaman took an initiative to computerize all the branches which

increased the efficiency and greatly reduced the operating cost of thebank. At present the day to day operations of the bank are carried out

using its own software. Moreover to provide faster and better service in

foreign exchange business the main branch maintains 11 email

accounts and 62 of its branches are enjoying internet facilities. To

satisfy customers further service related queries, Uttora Bank Ltd has

opened its own website with the address: www.uttarabank-bd.com.

Presently Uttara Bank Ltd has 26 of its branches are using the

Society for Worldwide Interbank Financial Telecommunication

("SWIFT") network. Linking the bank with this system enables it to

exchange messages securely and reliably between banks and otherfinancial institutions throughout the world at a relatively low

cost.(annual report 2005) Also, to facilitate its business, the bank has

recently moved its head office to the newly constructed Uttara Bank

Bhaban at the heart of Motijheel and at the same time is renovating

the old branches.
http://www.uttarabank-bd.com/http://www.uttarabank-bd.com/


22/32

Statistical pre & post growth rate analysis:

The growth in deposit, advance and total income of Uttara Bank from the

year 1978 to 1986 are shown in the graphs below:

From the graphs it can be seen that in case of all three accounts, there is

a decreasing trend till or around 1983 when the bank was privatized in

order to improve these situations. After 1983, deposit, advance and total

income growth rate all showed increasing trend, clearly showing the

effects of privatization. However it can also be noticed that during this

period income had its highest growth (52%) in 1981.


23/32


24/32

6.4. Problems persisting from the pre-privatization period:

1. Lack of competitiveness:

Compared to the number of banks in our country, the number of loan takersis still quite few and not rapidly growing. This is because entrepreneurship is

still at a premature state in here. So the banks have to compete amongst

themselves for this small customer base. The aggressive banks in this system

therefore are able to take the advantages by going for even the risky loans.

Thus there were more chances for these banks to make profits. But

conventionally, NCBs are not much of a risk taker. These banks approach for

safe banking and ultimately are unable to compete with the private banks in

generating much profit.

Uttara Bank, though now privatized, could not get out of this same trend. It

can be seen that for a certain period of time, as mentioned before, Uttara

Bank was able to get out of this defensive position & approached aggressive

banking under an efficient management. But soon after the management was

changed the bank went back to its conservative stance. Just a few years after

achieving the place of the 2nd best performer among commercial banks, in

2003 Uttara was marked as a problem bank by Bangladesh Bank. This proves

that Uttara Bank is still unable to maintain a consistent and efficient

management system and is reluctant to take risks and increase

competitiveness.

2. Classified loans:

One of the main reasons for privatizing Uttara Bank was to reduce its bad

debts. But unfortunately the bank failed to fulfill this objective effectively. As

it can be seen from the data given later, the bank still has a very high

proportion of classified loans compared to other private banks. Regarding

this, the management of the bank explained that the classified loans before

and soon after privatization accumulated to such a huge amount that the

bank is still unable to improve the situation. The bank even had to write off

the bad debts several times until now but having no apparent success.

3. Recruitment process:

The recruitment process of Uttara Bank still follows the same traditional

process. The process is not always fair and there is always some partiality or

preference for the candidates who are able to apply through high officials.


25/32

The authority is not even much interested in updating the recruitment

process.

4. Labor union:

Labor unions and CBAs, most of which are affiliated with political parties, are

quite common in state owned enterprises and thus NCBs. Uttara Bank was no

different in this case and even after privatization the bank faces some

problems, such as strikes or lockouts, of the existing labor union. The

problem is when the bank was privatized it was handed over to the new

owner along with all its belongings, including the unions. Currently the

authority sees no possible step that can be taken to completely get rid of the

troubles that might be caused the unions. It can merely negotiate with the

CBA and avoid any difficulties from arising.

4. Others:

Though many years have passed since its privatization, Uttara Bank did not

appear to have improved much regarding the overall working environment.

An on spot observation of the physical environment of the banks head office

gave the impression more of a nationalized bank than a private one. The

management claims that all the branches are computerized but it was found

that most of the works are still done manually first and updated in modern

database later. Even the high officials were not found to use computers for

their own work.

The employees were also unsatisfied on the level of renovation carried out in

the bank after privatization. The authority does not emphasize much on the

outlook of the bank, which however is quite regarded as an important part of

attracting customers by private banks. Any customer visiting the bank will

not have a very good first impression, which on the contrary can be found

easily in most other private banks. The employees also complained about the

absence of a welfare committee where they could inform about their

grievances regarding the working environment.


26/32


27/32

Chapter 7: Comparison between a privatized and a nationalizedbank: Uttara vs Janata

7.1. Problems generally faced by NCBs:In the pre-liberalization period, Bangladesh shared many characteristics of afinancial repressed economy. They are, rigidly administered interest rates,

high and inflexible reserve and liquid asset requirements, direct creditceilings, lack of close control on the large refinance programs, relaxation oflending criteria for special groups, etc. Banks have been prevented fromexercising their appropriate role in risk management, loan pricing, creditallocation and in loan recovery.

Until the early 1980s, the financial system was controlled and directed by thegovernment with the objective of allocating funds in the directions and for thepurposes the government established. This was done with the help ofnationalized banks. From independence right up to the early 1980s, all thebanks in Bangladesh were nationalized. The nationalized banks faced serioussolvency problems because they have been directed to lend to public sector

enterprises that are unable or unwilling to repay their loans. Allocation ofloans was guided by non-economic factors and political considerations ratherthan sound economic considerations. Since there was no competition fromprivate banks and private direct financial markets, the nationalized bankslacked the initiative to become efficient. High default rates have preventedthe formal financial institutions from becoming self-financing despite largegovernment injections of money. The banking system concentrated ondeposit collection which provided the cash flow which in turn enabled thesystem to operate with the low loan recovery rates. Proliferation ofspecialized financial institutions like the agricultural bank, industrial bank, ledto serious fragmentation and segmentation of the credit market. Specializedinstitutions attracted foreign resources effectively, but failed completely to

mobilize domestic resources and had a mixed record in allocating funds toproductive investments.

The government used inappropriate regulations to control the financialsector. Interest rates were set by decree and did not reflect the underlyingmarket forces. A very limited choice of financial instruments was available tosavers which made it difficult for monetary authorities to conduct anymeaningful monetary policy. The most commonly used instrument ofmonetary policy in developed countries, namely open market operations hadvery little relevance for the lack of a well developed financial market.

7.2. Background and history of Janata Bank:Janata Bank Limited, the second largest commercial bank in Bangladesh, hasan authorized capital of Tk. 800 crore (approx. US$ 115.99 million), paid upcapital of Tk. 259.39 crore (approx. US$ 37.61 million) and reserve of

Tk.172.65 crore (approx. US$ 25.03 million). The Bank has a total asset of Tk.21266.39 crore (approx. US$ 3083.4 million) as on 31st December 2006.Immediately after the emergence of Bangladesh in 1971, the erstwhile UnitedBank Limited and Union Bank Limited were nationalized and renamed as

Janata Bank Limited.


28/32

Janata Bank Limited operates through 848 branches including 4 overseasbranches at United Arab Emirates. It is linked with 1198 foreigncorrespondents all over the world. The Bank employs more than 13(Thirteen)thousand persons.

The mission of the bank is to actively participate in the socio- economicdevelopment of the nation by operating a commercially sound banking

organization, providing credit to viable borrowers, efficiently delivered andcompetitively priced, simultaneously protecting depositors funds andproviding a satisfactory return on equity to the owners.

The Board of Directors is composed of 7 (seven) members headed by aChairman. The Directors are representatives from both public and privatesectors. The Bank is headed by the Managing Director (Chief Executive), whois a reputed banker. The corporate head office is located at Dhaka.

7.3. Comparison of performance between Uttara and Janata:In this section we will compare the privatized Uttara Bank Limited with thenationalized Janata Bank to find out whether Uttara Bank could break out ofthe problems of the nationalized status and achieve the primary objectives of

privatization. The comparison will be based on the data obtained from theperiod 1996 to 2005.

At first the profit earning power of the banks are compared using the

return on asset ratios of both the banks.

The graph shows that until 1999 Uttara Bank was having a lower ROA ratiothan that of Janata Bank. After 1999, under a new management, Uttara Bankstarted using their assets efficiently thus causing a sudden boom in the ratio.

This rapid increase in trend continued till 2001, after which it again felldrastically and have a fluctuating and slow growth trend ever since. The ratioof Janata Bank however remained well below 0.20% till 2004 but experienceda sudden rise in 2005.


29/32

Next we have deposit growth which is a factor that lets bank keep

growing.

In this case no striking difference is seen between the two banks. Both thebanks show a very fluctuating trend in the growth of deposit volume, which isfollowing the industrial pattern. Though Uttara Bank, as a privatized bank,was expected to show a much higher percentage of deposit growth than

Janata, no such difference was found. Uttara showed a higher mark thanJanata in the years 99, 02 and 03. But rest of the time it kept pace alongwith or sometimes even lower than Janata Bank. This shows that privatizationcould not help Uttara to grow strongly or gain further customer trust.

The advance growths of the two banks are shown from the year 2001

to 2005.


30/32

This figure further goes against privatization. It shows that during the period

2001 to 2005 the percentage growth in the amount of advance of JanataBank is way above that of Uttara Bank. Both banks showed a decreasingtrend until 2003, after which they again started rising.

Classified loan is a loan that isnot being repaid on time and so iscriticized by bank examiners as being substandard after beingapproved. Under the regulatory system of Bangladesh Bank, classifiedloans consist of three types of loans- sub standard, doubtful and baddebts.

As mentioned before, one of the primary objectives of privatizing Uttara Bankwas to reduce the amount of classified loans. The graph shows though UttaraBank was able to decrease the proportion of classified loans, its pattern isalmost the same as Janata Bank. It showed no drastic change orimprovements as expected from privatization.


31/32

7.4. Camel rating: a global approach of evaluating bankperformance:

Central bank, the regulatory authority of the banking sector of Bangladesh, isresponsible for monitoring the financial conditions of commercial banks andenforcing related legislation and regulatory policy. The banking sector in

Bangladesh comprises of four categories of scheduled banks. These are,nationalized commercial banks (NCBs), government owned developmentfinance institutions (DFIs), private commercial banks (PCBs) and foreigncommercial banks (FCBs). As of December 2004, total number of banksoperating in Bangladesh remained unchanged at 48. These banks have atotal number of 6,303 branches including 10 overseas branches.

The overall performance of every bank is analyzed and evaluated accordingto the five crucial dimensions of banking operations. These criteria areCapital adequacy, Asset quality, Management efficiency, Earning capacityand Liquidity (CAMEL).Analyzing the overall operational activities of all commercial and specializedbanks; Bangladesh Bank has ranked 14 A-class or Strong, 11 B-class or

Satisfactory, 11 C-class or Fair, 9 D-class or Marginal and 3 E-class orUnsatisfactory banks by the end of 2005.A-Class banks: The 14 A-class banks are Prime Bank, Mutual Trust Bank,Dutch-Bangla Bank, Bank Asia, Exim Bank, Mercantile Bank, Jamuna Bank,Dhaka Bank, BASIC Bank, Standard Bank, Commercial Bank of Ceylon,Citibank N.A, State Bank of India and HSBC.B-Class banks: The B-class banks are Eastern Bank, Premier Bank, The

Trust Bank, BRAC Bank, Southeast Bank, NCC Bank, One Bank, StandardChartered Bank, Woori Bank, Bank Alfalah and National Bank of Pakistan.C-Class banks: Islami Bank Bangladesh Limited, Pubali Bank, Uttara Bank,National Bank, The City Bank, UCBL, Shahjalal Islami Bank, Al-Arafah IslamiBank, IFIC Bank, AB Bank, First Security Bank and Habib Bank.

D-Class banks: The D-class banks are Social Investment Bank, BangladeshCommerce Bank, Agrani Bank, Janata Bank, Rupali Bank, Sonali Bank, BSRSand RAKUB.E-Class banks: Bangladesh Krishi Bank, Bangladesh Shilpa Bank and TheOriental Bank.It is revealed by the analysis that the top ranking banks were able to bringbest results managing credit and asset efficiently.

The ratings indicate that financial performance of the PCBs and FCBs ingeneral has been better than that of the industry average. However, 4 of thePCBs rated CAMEL 4 or 5 are still in the problem bank list out of 7 put in thiscategory in the mid-nineties. Activities of the problem banks are closelymonitored by the central bank with special guidance and care. At present 6banks are in the problem bank list.

The rating also shows that all the four NCBs had Marginal or Unsatisfactoryrating. The NCBs are experiencing huge capital and provision shortfall, havinglarge amount of classified loans, low earnings and ineffective management.***(Banking Sector: CAMEL Rating 2005 By Khorshed Khokon

Banking Sector Performance, Regulation and BankSupervision)


32/32

Date post:	14-Apr-2018
Category:	Documents
Upload:	nusrat-haque
View:	218 times
Download:	0 times

Main Report(Macro)

Documents