Bangladesh Shilpa Bank : A Study of Development Banking

Abstract

Development Bank as an institutional device to accelerate the pace of economic development in underdeveloped countries is of a comparatively recent origin. Despite the fact that development banks are a post Second World War Institutional device, it cannot be regarded as an untried innovation because prototype of these banks had already been in existence even before the World War I. A development bank is an institutional mechanism which functions as an active agent for promoting a balanced and viable process of economic development. A development bank has been defined as an institution which undertakes to perform banking functions as well as development functions. When availability of finance in general or to special types of enterprises in particular from the normal channels is deficient, the special machinery of development banks has been created to fill this gap. The Bangladesh Shilpa Bank (BSB) has been the prime development Bank in Bangladesh. It is set-up to meet financial and developmental or promotional needs of industries. Over the years, the BSB has grown into good source of industrial finance. But the crisis in the functioning of the BSB has been mounting up as more and more loans to industries fell into arrear in their debt servicing. The magnitude of the debt default crisis is now threatening the very survival of the BSB. Previously, no research work was conducted on this very important subject. Only a few research works covered little portion of it. In the present study intensive efforts have been taken to examine the performance of BSB. With this end in view, the following objectives are set for the study : reviewing the past activities of the BSB, evaluating its performance, assessment of operational efficiency of BSB, assessment of the allocational effi ciency of the same. Finally initiatives have been taken to specify that problem of BSB and the remedies to overcome those. Method is the way of approaching to solve the problem. Methodology stands for the correct arrangement of thoughts either for the discovery or for the exposition of truth. One method, that is documentary analysis has been applied in this study for collection of necessary information and data. Secondary information was collected, from the publication of the BSB, Ministry of Finance, Government of Bangladesh, Bureau of Statistics, Bangladesh Bank and other institutions. The primary information were collected from the BSB's officers engaged in the department of loan operation, central accounts, management information service and secretary to the board of directors. Many senior officials of BSB also provides the researcher with necessary data and information. Collected data were processed and analysed manually as well as with the help of a computer. As a development Bank, the BSB has also both banking function and development function. The banking function of the BSB relates to its operational efficiency. The development function of the BSB relates to its allocational efficiency. BSB being the prime development Financing Institution, continued its efforts to make an effective contribution towards expansion of industrialisation process in the country. By mobilising local resources, the bank emphasized on long term lending to the viable comparatively advantageous, export oriented, forward and backward linked agro based, local technology dependent and raw material based projects. Top priority has been given to the realization of its loans towards augmenting and recycling of the investable funds and maintaining satisfactory loan portfolio for increasing profitability. Although BSB has gone a long way in helping industrial development of Bangladesh, but its performance has not been up to the mark. More than three decades have been passed away since the starting of the BSB, and now its activities should be examined from different angles. The present study covers the period from 1972 to 2003. This is a period of more than three decades. From the very birth of a new sovereign country till date, Bangladesh witnessed many changes with ups and downs in the economic scenario and in political arena. In the early years of independence, the political aim of Bangladesh was to pave the economy in a socialist path and later on, the subsequent regimes put it in a capitalist way. So, the BSB in the 1970's disbursed funds only to public enterprises and subsequently in the late 1970's and 1980's till date diverted its funds towards the growth of private industry. The period is also very important in the circumstances of a new-born country like Bangladesh where the urge for development is very strong. So, the time taken might show interesting picture in the functioning of the BSB. The analysis in this study brings out that the BSB has emerged as an apex financial institution in the task of promoting industrialisation in Bangladesh. The BSB disburses loans to individual industrial project alter completing a thorough project appraisal report and following other general norms. But the colossal volume of overdues and a huge amount of provision of debt accumulated by the Bank raise some questions. Though the project appraisal procedure has been done by the specialised man power of the Bank, there is the possibility of outside interference from the political power structure which in turn endangers the whole process of financing by the BSB. The most important financial indicator to test economic efficiency of the BSB's lending and investment operations is its profitability record. Viewed from this perspective of financial management, the BSB's performance was not very satisfactory. It's gross and net profit margins have declining trends. Increase in the interest payment in the later phase of the study may be one of the reasons. The BSB's expense ratios had a consistent rising trend both in terms of operating and financial expenses. It is borne out by the fact that its returns failed to keep pace with the rise in the cost of debts and as such its margins are adversely affected. The rate of return of the BSB has been very low. The volume of overdues had been continuously increasing at a rapid rate. The BSB also re-scheduled/ adjusted the overdues on an increasing scale in the second phase of the study. The delayed recoveries from the borrowers ultimately contribute to low returns to the BSB. The low profitability in respect of BSB's lending, raise a doubt as to the soundness of its own lending operations and accounts for low returns. There may also be certain other factors responsible for such a state of affairs. As a promotional financial institution, the BSB's loan operations are not expected to be guided exclusively by commercial feasibility of the project, but its promotional efforts are equally important and treated as a means to pursue socio-economic objectives. But a large part of these type of finances are prone to high risk leading with low returns from loan investment portfolio. Hence, its nature of financing is partly held responsible for the low returns to the BSB. The BSB had been operating with low working capital margins or low current ratios. Though the low current ratio for the BSB may well be accepted, the persistent downward trend in the ratio may pose a serious problem in terms of meeting its obligations. So far as the capital structure of the BSB is concerned, its existing debt-equity ratio is not consistent with its operating policy and the World Bank Model. The BSB's debt-assets ratio had a decreasing trend and equity-assets ratio shows almost static trend. The debt-service-coverage ratio and interest-coverage ratio of the BSB marked a firm-declining trend. The continuous shrinkage in the debt-equity and debt-assets ratio of the Bank has thwarted its profitability, and decreasing trend in the debt-service coverage ratio and interest-coverage ratio hampered its operational efficiency. To improve allocational efficiency, the BSB could not diversify and broaden development investment with the objective of attaining geographical dispersion of industries. Experience shows that the maximum flow of financial assistance by the Bank went to developed areas of Bangladesh, which was also concentrated to a very few industrial sub-sectors. For entrepreneurship development, the BSB took certain programmes under different names (e.g. PIW, PPT, special window service etc.). But these programmes were not continued for a long time and did not contribute anything worth mentioning. The BSB's financing in equity capital and underwriting of capital issues has not been encouraging and far below in comparison to total disbursen;ient of loan portfolio. Lack of sufficient capital has been one of the main hindrances to prospective entrepreneurs. By supplying investable funds, the BSB has definitely contributed to the development of entrepreneurship in Bangladesh, but much remains to be done. To give relief and rehabilitate the sick projects of the term loans of BSB, it rephased/rescheduled the repayment activities on an increasing scale. The increasing trend in the overdues and very low recovery of loans show little impact of rescheduling. However, still the bank plays an important role in the industrialisation process and in the economic development of Bangladesh.