State-owned banks: Reform or transform?
If all of the stakeholders agree to privatise the state-owned commercial banks,
it may be a win-win result for all of us
Md Nurul Islam Sohel
The state-owned banks in our country have been widely criticized over the decades on low quality service, wide-spread corruption and scams etc. Though in terms of reaching the banking services in the remote areas, agriculture finance, and inclusivity these banks have much higher contribution against other scheduled banks, seldom are the state-owned banks found strong or satisfactory in terms of performance indicators like profitability, efficiency and the like.
Presently, 8 state-owned banks (commercial 6 and specialized 2) share of deposits is around 30 percent, down from 60 percent in 1992 though their branch network has gone up steadily. State-owned banks with much more rural bank branches compared to private and foreign banks have extended the banking services for the people in far-off areas of our country. More than 70 percent of these banks branches are in rural areas whereas private banks have 41 percent of their branches.
However, from business performance perspectives, these banks are in worse state which is deteriorating day by day. Many a reform measure has been resorted to get better their performance, but those experiments did not bring any lasting outcome to date. The government took loans from the donors to fortify the operational aspects of these banks but whatever the progress was only short-lived. Time and again the government recapitalized these banks with taxpayers money, but the additional money went down the drain.
For decades the World Bank and the IMF had been prescribing the government to clean them up and privatize them. But officials at the central bank doubted that any government would willingly part with such important sources of influence and patronage. So, they came up with an alternative cure: issue lots of private-bank licenses and cap the rate of growth of state-owned banks.
These two multinational lending agencies have made it one of the major prerequisites for Bangladesh to receive Poverty Reduction Growth Facility loans. In line with that, the government initiated converting the banks to limited companies. In 2007, Sonali Bank, Janata Bank and Agrani Bank received licenses from the central bank and became public limited companies. As per the licenses, the banks have been allowed to carry out their activities following the Memorandum and Article of Association instead of the Nationalized Bank Order, 1972. All liabilities and assets of the banks were transferred to their new company names.
The central bank appointed a few of its executive directors as observers to the boards of four state-owned commercial banks last year. But will those observers be able to do any good unless some drastic measures are taken for restructuring ownership system?
So, the question arises why couldnt these reform measures produce any significant result expected in those banks? Where do the problems lie? Is it for external or internal reasons? Though experts are divided in opinions, one thing is agreed upon and that is the political will of the incumbent government.
These are owned by the government and directed by the government nominated people who are neither stakeholders nor do they have any professional expertise except a few. The Boards overseeing the management are constituted by the people having no direct interest in seeing these banks doing good business. The situation gets worst when the boards are manned by the political sycophants and people of bad reputation. Being example, the BASIC Bank, the best bank in the state sector, turned to be the worst performer as these types of people comprised its management board.
Here, political considerations reign supreme. Many loan cases are politically influenced resulting in defaulting, classified and written-off loans. A good number of recent bank scams are the consequences of this system.
Furthermore, the SoCBs operate under dual regulations of the government and the Bangladesh Bank. Only recently the Bangladesh Bank assumed some more powers with regard to regulating the SoCBs, including the power to remove the CEOs of the SoCBs.
Being in the intermediary nature of business, these banks are highly affected by the performance of other state-owned enterprises which have been financed. Over last four decades, a huge amount of loans given to state-owned non-financial public enterprises by state-owned commercial banks was written off which, in turn, affected the very financial base of such banks and caused the drainage of public money.
In many cases, these institutions suffer losses in implementing special credit programs of the government. Though extremely benevolent, the banks are losing income as there is no compensation for their time, labor and services.
The role of CBA in state-owned banks is also a matter of big concern. These CBA people have also a strong say in recommending loans, often bad loans. How long can banks survive such onslaughts? Ultimately, all these banks were crippled almost beyond repair.
If the reform measures fail to generate expected results, shouldnt we rather transform them from government ownership to publicly traded company? The strategy of transforming state-owned banks worked beautifully in case of a few banks in 1980s. Those privatized banks are doing much better than any other state-owned banks so far.
Apparently, there is no economic sense behind keeping commercial banks under government ownership. Someone may argue that governments objective is not earning profit rather ensuring social welfare and incurring loss is not a problem. Yes, the point would have merit if those losses were inadvertent or by chance. Ironically, this is deliberate in most of the cases with the hope of government bailout from the taxpayers money. Since, the deliberate loss making is eating up the hard earned money of the common people, it should not be considered as welfare to the society. Sonali Bank Limited may remain under government ownership as it carries out treasury functions. Bangladesh Krishi Bank and RAKUB also may stay in state ownership because in an agriculture based economy like ours some specialized banks need to offer financial back up and services which may not be expected from private commercial banks.
As a step towards damage control, the best option may be to sell the SoCBs to the public, preferably through the stock market. Some suggested that 49 per cent shares of these companies should be sold to the public through initial public offering (IPO). In fact, the SoCBs were made public limited companies with an objective of selling shares from these banks to the public in 2007. However, no action has been taken till date. Offloading shares of these banks may restore the investors confidence having positive impact on bearish bourses like DSE and CSE. To be more practical, the offloading of shares may be in phases because a radical transformation may not suit well.
Yes, the overall political and economic context of 1980s is much different from the circumstances of these days. Furthermore, both Pubali Bank and Uttara Bank were private commercial banks by origin which were nationalized in 1971 and denationalized in 1980s. Rupali Bank Limited is still a state-owned bank and only around 10 percent of shares have been offloaded in the bourses.
If the government is all set to transform these banks from public to private ownership, will there be any dissent from other stakeholders like customers, employees, and CBAs? For that reason, the government may arrange any opinion survey. It seems, most of the customers will welcome this move of ownership transfer from government to private sector. Then what about employees? Are they willing to leave their status of government banker and welcome being private banker? There may be mixed responses from employees. However, the CBA might have their say which should be mutually settled down for the greater benefit of all stakeholders.
If those banks are brought to private ownership, what will happen to a good number of rural branches many of which are incurring loss? Should they be allowed to shut down those branches? From business point of view, the answer may be yes, as banks will rationally try to ensure efficiency in resource allocation. However, in terms of financial inclusion, we have to think a bit differently for ensuring a sustainable development in the country.
So, if all of the stakeholders agree to privatize these state-owned commercial banks, there may be win-win result for all of us. In doing so, a smooth and attuned transition is required which will be another challenge for the banks. Keeping this point in mind, the transition measures should be carried out lest it would backfire in the end. No change goes unchallenged. Who will bell the cat? Of course, it is the government whose will can go a long way. Will the government will?
The writer is a banker
