Industrial Financing by Commercial Banks in Bangladesh with Special Reference to Basic Bank Limited

Abstract

Industrial development programs of the country went under divergent policy regimes. The early phase of industrialization was largely carried out in public sector under a strong regulatory role of the state. Policies adopted for industrial development of the country were, to a great extent, inconsistent and not broad based. The general characteristics of industrialization of the country were overcapitalization, under utilization of capacity, low efficiency and productivity, wide-scale industrial sickness. Broad economic sectors of the GDP of Bangladesh are agriculture, Industry, and Service sectors. Average contribution of the industry (Manufacturing) sector to national GDP was 27.80 percent for the study period. The share of Large and Medium-Scale industry to total contribution of the industrial sector is about three times greater than that of Small-Scale industries. With the changes in political leadership and world economic order, the country experienced rapid shift towards market economy from socialistic economic policy. The New Industrial Policy (NIP) of 1982 was a beginning of fostering private sector investment. The successive IPs e.g., Revised Industrial Policy (RIP) 1986, the Industrial Policy 1991, and the latest Industrial Policy 2005 continued to consolidate the process in favor of private sector, allowing level playing ground to all entrepreneurs. Realizing the growing needs of capital investments for industries sectors, the GOB undertook a number of structural reforms. In meeting the diversified needs of the industrial investors, the scope and functions of banking and non-banking institutions were expanded. Lending institutions have been asked to provide term-loans and working capital funds to industrial entrepreneurs. Alongside two DFls, scheduled commercial banks of the country have been engaged in providing funds to industrial entrepreneurs in addition to their normal banking services. Commercial banks provide two types of financial assistance to industrial enterprises e.g., Term Loan and Working Capital Advance. Total outstanding term-loan of all banks of the country was Tk. 27,696.39 crores at the end of 2006 with an average growth of 15.18 percent for the period of 1990 to 2006. Of this total outstanding loan, the shares of NCBs, PCBs, SBs, and FCBs were 55.33 percent, 22.53 percent, 18.20 percent, and 3.94 percent respectively. The average industrial credit to total credits of these banks was 38.73 percent for the period. The distribution of the average total term-loans among the three different industry types was 87 percent in Large & Medium scale industry sector, 4 percent in Small scale sector and 9 percent in Service industry sector. The outstanding working capital advance of all banks at the end of 2006 was Tk. 26,951.16 crores with average outstanding amount of Tk. 7,327.96 crores for the period. The average shares to this working capital advance of the banks were 55.16, 29.82, 4.77, and 10.26 percent for NCBs, PCBs, SBs, and FCBs respectively. In order to facilitate access to institutional sources of finance of SMEs, the GOB has set up Basic Bank Limited in 1989. The efficient and prudent credit management of the Bank makes it a unique institution to hold lower percentage of non-performing loans of only 4.55 percent compared to higher percentage of the same in the NCBs and PCBs for the same period. In terms of CAMEL rating the Bank has been rated as "A-Class" by the Bangladesh Bank in 2005. As a scheduled bank specialized in industrial financing and more importantly owned by the government witnessed an impressive growth in all the areas of its operations. The Bank has been able to set a unique example in the country's trouble-torn banking sector. Basic Bank started operation with Tk. 8 crore as paid up capital and increased the amount first by 100 percent in 1999 to Tk. 16 crore and thereafter the trend continued up to 2007 when its figure stood at Tk. 124.74 crore. With consistent growth in the Reserves and Surplus Account, shareholders' equity of the Bank increased to Tk.259.66 crore at the end of 2007. A strong growth had been found in total deposit of the Bank over the period under review. Total deposit of the Bank was Tk. 84.38 crore in 1991, but it has been reached to Tk. 3,194.80 crore (81.87 perce The Bank has been using a considerable amount of debt capital in addition to its own capital and deposit funds. Total debt capital of the Bank was Tk. 138.58 crore at the end of 2007. The major provider of this debt capital is Bangladesh Bank (61.06 percent). The Bank also enjoys a credit line facility with KfW (15.06 percent), a German development bank for financing Micro-Credit scheme and Small-Scale Industries. It also has a credit line facility with ADB to financing small-scale industries. Basic Bank has been performing satisfactorily in respect of all the performance indicators since inception. Total assets of the Bank reached to Tk. 3,877.39 crore at the end of 2007 from Tk. 99.12 crore in 1991 registering an average growth trend of Tk.2. 75 crore per year for the period of 1991 to 2005. Operating assets (average 99.26 percent of total assets) of the Bank had an excellent growth trend over the period registering an average year to year growth rate of 27.59 percent which is a clear sign of profitability, sound financial health, and prudent investment port-folio of the bank. Basic Bank's services are specially directed to promotion and development of Small and Medium-sized Enterprises (SMEs). Average 51.70 percent of the total loans and advances of the Bank is exposed to small and medium industries sector. There were total 569 industrial projects in the investment portfolio of the Bank on December, 2005. The textile sector including garments industries dominated the loan port-folio of the Bank followed by engineering; food and allied industries; chemicals, pharmaceuticals and allied industries; paper, board, printing and packaging; glass; ceramic; and other non-metallic goods and jute products. Total outstanding industrial loans including term-loan and working capital loan of Basic Bank stood at Taka 998.75 crore at the end of 2005 whereas it was only Taka 14.52 crore in 1991. Industrial loans of the Bank reflected a steady growth of average 37.61 percent over the period of 1991 to 2005 and the recovery rate of these loans was about 89 percent for the period. The Bank also launched a Micro-Credit Scheme in 1994 with a view to providing financial supports to generate employment and income on a sustainable basis in urban and sub-urban areas. Total amount of Micro-Credit of Tk. 33.83 crore remained outstanding at the end of 2005 with an average growth of 32.96 percent for the period. Recovery rate of this credit program during the period remained 100 percent. From profit earning point of view, Basic Bank can be considered as a quite successful one since it has been able to produce an increasing amount of profit each year maintaining all standard reserves and provisions against all contingencies as required by the BB. The Profit Before Tax (PBT) and Profit After Tax (PAT) of the Bank at during 2005 stand at Tk. 62.85 crore and Tk. 28.55 crore respectively having average growth rates of 57.05 percent and 51.13 per cent respectively for the period of 1991 to 2005. The Bank has also been maintaining its capital adequacy ratio well within the standard limit. As against the current requirement of minimum 9 percent of total risk weighted assets, the Bank maintained it by 11 .66 percent in 2005. The ratio, however, reached to 13.16 percent at the end of 2007. The averages earning assets and NPL to gross advances of the Bank were 85.14 percent and 2.74 percent respectively for the period. Bangladesh is an economy with great potentials. These potentials, however, are beset with many challenges. Accelerated GDP growth with other socio-political changes is a prerequisite for economic development and poverty alleviation of the country. Although the main contributor of GDP of the country is agriculture, it has little scope for further expansion at least in its present form. Therefore, the economic growth of the country critically depends on the growth and development of industrial sector. In conclusion, it can be said that the industrial development objective would be achieved if other commercial banks of the country adopt similar methods of industrial financing program and deliver sincerity like Basic bank Limited.