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Responsibilities of NCBs in Fund Management

by Zaman Mohd Fakhru and Naser Ezaz
NO matter IT M to a devel o^ed or developing co untry, the Importance of a sound capital market la universal for economic growth, (tanking plays the moat vital role tn capital market. In Bangladesh four Nationalised Commercial Banka (NCB) play the central role tn our banking sector for their huge network as well as for large volume of deposit and advance handling As a result the importance of NCBs in our capital market i.e. economic life ia beyond question.
When talking about banking the issue that comes first is fund management. The basic philosophy of baking is to mobilize deposits from Indi vidua Is and organizations and again deploying It in the form of loan and advances and for earning profit for this mediatory function. As a result fund management is basically man age me nt of liability te. deposits and management of assets i.e. advances.
While managing the fund, there are pressures on fund managers from depositors and investors Depositors are not ready to compromise their convenience while a bank owner is eager for a higher rate of return. This results in
conflict between liquidity and profitability. A fund manager s access depends on successful solti'icn to this "cnfltct.
I i th« ettse of our NCBs the situation is not ideal Le. identical to an ideal fund management. Other than the two above mentioned factors there works government s welfare motive. Interference of world bodies like the World Bank and IMF is there to make the job troublesome. Pressure from political leaders, unscrupulous bureaucrats and bankers even mustans contribute to making the job further complicated.
Fund management of a bank starts with the creation of fund. Better known as liability portfolio the main sources of fund for our NCBs are capital, deposits, call deposits, counter financing etc. Fund management problems for NCBs start right from here. Before formulation of the recent interest policy of government, the NCBs had no choice in offering interest on deposits. Government had strict guidelines in this regard. As a result a bank could find that a certain type of deposit yields high return while advanced so it could be given incentive. But they had no choice. Recently government has taken a policy for prescribing a floor and ceiling rate for NCBs and they decide their own interest rate. This is
as part of government's reform in the financial sector Still the deposit mobilization is not free from state control Because the amount a bank can raise is limited by the operation of capital adequacy ratio which is six per cent of total deposit liability Again government has no choice in this regard as we cannot afford any more BCI experience
Once the fund is mobilized it needs to be deployed In a way that ensures maximum return without disturbing the depositors. The entire task of fund management is done by careful formulation of credit policy, liqqldity planning and prioritization of the competing credit scare sectors without however threatening security and safety to the funds invested. A fund management strategy can be regarded well-concetved if it can successfully relate loan policy, deposit policy. capital and investment policy so that decision of one area can successfully reinforce that of other area. The influencing factors in loan allocation are: 1) Capital Position. 2) Risk and accompanying profitability of various loans. 3) Tenure of de
posits, 4) Credit environment, 5) Influence of monetary and fiscal policies. 6) Ability and experience of bank personnel to handle loan portfolio and 7) Credit needs of the area Covered. As all the deposits accompany with them certain liquidity requirement these In tern determines the size of the loan portfolio. A successful fund manager keeps the exact amount of deposit in exact liquid form and invest the remaining tn the way that ensures maximum return.
Now let's haw a look at the management of asset portfolio in NCBs. Central Accounts Division of NCBs are responsible for fund management. Day-to-day information of deposits as well as advances and loans goes to this department and the concern fund managers try to ensure that not a single taka is left idle. In some cases banks can borrow for short term even for overnight.
Fund managers are bound to take decision despite lot of restrictions. Deployment of fund depends on central bank's policy and the policy of bank it-sclf. Other than the restriction on liquidity maintenance, there are directives on loan sanctions. IDA loans coming through Ministry of Industry arc prescribed in such a way that fund managers have very little influence on it. Counter
finance Is a major source of fund. Rut bureaucratic procedure delays the arrival of the same forcing the NCBs to liquidity crisis.
A fund manager Is supposed to take decision in favour'of loan that ensures maximum profit But our NCBs are again crippled by government policy. Loan for jute trading gives 9.5 per cent interest for Sonali Bank while it Is 10 per cent for an ordinary business. But a fund manager Is bound to give priority to the jute loan. Here comes the conflict between profit motive and welfare. If NCBs are considered business enterprises, then they should be free In taking decision of this type.
Another example of government's unwanted interference Is financing the sick Industries. The nationalised and private industries having very poor repayment record are a real problem to our banking sector. Crores of taka tn loans are outstanding. Again policy makers are advocating for giving more loans. Their logic is that shortage of capital Is the main reason for the failure of these industries.
A critical analysis of the sfbk industry issue will show that most of these industries get loans by using outside influence without allowing the lending houses to go deep into the matter. Moreover, these industries fail for lack of management capability, marketability, lack of working capital ill-motive of the so-called entrepreneurs etc.
These industries arc already overburdened with huge liability, if further money is poured the total cost of fund of the project will increase and probability of failure will also go up. As a result those sick industries which have got the scope of bearing the burden of further liability and are viable should be given a chance strictly on close supervision.
Again If we look at the ideal asset portfolio management process, we find that diversification in loan allocation is a precondition to spread thg risk that associates with various kinds of loan. To the extent it is practicable banks should diversify their loan portfolio in broad areas of agriculture, commercial lending industry etc. For any band their Is a certain limit of taking risk and bands try to keep the overall risk exposure within that limit. Unfortunately our NCBs very little choice for loan sanction.
It we look at the performance of our four NCBs in deposit mobilization and loan allocation. we find that their performance is very frustrating. In 1989 75 per cent of total deposit figure was advanced. This declined to 70 percent in 90. However relationship of deposits with advance and Investment remained almost constant. This depicts that high interest rate on deposit is mobilizing more and more deposits but advance figures is not going up accordingly. The reason is manifold. High price of loan discourages
potential lenders. Change in government, most the of time In unpleasant ways, causes problem to entrepreneurs. Other socio-economic factors are also there. Government s step to bring discipline tn financial institutions prohibits unscrupulous lenders from borrowing money from the band as a result the advance figures in NCBs are going down leaving large amount of usable money idle Sixty four percent of our total national deposit is at the disposal of the four NCBs while their advance Is 54 per cent.
' One point that needs clari flcation is that although the advances of NCBs are not con sislent with deposit, the joint advance and Investment figure is. This la because banks Invest the money left in government security, treasury bills, deben ture of government and semi government organizations etc
These give very low return; soruetimes less than the cost of fund. After all banks' deposits are supposed to be advanced and failure in putting the biggest amount possible in advance causs Inefficiency In fund management
Government is aware of the problem and reducing the interest rate on loans. But so far their is no sign!flcant response from our money market. Even government Is thinking of reducing the interest rate on deposits so that the ultimate
price of loan goes down. However the possible negative impact on deposit mobilization is very significant.
Among all these do's and don'ts. NCBs are managing their funds. Before Introduction of private sector banking, our banking was fully controlled by NCBs. There were no scope for comparing the performance of NCBs. Private sector banking is successful in Bangladesh and comparison of productivity between NCBs and private banks shows the following picture.
Private sector banks afe 47 percent more productive tn deposit mobilization and 17 times productive in profit earning:
No doubt, poor fund management of NCBs is the most important reason behind the frustrating performance. But is it the only reason? No, meticulous analysis of total banking system reveals the following problems in our banking sector.
1 The banking system itself has not developed In a way
it should this is because- of frequent change in government policy.
2 The interest rate structure, even after all these reforms,
is no harmonious with the Investment environment.
3 Too much bureaucracy forces the banks to send weekly, monthly, half-yearly statement to the central bank.
4 Recovery record is very poor and recently tt has gone to 30-40 per cent. High growth rate of bank Income can be achieved only through higher loan recovery.
5 There Is no innovation in financial Instruments.
6 Non-Interest income of NCBs In very low
7 Growth rate of bank expenditure Is very high
8 Banks are not mechanised with the sophisticated technology Invented.
To cope with need of the time our NCBs should consider the following steps.
1 The importance of non-Interest income for banks is significant New additions 1n the stock of customer service like Introduction of credit cards will help the banka to earn new service charges to add to their non-Interest Income.
2 Coat control measures arc essential to bring down band expenditure. Proper plan can reduce expenditure. For example, at present a branch sends around 200 statements which can be reduced by 50 per cent.
3 Introduction of computers and use of modern banking packages can reduce the manpower requirement.
4 Besides better fund management and portfolio management improving recycling of funds and developing other Income earning business activities (non-fund) will certainly improve the productivity levels of NCBs.
In the changed context of financial sector reform which has brought new dimension the management of NCBs should undertake more indepth exercise there ever before in loan portfolio determination. This can ensure safety of the funds as well as higher profitability, which is pur national concern.
In fact our banks are passing a transition period between strict control and freedom. Once the banks are absolutely freed, our endeavour for national development will get momentum. Sincere and honest afford of all concerned is essential, otherwise we are not away from the crunch time. This is perhaps our last hope. Otherwise the efficiency in capital market will be a remote cry In a country where government tops the banks’ defaulter list.
The contributors are MBA students of Dhaka University and the article is based on their termpaper on NCBs, prepared under Prof. Rahim Box Talukdar.