Comparing the State-owned banking sector of

Bangladesh with India.

Course Code- FIN401
Course Title- Banking and Finance
Section-1
Course instructor-Zaima Ahmed

Group Members-
ID NAME

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 Table of Contents

Letter of Transmittal.............................................................................................3
Acknowledgement..................................................................................................4
Background of state-owned Bank........................................................................7
State-owned Bank’s contribution to economy....................................................9
Comparative analysis of Bangladeshi financial institutions............................10
Comparison between Bangladeshi state-owned Banks Vs Indian state-owned
Banks.....................................................................................................................16
Conclusion............................................................................................................19
References.............................................................................................................20

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 Letter of Transmittal

29th August 2021

Zaima Ahmed

School of Business

Independent University, Bangladesh (IUB)

Subject: Submission of Final Report

Dear Mam,

We are pleased to submit the report that you asked for & gave us the authorization
to work on the assignments. This assignment is a part of our course. We tried our
best to work on it carefully and sincerely to make the report informative.

The study we conducted enhanced our knowledge to make an executive report.

This report has given us an exceptional experience that might have immense uses
in the future endeavors, and we sincerely hope that it would be able to fulfill our
expectations.

We have put our sincere effort to give this report a presentable shape and make it
as informative and precise as possible. We want to thank you for providing us this
unique opportunity.

Sincerely yours,

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 Acknowledgement

People trade their financial assets on the International Financial Market (and
between countries). It can be conceived of as a complex system of rules and
institutions in which assets are traded between surplus and deficit agents and the
rules are defined by institutions. Institutions that work in them (Central Bank,
Ministry of Economy, and Finance), as well as direct and indirect policies
targeted at making the market the most efficient place for surplus and deficit units
to trade.

Those linked to monetary, fiscal, and more structural policies, as well as those
directly related to market governance, must be considered in terms of policies. In
the financial market, the term "governance" refers to a set of rules that serve to
connect the agents who operate inside it with the institutions. These regulations
are what make the market what it is. The governance rules of a financial market
can be set at both the microeconomic and macroeconomic levels.

Individuals (single money savers, professional agents, and enterprises) as well as

the market and its microstructure are subject to microeconomic regulations.
Market-regulating policies are closely tied to macroeconomic governance
principles, which apply to the entire market. On a macroeconomic level,
governance is critical for the financial market since it defines every single trading
rule, from those that regulate the stock exchange or Over the Counter (OTC)
trades to those that define who can access the market. Furthermore, market
microstructure is heavily emphasized, with microstructure defined as the set of
laws that determines and defines the asset exchange price. This is an important
part of allowing the market to function properly.

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The microstructure of each market is governed by its own set of laws. Variable
markets have varying liquidity, which is defined by the micro-rules that they have
devised. Both exchange and over-the-counter trading are subject to these
regulations. A rule that regulates who and how can operate in the market is
another form of microeconomic governance rule. Microeconomic laws also
govern how institutions operate.

The macroeconomic laws that govern the financial markets serve a different
purpose and are linked to the market's broad-spectrum policies. These can be used
to determine the appropriate market institution, market structure, market aims,
and monetary and fiscal policies. All of these characteristics set the market apart
from the economy in which it functions. One of the aspects of this distinctiveness
is market transparency. The (governance) norms, institutions, actors, and policies
that are linked with this attribute define it.

A market becomes more transparent as more people understand how to complete

the asset trading process. In this approach, information becomes diverse while
also reflecting what is accessible, which is then elaborated based on the various
sell/buy techniques. As a result, it is necessary to define expectations. There are
two goals in describing the role of expectations in a financial market. The first is
defined on a macroeconomic level. Expectations are established in relation to the
market policies and norms that will be applied. As a result, sell/buy strategies are
established based on the role that inflation, for example, will play in the future
period t+1 given the policies/rules defined in the current period t.

This expectation may fluctuate depending on the degree of flexibility available in

drafting regulations, both at the macroeconomic and microeconomic levels. The
second goal is the microeconomic objective. Agents formulate their expectations
in order to predict asset price fluctuations in order to determine asset returns. This
leads us back to the topic of liquidity, which we covered previously. The level of

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liquidity in the trading process determines a varied formulation of expectations.
Similarly, the degree of discretion utilized in enacting macroeconomic legislation
has an impact on inflation forecasting.

Macroeconomic policies are intertwined with monetary and fiscal policy, as

previously indicated. Regulatory agencies, in large part, define the policies that
regulate the financial market. Institutions are responsible for establishing
standards and ensuring that they are implemented in the marketplace. The
institutions develop the rules that define their scope of action. Individuals who
operate in a single market must follow these guidelines, but their decisions are
influenced by the market's rules. Individuals can optimize their utility by selecting
a market based on transparency, liquidity, and expectations.

The financial system in Bangladesh is categorized into three parts which are
formal, semi-formal, and informal. Industries are classified based on how much
control they have. All regulated enterprises, including as banks, NBFIs, insurance
companies, capital market intermediaries such as brokerage houses, merchant
banks, and other financial institutions, are included in the formal sector. The
semi-formal sector includes institutions that are regulated but do not fall under the
jurisdiction of the Central Bank, the Securities and Exchange Commission, the
Insurance Authority, or any other statutory financial regulator. The business is
dominated by non-governmental organizations and government initiatives, as well
as the House Building Finance Corporation, the Palli Karma Sahayak Foundation,
cooperative banks, Grameen Bank, and other specialized financial institutions.

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 Background of state-owned Bank

There are many types of state-owned banks. A public bank could be funded
through a one-time investment from the country or state, as well as tax and fee
revenue.

A state-owned bank similar to a private commercial bank, can collect

government tax revenues and all other government revenue as deposits, generate
money through bank credit, and lend at low interest rates compared to PCBs.
Because of their business model, private banks are obligated to take advantage of
lower interest rates by charging higher interest rates to borrowers. A state-owned
bank, on the other hand, has no stockholders to pay and may thus pass on
lower rates to borrowers such as local enterprises, government agencies, residents,
students, and households.

On the other hand, a state-owned bank's capital comes from national savings
which deposits into bank that would normally yield greater than a private
commercial bank, A hidden subsidy which is acting as a transfer of funds from
taxpayers to debtors.

State-owned banks grew in importance as significant medium of industrialization

in both socialist and capitalist countries in the late nineteenth and early twentieth
century; State-owned banks held and managed almost 25% of total banking assets
all over the world.

Public savings institutions, such as postal banks, frequently provide personal

savings accounts, remittances, savings bonds, and other products. Similar
financial services are provided by three out of every four postal systems around
the world, and such a system operated from 1911 to 1967 in the United States.

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The Bank of Amsterdam was founded in 1609 with the goal of simplifying and
standardizing coins and other kinds of trade. It was shortly followed by other
Dutch exchange banks, some of which lasted well into the nineteenth century.

The thirteen colonies' ruling colonial assembly began to take over the lending
activities of banks in the 17th and 18th century in order to raise money and
encourage farming and development. Governments would establish "land banks"
to issue and lend paper currency.

Bangladesh has six government-owned commercial banks and three government-

owned specialized banks, all of which are scheduled banks. In addition, the
government owns three non-schedule banks. The two primary types of banks are
scheduled and non-scheduled banks. Specialized banks are divisions of scheduled
banks in Bangladesh.

After Bangladesh's independence, Sonali Bank was formed in 1972 from the
merger of the National Bank of Pakistan, Premier Bank, and Bank of Bhwalpur,
with a paid-up capital of TK 30 million. That is the largest bank in Bangladesh.
Since then, it has been responsible for nation-building and overseeing all aspects
of socio-economic life.

JBL is Bangladesh's second-largest government-owned commercial bank. It was

formed in 1972 when United Bank Limited and Union Bank Limited
amalgamated.

On March 26, 1972, ABL and RBL were formed by merging Commerce Bank
and Habib Bank into ABL and three Pakistani institutions into RBL Muslim
Commercial Bank Ltd., Australasia Bank Ltd and Standard Bank Ltd.

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 State-owned Bank’s contribution to economy
The financial system is tremendously important in today's economy. Banks
receive money from individuals and then lend it to entrepreneurs and
manufacturers. Bank loans facilitate trade.

Manufacturers borrow money from banks to pay for raw materials and other
necessities such as working capital. Banks are a secure place to store cash. As a
result of this, interest is also earned. As a result, the desire to save grows, and the
quantity saved grows. The money saved can be put to better use by acquiring new
capital assets. And state-owned bank operates just like other commercial bank,
but their majority of the stock owned by state or government.

The contribution of the state-owned banking system in a country’s economy is

very controversial. Some economists said it is essential and some said no.
According to the economists who believed that state-owned bank is essential for
the economy conveyed that state-owned bank stimulates a countries growth and
development. In the 1950s and 1960s, major development economists such as
Alexander Gerschenkron, Gunnar Myrdal, Arthur Lewis, and others tended to
think that the state should play a key role in the banking sector.

State-owned banks grew in importance as significant medium of industrialization

in both socialist and capitalist countries in the late nineteenth and early twentieth
century; State-owned banks held and managed almost 25% of total banking assets
all over the world.

Bangladesh's public commercial banks have played an essential part in the

country's economic development. They give investible funds to both the public
and commercial sectors, with a focus on the latter. Banks have also played a
crucial part in Bangladesh's four major drivers of economic growth, as stated
above.

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Comparative analysis of Bangladeshi financial institutions

We choose three non-Banking financial institutions from Bangladeshi financial

institutions sector. We choose those top three NBFI according to their market
capitalization which are IDLC, Lanka Bangla and Delta Brac Housing Finance
Corporation. To analyze their performance, we choose to do ratio analysis. We
pick the five ratios to measure their performance. Those are Return on asset, Loan
to Deposit Ratio, Current Ratio, Non-performing loan ratio and Capital Adequacy
Ratio.

Return on asset: Return on assets compares a company's profitability in relation

to its total assets. ROA helps us understand how well we are using our assets to
generate profits. (Marshall Hargrave, 2021)

*Formula = Net Income/Total Asset

Return on Assets (%) 2016 2017 2018 2019 2020

IDLC Finance 1.96 1.71 1.51 1.33 1.79

Lanka Bangla Finance 1.86 1.73 0.89 0.93 1.07

Delta Brac Housing Finance
Corporation 0.71 1.74 1.82 1.82 1.52

ROA
2.50

2.00

1.50

1.00

0.50

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0.00
2016 2017 2018 2019 2020

IDLC Finance LankaBangla Finance

Delta Brac Housing Finance Corporation
IDLC had a declining ROA throughout the period but in 2020 it increased
significantly. Lanka Bangla is seen to have a decreasing return on assets while
DBH has kept its ROA stable throughout the years. On an average, IDLC had the
highest return on assets of 1.79%, which indicates that the company is utilizing its
assets efficiently to generate profits.

Loan to Deposit Ratio: Loan to Deposit ratio is used to understand the bank's
liquidity this is done by comparing the deposits and the loans at a given time. The
LDR is measured in percentage. If the ratio is too high one will say that the bank
may not be able to pay any unforeseen cost in the short run. A very low ratio
implies that they are not giving out enough loans thereby not making as much as
they could. The ideal loan-to-deposit ratio is usually between 80 and 90 percent.
A bank with a loan-to-deposit ratio of 100 percent means, they give away all their
deposits out as loan. (Chris B. Murphy, 2020)

*Formula = Total Loans/Total Deposit

Loan to Deposit (%) 2016 2017 2018 2019 2020

IDLC Finance 123.72 112.57 111.68 115.03 113.93

Lanka Bangla Finance 116.44 119.81 119.39 129.36 114.91

Delta Brace Housing Finance
Corporation 104.20 102.56 101.22 102.56 97.54

LBR
140.00
120.00
100.00
80.00
60.00
40.00
20.00
0.00
2016 2017 2018 2019 2020

IDLC Finance LankaBangla Finance

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Delta Brac Housing Finance Corporation
From 2016-2019, Loan to Deposit ratio of IDLC and DBH has been decreasing
steadily, whereas LDR of Lanka Bangla has been increasing. On an average, Lank
Bangla Finance has the highest LDR of 121.25%. This indicates that the company
may not have enough liquidity to fulfil needs of unexpected funding or cover
loans in case of loan defaults. DBH has the lowest LDR of 102.64% which is still
not within the ideal percentage but lower compared to its competitors.

Current Ratio: The current ratio measures the ability to pay off short term debts
with the current assets that they have. It explains how current assets are being
used to pay off the current liabilities. A ratio of less than 1.0 is seen in a negative
light as it indicates that they do not have the ability to pay off their current debts
without consequences, the most favorable ratio is a 2:1 which means for every
dollar of current liability there exists two dollars in current asset. (Jason Fernando,
2021)

*Formula = current assets/current liabilities

Current Ratio (times) 2016 2017 2018 2019 2020

IDLC Finance 1.17 1.18 1.12 1.06 1.18
Lanka Bangla Finance 1.14 1.11 1.08 1.04 1.13
Delta Brac Housing Finance
Corporation 1.10 1.09 1.10 1.11 1.12

From 2016-2019, The current ratio of DBH has been rising steadily, while current
ratio of IDLC and Lanka Bangla has been decreasing gradually.

Current Ratio
1.20
1.15
1.10
1.05
1.00 12 | P a g e
0.95
2016 2017 2018 2019 2020

IDLC Finance LankaBangla Finance

Delta Brac Housing Finance Corporation
All the Non-banks were able to maintain a current ratio of 1 or above. On an
Average, IDLC has the highest current ratio of 1.13, while Lanka Bangla has the
lowest of 1.10. Even though Lanka Bangla has an average ratio above 1, its
competitors have a higher current ratio indicating that they have more sufficient
liquidity to meet their short-term obligations in comparison.

Non-performing Loan Ratio: A nonperforming loan (NPL) is a loan that has

been declared default as the borrower has failed to make interest payments that
were due on the borrowings. If a borrower fails to make payment 90 days after the
payment day, it is called non-performing loan. (Amy Drury, 2021)

*Formula = non-performing loans/ Total Outstanding Loans

Non-Performing Loan Ratio (%) 2016 2017 2018 2019 2020

IDLC Finance 2.98 2.77 2.20 3.07 1.79

Lanka Bangla Finance 3.52 3.07 3.60 5.59 4.70

Delta Brac Housing Finance
Corporation 0.36 0.27 0.30 0.45 0.41

NPL Ratio
6.00
5.00
4.00
3.00
2.00
1.00
0.00
2016 2017 2018 2019 2020

IDLC Finance LankaBangla Finance

Delta Brac Housing Finance Corporation

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IDLC is having fluctuations patterns in their NPL over the years. NPL of Lanka
Bangla has been quite stable over the years, while it rose all the way to 5.59% in
2019 from 3.6% from the previous year. DBH is having a gradual increase in NPL
over the time frame. Based on the average ratio of years 2016-2019, Lanka
Bangla has the highest NPL ratio of 3.95% while DBH has the lowest of 0.35%.

Bangla’s high ratio indicates the more defaults compared their total loans and the
borrowers have failed to make scheduled payments or interest for a set period.
Whereas the DBH has less defaults making their Asset quality better than their
competitors.

Capital Adequacy Ratio: The capital adequacy ratio (CAR) calculates capital in
comparison to the risk weighted assets. CAR is needed for banks to be able to
handle a certain number of losses before going bankrupt. It is used by regulators
to check stress level and capital adequacy. (Margaret James, 2020)

*Formula = Tier 1 Capital + Tier 2 Capital/ Risk Weighted Assets

Capital Adequacy Ratio (%) 2016 2017 2018 2019 2020

IDLC Finance 13.25 15.30 15.47 14.82 14.59

Lanka Bangla Finance 13.22 11.81 15.74 16.40 18.83

Delta Brac Housing Finance
Corporation 15.80 17.16 18.90 21.92 24.22

CAR
30.00
25.00
20.00
15.00
10.00
5.00
0.00
2016 2017 2018 2019 2020

IDLC Finance LankaBangla Finance

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Delta Brac Housing Finance Corporation
Based on the average ratio of years 2016-2019, DBH has the highest CAR ratio of
18.44%, while Lanka Bangla has the lowest of 14.29$. The high CAR ratio of
DBH indicates that they are considered safe and likely to meet their financial
obligations. The minimum capital adequacy set by the central bank of Bangladesh
is 10%. All the non-banks have enough capital to absorb loses in case the go
bankrupt and therefore lose depositors’ funds.

Comparison between Bangladeshi state-owned Banks Vs Indian state-owned

Banks

Bangladesh has six government-owned commercial banks and three government-

owned specialized banks, all of which are scheduled banks. In addition, the
government owns three non-schedule banks. The two primary types of banks are
scheduled and non-scheduled banks. Specialized banks are divisions of scheduled
banks in Bangladesh.

There are six commercial banks owned by the government and three specialized
banks: Sonali Bank Limited, Janata Bank Limited, Agrani Bank Limited, Rupali
Bank Limited, BASIC Bank Limited, Bangladesh Development Bank Limited,
Bangladesh Krishi Bank, Rajshahi Krishi Unnayan Bank, and Probashi Kallyan
Bank.

Three non-scheduled government banks exist. They provide services that are
distinct from those provided by traditional banks. The Bangladeshi government
uses them to accomplish specific tasks or goals. Those are Ansar VDP Unnayan
Bank, Karmashangosthan Bank, and Palli Sanchay Bank

Public Sector Banks (PSBs) are a prominent form of government-owned bank in

India, with the Ministry of Finance of the Government of India or State Ministries

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of Finance of several State Governments of India holding a majority shareholding
(more than 50%). The number of state-owned banks has decreased from 27 in
2017 to 12 after a series of mergers. The 12 government-owned banks in India in
2021 are listed below. Banks that are owned by the state are Punjab and Sind
Bank Indian Overseas Bank, UCO Bank, Bank of Maharashtra, Central Bank of
India, Union Bank of India, Bank of India, Indian Bank, Punjab National Bank,
Canara Bank, Bank of Baroda, and State Bank of India.

Parameter India Bangladesh

Number of state-owned 12 11 (Including specialized
Bank and non-scheduled)
Largest state-owned State Bank of India Sonali Bank Limited
bank
Number of branches and 26,340 branches in 36 1225 branches, two
ATMs of largest Bank countries and 59,291 foreign branches and
ATMs three representative
offices
2nd largest Bank Punjab National Bank Janata Bank Limited
3rd Largest Bank Bank of Baroda Agrani Bank Limited
Number of branches and 10,530 branches branch, 913 branches
ATMs of 2nd largest 13,506 ATMs
Bank
Number of branches and 9,500 branches, 13,400 956 branches
ATMs of 3rd largest ATMs
Bank
Total Branches of all Around 87187 branches Around 6207 branches
state-owned banks
Total ATMs of all state- Around 130612 ATMs Around 45 ATMs (Only

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 owned banks Rupali Bank)
Total employees of Approx. 805,849 Approx. 70119
state-owned bank

The potential and challenges of Banking Sectors

 State-owned bank in Bangladesh has very less ATMs compared to others
country’s state-owned Bank. For example, total number of ATMs of Indian
state own Bank is almost 1.3 lakh where Bangladesh has only 45 though total
number of banks for both countries are almost same. So, Bangladeshi state-
owned banks should focus on this issue. As now a days ATMs is very
essential part of the Banking systems. So, this will boost the banking system.
 If government bank provides standard services, it can attract more customers
than it has now. As a customer for both government bank and private
commercial bank, I noticed that private bank tend to focus on customer
satisfaction. But employees of government bank more are not that cooperative
compared to private bank. If the authority could ensure the standard of
services, many peoples would use government bank instead of private bank.
 Increased non-performing loans (NPLs), a lack of effective governance,
government participation in banking procedures, and money laundering have
all been blamed on the banking industry in recent years. This has had an
inescapable impact on the sector's efficiency and productivity, as well as
limiting firms and industries that have the potential to thrive and become long-
term growth pillars. Government Bank could be in a stronger position if the
authority could keep the NPL ratio under control.

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 Conclusion
We may identify numerous tendencies in the analysis of ratios, such as certain
non-banks doing well, some fluctuating patterns, and some companies falling
behind their competitors. Companies like IDLC and Lanka Bangla could improve
their asset quality by doing a thorough assessment of a client's creditworthiness.
They should do a thorough credit check before approving loans because their non-
performing loans are higher than DBH's. Before approving a loan, the following
5cs of credit should be thoroughly examined: The credit history of the application,
the debt-to-income ratio of the applicant, the amount of money the applicant has,
collateral: an asset that can back or act as security for the loan, and finally, the
terms: the purpose of the loan, the amount involved, and current interest rates.
The loan-to-deposit ratio for all non-banks was greater than 90%, indicating that
they may not have enough liquidity to meet any unexpected funding needs. They
should not lend more money in loans than they receive in deposits to improve
their liquidity. In comparison to their competition, Lanka Bangla had a poorer
return on investment (ROI). They should make better use of their assets to
increase earnings, or they can improve their margin by cutting expenditures.
In the 4th part of this report, we did a comparison between state-owned bank of
Bangladesh and India. In every aspect, state-owned bank of India is better than
Bangladesh.

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 References

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sector. Retrieved 30 March 2022, from
https://thefinancialexpress.com.bd/views/views/economic-growth-in-
bangladesh-and-the-role-of-banking-sector-1547220114
 S, N. (2021). Role of Banks in the Economic Development of a Country.
Retrieved 30 March 2022, from
https://www.economicsdiscussion.net/banking/role-of-banks-in-the-economic-
development-of-a-country/26094
 Yeyat, E., Micco, A., & Panizza, U. (2004). Should the Government Be in the
Banking Business?: The Role of State-Owned and Development Banks |
Publications. Retrieved 30 March 2022, from
https://publications.iadb.org/publications/english/document/Should-the-
Government-Be-in-the-Banking-Business-The-Role-of-State-Owned-and-
Development-Banks.pdf
 Hossen, M. (2019). Challenges the banking sector faces. Retrieved 30 March
2022, from https://thefinancialexpress.com.bd/views/challenges-the-banking-
sector-faces-1556379991.ece
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https://www.researchgate.net/figure/Total-number-of-branches-and-
employees-in-government-banks-of-Bangladesh-Sl-No-Name-
of_tbl2_343686000
 Singh, S. (2022). List of Banks in India (2022): PSU and Private Banks.
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 (2022). Retrieved 30 March 2022, from https://oikosmist.com/government-
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https://www.bb.org.bd/en/index.php/financialactivity/index#:~:text=The
%20sectors%20have%20been%20categorized,Micro%20Finance
%20Institutions%20(MFIs).

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