2.2.2 The Bank Companies Act 1991
According to section 22 and sub-section 1 (a),any bank other than new or specialized bank will not declare dividend on Its hare until the bank has written off its previous losses, preliflui11 expenses and other deferred revenue expenses.
As per Bangladesh Bank inspection Reports-NBL incurred heavy losses continuously in real terms. But the bank declared div1de on its paid-up capital each year since the time of its operation. On the other hand, Sonali Bank, as a NCB, does not necessarily require paying any dividend. According to sub-section 2 (c) of sector 22; bank will declare dividend whatever be stated elsewhere if and ‘only if bank will take proper steps for their bad and doubtful credit in accordance with the satisfaction of their auditors.
Bangladesh Bank Inspection Report on NBL indicates that NBL charged Tk. 2.75 crores for the year 1989 as provisions for bad and doubtful credit whereas according to BCD Circular No. 34/ 1989 they should have charged Tk. 77.72 crores as provisions for bad and doubtful credit for the same period. Now the question a how it would satisfy the auditors by charged TK. 74.97 crores less as provisions for bad and doubtful debts.
The situations are same in case of Sonali Bank. Because in 1988 they charged only TK. 61.72 crores as provision for bad and doubtful debt whereas the Bangladesh Bank Inspection Report demanded the amount of Tk. 254.80 crores for the same purposes.
2.2.3 The International Accounting Standard No: 30
(The fund object of International Accounting Standard (IAS) is the generalization as well as harmonization of accounting practices in all over the world. The LAS # 30 becomes operative for the financial stat of banks covering periods beginning on or after 1st January 1991 under the title of “DISCLOSURES IN THE FINANCIAL STATEMENTS OF BANK AND OTHER SIMILAR FINANCIALINSTITUTIONS”. Though the accounting regulatory bodies i.e.: ICAB and ICMAB in Bangladesh still do not implement this IAS # 30 in our country, but I have to discuss some important paragraphs of this standard relating to sound credit management because of comparing the positions of our banking sector with that of international standard.
According to the IAS No. 30 bank should disclose the following information in its financial statements:
a. The basis for the determination of losses on loans and advances and for writing off uncollectible loans and advances.
b. The basis for the determination of charges for general banking risks and the accounting treatment of such charges.
c. The amount of losses which have been specifically identified are recognized as expenses and charged against income and deducted from the carrying amount of the appropriate category of loans and advances as a provision for losses on/ loans and advances.
Practices in Bangladesh
Bank discloses some general guidelines (not / comprehensive) that act as the basis for calculation of provisions for bad and doubtful credit. But National Bank Limited still does not disclose any sort of such information in that respect rather state that their auditors are satisfied. But whether users and investors are satisfied or not is not a matter of their consideration.
Paragraph No.10 of this standard again states that the principal types of expenses from the operations of a bank include Interest. Commissions, losses on loans and advances, charges relating to the reduction in the carrying amount of investments and general administrative expenses are separately disclosed in order that users can assess the performance of the bank. Both the banks under study do not d1 relevant and comparable information’s about their credit management operations. Not only that, both the banks Incurred losses continuously; but they disclosed profit from their operations in their financial statements which may mislead the users in their conception about the banks.
2.3 Foreign Banks in Bangladesh: Performance & limitations
Foreign banks have played a significant role in the less developed countries by the process of monetization and providing the cornerstone of an efficient and dependable financial structure which are crucially important for promoting economic growth. The manner in which the
Foreign Banks have benefited the colonies has been put succinctly by Edward Nevin in the following sentences: ‘It would be inaccurate and unfair to omit reference to the immense benefits which these territories have secured through their possession of a commercial banking system which has established and retained extremely high standards so far as stability, integrity and safety are concerned. It is by no means obvious that if the international banks had never operated in these countries any really adequate local banking would have emerged instead local banking in many of them has had an unhappy history of improvident operation and inefficient administration which has ultimately resulted in bank failures and has scarcely been conducive to confidence in banks and banking in the part of the local population. Despite the contributions made by foreign banks a number of criticism have been put forward against their modus operandi in the less developed countries. Drake (1980) has summarized the major allegations against the role of foreign banks especially in their early days of observation as follows:
Firstly the foreign banks especially in the LDCs. However, Professir nevin in a study observed a considerable reversal of this behavior. Data provided by him on the commercial bank’s operation in British colonial territories furnishes the following trend.
Table- 1
Percentage of Domestic Investment against Local Liabilities
In various years from 1954 to 1959.
year 1954 1955 1956 1957 1958 1959
% of domestic Investment against Liabilities 68 70 74 78 77 79
Source : Nevin, Edward (1961), Capital Funds in Underdeveloped countries: the Role of financial institutions.
The second criticism leveled against Foreign Banks is that these banks do not identify themselves with the economic goals of the LDC’s in which they operate. The volume and pattern of business to be carried out by the bank in any country tends to be determined by the Head Office and has no necessary connection with the local demand for credit and the output and employment generation in these countries. Credit mainly goes to finance international trade. Since foreign banks are not concerned with local development, they do not extend much credit to manufacturing and agricultural sectors as needed.
The presence of foreign banks in our country is helpful in attracting foreign investment; these banks often provide valuable services to Government in getting credit from the international capital market. Moreover, they facilitate the transfer of modern banking skill to out country. But foreign banks policies regarding deposit mobilization and advances needs a critical review in the context of out country. Bangladesh is predominantly an agricultural country where government policies put much emphasis on the modernization of agriculture and small and cottage industry sectors. There advances to manufacturing sector are concentrated on large-scale activities, so the foreign banks do not identify themselves with the economic goal of our country. Their fundamental aim is profit maximization and hence they usually undertake scale economization our social goals. In view of the “default culture” in our society it should not be expected that these commercial banks will ignore these socially desired goals. Rather in order to make them consistent with our social goals there needs to be some provision to lessen their risk of giving loans and advances to the hitherto neglected but priority sectors.
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