The expected improvement of the Nationalized Commercial Banks (NCBs) has not been forthcoming and the banks continue to experience rising levels of bad debt and operating losses. The jute exposure of these banks is not resolved yet. The critical question is whether the time is ripe for privatization of these banks. In spite of reforms implemented since 1989, and significant progress made in financial policy, Bangladesh'’ financial sector remains underdeveloped and continued reforms are needed along a broad front.  Then main issue is that the quality of financial intermediation remains poor. lending to priority sectors had inflicted enormous cost to the economy’s growth. Thus, improving the quality of intermediation dominates other important concerns such as resource mobilization and money and capital market development. Under present circumstances,  additional resources at the disposal of NCBs would only result in more bad loans. Money and capital market development is cotangent on the participation of healthy finical institutions and reputable firms in need of financing for expansion. A sound, efficient banking system, the main financier of industry, agriculture and trade, is essential for economic growth. Banker’s role in independently screening and monitoring investments and sharing risk is crucial for the development of entrepreneurs and the economy.

Countries in other South Asian countries have implemented  reforms gradually for many years to improve the performance  of its  banks, but they are still inefficient and provide poor service and are saddled with bad debts and inadequate capital. International experience suggests that developing a competitive, efficient banking system under government ownership is difficult at best. Thus, Bangladesh should privatize Nationalized Commercial Banks (NCBs), allow new banks and financial institutions entry and permit the orderly exit of failed banks and financial institutions to develop a competitive, efficient private financial sector which can contribute fully to industrial and economic growth. Commercialization of the NCBs, while desirable, will not substitute for their ultimate privatization.

The government as a candidate for privatization has identified Replay Bank, the partially privatized Nationalized Commercial Banks (NCB). The privatization strategy should minimize restructuring prior to privatization and fully disclose Rappel’s condition to enable buyers to make informed bids. Restructuring prior to privatization could include a financial package to restore solvency and some downsizing of staff and branches that could be done quickly, leaving the main effort to the buyer’s judgment and strategy. It may be advisable to amend the regulations restricting bank ownership by a group of 5 percent to interest buyers who can also manage the bank. Successful privatization will also require imposing a hard budget constraint on the state-owned enterprises, the main debtors of these banks-the major restructuring effort in the jute sector will assist in this regard. The privatization process should be transparent and utilize an auction to gain polemical support.

To reverse the public’s poor perception of bank privatization, previous unsuccessful attempts should be rectified as a priority. The denationalized banks, Uttra Bank and Pubali Bank have performed as badly as the Nationalized Commercial Banks (NCBs). Uttara bank and Pubali bank need to be restructured urgently by the Government with BBs intervention and assistance. Restructuring could include a financial package to restore solvency, management and staff reorganization and branch closure. Where necessary, the problems in domestic private banks also need  to be dealt with. The government should then build on the decisive, and hopefully successful, privatization of Reappear and interventions in Uttara, Pubali and other private banks, to privatize the remaining three NCBs.

Opposition to privatizing the remaining Nationalized Commercial Banks (NCBs) may arise from bank employees, bureaucrats, loan defaulters and the general public. The employees may not want this because they fear of losing jobs. The employees may not want this because they fear of losing jobs. Bureaucrats may oppose such move purely on ideological ground and belief that selling price is not fair. Loan defaulters may oppose it because they believe that private owners will be more stringent in collecting overdue loans. The general public may oppose it on the ground that the selling price is too low and selling a bank to a group of individuals is the result of nepotism.

A successful privatization may require the following steps. First, the branch network must be reviewed and the losing branches must be closed. For the most NCBs, this will lead to a substantial reduction of rural branches. Tier rural branches may be coordinated with BKB and RAKUB, the specialized agricultural and rural credit banks. Second, the labor force must be trimmed to a size consistent with the profitable operation of the bank, and the pension facility of retained staff must be funded. Golden shake program to discharge employees must also be funded. Third, the future tax liability of the banks must be assessed prior to privatization, and the government should be ready to pay any overpaid taxes as they are likely to receive any underpayment. Fourth, the management responsibility must be clearly defined. It may be desirable to relax the restriction of 5 percent ownership in order to find prospective manager owner . Finally, the loan portfolios of the NCBs must be cleaned up.

The privatization of two nationalized commercial banks (NCBs) in the early 1981s offers some interesting lessons in the pitfalls of implementing a policy of privatization. While the privatization of one bank(Rupali) was stalled after partial sale, the Government divested two other banks, Pubali and Uttara. The decision to divest these banks was related to the fact that their previous owners were Bangladeshi, and thus no legal entanglements were expected. The process of divestiture was, therefore, limited to negotiating only with the previous owners. However, to make it politically acceptable, a portion of the shares was reserved for the employees and a small part for the Government. The sale prices of Pubali and Uttara were fixed by Government on its “valuation” of net worth. The Government skipped the essential task of properly evaluating asset values and restructuring finances where necessary. Even the asset valuation was reportedly unavailable to the prospective owners.

Almost a decade after privatization, the competitive position and operational efficiency of the two banks has hardly changed, no major management changes have occurred, redundant staff has not been released, and the banks are suffering huge operating losses. In spite of the fact that both banks did not provide for classified loans, their combined loss in 1991 alone amounted to about Taka 243milion.A large part of the ongoing problems of he privatized banks can be traded to the history of mismanagement during the erred of public sector management. Substantial advance-transferred during privatization as asset-have  not turned out to be non-performing; overrunning continues under threat of militant unionism; and unprofitable branches cannot be closed as they serve the Government’s social program. While one bank is owed almost Taka 240 core by Government-owned corporations(mainly textile mills) and on account of the recent  Government agricultural loan forgiveness scheme, the other carries almost Taka 200 core on account of the directed jute credits.

The Government has not taken an evenhanded approach between NCBs and these private banks in meeting its debt obligations. In one case, whereas it compensated all the NCBs for its debt obligations. In one case, whereas it compensated all the NCBs for its guaranteed debt for a  closed out Government consumer corporation, it refused to pay the privatized bank, which had to ultimately seek a decree from the High Court. Another important aspect, which has seriously undermined commercialization of these banks, is the continuing lack of autonomy on staffing issues. The privatization terms not only bound the purchasers to abide by the service and employment rules agreed to by the Government in 1982, the banks were also required to follow strictly the frequent pay raises and annual bonuses awarded to public enterprises. In short, the basic ingredients for successful privatization-a healthy cash flow and managerial autonomy-were missing, thereby eliminating the possibility of any genuine commercialization.

The following three major lessons can be learnt from the early experience with bank privatization in Bangladesh. First, while change in ownership is a necessary condition, it is not a sufficient condition for successful privatization. There is a need to successfully develop privatization strategy, which includes a thorough ex-ante analysis of financial and managerial aspects of the enterprises targeted for privatization. This must be done within an environment of strong  banking supervision. Second, the failure to reap clear economic efficiency gains results in deepening public skepticism about the privatization process, and provides Government with a disincentive for  further divestiture programs. Third, the choice of the sale strategy-public offering, wide ownership, as opposed to a closed deal-is also an important determinate of the ultimate success of the enterprise. In the case of the two banks, the mere transfer of shares to the previous owners did not precipitate major efficiency changes. The doubts surrounding the value of assets and the task of fixing responsibility for past debt has preoccupied the attention of the owners, to the detriment of introducing such changes.