Private banking and its impact: A theoretical study on the basis of Bangladesh

Banks are meant to serve commerce, not undermine it. (Creighton,2012) Introduction
In 1983, the Bangladesh Government initiated ownership reform program and allowed private commercial banks (PCBs) to start their business in the industry and to enhance the efficiency of the individual banks. Since then, they play a vital role in the economic development of the country. With the help of developed banking technologies and client-focused mentality, they try to ensure quality services in quick time to their customers as per their expectation. Their prudence in selecting appropriate borrowers and sector of providing loans and monitoring them closely has decreased the percentage of non-performing loan. Besides, the prudent regulatory measure of the central bank including guidance regarding prudential norms of capital adequacy, classification of loans, on-site and off-site supervision have made the PCBs sound in Banking operation. For these reasons, they are found profitable in their business. Their performance in respect of the profitability determinants shows their potentiality in the banking industry. An effectively functioning financial system requires a banking system that can earn a reasonable return by taking an acceptable level of risk.

Impacts
One of the major objectives of private banking sector is to develop the financial system. It also aims to increase the competition among the banks in addition to the improvement in the profitability. Financial Deepening. Competitiveness within the banking industry. Profitability of the banking industry. Positive impacts: (Rahman, 2012, p.15)

Reduce the deficit of the government to meet the continuous loss of the public banks. In
2007, the state-owned commercial banks (SCBs) held 31.1 percent of the total industry assets as against 32.7 percent in 2006.PCBs' share rose to 51.4 percent in 2007 as against 47.7 percent in 2006 (Bangladesh bank, 2008, chapter 5, p.39 ) Improve the efficiency of the banking sector. At the end of December in 2010, the private commercial banks and foreign commercial banks were able to maintain the required

Capital Adequacy Ratio and the ratio was 10.1 percent for PCBs and 15.6 percent for FCBs. (Rahman, 2012, p. 19) Introduce competition in all spheres of banking sector. Share of Banking System Assets (%)
Type of bank Stateowned commercial banks Specialised development banks Private commercial banks Foreign commercial banks Total 2002 47 2003 44 2004 42 2005 39 2006 33 2007 33

35

39

42

44

48

52

10

10

12

100

100

100

100

100

100

Source: Anandakumar and Khan, 2009, p. 3 Improve the customer service and new features of the banks. It is said that the operation of private commercial banks have created a new era in banking in Bangladesh with many value added services like 24 hour ATM services, online banking, credit card facilities, ebanking etc.( Chowdhury & Rahman, 2009, p. 2) Safe & healthy working environment. The fact is supported by the differences of the overall job satisfaction in public and private bank officers (3.70 versus 5.64). The reasons for this difference in job satisfaction between public and private bank officers might mainly be related to the banks salary, efficiency in work, fringe benefit, supervision quality, and co-worker relations. (Islam and Saha, p. 9) Contribution to our GDP. The Domestic credit provided by banking sector (% of GDP) in Bangladesh was last reported at 71.27 in 2011, according to a World Bank report published in 2012.( Trading economics, 2012) Negative impacts: Private commercial banks in Bangladesh are continuously making a huge chunk of profit. The 30 banks in the private sector posted a 24% in operating profits in 2009 over the previous year. ( Bangladesh Bank Annual Report, 2002-2010.)

 The profit growth seems to be astonishingly high. In 2004 their Net interest income is
13.7 billion taka but in 2007 their income is 36.1 billion taka.(Banking Sector Performance, Regulation and Bank Supervision,2008. p. 46) Banks are involved in the wide array of other nontraditional banking activities. Some of these profit seeking activities may lead banks to take very high exposures to the risk. They introduced many types of loans like car loan, education loan, marriage load, holiday loan etc. But in each loan interest rate is different, in car loan interest rate is 18% but in term loan or working capital loan interest rate is (15-17)%. (Rahman and Akter,2012, p. 89)

New and Innovative products- create more complexity- customers can be exploited by
higher fees and commission. The private banks are offering more differentiated services according to the needs of the specific clients, for example, teachers loan, car loan, holiday loans, salary loan, online banking, future education loan, small business loan, home decoration loan, credit cards, ATM services, evening banking, instant money transfer etc.( Chowdhury & Rahman, 2009, p. 15)

Recommendation
Fees and commission should be monitored and managed so that a customer is not deceived. The risk taking investment activities also should be monitored very closely by the supervisor. Government interference, political involvement, pressure from the trade unions has to be reduced for the smooth functioning of the banks. Non-performing loans should be focused exclusively in an efficient and productive way. Opening new branches at appropriate locations, a PCB can expect to spread new avenues of businesses & expand volume of customers. The cooperation and coordination between management and employee should be developed because it is crucial for effective and efficient functioning of an organization.

Conclusion
The PCBs in Bangladesh are performing well. The deposit, advance, total asset, equity and net income of Private Commercial Banks (PCBs) are found to have their increasing trend over the period. CAGR of deposit, advance, total asset, total equity and net income of the PCBs of second generation is higher than that of first generation. During 2001-2010, the PCBs are found to

achieve mentionable growth in the above selected variables. This reflects their gradual expansion of business and earning increasing amount of profit over the period. PCBs should be innovative in launching their various new deposit schemes according to the changing demand of the customers. Keeping pace with the time, they should be more technology driven to serve the customers. If a PCB can increase business per employee (BPE), it can be able to enhance its profitability.

References
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5. Chowdhury, T., & Rahman, M. 2009. Client Choice Analysis of Commercial Banks in Bangladesh & Some Policy Implications. Page:2, 15. 6. Islam, N., & Saha, G. 2002. Job Satisfaction of Bank Officers in Bangladesh.Page:9. 7. http://www.tradingeconomics.com/bangladesh/domestic-credit-provided-by-bankingsector-percent-of-gdp-wb-data.html 8. Bangladesh Bank Annual Report, (2002-2010) http://www.bb.org.bd/pub/publictn.php?cat_id=0&pub_id=2 9. Rahman, D., & Akter, K. 2012, Interest rate convergence in Bangladesh. Page:89. International Journal of Banking and Finance Volume 9 | Issue 1 Article 4