The bank is to actively participate in the socio-economic development of JANATA BANK.
Foreword: On 16 July, Mr. A.K.M. Abdullah, lecturer of Finance & Banking assigned a study to analyze the financial performance and the accounting system of Janata Bank. Purpose: The purpose of this study is to provide the assignor a complete illustration on the financial condition and the accounting system of Janata Bank. Research Method: The report was prepared maintaining the following steps: o . Theoretical discussions are from the teacher’s lectures, text and reference books. o . Collecting information from annual reports of Janata Bank of 2000,1999 &1998. o . Analyzed the information. o . Prepared the report. Findings: While preparing report we found the following matters: • As Janata Bank is a nationalized commercial bank, it does not pay corporate tax. • Janata Bank charged depreciation on the following basis: • Reducing balance method & • Straight line method. • Income on investments other than shares in joint stock companies is accounted on accrual basis. • Janata Bank stated investment at cost.
Performance Analysis
for
Part-1
Janata Bank is a nationalized commercial bank which was established by the Bangladesh Bank (nationalization) and is fully owned by the government of the People’s Republic Of Bangladesh. It is the second largest commercial bank in Bangladesh. The aim of the bank is to actively participate in the socio-economic development of the nation by operating a commercially sound banking system. The principal activities of the bank include providing of all kinds of commercial banking services to its customer. • Ratio Analysis: 1. Current ratio:
Current assets
Current ratio = Current liabilities =
65193932157 18372471386
= 3.548
The current ratio is especially useful to short term creditors. The Janata bank’s current ratio increased slightly in 2000 because current assets increased just a bit more rapidly than current liabilities. The primary cause of the growth in current assets was the increases in cash and equivalents and short term investments. 2. Debt to Equity ratio: Total Debt Debt to equity ratio = Total Equity =
125434265571 3133624188
= 40.03 The debt to equity ratio is the ratio of the total debt in the firm, both long term and short term, to equity. Any ratio over 1.0 means the firm has used more debt than equity to finance its investment. Here Janata Bank has been much more aggressive than most of the banks. 3. Equity ratio: Total equity Equity ratio = Total asset 3133624188
= 128567889759
× 100 × 100
= 2.44% The equity ratio indicates the proportion of total assets that is provided by owners. The Janata Banks equity ratio decreased to 2.44% in 2000. The equity ratio must be interpreted carefully. From a creditor’s point of view, a low proportion of owner’s equity is not desirable. A low percentage indicates the existence of small protective buffer to creditors in the event the company suffers a loss. But from an owner’s point of view, a low proportion of owner’s equity may be desirable. If borrowed funds can be used by the business to generate earnings in excess of the net after tax cost of the interest on such borrowed funds, a lower percentage of owner’s equity may be desirable. 4. Times-Interest Earned ratio: Income before interest and tax Times-interest earned ratio = Interest Expense =
5951106467 5939889157
= 1.002 Creditors, especially long term creditors, want to know whether a borrower can meet its required interest payment when they become due. A ratio that provides some indication of this ability is the times-interest earned ratio. The times-interest earned ratio of Janata Bank is 1.002 to 1 that means, the company earned its interest expense 1.002 times during the period. The ratio is a rough measure of cash flow from operation and cash flow out as interest on debt. Very low interest coverage ratio suggests that the borrower could default on required interest payments.
5. Return on Assets: Net profit after tax Return on assets = Total assets 11217310
= 128567889759
× 100 × 100
= 0.0087% Return on assets relates net income to total assets; it measures how profitably the firm had used its assets. Janata Bank’s relatively low return on assets suggests that the firm is not utilizing its assets as profitably as many of its competitors. 6. Return on Equity: Net Profit after tax Return on Equity = Total Equity 11217310
= 3133624188
× 100 × 100
= 0.358% The return on equity measures the profit earned by a firm though the use of equity. Janata Bank’s low return on equity states that the firm’s equity is not properly utilized to earned profit. 7. Debt to asset ratio: Total Debt Debt to Asset = Total asset × 100 125434265571
=128567889759 × 100 = 97.6% The debt to asset ratio indicates the percentage of assets financed by debt of all types, whether or short term or long term. About 97.6% of Janata Bank’s assets are financed by debt. That means, Janata Bank is a heavy user of debt. 8. Credit to Deposit ratio: Advances Credit to deposit ratio = Total deposit 80952941706
=104667929889 = 0.773 Depreciation policy: •
Part-ii
Depreciation:
Depreciation is the portion of the cost of tangible operating assets (other than Land) recognized as expense for each period. •
Methods of calculation:
Janata Bank charges depreciation in two ways: They charges depreciation on reducing balance method on all types of fixed assets at the following rates: Type of asset Building Furniture & fixed assets Library books Type writer & calculating machine Electrical installations & machinery
Percentage 2.5% 10.0% 10.0% 20.0% 20.0%
They charge depreciation on Straight –line method at the rate of 20% per annum on the following assets: a) Motor vehicles ; b) Bi-cycles ; c) Computer etc. Note: But in case of premises, they are stated at historical cost or reveled amount (where applicable) less accumulated depreciation. •
Some consideration:
Depreciation at the applicable rates is charged proportionality on additions made during the year from the month of their acquisition excepting that no depreciation is charged thereon for the month if such assets are acquired in the second half of the month and on assets retiring during the year, depreciation is charged for the period up to the end of the month of their retirement excepting that no depreciation is charged on assets retiring in the first half of the month. •
Impact on profit:
1. Upon retirement of items of fixed assets the net book values are eliminated from the accounts and the resulting gains or losses, if any, are transferred to Profit & Loss account. 2. Repairs and maintenance costs of fixed asset are charged to account •
Tax savings:
Depreciation decreases the net profit. As a result the ultimate tax on net profit is reduced. Thus tax savings appear from the reported depreciation. As Janata Bank does not pay any corporate taxes and all income goes to government so Janata Bank has no tax savings.
Lending rate and cost of capital: •
Components of lending rate: 1. Cost of fund:
Part-iii
When bank receives deposits from people they cannot invest the full amount. They are to reserve 20% of the total deposit to Bangladesh Bank of Sonali Bank according to SLR rule. But they are to give interest for the full amount. So the effective interest rate gets higher this is the cost of fund. 2. Administration Cost: To lend money and to collect the money from the borrower, a bank is to bear some expenses. Since the administrative cost is occurred for lending process, to find out the lending rate, it becomes a useful component. 3. Profit margin: As the main objective of a bank is to gain profit (except nationalized bank), they re to keep a profit margin while deciding lending rate because we knew that a bank’s income generally comes from, [Interest received for lending – interest paid for deposits.] •
How lending rate is decided:
Actually lending rate is decided in two ways: If the money is collected from public as deposits, then the bank decided their lending like that: Cost of fund (8%) + Administrative cost (3% marginally) + Profit margin (2%) =Lending rate (13%). If the money is collected from Bank as deposits, then the bank decided their lending like that: Bank rate (6%) + Administration cost (3% marginally) + Profit margin (4%) = Lending rate. (13%) Note: This source is not so available because of some obligations. • Administration cost as % of profit: The total operating expense of Janata Bank is 2435927298 Tk. and the gross profit of this bank is 9478858990 Tk. The calculation of administration cost as % profit is shown below: = (administration cost / gross profit) × 100 = (2435927298/9478858990) × 100 = 25.70%.
•
Measures taken to minimize administration cost: 1. Classified advances recovery:
Actually loans and advances are regarded as investment. Here if we can less or control the bad-losses in case of classified advance recovery, the cost will automatically reduce. 2. Law charge: By analyzing creditor’s habit, if loans are granted, the possibility of credit default risk will be much lower. Thus law charge can be minimized. 3. Entertainment: Every year the bank pays a huge amount of money for entertainment. A fair use of this expenditure will possibly minimize administration cost. 4. Miscellaneous: If the amount paid for miscellaneous expenditure is used consciously. 5. Budgeting: By budgeting and contrasting among the previous years costs we can minimize administration cost.
Tax burden: •
Part-iv
Methods of calculating & payment of tax: Income tax: Income tax is deducted from the income of employee at the rule3 of year “2001-2002” budget.
•
Corporate tax: No corporate tax is charged upon Janata Bank because it’s a nationalized bank. As a result, the income goes to the Government.
•
Measures that are taken to minimize tax burden:
As Janata Bank doesn’t pay corporate taxes and all income goes to government, so there exists no preparation to minimize administration cost. • Transformation of net profit: Since the net profit does not go to the government as tax, it is transferred to the reserve fund. Rest portion of the net profit goes to another two funds named as benevolent fund and Insurance Fund. For the year 2000 Janata Bank distributes their net profit by following ways: Title
Amount (tk.)
Rate (%)
Reserve fund Benevolent fund Insurance fund
7000000 2217310 2000000
62.40 19.77 17.83
Total (net profit)
11217310
100
Investment Portfolio •
Part-v
% of each type of investment:
Criteria Government Securities: i. Treasury bill ii. National investment Bond iii.Other Bonds: 15 Years special Treasury Bond _2005 15 Years Treasury Bond _2008 10Years (JSAP) Treasury Bond 10Years (BSC) Treasury Bond 25 Years (JSPA) Treasury Bond 10Years (sick industries)Treasury Bond 5 Years (CSM) Treasury Bond Securities of Bangladesh Government iv. 30 days B.B treasury bills v. Debentures vi. Prize Bond
Amount (in taka)
Rate
8490000000 ---
---
4100500000 1064500000 790900000 376600000 2143123000 104646219 1033600000 150000000 --645636346 35.094900
19.94% 5.18% 3.85% 1.83% 10.42% .51% 5.03% .73% --3.14% .17%
78276884 45032812 234226825
.38% .22% 1.14%
1250000000
6.08%
Other investments Pak. Govt. securities of pre-liberation period
17889622
.09%
Total
2055962608
100%
Other Investment: i. Shares of Joint stock company Quoted Unquoted ii. Debentures iii.Bonds Gramen Bank Bond
41.29%
•
Return on each type of investments:
The annual return of each type of investment is stated below Criteria Investment on Govt. securities
Return (taka) 1159952263
Interest on debenture
35363684
Interest on Grameen Bank Bond
177050674
Other investment income
178416
Dividend on shares
7425197
Total
1379970234 Matching between sources and uses of funds:
The cost of fund of Janata Bank is approximately 8% and the administration cost is 3%, the return on investment is 13%. Thus 2% profit comes out from use o fund. Thus the cost of source of fund is [cost of fund + ad. cost] or 11%. And the income from uses of fund is the matching and in this way profit comes out. •
Bad debts & provision for bad debts:
Bad debts are charged against the loans and advances according to the probability of credit default risk. The rates of bad debts on loans are shown below:Criteria Regular creditor Sub-standard Doubtful Loss
Return (taka) 1% 20% 50% 100%
In case of agricultural loan: Regular Doubtful Sub-standard Loss • Status
5% 5% 5% 100%
Amount of bad-debt for the year 2000 of Janata bank: Amount
In Bangladesh : Provision held as at 31-12-2000 Net charge to P/L account
3,456,708,908 386,805,182
Outside Bangladesh: Provision held as at 31-12-2000 Net charge to P/L account
98,194,818 1,070,416,590
•
Measures taken to minimize administration cost: 1. Classified advances recovery: Actually loans and advances are regarded as investment. Here if we can less or control the bad-losses in case of classified advance recovery, the cost will automatically reduce. 2. Law charge: By analyzing creditor’s habit, if loans are granted, the possibility of credit default risk will be much lower. Thus law charge can be minimized. 3. Entertainment: Every year the bank pays a huge amount of money for entertainment. A fair use of this expenditure will possibly minimize administration cost. 4. Miscellaneous: If the amount paid for miscellaneous expenditure is used consciously. 5. Budgeting: By budgeting and contrasting among the previous years costs we can minimize administration cost.
Conclusion
Part-vi
As Janata Bank is a nationalized commercial bank, the aim of the bank is to actively participate in the socio-economic development of the nation by operating a commercially sound banking system; not to maximize profit or wealth. For this reason, the overall financial performance of this bank compared with other commercial banks is not satisfactory. But considering the root motives of Janata Bank, we can say that, in developing the socioeconomic condition of the country- Janata Bank performed successfully.
Enclosure Index Bank rate, 7 Corporate tax, 9 Income tax, 9
Part-vi
Depreciation, 5 Deposit, 7 Lending Rate, 7 Administration cost, 7 Profit Margin, 7 Premises, 1 Operating Asset, 1 Straight-line method, 1 Reducing balance method, 1 SLR, 7 Cost of fund, 7 Bad debts, 11 Appendix: B. Bank rate: Rate, under which bank (commercial) borrow money from government through Bangladesh Bank or his nominated Sonali Bank. Bad debts: The amount of loan which have no probability to return. C. Corporate tax: Tax, which is charged upon the income of a corporation. D. Depreciation: The expiration of plant assets quantity usefulness. Deposit: The money received by the bank from public at a certain interest rate. L. Lending Rate: Rate, under which the bank lends their money to its borrower. O. Operating Asset: Those types of assets which used to maintain the business. P. P/L account: The account for showing the revenues and expense; and determining the profit and loss of the firm is called profit and loss account. S. Straight-line method: In this system depreciation is charged at an exact amount over the years of asset expiration. SLR: SLR stands for standard liquidity rate. This rate is fixed by Bangladesh Bank Commercial bank must maintain this rate amount in cash whether in Bangladesh Bank or his nominated Sonali Bank. T. Tax: Tax is the source of government’s revenue by charging upon the civilians’ income.