While foreign multinational banks operating in Bangladesh are making hefty profits year after year, the state-run lenders are struggling with low profits despite their huge customer base and vast network across the country.

In 2023, Standard Chartered Bangladesh and HSBC Bangladesh's combined profits stood at Tk 3,334 crore whereas four state-run banks -- Sonali, Janata, Agrani, and Rupali -- saw a combined profit of Tk 974 crore.

Although the two multinational banks operate just 25 branches, mainly in Dhaka, they logged more than thrice the profits posted by the state-run banks, which have a network across the country thanks to 3,720 branches in total.

The suffering of the state-run banks does not end there.

Until recently, the government had to recapitalise the four banks several times in order to keep them alive. In the 17 years to May 2019, it injected Tk 20,584 crore of the taxpayers' money into the state-run banks -- without any tangible improvement in their governance and lending practices to show for it.

Why is there such a huge discrepancy between multinational banks and state-run lenders despite operating in the same business environment? The reason is a lack of efficiency in making business decisions, business focus, and political bias.

While foreign banks are significantly invested in consumer loans and the working capital segment, which are short-term in nature, state-run banks mainly provide term loans, which offer multiple years in the repayment period.

Besides, interest rates for consumer loans are higher compared to term loans, so foreign banks get a lot of mileage for their products. Likewise, consumer loans are less likely to turn sour than term loans.

AB Mirza Azizul Islam, a former finance adviser to a caretaker government, said foreign banks have stellar reputations, so they get huge deposits. As a result, the banks have no problem in terms of cash flow.

Thanks to their reputation, good borrowers take loans from these banks even if their interest rate is a bit higher than at other banks.

"The main reason for the poor performance of state-run banks is a lack of good governance," he added.

Another factor is the gulf in terms of loan quality.

When providing term loans or working capital, foreign banks select projects based on their merits. However, the decisions of state-run banks are influenced either by politically influential people or board members.

Furthermore, the performance-based nature of jobs at foreign banks means officials never lend to dubious projects and are meticulous in analysing the potential of businesses.

The lack of accountability, however, makes it a different story for state-run banks. This is because once an official gets a job at a government-controlled financial institution, they work until their retirement with proper benefits regardless of their performance. Hence, many of them try to make money by lending to projects that are not up to the mark.

As a result, the classified loan ratio rises in state-run banks almost every year compared to foreign banks. This has a direct impact on their profitability.

The classified loan ratio at Sonali Bank and Janata Bank stood at 13 percent and 25 percent, respectively, in 2023 while it was 21 percent for Rupali Bank and 28 percent for Agrani Bank.

On the contrary, the classified loan ratio was 3 percent at both Standard Chartered Bangladesh and HSBC Bangladesh in the same year.

Another example of the difference in efficiency is that foreign banks have no investment in the stock market despite having huge assets. Due to the poor performance of the stock market and its vulnerability to manipulation, foreign lenders shun stocks, keeping their balance sheet healthy.

Conversely, state-run banks invested around 2 percent of their assets in the stock market and had to keep a large sum of provisions against the investments as the value of the stocks eroded significantly. What's worse, their stock selection is not up to the mark.

An analysis of the financial reports of the banks shows that that the state-run banks lag in bringing changes to their business practices in order to make the most of any new opportunities.

For example, the yield rate of treasury bonds and bills rose sharply last year. Accordingly, foreign banks shifted their focus by reducing the volume of loans and increasing investments in treasury bonds. The state lenders stuck to the trend of providing loans.

Foreign banks earned a hefty income from treasury instruments whereas their state-run counterparts completely missed out on the opportunity.

At other times, state-run banks had to follow government policies, which also impacted their profitability. For instance, they had to lend to some sectors at a low interest rate. Many loans turned sour, thus inflicting losses on the banks.