Role of Central Bank to regulate commercial banks in Bangladesh
Why central banks is heavily regulated:
► To protect the safety of the public’s saving
► To regulatory agencies are charged with the responsibility of gathering and evaluating the information needed to assess the true financial condition of central bank to protect the public against loss.
► central bank also closely watched because of their power to create money in the from of readily spend able deposit’s by making loans and investment.-
President’s Order No. 127 of 1972
THE BANGLADESH BANK ORDER, 1972
Whereas, it is necessary to establish a central bank in Bangladesh to manage the
Monetary and credit system of Bangladesh with a view to stabilizing d domestic- monetary value and maintaining a competitive external par value of the Bangladesh Taka towards fostering growth and development of country’s productive resources in the best national interest.
Now, therefore, in pursuance of the proclamation of independence of Bangladesh, read
with the Provisional Constitution of Bangladesh Order, 1972, and in exercise of all powers
■ Banks in one form or another have been subject to the following non exhaustive list of regulatory provisions:
1) restrictions on branching and new entry;
2) restrictions on pricing (interest rate controls and other controls on prices or fees);
3) line-of-business restrictions and regulations on ownership linkages among financial institutions;
4) restrictions on the portfolio of assets that banks can hold (such as requirements to hold certain types of securities or requirements and/or not to hold other securities, including requirements not to hold the control of non financial companies);
5) compulsory deposit insurance (or informal deposit insurance, in the form of an expectation that government will bail out depositors in the event of insolvency);
6) capital-adequacy requirements;
7) reserve requirements (requirements to hold a certain quantity of the liabilities of the central bank);
8) requirements to direct credit to favored sectors or enterprises (in the form of either formal rules, or informal government pressure);
9) expectations that, in the event of difficulty, banks will receive assistance in the form of “lender of last resort”;
10) special rules concerning mergers (not always subject to a competition standard) or failing banks (e.g., liquidation, winding up, insolvency, composition or analogous proceedings in the banking sector);
11) other rules affecting cooperation within the banking sector (e.g., with respect to payment systems).
■ In recent years regulation in banking has become less pervasive and has shifted from structural regulation to other more market oriented forms of regulation. As a consequence competition has come to play a very important role in the allocation of credit and in the improvement of financial services. The capital requirements framework created in the context of the Basel committee paved the way to the development of stronger competition in banking. It is unquestionable that all over the world banks now face greater competition both from new entrants in the banking sector and from other financial companies.
■. Competition authorities have not been much involved in the process of liberalization of banking. Moreover, in several countries the enforcement of antitrust rules until very recently has not been applicable to banking because of sectored exceptions.
■. In this light, the purpose of this report is:
• to assist policy makers and enforcement authorities (in their competition advocacy function) in their efforts to promote competition oriented regulatory reform in banking;
• to assist policy-makers and enforcement authorities (in their competition advocacy function) in promoting an environment where competition law is fully applicable to banking and where there is an appropriate institutional setting to that end; and
• to assist competition enforcement authorities in the enforcement of competition law in this sector, with a special emphasis on merger control.
1. (1) This Order may be called the Bangladesh Bank Order, 1972
(2) It extends to the whole of Bangladesh.
(3) It shall come into force at once and shall be deemed to have taken effect on the16th day of December, 1971.
2. In this Order, unless there is anything repugnant in the subject or context, –
(a) “appointed day” means the 16th day of December, 1971;
(b) “approved foreign exchange” means currencies declared as such by any notification under Article 18;
(c) “Bank” means the Bangladesh Bank;
(d) “Bank Notes” means notes made and issued by the Bank in accordance withArticle23;
(dd) “bank rate” means the standard rate made public by the Bangladesh Bank under Article21;
(e) “Board” means the Board of Directors of the Bank;
(f) “Co-operative Bank” means any co-operative society or co-operative bank
Including the apex co-operative bank registered under, or any other law for the time being in force relating to cooperative societies, one of objectives of which is to provide financial accommodation to its members;
(g) “Director” means a Director of the Bank;
(h) “Governor” and “Deputy Governor” means respectively the Governor and Deputy
Governor of the Bank;
(i) “Government” means the Government of the People’s Republic of Bangladesh;
(j) “Scheduled Bank” means a bank for the time being included in the list of banks
maintained under sub-clause (a) of clause (2) of Article 37;
(k) “State Bank” means the State Bank of Pakistan constituted under the State Bank of
Pakistan Act, 1956; and
(l) “Taka coin” means one Taka coin and one Taka note and two Taka coin and two
Taka note which are legal tender in Bangladesh.
- THE RECENT HISTORY OF REGULATORY REFORM IN BANKING
■ In the early 70s financial systems “were characterized by important restrictions on market forces which included controls on the prices or quantities of business conducted by financial institutions, restrictions on market access, and, in some cases, controls on the allocation of finance amongst alternative borrowers. These regulatory restrictions served a number of social and economic policy objectives of governments. Direct controls were used in many countries to allocate finance to preferred industries during the post-war period; restrictions on market access and competition were partly motivated by a concern for financial stability; protection of small savers with limited financial knowledge was an important objective of controls on banks; and controls on banks were frequently used as instruments of macroeconomic management”.
■ Since the mid 70s there has been a significant process of regulatory reform in the financial systems of most countries. This process involved a shift towards more market-oriented forms of regulation and involved partial or complete liberalization of the following:
• interest rate controls
Until the early 1970s controls on borrowing and lending rates were pervasive in most countries. These controls typically held both rates below their free-market levels. As a result, banks rationed credit to privileged borrowers. By 1990 only a handful of countries retained these controls.
• quantitative investment restrictions on financial institutions
Investment restrictions on banks took a variety of forms, including requirements to hold government securities, credit allocation rules, required lending to favored institutions and controls on the total volume of credit expansion. Compulsory holdings of government securities, as well as having a prudential justification, also acted as a disguised form of taxation in that it allowed governments to keep security yields artificially low. With some exceptions these controls were largely eliminated by the early 1990s.
• line-of-business restrictions and regulations on ownership linkages among financial institutions :
Although important line-of-business restrictions still remain in place in many countries, the role of these restrictions has been significantly eroded or, in some cases, entirely eliminated. For example, the separation of savings-and-loans and commercial banks has been largely eliminated in many countries, as has the distinction between long-term and short-term credit institutions in Italy and the legal separation of various types of credit suppliers in Japan. Bank branching restrictions were phased out in a number of European countries by the early 1990s. In the US “breaking down the barriers imposed by the (1933) Glass-Steagall Act the Gramm-Leach-Bliley Financial Service Modernization Act of 1999 permits banks, securities firms, and insurance companies to affiliate within a new structure – the financial holding company”
• restrictions on the entry of foreign financial institutions
There has been significant liberalization of cross-border access to foreign banks. In particular, there are now in place a number of international agreements on trade in banking services, including GATS, NAFTA and the EC. In particular, in the European Union, the second banking directive (89/646/EEC) forbade the obligation for banks established in one Member State to seek authorization from other Member States when they intended to establish a branch in their territory. In many countries however the entry of foreign banks is still made more difficult than that of domestic ones.
• controls on international capital movements and foreign exchange transactions
Liberalization of controls on capital movements is now virtually complete in OECD countries and in many developing countries as well. Some controls remain on long-term capital movements, particularly with respect to foreign ownership of real estate and foreign direct investment. There also remain important restrictions on international portfolio diversification by pension and insurance funds.
- The origins of regulatory reform
■ regulatory reform was driven by a number of inter-related factors, including:
• The diminishing effectiveness of traditional controls due to financial innovation (including the difficulty of isolating domestic markets) and rapid technological development;
• The development of various types of regulatory avoidance (such as the development of offshore financial centers and off-balance-sheet methods of financing);
• Competition between international financial centers;
• Competition with non-banks for many services (consumer credit; small business loans; mortgages; etc.);
•Competition between financial institutions under different regulatory environments; and, finally,
• Multilateral agreements liberalizing cross-border banking activities.
- BANKING REGULATION: THE RISK OF BANK RUNS AND OF MORAL HAZARD IN BANKING AND THEIR EFFECTS ON THE ECONOMY
It is widely accepted that in the absence of market failures, open and competitive markets yield strong incentives to efficiently meet the demands of consumers and to adapt to changing demands and technology over time. With very few exceptions, in the absence of a market failure there is no economic justification for regulation. 16. The most important rationale for regulation in banking is to address concerns over the safety and stability of financial institutions, the financial sector as a whole, or the payments system. The description and the evaluation that follows necessarily reflect the views of competition authorities. With only one exception, no bank regulator has reviewed this Report, which therefore, does not necessarily reflect the positions and the opinions of bank regulators.
- · The risk of bank runs
All banks operate in conditions of fractional liquidity reserve. The great majority of banks liabilities are very liquid deposits redeemable on demand. The great majority of their assets are instead much more illiquid loans. This situation leads to the problem that if all depositors demanded their deposits back at the same time, any bank (even if perfectly solvent) would face serious problems in meeting its obligations vis à vis its depositors. A single bank might obtain refinancing on the financial market but the problem would severely persist in cases of low liquidity on the market or if the issue concerned a big portion of the banking sector. 18. It is well known in the literature that whenever depositors start fearing the insolvency of their bank, their first most common reaction is to go and withdraw their deposits creating serious problems to the banks. Such behavior is normally referred to as a bank runI7.
- ·The risk of excessive risk taking (moral hazard) in banking
Banks grant loans normally financed by the deposits they received. This is by itself a powerful incentive for banks to grant credit in a not sufficiently prudent way and to take in too much risk. In fact it is well known in the literature that with debt financing, while the risk of failure of the financed investment is mostly carried out by the bank depositors, in the case of success profits accrue mostly to the banks good example of this deviating behavior is the Asian financial crisis of 1997 that is mentioned further below. In general, however, this incentive is somehow mitigated by the possibility that the market, both via depositors and other banks, could monitor the risks assumed by the bank’s management.
The main purpose of regulation is to avoid the highly negative consequences for the economy of widespread bank failures. There are two main strands of arguments for banking regulation. – The first focuses on the systemic dangers of bank failures, while the second on the need for security and stability in the payments system.
- ·Systemic dangers of a bank failure
The main argument for bank regulation focuses on the possibility of systemic or system-wide consequences of a bank failure. In exemplarity that the failure of one institution could lead to the failure of others. This argument is summarized by Feldstein as follows: “The banking system as a whole is a ‘public good’ that benefits the nation over and above the profits that is earns for the banks’ shareholders. Systemic risks to the banking system are risks for the nation as a whole. Although the management and shareholders of individual institutions are, of course, eager to protect the solvency of their own institutions, they do not adequately take into account the adverse effects to the nation of systemic failure. Banks left to themselves will accept more risk than is optimal from a systemic point of view. That is the basic case for government regulation of banking activity and the establishment of capital requirements-
It is possible to distinguish two mechanisms by which the failure of one bank could lead to the failure of other banks or other non-bank firms:
(a) the failure of one bank leading to a decline in the value of the assets sufficient to induce the failure of another bank (“consequent failure”) and
(b) the failure of one bank leading to the failure of another fully solvent bank, through some contagion mechanism (“contagion failure”)
- REFORM OF BANK REGULATION AND MARKET POWER
On the credit side competition between banks has led to lower spreads and greater care in financing sound projects. Classes and Leavens (2005) write: “More competitive banking systems are better in providing financing to financially dependent firms. There is support for the view that more competition may reduce hold up problems and lower the cost of financial intermediation, making financially dependent firms more willing to seek (and more able to obtain) external financing” Furthermore in most countries, including developing ones, recent market developments have led to strong rivalry by non bank financial institutions for the supply of some banking services, for example consumer credit or factoring services to small and medium size firms. This implies that banks market power is somehow disciplined also by non banks.
■Ensuring that banks are properly informed of the debt exposure of potential borrowers:
Especially in developing countries, however, competition among banks may be impaired because information on the credit worthiness of potential borrowers is not readily available. Without a proper supplier of information on borrowers credit worthiness, each single bank has an informational advantage over any other bank on the credit worthiness of its customers. New banks will be very reluctant to lend to customers of other banks, if they are not fully and readily informed on the total debt exposure of each potential borrower. A competitive financial market, where banks compete for customers and potential borrowers choose among alternative banks as suppliers of funds, can only develop if banks are fully informed on the total exposure of each customer. Otherwise, if information is privately held by each bank, the market for credit will be segmented and banks will only lend to customers they personally know.
■Relationship banking: Relationship banking is particularly efficient when firms are small and accounting rules are not very effective. On the other hand a marked based system is particularly effective when firms are relatively large and accounting statements transparent. Moreover, “limitations on competition in a relationship-based system do not just give the financier (market) power, but also strengthen his incentive to cooperate with the borrower”. This implies that a relationship-based system tends to smooth firm specific shocks internationally, while an arm’s length system is much less able to provide such contingent insurance. On the other hand relationship-based systems, because of the liquidity of the financed assets, have an incentive to increase financial risk more than arm’s length systems. Market based financing “permits more flexibility in explicit contracts, which allows the system to absorb adverse shocks. Moreover the healthy can be distinguished from the terminally ill after a shock and can be dealt with differently – not everyone has to sink or swim together as in the relationship system” Relationship banking does not imply that potential borrowers do not have but one choice with respect to the bank that would assist them. There can be strong competition among banks also with relationship banking. In fact, in some countries, where the banking industry is sufficiently competitive and the industrial sector is sufficiently developed, each local bank may be willing to invest in order to develop a credit relationship with each local firm.
■ Arms-length and relationship banking: In many ways the two systems (arms-length and relationship banking) coexist in the same economy. Regulators should therefore not impose or favor one system over the other and should introduce regulatory provisions that are as much as possible neutral with respect to the type of relationship between banks and their creditors.. Regulators should therefore maintain a centralized system of monitoring the full exposure of different firms with respect to the banking system, and more in general with respect to the financial sector at large, requiring all financial institutions to communicate to the regulator all loans granted to a given (consolidated) borrower and their degree of utilization. The increase in transparency that such a system of centralized monitoring of debt exposure would provide, may help the development of arm’s-length financing, and in any case reduce the market power of each bank with respect to its customers.
- STANDARD INSTRUMENTS OF BANK REGULATION
■ This section of the paper provides a description of the most standard instruments of bank regulation: deposit insurance, capital adequacy requirements and lender of last resort. These three policies are linked one with the other. Deposit insurance protects the smallest depositors from a bank bankruptcy and prevents bank runs. Capital adequacy requirements are necessary in order to make sure that bank managers follow a responsible credit policy, in the absence of an effective control on the part of depositors. Lender of last resort policies further reduce the risk of banks bankruptcies providing banks with Emergency Liquidity Assistance facilities that are designed to avoid that temporary situations of liquidity lead to the insolvency of the bank.
■ Deposit insurance is a guarantee that all or part of a depositor’s debt with a bank will be honored in the event of bankruptcy. The specific form of insurance schemes can vary in a number of ways, including the fee structure (flat fee versus variable, risk-related fees); the degree of coverage (full versus partial coverage, maximum limits); funding provisions (funded versus unfunded systems); public versus private solutions; compulsory versus voluntary participation.
■ Deposit insurance reduces (and in most cases eliminates entirely) the incentive to “run” on the bank in the event of financial difficulty. Therefore it reduces the possibility that a temporary situation of illiquidity and rumors on the insolvency of the bank actually lead to the failure of the bank. Furthermore, deposit insurance prevents the “chain reaction” that can also be started associated by the run on a single bank, so that it reduces the possibility of contagion in the banking system.
■ A drawback of its introduction is however the fact itself that from the point of view of the depositor, deposit insurance makes all banks equally attractive. It almost completely removes the incentive on the depositor to determine the risk of a bank and the need for the bank to compensate the depositor for bearing bank-specific risk by including a bank-specific risk premium in the interest paid to the depositor. Similarly, the depositor faces little incentive to diversify her portfolio of assets held in banks.
■ The effect of deposit insurance on the incentives of the bank depends upon the nature of the insurance contract (and also on any other complementary regulatory measures). In particular, the effect of the deposit insurance on the bank will depend on whether or not the insurance premium paid by the bank depends on the individual bank’s risk.
■ In the case where the premium is completely unrelated to the risk of a particular bank (i.e., the “fixed fee” system), there is clearly an incentive for the bank to attempt to increase its profits by either increasing its revenues (by lending to higher return but riskier projects) or by reducing its costs (by reducing its reserves). Both actions increase its risk. This is the well-known “moral hazard” problem of deposit insurance. Fixed fee deposit insurance creates incentives for banks to take on more risk in their operations than they would without deposit insurance. “This effect was apparent almost as soon as deposit insurance was adopted in the 1930s, when bank capital ratios dropped from 15% to around 6%”
■ Deposit insurance, especially if extended to all deposits, by reducing the market incentives for prudent management, may have the perverse incentive of making banks riskier.When this moral hazard extends across all financial institutions, the macroeconomic consequences can be very significant. .
■ The problem of moral hazard and the need for additional regulatory measures can be reduced if the insurance premium is related to the risk of the insured bank. “An efficiently organized insurer would graduate insurance premier according to the risk of the bank’s asset portfolio and the adequacy of its capital holdings. Such a system would minimize the danger of adverse incentive effects … Under such a system, the individual bank bears the consequences of a higher risk portfolio or a lower capital-deposit ratio, in the form of a higher insurance fee.
POLICY ON CAPITAL ADEQUACY OF BANKS
New arrangements for assessing the capital adequacy of banks on the basis of Risk -weighted Assets replacing the capital-to-liabilities approach were introduced vide BRPD Circular No. 1 dated 08.01.1996 .The revised policy on capital adequacy takes account of different degrees of credit risk and covers both on-balance sheet and off-balance sheet transactions. The following broad outlines containing certain amendments made thereto from time to time and a few new instructions are issued for compliance by banks:
1. Definition of Capital
For the purpose of supervision, capital will be categorized into two tiers: Tier 1 i.e., Core Capital comprises the highest quality capital elements and Tier 2 i.e., Supplementary Capital represents other elements which fall short of some of the characteristics of the core capital but contribute to the overall strength of a bank.
2. Minimum Capital Standards
Each bank will maintain a ratio of capital to risk weighted assets of not less than 9% with at least 4.5% in core capital and this requirement will have to be achieved by 30 June 2003. However, minimum capital requirements (paid up capital and reserve) for all banks will be Tk.100 core as per Bank Company (Amendment) Act, 2003. Banks having capital shortfall will have to meet at least 50% of the shortfall by 09 March 2004 and the rest by 09 March, 2005.
3. Risk-weighted Assets
Both balance sheet assets and off- balance sheet exposures are to be weighted according to their relative risk. Presently, there are 4 (four) categories of risk weights ¾ 0,20,50 and 100 percent. Off -balance sheet transactions to be converted into balance sheet equivalents for the purpose of assessing capital adequacy before assigning a risk weight as shown in section 10(a) of Annexure-II. Four categories of credit equivalents of 0,20,50 &100 percent will apply.
Banks are advised to assess their capital position on half-yearly basis i.e., on 30 June and 31 December each year and report the same to the Off-site Supervision Department of Bangladesh Bank within one month from the end of respective half-year. Banks are also advised to contact Banking Regulation and Policy Department (BRPD) of Bangladesh Bank in case of any confusion or ambiguity.
Regulatory reform, competition and depositors’ switching costs
While, in many countries banks benefited from the new opportunities originating from regulatory reform by offering new and improved financial services to customers, switching costs for consumers remained quite high, so that competition between banks did not increase proportionately. There is now substantial evidence that the widening range of services offered by banks was not associated with a significant increase in the elasticity of each bank residual demand (as should have been expected because of greater competition). The effect of liberalization on the market power of banks with respect to customers of banking services was probably not too strong.
■In recent decades, besides the traditional deposit-taking banks have entered quite a number of new related markets, such as (among others): 1.Credit cards services, paying bills for depositors 2. Consumer oans 3.Mortgages 4. Life insurance 5.Financial consulting; 6.Management of investment funds;
Asset management By providing all these services under one roof, banks reduce the transaction costs depositors would have faced had they been obliged to negotiate for receiving these services with a number of different providers. At the same time, however, by offering all these services, banks have made it more costly for depositors to switch bank. In fact should depositors decide to move to a new bank they would need to:
1) Receive new credit cards (with a different number and expiry date) that would need to be communicated to any service provider, for example the cable TV company, should its bills being paid by credit card;
2) Inform the new bank about all utilities whose bills checking account debiting the depositor checking account; was paying;
3) Transfer the depositor all purchased stocks or bonds to the new bank;
4) Maintain the checking account of the old bank just to service the mortgage;
5) Communicate to all correspondents the new banking coordinates. The increase in switching costs tends to make steeper the residual demand curve each bank faces, so, even though competition may be increased in each of the markets where the bank expanded, the overall market power of each bank is increased, at least with respect to existing depositors. Or, to say it differently, in order for a bank to convince depositors of another bank to switch, the improvements in the quality of services it offers must be much larger than it would be the case in the absence of switching costs.
■Depositors may also face switching costs because of strategic behavior on the part of banks. For example while opening a checking account may be free, banks may require that a high fee be paid when closing an account. There are good reasons why a policy of charging for closing an account would be followed by all banks and would not be competed away: Each bank benefits by market segmentation and no bank benefits by unilaterally reducing exit costs.
■This is why it is unlikely that banks would engage autonomously in switching costs reducing activities, given that this would imply reducing profits for each bank and also for the industry as a whole. Pro-competitive rules and regulations may contribute to make switching easier, so as to ensure that all the benefits originating from greater competition actually reach consumers.
■Regulation could impose on all banks disclosure rules with respect to all the costs involved in switching, so that consumers are made aware of these costs and competition among banks may indeed prove to be very useful.
■With the advent of the internet, banking is no longer necessarily a local industry, not even for the smallest depositor, at least in countries with widespread internet literacy. Since banking technology is the same across the world it is extremely important that regulation does not limit the extent of the market with unjustified restrictions. This is particularly important in jurisdictions that use the same currency. For example, the introduction of the Euro in 2002 could have made depositors indifferent as to the nationality of the bank where they would deposit their savings, leading to a very significant enlargement of consumer choices and of competition. Notwithstanding the regulatory interventions in such directions, such as with regulation (EC) 2560/2001 on cross-border payments in the Euro area, the high costs traditionally associated with dealing with foreign banks have remained. As a consequence, the residual demand of a bank localized in one country remained substantially equal to what it was before the Euro, while the removal of the higher costs associated with cross border transactions would have probably led to a significant increase of the elasticity of its residual demand.
BANKING AND THE FINANCING OF DEVELOPMENTCross country comparisons show the importance of a well developed banking sector for achieving both long term economic growth and the reduction of poverty. Countries with better developed banking systems and capital markets have shown higher growth rates.
■Finance is always necessary for growth. In particular ongoing business need finance for operation and for expansion. The same is true for launching new business enterprises. Households need to have safe deposits, access to the payment system, to mortgages and consumer loans. In this respect the experience of many developing countries show that the banking sector is generally responding well to the needs of the wealthy households and of the established firms. More in general, banking seems to develop well with firms and people that are able to offer a collateral or have formal employment so as to provide some guarantee with respect to future income, less well with people and firms that are unable to offer guarantees. However, while in developed countries this second group of customers is relatively small, in developing countries it represents the majority, so that banks tend to provide services only to the minority of the population. In banking, while the competitive solution with little regulation is appropriate for these existing banks so as to eliminate distortions, favoritism and high interest rate spreads. As an example, the Pakistani competition Authority in its submission to the OECD Global Forum on Competition in February 2005 writes: “The financial sector was deregulated and … with the economic liberalization, new banks, financial institutions, leasing companies, housing finance, investment companies and foreign banks have come up, which has created a competitive milieu”
■Regulatory reform and competition are able to expand the reach of banking to the underprivileged. On the one hand, especially in countries where the majority of potential borrowers do not have a collateral to offer, conventional banking may lead to a non optimal equilibrium, where quite a number of low risk project are not financed and high-risk borrowers end up having to pay higher interest payments. On the other hand technical progress and flexible regulation have made it possible to provide banking services also to the poor. For example Dymski (2003) writes: “Lemon Bank (a micro credit bank)… offers credit and debit cards and savings accounts to the unbaked. Its minimum amount is tiny, and checking services are available without annual fees. … Lemon Bank, which has 3600 access points, many in favelas and in drugstores, is about to launch a media campaign aimed at opening 100,000 new accounts by year’s end.”
■As for the lending side, in recent years in many developing countries specialized lending institutions started to use unconventional methods to lend successfully to the poor, starting what is now known as micro credit. Considerable evidence shows that such unconventional lenders were able to lend to borrowers that no conventional borrower was willing to attract and nonetheless performed much better, in terms of financial self sufficiency and repayment rates, than would conventional banks in comparable loans. The reason of this success, that is not limited to the Grameen Bank in Bangladesh, is the use of unconventional methods of risk reduction: forming groups of borrowers that are jointly responsible for each other’s loans (joint liability) and intense monitoring of clients, relying heavily on the promise of repeating the loan.
In terms of the BRPD Circular Letter No. 05 dated May 29, 2004 it was made mandatory for the banks to have themselves credit rated to raise capital from capital market through IPO.
The issue has been reviewed further and with a view to safeguard the interest of the prospective investors, depositors and creditors and also the bank management as a whole for their overall performances in each relevant areas including core risks of the bank, it has now been decided to make it mandatory from January 2007 for all banks to have themselves credit rated by a Credit Rating agency.
Banks are, therefore, advised to take necessary measures from now on so that they can have their credit ratings in all relevant areas as well as the bank management.
Banks will be required to complete their credit rating by June 30, 2007. The credit rating will be an ongoing process i.e. credit rating should be updated on a continuous basis from year to year, within six months from the date of close of each financial year.
The rating report completed in all respects be submitted to Bangladesh Bank and made public within a period of one month of the notification of rating by the credit rating agency.
Banks will disclose their credit rating prominently in their published annual & half yearly financial statements.
Prudential Guidelines for Consumer financing and Small Enterprise Financing:
Due to significant increase in credit disbursement in the arena of Consumer Financing and encouraging credit flow in the Small Enterprise Financing sector in the recent time, two separate guidelines have been issued to the banks for better management of credit in those two sectors where-in loans will have to be classified into 8(eight) categories (in light of Credit Risk Grading Manual). Banks have been advised to implement the guidelines by 31 December 2005. Bangladesh Bank will monitor the progress of implementation of these Regulations/Guidelines through its on-site inspection teams through routine inspection.
Guideline on Information & Communication Technology for Scheduled Bank
Bangladesh Bank has forwarded guidelines to provide the industry with IT guideline of ‘minimum’ security standards for scheduled banks with a view to ensuring security in IT setup as well as in IT operations by taking adequate measures to prevent the information from unauthorized access, modification, disclosure and destruction so that customers’ interest is fully protected. Banks are advised to follow the Guideline in their IT area and implement all the security standards by May 15, 2006.
Implementation of Credit Risk Grading Manual
With the aim to fully implement a Risk Grading System, an Integrated Credit Risk Grading Manual has been developed and forwarded to the banks. Banks are advised to implement Credit Risk Grading (as described in the manual) by March 31, 2006 for all exposures (irrespective of amount) other than those covered under Consumer and Small Enterprises financing Prudential Guidelines and also under The Short-Term Agricultural and Micro-Credit. Banks are also advised to submit a compliance report by April 15, 2006 to the effect that the Credit Risk Grading has been put in place. Risk Grading Matrix provided in the Manual will be the minimum standard of risk rating and banks may adopt and adapt more sophisticated risk grades in line with the size and complexity of their business. Bangladesh Bank will monitor the progress of implementation of the manual/guideline through its on-site inspection teams during routine inspection.
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