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Central Bank and its policies
Bangladesh Bank (BB), as the central bank, has legal authority to supervise and regulate all banks and non-bank financial institutions. It performs the traditional central banking roles of note issuance and of being the banker to the government and banks. Given some broad policy goals and objectives, it formulates and implements monetary policy, manages foreign exchange reserves and lays down prudential regulations and conduct monitoring thereof as they apply to the entire banking system. Its prudential regulations include, among others: minimum capital requirements, limits on loan concentration and insider borrowing and guidelines for asset classification and income recognition. The Bangladesh Bank has the power to impose penalties for non-compliance and also to intervene in the management of a bank if serious problem arise. It also has the delegated authority of issuing policy directives regarding the foreign exchange regime.

Monetary policy
Monetary policy is a set of rules that aims at regulating the supply of money in accordance with predetermined goals or objectives. Monetary policy plays a very dominant role in altering the economic activity and the price level in a country. So, it should be very carefully formulated and implemented in achieving the goals and objectives as outlined in the Bangladesh Bank Order, 1972 below:

  • Price stability both internal & external
  • Sustainable growth & development
  • High employment
  • Economic and efficient use of resources
  • Stability of financial & payment system

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Reserve management strategy
Bangladesh Bank (BB) is empowered by section 7A of Bangladesh Bank Order, 1972 (President's Order No. 127 of 1972) to hold and manage the official foreign exchange reserve of Bangladesh. It maintains its foreign exchange reserve in different currencies to minimize the risk emerging from widespread fluctuation in exchange rate of major currencies and very irregular movement in interest rates in the global money market. BB has established Nostro account arrangements with different Central Banks. Funds accumulated in these accounts are invested in Treasury bills, repos and other government papers in the respective currencies. It also makes investment in the form of short term deposits with different high rated and reputed commercial banks and purchase of high rated sovereign/supranational/corporate bonds. Forex Reserve & Treasury Management Department of BB performs the operational functions regarding investment which is guided by investment policy set by the BB's Investment Committee headed by a Deputy Governor. The underlying principle of the investment policy is to ensure the optimum return on investment with minimum market risk.

Exchange rate policy
Towards liberalization of foreign exchange transactions, a number of measures were adopted since 1990s. Bangladeshi currency, the taka, was declared convertible on current account transactions (as on 24 March 1994), in terms of Article VIII of IMF Article of Agreement (1994). As Taka is not convertible in capital account, resident owned capital is not freely transferable abroad. Bangladesh adopted Floating Exchange Rate regime since 31 May 2003. Under the regime, BB does not interfere in the determination of exchange rate, but operates the monetary policy prudently for minimizing extreme swings in exchange rate to avoid adverse repercussion on the domestic economy. In the forex market banks are free to buy and sale foreign currency in the spot and also in the forward markets.

Interest rate policy
Under the Financial sector reform program, banks are free to charge/fix their deposit (Bank /Financial Institutes) and Lending (Bank /Financial Institutes) rates other than Export Credit. At present, Loans at reduced rates (7%) are provided for all sorts of export credit since January 2004. With a view to controlling the price hike and ensuring adequate supply of essential commodities, the rate of interest on loan for import financing of rice, wheat, sugar, edible oil (crude and refined), chickpeas, beans, lentils, onions, spices , dates and powder milk has been temporarily fixed to a maximum of 12%.

Now, banks can differentiate interest rate up to 3% considering comparative risk elements involved among borrowers in same lending category. With progressive deregulation of interest rates, banks have been advised to announce the mid-rate of the limit (if any) for different sectors and the banks may change interest 1.5% more or less than the announced mid-rate on the basis of the comparative credit risk.

Recently Banks have been advised to upload their deposit and lending interest rate in their respective website.

Capital adequacy of the banks
With a view to strengthening the capital base of banks and making them prepare for the implementation of Basel-II Accord, banks are required to maintain Capital to Risk-Weighted Assets ratio 10% at the minimum with core capital not less than 5% effective from December 31, 2007. However, minimum capital requirement (paid up capital and statutory reserve) for all banks will be Tk.200 crore as per Bank Company (Amendment) Ordinance, 2007. Banks having capital shortfall will have to meet at least 50% of the shortfall by June, 2008 and the rest by June, 2009.

Revaluation reserves of held to maturity (HTM) securities (up to 50% of the revaluation reserves) has been added to the components of supplementary capital. Besides, 'Hedging the price risk of commodity transactions' has been included in Short-term self liquidating trade related contingencies.

Loan classification and provisioning
In order to strengthen credit discipline and bring classification and provisioning regulation in line with international standard, Bangladesh Bank issued a master circular on loan classification and provisioning through BRPD circular no 5 dated June 5, 2006. The revised policy covers an independent assessment of each loan on the basis of objective criteria and qualitative factors which is appended below :

Any Continuous loan/Demand loan if not repaid/renewed within the fixed expiry date for repayment will be treated as past due/overdue from the following day of the expiry date. A Continuous loan/Demand loan/Term loan which will remain overdue for a period of 90 days or more, will be put into the "Special Mention Account(SMA)". Interest accrued on "Special Mention Account (SMA)" will be credited to Interest Suspense Account, instead of crediting the same to Income Account.

A Continuous loan/Demand loan is classified as 'Sub-standard' if it is past due/over due for 6 months or beyond but less than 9 months, classified as `Doubtful' if it is past due/over due for 9 months or beyond but less than 12 months and classified as `Bad/Loss' if it is past due/over due for 12 months or beyond.

If any installment(s) or part of installment(s) of a Fixed Term Loan is not repaid within the due date, the amount of unpaid installment(s) will be termed as `defaulted installment'. In case of Fixed Term Loans, which are repayable within maximum five years of time- If the amount of 'defaulted installment' is equal to or more than the amount of installment(s) due within 6 (six) months, the entire loan will be classified as "Sub-standard", if the amount is equal to or more than the amount of installment(s) due within 12 (twelve) months, the entire loan will be classified as "Doubtful" and if the amount is equal to or more than the amount of installment(s) due within 18 (eighteen) months, the entire loan will be classified as "Bad/Loss".

In case of Fixed Term Loans, which are repayable in more than five years of time and if the amount of 'defaulted installment' is equal to or more than the amount of installment(s) due within 12 (twelve) months, the entire loan will be classified as "Sub-standard". If the amount is due within 18 (eighteen) months, the entire loan will be classified as "Doubtful" and if the amount is due within 24 (twenty four) months, the entire loan will be classified as "Bad/Loss".

The Short-term Agricultural and Micro-Credit will be considered irregular if not repaid within the due date as stipulated in the loan agreement. If the said irregular status continues, the credit will be classified as 'Substandard ' after a period of 12 months, as 'Doubtful' after a period of 36 months and as 'Bad/Loss' after a period of 60 months from the stipulated due date as per loan agreement.

Besides, if any situational changes occur in the stipulations in terms of which the loan was extended or if the capital of the borrower is impaired due to adverse conditions or if the value of the securities decreases or if the recovery of the loan becomes uncertain due to any other unfavorable situation, the loan will have to be classified on the basis of qualitative judgment.

As regards the provision, banks are required to maintain General Provision against all categories of loans along with off-balance sheet items in the following manner:

Particulars

Short Term Agri. Credit and micro credit

Consumer Financing

Small Enterprise Financing

All other Credit

Other than Housing Finance & Loans for Professionals to set up business

Housing Finance

Loans for Professionals to set up business

UC

Standard

5%

5%

2%

2%

1%

1%

SMA

-

5%

5%

5%

5%

5%

 

Classified

SS

5%

20%

20%

20%

20%

20%

DF

5%

50%

50%

50%

50%

50%

B/L

100%

100%

100%

100%

100%

100%

Besides, banks are required to maintain general provision against Off-balance sheet exposures in the following manner:
            (i) @ 0.5% provision effective from December 31, 2007 and
            (ii)@ 1% provision effective from December 31, 2008 .

Other instructions such as Eligible securities in determining base for provision along with a revised format for submitting the report on classification of loans and advances are also provided in the respective circulars.

Reference: BRPD circular no: 05, dated  June 5, 2006.
                  BRPD circular no: 08, dated  August 07, 2007
                  BRPD circular no: 10, dated  September 18, 2007
                  BRPD circular no: 05, dated  April 09, 2005

Deposit and insurance
The deposit insurance scheme (DIS) was introduced in Bangladesh in August 1984 to act as a safety net for the depositors aiming at minimizing the risks of loss of depositors' fund with banks in which all the commercial banks including foreign banks and the specialized banks operating in Bangladesh are the member of this scheme by compulsion as provided under Article of Bank Deposit Insurance Act 2000. The DIS is designed to minimize the risks that the depositors suffer a loss out of placing funds with a bank. The purpose of DIS is to help to increase market discipline, reduce moral hazard in the financial sector and provide safety nets at the minimum cost to the public in the event of bank failure. The direct rationale for the deposit insurance is customer protection. The indirect rationale for deposit insurance is that it reduces the risks of systemic crisis, involving, for example, panic withdrawals of deposits from sound banks and breakdown of payments system. A Deposit Insurance Trust Fund (DITF) has also been created for providing limited protection (not exceeding Taka 0.01 million) to a small depositor in case of winding up of any bank. The Board of Directors of Bangladesh Bank is the Trustee Board for the DITF. Bangladesh bank has adopted a system of risk based deposit insurance premium rates applicable for all scheduled banks effective from the half year January - June 2007. According to new instruction regarding premium rates, problem banks are required to pay 0.09 percent and private banks other than the problem banks and state owned commercial banks are required to pay 0.07 percent where the percent coverage of the deposits is taka one hundred thousand per depositor per bank. With this end in view, BB has already advised the banks for bringing DIS into the notice of the public through displaying the same in their display board.

Foreign exchange system
On March 24, 1994 Bangladesh Taka (domestic currency) was declared convertible for current transactions in terms of Article VIII of the IMF Articles of Agreement. Consequent to this, current external settlements for trade in goods and services and for amortization payments on foreign borrowings can be made through banks authorized to deal in foreign exchange, without prior central bank authorization. However, because resident owned capital is not freely transferable abroad (Taka is not yet convertible on capital account), some current settlements beyond certain indicative limits are subject to bonafides checks.

Direct investments of non-residents in the industrial sector and portfolio investments of non-residents through stock exchanges are repatriable abroad, as also are capital gains and profits/dividends thereon. Investment abroad of resident-owned capital is subject to prior Bangladesh Bank approval, which is allowed only sparingly.